Table of Contents

A Look Into the Monetary Policies During the Great Recession and the Great Depression - Part 3

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2.1.3 Events During the Great Depression

When the Great Depression officially began in 1929, employment rates began to go down. By March 1930, more than 3.2 million people lost their jobs, and there was no sign of abatement. Even during this time, President Hoover remained optimistic, and believed that the economy would recover in 60 days. Apparently, his optimism failed to convince either the economy or the people as the unemployment rates kept going up.  As a result, many American families lost their incomes, and they were forced to go through financial hardships. The events took on an interesting twist in January 1931 when Texas Congressman Wright Patman introduced a legislation in the US Congress to pay the promised bonus to World War I veterans. He contended that this payment would help the families of these war veterans. Earlier, in 1924, the government had promised to pay veterans a sum of $1 for every day of service within the US and $1.25 for every day outside the US. However, President Hoover refused to accept the legislation because it would cost the Treasury $4 billion, and he felt this was not the right time for these disbursements. This negative response from President Hoover triggered a protest where thousands of veterans marched into Washington DC to demand the money that was promised for their services. Despite these protests, it did not translate into monetary gain for the war veterans, and the protests eventually died down. However, these protests set the stage for more as the American public were desperate for food and money.

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This desperation was evident during the “Food Riots” that took place in February 1931 across the country. In Minneapolis, for example, mobs broke into grocery stores to steal food, and this resulted in a situation of chaos and confusion. Furthermore, workers who were not born in the US were increasingly seen in different light, so more than 6,000 Mexican Americans were deported to Mexico during that year.

These expressions of anger by the American people were further precipitated by the collapse of New York's Bank of the United States in December 1931. This bank had more than $200 million worth of deposits, thereby making it the largest bank failure in the US history. To alleviate this collapse and to provide stability to the banking sector, the Congress established the Reconstruction Finance Corporation (RFC). This company was given the authority to lend $2 billion to banks, financial institutions and other credit organizations to help them meet their short-term liabilities. Also, the RFC began to lend money for public works projects that would increase employment levels across the country. The government believed that this move to create RFC would improve the liquidity position within the economy, and would provide better employment opportunities for any Americans who were out of work.

However, none of these measures showed any signs of improvement right away that went to show the failed attitudes and policies of the federal government. As a result, Hoover lost the next Presidential election to Franklin D Roosevelt in a landslide victory for the latter. During his inauguration, FDR promised that he would do everything to bring the economy back in shape. The first measure he took was to give banks a day off to halt the outflow of gold reserves, and also to use this time to come up with a plan that would save the banking industry.

In March 1933, the US Congress passed the Emergency Banking Act, under which, the powers of the President were broadened during a banking crisis. He had over-reaching authority to regulate all banking functions including transactions of foreign exchange, export, hoarding, melting and credit transfers. Under this Act, federal reserve banks were allowed to convert bonds and other US debt obligations into cash at par value. Furthermore, any cheque or bank draft could be converted at 90 percent of its value. Furthermore, the Federal Reserve was given the power to authorize the purchase of government bonds, both in the open market and through the Treasury, and they had the power to give secured loans to any bank at a rate that was one percent more than the prevailing discount rate.

The idea behind this Act was to stabilize the money supply and to bring back the confidence of people into the banking system. Thanks to the relief of the President, when the banks opened after the holiday, people were willing to deposit money into banks. This confidence reflected in the stock exchanges as well, with the Wall Street registering the biggest one-day gain since the Great Depression began.

For the time being, the Emergency Banking Act became a success. To follow up on this success, President Roosevelt and the US Congress passed a bulk of other reforms that were aimed to boost the economy. One such reform was the creation of a program called the Civilian Conservation Corps (CCC), a relief and employment program that encouraged men in the age group of 17 to 27 to work in national forests and parks. A similar organization that was created was the Agricultural Adjustment Administration that was aimed to provide an impetus to the American agricultural industry.

