The Great Depression: US's New Deal to Overcome Financial Hardships - Research Paper

Paper Type:  Research paper
Pages:  7
Wordcount:  1852 Words
Date:  2022-12-27


The Great Depression, which was an epical economic downturn in the industrialized economies lasted between 1929 and 1939. It was a period of financial hardships occasioned by a crash in the stock market. Every industrialized economy designed its way of responding to the economic problems presented by the depression. The United States of America developed the New deal as a national initiative aimed at resolving the challenges of the Great Depression. President Roosevelt initiated and initiated the New Deal as a way of bringing immediate economic relief and reforms in various critical sectors of the US economy. The programs targeted vital sectors in the economy including industry, finance, energy, housing and agriculture. The series of reforms and programs significantly increased the role of the federal administration by tasking them with more responsibilities of overseeing the implementation of the various interventions. The term "new deal" came from the speech by President Roosevelt when he was accepting his elections to vie for the presidency on the Democratic Party ticket. In the statement, the president promised to develop various approaches, which would have far-reaching effects in fixing the problems of the Great Depression. Over eight years of the deal, the United States government started a series of projects including the Civilian Conservation Corps (CCC), Works Progress Administration (WPA), and the Tennessee Valley Authority Act among others. The primary focus of all these initiatives was to restore at least some sense of dignity and prosperity among the Americans who had by then become disillusioned. The New Deal had a fundament and permanent effect on how the American citizens related to their federal governments. The fact that the New Deal was sectorial in nature made it to have various effects on agriculture, finance and banking.

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Effects of the New Deal on Banking and Finance

The New Deal occasioned the passage and implementation of two critical legislation that profoundly affected the banking and finance sectors in the United States. These regulations include the Federal Deposit Insurance Corporation (F.D.I.C.) and the Securities and Exchange Commission (S.E.C). The FDIC was formulated in 1934 with the role of offering insurance to the banks to a tuned of up to one hundred thousand US dollars (Calomiris and Joseph 942). This was to make people more confident in the viability of the banks so that they could make more deposits. The great effects of the depression had forced people to withdraw their deposits and shun banking (Thies, and Daniel 677). Gerlowski. As the stock markets dwindled and finally crashing, the Americans could not recover their investments, which made them sceptical about deciding to depict their money in bank accounts. This approach was the first of its kind in which the government intervened in securing the banking sector using large sums of money (Calomiris and Joseph 938). To date, the involvement continues to grow, and the government even invests more funds in securing bank deposits. On the other hand, the Securities and Exchange Commission was intended to prevent fraud in the stock market. The commission was tasked with overseeing the regulatory actions of the stock market. Some of the interventions that the commission instituted included buying on credit and documentation of financial statements for the public (Mitchener 163). These activities helped in stabilizing the financial markets and preventing speculations. These practices have been carried an along to date with firms continuing to them (Bordo, Claudia and Eugene 125). However, some unscrupulous sticks sometimes alter their financial statements to mislead stockholders.

As a response to the tremendous financial challenges presented by the Great Depression, President Roosevelt made significant changes to the Federal Reserve and financial system. Some of these changes included improving the independence of the Fed Reserve from the executive influence and taking some of the powers, which were formerly held by the Reserve Banks to the Board of Governors (Cole and Lee 793). The Banking Act affected three main issues. It altered the structure, powers and functions of the Federal Reserve Bank. Title II of the act focused on expanding the power of the Federal Reserve Bank and shifting the power from regional reserve bans to the Board in Washington DC. It also clarified and made into a code the relationship between the Federal Reserve, the executive and the legislative arms of the US government. It also reorganized the structure of the Federal Reserve (Cargill and Thomas 423). For instance, The Federal Reserve Board was changed to become the Federal Reserve systems' Board of Governors. There were a series of other cosmetic and consequential changes, which gave the Federal Reserve and entirely new outlook (Bordo, Claudia and Eugene 162). Furthermore, the Banking Act gave the board more control over the discount rates in every Federal Reserve district (Gorton and Andrew 58). Initially, such decisions about the discount rates were decided by the Reserve banks, which could set the specific rates for their districts. This arrangement was drastically altered. According to the act, the Board sitting in Washington DC ad to approve any changes in the discount rates before being implemented by the Federal Reserve (Coe 87). Nonetheless, the act disallowed the Board from imposing changes in discount rates on the banks or setting a uniform rate nationally.

