THE ROLE AND IMPACT OF FEDERAL INTERVENTION FOLLOWING THE GREAT DEPRESSION
First and Last Name
Course Name
Date
The major transformation in the federal government’s role undoubtedly came with the passing of the New Deal. Before its implementation, the United States faced its longest and deepest economic downturn in the form of the Great Depression. At the time, an unclear understanding of the causes of the financial crisis led to confusion over the federal government’s role in protecting its populace from such manmade disasters. The increasing popularity of Keynes’ economic principles encouraged the mass belief that adopting different economic policies can help boost national economies struggling with recession. Such a novel understanding, coupled with the failure of President Herbert Hoover, prompted the expansion of the federal government through the enactment of Franklin Roosevelt’s ‘The New Deal.’ Even though it is difficult to quantify the impact of the New Deal, its legacy on national policy largely lies in its expansion of the federal government’s size, role, and scope in regulating national economic activity.
Historical Context
On October 24, 1929, the stock market crashed less than a year into President Herbert Hoover’s tenure. The president, among other financial experts, believed the crisis was part of a larger passing recession[1]. While economists continue to affirm the main causes of the market collapse, most experts argue on the possible role of poor financial policies. Across four years (1929-1933), the quantity of goods and services output by the United States fell by more than a third[2]. The unemployment rate exploded by 25%, and the stock market lost over 75% of its value[3]. Such market conditions led to nearly 7000 banks failing. In the stores, the price of eggs had fallen from 50 cents to 13 cents, while the price of gasoline had fallen from 10 cents to below a nickel[4]. Despite the price of goods going down to stimulate demand, there was little supply due to the recession.
Some experts believed that the adoption of protectionist trade policies led to the collapse of the stock market. The policies were impediments to effective international trade but were seen as essential at a time when political tensions between developed nations were at a peak[5]. For instance, The Smoot-Hawley policy of 1030 increased the cost of importing, resulting in retaliatory financial policies against the United States by its primary trading partners[6]. On the other hand, some economists argue that the cause of the Great Depression was the inevitable failure of capitalism. The flawed economic principle was associated with excessive consumption in the 1920s. The excessive building and investments made from speculation contributed to a skewed distribution of income and wealth[7]. The failure of such investments and the existing income disparities created conditions for the nation’s money stock to contract.
While the causes of the depression remain unclear, it was evident that existing monetary policies prevented the United States economy from recovering. President Hoover had rejected the thought of increased federal interventions in implementing fixed prices, regulating business, and manipulating currency value since they seemed like steps that would drive the country towards socialism[8]. As a result, the president refused to employ federal money to assist the citizenry. Without federal intervention, poor capitalistic policies, such as monetary contraction, tax hikes, and restrictions on international trade, remained in play[9]. Most states continued to restrict banks from diversifying their portfolios while the Revenue Act of 1932 was the highest tax increase in American history[10]. The increase in individual and corporate taxes killed all incentives for industrial work, entrepreneurship, or investments in the American economy. The federal government was failing by not intervening and its financial policies at the time were equally ineffective.
Analysis of the New Deal
The United States’ monetary haemorrhage during the Great Depression ended with President Franklin Roosevelt’s election. As part of his New Deal, the president declared a national bank holiday, which was the immediate closure of all banks, including the Federal Reserve Bank[11]. The financial institutions could only resume normal operations after receiving a federal license. The need for licensure highlights the New Deal expanding the federal government’s role in regulating banks. Roosevelt’s Emergency Banking Act reorganized banks in the country by closing insolvent ones during this national banking holiday[12]. The federal government also implemented the Federal Deposit Insurance Corporation (FDIC), a permanent deposit insurance system designed to offer people relief during financial disasters[13]. The structural changes to banks and the introduction of the FDIC helped restore confidence in the banking industry, with many Americans pouring their savings back into the banks and money stocks expanding.
One of the major objectives of the New Deal was to stimulate increased spending and production to facilitate price increments in goods and services. One way in which the New Deal achieved this feat was by ratifying the 21st Amendment to end alcohol prohibition[14]. Americans were free again to purchase and consume beer. President Roosevelt also passed the Tennessee Valley Authority Law, which gave the government the power to control flooding and hydroelectric power production[15]. The move was essential in controlling agricultural production in the country. Congress also paid commodity farmers a fee for them to abandon their fields at the end of production to prevent surpluses in the market, which is essential in driving prices up[16]. Roosevelt was able to secure other major Congressional bills within his first 100 days, all designed to stimulate spending and price increments. The federal government was taking a direct and vigorous approach to addressing the Great Depression.
