Outlines of the Lectures and Supplemental Notes

American Economic History

Fall 2008

Professor Rockoff

Last Updated: Friday, Tuesday, November 18, 2008

Below are brief introductions to and outlines of each lecture. Some of the outlines include more detailed notes concerning points that are not covered in the textbook. From time to time during the semester I will update these outlines so they correspond to what was discussed in class this semester.  

1. The American Economy in Historical Perspective

It is important to learn the basic periods of American History and to begin putting events, as we study them, into their time slot. That means you will have to memorize when things happened.

Colonial Period
Revolutionary War (1775-1783)
Federalist Era
Early National Period
Antebellum Era
Civil War (1861-1865)
Postbellum Era
The Gilded Age (1870-1900)
Progressive Era (approximately 1900-1917)
World War I (1917-1918)
Interwar Period
World War II (1941-1945)
Postwar era

2. Mercantilism

Mercantilism was the philosophy that guided the economic relationship between Britain and her North American Colonies. Mercantilism emphasized the strict regulation of international trade in order to produce a persistent balance of payments surplus (exports>imports). Although many economists today are opposed to Mercantilism, these ideas still strike many non-economists as commonsense. I will discuss the ideas that guided the Mercantilists, especially when it came to foreign trade and colonies, the policies that they actually put into place, and the attempts by economic historians to measure the effects of  Mercantilist policies. A minor but persistent theme will be the role of special interests in shaping British colonial policy, as opposed to the broad national goals emphasized by Mercantilist thinkers.

1. Definition of Mercantilism

Sir James Steuart

Favorable balance of trade

Colonies

2. What were the ultimate goals of the mercantilists?

Full employment

An inflow of gold and silver

Military power

4. Examples of mercantilism

Navigation Acts

Enumeration

Hat Act

Iron Act

5. The critique of mercantilism and the birth of modern economics

Adam Smith

Wealth of Nations

Laissez-faire

6. Measuring the costs and benefits of mercantilism

7. The bottom line

3. The Economics of the Revolutionary War

In this lecture I look at the causes of the Revolution, in particular British land policy, and then at how the United States was able to mount an effective military action despite its governmental and financial weaknesses.

1. Economic Causes of the War
A. The Old Colonial Policy.
B. The New Colonial Policy
C. Restrictions on Western Settlement
2. The Economic Problems Faced by the Colonists
A. The British economy was larger
B. U.S. lacked a Navy, while the British had the world’s best
C. U.S. lacked a good tax system
3. Raising an Army
A. Militia
B. Regular Army
C. Conscription
4. Building a Navy
A. Regular Navy
B. Privateers
5.  Building an Air Force
6.  Financing the War
A.  Taxing
B. Borrowing
C. Printing Money
7. Economic Consequences of the War
A. Mercantilist trade restrictions removed
B. Restrictions on Western settlement are removed

Note on Conscription.

The following diagram illustrates the market for soldiers during the Revolutionary War.

The horizontal axis shows the number of soldiers; the vertical axis the income per soldier. OF is the target size of the army, say 20,000 soldiers. This may be based, for example, on recommendations from General Washington. The Continental Congress, however, is willing to pay only OC per soldier, say $5.00 per month. Its revenues are not adequate to pay OA, the amount that would bring forth the number of troops that are needed. You could say that the Continental Congress’s effective demand is CEF. There is a shortage of DE soldiers. The Continental Congress, however, begins to draft soldiers, allowing the draftees to hire substitutes to serve in their place. This means that the total demand for soldiers would be the sum of the demand from the Continental Congress and the additional demand from draftees who want to hire substitutes. If the total demand shifts out far enough we can have the equilibrium shown in the figure. The entire army will consists of volunteers. Their income per month OA will be in two parts: OC dollars per month from the Continental Congress and CA per month from the draftees who hire the substitutes. (I have described the amount paid to the substitute as CA per month, but typically he will demand it as a lump sum, because he can’t get out of the army once he signs up, even if the draftee refuses to pay him.) The total amount received by the army will be OCEF from the Continental Congress plus ABEC from the draftees for a total of ABFO. The system is efficient because people with high opportunity costs (high productivity) do not have to serve. But it may be perceived as unfair because the rich do not have to serve.

4. Opening the West

In this lecture I will discuss the process through which the public land was sold to farmers, the role of the railroads in opening the west, and the consequences of westward expansion for the American economy.

1. Privatizing of the Public Domain
A. Trends in Land Policy
B. Waves of Settlement
C. Illustrating the economic benefits of a cheap land policy with supply and demand.
2. Railroad Building

A. Joseph Schumpeter’s idea: “Building Ahead of Demand”
B. Albert Fishlow's 3 Tests of the Theory of Building Ahead of Demand
1. Population Densities -- they were relatively high when the RRs opened
2. Subsidies -- were a relatively small source of finance
3. Profit Patterns -- profits were high from the start
C. Fishlow’s concept of "Anticipatory Settlement"

3. Consequences of Rapid Settlement
A. Real GDP growth

            B. “safety valve”

C. the “naïve safety valve”

Note. Here is diagram to show the effect of the liberalization of land policy.

The government could sell the land in a particular area to farmers at $1.25 per acre. In that case the government (taxpayers) would get area B, $12,500 dollars, and the farmers would get area A.

(These are discounted values that represent earnings over a period of years. We can think of the farmer as generating a certain income each year from his farm and then paying part of it to a bank that he has borrowed from to buy the land. We could even think about the government renting out the land each year. This doesn’t change the analysis, but it is an extra complication.)

Alternatively the government could adopt a more liberal policy: it could make the land available for free, the policy known as homesteading that was eventually adopted in 1862.

(In fact, under the Homestead law the farmer had to work the land for a number of years before he could take title to it, but we won’t worry about that here.)

Under this plan farmers will take up more land. The amount bought will be 2,000 acres. (We are assuming that there is enough land even at a zero price.) The total income of the farmers will be A+B+C. But the income of the government will be zero. Since the government charges nothing, it gets nothing.

So the farmer’s net income has gone from A under a price of $1.25 to A+B+C under homesteading. True the net income of the government would go from B to zero. But total income (farmers and the government) would go from A+B to A+B+C. The total gain for society as a whole from adopting a cheaper price would be C = A+B+C - (A+B).

So what does this show us? For one thing it illustrates part of the liberal case for a lower price (poor farmers are better off, national income is higher). But it also illustrates part of the conservative case against lower prices (the government would get less).

