Global and Political Economic Environment

Lecture 1
 What is “Political Economics”
Our approach will be:
+ to study major aspects of global economic history since the 1920’s,
and,
+ to review changes in principles for management of economic
policy, that arose as a result of social and economic experience,
+ and understand the role of political influences on the direction of
policy change.
Collectively, that illustrates the operation of “Political economics’.
 Evolution in Political Economy
• Pre Industrial Revolution, economies were based around
agriculture and limited basic manufacturing (cloth, crafts,
etc) – made in cottages and by small guilds in towns.
• Populations were rural (85%) and widely dispersed.
Governed through feudal system. Feudal nobles and leading
merchants created Parliament to restrict use of arbitrary
power by Monarchs.(Magna Carta etc)
• Society suffered heavy concentration of wealth and power.
• ‘Mercantilism’ drove Trade, i.e. Rulers used sea-power, and
traders, to enlarge national share of global wealth (gold).
• With Industrial revolution, urban populations rose rapidly.
Need for political representation of large new urban classes
became critical …many feared mass uprising if this not
achieved. Beginning of movements leading to modern democracy
 Why study Political Economy?
• Over 20th century – with advent of mass politics – economic policy has become
major priority of Governments.
• Growth, inflation, Taxation and social services are central issues in lives of urban
classes, with middle-class aspirations
• Democratic Governments draw their success, and define their mandates, around
Economic policies
• Globalisation has greatly increased national interdependence. Foreign policy of
major nations increasingly based around global co-operation on Trade and Capital
flows
Future prosperity for corporations will depend on sound domestic macro-
economic management by major economic Blocs; and politicians will need to
demonstrate much clearer understanding of economic policy management in an
increasingly integrated world.   
 Why start with the Great Depression?
- taught weaknesses of ‘Laissez faire*’
  Economic management learnt critical lessons from policy
shortcomings , between 1928 and 1933 with respect to:
•  Evaluating Monetary policy actions in isolation from risks posed to/by
conditions in the Banking sector’;
• Ignoring damage of “Debt deflation*” to overall economy;
• Appreciation that ‘Market failure” could nullify effectiveness of
Monetary policy: Fiscal ‘excess’ then critical;
• Understanding the contractionary impact of Trade Protectionism on
world growth;
• Recognising limitations of Gold Standard, and even fixed-exchange
rates, as Exchange rate policy.
All preempted by Keynes. ‘Keynesianism’ dominated next 50 years.
Required very active economic intervention by Govt.
World economic growth since the ‘30s, and Globalisation, owes a great
deal to the ‘lessons learnt’ from the Great Depression.
 3.The Great Depression
Causes, Remedial Action, Results
Causes :
While the USA was both the source of, and the most deeply affected by, the Depression spread
internationally. Causes:
1. US and Global economic Imbalances:

• Unequal Distribution of Income/Income Inequality: Within the US, ’23 to ’29, manufacturing grew 32%-
while wages grew only 8%; income of top 0.1% of population equal to bottom 42%’s: Industrialists only thought
about themselves.

• Excess lending & credit by the Bank: to ensure consumption power, huge increases in Banks Consumer
credit;

• Excess lending of Shares: Stock Market shot up from continued manufacturing expansion and margin
lending by banks at 10%;
The Bank Failures
• Agri-manufacturing imbalance: Agricultural incomes in US eroded sharply as over-production led to price crash; Agri incomes
fell to 1/3rd per capita income.

• Europe was rebuilding after WW1; heavily indebted to US ($10.3bn); high US tariffs prevented generation of Trade surpluses to
repay debt. Europe had to repay the debt to US and it was also facing a trade deficit.
 Causes..contd (3 other structural arrangements)

2.Protectionism:
• To protect domestic industry, US raised tariff barriers twice, in1922 and
1930. As European exports to US fell, Europe cut back on Imports from
primary producing countries, affecting Asia, Latin America .
3.Gold standard:
• Gold standard meant countries could not restore competitively through
devaluation; Gold hoarding by US and France raised interest rates
elsewhere and sharply reduced global money supply, worsening
Depression.
4. Bias for “Market” vs. “State” role as economic agent:
• Prevailing conviction that Business, not the State, ‘owned’ the machinery
for economic growth – “market” was ablest/able to guide, State
interference would distort natural order.
 
Gold Standard

• a monetary system in which a nation’s currency is

pegged to the value of gold.
• In a gold standard system, a given amount of
paper money can be converted into a fixed
amount of gold.
• Countries on the gold standard can’t increase the
amount of paper money in circulation without
also increasing their reserves of gold.
The Federal Reserves had limited the supply of
paper money
paper money is backed up by gold.

