Perhaps the most relevant article that displays the intervention of the government of the United States to the economy of the country is the Great Depression of the thirties. Throughout American history, it can be said that the Great Depression has indeed changed the course of America’s economic history. It was a very important event where businesses and banks failed. Whatever happened to the economy of the United States during the Great Depression is something anyone would never want to go back to. Not one martyr will ever want to re-experience the days of the Great Depression.
Robert Samuelson says everything very well in his article entitled “Great Depression”. The author of this article is a well-known journalist for several newspapers, including the Washington Post and Newsweek. The article he wrote makes the readers realize that the Great Depression is best understood if the order of worldwide economy is broken down, having the Great Depression as the last chapter of it. Robert Samuelson’s article, in summary, is about the difference between the United States’ economy when the US government intervened and when it did not.
He named four major differences which he explained very well in the context of “the gold standard,” “economic policy,” “production patterns,” and the “impact of the First World War. ” The Major Differences In the gold standard, the US government was requested to restore money for gold. A higher limit was then set for the number of paper currency. Inflation was successfully prevented because of such convertibility. The main goal restored during the First World War was keeping the gold standard alive. In fact, in 1925, Great Britain was made to use gold for their market.
A lot of other countries did not use gold, although they supported their paper money by using British pounds and US dollars which are the same currencies convertible to gold. Because of this, governments became less flexible. Once a loss of convertible currency is experienced, interest rates become higher. This resulted to the discouragement and disappointment of a lot of people when it comes to having gold converted from deposits that were bearing interest. The commitment to convertibility and the value of gold was not ruined by inflation during this time (Samuelson, 5).
As to economic policy, the US government didn’t have the confidence of its people when it comes to the prevention of business failure and depression. Businesses were self-correcting. They could stand on their own. Recovery was spurred because of the presence of interest rates and wages that got lower. The decline of industrial production was experienced in 1920 to 1921 with a whopping 25 percent downturn. A Federal Reserve was initiated by the government, supporting the people with emergency funds.
The advantage of emergency funds can be seen with the absence of financial panic in the middle of economic depression in the United States. With Federal Reserve, surprise withdrawals did not cause panic since emergency funds was there to support banks (Samuelson, 6). With production patterns, it was in the time of Great Depression when raw materials and farming had the most significant economic role to play. The domestic prices, during this time, had a lot to say about world trade and market. Once the price of a commodity was lowered, domestic prosperity was sure to be crippled.
The purchasing power of primary producers, especially farmers, in the whole nation, was always destroyed everytime commodity prices were reduced to a lower price. In fact, a major part of the employment rate of the United States was made of farmers. During this time, it was 23 percent. Today, there is only 2. 5 percent. Poor nations had their goods imported from other countries (Samuelson, 7). The impact of World War I is indeed something to be remembered because of the suspension of the gold standard. People feared the potential inadequacy of gold reserves when it comes to functioning as a back up or support for larger money supplies.
British pounds and US dollars soon become convertible to gold and sometimes a gold substitute itself. Germany was left in the middle of overwhelming reparations payments since Britain got weaker and weaker each day because of the war. The Astro-Hungarian Empire was divided into a lot of different countries. The countries under the Austro-Hungarian Empire, including Germany, loaned convertible currencies. These foreign loans were needed to finance their imports. Instability was very prominent at this time. Short-term loans were withdrawn and world trade was crippled.
The countries that borrowed foreign currencies from other countries retrenched (Samuelson, 8). The Intervention of the Government According to the article, the decline of the US economy can be blamed to the government intervention when Federal Reserve was initiated. The Federal Reserve was not initially entirely a system controlled and operated by a private company. Half of its operations came from the government of the United States. It was during the next years when it became an act and signed into law by President Woodrow Wilson.
Deposits were not insured during these years. This meant that once the bank goes bankrupt, money supply gets shrank and savings are automatically wiped out (Samuelson, 9). Since anything can be seen in two different perspectives, economist Charles Kindleberger considers the Great Depression as a sign that economic leadership was very scarce or barely even there. However, emergency loans were created. Without it, financial crises would never have been prevented at all. Overseas investments were started too, which kept the market’s expansion continuous and open (Samuelson, 10).