Despite the positives of the New Deal, the Great Depression persisted. High unemployment rates, struggling agriculture, and an unstable national economy continued to plague President Roosevelt’s tenure. Therefore, in the Spring of 1935, the president introduced a Second New Deal. Roosevelt introduced the Works Progress Administration (WPA), an institution for providing jobs to the unemployed. WPA was not allowed to compete with private entities and was primarily focused on improving the public infrastructure. The project led to the emergence of the creative industry, with artists, theatres, and music entering the mainstream economy. The Wagner Act of 1935 improved working conditions, while the Social Security Act of 1935 guaranteed pension payments. All these new policies boosted corporate performance by enhancing the conditions in the labour market. The federal government was direct in its control of labour conditions and their influence on national corporate performance.
Impact of the New Deal
Franklin Roosevelt’s New Deal had substantial implications on America’s history and approach to federal governance. The novel legislations effectively introduced various federal agencies, including the FDIC, Securities and Exchange Commission, National Recovery Administration, and Civilian Conservation Corps[17]. The rise in the number of public institutions mirrored a philosophical change in public sentiment regarding the federal government’s role in ascertain public welfare. It was collectively accepted that it is the federal government’s responsibility to maintain the positive health of the national economy and the citizens’ welfare[18]. Therefore, each introduced federal institution targeted one or two controls driven towards these nationalistic objectives. The result was increased government control of agricultural production, labour availability, money supply, and the price of goods and services. It should be perceived that the new legislation ushered in a new era of unparalleled government participation in solving America’s economic problems.
The New Deal helped address the unemployment rate and provided a long-term framework for economic policy reforms. The WPA introduced a means to include the civil populace in the mainstream economy without impacting the private sector. The government took up the role of employing people in domestic infrastructure projects, helping improve transport and health in the country[19][20]. Improvements in highways and healthcare delivery are associated with enhanced corporate and national performance. The SEC and FDIC remain to be important federal agencies in the stabilization of stock markets[21]. Through the introduction of the SCE, American companies have learned to comply with particular financial reporting standards that help investors and consumers from purchasing risky stocks. Perhaps the largest impact of FDR’s New Deal was the reinstitution of people’s trust and faith in banks.
FDR’s New Deal effectively balanced the tenets of socialism and capitalism while rejuvenating the national economy. The reforms to the labour market facilitated the introduction of unequal pay scales for women and ethnic minorities[22]. The approach could be perceived as a form of income relief for the lower social classes as it enhanced household disposable income. The New Deal also offered financial help to vulnerable groups, such as single mothers, the disabled, and the elderly[23]. By empowering such disadvantaged groups, FDR was able to boost their reintegration into the national economy. More people were able to go back to work, directly saving capitalism[24]. Unfortunately, time has revealed that the socio-political aspects of the New Deal were more successful than the economic ones.
Long-Lasting Implications of the Federal Intervention
FDR’s New Deal aimed to rejuvenate the national economy by stimulating consumer demand and spending. The novel federal approach accepted the concept of federal deficit spending, a monetary policy approach that traces back to the British economist John Keynes. The economist believed that government spending that places money in the people’s hands enhances their purchasing power, improving their capacity to buy goods and services from the private sector[25]. Within the same principle, if the employers (producers) can create and sell more goods and services, they are in a better position to hire more people. The same employees that are hired benefit from affording the goods and services. A cyclic economic approach that Roosevelt and his supporters embraced in the reversal of the Great Depression.
The New Deal, however, was partially successful in its expansion of federal interventions. In 1935, the Supreme Court ruled against implementing several fiscal policies. The opposition led to FDR suggesting the potential expansion of the Supreme Court to include fifteen justices. The suggestion was a political miscalculation as the expansion of the judiciary has long curtailed the functions of the executive. Ultimately, the United States could only come out of recession due to the exploded expenditure on the military that the Second World War demanded. Nevertheless, the main features of the New Deal, born out of Keynesian principles, such as the federal regulation of income, labour, social security, and collective bargaining, are still practiced today.
