Those who believe in Keynesian economics point out the importance of government intervention during economic hardships. The Keynesian view says the economy is dependent on demand driven spending and when the private sector is unable to spend, the government has to pick up the slack through fiscal stimulus. They point out the New Deal as the turning point of the Great Depression and government spending as the main reason why the economy began to improve. The justification for the economy not improving at significant pace and the second depression that occurred in 1937 is the result of not enough spending by the government, in the Keynesian view. The rise again of government spending during WWII is what Keynesian theorists say finally pulled America and the world out of the Great Depression.
The argument to this idea is that the economy had no place left to go but up after hitting all time lows in most major economic indicators. We then have to be critical about the reform policies that took place in order to truly see which programs were effective and which were not. The New Deal failed to provide sustainable growth policies to the economy and although this fiscal stimulus might have helped in some ways, it was not the driving force behind the eventual stable economy in the postwar period. The surge in growth early in Roosevelt’s presidency is now viewed by Barry Eichengreen and many other economic historians as a result of the abandonment of the gold standard and other non-fiscal factors, though few would deny that the New Deal deficits were of some help (Hannsgen 80). How then could there be an argument against the spending during WWII as not being the cause of a prosperous postwar economy? Many people do not realize that during the war, there was a drop in consumer spending due to the fact that manufacturing and many other sectors were focused on providing goods for the war. While income increased during this time period, savings increased as well because of the drop in consumer goods production. Although government spending is an integral part of the GDP calculations, it cannot be the driving force behind a sustainable economy. Consumer spending is also critical.
The unemployment numbers are also disputed because of the increase in national defense related jobs. Similar to today when 200,000 people get hired by the government for temporary work on gathering census data and the jobs report get skewed. Many people wonder why if the government spending did not lead to sustainable economic recovery back then, why would we think it would work today? The answer seems to be that although government spending might not have been the driving force, it definitely provided short term relief from a potential complete economic collapse. In the same way the fiscal stimulus today may have prevented complete economic collapse.
Hoover’s administration failures taught us valuable lessons about monetary and fiscal policy during a recession. Raising taxes to tackle deficits is something countries know now makes the crisis substantially worse and must be dealt with at a later time. This is why taxes have actually gone down during the current crisis for 95% of Americans. Higher tax rates mean less money for consumers to spend and the Federal Reserve is wisely advising our government to abstain from tax increases. Liquidity in the form of the money supply is also something we have learned cannot be ignored. Monetary policy has been enacted to keep interest rates at virtual zero, in order to encourage the quantity of loans demanded. Many people say that this only encourages borrowing by the same institutions that overleveraged themselves in the first place and will cause the economy to collapse again, but the cost/benefit analysis has obviously determined that the costs of a tight monetary policy during a recession has to be avoided. And although globalization has caused imports and exports to be a higher factor of GDP than before, the Great Depression taught us the impacts of restricting trade during a recession. US President Obama has been involved in restoring world trade in negotiations with China, Canada and many other countries.
PBS timeline of the Great Depression: http://www.pbs.org/wgbh/amex/rails/timeline/index.html.Additional Sources:
1. Beaudreau, Bernard C. 2005. How the Republicans Caused the Stock Market Crash of 1929. Bloomington, Indiana: iUniverse Publishing.
2. Bernanke, Ben S. 1995. The Macroeconomics of the Great Depression: A Comparative Approach. Journal of Money, Credit and Banking, 27(1): 1-28.
3. Bernanke, Ben S. 2002. Remarks by Governor Ben S. Bernanke At the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois. On Milton Friedman's Ninetieth Birthday. November 8.
4. Bernanke, Ben S. and Kevin Carey. 1996. Nominal Wage Stickiness and Aggregate Supply in the Great Depression. Quarterly Journal of Economics 111(3): 853-83.
5. Bordo, Michae D., Christopher J. Erceg, Charles L. Evans. 2000. Money, Sticky Wages, and the Great Depression. The American Economic Review 90(5): 1447-1463/
6. Britannica Online. 2010. New Deal. Retrieved January 8, from Encyclopædia Britannica Online: http://search.eb.com.ezproxy.lib.utexas.edu/eb/article-9055453.
7. Calomiris, Charles and Joseph R. Mason, 2003. “Fundamentals, Panics, and Bank Distress During the Depression”, American Economic Review 93.
8. Cogley, Timothy. 1999. FRBSF Economic Letter 99-10. Federal Reserve Bank of San Francisco online. March 26.
9. Cole, H., and L. Ohanian. (2000). New Deal policies and the persistence of the Great Depression: A general equilibrium analysis. Federal Reserve Bank of Minneapolis. Discussion Paper.
10. Barry Eichengreen. 1996. Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. New York: Oxford University Press.
11. Eichengreen, Barry, and Jeffrey Sachs. 1985. Exchange Rates and Economic Recovery in the 1930s, Journal of Economic History 45: 925-946.
12. Eichengreen, Barry and Peter Temin. 1997. The Gold Standard and the Great Depression. NBER Working Paper No. W 6060.
13. Fisher, Irving. 1933. The Debt-Deflation Theory of Great Depressions Econometrica 1: 337-357.
14. Fisher, Irving. (1934). "Are Booms and Depressions Transmitted Internationally Through Monetary Standards?" 2nd printing with additions and corrections. New Haven, CT: Irving Fisher.
15. Friedman, Milton and Schwartz, Anna J. A monetary history of the United States, 1867- 1960. Princeton, NJ: Princeton University Press, 1963.
16. John Kenneth Galbraith. 1955. The Great Crash of 1929. New York: Mariner Books. An excellent account of the stock market bubble and the Great Depression
17. Gay, Edwin F. 1932. The Great Depression. Foreign Affairs, Vol. 10, No. 4 (Jul., 1932), pp. 529-540.
18. Hannsgen, Greg and Dimitri B. Papadimitriou. 2009. Lessons from the New Deal: Did the New Deal Prolong or Worsen the Great Depression? Levy Institute Working Paper No. 481.
19. Keynes, John Maynard. 1936. The General Theory of Employment, Interest and Money.
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21. Kindleberger, Charles P. 1986. The World in Depression, 1929-1939. Berkeley: University of California Press.
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23. NPR.org. http://www.npr.org/templates/story/story.php?storyId=113875201
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26. Powell, Jim. 2003. FDR’s Folly. New York: Three Rivers Press. One attack on FDR's policies can be found in Jim Powell's FDR's Folly.
27. Rappoport, Peter and Eugene N. White. 1994. Was the Crash of 1929 Expected? The American Economic Review 84(1): 271-281.
28. Robinson, Bruce. 2009. World War Two: Summary Outline of Key Events. BBC Online. November 5.
29. Sprinkel, Beryl Wayne. 1952. Economic Consequences of the Operations of the Reconstruction Finance Corporation. The Journal of Business of the University of Chicago 25(4): 211-224
30. Steinbeck, John. 1939. The Grapes of Wrath. New York: Viking Books.
31. Taylor, Jason E. 2002. The Output Effects of Government Sponsored Cartels During the New Deal. The Journal of Industrial Economics 50(1): 1-10.
32. P. Temin, Did Monetary Forces Cause the Great Depression? New York 1976.
33. Temin (1989) . Temin, Peter. (1989). Lessons from the Great Depression. Cambridge, MA: MIT Press.
34. Wicker, Elmus. "A Reconsideration of the Causes of the Banking Panic of 1930." Jour-nal of Economic History, September 1980, 40(3), pp. 571-83.
35. Wicker. The banking panics of the Great Depression. Cambridge: Cambridge University Press, 1996.