Anytime I can take my paper

money to some bank and
redeem them by gold
Linking the gold to the paper
currency actually limited the
money supply

Using money backed up by

Gold rather than floating it
free
 Advantages of GS
• It guaranteed that the government would redeem any amount
of paper money for its value in gold.
• That meant transactions no longer had to be done with heavy
gold bullion or coins.
• It also increased the trust needed for successful global trade.
• Paper currency now had guaranteed value tied to something
real.
• The benefit of a gold standard is that a fixed asset backs the
money's value.
• It provides a self-regulating and stabilizing effect on the
economy.
• The government can only print as much money as its country
has in gold. That discourages inflation, which is too much
money chasing too few goods.
 How the Gold Standard Made the Great Depression
Worse?
• Once the Great Depression hit with full force, countries once again had to
abandon the gold standard.
• When the stock market crashed in 1929, investors began trading in
currencies and commodities.
• As the price of gold rose, people exchanged their dollars for gold.
• It worsened when banks began failing (and as money supply circulation
was limited due to GS it cannot help the failing banks)
• People started to withdraw all their money from Banks
• People began hoarding gold because they didn't trust any 
financial institution.
• The Federal Reserve kept raising interest rates.
• It was trying to make dollars more valuable and dissuade
people from further depleting the U.S. gold reserves.
• These higher rates worsened the Depression by making the
cost of doing business more expensive.
• Many companies went bankrupt, creating record levels of 
unemployment.
• On March 3, 1933, the newly-elected 
President Franklin D. Roosevelt closed the banks.
• He was responding to a run on the gold reserves at the
Federal Reserve Bank of New York.
• By the time banks re-opened on March 13, they had turned in
all their gold to the Federal Reserve.
• They could no longer redeem dollars for gold. Furthermore,
no one could export gold.
 Events 1929-1932:
The US slowdown; Wall Street Crash; international
repercussions:
• US Govt strongly pro-business and pro- capital: through ‘20s: Tilted policies of US
govt towards the Supply-side of the economy:
– tax rates slashed;
– interest rates kept low;
– labor union powers limited;
– minimum wage declared illegal by US Supreme Court, etc.
– Social Security virtually absent.

• US economy slowed mid 1920’s:

– from over-production,
– falling US exports (as European countries cannot import due to high debt)
– over-indebted consumers - Bank Credit losses increased, even before Stock Market
crash.
• Between 1/28 and 9/29, DJI doubled – 190 to 380, supported
by heavy Bank lending ( at 10% margins, DJI gave 10x ROI)????

• To curb runaway speculation, FED (Ferderal Reserve - the

central banking system of the United States of America) raised
interest rates: share prices fell sharply, accelerating credit
losses at Banks, and igniting Banking crisis.
 Events 1929-1932 contd..
• International economic repercussions were widespread: by 1932,
World Trade fell to 33%;

• Credit-Anstalt (Austria) crash, 1931, led to run on European banks,

and currencies, forcing most major countries ( exc. France) off Gold
Standard.
 Credit-Anstalt (Austria) crash, 1931

Former Creditanstalt
building
Socio/political effects of high unemployment and perception of ‘flaws’ in Capitalist
systems, were significant, and resulted in major changes in political governance in
Europe and beyond:

1) the arrival of Social-welfare State, in the UK/France/Scandinavia;

The welfare state is a form of government in which the state protects and promotes
the economic and social well-being of the citizens, based upon the principles of 
equal opportunity, equitable distribution of wealth, and public responsibility for
citizens unable to avail themselves of the minimal provisions for a good life.
 2) the rise of new political ideologies to replace Capitalist democracies –
Fascism in Germany/Italy;

• Fascism is a form of far-right, authoritarian characterized by dictatorial power, forcible suppression of

opposition, and strong regimentation of society and of the economy[3] which came to prominence in
early 20th-century Europe.
• The first fascist movements emerged in Italy during World War I, before 
spreading to other European countries
• Fascists believe that liberal democracy (characterised by elections between multiple distinct 
political parties, a separation of powers into different branches of government) is obsolete and regard
the complete mobilization of society under a one-party state (which one political party has the right to
form the government) as necessary to prepare a nation for armed conflict and to respond effectively to
economic difficulties.
• Such a state is led by a strong leader—such as a dictator and a martial government composed of the
members of the governing fascist party—to forge national unity and maintain a stable and orderly
society.
• Fascism rejects assertions that violence is automatically
negative in nature and views political violence, war and 
imperialism as means that can achieve national rejuvenation.
• Fascists advocate a mixed economy, with the principal goal of
achieving national economic self-sufficiency) through 
protectionist and interventionist economic policies (favoring
government intervention in the market process to correct the 
market failures and promote the general welfare of the people.)
 Benito Mussolini (left)
and Adolf Hitler (right), the
fascist leaders of
the Kingdom of
Italy and Nazi Germany,
respectively
3) the rise of Military or Military allied Govts in Latin America and
Japan;

