The Great Depression and the Modern American Economy, Research Paper Example

Introduction

The Great Depression is considered the single most devastating financial event in American history. When the stock market crashed on October 29, 1929, it was responsible for raising unemployment in the United States by 25% and to as much as 33% in other affected nations (Frank & Bernanke 98). To protect the economy of the United States, the Securities and Exchange Commission (SEC) was established in 1934 to oversee the conduct of markets by requiring the transparency of financial institutions. Furthermore, they regulate brokerage firms and other financial agencies in a manner that creates and enforces laws that prevent detrimental conduct, such as insider trading (U.S. Securities and Exchange Commission).

A majority of the guidelines that were established to reinvent the United States after the Great Depression still impact the economy today. Some of these systems, such as the policies put in place by the SEC continue to direct the stock market sector and therefore business in the country today. Furthermore, since the Great Depression impacted nations on six continents, the United States has worked with foreign countries in order to establish international policies to regulate trading security. Lastly, the Great Depression has created a major concern that has encouraged politicians to enact policies that strengthen the economy. Therefore, many aspects of modern politics and economic policy are derived from needs that were recognized to rectify the damage that the Great Depression caused the country in the 1930s.

Background

The Great Depression was a major economic event in the United States due to its prolonged and widespread impact. During this time, personal income, tax revenue, prices, and profits dropped dramatically, which completely altered the lifestyle of the 121.77 million citizens living in the country. Historians consider this economic event to have begun on a day called “Black Tuesday” on October 29, 1929, which is used to describe the sudden collapse of US stock market prices (Hamilton 145). At this time, the U.S. government took little action because they had believed that the situation would naturally resolve on its own. However, five years after this stock market crash, there had been little sign of change concerning America’s economic situation. At this time, interest rates dropped in addition to deflation and the trust that people held in the lending system. Therefore, people were unwilling to invest, contributing the inability of the economy to recover in a reasonable amount of time.

Although Black Tuesday was the culmination of economic events that brought about the Great Depression, there were several causes that explain the suddenly devalued market. A major contributor, therefore, was the status of American banks leading up to 1929. There were many bank failures, actions by the U.S. Federal Reserve that contracted the money supply, and a discussion as to whether the free market is able to regulate interest rates and other aspects of the economy. One major theory concerning the cause of the Great Depression states that this economic event begun as a typical depression, but worsened as a consequence of the Federal Reserve shrinking the money supply. At this point, debt deflation caused people who borrowed money to owe even more. Since the wealth enjoyed 1920s had establish money borrowing as a normal activity, this deflation had a negative impact on many families. An additional theory concerning the cause of the Great Depression states that the people lost confidence in the market, which led to a significant decrease in investments and money usage. Many people though that to avoid personal loss, they should avoid the markets. Since this causes prices to drop, goods became less expensive, thereby facilitating a drop in demand.

Many economists believe that Franklin D. Roosevelt’s New Deal helped the United States recover from this economic travesty more rapidly, which resulted in the “first hundred days” that the president intended to use to turn the economy around. One of the major regulations that was established was the need for the Federal Deposit Insurance Corporation (FDIC) to ensure bank accounts to protect against bank runs. Furthermore, he effectively altered the federal budget in a manner that saved the country $500 billion per year by cutting the salaries of government employees in addition to veteran pensions. Roosevelt also established the Emergency Banking Act, which stated that banks would be able to reopen under supervision of the United States Treasury, with federal loans provided to them if necessary. This helped stabilize the banking system, allowing them to remain reliable independently of the amount of money deposited and withdrawn. Most importantly, the Glass-Steagall Act aimed to regulate speculations by limiting commercial bank securities activities in response to affiliations between these banks and securities firms. This act was also responsible for the establishment of the FDIC, which insured deposits that were up to $2,500 (Eggertsson 1476).