Conclusion
The big question that remains today is whether the Great Depression could happen again. Economists are yet to reach a consensus on the actual causes of the financial recession, and scholarly research highlights that the New Deal was not completely successful in addressing the economic downturn. Despite these fears, it is anticipated that there will be increased federal efforts in preventing such manmade catastrophes. The New Deal introduced numerous federal agencies that oversee specific financial and economic functions, making it unlikely that there could be an entire system collapse. The Great Depression was an essential lesson that sound and informed economic policies can help guarantee that periodic fluctuations in the labour market and national corporate output do not develop into major financial disasters. Economic shocks are inevitable; therefore, the goal is to prepare for them and become resilient.
Bibliography
“Herbert Hoover on the Great Depression and New Deal, 1931-1933.” History Resources, July 10, 1931. //www.gilderlehrman.org/history-resources/spotlight-primary-source/herbert-hoover-great-depression-and-new-deal-1931%E2%80%931933
Edwards, Chris. “The Government and the Great Depression.” CATO Institute Tax & Bulletin, no. 25 (2005): 1-2.
Fishback, Price. “How Successful was the New Deal? Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s.” Journal of Economic Literature, vol. 55, no. 4 (2017): 1435-1485.
Forner, Eric. Give Me Liberty: An American History. London: W.W. Norton, 2014.
Forner, Eric. Voices of Freedom: A Documentary History. London: W.W. Norton, 2017.
History Editors. “The New Deal.” History, March 28, 2023, //mail.google.com/mail/u/0/#sent/FMfcgzGsmhVXprzlFlBgmxXKKclJRHhR
Kennedy, David. “What the New Deal Did.” Political Science Quarterly, vol. 124, no. 2 (2009): 251-268.
Wheelock, David. “The Great Depression: An Overview.” St. Louis: The Federal Reserve Bank, 2021.
[1]Chris Edwards. “The Government and the Great Depression.” CATO Institute Tax & Bulletin, no. 25 (2005): 1.
[2]David Wheelock. “The Great Depression: An Overview.” (St. Louis: The Federal Reserve Bank, 2021): 11.
[3] Wheelock. “The Great Depression: An Overview.” 11.
[4] David Wheelock. “The Great Depression: An Overview.” (St. Louis: The Federal Reserve Bank, 2021): 11.
[5]Chris Edwards. “The Government and the Great Depression.” CATO Institute Tax & Bulletin, no. 25 (2005): 1.
[6]David Wheelock. “The Great Depression: An Overview.” (St. Louis: The Federal Reserve Bank, 2021): 11.
[7] Wheelock. “The Great Depression: An Overview.” 12.
[8]“Herbert Hoover on the Great Depression and New Deal, 1931-1933.” History Resources, July 10, 1931.
[9] Chris Edwards. “The Government and the Great Depression.” CATO Institute Tax & Bulletin, no. 25 (2005): 1.
[10] Chris Edwards. “The Government and the Great Depression.” CATO Institute Tax & Bulletin, no. 25 (2005): 1.
[11] History Editors. “The New Deal.” History, March 28, 2023.
[12] Chris Edwards. “The Government and the Great Depression.” CATO Institute Tax & Bulletin, no. 25 (2005): 2.
[13] Edwards. “The Government and the Great Depression.” 1.
[14]History Editors. “The New Deal.” History, March 28, 2023.
[15] History Editors. “The New Deal.” History, March 28, 2023.
[16] History Editors. “The New Deal.”
[17]David Kennedy. “What the New Deal Did.” Political Science Quarterly, vol. 124, no. 2 (2009): 253.
[18] Kennedy. “What the New Deal Did.” 252.
[19]Eric Forner, Give Me Liberty: An American History. (London: W.W. Norton, 2014): 817.
[20] Price Fishback. “How Successful was the New Deal? Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s.” Journal of Economic Literature, vol. 55, no. 4 (2017): 1437.
[21] David Kennedy. “What the New Deal Did.” Political Science Quarterly, vol. 124, no. 2 (2009): 266.
[22]Price Fishback. “How Successful was the New Deal? Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s.” Journal of Economic Literature, vol. 55, no. 4 (2017): 1438.
[23] Fishback. “How Successful was the New Deal? Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s.” 1439.
[24] Fishback, 1439.
[25] Forner, Eric. Voices of Freedom: A Documentary History. (London: W.W. Norton, 2017): 305.