Podcast Summary
Government role in economy during Great Depression: The Great Depression led to a shift from laissez-faire capitalism to increased government involvement in the economy through programs like the New Deal, which provided relief and stimulated economic growth.
The Great Depression rapidly transformed the relationship between government and business in the United States. Prior to the Great Depression, the US economy was functioning under the philosophy of laissez-faire capitalism, which advocated for minimal government involvement. However, the economic crisis brought about by debt, wealth inequality, and oversaturation in the market led to a shift in this thinking. The government stepped in to provide relief and stimulate the economy through programs like the New Deal. This marked a significant change in the nature of money and the role of government in the economy. Today, we continue to see the impact of these changes, particularly in areas like social safety nets and monetary policy. To better understand the current economic landscape and the issues shaping the 2022 elections, tune in to the NPR Politics Podcast.
Gold Standard's inflexibility: The gold standard's inflexibility during the Great Depression led to higher interest rates, unemployment, and prolonged the economic crisis.
During the Great Depression, the gold standard, which tied currencies to gold, exacerbated the economic crisis. With people losing trust in paper money and demanding gold, countries raised interest rates to keep their gold reserves, instead of lowering them to stimulate the economy. This perverse response led to higher unemployment and prolonged the depression. Montague Norman, head of England's central bank, faced a dilemma: raise interest rates to save gold or abandon the gold standard. Unable to make a decision, he collapsed under the pressure. The gold standard's inflexibility made the Great Depression worse, demonstrating the importance of monetary policy adaptability during economic crises.
Gold standard crisis: During a financial crisis, confidence and fear can significantly impact financial decisions, leading to abandoning the gold standard and illegal gold transactions.
During the worst financial crisis, Montague Norman, a central banker, was under immense pressure as he believed the future of Western civilization rested on his decisions. While on a trip to Canada, his colleagues made a radical move without his knowledge – England abandoned the gold standard. This event caused a chain reaction around the world, leading to people hoarding gold and cash out of fear. In response, FDR, during the Great Depression, made a move to turn those hoarding gold into losers by devaluing the dollar and making gold transactions illegal, while those who didn't hoard became potential winners. This historical event highlights the power of confidence and fear in shaping financial decisions.
FDR's decision to abandon gold standard: FDR sought advice from an agricultural economist to abandon gold standard, faced backlash but it was crucial in combating deflation and ending the Great Depression
During the Great Depression, President Franklin D. Roosevelt made the decision to go off the gold standard without explicitly stating his reasons to his advisors. He sought advice from an unexpected source, an agricultural economist named George Warren from Cornell University, who argued that leaving the gold standard was necessary to combat deflation and falling prices. Despite opposition from many of his advisors, FDR introduced this decision as an amendment to the Agricultural Adjustment Act and faced significant backlash. This move allowed FDR to implement policies aimed at increasing prices and ending the deflationary spiral. In essence, FDR's decision to abandon the gold standard was a crucial step in addressing the economic crisis of the Great Depression.
New Deal monetary policy: FDR's decision to take the US off the gold standard in 1933 allowed for increased money supply, lower interest rates, and boosted confidence, leading to economic recovery during the Great Depression
President Franklin D. Roosevelt's decision to take the United States off the gold standard in 1933, an event known as the "New Deal," marked a turning point in ending the Great Depression. This decision allowed the government to increase the supply of money, lower interest rates, and boost confidence, leading to economic recovery. The New Deal itself was a collection of various programs, including agricultural relief, public works projects, bank regulations, and social safety net initiatives. FDR's approach was described as a "shotgun approach," where he brought together experts and encouraged experimentation to find solutions. The success of the New Deal is often attributed to the combination of monetary policy and government intervention, which ultimately restored faith in the economy and set the stage for long-term growth.
Keynesian Economics: During the Great Depression, Keynes advocated for government intervention to manage the economy and create jobs, leading to the New Deal and labor rights, but even with recovery, many were still unemployed, necessitating collective action for better wages and conditions.
During the Great Depression, economist John Maynard Keynes introduced a new way of managing the economy by advocating for government intervention to smooth out business cycles. This was a significant shift as the government could now create money without being tied to the gold standard. The New Deal, which included a law guaranteeing workers' right to unionize, provided an opportunity for labor to regain some power. Despite the economic recovery, one in four people were still unemployed, making collective action like the Flint sit-down strike at General Motors essential for workers to negotiate better wages and working conditions.
Sit-down strikes: During the 1930s, the UAW used sit-down strikes to gain membership and better benefits, proving an effective strategy despite violent resistance from companies.
During the 1930s, the United Auto Workers (UAW) faced a challenge in gaining membership due to the risks involved and the reluctance of companies to negotiate with unions. To prove their worth, the UAW organized a sit-down strike in Flint, Michigan, where workers occupied factories and refused to leave until their demands for better benefits and job security were met. This tactic required fewer workers to shut down a factory, making it a more effective strategy than traditional strikes. However, these strikes were met with resistance from companies, often resulting in violent conflicts. Despite the risks, the UAW's success in Flint helped establish it as a major union and set the stage for further labor rights advancements in America.
Flint Sit-Down Strike: The Flint Sit-Down Strike of 1936-1937 led to GM agreeing to negotiate with the UAW, resulting in unionization of many industries, increased wages, and improved conditions for workers, marking the start of a 'golden age' for American unions.
The Flint Sit-Down Strike of 1936-1937 was a pivotal moment in American labor history. The UAW's demand was not just for better wages but for the right to negotiate with General Motors. When Governor Frank Murphy intervened and urged peace and negotiation, it was a turning point for the union movement. The strike ended with a deal that included GM agreeing to negotiate with the union, leading to the unionization of many industries and a significant increase in wages and improved conditions for workers. This period marked the beginning of a "golden age" for American unions, with about one in three Americans becoming union members by the 1950s. The impact of unions on wages and conditions was undeniable.
Union impact on middle class growth: Strong unions during the 1950s contributed to the growth of the middle class by increasing wages, but their membership has since declined due to legislation, economic shifts, and state laws, leading to less government involvement in managing wages and the economy.
During the 1950s, strong unions played a significant role in the growth of the middle class by increasing wages across the board. However, since then, union membership has declined due to legislation, economic shifts, and state laws making unionization more difficult. The economy has seen less government involvement with the concept of laissez-faire, but the idea of fiat currency and Keynesian economics have emerged, emphasizing the role of the government in managing the economy. Next week on Planet Money Summer School, we'll explore the last 50 years of economics and hear advice from great thinkers like Adam Smith, Karl Marx, and John Maynayr Keynes. Remember, as history has shown us, it's important not to predict the future but to learn from the past. Stay tuned for the graduation episode.