5. Financial Panics

I lectured on the history of financial panics in the United States in order to provide some background for understanding the current crisis.

1. Financial Panics

A. What is a panic?

B. How frequent were they?

C. What causes panics?

2. Special Weaknesses of the American System

3. Financial panics and depressions

4. Lender of Last Resort

5. The Great Depression

Note on Speculative Bubbles and Financial Crises.

As I pointed out in class, there are many examples in American financial history of “bubbles” in financial markets that burst and produce financial crises. This has not been true in recent years because we have institutions in place, the Federal Reserve and Federal Deposit Insurance that (up till now) have damped down the impact of the bursting of speculative bubbles. But in the nineteenth century and the early part of the twentieth century it was a common phenomenon. It is not easy to define a “bubble” precisely. A quick definition might be a situation when asset prices seem to be rising much faster than can be justified on the basis of “fundamentals.” But to some extent that just begs the question: we then need a definition of “fundamentals.” Nevertheless, we can usually recognize a bubble when we see it. What are some examples of financial crises that seem to be preceded by a bubble and then associated with the bursting of the bubble? The crisis of 1837 was associated with the bursting of the bubble in sales of public land. The crisis of 1857 was exacerbated by the failure of the Ohio Life Insurance and Trust Company which had invested heavily in railroads. The early 1870s were a period of again of heavy investment in railroads. The Crisis of 1873 was exacerbated by the failure of Jay Cooke and Company of Philadelphia which had invested heavily in the Northern Pacific railroad. The crisis of 1907 was exacerbated by the failure of some New York banks that had (or so some accounts suggest) speculated in copper. The banking crisis of 1930 was exacerbated by the failure of the Bank of United States which had invested in mortgages on urban real estate. The current problem with subprime mortgages is part of an old story.

6. U.S. Financial History, 1791-1830 (The Federalist Financial Revolution)

In this lecture I will discuss Alexander Hamilton's plans for the currency and for the banking system, and their implementation in the early republic: the “Federalist Financial Revolution.” It is important because it introduced a set of institutions that many economic historians believe contributed significantly to the economic growth of the United States. Studying these early monetary systems is also a good way to learn some money and banking. Andrew Jackson's attack on the Second Bank of the United States is often blamed for the inflation of the 1830s and the subsequent depression. But a close look at the data shows this view to be mistaken. An increase in the stock of specie resulting from international forces appears to have been more important. The economy remained in the doldrums until the discovery of gold in California. The California gold discoveries served as a “natural experiment” that helped persuade economists that the “quantity theory of money” was correct.

1. Alexander Hamilton – the “Federalist Financial Revolution”

2. The Bimetallic Standard

3. “Gresham’s law”

4. Bank Notes as Paper Money

5. The First (1781-1811) and Second Banks of the United States Second Banks of the United States (1816-1836)

6. The Jacksonian inflation

7. America’s First Great Depression

8. The California Gold Rush

Note: Bimetallism. The story of the bimetallic ratio is worth learning because it illustrates how the search for profits can influence something as basic as the monetary system. Here is the story. The U.S. defined two quantities as being equal to a dollar: 371.25 grains of silver and 24.75 grains of gold. That meant that if you brought a lump silver to the U.S. mint they would coin it into legal tender dollars for you, with each dollar containing 371.25 grains of silver. If brought a lump of gold to the mint, they would coin it into legal tender dollars for you, with each dollar containing 24.75 grains of gold. The reason why there was more silver (by weight) in the silver dollar was that silver was less valuable. The “bimetallic ratio” was therefore 15/1 = 371.25/24.75. Another way of saying this is to say that in the United States 15 grains of silver would “buy” one grain of gold: People would exchange one silver dollar for one gold dollar because both were legal tender, and it was inconvenient to treat them as having different values. This was fine as long as the bimetallic ratio in Europe was also 15/1, as it was initially. But then the ratio in Europe began to rise. People were willing to exchange, say, 16 grains of silver for 1 grain of gold. The reason for this was that the supply of silver was rising faster than the supply of gold. Arbitragers now saw an opportunity. If you exchanged silver coins for gold coins in the U.S., exported the gold coins to Europe, exchanged the gold for silver in Europe, and then imported the silver back into the United States you could make a profit of one grain of silver on each grain of gold exported (16 -15), or one dollar on each 15 dollars of gold exported. You would have transaction costs – shipping costs, insurance costs, etc. – but if the ratio in Europe was high enough and the costs low enough, you could make a profit. For example, if you managed to exchange 150 silver dollars for 150 gold dollars, you would have 3,712.5 grains of gold. If you took that gold to Europe you could sell it for silver coins containing 59,400 grains of silver. If you brought that silver back to the U.S. mint they would coin it into $160 in silver coins. Your profit would be $10 less the costs of going through the whole thing. This is what happened, gold left the country, silver came in and the U.S. went on a de facto silver standard. This is an example of Gresham’s law in operation. You might ask yourself what would have happened if the ratio in Europe fell to 14/1.

Note: A number of students have been bothered by the idea that the Chinese balance of payments could have influenced the amount of silver and the price level in the United States, something discussed under item 2, the Jacksonian Inflation. You can read a bit more about it in the section of the text entitled "Economic Fluctuations and the Second Bank." The basic idea is simple. There are various ways to buy something from someone. You can pay cash, or you can give them something else of value. The same is true here. One way for the U.S. to buy a particular good from China (tea) was to pay in silver. Alternatively, we could pay in British pounds. Why would the Chinese take British pounds? Because they wanted a good being produced by the British (opium). Why would we have pounds to send to them? Because we were selling goods (cotton) to the British.

7. The Economics of the Civil War

In this lecture I discuss the economics of the Civil war. The lecture covers the causes of the war; the mobilization of the resources; the financing of the war; and the long-run consequences for the growth of Northern industry.

1. Economic Causes of the War

A. Slavery

B. Crisis of 1857

2. The Economics of the War

A. How bad was it?

B. Lincoln and Grant's Grand Strategy

C. Superior Northern Resources

3. Trade and Financial Policies

A. Failure of King Cotton Strategy

B. Financial Policy in the North

C. Financial Policy in the South

4. The Civil War and Northern Industrialization?

A. The Beard-Hacker Thesis.

B. Did Legislation unify the market?

C. Did Ending Slavery promote industrialization?

D. The Bottom line

8. The South after the Civil War (Sharecropping)

In this lecture I discuss the system of renting land that developed in the South after the Civil War. Land reform which transferred land from planters to the Freedmen would have eased the transition to freedom. But this did not happen. Instead the South was forced to rely on renting and sharecropping land. Sharecropping had certain advantages for the renter. But it became a symbol of Southern poverty.