Prior to the Great Depression era, the gold standard had been implemented to ensure that the U.S. dollar would be convertible to gold. After the stock market crash, the government has suspended the gold standard and prevented the export of gold from the country. This prevented gold from being used as legal tender, which ultimately, helped strengthen the value of the dollar. To increase the efficacy of these efforts, the Gold Reserve Act was passed in 1934 to increase the price of gold and increase the amount of money that was in circulation. The markets responded to this change, allowing production to raise significantly in the following decade.

An additional effort taken by Roosevelt in order to ensure that the stock market would not crash to such a severe extent in the future, he established the Securities Act of 1933, which created the SEC. It requires that firms who publicly trade provide records of their balance sheet, profit and loss statements, and the names and salaries of employees to the federal government. Therefore, publicly traded companies are required to publish accurate reports to their shareholders in order to ensure that fair trading is possible. The SEC is also responsible for preventing corporate abuse related to reporting and the sale of securities in addition to regulating the stock market as a whole.

Lastly, Roosevelt aimed to bolster the economy by repealing prohibition. This political move gained him support for the ratification of the New Deal, allowing him to move forward with the other aspects of his economic plan. However, the reversal of this policy allowed cities and states to gain much needed additional revenue. This move was considered to be extremely popular among Roosevelt’s constituents, which provided the president with the support he needed to ensure that the United States’ economy would recover (Clemens 106).

The Issue at Hand

The United States currently engages in economic policy that is hotly debated. Many of these policies remain from the Great Depression era, a time in which Franklin D. Roosevelt was required to take sudden action to ensure that the economy of the United States would become restored in a timely manner. Therefore, it is essential to determine which of these policies continue to determine the relationship between the market and the economy today in addition to which policies continue to be beneficial and which are relics from the 1930s that should be removed in order to ensure greater economic stability.

A major way that the Great Depression impacts the modern economy is due to the establishment of the SEC by Franklin D. Roosevelt in the New Deal. Prior to the creation of this committee, the stock market was not regulated in a useful manner. As a consequence, publicly traded companies were able to be dishonest about their earnings to lure potential stockholders into purchasing their stock, thereby raising the value of their company in this process. During the 1920s, the United States was experiencing a period of economic growth, which encouraged many civilians to invest their earnings into the market with the potential of earning additional profit. Therefore, the ability of these companies to be dishonest impacted a great number of individuals.

The SEC was established primarily to police the stock market and to ensure that companies were providing accurate descriptions of their earnings and expenditures. If the SEC determines that an executive has committed a crime, civil action can be taken against them. This includes preventing against both insider trading and providing inaccurate accounting reports. The SEC works with law enforcement to prosecute companies or individuals that are responsible for committing these crimes. Prior to the SEC, the government had established blue sky laws to regulate the market, but it was found that these policies were generally ineffective.

The Securities Act of 1933 was established to legally require the uniform discourse of information concerning public securities offerings. Originally, this law was enforced by the Federal Trade Commission (FTC), but these responsibilities were passed over to the SEC following its establishment. Since its creation in 1933, the SEC has been responsible for enforcing market policies that have been passed during the Great Depression to the modern era. The Securities Exchange Act of 1934, also known as the Exchange Act, is responsible for regulating trade between individuals and companies that are unrelated to the original issuers of securities. Ultimately, this indicates that the SEC is responsible for monitoring and policing the New York Stock Exchange (NYSE) in addition to self-regulatory organizations such as the NASDAQ Stock Market.

Since these initial alternations made to the SEC during the Great Depression era, this organization has been modified to suit the needs of the modern economy. It is currently divided into several divisions including corporation finance, trading and markets, investment management, enforcement, and risk, strategy, and financial innovation (U.S. Securities and Exchange Commission). Furthermore, these divisions have several offices to ensure that SEC policies are enforced. Ultimately, the Great Depression impacted the modern American economy by establishing the SEC, which has evolved to regulate a broad range of economic policy.

