Fannon 1

HistoryoftheUnitedStates
Economy

ConnorFannon

Macroeconomics

Fannon 2

Thispurposeofthisdocumentistodecipherthemeaningsbehinddeviationsfromthe
trendline,seeninthelongtermrealgrowthofUSGDP.Asyoucanseeinthegraphbelow,
therearedeviationsfromthetrendlineoccurringwithinthetimeperiodsoftheRoaring20s,
TheGreatDepression,WorldWar2,theVietnamWar,theStockCrashof1987,andthe
Recessionof2007.

Roaring20s
TheRoaring20swasatimeofgreatsocialandpoliticalchange.ThenationstotalGNP,
whichstandsforGrossNationalProduct,aswellasGDP,nearlydoubledoverthecourseofnine
years.Americanbusinessandmanufacturingcompanieswereexperiencinghighlevelsof
boomingduetotheadoptionofautomobiles,radios,androadconstructionwhichwereall
contributingfactorsofthehighrateofjobsavailablefortheAmericanlaborforce.

Fannon 3

Automobilesinthe20s
TheautomobilebusinessexperiencedatremendousamountofgrowthduringtheRoaring
20sandwasamajorreasonweseeGDPgrowthduringthe20s.HenryFordcreatedthe
assemblyline,providinganefficientwaytomanufacturetheautomobile,whilecreatingmany
morejobs.Hepaidhisworkersawhopping5dollarsaday,comparedtothenormal2dollarsa
daytheindustrialmanufacturerswereusedtomaking.Hedidthishopingitwouldincreasetheir
productivity,aswellasusingtheirhighwagestopurchasenewcars.Hishighestsellingcar,the
ModelTsoldfor$490in1914,aboutonequarterthecostofthepreviousdecade.By1920,
therewereover8millionregistrations.The1920ssawtremendousgrowthinautomobile
ownership,withthenumberofregistereddriversalmosttriplingto23millionbytheendofthe
decade.(USHistory)Becausethenumberofjobscreatedintheautomobileindustry,overall
GDProsesubstantially.
ThegrowthoftheAutomobileIndustryallowedtonsofspinoffindustriestoboomas
well.Forexample,therubberindustrysawextremedemandincreasesbecauseoftiresneeded
androadconstructionwasneeded,creatinghundredsandthousandsofjobsforAmericans,as
stateandlocalgovernmentsbeganfundingstreetandhighwaydesign.Eventhefederal
governmentbecameinvolvedwiththefederalhighwayactof1921.Gasstationsbegantodot
theland,andmechanicsbegantoearnalivingfixingtheinevitableproblems.Oilandsteelwere
twowellestablishedindustriesthatreceivedaseriousboostbythedemandforautomobiles.
Travelersontheroadneededshelteronlongtrips,somotelsbegantolinethemajorlong
distanceroutes.Evencuisinewastransformedbytheautomobile.ThequintessentialAmerican
foodshamburgers,frenchfries,milkshakes,andapplepieswerehallmarksofthenew
roadsidediner.Driverswantedcheap,relativelyfastfoodsotheycouldbeontheirwayina
hurry.Unfortunately,asnewbusinessesflourished,oldonesdecayed.WhenAmericaoptedfor
theautomobile,thenation'srailsbegantobeneglected.AsEuropeannationswerestrengthening
masstransitsystems,individualisticAmericansinvestedintheautomobileinfrastructure.
Theinventionofcreditwasanotherhugecreationofthe20s.Insteadofhavingtobuyproducer
industrialgoodsinfullsuchastheautomobile,consumersonlyneededtobeabletopurchasea
downpaymentwithproofthattheyweremakingenoughmoneytopaybackwhatyouowedina
specifiednumberofmonthsoryears.Theideaofcreditpersuadedtheconsumertotakea
chanceandbuysomethingbecausepsychologicallytheyknewtheyhadyearstopayitback.It
wasageniusinventionthatreallycontributedtothegrowthofGDPthatweseeinthelongterm
GDPgraph.
Whenlookingateconomicpolicydecisionsofthe20s,youcanseethatCalvinCoolidge
wasprimarilyinterestedincuttingtaxes.Hebelievedthatdecreasingtaxeswouldresultin
promotingconsumerspendingandinvesting,thuscontinuingtheincreaseinGDP.The