Government intervention was just inappropriate in the United States during this time because of the Federal Reserve System. How the government intervened with the economy and what goals it held to achieve can be seen with the main objectives of coming with a Federal Reserve System. Banking panics are a very big problem when it comes to the economy of a specific country. What the Federal Reserve aimed to address was this problem. The government thought that a healthy economy and an intelligent banking system can be created through such an act or system.
With this, the United States had a central bank, too. Other purposes of the Federal Reserve System were to balance the government’s responsibilities in terms of centralized efforts and the interests of banks. The consumers had credit rights and the Federal Reserve aims to protect it. It also served to regulate and supervise banks and their operations (The Fed, 4). Monetary policy was another the result of the Federal Reserve System because it was through this act where the supply of money in the United States was managed.
Because of this, the Federal Reserve System assumed to effect long-term yet moderate interest rates, stability of the prices of commodity and optimization of employment (Armed with, 3). Federal Reserve also aimed to keep the stability of the economic situation in terms of the whole financial system of the nation. Financial markets were removed of systemic risks if there are any. Foreign official institutions, depository institutions and the government of the United States itself was relieved because of the financial services of the Federal Reserve System.
The exchange of money between countries was facilitated and the needs for local liquidity were attended. Overall, the Federal Reserve aimed to make the United States the last one standing when it comes to world economy (After each, 5). All these, however, came too late. If it ever came just in time, problems would still arise and goals were never tried and tested for the government to be sure about enacting this into a law and more so, intervene with the economy. Because of the disadvantages the Federal Reserve has, Ron Paul, who was then a congressman in 2002, suggested the abolition of the Federal Reserve.
He knows that its monetary policies and the efforts of the government to intervene with the nation’s economy does not really work. He believes that the Federal Reserve is the breeding ground of the monetary policy being nothing but boom-and-bust. The people affected by the abusive monetary policy of the Federal Reserve are the working and middle class Americans. The purchasing power of each American has slowly eroded throughout the years, starting from the very first day Federal Reserve came to life (Paul, 2). Whatever economic suffering experienced by the nation all roots down to the Federal Reserve.
After the tragic Great Depression period, there came the seventies when stagflation occurred. After this, the dotcom bubble had burst. In the last 80 years, Americans had been suffering. The roots are traced back to the policy and government intervention in the face of the Federal Reserve System. The people who have direct access to the money that’s artificially inflated and to the credit are the same people who turn out to be the major beneficiaries of such government intervening act. Leaders who spend big benefit a lot, too, because they use the artificially inflated currency to cover the actual prices of the welfare-warfare situation.
Without the Federal System, free market is achieved and the value of money finally becomes stable (Paul, 5). In conclusion, the intervention of the government was very much needed during the Great Depression. The government, however, lacked world economic leadership as suggested by economist Charles Kindleberger. With this, government intervention may not be something that economists would suggest. What the government needs to do, if it really has to intervene with the economy, is to stop permitting or allowing any possibility of massive spending or overwhelming banking collapse.
The dropping of rates initiated by the Federal Reserve System alone aggravated the declining economic situation of the world, particularly the United States. The government can do two things: hinder or help the economy. Then again, there is always a smarter and more appropriate way to handle the economic heat. What the government needs to do for now is to go back to the basics and figure out exactly how.
Works Cited Paul, Ron. “Abolish the Federal Reserve. ” Ron Paul’s Speeches and Statements. 10 September 2002. 16 April 2008 <http://www. house. gov/paul/congrec/congrec2002/cr091002b. htm>.
Samuelson, Robert J. “Great Depression. ” The Library of Economics and Liberty: The Concise Encyclopedia of Economics. 2002. 16 April 2008 <http://www. econlib. org/Library/Enc/GreatDepression. html>. The Federal Reserve System Publications. “In Plain English: Making Sense of the Federal Reserve. ” The Federal Reserve Board. 2006. 16 April 2008 <http://www. stls. frb. org/publications/pleng/PDF/PlainEnglish. pdf>. Wolfram, Gary. “Econ101: The Great Depression. ” Human Events: Leading the Conservative Movement Since 1944. 28 February 2008. 16 April 2008 <http://www. humanevents. com/article. php? id=25234>.