Economic IssuesFrom Mercantilism to Stagflation
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MercantilismObject is the power and wealth of the NATION STATEWealth is POWERThe size of a countrys treasury determines its military and political powerWealth equals an accumulation of GOLD through a favorable balance of trade/paymentsA country needs to export more than it imports
Protective tariffs and trade restrictions help national industries and agricultureAcquisition of colonies which supply raw materials and buy finished products from closed marketsAssumption of an uneducated, perpetually poor laboring class
Effect on the American ColoniesAmericans were expected to provide raw materials (furs, tar, pitch, tobacco, lumber, agricultural products)No manufacturing which might compete with English monopoliesTrade only with England unless England has no interest in productsOnly buy manufactured goods from Great BritainNo dreams of economic self-sufficiency or self-government
Navigation ActsAll commerce could only be moved in British or Colonial shipsEuropean goods destined for America had to stop in Britain where tariffs could be collectedRegardless of who offers the best price, certain products must only be sold to Great Britain
The flow of moneyMoney goes OUT. Colonists buy more from Great Britain than they sellMoney used in illegal trade with other countries drains outAmerican colonies not allowed to coin moneyPerpetual shortage of currency results in BARTER
Problems with barterRestricts transactions and is inefficientDouble coincidence of wants is necessaryHow do you make change?Colonists are always in debt to banks and merchants in EnglandThe natural result is SMUGGGLING and ILLEGAL TRADE
Salutary Neglect and RevolutionForeign wars kept England distractedLed to lax enforcement of Navigation lawsSmuggling-many fortunes madeHigher standard of living in the Colonies by the RevolutionConfidence in Self-SufficiencyResentment of restrictions-perpetual economic adolescence
Rights of EnglishmenMagna Carta, Common Law, Parliament, English Bill of Rights (1688)Parliament must approve all new taxesBritish theory of virtual representationColonial belief that only their own assemblies could levy internal (direct) taxes
Market EconomyTheory: Adam Smiths Inquiry into the Nature and Causes of the Wealth of Nations (1776)AssertionsLabor, not nature, is the source of valueMan appropriates the fruits of nature by investing his labor in themPrivate property is justified by invested laborSelf-interest is the primary economic motivationMan will work harder or make innovations to benefit himselfThe market allows him to seek benefits
Market Economy (cont)The profit motive is the invisible hand which regulates the marketplaceCompetition keeps prices from going too far from production costs. Specialization and division of labor increase productivity and allow more profit.Self-interest motivates the producer to provide what society wantsThe laws of supply and demand create a self-regulating marketThe role of government is to provide for finance defense, justice and public goods
Conflict with MercantilismMercantilism required strict regulation of markets for the benefit of the nation state. Tariffs and monopolies are therefore reasonable. Adam Smiths market economy called for a laissez faire government policy which would allow competition in a free market. Greater productivity would produce a higher living standard and thus increase the wealth of the nation.
Constitutional IssuesWhich governmental authority will have the power to determine the rules of commerce?Who will levy taxes and tariffs?What rights will the owners of businesses have?What rights, if any, do workers have?Who will print or coin money, and how will its value be determined?How will the government fund its functions?
Hamilton Plan-Based on belief in a market economy and a cynical view of human natureAssumption of state and national revolutionary war debtsEstablishes creditAllows huge profits for speculatorsCreates support for the federal government by owners of newly issued bonds financing paymentsObjections of states which had paid off most of their own debts
Hamilton Plan (cont)A protective tariffConflicts with Adam Smiths theoryEncourages infant industriesStrengthens the nation by providing jobs and self-sufficiencySale of government lands at low pricesAgriculture supports citiesProsperous farmers buy industrial products
Hamilton Plan (cont)Creation of the Bank of the United StatesEstablished with both public and private fundingDiscounts bills of exchange and promissory notes of merchants, accepts deposits, issues sound currency, controls money supply (based on bimetallism), holds government deposits and sells government securities, lends money to the governmentRaises serious Constitutional questions-implied powers
Hamilton Plan (cont)Objections to the plan on the basis of:Belief in limited power of federal governmentPrediction that this would be an agricultural, not an industrial nationDetrimental effects of protective tariffs on non-industrial areas
Marshall CourtMarbury v. Madison (1803)- Judicial ReviewDartmouth College v. Woodward (1819)-Sanctity of Contracts (applied to business charters too!)McCulloch v. Maryland (1819)-States cannot tax the national governments agencies. The bank is constitutional (applied powers)Gibbons v. Ogden (1824)-Only the federal government can regulate interstate commerce (broadly defined). Eventually led to regulation of transportation, broadcasting, labor unions, product quality, wages and hours, etc.
