Iinstitutional regulation of economic growth

Great Depression refers to a ten-year slump in the global economy that most stunningly affected industrialized nations. A combination of interrelated factors caused the depression, which affected Australia, Western Europe, and North America. The primary causes of the Depression include overproduction and surplus; market and stock speculation; immature government or institutional regulation of artificial economic growth; income disparity; and false optimism. Black Tuesday symbolizes the Great Depression, even if the stock market crash did not cause the ensuing crisis. Rather, the Wall Street crash reflected the failure of speculative spending and indicated core weaknesses in global economic policy. The United States in particular felt the brunt of the depression because of the devastating effects it had on the agricultural sector. Moreover, the political responses to the Great Depression by Presidents Hoover and Roosevelt transformed American domestic and foreign policy. Hoover’s hands-off approach gave way to Roosevelt’s brand of big government.

Speculation artificially inflated the U.S. And global economy throughout the 1920s. Investors pumped up stock prices on borrowed funds, a short-sighted approach that would lead to an enormous production surplus. With too many consumer goods and not enough consumer purchasing power, almost all the key industries faced collapse including technology and agriculture. The prevailing economic doctrine presumed that all booms and busts were inevitable and that the crisis would subside on its own. However, the Great Depression forced economists and politicians to rethink the role of the market economy and global trade.

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One of Hoover’s most disastrous responses to the Great Depression was the Smoot-Hawley Tariff. Intended as protectionist legislation, the tariff deeply curtailed the flow of international trade and injured the global economy. Passed in 1930 in the wake of Black Tuesday, the Smoot-Hawley Tariff slapped a 50% tax on all imported goods and led to a strong retaliatory response from America’s trading partners. With international trade at a stand-still, surplus goods could not be circulated through the economy and the Tariff thus deepened the Great Depression.

The national currencies of industrialized nations were also backed by the gold standard: each bill was essentially a promissory note of a specific value of bullion. By linking currency to gold, economies restrict the value and quantity of money available.. If the supply of money circulating through the economy is limited to the nation’s gold deposits, then any hoarding will severely curtail and stagnate spending.

The gold standard proved too inflexible to permit a burgeoning interdependent global market to survive the initial economic recession. Had economies been more flexible the industrialized nations might have been able to curb the crisis and prevent a recession from becoming an all-out depression. Being linked to the 100% gold standard therefore harmed prospects for a speedy economic recovery in the United States and abroad. Gold, moreover, had stabilized in price and backed up the economies of most industrialized nations (Gupta & Lee 1996). In fact, a lasting legacy of the Great Depression was its virtual obliteration of the Gold Standard.

Hoover also blindly and naively trusted in existing institutions like the Federal Reserve Board. Many banks were not even members of the Fed, rendering the institution powerless. The Fed failed to prevent the artificial boom of the 1920s (Gupta & Lee 1996). Lowering the interest rates led to a flood of investors who helped stimulate industrial and agricultural production during a time when purchasing power for the average consumer was low. In other words, the investments were unwise and unfounded. Inflation resulted. Before he was president, Hoover served as Secretary of Commerce under Coolidge. Coolidge ignored Hoover’s early warnings about market speculation but the unwavering belief in perpetual prosperity led to a laissez-faire response to the impending crisis. Adding to the problem, Wall Street investment bankers refused to obey the Fed’s proposals to cease speculation. Weak governmental intervention and stubborn responses by overzealous investors led to the stock market crash in October of 1929. Non-existent money artificially inflated the prices of stocks traded on the market and caused firms to produce more than they could sell. When reality hit, it was too late to prevent the market from crashing.

President Hoover reacted by stimulating construction and public works projects. Urging firms to keep wages steady and relatively high, he cut taxes and increased allocations for public spending. Hoover was initially praised for his approach and for his awareness of ancillary factors causing the recession including his blaming rampant stock speculation. His reputation fell when he passed the Smoot-Hawley Tariff. Moreover, his pro-development policies did not help circulate the surplus goods. Oversupply and under-demand were still core problems that needed to be addressed. Worker wages remained too low to stimulate consumer spending. In the absence of unemployment insurance or welfare assistance programs, many Americans went hungry even in the midst of surplus goods.

Hoover’s successor, Franklin Delano Roosevelt, initiated big-government policies to make up for Hoover’s more lax response to the crisis. When he took office in 1933 Roosevelt began delivering regular radio addresses to the public to stimulate confidence and hope. His set of big-government responses was collectively known as the New Deal. New Deal programs stimulated key industries. Not all of Roosevelt’s New Deal programs succeeded and many failed. However, his interventionist politics changed the course of American History by redefining the role of the government in economic affairs, in the market, and in global policy.

Two of the predominant failures of the New Deal include the Agriculture Adjustment Administration (AAA) and the National Industrial Recovery Act (NIRA). Both were later declared unconstitutional, and they failed to achieve their stated objectives. The AAA was intended to raise the price of agricultural goods to help farmers get back on their feet. However, to accomplish the goal the AAA actually paid farmers not to grow crops and manage their livestock for production. Similarly, the NIRA was instated to boost the prices of industrial goods but it too failed to address the root causes of the Depression. The NIRA did boost support for trade unions and set the stage for the federal minimum wage. The Public Works Association (PWA) also grew out of the NIRA and its grade-scale public projects helped stimulate the economy through job production and a reasonable, long-term outlet for industrial spending. Similarly, the Civilian Conservation Corps (CCC) offered work for both men and women to contribute to the restoration of American parks and recreational areas while earning a living. The Works Progress Administration (WPA) left a lasting legacy as did the Federal Emergency Relief Administration (FERA).

New Deal programs, policies, and ideologies changed American core values. What was once a nation characterized by libertarian ideals became a nation inextricably intertwined with the global market economy. The First and Second World Wars also brought to light the political interconnections and unavoidable conflicts between nations that would affect American foreign policy for the remainder of the century. New Deal programs created the Social Security Act and institutions like the Federal Deposit Insurance Corporation (FDIC) that acknowledged the need for some big government programs.


America’s Great Depression.” Retrieved Oct 25, 2006 at http://www.amatecon.com/gd/gdcandc.html

Gupta, P. & Lee, J. (1996). “The Great Depression and the New Deal.” Retrieved Oct 24, 2006 at http://www.bergen.org/AAST/Projects/depression/

Gusmorino, P.A. (1996). “Main Causes of the Great Depression.” Retrieved Oct 25, 2006 at http://www.gusmorino.com/pag3/greatdepression/

The Herbert Hoover Presidential Library and Museum.” Retrieved Oct 24, 2006 at http://hoover.archives.gov/exhibits/Hooverstory/gallery06/gallery06.html

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