The Federal Emergency Relief Administration was also created to provide financial assistance for struggling small and medium businesses. Along with this Act, the National Industrial Recovery Act was passed by the Congress to create and maintain a reasonable form of wage control. As a part of this Act, the National Labor Board was setup to provide collective bargaining rights to workers. Later, the Tennessee Valley Authority (TVA) was created to undertake public works programs such as running a hydroelectric power, constructing dams, producing and selling fertilizers and developing recreational lands.

In June of the same year 1933, the US Congress passed the important Glass-Steagall Act that separated commercial banks from investment banks, and also setup the Federal Deposit Insurance Corporation (FDIC) to guarantee bank deposits. In August, the Soil Erosion Service was created to help farmers in the Southwest from the years of drought and dust that had made agriculture difficult in these regions. The Civil Works Administration was formed in October, 1933 to build bridges, schools, airports, parks, highways, roads and other infrastructure. This administration was created to provide employment to more than four million people. These measures reduced unemployment rates and the economy stopped its free fall. In fact, the economy turned around and registered its first rise, and this signaled the end of the depression and the beginning of the road to recovery.

In 1935, President Roosevelt created the Works Progress Administration, which was an extension of the Civil Works Administration. Under this program, job opportunities were given to more than eight and a half million people, and they were paid a sum of $41.57 per month. It was a massive project that helped to develop the country's infrastructure, and at the same time, it provided opportunities for skilled workers such as writers, painters, theater directors and sculptors to work on different projects related to their area of interest. Recovery continued on through the rest of the year with the Wagner National Labor Relations Act and the Social Security Act that were aimed to improve the welfare of the people. All these measures were enacted to help to take the economy slowly out of recession, though the unemployment rate continued to be high. Finally, the recession officially ended in 1939, and this was followed by a sequence of events that led to the Second World War. Despite these efforts taken by the US government, there was much controversy surrounding it, and this debate continues even today. There has been many questions as to whether it was necessary to create so many institutions to help the economy recover. Some economists even argue that the Fed and the US government should have looked at alternate and more effective policies to help the economy recover instead of the above policies.

The New Deal failed on many fronts because it did not help the economy to come out of depression. Though it provided short-term relief to some extent, it did not help the economy to gain fundamental strength. As a result, unemployment levels remained high and economic growth was painfully slow for the most part of 1930s. The economy saw light only when World War II began, and troops began to move towards the war front.

One of the biggest problems with the New Deal programs were that it was financed by imposing additional taxes on individuals and businesses. Personal taxes, excise duty, and corporate taxes all went up. In fact, the funding for the New Deal programs increased from $1.6 billion in 1933 to $5.3 billion in 1940, and all this money came from additional taxes alone (Padasso, 2003). Excise taxes were levied on almost every product, and this caused profound hardships to people. Business taxes were increased, so businesses refused to hire more people, and this caused the unemployment levels to remain high. Furthermore, the National Labor Relations Act of 1935 empowered the unions, and this again gave little motivation for businesses to increase its workforce. Also, the National Adjustment Act cut back farm production, and this led to many workers getting displaced. Due to these reasons, the New Deal programs failed miserably.

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2.1.4 The World After the Great Depression

After the Great Depression, the world saw a huge economic upswing that continued for the next few decades. This boom made many countries in the Western World prosperous, especially, after the Second World War. A few small downturns and recessions took place now and then as a way of correcting the economic system and following wrong economic policies, such as the oil crisis in 1972 and the dot-com bubble in 2000. After this relative period of economic stability, the next major downturn took place in 2007. Rightly termed as the Great Recession, this period had many aspects that were similar to the Great Depression. However, this was not as severe as the depression itself because the economic situation and the underlying causes of the recession were different, though the banking crisis was similar. Moreover, not all industries saw the same levels of fall, and in some ways, this helped the Great Recession to just remain as a recession.

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