Fannon 4
RevenueActssharplyreducedincometaxes,especiallysurtaxesonthewealthy(taxesonmost
Americanswerealreadyverylow).Theyalsocutgift,excise,andinheritancetaxes.Atthetime,
manyobserverscreditedthecutsforwhatwaswidelycalledthe"CoolidgeProsperity":robust
growth,risingwages,decliningunemploymentandinflation,andabullmarket.Infact,such
propitiousconditionsprobablyhadmoretodowiththeeffectsofwartimespendingand
economicmobilizationseveralyearsbefore(MillerCenter).Americanbelievedthatthese
economicpolicieswerehelpingtheeconomybutitwasjustanillusion.Thoughlivingstandards
wereincreasingforeverybody,thegapbetweentherichandthepoorweregrowinglargerand
larger.Hisfiscalpolicyencouragedspeculationandignoredinequality,astheflowofdollars
intothepocketsofthewealthyhelpedtipthehealthyinvestmentofthemid1920sintothe
gamblingthatfollowed.Hishandsoffregulatorypolicytookitstollespeciallyinthefinancial
arena,wherethedangerouspracticeofmargintradingwasallowedtoflourishunrestrained.
BecausetherichwerereceivingsomuchoftherisingGDP,itmadeforanunevendistributionof
incomeandbuyingpower.Thiscreatedtheillusiontoindustriesthattheycouldproducemore
becausethereweremorewillingbuyerswheninrealitytherichhadallthemoney.Therewere
notenoughbuyersandtheindustrieswereoverproducing.
AnotherbigeconomicpolicydecisionthatCoolidgemadewasthedecisiontonotaidthe
depressedagriculturalsectoroftheeconomy.Manyfarmstateprogressivesembraceda
panaceaknownasMcNaryHaugenism,basedonaproposaldatingbackto1921thatwouldhave
establishedagovernmentcorporationtobuysurpluscropsatartificiallysetprices(tobeheldor
soldabroadwhenmarketpricesrose).Althoughtheschememighthaveshoredupthedepressed
farmeconomy,itwouldhaveencouragedoverproduction,hurtconsumers,andposeddangersto
theinternationalsystem.CongresspassedversionsoftheMcNaryHaugenbilltwice,but
Coolidgevetoedthem.Stillhefailedtochampionanyalternativelegislation,thusworseningthe
farmcrisiswhentheGreatDepressionstruck(MillerCenter).Nearly5thousandbanksinthe
MidwestandSouthfiledforbankruptcy,takingthousandsoffarmersland.OncetheGreat
Depressionbegan
ItisapparentthatCalvinCoolidgeseconomicpolicydecisionsofthe1920sdidnot
work.Heattemptedtocontinuetheeconomicgrowthbytaxingtherichlesstohopefully
persuadethemtospendandinvestmore.TherisinggrowthofGDPwasgoingrighttotherich,
makingitseemliketherewasmoremoneyforbuyingpower.Theindustriesbeganproducing
muchmorethantheyneededbecauseoftheappearanceofmorecustomers,andtheybeganto
crash,affectingthestockmarketwhichcontributedtoTheGreatDepression.Coolidge
neglectedtoaidtheagriculturalsector,astheywereneedofaresolutiontooverproduction.It
wasCalvinCoolidgeseconomicpolicythatencouragedthebiggestdownturntotheUS
economyinitshistory,TheGreatDepression.
IbelievethatCalvinCoolidgeshouldhavegoneadifferentroutewhentryingtopromote
thealreadyraisingGDP.Ithinkthatinsteadofloweringtaxes,heshouldhaveraisedtaxestothe
upperclass.Thiswouldhavereducedtheunevendistributionofmoney,raisingthebuying
powerofconsumers.Theindustrieswouldhavehadrealdemandfortheirproductsandthey
wouldnothaveoverproduced.IalsobelievethatCoolidgeshouldhavefoundawaytomeetthe
needsoftheAgriculturalsectoroftheeconomy.

Fannon 5
Whilelookingattheproductionfunction(Y=AF(K,L,N,H)),youcanseethattheboostin
automobilemanufacturingincreased:Technology,capital,labor,andhumancapital,boostingour
overallGDPaswellasourGNP.Wesawagrowthintechnology,asHenryFordcreatednew
carsandtheassemblylinewhichinturncreatedagrowthinlabor.Sincehebrokeeachtaskinto
smallertasksheneededmoreworkers.Therewasgrowthincapitalbecauseofthegrowthof
labor;peoplehadmoremoneytobuywhatevertheywantedorneedednow,ratherthansavingit
forlater.Growingcapitalisthekeyforlongtermproductiongrowth.Becauseofthegrowthof
capital,humancapitalalsoincreased.Inanattempttoincreaseinvestmentandcomsumer
spending,Coolidgeloweredtaxes,incometaxinparticular,toraiseGDPanditdidnotworkin
thewaythatwasintended.GDPdidrise,butthewealthwasnotdistributedcorrectly,andit
ultimatelycontributedtoTheGreatDepression.
SectionFoundat:(ConsumerEconomy)(EHNet)(History)(Shmoop)
TheGreatDepression
TheGreatDepressionwasoneofthethedeepestandlongesteconomicdownturnsinthehistory
oftheworld.AftercomingoffofatimeofgreateconomicboomingintheRoaring20s,there
wasagreatdisparitybetweentherichandpoorclasses.AttheendoftheRoaring20s,More
than60%ofthepopulationwaslivingbelowpovertylevels,whileamere5%ofthewealthiest
peopleinAmericaaccountedfor33%oftheincome,andtherichest1%owned40%ofthe
nationswealth.Thisunevendistributionofwealthwasmirroredintheunequaldistributionof
richesbetweenindustryandagriculture(GreatDepressionCauses).Becausethetop5%ofthe
wealthiestpeopleaccountedfor33%oftheincome,muchoftheinvestinginthestockmarket
camefromthem.
Therewereveryloosestockmarketregulations,meaninginvestorscouldbuystockson
margin,onlyneedingtopay10%ofwhatthestockwasworthtobuyit.Whenitwastimefor
theinvestorstopaytherest,leadinguptothecrash,theycouldnt,causingamassiveselloff.
Thisselloffiswhatultimatelycausedthecrash.Oncethestockmarketcrashed,fearfulthat
bankswouldfail,millionsofAmericansbegantowithdrawtheirmoney.Virtuallyovernight,
theyputthousandsofbanksinperil.ThemoremoneyAmericanswithdrew,themorebanks
failed,andthemorebanksfailed,themoremoneyAmericanswithdrew.By1933,morethan
11,000ofthenations25,000bankshadcollapsed(GreatDepressionCauses).Withthelackof
moneytolendout,italsodidntallowcredittobelentouteither,furtherworseningthe
economicdownfall.Afterthebanksfailed,unemploymentkeptraisinghigherandhigherand
peoplebegansavingtheirmoney.Thismadethecrisisevenworsebecausethedemandfor
productsandserviceswereputtoanend.Therewasnoneedtokeepproducing,thusnoneedfor
workers.Unemploymentraisedanunbelievablehighof25%.Tomakemattersworse,therewas
adustbowlrangingfrom19301936,whichwasaidedbyseveredrought,andwhippedout
millionsofacresoffarmland,attributingtofoodshortagesandunemployedfarmers.