Under the New Deal, President Franklin Roosevelt administration instituted legislation in the late mid-1930s, which limited the operations of banks. The regulations prevented banks from dealing in securities and insurance business (Mitchener 157). Before the Great Depression, the banks had various challenges attributable to their reckless involvement in securities and insurance (Wheelock 536). For instance, they would take excessive risks in the stock market or irregularly gave loans to the industrial companies in which the bank directors and officers have private investments (Calomiris 553). As a remedy to this problem, the administration proposed the Banking Act, which was signed into law by the Congress on the same day it was resented to them. The Act has a clear framework on reopening new banks that were compliant to the laid out banking regulations. The regulation provided some sense of temporary sanity and ability in the operations of the banking sector. However, it did not have a progressive outlook. As a remedy to the possible non-compliance of the banks, the politicians in the depression era passed the Glass-Steagall Act. This act had a primary provision prohibiting the mixing of banking, securities, and insurance businesses (Wheelock 539). These two acts of banking reforms streamlined the operations of the banking industry by preventing mix up in their dealings, which have the effect of plunging them into serious financial crisis.

Impacts of the New Deal on Farming

The advisors of President Roosevelt partly blamed the Great Depression on economic slowdown in farming. Therefore, various reforms and programs were initiated which drastically changed the farming systems in the United States of America. Upon getting into office, one of the primary New Deals was to increase the prices of crops. The signing into law of the Agricultural Adjustment Act (AAA) in 1933 was a first step towards changing the agricultural sector (Rasmussen 1158). In the 1920S, The American farmers produced so much for the American market, which led to a drastic drop in the prices of farm produce. The excess farm produce had been further worsened by the closure of Western Europe due to tariff wars. With a lot of produce from the farms and a shrinking market, the prices plummeted, and agriculture did not generate a lot of profits as would be (Rosen 96). These challenges culminated into bankruptcy among the farmers. The Agricultural Adjustment Act was intended to correct such evident errors and bring back dignity to farming and farm families. The Act encouraged the farmers to reduce their crop production so that the supply of agricultural produce in the market reduces and then trigger an increase in their prices. The idea was to manipulate the supply so that the increased demand could automatically move the prices higher (Rasmussen 1160). Roosevelt's administration had the belief that there was a direct link between agricultural production and the economy and that the low food prices in the then economy resulted from the high output. Therefore, according to him, reducing production would benefit the farmers since their produce would fend higher prices and revamp the economy (Olson 3). AAA used an untraditional approach to causing a rise in the market price of farm produce such as paying the farmers so that they could destroy their crops and livestock.

Under the Agricultural Adjustment Act, a scheme was developed which paid farmers money to the tune of more than $100 million in 1933 alone. The cotton farmers were paid so that they could clear their farms; the government bought livestock from the farmers and slaughtered them. They then canned and distributed the meat to the unemployed people free of charge. This approach was practical in making farming economically viable through stabilization of the prices at a relatively higher margin (Paarlberg 1163). Despite some opposition to the approaches, the Act fundamentally changed the status and welfare of the farmers. Their income increased and they started to live a dignified life while providing a substantial revenue stream to the government. Even though the AAA had no benefits to the sharecroppers, it opened jobs for such people (Olson 5). They got employment from farm owners to help in destroying the crops. The resultant work immediately changed the status of the sharecroppers who were primarily African Americans and had lived in poverty before the effect of AAA. Nonetheless, this was only temporary since after the destruction of the crops in the farms was over, the sharecroppers lost their employment, abandoned the farms and returned to their destitute ghetto life (Choate 125). The farmers were pleased with the government subsidies and adhered to the allotment plan as agreed by the government in exchange for handouts. As would have been expected, the price of farm produce rose by up to more than 50% between 1932 and 1935 (Paarlberg 1164). The farmers who planted corn, wheat, and hog benefited from this plan. However, there were many unintended consequences of the Agricultural Adjustment Act. Food supply became scarce, and people went hungry, as most Americans could not afford to buy the hiked prices of agricultural produce.

A severe drought in Great Plains states followed the implementation of AAA. Farmers had already reduced the acreage of land under cultivation, or other abandoned it completely. The violent storms and winds that blew over the agricultural fields greatly affected the economic viability of farming which has already undergone a decline due to the enforcement of AAA (Libecap 63). The damage caused was considerable, and the anticipated high price yields from agriculture were not meaningful as about eight hundred thousand people including farmers moved towards the west to California. Despite the debatable failure of the AAA as an intervention for farmers in the era of the great depression, basic policies by the federal government are still premised on maintaining production low to keep the prices high (Paarlberg 1163). This is an example of how the legacy of the Great Depression continues to affect the United States today.

The AAA as the most influential regulation of the Agricultural sector during the Great Depression succeeded in raising farm prices of farm produce and temporarily improved livi...

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