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Final

History 1807 Study Guide - Final Guide: John Maynard Keynes, Herbert Hoover, Bretton Woods System


Department
History
Course Code
HIS 1807
Professor
Jeffery Vacante
Study Guide
Final

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History 1807 Final Exam Notes
The Crisis of Capitalism: The Great Depression
The US never tried extremism partly due to the government reaction to the depression
o Convinced people that the government was valuable for economy
The stock market crash was unusual and caused the depression
Corporate Liberalized Market: Push for deregulation and opening markets to the outside world.
1920s:
- Laissez-Faire Culture
- A period of great prosperity and “one big party”
o Masked all the problems that were evident in the 1930s
- Stagnant wages
o Growing access to credit people didn’t realize state of their wages
Emergence of an economy that is reliant on credit
Gets bad when stocks are bought using credit
- Stock Market Crash [Speculation]
o If the market had not changed so much in the 20s in the way that it did, the crash
may not have had the ripple effects that caused the depression
Little regulation
The problem was that most people were able to buy/invest in stocks by this
point
Business and government encouraged people to speculate on the stock market
People bought because it was easy money in return
- Increasing amount of people were active speculators of Wall Street, but was not
the only reason the depression continued
Government response was moving away from Laissez-Faire and instead going forward with the
new ideals of the 19th century
Herbert Hoover
Told people that the market will correct itself, therefore, keep doing what we are doing
The stock market was a great big gauge of what people believed the economy to be
People are buying stocks, companies become flush with money, the more people buy and trade
the stocks the higher the values of the stock
The companies then take the new profits and re-invest it back into their own company
o More efficient with better technology and increased production
o Gives investors more confidence in the success of a business, leads to more people
buying stocks
Stocks are such a sure thing in the public eye; borrowing money to buy stocks becomes a
supplement to most people’s incomes
A bubble has been developing where the values of the stocks on the market are greatly
inflated
People believed companies were successful because of what was promoted (mass production,
new tech, etc.)
o Companies are actually overproducing
More productive companies = lower prices of the goods because the goods are flooding the
market
o People buy the goods on credit, the company needs to produce more to maintain
profits, and the cycle continues with stagnant wages
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1928/1929 - people doubted the valuation of companies [bubble bursts], normally would be fine
but not in this case
The value of the stock bought on credit goes down bad because that the profit you make
on the investment was money that someone was using to pay a loan
Banks lose money because people cannot pay back their loans
o Hundreds of banks go bankrupt
o People who have never touched a stock that lose all their money because of bankruptcy
Life savings get wiped out, crash turned to depression
Job loss - the companies can’t afford to employ as many people
Runs on the banks bankrupt
No protection for assets in the 20s such as present day insurance
Economy collapsing because of a large amount of overproduction, stagnant wages, but was covered by
the wealth on Wall Street and easy access to credit
Advancement to people who invest money that are not the same people that are saving
As the middle class emerges and saves money they put it in the bank
o The bank loans out that money to the investors, but when the bank loses that money
it will affect the saver too
Depression lasts for 10 years because of a lack of savings, normally investors change the
state of depression
o Savers and investors are different, no money to be invested
Government had to intervene and make up for the absence of savings
John Maynard Keynes
Reason for the depression is because there are no savings available
The government should do whatever the government is not currently doing (popular until 1980s)
Loss of faith in Laissez-Faire capitalism
The normal things a government could do were useless
Need to break this deadlock (or the depression would be permanent), need to have an entity
step in for the job that investors are not meeting
Argues the depression was prolonged by the absence of investment
o The result of the absence of savings in the economy
The market is not self regulating
o Keynes makes the case for state intervention, a correction for the flows in the market
Treaty of Versailles (book) a warning
o Economic disaster mostly in Germany
o Essentially predicts the rise of Hitler
o Helped FDR with the New Deal
The Legacy of the Great Depression The New Deal changed
social assistance
and
social security
welfare cheques, food banks, food stamps, unemployment insurance
The government implements regulations to help people accept putting money in the bank by
insuring it
FDR passes laws, making banks more regulated, giving people more confidence
People still do not have money
Herbert Hoover would not have liked this
Government spending would provide investing to everyone and anyone
The Postwar Economic System: Toward Global Business
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1920s - people had more access to capital, loans were cheaper than their ROI with the stock market,
people began to speculate on the market
Leads to bank failures when the stock market starts tending downwards
The intertwining of the economy and the lack of regulation depression
Stock market was democratized, began a culture of speculation
o Culture that is the heart of this bubble
People borrowed too much and speculated everything they have in order to get a bigger
return, but it was the culture that told people to proceed
Herbert Hoover told people everything was final after the initial crash as markets crashed all
the time, which also corrected the market
o Wrong because there was a structural error with the economy
Keynes: Money isn’t created out of thin air and something must step in, and that (s)he should
be the government
o Wanted to ensure that WWIII would not exist, he helped create a system to prevent it
o UN designed to help countries communicate with each other
Economy rebounded due to WWII (massive government spending), what Keynes had proposed
WWII = massive stimulus package
The war caused tremendous trauma (e.g. the holocaust, the atomic bomb)
People who lived through this era do not remember a time of prosperity
UN, EU and the European Economic Community, Postwar Monetary System, Bretton Woods Agreement
(1944), World Bank, IMG, Postwar Trading System, General Agreement on Tariffs and Trade (GATT)
WB created to help countries with reconstruction after the war by providing loans
The Marshall Plan
US was not patient enough and they decided to proceed with the Marshall Plan
o Same thing the world bank wanted to do (better), more money quicker
Not a selfless act, the US realized they rely on the European countries to trade and if they
have fully restored economies then the US economy would be safe
Less of a threat of communism
Post War Era - the developing world was supported by the WB which would help persuade
them to side with the West during the Cold War
After centuries of colonial control, countries withdraw their money, the countries would depend in
conflict, civil war and economic crisis
Receiving loans from WB ha expectations that need to be met
o Example: Privatizing the public utilities
o US thought that it was socialist to have public utilities
These conditions brought protests in these developing countries
WB was created to stabilize and reconstruct the postwar developing world (initially for Europe)
The need for this body emerges from the belief of relapse of the depression after the war
Countries had difficulties maintaining the value of their currencies
IMF (International Monetary Fund)
WB (World Bank)
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