Fannon 6

AboveyoucanseejusthowfastoverallGDPfell.Investors(therichestofthecountry)
immediatelypulledouttheirmoney,andwithdrewfromthebanks.Moneyorcreditwerenot
available,limitingbuyingpowerevenmore.Thebankscrashedandunemploymentgrew.
Asifallthiswerenotenough,theFED,ineffect,conductedasharplycontractionary
monetarypolicyintheearlyyearsoftheDepression.TheFEDtooknoactiontopreventawave
ofbankfailuresthatsweptthecountryattheoutsetoftheDepression.Between1929and1933,
onethirdofallbanksintheUnitedStatesfailed.Asaresult,themoneysupplyplunged31%
duringtheperiod.TheFEDhadachancetobailoutthesefailingbanksbutchosenottofor
somereason.
TheFEDcouldhavepreventedmanyofthefailuresbyengaginginopenmarket
operationstoinjectnewreservesintothesystemandbylendingreservestotroubledbanks
throughthediscountwindow.Butitgenerallyrefusedtodoso.InawaytheFEDthrewfuelon
thefire.

Fannon 7
RooseveltsResolution
TocombatTheGreatDepression,Rooseveltcreatedmassiveworkfareprogramswhich
wereincludedintheNewDeal.Thegovernmentfundedandhired60%oftheunemployedfora
numberofreasons.First,hecreatedmanyconservationprojectsinwhichworkersplantedover
abilliontrees,savedthewhoopingcrane,modernizedruralAmerica,andbuiltsuchdiverse
projectsastheCathedralofLearninginPittsburgh,theMontanastatecapitol,muchofthe
Chicagolakefront,NewYorksLincolnTunnelandTriboroughBridgecomplex,theTennessee
ValleyAuthorityandtheaircraftcarriersEnterpriseandYorktown.Healsocreatedpublic
worksprojectsthatbuiltorrenovated2,500hospitals,45,000schools,13,000parksand
playgrounds,7,800bridges,700,000milesofroads,andathousandairfields.Anditemployed
50,000teachers,rebuiltthecountrysentireruralschoolsystem,andhired3,000writers,
musicians,sculptorsandpainters.(RooseveltInstitute)
Rooseveltalsocreatedfiscalpolicyalsoactedtoreduceaggregatedemand.As
consumptionandincomefell,governmentsatalllevelsfoundtheirtaxrevenuesfalling.They
respondedbyraisingtaxratesinanefforttobalancetheirbudgets.Thefederalgovernment,for
example,doubledincometaxratesin1932.Totalgovernmenttaxrevenuesasapercentageof
GDPshotupfrom10.8%in1929to16.6%in1933.Highertaxratestendedtoreduce
consumptionandaggregatedemand,buttheycanbeusedtonegateraisinginflation.
AD=Y=AF(K,L,N,H)REDUCEDADBYLOWEREDCAPITAL
Inregardstotheproductionfunction,FDRincreasedlaborandhumancapitalinanattemptto
growGDP.
ThisSectionfoundat:(History)(GreatDepressionCauses)(Fee)(MillerCenter)
WW2Boom
WorldWarIIbeganin1939,itwasrightinthemidstofTheGreatDepression.Thewars
effectswereprimarilypositiveforoureconomyasitultimatelypulledtheeconomyoutofThe
GreatDepression.TroopswereneededastheUnitedStatespreppedtoenterEurope,helpingto
alleviateourhighunemploymentrate.TheFederalGovernmentneededtoprepitsindustrial
basetoconvertitsproductsfromciviliangoodstowartimematerials.Inmanyindustries,
companyexecutivesresistedconvertingtomilitaryproductionbecausetheydidnotwanttolose
consumermarketsharetocompetitorswhodidnotconvert.Conversionthusbecameagoal
pursuedbypublicofficialsandlaborleaders.In1940,WalterReuther,ahighrankingofficerin
theUnitedAutoWorkerslaborunion,providedimpetusforconversionbyadvocatingthatthe
majorautomakersconverttoaircraftproduction.Thoughinitiallyrejectedbycarcompany
executivesandmanyfederalofficials,theReutherPlaneffectivelycalledthepublicsattentionto
Americaslaggingpreparednessforwar.Bytheendof1943,twothirdsoftheAmerican
economywasintertwinedwiththeindustrialwartimeeffort.(Boundless)