1. Freedman’s Savings Bank

2. What didn't happen -- land reform

A. "40 Acres and a Mule"

B. Two Experiments with Land Reform

1. the Jefferson Davis Plantation

2. the Sea Islands of Georgia

2. Experiments with other systems in 1865-67

A. The "gang system" with wages

B. The "squad system"

C. Renting the land

1. renting for cash

2. sharecropping

3.  Sharecropping vs. Renting.

A. A typical Sharecropping contract

B. A comparison of sharecropping and renting

4. The Agricultural Ladder

A. Wage labor

B. Sharecropping

C. Cash Renting

D. Owning the land

A Typical Sharecrop Contract

GRIMES SHARECROP CONTRACT, 1882

To every one applying to rent land upon shares, the following conditions

must be read, and agreed to.

To every 30 or 35 acres, I agree to furnish the team, plow, and farming

implements, except cotton planters, and I do not agree to furnish a cart

to every cropper. The croppers are to have half of the cotton, corn and

fodder (and peas and pumpkins and potatoes if any are planted) if the

following conditions are complied with, but-if not-they are to have

only two fifths. Croppers are to have no part or interest in the cotton

seed raised from the crop planted and worked by them. No vine crops

of any description, that is, no watermelons, muskmelons, ... or

squashes or anything of that kind, except peas and pumpkins, and potatoes,

are to be planted in the cotton or corn. All must work under my

direction. All plantation work to be done by the croppers. My part of the

crop to be housed by them, and the fodder and oats to be hauled and put

in the house. All the cotton must be topped about 1st August. If any

cropper fails from any cause to save all the fodder from his crop, I am

to have enough fodder to make it equal to one half of the whole if the

whole amount of fodder had been saved.

For every mule or horse furnished by me there must be 1000 good

sized rails m.. . . . . . ., hauled, and the fence repaired as far as they will

go, the fence to be torn down and put up from the bottom if I so direct.

All croppers to haul rails and work on fence wherever I may order. Rails

to be split when I may say. Each cropper to clean out every ditch in his

crop, and where a ditch runs between two croppers, the cleaning out of

that ditch is to be divided equally between them. Every ditch bank in the

crop must be shrubbed down and cleaned off before the crop is planted

and must be cut down every time the land is worked with his hoe and

when the crop is "laid by," the ditch banks must be left clean of bushes,

weeds, and seeds. The cleaning out of all ditches must be done by the

first of October. The rails must be split and the fence repaired before corn

is planted.

Each cropper must keep in good repair all bridges in his crop or over

ditches that he has to clean out and when a bridge needs repairing that

is outside of all their crops, then any one that I call on must repair it.

Fence jams to be done as ditch banks. If any cotton is planted on the

land outside of the plantation fence, I am to have three fourths of all the

cotton made in those patches, that is to say, no cotton must be planted

by croppers in their home patches.

All croppers must clean out stables and fill them with straw, and haul

straw in front of stables whenever I direct. All the cotton must be manured,

and enough fertilizer must be brought to manure each crop

highly, the croppers to pay for one half of all manure bought, the quantity

to be purchased for each crop must be left to me.

No cropper to work off the plantation when there is any work to be

done on the land he has rented, or when his work is needed by me or

other croppers. Trees to be cut down on Orchard, House field & Evanson

fences, leaving such as I may designate.

Road field to be planted from the very edge of the ditch to the fence,

and all the land to be planted close up to the ditches and fences. No

stock of any kind belonging to croppers to run in the plantation after

crops are gathered.

If the fence should be blown down, or if trees should fall on the fence

outside of the land planted by any of the croppers, any one or all that I

may call upon must put it up and repair it. Every cropper must feed, or

have fed, the team he works, Saturday nights, Sundays, and every

morning before going to work, beginning to feed his team (morning,

noon, and night every day in the week) on the day he rents and feeding it

to and including the 31st day of December. If any cropper shall from any

cause fail to repair his fence as far as 1000 rails will go, or shall fail to

clean out any part of his ditches, or shall fail to leave his ditch banks, any

part of them, well shrubbed and clean when his crop is laid by, or shall

fail to clean out stables, fill them up and haul straw in front of them

whenever he is told, he shall have only two-fifths (2/5) of the cotton,

corn, fodder, peas and pumpkins made on the land he cultivates.

If any cropper shall fail to feed his team Saturday nights, all day Sunday

and all the rest of the week, morning/noon, and night, for every time

he so fails lie must pay me five cents.

No corn nor cotton stalks must be burned, but must be cut down, cut

up and plowed in. Nothing must be burned off the land except when it

is impossible to plow it in.

Every cropper must be responsible for all gear and farming implements

placed in his hands, and if not returned must be paid for unless it is

worn out by use.

Croppers must sow & plow in oats and haul them to the crib, but must

have no part of them. Nothing to be sold from their crops, nor fodder

nor corn to be carried out of the fields until my rent is all paid, and all

amounts they owe me and for which I am responsible are paid in full.

I am to gin & pack all the cotton and charge every cropper an

eighteenth of his part, the cropper to furnish his part of the bagging, ties,

& twine.

The sale of every cropper's part of the cotton to be made by me when

and where I choose to sell, and after deducting all they may owe me and

all sums that I may be responsible for on their accounts, to pay them their

half of the net proceeds. Work of every description, particularly the work

on fences and ditches, to be done to my satisfaction, and must be done

over until I am satisfied that it is done as it should be.

No wood to burn, nor light wood, nor poles, nor timber for boards, nor

wood for any purpose whatever must be gotten above the house occupied

by Henry Beasely-nor must any trees be cut down nor any wood used

for any purpose, except for firewood, without my permission

From the Grimes Family Papers ( #3357) in the Southern Historical Collection.

Quoted in Joseph E. Reid, “Sharecropping as an Understandable Market Response: The Postbellum South,” Journal of Economic History, March, 1973

9. The South after the War (Debt Peonage)

The system of agriculture adopted in the South contributed slow economic growth and poverty. One of the most controversial institutions, then and now, was the country store, which provided credit to the sharecroppers and other poor farmers. As often in economics, the case was: at what price? Why were interest rates at country stores so high? What were the effects on poor farmers? A variety of forces eventually brought the sharecropping system to an end. The country store system of the South illustrates that even the poorest farmers in the United States, the sharecroppers of the deep South, were integrated into the financial system, and were influenced by financial institutions and financial crises.