A second way that the Great Depression has impacted modern American economy is that it forced international trade regulation to ensure that the economic downfall of one nation will not contribute to the downfall of others. During this period of economic turmoil, international trade decreased by more than 50%. Therefore, the United States was unable to boost its economy by producing exports and the countries that relied on it as an importer were impacted as well. When the United States noticed the negative economic impact it was having on other nations, it established the Smoot–Hawley Tariff Act in 1930, which raised U.S. tariffs on imported goods. Despite the country’s original intensions by establishing this protectionist policy, it had caused the global collapse in trade to increase more significantly (Hamilton 145).

Historians and economists believe that the United States’ failure to continue to produce and trade goods entrapped them in their economic situation. However, the government did not understand that reducing the nation’s trade would have negative consequences on foreign nations, as trade comprised a small part of the economy in the United States. Many nations, such as Australia and English were dependent upon trade in order to boost their economic standing, and the inability to trade with the United States during this period impacted their stability. Therefore, while it was easy for Franklin D. Roosevelt to resolve farm production in the United States by providing farmers with subsidies and regulations, these policies had little impact on damaged foreign economies.

Today, international trade policy has been established in order to ensure that depressions that occur in the United States have minimal impact on foreign nations. Currently, free trade policies are encouraged as opposed to protectionism. This allows all countries to exchanged goods based on what is available in addition to their ability to produce the best and most affordable products. Preventing free trade decreased the economic status in both the United States and in foreign trade nations, so it is imperative to avoid this market strategy in the future.

Lastly, the Great Depression currently impacts the economy of the United States by having a direct impact on the political decisions made. Concern for the economy is an important factor that is currently called upon both by Republicans and Democrats. In fact, fundamental policy disagreements rely on the political thought that is reminiscent for this area. For example, Republicans believe that the economy can be strengthened primarily by reducing the country’s deficit and by allowing the free market to continue unhindered. On the other hand, Democrats believe that the economy should be strengthened primarily by investing the budget in government programs to promote employment in addition to benefits programs for the less fortunate, with an additional focus on reducing budget deficit.

Interestingly, the Great Depression established a need for budget deficit. Originally, Franklin D. Roosevelt had intended for the country’s budget to be balanced, but Congress wanted him to create a program that would provide World War I veterans with a larger pension. Although a national debt was created in the process, this political decision was beneficial at the time because it allowed the nation to finance government programs that would help repair the damaged economy. Since this time, primarily Democrats have used the budget deficit for this purpose. There is currently a great disagreement as to whether this is a beneficial economic policy, and many Republicans argue that it is more beneficial to the economy to ensure that the deficit is reduced.

Aside from the bipartisan decisions that are required to implement policies that regulate economic stability, there is much disagreement as to what extent these regulations should occur. Republicans argue that the free market will regulate policy and that the laws of supply and demand are sufficient for this process. Franklin D. Roosevelt and modern Democrats argue that it is necessary to regulate supply and demand depending on a variety of situations. For example, in the New Deal, Roosevelt provided subsidies to farmers in order to ensure that they would stop producing crops that were too available. By providing them with finances to be able to discontinue production, the price of these crops were able to return to a normal value. Likewise, Democrats believe that is it useful to continue these subsidies today to ensure that the market is predictable.

Policy Recommendations

Currently, the SEC is an important committee that is responsible for policing the stock market. Since its establishment, it has been responsible for detecting many corporate scandals that have helped protect the country’s economy. Therefore, it is recommended that the SEC continue to operate, as it is responsible for protecting against future severe economic depression. Because publicly traded organization are required to be honest about their accounting, it is illegal for them to provide false numbers to stockholders in order to appear more profitable. Many corporations attempt to growth their company by faking these numbers and the SEC is responsible for preventing this.

Although the SEC is effective today despite its original intention, this is the case because the U.S. government has continued to increase the scope of the SEC based on modern economic needs. For example, the SEC was a small organization when it was established and primarily policed securities and financial reports of publicly trading companies. However, it has expanded to work closely with other government agencies and committees to ensure that the country’s economy will remain strong.