Fannon 8

Above,wecanseejusthowKeynesianeconomicsworkeditsmagicintheWorldWar2
years.Keynesianeconomicsfocusesonaggregatedemandanditsabilitytoshiftthedemand
curveleftandright.Thiseconomicapproachbelievesthatstickypricesandwagesmakeit
difficulttoproduceatorpastyourpotentialoutput.Becauseofthis,Keynesianeconomists
believethatfiscalandmonetarypolicyisessential.InWorldWar2wesaw2majorfiscal
policiesand1majoreconomicpolicy.
FiscalPolicies
DuringWorldWarIIfiscalpoliciespredominantlygovernmentspendingandtaxation
markedconsiderablechangesintheUSpolicymaking.Theuseofthesefiscalpoliciesinthe
USduringWorldWarIIhadacrucialroleintheboostoftheeconomy.Infact,thewartime
fiscalpolicieswereamajorcontributortotherecoveryfromtheDepression.(Vernon,p.850).
DuringtheDepressiontheaggregateoutputwaswaybellowitspotential.Duringthewartime,
however,theaggregateoutputmarkedasignificantincreasemainlybetween1941and1942.
Thisincreasewascausedtoalargeextentduetoanenormousincreaseingovernment
expenditures.Thegovernmentwasspendingunbelievableamountsofmoneyonwartime
materials,anditimprovedtheoverallhealthoftheeconomy.
GovernmentExpenditures
Becauseaggregateoutputwassomuchlowerthanfullpotential,governmentpurchased
massamountsofmilitarysupplies,whichultimatelyincreasedaggregatedemand,raisingour
GDPandGNP.ThetotalamountofgovernmentpurchasesduringWorldWarIIwas$304

Fannon 9
billionRealGNPadvanced40%between1941and1945,whichrepresentsanaverageannual
growthrateof8.4%(Ohanian,p.23).Therefore,thehugeriseingovernmentspending
increasedsignificantlytheGDPandhadanexpansionaryeffectontheeconomy.Theimportance
offiscalpoliciesdoesnotendwiththegovernmentexpenditures.Theseexpendituresnaturally
neededtobepaidfor.Oneofthemeansofpayingforthewarwasthroughcollectingmore
taxes.ThisiswhymanyeconomistsbelievetheboostinGDPdidntreflectlivingstandards.
TogetthemoneybacktheyowedtheyhadtocollectmoretaxesfromAmericans,loweringits
percapitaandbuyingpowerbutstillraisingoverallGDPandGNP.
Taxation
TaxesduringWWIIincreased.Theriseintaxationnormallyhasacontractionaryeffect
onaneconomybutbecausethefederalpurchaseswaresohighduringthewarandtheireffect
wasconsiderablylarger,theincreasedamountoftaxescollectedonlysloweddownthe
expansionaryeffect.Moreover,purchasesenterdirectlyintoaggregatedemand,whereas
increasesinnettaxesaffectaggregatedemandindirectlythroughtheirimpactsondisposable
privateincome(personaltaxesandtransfers),therentalcostofcapital(corporateprofitstaxes),
and,intheshortterm,prices.(Vernon,p.856,857)Therefore,thecurveforaggregatedemand
keptshiftingrightward.
BoththeincometaxesandcapitaltaxeswentupduringWWII.Theincometaxbeforethe
warwas9%,whereasduringthewaritincreasedtoapproximately18%.Thecapitaltaxrose
from44%beforethewarto60%duringthewar.Theincreasednumberofpeopletaxedalso
helpedtheriseinmoneycollectedbytaxation.BeforeWWII,only4millionAmericanspaidthe
federalincometax.Duringthewarthisnumberincreasedto42million.
Asaresultofthenewtaxationpolicies,thegovernmentcollected20timesmoreontaxes
paidbyindividualsthanbeforethewar.However,theincreasedamountofmoneycollectedon
taxeswasnowherenearpayingforthegovernmentswartimepurchases.Therefore,theU.S.
governmentissuedconsiderabledebtduringthewaratnominalinterestratesrangingbetween
0.375and2.5percent,andthedebtGNPratioattheendofthewarwasatarecord1.2percent.
(Ohanian,p.23)
AllQuotesinthissectionfoundat(Dickinson.edu)

MonetaryPolicy
ThemainmonetarypoliciesthatwereputinplaceweretoprimarilypaytherestofU.S.
debtsthatthetaxesdidntcover.Theeffectontheeconomythatthemonetarypolicieshadwere
loweringthemoneysupply,whichdecreasedinflation,butbecausethegovernmentwas
spendingsomuchmoneyatthesametimeaggregatedemandcontinuedtogogrow.Thebiggest
andmostprofoundmonetarypolicyputinplacewasthecreationofwarbonds.

Fannon 10
WarBonds
WarbondsweresavingsbondsoldtoindividualsbythegovernmentduringWorldWar
II.ThesetypesofbondswereknownasSeriesEbonds(laterreplacedbySeriesEEbondsin
1980)andwerefirstmadeavailableforpurchaseonMay14,1941indenominationsof$25upto
$10,000.Themainfunctionofthesebondswastogivefundingtothegovernment,howeverthey
alsoservedotherpurposes.WiththeboostinavailablejobsandhigherwagesduringWorldWar
II,theaveragedisposableincomewasrising.Thefactthatsomanyofthesepeoplewerewilling
tospendtheirdisposableincomeforacauseshowedthatpeoplehadapositiveattitudetoward
thewarandfelttheirinvestmentsweresafe.Manycompaniesofferedpayrolldeductionplansin
exchangeforWarbonds.Sinceconsumerswerenotspendingtheirdisposableincomeongoods,
themoneyspentonwarbondsbecamesavings.Thebuyingandsellingofwarbondswasa
majoraspectoffinancingthewar.Thegovernmentsoldmorethan$185Billionworthofwar
bonds.Thisaccountedforoverhalfofthewar's$304billioncost.Theenormousspendingon
warbondsbythepeoplecausedasharpincreaseinthepersonalsavingsrate.In1944the
personalsavingsratewasover25%,analltimehigh.Thismeantthatpeoplewerentwillingto
spendoveraquarteroftheirdisposableincome.Theincreaseininvestmentwesawgoingto
governmentwartimeneeds,isamajorcontributortoaGDPincreaseduringthewar.
Ithinkthatthefiscalandmonetarypoliciesputinplacedidagoodjobmonitoringwar
timedebtwhilealsopullingusoutofthedepression.Idohowever,thinkenteringthewarin
generalwasnotagoodidea.WhileGDPandGNPbothincreasedduetothewar,Idontthinkit
waswiseuseofeconomicresources.Thewardidntcontributetoanimprovementofeveryday
lifeforthepeopleeither,thoughitincreasedGDPandGNP.DuringWorldWarII,gasoline,
milk,cheese,meats,metals,andscoresofotherproductswererationedathomeandredirected
towardthewarproductionandtroops,leavingthepeopleathomedeprivedofeverydayneeds
andwants.Whywouldsomebodyconsiderasocietylikethatprosperous?
GNPactuallyincreasedafterthewaryears,by8percentin1946,andevenmoreinthe
followingthreeyears.From1941to1943,realgrossprivatedomesticinvestmentplungedby64
percent;duringthefouryearsofthewar,itneverroseabove55percentofits1941level[and]
onlyin1946diditreachanewhigh.IfIwereadecisionmaker,Iwouldhavenotevenentered
thewarandallowedtheeconomytofixitself.Iwouldhavefoundawaytorestorethemarket
andfoundawaytocreatedemandfordomesticgoods.