1. Debt Peonage
A. High Interest Rates at the Country Store
B. The “Crop Lien” law
2. The Institutions Controlling the Sharecropper -- Country Store, landowner, the legal system.
3 The Source of the Country Store's Monopoly
A. Risk.
B. Information
C. The Banking Problem in the South
State Banks
National Banks
4. Comparing sharecropping and slavery
5. Consequences for the South
A. The "Cotton-lock-in"
B. Soil Erosion -- Cotton mono-culture produced a massive problem of soil erosion
C. Education -- Southerners spent less on schooling than did other regions. There was a large gap in all states between the amount spent on White schools and African American Schools. This gap was larger in the Deep South
6. The End of Debt Peonage. A number of factors brought the system of debt peonage to an end.
A. The Boll Weevil
B. Banking reform

Interest rate example. The cash price of wheat is $.66 per bushel on May 1. The credit price, payable on November 1 (six months later) is $.87 per bushel. What is the implicit interest rate? It is approximately 63.6 percent per year, a very high rate. [($.87-$.66)/$.66]x2 = .636  (The rate is multiplied by 2 to change it from the six month rate to the annual rate).

10. Western Agriculture and Populism

After the Civil War the westward movement continued. Farmers in the new wheat-growing areas suffered from a long period of declining “terms of trade” and other problems. One result was the Populist movement which reshaped the political landscape of the United States and produced long-term changes in the role of the Federal government in the economy. The People’s party was absorbed by the Democratic party. But the Democrats became champions of many Populist proposals. During the Great Depression many of these proposals were adopted.

Chapter 15

1. Hard times on the farm.
A. The farmer's terms of trade declined.
C. The “Rain Line” was shifting. In some cases farmers had advanced into dry country because they believed that “rain follows the plow”
D. Debt burdens were also very high. Deflation made the burden of debts heavier.
2. The Populist Platform
A. The Populists championed a number of political reforms such as the secret ballot, and direct election of senators
B. The Populists opposed the War in the Philippines resulting from the war with Spain.
C. The Populists favored the regulation of Railroads, Grain Elevators, and telephones. The Supreme Court in Munn vs. Illinois held that governments could regulate the prices charged by firms that were “clothed with the public interest.”
D. In the “Crime of 1873”, as the Populists referred to it, Congress discontinued the U.S. silver dollar.
E. The Populists wanted to return to bimetallism at a ratio of 16/1. Adding silver to the money supply would create inflation and lower debt burdens.
3. The Election of 1896 and 1900. William Jennings Bryan won the Democratic nomination after giving his famous speech which he ended by declaring that "Thou Shall Not Crucify Mankind Upon a Cross of Gold"
4. The Wizard of Oz

The Wizard of Oz (notes)

Setting

Kansas …The Great Plains, Kansas City
The Land of Oz....The East
The Yellow Brick Road....The Gold Standard
The Emerald City...Washington D.C.
The Castle of the Wicked Witch of the West...McKinley’s home in Ohio

Players

Dorothy....America
Toto...The Prohibitionists
Scarecrow…The Farmer
Tin Man...The Worker
Cowardly Lion....William Jennings Bryan
Wicked Witch of the East...Eastern Financiers, Grover Cleveland, (holder of the silver shoes)
Wizard of Oz...Politicians: William Jennings Bryan, Mark Hanna (Chairman of the Republican  National Committee, later Senator)
Wicked Witch of the West…Western Financiers, William McKinley, Extremist Populist Politicians
Good Witch of the North...A sympathetic Northern politician
Good Witch of the South...A sympathetic Southern politician

Act I. "The Cyclone from the West"

The Populist movement comes roaring out of the West in 1896 like a tornado, defeats the goldbugs, and nominates William Jennings Bryan for the Presidency on the Populist and Democratic tickets. When the house falls on the Wicked Witch of the East Dorothy takes her silver shoes but does not realize their real power. (The shoes were changed to ruby slippers for the movie.)

Act II.  "On the Yellow Brick Road"

In 1900 at Kansas City the Democrats again nominate Bryan. But Bryan falters on the way to the White House by failing to push the silver issue. He proves to be Cowardly Lion.

Act III.  "The Wicked Witch of the West"

McKinley, with his clever advocacy of international bimetallism, seems to have everything going his way. But with some luck McKinley might be defeated.

Act IV.  "Home Again"

All it takes to defeat McKinley is a little liquidity. America can wake up and use the monetary system of the founding fathers, a bimetallic standard of gold and silver. Everything can be made right again.

11. FIRST EXAM

The exam will consist of multiple-choice question and short-answer questions. It will stress the lectures.

12. Transcontinental Railroads (Land Grants)

”From the calm Pacific waters to the rough Atlantic shore
climbing hills and mountains like she never did before
she is graceful as a comet, and swift as a waterfall
she is the western combination, the Wabash Cannonball”

The construction of the Union Pacific Railroad, the first of the transcontinentals, provides some important lessons about the role of government in providing the transportation infrastructure.

1. The Union Pacific Railroad
    A. Land Grants
    B. Cash subsidies
    C.  The Credit Mobilier Scandal (1872)
2. Private Rate of Return v. Social Rate of Return
3. Regulation of Railroads
    A. Granger laws
    B. The Interstate Commerce Commission was established in 1887 to regulate the railroads.
    C. Who captured the ICC?

”I've been working on the railroad
All the livelong day
I've been working on the railroad
Just to pass the time away”

”Can't you hear the whistle blowing
Rise up so early in the morn
Can't you hear the captain shouting
Dinah, blow your horn”

13. Transcontinental Railroads (Social Savings)

Robert W. Fogel measured "the social savings" – the extra amount of real GDP – created by the railroads. Fogel’s book on the railroads is one of the most brilliant and beautiful works in economic history written in this century. It was a major factor in his being awarded the Nobel Prize. His calculations showed that the railroad was not the indispensable innovation that many historians had assumed. In addition, Fogel drew attention to and refined the idea of counterfactual analysis, which has become a mainstay of economic historians.

1. The Axiom of Indispensability. Some historians claimed that the railroads were necessary for the United States to reach a high level of real GDP. Fogel tested this theory.

2. Price Differentials. Published transport costs are not sufficient to estimate the social savings.

3. Eastern distributors. Speed of replacement allowed eastern wholesalers to reduce their inventories of agricultural products.

