This project will examine the various economic theories that permeated fiscal policy between the era that led into the Great Depression through the end of President Clinton’s first term. Economic policy has varied by administration due to partisan politics and the state of the world economy, and this project will explore the assorted theories and policies that prevailed during the aforementioned time period.
The state of the economy is frequently used to gauge presidential success, and consequently, one’s economic platform has often been afforded greater credence in elections than other issues. Having held true for decades, those who possess basic knowledge of economic thought are familiar with the terms “Reaganomics” and “trickle-down economics,” phrases coined during the Reagan administration. Those with even more rudimentary knowledge have heard of the Great Depression. Yet, the vast majority have no understanding of the causes of such a horrid economic catastrophe that forever changed the manner in which presidents developed economic policy. The Federal Reserve’s raising of interest rates to address the 1920s spending spree could have been “good medicine if delivered in a moderate dosage years earlier. Delivered all at once after the disease had spread, it nearly killed the patient.”[1] In other words, the steps the Fed had taken during the decade preceding the Great Depression could have been comparatively more effective if implemented even earlier. Additionally, the Fed was unwilling to commit to the arduous work that was raising rates, even in the face of spending frenzies caused by manic market speculation that changed the economic landscape and eventually led to the Great Depression.[2] Coupled with the inadequacies of the Federal Reserve, exceptionally tight monetary policy and the liquidation of foreign exchange reserves by central banks caused changes in the demand for money that experts believe led to serious deflation and subsequently the Great Depression.[3] In summation, the Great Depression was caused by poor adjustments of interest rates by the Federal Reserve, restrictive monetary policy that tied the hands of both the Fed and federal government, and an over-liquidation of foreign exchange reserves by central banks around the world.
Having suffered insurmountable blame for the Great Depression, Herbert Hoover was soundly defeated in the 1933 Presidential Election by Franklin D. Roosevelt by a whopping four hundred thirteen electoral votes.[4]President Roosevelt may be most notably known for his post-Depression efforts to jumpstart the economic via government intervention. Fathered by Roosevelt, the early, or first, New Deal justified its legal authority and emergency intervention on the government’s actions taken during during the First World War.[5]It’s two main characteristics, “a readiness to turn to the federal government to deal with domestic and foreign problems, and an inclusive popular nationalism,” remained readily present in the years following its enactment.[6]
Shortly after the final New Deal, the United States entered World War Two when the Japanese bombed Pearl Harbor on December 7, 1941. This led to an increased demand for both skilled and unskilled labor due to the need for more artillery, vehicles, and weapons. The gargantuan scale of the global conflict “produced numbers that once belonged only to astronomers and were no more fathomable than a light year. … A nation fighting a new kind of war needed to stabilize and balance its workforce to maximize production.”[7] The employment initiatives and necessities led to full employment, allowing women and minorities, especially African Americans and immigrants, a greater role in the workforce that would extend beyond the war.
American prosperity continued well into the 1960s without any major setbacks. However, President Lyndon B. Johnson’s “War on Poverty,” while genius on face value, created divisions across the United States. Anchored in anti-communist sentiments and the precepts of the New Deal, the program aimed to foster economic growth via job training programs and “a new mechanism emphasizing community participation and planning that [was] called community action.”[8] Yet, the misappropriation of funds, along with a lack of focus on areas in need caused the program to sputter and eventual fall flat, disappointing the masses.[9]
Between the late 1960s and the beginning of the 1980s, the United States saw its worst recessions since the Great Depression, largely due to stagflation and horrific price instability.[10] The subsequent rise of an actor-turned-politician named Ronald Reagan brought about massive economic change. A former governor of California, Reagan won the 1980 election by four hundred forty electoral votes, establishing one of the largest wins in history by a candidate seeking their first term in the Oval Office. Looking to “develop a market-oriented political economy, … Reaganomics had a fiscal core of tax reduction and domestic spending restraint,” reversing the trend of heavy government intervention that can be traced back to the New Deal.[11] The notion of limiting the scope of the federal government was readily apparent throughout Reagan’s and Bush’s presidencies, until ultimately returning to a government-first orientation under Clinton.
[1]Nations, Scott. “Crash.” In A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation. New York, NY: HarperCollins, 2017. Page 64.
[2]Nations, 70.
[3]Mihov, Ilian. “Deflation and Monetary Contraction in the Great Depression: An Analysis by Simple Ratios.” In Essays on the Great Depression, by Bernanke Ben S. Princeton University Press, 2000. Page 109.
[4]Britannica, The Editors of Encyclopaedia. “United States Presidential Election of 1932.” Encyclopædia Britannica. November 01, 2018. Accessed April 04, 2019. https://www.britannica.com/event/United-States-presidential-election-of-1932#ref299485.
[5]Keller, Morton. “The New Deal: A New Look.” Polity 31, no. 4 (1999): Page 661.
[6]Ibid.
[7]Klein, Maury. “The Manpower Muddle.” In A Call to Arms: Mobilizing America for World War II. New York, NY: Bloomsbury Press, 2013. Pages 333-334.
[8]Lerner, Mitchell B., ed. 2012. A Companion to Lyndon B. Johnson. Hoboken: John Wiley & Sons, Incorporated. 93-94. Accessed April 3, 2019. ProQuest Ebook Central.
[9]Ibid.
[10]Barsky, Robert B., and Lutz Kilian. “Do We Really Know That Oil Caused the Great Stagflation? A Monetary Alternative.” NBER Macroeconomics Annual 16 (2001): Page 159.
[11]Morgan, Iwan. “Reaganomics and Its Legacy.” In Ronald Reagan and the 1980s: Perceptions, Policies, Legacies, edited by Cheryl Hudson and Gareth Davies. New York, NY: Palgrave Macmillan, 2008. Pages 101-103.