This project will examine the Presidential and Federal Reserves Monetary/Fiscal Policy that led up to the Great Depression through the end of Reagan’s Presidency. In particular, it will explore economic policy during times of crisis and war throughout the 1900’s.
The Federal Reserve is the most important bank in the world. The Federal Reserve is a bank that is entirely independent of outside influences and strictly makes decisions based on the current position of the economy. Thus, Federal Reserves’ decisions have had a massive impact on events such as the presidency, recessions, and war. The state of the economy is widely used to gauge presidential success. With this having been true for decades, many have heard the term “Reaganomics,” a phrase used during the Reagan term. Also, many have heard about the Great Depression. However, many do not understand the causes of the worst economic downturn that forever changed the landscape of the Federal Reserve and the future President’s economic policy.
Unfortunately, before the Great Depression had come, the Federal Reserve had crippled the economy by tightening interest rates. “From 1921 to 1929, the Fed committed a grievous series of sins, and in doing so abdicated responsibility for managing the supply of money” [4]. In other words, the steps the Fed had taken before the crash of the Great Depression could have been more effective if they had not been so aggressive in raising and cutting rates. The Federal Reserve before the crash of the Great Depression were not effectively using Monetary and Fiscal Policies to help expand the economy. However, the Federal Reserve was created in 1913. The Fed was put into a position to control the money supply of the U.S, which seemed impossible with only a few year’s experiences before the start of the Great Depression.
Additionally, the Federal Reserve raised and cut rates too quickly during this period, which created a lot of volatility in the market, causing it to crash. An active fiscal policy also was missing during the Depression [7]. The Fed’s had no control over the regulation on the economy at the time. The Fed believed that the Government had to take a more significant role than they themselves in controlling the economy [9]. The Fed’s inadequate reasoning for raising and cutting interest rates caused severe uncertainty throughout markets, which was a factor in the start of the Great Depression. In summation, the Great Depression was created in a multitude of ways. However, if the Fed held interest rates at a reasonable rate and enacted more stable monetary and fiscal systems, than the Great Depression could have been avoidable.
Herbert Hoover, who was President from March of 1929 through March of 1933, during the Great Depression, received backlash and lost his re-election to Franklin D Roosevelt. The United States was in its most profound economic Depression in history, which caused economic and political systems to the edge of breakdown [1]. President Roosevelt is most known for his actions on trying to stimulate the economy. Roosevelt created the New Deal, and it consisted of governments intervening to stimulate the economy and bolstering new trade deals to spur growth [3]. Hoover wanted the economy to be into more debt. Hoover wanted people to practice debt spending, which would hopefully turn the economy around. Rather than raising taxes, which would decrease the income of individuals, the Government issued debt in the form of bonds to raise capital. Although the Government still has to pay interest back to creditors, it was a step in the right direction for an economic boost.
Following the New Deal, the United States entered into World War Two after the bombing of Pearl Harbor on December 7th, 1941. During World War Two, production, work, labor, and wages all rose, which reflected a very dovish monetary policy and fiscal policy [6]. There is no need for the Fed to implement any action on the current state of the economy since the U.S is a production powerhouse. The U.S was producing output at astronomical levels, which, in turn, makes a life for the Fed much easier. Americans enjoyed the prolonged period of economic prosperity from the beginning of WWII through the end of the 1960’s.
An American industrial production boom sparked a robust economy from WWII through the end of the 1960s. On the other hand, as Europe and Japan finished rebuilding after WWII, the U.S manufactures lost their global monopoly and found themselves struggling to keep up with foreign goods [2]. The Federal Reserve, after years of loose monetary and fiscal policy, was now tasked with high unemployment, slow growth, and double-digit inflation.
Between the 1960’s and the 1980’s, the Federal Reserve saw one of the worst economic slowdowns since the Great Depression due to stagflation, volatile price stability, and misguided fiscal policy [8]. On January 20th, 1981, Ronald Reagan brought massive economic change. Reagan planned to make cuts in the growth of government spending, decrease income taxes and capital gains taxes, expand the money supply, and regulate businesses [5]. The Fed had a substantial impact on the economy. However, it had to rethink its policies due to the stagflation from the 1960’s to the early 1980’s. Although the Fed makes Monetary and Fiscal policies independently, it was aided by New deal and Reaganomics.
Starting with the early stages of the Great Depression, the project will take a look at how the Federal Reserve handled interest rates before and after the Great Depression. The project will also look at other government factors that helped the Federal Reserve enact specific monetary policies to help cure the Great Depression. This project will also look at WWII, stagflation post-war, and Reaganomics. These topics will be covered in the project to help build a better understanding and knowledge of the importance of the Federal Reserve and the economic thought the early 1900’s up through the term of Ronald Reagan.
Notes
- Monroe Billington and Cal Clark, “Catholic Clergymen, Franklin D. Roosevelt, and the New Deal,” The Catholic Historical Review, no. 1 (1993) : 65–71.
- Richard Cooper and Jane Little, “US monetary policy in an integrating world: 1960 to 2000,” New England Economic Review, no.3 (2001) : 33-34
- Price Fishback, “How Successful Was the New Deal? The Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s,” Journal of Economic Literature, no.1 (2017) : 1435–1485.
- Scott Nations, A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation (New York, NY: William Morrow, 2018), 101-9
- Robert Barsky, “International Journal of Political Economy,” Bloomsbury Press, no.3 (1989): 44–47.
- Moritz Schularick and Alan Taylor, “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises,” American Economic Review, no. 2 (2012) : 1029–1034.
- Peter Temin, Did Monetary Forces Cause the Great Depression? (New York: Norton, 1976), 32-9
- Vito Tanzi, “Fiscal Deficits and Interest Rates in the United States, An Empirical Analysis,” 1960-84. Staff Papers (International Monetary Fund), no. 4 (1985) : 551–576
- George Tavlas, “Two Who Called the Great Depression: An Initial Formulation of the Monetary-Origins View,” Journal of Money, Credit and Banking, no.3 (2011) : 565–574.