4. Rents. Western farmers benefited from the railroads because the amount of wagon transport was reduced.

5. Counterfactuals. Fogel estimated GDP in an imaginary world in which road and water transport were improved.

7. The Bottom Line.

Note on transport costs.

The following diagram illustrates how you measure the social savings (= extra consumer surplus = extra GDP) from going from water transport to rail transport. In the diagram the cost of transport falls from OC to OD and the amount of transport purchased increases from OA to OB. The social savings is the shaded area. But we have to be careful about how we measure OC and OD. Published fares may not include all the costs of using water transport, such as waiting a long time for goods to be delivered, or all the costs of rail transport. That is why Fogel had to dig more deeply to come up with his estimates.

14. Big Business and the Robber Barons during the Gilded Age (1870-1900)

“Hog Butcher for the World,
Tool Maker, Stacker of Wheat,
Player with Railroads and the Nation's Freight Handler;
Stormy, husky, brawling,
City of the Big Shoulders: “

”Chicago” by Carl Sandburg 1916

After the Civil War the giant national and international industrial corporation came into its own. This period is often termed the second industrial revolution. This lecture discusses the reasons for the emergence of the giant corporation and the governmental response.

Chapter 17: all.

1. Industrial Revolutions

A. “The First Industrial Revolution”

B. “The Second Industrial Revolution”

C. The “Robber Barons”

2. Mass Production

A. The “Chandler Thesis”

B. Standard Oil

C. American Tobacco

3. Sherman Antitrust Act

A. Limitations of the Sherman Act

B. Founding of the Justice Department Antitrust Division

C. The Break up of Standard Oil and American Tobacco

D. “The Rule of Reason”

Note: Consider the following diagram. It shows the cost of production over a certain range of output for a particular plant employing one of the famous Bonsack cigarette making machines. When output is DG, the cost per pack is DE (or FG). Costs are measured vertically; quantities horizontally. When output is DC (or AB) then the minimal level of costs AD (or BC) will be achieved. Costs are measured vertically; quantities horizontally. Chandler’s point is that lowest costs per unit normally will be achieved when the Bonsack machine is “fully employed,” that is when it is operating around the clock. Hence the need to assure a continuous flow of raw materials into the plant and a continuous flow of finished products out of the plant.

The “Chandler Thesis” is that the new continuous-flow technology was the cause of the development of large scale integrated corporations that often controlled a large fraction of the market during the Gilded Age. Examples are Standard Oil (Rockefeller’s refineries that could process large amounts of petroleum quickly), American Tobacco (the Bonsack machine) and the Chicago meat packers.

15. The United States and the International Gold Standard

“Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”

William Jennings Bryan, 1896.

The period from 1879 when the United States joined the gold standard after the Civil War until World War I is known as the era of the classical gold standard. The currencies of the major industrial countries were all convertible into gold. This lecture explores the costs and benefits of this system. You should know this because the “Gold Standard” is frequently referred to in economic discussions. Advocates of fixed exchange rates or monetary unions, for example, may refer to the benefits that resulted from fixed exchange rates during the era of the classical gold standard.

1. What was the gold standard?

2. Why gold? (and not nickel, rubber, dead cats, etc.)

3. When was the gold standard in existence?

4. Why did the Gold Standard Produce price “stability”? Or at least avoid severe inflation.

5. How did the Gold Standard produce equilibrium in the balance of payments?

6. What were the “rules of the gold standard game”?

7. What were the Economic Costs and Benefits?

1. What was the gold standard?

It was a monetary system in which each country would fix it currency in terms of gold. For example the U.S. price of gold was $20.67 per ounce. This means that if you took 1 oz of gold to the U.S. mint, it would be turned into $20.67 in legal tender gold coins. Alternatively, if you melted down $20.67 in gold coins, you would end up with 1 oz of pure gold. The UK price was 4.253 £ per ounce. This works out to $4.86 per £. This is called the par exchange rate. Another way to look at it is in terms of the amount of metal in the coins. The U.S. dollar contained .0484 oz. of pure gold. The British pound contained .2352 oz. of pure gold. Therefore the metal contents determined the exchange rate ($4.86 = 2352/.0484). Under the classical gold standard private citizens could use gold coins. They were free to exchange paper money for gold or gold for paper money. Under some later gold standards, only the central banks were permitted to own gold. The exchange rate was fixed because you could literally melt U.S. gold coins, ship the gold bullion to England, and have it minted into gold coins in England.

2. Why gold? (and not silver, nickel, rubber, etc.)

(1) Gold had an independent value because it was used in jewelry and other decorative arts, and this added to the credibility of the government’s money.

(2) Gold was easily worked and divided, and was resistant to erosion.

(3) During the nineteenth century gold became the base of the British money supply. Since Britain was the leading industrial nation, other countries wanted to adopt the gold standard. Being part of the gold standard seemed to be a sign of being in the first tier of the nations.

3. When was the gold standard in existence?

Chronology of the Gold Standard
1821-1914	Britain is on the gold standard.
1879-1914	Britain, Germany, the United States, and many developing countries are on the gold standard. Era of the classical gold standard.
1914-1919	WWI. Only the U.S. and a few small countries closely tied to the U.S. remain on gold.
1925-1931	Great, Britain, France, and many other countries join the Gold Exchange Standard.
1931-1938	Great Depression. Countries leave gold. Exchange rates "float." There are "competitive devaluations."
1941-1946	WWII Government exchange controls.

4. How did the gold standard promote price stability? Let’s assume that prices are ultimately determined by the amount of money in circulation (the quantity theory of money). Then under the gold standard there is a limit to how fast prices can rise because there is a physical limit to how fast the money supply can rise – you have to dig the money out of the ground. There was some inflation from 1896 to 1914 because of gold discoveries in South Africa and other countries. But it was mild, two or three percent per year. Really high inflation, say 20 percent per year requires paper money. Then you can just print the stuff.

5. How did the Gold Standard produce equilibrium in the balance of payments?

Suppose the United States was on the gold standard and we were buying more from the rest of the world than we were selling to the rest of the world: a balance of payments deficit. What would happen? In other words, suppose the situation was much like it is today with the United States running a balance of payments deficit except we were on the gold standard. This is the situation in the figure. The dollar value of imports exceeds the value of exports. Under the gold standard we would be losing gold at any time such as T when imports exceeded exports. Our money supply would be falling. Prices in the United States would be falling relative to the rest of the world, making our exports more attractive (because they were cheaper) and our imports less attractive (because they were becoming more expensive relative to goods produced at home). Bourbon (which is produced in the United States) would be becoming cheaper relative to Scotch (which is produced in Scotland). In addition, interest rates would be rising in the United States This would make it more attractive for foreigners to invest in the United States. Higher interest rates might slow down the economy. But this would help solve the balance of payments problem because a recession would discourage importing and encourage exporting.