ThisSectionfoundat:(Dickinson.edu)(Weinberger)(MacroeconomicPrinciples)(EhNet)
TheVietnamWar
Rangingfrom19551975,theVietnamWarhadahugeaffectonAmericanslives.The
wartookover2millionlives,manyVietnamesecivilians,andover3millionotherswere
wounded.OntheUSsideofthings,morethan58,000Americansoldierswerekilledwhilemore

Fannon 11
than150,000wounded.Thetimeperiod19551975includedmanychangesinoureconomy.
TheUSgovernmentspentbetween$350billionand$900billiononthewarincludingveteran
benefitswhichhurttheeconomyoverall,butwartimespendingandproducingmadeupforthe
deficit.
Beforethewarbegan,theUnitedStateswasonceagainexperiencinghighlevelsof
unemployment,andwhenitbegantoescalate,therewasagrowingportionofAmerican
industrialcompaniesonceagaindevotingitsresourcestomeetthewartimeneeds,muchlike
whatwesawinWorldWar2.Thiswasgoodfortheeconomybecausecompaniesneededto
hire.From1965onward,U.S.industrycouldnolongerincreaseproductionasfastasdemand
wasgrowingattheexistingpricelevel.Whenthishappensinacapitalisteconomy,demandis
reducedtosupplythroughariseinprices.Theboomofthe1960swasinfullaffect.When
lookingattheGDPgraph,youcanseerealGDPdeviatingpositivelyfromthetrendline.The
warwasnottheonlycontributortopositiveGDPgrowth.Aroundthesametime,PresidentJohn
F.Kennedywasworkingoneconomicpoliciestobetterthelifeofdomesticconsumers,which
alsopositivelyaffectedrealGDPgrowth.Twoofthemostinfluentialeconomicpoliciescreated
bytheKennedyadministrationweretheRevenueActof1964andtheEconomicOpportunity
Actof1964.
RevenueActof1964
PresidentJohnF.Kennedybroughtupthepossibilityoftaxreductioninhis1963Stateof
theUnionaddress.Hisinitialplanincludeda$13.5billiontaxcutbyreducingthetopincome
taxratefrom91%to65%,reducingthebottomratefrom20%to14%,andalsobyreducingthe
corporatetaxratefrom52%to47%.Afterintroducingthesenewpotentialtaxregulations,
Kennedywasassassinated,leavingLyndonJohnsoninoffice.HearchivedKennedystaxcuts
withapromisethathewouldnotbudgetmorethan$100billiondollars.
EconomicOpportunityActof1964
JohnsonpassedthispolicyalongsidewiththeRevenueAct,whichwasaimedat
reducingpovertyandunemployment.Theeconomicopportunityactestablisheddifferent
programstoeliminatepoverty.SomeoftheseprogramsaretheJobCorps,HeadStart,Adult
BasicEducation,FamilyPlanning,SumerYouthPrograms,SeniorCitizenCenters,Community
HealthCentersandCommunityActionAgencies(Weebly).Healsocreatedpoliciessuchas
MedicareandMedicaid.Theyweremadetoallowpeopleofallagesreceivemedicalattention.
Medicaidwasforthepoorandlessfortunate,whileMedicarewasfortheelderly.Medicareis
availabletothosewhoare65andover,anditcoversmedicalandsurgicalfees.TheMedicare
programwasimportanttopassbecauseoftheincreasingrateinthepopulationoftheelderlyand
theincreasingrateforhospitalvisitsmadebytheelderly.
Bytheendof1965,Unemploymentdroppednearlyonepercent,overallGNPandGDP
wereexperiencinggrowth,industrialproductionincreased,theaveragepersonalincomeand
taxesrose(mostlytopayforwartimespendingandMedicare/Medicaid),theweeklypayforthe
averagemanufacturingworkerincreasedbynearly26%in5years,theprofitsofcorporations