A primary example of the SEC efficacy was demonstrated in the detection of Bernie Madoff’s asset management Ponzi scheme. This allowed the profit of his investment company to appear very high, therefore encouraging individuals to contribute investment. However, the SEC determined that his earnings were mathematically impossible, thereby exposing his scheme. Since he cost investors more than $180 billion, he was sentenced to prison for the maximum sentence, which was 150 years (Lieberman et al.). Although this scheme damaged the economy due to the number of institutions and individuals impacted, it demonstrates that the SEC is a useful ally in crime detection and prevention. While market scandals do occasionally occur, the SEC serves as a reminder that violators of the law will be caught.

The Great Depression has taught us that it is imperative to protect against poor economies by allowing free trade. The protectionist policy that the United States established at the beginning of the depression in 1930 proved detrimental to both itself and other trade partners. In fact, the Smoot–Hawley Tariff Act is the main reason that foreign nations were brought into the depression, although it was independent economic factors that keep them in this position. Currently, many nations of the world are members of the World Trade Organization (WTO), which regulates this trade industry. Therefore, member countries are able to set up trade agreements in a manner that is beneficial to their economic interests.

Important regulations that are discussed by the WTO include tariffs, export subsidies, and regulatory legislation. Therefore, this allows some extent of protectionist policies, but these are open for discussion in a manner that protects the economic interests of all nations involved. It is important to continue the use of organizations like the WTO in the discussion of world trade. Although this committee was established in 1995, it would have proved beneficial during the Great Depression era. By regulating international trade policy, it would have prevented the Smoot–Hawley Tariff Act from being passed. Thus, trade between the United States and its partner nations would have continued in a productive manner. The tariff would have allowed the economies of South America, Australia, Asia, Europe, and Canada to have remained relatively stable, and this stability would have allowed the United States to bolster its economy more effectively and quickly with this support.

International trade agreements are effective in protecting against periods of depression. These partnerships are essential to ensure that demand continues to be met, even if it cannot be provided by an individual country. Furthermore, the United States’ involvement in world trade should continue even during times of economic turmoil. This ensures that the country will continue to have economic stores, even if these stores are unevenly distributed. As the economy covers, this wealth will be redistributed more quickly. Therefore, it is important to ensure that businesses in the nation are stable to maintain economic growth.

While there is much debate over what the correct economic policy is among Republicans and Democrats, it is clear that many of the policies established by Franklin D. Roosevelt in the New Deal were beneficial for reducing the length and severity of economic depressions in addition to preventing them from occurring in the first place. Therefore, it is essential to modern economic policy to create a balance between Republican and Democrat ideals in order to ensure the establishment of a strong, relatively recession proof economy.

Firstly, it is essential to continue free trade. While a degree of tariffs on imports should be imposed, it should be minimal in order to promote international trade. It is necessary for the United States to increase production at home and to keep its ties with foreign nations strong in order to mitigate risk in times of trouble. However, it is also essential for the country to maintain control over production. When an item is overly available, its price will drop, impacting its profitability. Therefore, it is essential for the government to step in and provide subsidies to farmers to both prevent and encourage the growth of certain crops.

Both parties agree that it is essential to reduce the budget deficit, although they disagree about what government programs and investments should be cut in order to do so. Ultimately, it is important to reduce spending in a way that will continue to support the economy. Therefore, according to what was observed during the Great Depression and as a consequence of the New Deal, it is important to continue spending on essential economic programs such as the SEC, farm subsidies, and job growth. Furthermore, for the sole purpose of reducing national debt, it would be useful to increase taxes across the board. Ultimately, the United States is currently experiencing a depression for a variety of reasons, but this situation can be fixed by repairing the national debt. Therefore, it is in the financial interest of both individuals and companies alike to pay higher taxes until this economic situation is resolved. Although there are many policies currently in place to protect the country against another Great Depression, the nation is currently at an economic low point.