To use moralistic language, we were a bad country. We ran a balance of payments deficit. So the gold standard disciplined us by forcing us to raise prices and interest rates. If you are a bad person and spend more than you earn, you need to be disciplined. Someone needs to cut off your credit card, even if it causes you some short-term misery. The same thing was true, advocates of the gold standard believed, of nations.

This sequence (high prices, balance of payments deficit, loss of gold) is known as Hume’s “price-specie-flow mechanism.”

6. What were the “rules of the gold standard game?”

Under the "rules of the gold standard game" the Bank of England (or other central banks) was supposed to maintain the gold standard above all other goals. Thus, if England was losing gold, as in the figure above, the Bank of England was supposed to raise interest rates. This would reinforce the tendency of interest rates to rise when a country lost gold. Raising interest rates would help solve the balance of payments problem, but it might aggravate other problems such as unemployment. High rates of unemployment were not as important to politicians then as they are now because labor had less political influence.

During financial crises the Bank of England was supposed to act as lender of last resort. But even then its policies had to be based around the gold standard. It might not have enough gold to bailout everyone in trouble. And it might have to raise interest rates to attract more gold.

7. What were the benefits and costs of the gold standard?

Benefits

1. Exchange rates were fixed. This encouraged trade among nations.

2. Exchange rates were fixed for long periods of time. This encouraged capital mobility. Britain was the world’s great lender. Capital moved to the developing world to build railroads and develop natural resources. This was encouraged because exchange rates were fixed over the long run.

3. Price level stability. There could be mild inflations or deflations but no wild and crazy inflations because of the "golden anchor."

Costs

1. It takes real resources to maintain a gold standard. You have to dig gold out of the ground. Under a paper money system, the cost of producing the money supply is low.

2. High unemployment can’t be cured by monetary expansion. Instead monetary policy might have to be used to protect the gold standard. For example, if England was running a balance of payments deficit, the Bank of England would have to raise interest rates, and this would harm industry and trade. If it followed the “rules of the game” it would have to do this (staunch the loss of gold) even if it meant raising interest rates when the country was already in a recession.

Here are some wise old (British) sayings.

"10 percent bank rate will bring gold from the moon" By raising interest rates the Bank of England can attract gold to London – even if Britain starts with a balance of payments deficit – and preserve the gold standard.

"John Bull can stand many things, but he cannot stand 10% bank rate." This means that the Bank of England might have to raise rates to a very high level to save the gold standard, but these rates might depress economic activity, which would hurt John Bull, the British version of Uncle Sam.

3. Financial panics could occur and the Bank of England (or other central banks) might not be able to stop them, because they might not have enough gold to act as lender of last resort. Today the Fed can stop any financial crisis (I hope) by buying up any amount of assets. It can always print money to buy assets.

16. The Panic of 1907 and the Federal Reserve

Reporter: What will the stock market do next year?

J.P. Morgan: It will fluctuate.

About 100 years ago the financial system was rocked by a financial crisis, the panic of 1907, which is similar to today’s panic. This lecture describes the panic of 1907 and the response to it.

1. Commercial Banking vs. Investment Banking

2. Real Bills Doctrine

3. J. P. Morgan

4. Panic of 1907

5. National Monetary Commission

6. Regional Monetary Problems

7. Federal Reserve System (1913)

17. World War I (Mobilization)

Woodrow Wilson: “The World Must be Made Safe for Democracy.”

The United States was actively engaged in the war for only about 19 months. But during that time the United States had to solve some major economic problems: how to pay for the war, how to contain wage and price increases, and how to allocate resources within the munitions sector.

Chapter 21

1.Origins of the War

A. August 1914 – the outbreak of the War in Europe

B. The British Blockade

C. April 1917 – the U.S. enters the War

2. Cost of the War

A. The Size of the Armed Forces

B. The dollar cost of the War

3. Financing the War

A. Theories of War Finance

B. How WWI was actually financed.

A Note on Blowing Things Up. As an economist you must learn how to "blow things up."   For example, the baseball player Babe Ruth's salary in 1932 was $80,000. (That was more than President Herbert Hoover, but as the Babe pointed out he had a better year than Hoover.) But to understand that amount we need to blow it up and put it into today's money. We could use wages of unskilled labor to "inflate" or "blow up" the Babe's salary. Since wages rose about 46 times between 1932 and today (4600/100) the Babe's salary in today's money using wages to blow up or inflate his salary would be $80,000 x 46 = $3,680,000.

To learn more about the process you can look at the essay on my website. It is on the same page as the practice exam. Be sure to practice blowing things up.

18. World War I (Homefront)

George M. Cohan, “Over there”

Chorus:

Over There, Over There

Send the word, send the word,

Over There

That the Yanks are coming,

The Yanks are coming,

The drums rum tumming everywhere

So prepare,

Say a Prayer

Send the word,

Send the word to beware

We'll be over, we're coming over.

And we won't be back till it's over over there!

1. American entry

2. Money and Prices

3. Central Controls

A. Food Prices

B. Priorities

4. Treaty of Versailles

A. Reparations

B. Keynes and the Transfer Problem

5. Legacies of the War

Note on printing money. How can the Fed finance a war just by “printing money.” Let’s take it one step at a time, starting with a very simple case where it is easy to see that the Fed is just “printing money.”

1. The Federal Reserve could just print some paper money (say $1,000) and hand it to the Army. The Army could then go out and spend it. This would clearly be just “printing money”. And it would work: the army could use the cash to pay soldiers or buy stuff. But with more money chasing the same quantity of goods in the economy there would be inflation.

2. Make it more complicated. The Federal Reserve could print up some paper money ($1,000) and use it to buy a long-term government bond from the U.S. Treasury. The Treasury could then give the $1,000 to the Army to spend. The effect in the short-run would probably be the same: the army would have cash to spend on stuff and the spending would produce inflation. (There might be some differences in the long-run, especially if the Treasury raised taxes after the war to pay off the bond. But we can ignore these complications just to get the idea that it may not matter whether the Fed just hands cash to the Treasury or takes a bond in return).