Fannon 12
aftertaxesincreasedby67%,andtheaveragefarmincomerose23%.ItappearedthatKennedy
andJohnsonsmonetaryandfiscalpoliciesworked
BacktotheVietnamWar
Naturally,onanationslevel,theUSpolicymakersspentmuchmoreondefenseandsocial
programs.Thehighlyexpansionaryfiscalpolicyputupwardpressureondemandforgoodsand
services.Regrettably,monetarypolicywastooaccommodative.TheresultwastheGreat
Inflationofthe1970sandearly1980s.Afteraveragingabout1.75percentfrom1965to1967,
CPIinflationaveragedabout7.5percentfrom1968to1981,peakingat13.5percentin1980.It
requireddoggedcommitmentbyagenerationofmonetarypolicymakerstorectifythismistake.
YouseeaslightincreaseinGDPduringtheyearsofJohnsonsdomesticpolicyandthena
decreaseduringthe1970s.Becauseofdomestictaxcuts,peoplehadmoremoneytospend.
Initiallywesawanincreaseinconsumerspendingbutsoontherewastoomuchmoney
circulatingthroughtheeconomy.Inflationrose,andwesawconsumerssavingmoreandmore
insteadofspending,creatingadownwardspiral.Onewaytocombathighinflationistoraise
taxes,buthowcouldtheJohnsonadministrationraisetaxesnow?Justacoupleofyearsearlier
Johnsonconvincedcongresstolowertaxesbyasubstantialamount.Itwouldlookbadtoonce
againraiseit.
CreditCrunchof1966
Becausepolicymakerscouldntraisetaxes,theFEDdecidedtocrunchcredit.OnJan
19,1966,thefedfundsratefellto1.50percent.ButbetweenSeptember9and11,thefed
fundsratehit6.13percent,anextremelyhighlevelbypre1968standards.
Thisabrupttighteningofthemoneymarketledtoasuddenfreezeupofcredit.Itwasthe
collisionbetweenthedemandsforcreditbythefederal,stateandlocalgovernments,consumers,
industrialcapitalistsandcommercialcapitaliststhatdrovethefederalfundsrateupsoabruptly.
Orwhatcomestoexactlythesamething,thedemandforcreditexceededthesupplyofcreditat
currentinterestrates.
FromCreditCrunchtoMiniRecession
Withcreditnearlyunattainable,theU.S.economyenteredaminirecession.Youcansee
ontheGDPgraphasuddendroparound19681970.TheFEDthenfearedanotherdepression
typecrisisandcompletelyreverseditsmonetarypolicyfromextremelytightpolicytoavery
looseone.TheFEDboughttonsofbondstoputmoremoneybackintheflowoftheeconomy
andtheFederalFundsratedroppedbackbelow4percent.Theeconomyslowlybegangrowing
onceagainandinflationwasstillhigh,butmuchlowerthanithadbeenpreviously.Guidedby
Keynesianeconomics,theFedhadapparentlysucceededinslowingdowntheeconomy
sufficientlytodampeninflationwithoutthrowingitintoafullscalerecessionandmass
unemployment.Indeed,bytheirskillfulmonetarypolicyhadnttheFedidledjustenough
industrialcapacitytosupportthewareffortagainstVietnamwhileavoidingareallybig

Fannon 13
economicdownturn?ButasitturnedoutthevictoryofKeynesianpoliciesin196667wasa
Pyrrhicone.
Allinformationfoundat:(Wordpress.com)
IthinkthattheJohnsonadministrationdidagoodjobgettingitselfoutofthemini
recession.Idohoweverdontthinkitwasagoodideaissuingthemajortaxcutsinthefirst
place.Thetaxcutswereultimatelythereasonfortheminirecession.ThoughKennedyand
himselfmeantwellinissuingthecuts,theyshouldhaveknownitwouldhavejustbumpedup
inflation.Nothinggoodcomesoutofjustgivingmoremoneytothepeople.Thebestwayto
counterinflationisbytaxingmore.
IfIwasapolicymakerIwouldhavemadeallthesamedecisionsasKennedyand
JohnsonbutIwouldhavenotissuedthetaxcutsbecauseIwouldhaveknowthatdoingthat
wouldjustincreaseinflation,givingconsumersincentivetosave,creatingadownwardspiral.
Allinformationfoundat:(Wiki)(Rohn)(Poole)(HistoryCentral) (EHNet)

1973OilEmbargo
The1973oilembargotookplacetowardstheendoftheVietnamWar.Withgovernment
spendingdecreasinganddomesticproducersputtinganendtowartimeproduction,theeconomy
wasonceagainintrouble.ThiswasrightaboutthetimePresidentNixontookofficeandhe
wantedtotacklethehighinflationatraditionalapproachrecessions.Hegearedfiscaland
monetarypolicytoslowthegrowthofmonetarygrowth,raisedinterestrates,andlowered
governmentspending.Hecreatedarecessionin1973anditlasteduntil1975andthatiswhy
youseethesuddendownwardslopeonthelongtermrealgrowthofUSGDPinthegraph.
Beforetheendoftherecession,NixonwasforcedtoresignbecauseoftheWatergateScandal
andpushedthetroubledeconomyontoPresidentFord.TheFordadministrationhandledthe
economyterribly.Allpriceswereincreasingbydoubledigitsin1974,bothintheCPI(11%),
andtheWPI(19%),withfuelpricesrisingby33%.Theunemploymentrateroseto7%in1974,
andrealwagesfellby5%.Astheeconomysankintorecession,stagflationwasbecoming
painfullyevident.(EconomyintheReaganYears)

In1973,ArabOrganizationofPetroleumExportingCountries(OPEC)membersdecided
toplaceanembargoonoiltotheUnitedStates.Thereasontheydidthisisbecausetheywanted
toshowtheirdisprovalforUnitedStatessupporttoIsraelduringtheArabIsraeliWar.USoil
productionhadalreadybeguntodecline,andtheUSwasunabletomakeupthesupplyshortage
causedbytheembargo.Thisresultedinasupply/demandimbalance.Oilpricesquadrupledina
veryshortperiodoftime,contributingtoadeepglobalrecession(OilPrice).Inresponsetothe
oilembargo,Nixoncreatedpricecontrolsandbeganrationingoiltostates.OnNov.7,1973,he
announcedProjectIndependence,whichpromotedconservationandalternativeenergyinitiatives
withthegoalofendingtherelianceonoilimportsby1980.Nixonalsoincreasedfundingfor
mass transit, and soon after, the National Maximum Speed Law was passed, reducing the