Connection between the Great Depression and Modern Economy

The impacts of the Great Depression are similar to that of the modern depression in the United States. According to Forbes, a major similarity is that “Each period is marked by a massive run up in asset prices followed by a tremendous deflationary pressure that has sent both debt and equity markets into turmoil (down)” (Edwards). However, a major difference between both depressions is that the Great Depression was caused in part by the devaluation of gold and the government’s use of the gold standard. Today, we have removed the gold standard in order to become independent of the value of precious metals. This allows the federal government to create money in time of need by increasing deposits at the Federal Reserve. This was not possible before the removal of the gold standard, as the currency was too closely tied to the value of this precious stone.

Despite the different approach towards the valuation of money between the Great Depression and the modern depression, economists consider the two events to be very similar due to the similar unemployment rates. During the Great Depression, unemployment reached 25%; currently, we are reaching 20% employment. These values are both large parts of the populace and many individuals are currently relying on government support to make ends meet. Many people believe that the current economic depression differs from the Great Depression because they believe that international trade will benefit our situation. However, Europe has recently suffered a depression as well, which will in turn impact our own ability to trade. Although this situation was reverse during the Great Depression, it will have similar impact in the modern era. Furthermore, the level of bankruptcies that modern Americans are facing is similar to the levels observed during the Great Depression. Lastly, while many individuals argue that people are no longer waiting on lines for food and other government assistance, this is occurring at high rates, however existing government programs have made this phenomena less apparent to the naked eye.

Conclusion

In conclusion, the Great Depression has made a major impact on the way that the United States government regulates its economy today. During Herbert Hoover’s presidency, many failed economic policies were established that indicated what future politicians should avoid in similar situations. On the other hand, Franklin D. Roosevelt provided an excellent example of what should be done in order to ensure that the economy remains stable and is able to recover from such catastrophes.

The establishment of the SEC was an important way that the New Deal aimed to prevent major economic crashes from occurring in the future. Since this agency was established to police the stock market, it became significantly more difficult for publicly traded companies to be dishonest about income. These policies protected shareholders, increasing their trust in the stock market again and putting money back into the American economy. Today, the SEC continues to be effective for this purpose, and many corporate leaders have been caught committing fraud and appropriately punished.

A second way that the Great Depression impacts the American economy today is due to our current policy on international trade. During the Great Depression, the Smoot–Hawley Tariff Act was established in order to promote protectionist policy. However, this damaged the economy of both the United States and its trade partners. In response to the damage that the depression brought to many nations, the World Trade Organization was established in order to protect the trade interests of many countries across the world. The establishment of this organization was a valuable consequence of the Great Depression, as there is now a means for countries to discuss regulations that will benefit a majority of nations.

Lastly, the politics that currently revolve around the United States’ economic policy derive from the successes and failures of the New Deal. Ultimately, both Democrats and Republicans believe that it is important to reduce the national debt in order to bolster the economy, but they disagree as how to do so. Republicans believe that it is essential to keep the market free and to implement as few regulations as possible. On the other hand, Democrats believe that it is necessary to create government programs that will increase the amount of jobs available and to provide assistance to the jobless. It is important to combine both of these beliefs in order to ensure that the economy remains stable. Keeping the market free while allowing occasional protectionist policies as needed while decreasing unemployment is essential. It is helpful for us as Americans to look at our past economic catastrophes to ensure that we do not repeat the same errors in the future.

Works Cited

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Frank RH, Bernanke BS. Principles of Macroeconomics (3rd ed.). Boston: McGraw-Hill/Irwin,  2007.

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Lieberman D, Gogoi P, Howard T, McCoy K, Krantz M. Investors remain amazed over Madoff’s sudden downfall. 15 December 2008. Web. 15 August 2014.  <http://usatoday30.usatoday.com/money/markets/2008-12-14-ponzi-madoff-downfall_N.htm>

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