3. Make it more complicated. The Federal Reserve could give the Treasury a check book with the right to write $1,000 worth of checks in exchange for a long-term bond. The same thing happens again. The Treasury would pass the check book on to the army. The army could write checks and buy stuff. Again, the army would get stuff and their would be inflation. It doesn’t really matter whether you buy stuff by writing a check or by handing over paper money.

Step 4. Make it more complicated. The Federal Reserve could buy a $1,000 U.S. Treasury bond from a member of the public who had bought it in turn from the U.S. Treasury. The story is really the same. The Treasury would end up with a check for $1,000 that it could deposit in a bank. It could then give the army a checkbook and tell the army that it was OK to write checks up to $1,000. The army could go out and buy stuff. In the end the effect on the economy would be the same as in 1. where the government had just “printed money.”

Note on Hidden Price Increases.

One aspect of today’s lecture that some of you found troubling was the nature and purpose of a hidden price increase through a tie-in sale. Here is an example and a diagram.

Suppose the market clearing price for wheat flour was $2.00 per sack. But suppose the Food Administration set a lower legal maximum price of $1.50 per sack. It did this, let us say, to help the poor. Grocers, however, might evade this price control with a tie-in-sale. The grocer might say, for example, that he will sell flour to you at the official price of $1.50 per bushel if you will also buy a sack of potatoes for $0.75. Suppose that the most you would pay for the potatoes, if they were sold separately, would be $0.25. Then in effect you are paying $2.00 for a bushel of flour: the actual legal price of the flour $1.50 plus the extra bit you are forced to pay for the potatoes ($0.75 - $0.25). The price controllers could try to outlaw tie-in sales. But Herbert Hoover, the chair of the Food Administration made the tie-in legal, provided the grocer was tying the sale of wheat flour to commodities and at prices that Hoover approved.

The following supply and demand diagram illustrates some of these ideas. The market clearing price of flour is $2.00, but the Food Administration sets a lower price of $1.50. This means that even when grocers sell their last sack of flour, the amount people are willing to pay exceeds $1.50. This is the incentive for sellers to try various tricks to raise the price of flour: tie-in sales, quality deterioration (add some sawdust to the flour), reduce the size of a sack of flour, and so on.

Note on rationing. This is the economic insight on page 422 of the text. Here is another version. Consider the following diagram which shows the supply and demand for sugar during World War I.

What is the free market price? Answer: the free market price is EK = DJ = CO.

Suppose the government sets a maximum price of OF = GJ = HK. What will be the resulting shortage? Answer: GI (the difference between demand and supply at the fixed maximum price).

Suppose the government issues ration tickets after fixing the price at OF. How many should they issue? Answer: OJ. (With demand equal to ABJ there will be no shortage or surplus at price OF.)

19. The Roaring 1920s: Prohibition and the Stock Market Crash of 1929

Herbert Hoover (1928). “A chicken in every pot, and a car in every garage.”

This lecture discusses two events that made people think that the 1920s were the "roaring twenties:" prohibition and the stock market boom and bust. Both events are worth studying because they are relevant to public policy. Prohibition provides important lessons about the ability and wisdom of making an addictive drug illegal. The stock market boom and bust provides important lessons about the ability and wisdom of actions by the Federal Reserve intended to control asset prices.

Chapter 22

1. Prohibition

A. Political History of Prohibition

B. Irving Fisher, America’s top economist, favored prohibition.

C. Did prohibition decrease consumption of alcohol?

D. Did prohibition increase criminal activity?

2. The Great Bull Market – the stock market boom

A. What Caused the Rise in Stock Prices?

1. Buying on Margin

2. Belief in a "New Age"

B. Was it a bubble?

C. What Caused the Collapse?

1. Recession

2. Interest Rate Policy of the Federal Reserve

D.  Did People Jump off Roofs? Lower floors? Out the basement window?

E. Did it Contribute to the Depression?

1. End of a New Age

2. Consumer durables

3. Banking crises, a separable phenomenon, also contributed to the Depression.

The following graph showing the death rate from cirrhosis of the liver (a proxy for alcohol consumption) is interesting. Note the decline in the death rate prior to the imposition of national prohibition in 1917.

The following chart shows the homicide rate. One of the criticisms of prohibition is that it produced an increase in violent crimes. What do you think? Does it confirm the idea that Prohibition produced violent crimes?

Here is a diagram which shows the stock market during the Great Bull Market of the 1920s. Note that the gains achieved in the 1920s were not wiped out immediately.

Note on Buying on Margin

When you buy stock on margin you pay for part in cash and part by borrowing from your broker. This increases your “leverage” and increases your potential profits or losses.

Consider a share of stock that costs $100. Suppose you simply pay for it with cash. Then if the price of the stock goes up to $110 you will have made a 10 percent profit.

($110-$100)/$100 = $10/$100 = .10 = 10%

If the price goes down to $90 you will have made a 10 percent loss.

($90 - $100)/$100 = -10%

Now suppose you borrow 50% of the purchase price from your broker. In this case, if the price goes up to $110 you will have made a 20% profit. Why? Because you can sell the stock, use $50 to pay off your debt, and that will leave you with $60 on your initial $50 investment.

($60 - $50)/ $50 = .20 = 20%.

If the price goes down to $90 you will have made a 20 percent loss because you will have just $40 left after paying off your loan.

($40-$50)/$50 = - 20%

If you put down just $10 in cash and borrow $90, then you will earn a 100% profit if the price of the stock goes up from $100 to $110.

($20-$10)/$10 = 100%

But if the price of the stock goes down to $90, you will lose everything. After paying off your $90 loan you will be left with nothing.

($0-$10)/$10 = -100%

There was a good deal of buying stock on margin during the 1920s. But extreme leverage was unusual. 50% down was typical.

20. Second Exam

21. The Great Contraction -- One Darned Thing after Another

Hit song in 1932:

“Once I built a railroad, I made it run,
Made it race against time.
Once I built a railroad, now it’s done –
Brother, can you spare a dime.”

National Public Radio recently ran a story about "Brother, can you spare a dime." If you go to the following site you can hear a number of renditions of the song, including one by the songwriter.

National A Depression-Era Anthem For Our Times
http://www.npr.org/templates/story/story.php?storyId=96654742&sc=emaf

This lecture discusses the dimensions of the Great Depression and the key historical events. The Depression lasted from 1929 to 1939 an entire decade. The period from 1929 to 1933 is known as the Great Contraction. In a sense we fell into a hole during the period 1929 to 1933 and spent the remainder of the decade crawling out. It is important to understand the causes of the Great Depression because the Depression was the “defining moment” in American economic history. Many of the economic institutions we know date from the Depression: deposit insurance, minimum wages, unemployment insurance, social security, the Securities and Exchange Commission, etc.