Fannon 14
maximumspeedlimitnationwideto55milesperhourinanattempttosaveasmuchoilas
possible.
LessthanaweekbeforetheAraboilembargoofficiallybegan,PresidentNixonresigned
andVicePresidentFordtookover.Ourgrowingdependenceuponforeignsources[of
petroleum]hasbeenaddingtoourvulnerabilityforyearsandyears,andwedidnothingto
prepareourselvesforsuchaneventastheembargoof1973,FordsaidinhisfirstStateofthe
Unionaddress.Fordhighlyencouragedtheuseofalternativeenergysolutionssuchasnuclear
energyorcoal,ratherthanoil.Hesetforthgoalstoreduceoilimportsby1millionbpdbythe
endof1975andby2millionbpdbytheendof1977.BecauseFordwasnotelected,Congress
didnotcomplywithmanyofhisideas.Forddidhowevermanagetogetsomeenergysaving
lawspassed.InDecember1975,theStrategicPetroleumReserve(SPR)wasestablishedwhen
theEnergyPolicyandConservationAct(EPCA)waspassedbyCongress.Thelawwasdesigned
toreducetheimpactofsevereenergysupplyinterruptionssuchastheOPECembargo.The
fuelefficiencyofautosimprovedquicklyfollowingadoptionoftheCorporateAverageFuel
Economy(CAFE)standardsin1978.A2002studybytheNationalAcademyofSciences
concludedthatmotorvehiclefuelusagewas14percentlowerin2002thanitwouldhavebeenin
theabsenceoffuelefficiencystandards.(OilPrice)
Theoilembargohadprofoundeffectsontheworldeconomy.Worldwide,thepriceofoil
quadrupledby1974.Thispriceincreasehadahugeeffectonoilexportingnations,especially
thecountriesoftheMiddleEastwhohadalwaysbeendominatedbytheindustrialpowerssuch
astheUnitedStates.Theynowhadthemorevitalgood(oil),andtheymadeunbelievable
amountsofmoneyfromit.ManyofthenewlyrichMiddleEastcountriespurchasedwar
materialswiththeirhigherprofit,whichputtonsofpoliticaltensiononmanycountries.
TheembargohadanegativeinfluenceontheUSeconomybycausingimmediate
demandstoaddressthethreatstoU.S.energysecurity.Onaninternationallevel,theprice
increaseschangedcompetitivepositionsinmanyindustries,suchasautomobiles.
Macroeconomicproblemsconsistedofbothinflationaryanddeflationaryimpacts.Theembargo
leftoilcompaniessearchingfornewwaystoincreaseoilsupplies,eveninruggedterrainsuchas
theArctic.Findingoilanddevelopingnewfieldsusuallyrequiredfivetotenyearsbefore
significantproduction.
TheUnitedStatesattemptedtocombattheoilembargothroughmonetarypolicies.
Westerncentralbanksdecidedtosharplycutinterestratestoencouragegrowth,decidingthat
inflationwasasecondaryconcern.Althoughthiswastheorthodoxmacroeconomicprescription
atthetime,theresultingstagflationsurprisedeconomistsandcentralbankers.TheUnited
Statesalsocontrolledoilpricesaswell.Thesystemlimitedthepriceof"oldoil"(thatwhich
hadalreadybeendiscovered)whileallowingnewlydiscoveredoiltobesoldatahigherpriceto
encourageinvestment.Predictably,oldoilwaswithdrawnfromthemarket,creatinggreater
scarcity.Therulehadbeenintendedtopromoteoilexploration.

Fannon 15
IthinkthatUSpolicymakersmostlywentabouttheoilembargointherightway.Ithink
thatitwasagoodideatopromoteothersourcesofenergyinitially.Ithoughtitalsowasagood
ideatolowerthespeedlawsonhighwaystopreserveoil.Oncewefoundoutitwouldbenearly
impossibletochangeourprimarysourceofenergy,Ithinkitwastherightthingtodotostart
changingpricesonnewandoldoil.Withtheembargoinplace,weneededincentivetostartto
produceourownoilbecauseitwasveryexpensivetoimport,butalsowewereprimarilyfunding
theMiddleEastspurchasesonwargoods.OntheGDPgraph,weseeasharpdownwardslope.
ThisisbecausetheUSwasimmediatelycutoffofoil,andweseeitstartstoincreaseonceagain
whenOPECbeginstogetpassedupbyotherMiddleEastoilcompanies,drivingpricesdown.
Themonetarypoliciesputinplacealsoencouragedgrowth,boostingouroverallGDP.Growth
isessentialinincreasingGDPonceagain.
Informationinquotesandparagraphsfoundat:(OilPrice)(OilCrisis)(EconLib)(Monetaryand
FiscalPolicies)(Lovins)
TheGreatRecessionin2007
OntheGDPgraph,weseeattheveryendaverylargedownwardslope,thisisThe
GreatRecession.GDPdrasticallydropped,makingitthemostdramaticcontractioninGDP
sincetheGreatDepression.TherecessionofficiallylastedfromDecember2007toJune2009,
thoughtheeffectscanstillbeseentoday.TheRecessionallstartedwiththepoppingofan8
trilliondollarhousingbubble.Thiscausedagiganticcutbackofconsumerspending,
contributingtothelossof8.4millionjobs.Thecutbackinconsumerspendingweredirectly
influencingjoblossanditcreatedaseeminglyneverendingspiral.
Astheeconomywasgettingworseandworse,theFedwasforcedtoaggressivelylower
therateuntilreachingthebottomDecember16,2008.TheFedFundsTargetRatefloorofzero
to0.25%stilldidnotrevivetheeconomy.Infact,aftermorethanfiveyearstheTargetRate
remainsatthefloor.Thetraditionaltoolwasnotworking,astheeconomycontinueditsslide.
AnewtoolcalledQuantitativeEasing(QE)wasinitiatedDecember2008andcontinuesyet
todaywithnoenddatecommitment.QuantitativeEasingistheprocessoftheFedbuyinglarge
amountsofexistingTreasuryandmortgagedbondsintheopenmarketwiththesolepurposeof
drivingdownlongterminterestrates.Theultimategoalislowerborrowingcostsfornotonly
shorttermborrowersbutlongtermmortgageborrowersaswell.(FirstAffirmative)
QuantitativeEasingshowedtobeimprovingtheeconomyslightlybutweneededthatin
conjunctionofdrasticfiscalpoliciestopullusoutofthisrecession.