4) and everywhere, the strong surge of Leftist/Communist parties, given

that the USSR was industrializing rapidly through this period, showing high
growth and employment levels. 
 Events 1929-1932 contd…
• In the US, between ’29 and ’32, unemployment rose to 25%;
manufacturing fell 40%; and GDP, 30%.
• 11,000 out 25,000 US Banks collapsed; deposit conversion to cash
shrank money supply and thus, lending capacity – Economy’s
“Conveyor belt” thus broken;
• Govts reaction muddled; also too little, too late – e.g., raised
interest rates in ‘31; did nothing to prevent banking crisis.
• Govt inactivity based on “market” view that economy would
restructure at lower costs, once enough weaker players had been
wrung out…employment would ensue, growth rebound.
• Did not recognise ongoing “Market failure” in which falling
prices created “debt deflation’, i.e. unemployment reduces
demand; prices fall; Money worth more in future – so
investment/consumption postponed ; production falls,
factories close;, unemployment rises even more, etc.
 Events 1932- 1936
US Rescue and Reform strategy:
•Roosevelt became President in 1932 with mandate to provide relief and employment. 3 “R”s – Relief, Recovery, Reform.
Immediate steps – within 100 Days- included:

1)Banking recovery: shut Banks with assurance only ‘solvent’ Banks would be allowed to open – confidence returned;
2)Passed Glass-Steagall law 1933:
– separated Commercial and Investment banking;
– created FDIC: The Federal Deposit Insurance Corporation is one of two agencies that provide deposit insurance to depositors in U.S. depository
institutions
– Set up Security Exchange Commission (SEC).

• 
 Glass-Steagall law 1933:
• This act separated investment and commercial banking activities. At the time,
"improper banking activity," or what was considered overzealous commercial bank
involvement in stock market investment, was deemed the main culprit of the
financial crash.
• According to that reasoning, commercial banks took on too much risk with depositors'
money.
• Commercial banks were accused of being too speculative in the pre-Depression era in
part because they were diverting funds to speculative operations. Thus, banks
became greedy, taking on huge risks in the hopes of even bigger rewards. Banking
itself became sloppy, and objectives became blurred. Unsound loans were issued to
companies in which the bank had invested, and clients would be encouraged to invest
in those same stocks.
• the GSA set up a regulatory firewall between 
commercial and investment bank activities, both of which
were curbed and controlled. 
• Banks were given a year to decide on whether they would
specialize in commercial or in investment banking. 
What Is the Federal Deposit Insurance
Corporation (FDIC)?
• The Federal Deposit Insurance Corporation (FDIC) is
an independent federal agency insuring deposits in
U.S. banks and thrifts in the event of bank failures.
• The FDIC was created in 1933 to maintain public
confidence and encourage stability in the financial
system through the promotion of sound banking
practices.
• As of 2018, the FDIC insures deposits up to $250,000
per depositor as long as the institution is a member
firm. It is critical for consumers to confirm if their
institution is FDIC insured.
The U.S. Securities and Exchange
Commission (SEC) is an 
independent agency of the United States
federal government
. The SEC holds primary responsibility
for enforcing the federal securities
 laws, proposing securities rules, and
regulating the securities industry, the
nation's stock and options exchanges,
and other activities and organizations,
including the electronic securities
markets in the United States
 Events 1932- 1936
US Rescue and Reform strategy:
3) Created Civil Conservation Corps: environment development, employed 2.5mn:
•CCC - a voluntary public work relief program that operated from 1933 to 1942 in the United States
for unemployed, unmarried men. Originally for young men ages 18–25.
•The CCC was a major part of President Franklin D. Roosevelt's New Deal that provided unskilled
manual labor jobs related to the conservation (prevention of wasteful use of a resource) and
development of natural resources in rural lands owned by federal, state, and local governments. ‘
•The CCC was designed to provide jobs for young men and to relieve families who had difficulty
finding jobs during the Great Depression in the United States.

• 
 Events 1932- 1936
US Rescue and Reform strategy:
4) Passed Agricultural Adjustment Act: restricted Agricultural production, to raise prices;
invested in farming modernization:
•a United States federal law of the New Deal era designed to boost agricultural prices by reducing surpluses.
•The Government bought livestock for slaughter and paid farmers subsidies not to plant on part of their land. 