Chapter 23

1. Why is the Depression so important?

A. Institutional Legacies: Social Security, Unemployment Compensation, Minimum Wages, Agricultural Price Supports, etc., etc.

B. Ideas: macro-economic stabilization

2. What were the dimensions of the crisis?

3. What caused the Crisis?

A. The Stock Market Crash in October 1929 intensified the contraction; consumer durable purchases fell.

B. The Banking Crises        

1. October 1930 Onset of the First Banking Crisis. People withdraw cash, depressing money and credit        

2. December 11, 1930 Failure of Bank of United States. More bank withdrawals, depressing money and credit.

3. March 1931 Second Banking Crisis, More bank withdrawals depressing money and credit.

4. May 1931 Failure of Kreditanstalt in Vienna. Capital flows to U.S., but panic increases.

5. July 1931 Closing of the German Banks. Capital flows to U.S., but short-term foreign obligations of U.S. banks are frozen, more panic.

6. September 1931 Britain’s departure from gold standard. External drain of Gold.  More bank contractions.

7. February 1933 The Banking Panic of 1933. More trouble. State Bank Holidays.

4. The Federal Bank Holiday.

A. Roosevelt declares a national bank holiday.

B. The Banks are inspected, “sound” banks allowed to reopen.

C. It is announced that a system of federal deposit insurance will be set up.

D. The banking crisis comes to an end.

22. Monetary and Fiscal Policy in the New Deal

Herbert Hoover: “A chicken in every pot, and a car in every garage.” (Campaign slogan 1928)

Franklin Roosevelt: “The only thing we have to fear is fear itself.” (First Inaugural address 1933)

Chapter 23: 465-470

The leading ideas about what produced the Great Depression and what should have been done to counteract it were introduced by John Maynard Keynes, Milton Friedman and Anna J. Schwartz, and Ben Bernanke.

1. Fiscal Policy

A. John Maynard Keynes

B. Investment spending and consumption spending.

2. Monetary Policy

A. Milton Friedman and Anna J. Schwartz.

B. A “contagion of fear”

3. Banking policy

A. Ben Bernanke

B. Maintaining credit channels

23. The New Deal

Franklin Roosevelt, second inaugural: “I see one-third of a nation ill-housed, ill-clad, ill-nourished.”

1. Relief. Some of the most famous New Deal agencies were those that created jobs for the unemployed. These included the Civilian Conservation Corps and the Works Projects Administration. Harry Hopkins was an important advisor to Roosevelt who shaped Roosevelt’s relief philosophy.

2. Recovery.

3. Reform. Many areas of the economy were reformed.

A. The financial system was reformed in order to prevent a recurrence of the stock market crash and banking crises that had produced the Depression:

B. The Labor market was reformed. New legislation strengthened the hand of organized labor; and introduced social security, unemployment compensation, and the minimum wage.

4. Persistence of the Depression

5. Legacies of the Depression

6. Is it happening again?

24. World War II

Winston Churchill, First Speech as Prime Minister May 13, 1940: “I have nothing to offer but blood, toil, tears and sweat."

1. Economic Causes of the War

A. German anger over reparations

B. The desire of Germany and Japan to reach first power status

C. Autarky – the idea that a great power had to have all of the crucial raw materials within its sphere of influence

2. Cross-Country Comparisons of Munitions Production

A. The German Buildup in the 1930s

B. The U.S. “Production miracle”

C. The “Soviet Production Miracle”

D. The German and Japanese economies after the tide of war had turned.

3. Guns vs. butter in the United States

A. meaning of the term

B. The Production Possibilities Curve

4. Strategic Bombing (See the note below)

A. Strategic Bombing vs. Tactical Bombing

B. Lessons of the Spanish Civil War

C. Theories of Strategic Bombing -- sensitive points vs. mass destruction

D. The debate over the success of strategic bombing

Note on Strategic Bombing. There were two types of bombing: tactical bombing, which supported the army or navy in military operations, and strategic bombing, which aimed at destroying the economy or morale of the enemy. The U.S. and U.K. specialized in strategic bombing; Germany and the Soviet Union emphasized tactical bombing. Germany and the Soviet Union may have lost interest in strategic bombing because of their experiences with strategic and tactical bombing in the Spanish Civil War.

Here is Pablo Piccasso’s famous painting Gurenica.

It depicts the horrors of a German air attack on the town of Guernica. The attack, however, apparently did not lead to a serious loss of production or long-term deterioration in morale.

Initially, the U.K. and the U.S. emphasized striking at sensitive points in the enemy economy such as transportation, steel, ball bearings, etc. The campaigns based on destroying sensitive points, however, ran into trouble because the Germans could protect these points with massive amounts of anti-aircraft protection, and because the Germans found ways to harden sensitive cites, and disperse facilities. The Germans also found substitutes for items in short supply. In general, therefore, the attempt to destroy sensitive points in the enemy economy proved frustrating, although the attacks on oil production and rail transport at the end of the war were fairly successful. So the Allies turned to mass destruction -- destroying as much of the enemy's industrial base as possible -- of Germany and Japan as a way of ending the war. This was more true for the British who bombed at night than for the Americans who bombed by day. But in the end both countries followed a policy of mass destruction. After the war the U.S. Strategic Bombing Survey, led on the civilian level by John Kenneth Galbraith, found that strategic bombing had not been effective in the sense of reducing German or Japanese munitions production to a very low level. To the contrary, production of munitions continued to rise in Germany and Japan until very near the end of the war. Richard Overy, however, in Why the Allies Won, argues that strategic bombing was important to the war effort from a military perspective because it opened a second front against Germany. One third of German artillery production was destined for anti-aircraft protection. And many of the planes produced in Germany during the war years went up to fight the British and American bombers. This diversion of resources eased the burden of the Soviets fighting Germany on the Eastern front.

25. The Business Cycle After World War II

chapter 27

1. Definition of the business cycle – peaks, troughs, expansions, contractions

2. John F. Kennedy and Lyndon B. Johnson – the “New Economics”

3. Richard Nixon – ending “Bretton Woods”

4. Jimmy Carter – Inflation

5. Ronald Reagan – Monetarism

6. Clinton – Clintonomics

26. Final Exam