Types of ownership in a market economySole ProprietorshipPartnershipCorporation-Chartered by a state, owned by stockholdersDisadvantages-Cost Double taxationAdvantages- Easy access to capitalUnlimited lifeLimited liabilityEasy transfer of ownershipAdvantages of scaleMass production, research, use of byproducts, pricing, efficiency, lobbying
Laissez Faire-domination of business ownersThis term was applied by others to Adam Smiths ideas: Government should not interfere with businessSmith never meant that the government should not pass laws regarding business and enforce them.By the late 1800s, industrialists expected protective tariffs and even subsidies, but they were outraged when business was regulated. Labor unions and farmers began calling for government intervention as the only possible countervailing power to industry.
TariffsRevenue tariffsLow tariffs intended to collect income for government and allow foreign goods inProtective tariffs Intended to give an advantage to domestic industry and keep out foreign goods or raise their prices so high that they are unattractive
Banks, Banking and the Money SupplyFunctions of BanksDeposits, withdraws, checks, savings, safe-deposit boxes, foreign currency, money orders, travelers checks, trust services (money management and investments), loans to businesses and individuals
What is money?Anything people will generally accept as payment for goods, services or debtsFunctionMedium of exchange (can be earned and spent in many ways-no coincidence of wants is necessary)Standard of value (allows us to compare costs)Store of value (can be saved for future use)
Money Standards(gold, bimetallism, fiat money)From the time of Washingtons administration until 1900, the U.S. used a bimetallic system to back its currencyThe problem with this is that the relative value of gold and silver fluctuates.If two kinds of money are available, people will hoard the more valuable/stable and spend the less valuable/stableWhen the government didnt adjust rates promptly, gold money would start to disappear
From 1900 until 1933, the U.S. was on the gold standard.During the depression, the U.S. went on a modified gold standard. Only in certain circumstances could dollars be redeemed for specie. Silver certificates were printed
In 1971, due to our unfavorable balance of trade with oil exporting countries, the U.S. went off the gold standard altogether. There is now a floating exchange rate internationallyThis is based on a money market much like the stock marketBanks bid on currencies of other countries and the rate depends on supply and demand. If other nations want to buy American goods, the value of the dollar rises.
Today the U.S. dollar is FIAT money. It is worth something because the government says you have to accept it for payment of debts (it is legal tender)You cannot redeem it for precious metals, but you can buy valuable goods with it
Federal ReserveThe Federal Reserve was created in 1913 to:Address banking panicsServe as the central bank of the U.S.Supervise and regulate banking institutionsProtect credit rights of consumersManage the nations money supply through monetary policyProvide financial services to depository institutions, the U.S. government, and foreign official institutions Strengthen U.S. standing in the world economy
InflationInflation is characterized by rising prices.It occurs because costs have gone up, or because demand has increasedIn the U.S. we like a LITTLE inflation. It makes the GDP go up and brings job creationRapid inflation, however, can have drastic results. People need to know what to expect.
Inflation (cont)Who benefits?Debtors (debts are easier to pay since wages are generally higher)Professionals who can increase their charges or union workers who can force increases by strikingProducers of necessary goodsWho is hurt?Lenders (who get back cheaper dollars)People on fixed incomeProducers of luxury goods