• 
5) US left the Gold Standard (1933):
•Faced with mounting unemployment and spiraling deflation in the early
1930s, the U.S. government found it could do little to stimulate the
economy.
•To deter people from cashing in deposits and depleting the gold supply, the
U.S. and other governments had to keep interest rates high, but that made it
too expensive for people and businesses to borrow.
•So in 1933, President Franklin D. Roosevelt cut the dollar’s ties with gold,
allowing the government to pump money into the economy and lower
interest rates.
 Events 1932-1936
6) Set up Tennessee Valley Authority: massive
building of Dam and irrigation infrastructure
covering 7 States (most of Tennessee, portions of 
Alabama, Mississippi, and Kentucky, and small slices of 
Georgia, North Carolina, and Virginia):

– a federally owned corporation in the 

United States created by congressional charter
on May 18, 1933, to provide navigation, flood 
control, electricity
generation, fertilizer manufacturing,
and economic development to the Tennessee
Valley, a region particularly affected by
the Great Depression.
 Events 1932-1936
7) Established National Industrial Recovery Act: companies
could raise prices as long as they raised wages as well.

• A US labor law and
consumer law passed by the
US Congress to authorize the
President to
regulate industry for fair wages
and prices that would stimulate
economic recovery.
 Events 1932-1936
8) Public Works Administration – constructions of
schools, roads, civil amenities, employed 4 mn people;
• It was created by the National
Industrial Recovery Act in June 1933
in response to the Great Depression.

• It built large-scale public works such

as dams, bridges, hospitals, and
schools.

• Its goals were to spend $3.3 billion in

the first year, and $6 billion in all, to
provide employment,
stabilize purchasing power, and
help revive the economy.
 Events 1932-1936
• National Industrial Recovery Adminstration (NIRA) involved
Business and Labour working together in recovery strategy;
 Events 1932-1936
9) National Housing Agency: lent for home mortgages:
•The Federal Housing Administration (FHA) is a United States government
agency founded by President Franklin Delano Roosevelt, created in part by
the National Housing Act of 1934.
•The FHA sets standards for construction and underwriting and insures
loans made by banks and other private lenders for home building.
•The goals of this organization are to improve housing standards and
conditions, to provide an adequate home financing system through
insurance of mortgage loans, and to stabilize the mortgage market.
10) FERA: direct cash relief to the poorest;
SECOND TERM:
REINFORCEMENT AND MORE FUNDING FOR
PROGRAMS INITIATED;
IN ADDITION, WORKED ON QUALITATIVE
CHANGES:
1) National Labour Relations Act 1935: empowered labour
Unions;
a foundational statute of United States labor law which
guarantees the right of private sector employees to
organize into trade unions, engage in collective bargaining,
and take collective action such as strikes. 
2) Fair Labour standards act: ensured minimum wage;
a federal law which establishes minimum wage, overtime pay
eligibility, recordkeeping, and child labor standards affecting
full-time and part-time workers in the private sector and in
federal, state, and local governments.
3) Social Security Act 1935: provided for provision of
Pensions; Unemployment insurance; child welfare support;

1935, created Social Security, a federal safety net for elderly,

unemployed and disadvantaged Americans.
 Legacy of New Deal
• Stability of Financial system undertaken as a fundamental responsibility of Government
• Enlarged responsibility for Government in economic and social issues: transformation
of Fiscal policy guidelines, deficits necessary when “Market” fails
• Social Security Act: collective responsibility for popular well being  
The New Deal did aid recovery: but in 1937, by raising interest rates again,
unemployment – which had reduced to 12% - once again rose, to 15%.
It was only the arms spending and military recruitment, leading up to US entry into
WW2, that really restored employment and economic growth:

the US, post WW2, was the unchallenged ‘free’ world superpower, and asserted its
economic dominance rapidly in the following years.
 
 
 Did FDR actually hold up US recovery?
Several observers say FDR in fact delayed recovery, while he achieved some gains
on relief and reform. Criticism is:
• NIRA allowed oligopolistic behaviour by industry, kept prices too high;
• Labour power allowed it to raise wages, go on strikes etc, which discouraged
investment;
• high taxes also discouraged investment, while Excise taxes hurt the poor
consumer;
• AAA raised price of agricultural goods, and benefitted only largest farmers; etc
In reality, FDR was not at heart a true Keynesian, and was keen to cut fiscal deficit
– so did not spend enough, and used monetary policy too conservatively.
 Keynesian
• Keynesian economics was developed
by the British economist John
Maynard Keynes during the 1930s in
an attempt to understand the Great
Depression. Keynes advocated for
increased government expenditures
and lower taxes to stimulate
demand and pull the global
economy out of the depression.