Great Depression Today's Global Economic Thesis
- Length: 9 pages
- Sources: 5
- Subject: Economics
- Type: Thesis
- Paper: #72406170
Excerpt from Thesis :
The excessive use of margin had encouraged speculation. Poor governance on the part of banks and brokerages allowed for a market failure where investors were not making rational decisions, resulting in a bubble.
A variety of new taxes were created to offset Roosevelt's social programs. The American psyche had been scarred by the abject poverty of such a wide proportion of the population. There was palpable fear and desperation. This resulted in the creation of a social safety net and massive infrastructure investment. To pay for this, payroll taxes were developed and this was followed by more taxes to pay down. Withholding taxes and broader income taxes also came out of this era.
The gold standard was abandoned as a result of the Great Depression. The rigidity of the standard was considered to be an impediment to recovery. The coming of World War Two resulted in the postponement of monetary system development until the Bretton Woods conference, which resulted in a modified version of the gold standard.
Economists have spent entire careers trying to understand the Great Depression. Keynesian economic theory derives largely from an explanation of the New Deal -- the government spending made up the difference in the balance of payments, raising the GDP as a result. The monetary supply theory was developed, attributing the bulk of the Depression to the structural problems in the banking system. The Federal Reserve's inaction with respect to increasing money supply is therefore held as a primary cause. This theory has guided Federal Reserve policy in recent years. This theory is similar to the Austrian school's money supply theory, which blamed the excess of money in the 1920s for the bubble and its subsequent burst.
The neoclassical view is that the decline in productivity in the late 1920s caused the Depression. In truth, it was likely a combination of all of these factors. Events as cataclysmic as the Great Depression are not caused by one or two antecedents. It takes a wide range of problems to back a nation into a corner like the Great Depression. The causes can thus be divided into two categories -- structural issues from the 1920s and government responses in the 1930s.
Roosevelt's famous inaugural address exemplifies the view of Hoover's responses to the crisis:
"So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself -- nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance." -- F.D. Roosevelt
The fear was twofold. The first fear was the consumer fear of the country's financial system. There was credit available in 1930 and the market was on the road to recovery. But consumers did not feel as comfortable as market participants, however, and kept their cash to themselves. It was not until Roosevelt's banking reforms that the fear began to fade. Had the government taken steps to alleviate the fear at the outset of the crisis, the impacts may not have been as bad.
The second fear was the fear of competition. Competition is the lifeblood of the market system. Trade increases availability and decreases prices. The retaliation for Smoot-Hawley reduced U.S. exports, putting significant strain on the economy. Equally important was the reduced availability and increased price of imported goods. The impacts of this response were devastating, taking a recession and turning it into Depression. The Fed's lack of willingness to increase the money supply may have also contributed to the Depression. Consumers were relatively unwilling to spend, so more money may not have helped, but businesses may have been able to keep their workers employed long enough for Roosevelt to take power and make the necessary banking and trade reforms.
The Great Depression is the benchmark for economic crisis and the most important event in 20th century U.S. history. From the depths of the Depression comes the basis of our current economic thought and many of our governmental institutions and programs (and taxes). There is no one root cause of the Depression. It was precipitated by poor governance and irrational investing and then exacerbated by a series of ill-conceived policies. Debate also remains as to the impact of the New Deal. Most of the world had already turned the corner by the time the New Deal was implemented and it is entirely possible that the U.S. would have turned the corner as well.
On balance, Roosevelt's greatest contribution to the ending of the Depression may have been the development of a regulatory framework for the banking industry. This restored some of the faith in the banking system. Consumers will did not have jobs, which meant that this restoration of confidence took a long time to trickle through the economy.
Ironically, it was Smoot and Hawley who made the greatest contribution of any politician or economist as a result of the Great Depression. Over one thousand economists had petitioned against their bill, but a clutch of selfish business interests made the Act happen anyway. It would be to their detriment, as export markets dried up. The value of open trade to the development and sustained success of the global economy would be taken much more seriously following Smoot Hawley. The end of the 20th century and the beginning of the 21st century have been driven by improved freedom of trade, a telling legacy of Smooth Hawley's brutal contribution to Depression-era suffering.
The greatest economic event of the 20th century was followed by the greatest event of any type. The New Deal had failed to provide employment for Americans despite the government-sponsored improvements to the GDP. The Depression, built on the bubble of 1920s excesses, declining consumption and incompetent government response during the Hoover era, came to an end as loudly as it began, with the coming of war. But the lesson we learned from the Depression are still remembered today, and our policies and actions reflect that.
No author. (1929). Wall Street Hums on the Day of Rest to Catch up at Work. New York Times. Retrieved April 23, 2009 from http://www.nytimes.com/library/financial/102829crash-sunday.html
No author. (1929). Stocks Collapse in 16,410,030 Share Day, but Rally at Close Cheers Brokers; Bankers Optimistic, to Continue Aid. New York Times. Retrieved April 23, 2009 from http://www.nytimes.com/library/financial/103029crash-lede.html
Salesman, Richard M. (2004) "The Cause and Consequences of the Great Depression, Part 1: What Made the Roaring '20s Roar" The Intellectual Activist .
Carter, Susan. (2006). Historical Statistics of the U.S.: Millenial Edition. Retrieved April 23, 2009 from http://www.hyperhistory.com/online_n2/connections_n2/depression9.html
Wilson B. Brown and Jan S. Hogendorn. International Economics: In the Age of Globalization. Retrieved April 23 from http://www.google.com.au/books?id=5SoP6KUDwY4C&pg=PA246&dq=smoot+hawley&sig=GplUGJBCti3Tv3XN2saPicP5Lsw
U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1957 (Washington, D.C., 1960), p.70.
Franklin D. Roosevelt's Inaugural Address, 1933 retrieved April 23, 2009 from http://historymatters.gmu.edu/d/5057/