TheRecoveryAct
TheRecoveryActwastheboldestcountercyclicalfiscalstimulusinAmericanhistory.It
included$787billionoftaxcutsandspending,withthetotalsplitroughlyonethirdtaxcuts,

Fannon 16
onethirdgovernmentinvestments,andonethirdaidtothepeoplemostdirectlyharmedbythe
recessionandtotroubledstateandlocalgovernments.Americanfamilieshavereceivedmore
than$200billionintaxcutsandinreliefpaymentssuchasunemploymentinsurance.
Thousandsofinvestmentprojectswerecreated,includingeverythingfromroadsandbridgestoa
smarterelectricalgridandcleanenergymanufacturing.PresidentObamacameintoofficewith
theideaofcreatingasmanyjobsaspossibleinattempttogetthemoneybacktoconsumers.The
ObamaadministrationworkedwiththeFederalReservetohelprepairtheentirefinancialsystem.
Perhapsthemostimportantactionwasthestresstestthatgaveacomprehensiveevaluationof
thehealthofthe19largestfinancialinstitutions.Thiscarefulscrubbingofthebooks,together
withthegovernmentspledgetofillanyidentifiedcapitalshortfallsthattheinstitutionscouldnt
fillbyraisingprivatecapital,helpedtorestoreconfidenceinthefinancialsystem.Italsoledtoa
spurtofprivatecapitalraisingthatputourfinancialinstitutionsonamuchmoresecurefooting.
Creditspreadsdecreasedsubstantiallyandstockpricesrecoveredgreatly(WhiteHouse).This
privatecapitalthatwasgiventoinstitutionswasextremelyimportantbecauseitraisedstock
prices,givingAmericansmoreconfidencetoinvest.
TheAdministrationalsoworkedtostabilizethehousingmarketandstemtherisingtide
offoreclosures.TheTreasuryworkedwiththeFederalReservetohelpreducemortgageinterest
rates,resultinginlowerpaymentsforthemillionsofAmericanswhorefinancedtheirhomes.
Refinancinghomeswereanimportantbecauseitrequiredindustrialproductsanddomestic
services,decreasingunemployment,drivingupdemand,andincreasingconfidenceininvestors
thatthehousingmarketwasbeginningtorecover.Byreducingmortgageinterestrates,itwas
essentiallyrewardingconsumersforinvesting,encouraginggrowth.
ThesepolicyactionscomplementedtheFederalReservesactions.Monetary
policymakersquicklyreducedthepolicyinterestratetonearlyzero.Theyalsoundertooklarge
scalepurchasesofgovernmentbondsandmortgagebackedsecuritiestofurtherreducelonger
terminterestrates.And,theycreatedprogramsthatsuccessfullyrestartedsomeofthesecuritized
lendingthathadevaporatedfollowingthecrisis(WhiteHouse).
ThesealloutpolicieshaveproventogettheUnitedStatesoutofTheGreatRecession.
RealGDPgrewsolidlyforthreequartersinarowafterimplementingallofthepoliciesin
conjunctionwithoneanother.Theeconomyalsoexperiencedgrowthatanannualrateof3.2
percentinthefirstquarterof2010,whichisadramaticturnaroundfromthedeclineof6.4
percentthattheUShadinthefirstquarterof2009.Employmentroseby160,000inimmediate
yearsandstillisincreasingtoday.
IthinkpolicymakersdidagoodjobendingTheGreatRecession.Thisrecessionwas
muchmorecomplicatedcomparedtothesmallerrecessionsweseethroughouthistoryandit
requiredmuchmorethoughtandinterveningbythepresidentandFederalReserve.Ithinkitwas
completelynecessarytobottomouttheFederalFundsRatethoughitdidntnecessarilywork.
Thecreationofquantitativeeasingwasnecessarytolowerlongterminterestrates.Itmadethe
consumermoreopttobuyproducts,becausepriceswerelowering,creatingmorebuyingpower

Fannon 17
fortheconsumer.TheObamaadministrationalsodidagoodjobhandlingthedelicatehousing
bubble.Givingareducedmortgageratewasessentialingettinghomeownerstorefinancetheir
homesandhavemoreconfidenceintherealestatebusiness.Iprobablywouldhavedonethe
samethingifIwereapolicymakerduringatimeofeconomictragedysuchasTheGreat
Recession.

InformationFoundAt:(TheFiscalTimes)(StateofWorkingAmerica)

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