History 240 Notes Week 4
Orthodox Economic Thought
- Economics was a relatively new discipline, in comparison to history and philosophy.
- Orthodox economic thought of the 1920’s called for balanced budgets, low spending, and
a strong currency.
- Absence of taxes would have meant the forfeiture of the freedom to pursue national
- During this time any money that went to welfare would have been balanced with a cut in
John Maynard Keynes
- Present at the Council of Versailles
- Critiqued the outcome; he claimed that they were setting the seeds of a future war
for punishing Germany so severely.
- Wrote the “General Theory of Employment, Interest, and Money”
- His were only put into full force by 1938 in Sweden, and partly in USA and Canada.
- Did not support the redistribution of wealth (socialism) or the prolonged deficit of
- He was a liberal individualist.
- Knew how to read the stock market, he became very wealthy this way.
- His name is associated with the mass of public spending in the 50’s, 60’s, and 70’s.
- He died in 1949.
- Had he of seen everything attributed to his name, he would not have been
- Saw all markets as having gaps: failure to provide what the free market needs, which the
government has a legitimate role to fill.
- Markets cannot be relied upon to provide law and order, and the necessary
- However, “governments have no business IN business”
- Viewed the “reflation” of the economy as the solution to depression.
- Stimulating the economy (injection of funds) and tax-cuts.
- Fear was that surplus funds would lead to the surplus of currency, leading to
- Inflation was viewed as a burden that was passed onto those in the future.
France in the 1920’s and 1930’s
- France had the largest army in the world at this time.
- Leon Blum, Prime Minister
- Followed orthodox economic mentality (balanced budgets, etc.)
- Protected domestic markets by placing very high import tariffs.
- Mentality to protect the Franc even at the expense of the economy.
- Policy of Autarky: Greek for close in; shutting off from the external.
Britain in the 1920’s and 1930’s
- Struggles to honour the promises that it already made. - Fails to innovate during these decades (prior to the war)
Canada: from Orthodox Liberalism to Keynesian Economics
- By 1933, national income is 1/2 what it was in 1929
- Industrial output is at 57%
- Unemployment hits 25%
- Welfare state is virtually non-existent at this time
- Cities and private charities cared
- Federal welfare system established in response to the Great Depression
- Spending goes from 3% to 33% of total welfare in one year.
- No central bank at start of Depression.
- Low staffing meant that there are not as many reliable statistics for this time in Canada.
- General absence of provincial and national economic standards
- Prime Minister William Lyon Mackenzie King
- “Unemployment is a personal issue only to be dealt with by the gov’t when cities
and provinces have failed to deal with it” -1930 (loses election to Bennet)
- 1940 Unemployment Insurance
- 1945 Family Allowances
- Prime Minister R.B. Bennett
- 1934 establishes Royal Bank of Canada
- 1935 Bennett New Deal modeled on US New Deal. Fails. Loses election. King
returns to power in 1935.
- Had been stuck down by the highest court of appeal, which claimed that
the national government had no right to establish national unemployment
- Taxes used to help fund welfare
- Initially primarily income tariffs
- Shrinks the economies size
- Domestic taxes must increase
- Taxing a shrinking economic base means people can’t buy as many things
- With the late 1930’s, a coast-to-coast expectation arises that the national government has
the responsibility to meet certain needs (such as unemployment insurance).
USA and the Achievements of the New Deal
- At no other time in history were the American people looking to the national government
to solve internal problems.
- Welfare instituted: ADC (aid to dependent children) and then AFDC (aid to families with
dependent children, after the war).
- Regulation of Wall Street and banks.
- Insurance of bank deposits (even if the bank fails, your money is safe).
- Republicans believe this is where the government failed.
- Democrats believe that this is where the government saved the capitalist economy
from destroying itself.
- Though Roosevelt begins building up the military, it is not enough to stimulate the
- It is not until the US starts providing Britain with large quantities of arms. - FDR signs the Social Security Act (1935), payments begin in 1940
- Prior to Roosevelt and the New Deal the stock market and economy was not regulated,
there wasn’t old age insurance, pensions, unemployment insurance, etc.
- He was able to do this during a rare window of opportunity in which neither
congress nor the House of Representatives oppose him, and the Supreme Court is
partial to him.
Shortcomings of the New Deal
- Half measures cynically introduced to save capitalism from self-destruction.
- Same critiques were leveled against Bismarck
- Does not address racism or sexism
- Leaves out many categories of workers (certain professions which tend to African
- However, Roosevelt’s first aim was to save the economy.
- Though not a racist, his views were indeed murky.
- Note: the concern for inequality was not as great then as it is now.
- Glass-Steagall Act (1933)
- Named after its sponsors in congress
- Sets up FDIC (federal deposit insurance corp.)
- Insurance of bank accounts
- Canada follows suit a couple of years later
- Note: Canada lagged behind the US in social spending until 1958
- Legacy of the time: it has become unacceptable for a government to remain idle in
periods of need and distress.
- Exposed millions of people to their financial vulnerability, both lower and middle classes.
- Opened up the masses to government economic and financial regulation/support.
- The experience of mass unemployment helped capture the dream of social reform.
- International regulation
- When new nations attained their freedom from colonialism, many were apt to avoid
liberal-capitalism (which was associated with colonialism and had been discredited by
the Great Depression) and adopt statism.
- Statism is the belief that the state should control either economic or social policy,
or both, to some degree.
- Was deemed the safer option.
- 1950: laissez-faire was seen as a thing of the past; planning emerged as superior.
- Made sense for this point in history; it was given about 40 years to prove itself
until it was replaced by neoliberalism (privatization, small gov’t, etc.).
The Great Depression and Public Policy
1) The Unprecedented Scope of Depression
2) What Caused the Great Depression?
3) Why did Governments seem powerless?
- They didn’t have the same capabilities and tools at their disposal required to re
stimulate the economy. - Globalizing economies without international institutions.
- Wrote the “General Theory”.
- Most nations expanded their welfare states in the 1920’s.
- However, Canada and USA did not.
The People’s War; the People’s Peace
- Wartime Solid