The Great Depression

The Great Depression is often seen, in its simplest form, as the resulting recession in the wake of the Stock Market Crash of 1929 until the entry of the US into World War Two more than a decade later, with the accompanying mobilization of the populace, industry, and policy towards victory. To attribute the total reversal of fortune in the US to the outbreak of war itself is disingenuous, as many government policies during the Great Depression not only alleviated the sufferings of the general public, but also stimulated the economy and hastened its recovery either directly or indirectly. Perhaps the most impactful legislation during the period is FDR's New Deal, which encompasses many economic policies specifically designed to mitigate the effects of the depression. The claim that the Great Depression was caused specifically by government intervention in the economy can be proven demonstrably false, as several presidencies directly prior to FDR's had advocated for a Laissez Faire economic policy as well as promoted a generally deregulatory atmosphere dealing with business and wealth accumulation. To preface any further elaboration, I must define 'government intervention.' 'Government' will be defined as, ' the organization, machinery, or agency through which a political unit exercises authority and performs functions and which is usually classified according to the distribution of power within it,' [1] while 'to intervene' will be defined as, 'to come in or between by way of hindrance or modification.' [2] The term 'government intervention' in the economic context which I describe it in will therefore signify the imposition of the will of a ruling political body (i.e. The United States) onto the market in a way designed to curb economic autonomy of the market. I will first address the causes of the Great Depression. The Great Depression was caused by a myriad of factors, but most directly by the repeated failure of the US government to intervene in the economy and further legislate certain areas of the market, allowing corporations to expand in a swift and unsustainable manner in addition to facilitating banks' irresponsible lending habits and monetary policy. The US Federal Reserve was organized largely in response to the Panic of 1907, wherein a failure to corner the stock of United Copper nearly resulted in economic disaster on Wall Street. The disaster was only averted when financial giant J. P. Morgan stepped in and took control of the situation, though damage had been done. The tide of public opinion, having already been negative towards the elite members of society, seemed to have reached a peak as a result of the adverse effects of the crisis; commodity prices fell by 21%, industrial production dropped by 11%, imports fell by 26% and unemployment rose from 2.8% to 8%. [3] Various efforts originating from the panic would culminate in the 1913 Federal Reserve Act, formally establishing the Federal Reserve, which still exists to this day. During the Great Depression, the Federal Reserve would fail in its duty to act as a lender of last resort and would also stifle the economy leading up to the Depression through mismanagement, poor monetary policy, and inspiring a confidence to invest among smaller banks with less capital on hand, as they believed that they would be bailed out. Thus, the Federal Reserve assumes a unique role in history; It was an evidently necessary agency, so as to avoid a devastating situation similar to the Panic of 1907, but also was one of the main causes of the Depression. The main issue here lies not in the fact that the Federal Reserve was the literal apparatus for government intervention in the economy, as a Federal Reserve system is generally considered necessary to ensure the health and vigor of the economy, but the fact that the government failed to strengthen it at all prior to the onset of the Depression. The distinction here is key; The government's lax policy not only in managing the Federal Reserve but also in finance, compounded with a failure to decisively act, was the root cause of the Great Depression. The government was responsible for the depression precisely because they failed to act when they could. A lack of oversight or any sort of cohesiveness in the Federal Reserve system, which was highly decentralized at the time, was a major issue. Each district was run by a governor who set the policy for his individual district, sometimes answering to the overseeing Federal Reserve Board that was based in Washington D.C., whose members were appointed by the president for terms of 10 years initially, 14 year terms later in the system's life. Monetary policy became chaotic without reliable current information, with many different individuals in the Federal Reserve having a variety of opinions on the best course to take with fiscal policy. [4] Enforcement of government policy can therefore be described as erratic through the Federal Reserve System, and many glaring issues weren't rectified within the Reserve system and the banks until the Banking Acts of 1933 and of 1935, when it was too late to prevent the depression itself. Inability to deal with a variety of economic realities persisted in even the relatively robust Federal Reserve system and persisted abroad in other countries who had readopted the gold standard after the First World War, mostly due to the inherent nature of the gold standard itself and it's deflationary trends. The depression was as much a product of the international situation post-World War One as it was of the poor domestic situation. America had been launched into financial relevance on the international stage by its entrance into World War One and emerged a creditor, insisting on the repayment of large war debts, especially from France and the United Kingdom. Stubborn insistence by the US government of full repayment soured European relations immensely and sparked a new wave of isolationism, influencing future trade agreements and interactions, most evident in the form of retaliatory tariffs. Adherence to the gold standard can be generally correlated to deflation and poor economic performance when compared to countries that weren't on the gold standard. While the countries which were to abandon the gold standard in 1931 did slightly worse in 1930 and 1931 than the nations of the Gold Bloc, subsequent to leaving gold these countries performed much better. Between 1932 and 1935, growth of industrial production in countries not on gold averaged about seven percentage points a year better than countries remaining on gold, a not insignificant amount in any meaning of the word. [5] Deflation would exert itself negatively in three major ways; through the increase of real wages, the increase of the real interest rate, and by causing financial crises, all of which were significant causes of the Great Depression. The US was inextricably tied with foreign countries on the gold standard and was affected by their financial struggles to a large degree, meaning that its prosperity would be subject in a certain measure to the whims of the foreign market. The world wide situation in which the US became a creditor generally worsened its prospects. Gold increasingly flowed towards US markets and accumulated within the Federal Reserve itself. By August 1929, the Fed Banks" gold holdings were $3.12 billion, double the legal requirement. This did not lend itself to inflation, as one would expect, but instead resulted in deflation as Federal Reserve policymakers had realized that they could sterilize the inflow of gold and keep prices at roughly the same level. The gold standard was thus circumvented, leaving determination of currency largely up to the US/other governments in a similar situation, such as France. The sheer amount of gold entering the US due to the higher price in the US and the European situation during the middle of the depression also caused the commercial banking system to have double the required legal reserves in gold in 1936. Despite this, the Federal Reserve still pursued a deflationary policy, damaging the already fragile economy more. [6] Domestic factors also contributed significantly to the depression. Following World War One, the European economy recovered much more quickly than expected, especially agriculturally, and US farmers were no longer able to get a favorable government price for their crops. The huge surplus of crops caused the price of them to drop dramatically, resulting in a plummet in average farm incomes. Increasing mechanization would not help the poor situation among farmers during the 1920s. Irresponsible or shortsighted investment, encouraged by the vigor of the economy, was commonplace, and an increasing number of farmers were forced to foreclose on second properties or even their main properties because of the recession. Bank failures climbed during the period before the Great Depression in the US. Inexperienced investors entering the stock market made a crash nigh unavoidable. The primary forces behind the great depression itself were either out of government control almost entirely, such as the international trend of the gold standard, or should've been brought under more control or scrutiny, such as the Federal Reserve. Most of the issues were exacerbated either by government non-intervention or minimal intervention in the economy. In the next round I'll address FDR's New Deal policies as well as refute some of the claims that my opponent has made about their effectiveness. Sources: [1] https://www.merriam-webster.com... [2] https://www.merriam-webster.com... [3] http://www.fas.harvard.edu... [4] http://www.federalreservehistory.org... [5] http://www.nber.org... [6] http://www.econlib.org...