Fiscal, Trade, and Monetary Policy Under Hoover and Roosevelt

The following sample Economics research paper is 1663 words long, in MLA format, and written at the undergraduate level. It has been downloaded 97 times and is available for you to use, free of charge.

The presidency of Herbert Hoover saw the 1929 stock market crash and the onset of the Great Depression. President Franklin Delano Roosevelt was elected largely on his promises to help the nation out of the Depression via an unprecedented program of government intervention in the economy, called the “New Deal.” In addition to massive government deficit spending and the entry of the federal government into the employment market, it featured many social safety net programs and initiated the era of transfer payments and higher taxes. Many debate the effectiveness of the New Deal even now, but the entry of the U.S. into WWII is agreed to have ended the Depression once and for all.

Historians differ widely on the cause of the Great Depression, but many point to certain causal factors, among them being the extremely high outstanding loans-to-deposits ratio of most major banks, as well as the margin-to-capital ratio of most stock brokerage firms: both of these exceeded 10:1 in many cases. This meant that any even minor trauma in the financial markets could trigger a liquidity crisis. Other causal factors included the boom-and-bust cycle initiated by the “Roaring Twenties” and the huge expansion of needed capital caused by the qualitative and quantitative increases in the nation’s infrastructure with the democratization of the automobile and the creation of a nationwide electrical grid. When the economy “cooled off” in the late 1920s, capital markets did not adjust as quickly as they might have. The first sign of weakness was a contraction of the money supply. The problem was exacerbated, many feel, with the implementation, or one should say lack thereof, of federal monetary policy; many leaders, including Hoover himself, had a laissez-faire philosophical approach. FDR’s strongly interventionist fiscal policies were an attempt to reverse that trend.

Q2. Fiscal and trade policy under Hoover and Roosevelt. It is the popular perception that Hoover did not react to events as he should have. In fact, many of FDR’s policies were a continuation of those started by Hoover, such as the WPA government make-work program. Hoover’s error may have been that he did not regard the economic situation as a full-blown crisis until it was too late. Still, there is evidence that he did act decisively once the gravity of the situation became apparent. It should also be noted that regardless of what anyone may have thought then or thinks now, the President of the United States is far from all-powerful. The perception that he has more influence on the outcome of events than he does was, and is, inflated by the media. As Leibovich (1994) observed, the media, seeking a causal factor for the stock market crash and the ensuing Great Depression, naturally focused on the man in charge. This was exacerbated by Hoover’s reticence to interfere in the economy: “He also did not want to comment on the crash, feeling that it was not his place to reassure the public. ‘I had no business to make things work in the middle of a crash,’ he wrote years later. He obviously did not have a good sense of the panic that was developing” (103). FDR, by contrast, focused as much on raising the country’s morale as on policy: “The only thing we have to fear is fear itself” as on actual fiscal policy. Much of the New Deal was more of an attempt to do something, anything, rather than a cool, precise calculation of how much good that something would do. This contrast between Hoover’s natural laissez-faire philosophy and FDR’s breezy optimism led to the media blaming Hoover for the Depression and later, crediting FDR with having lifted America out of it—both of which assessments are inaccurate.

That said, there were many steps taken during the Hoover administration that exacerbated the problem rather than solving it. The money supply contracted by one-third between 1929 and 1933, and little if anything was done to expand it. One policy move that illustrates the effect of this was Hoover’s deal with labor unions. Ohanion (2009) created “…a theory of labor market failure for the Depression based on Hoover's industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed” (2310). This contributed to market failure in the labor sector and the resulting very high unemployment, which lasted for almost a decade. Other generally agreed-upon as causal policy factors include a fee levied on each bank check written (which artificially constricted the money supply) and trade protectionism such as the Smoot-Hawley Act, which raised trade barriers precisely when free trade was badly needed to stimulate the U.S. and the world economy. Unfortunately, the urge to “protect” one’s own markets—an urge that is almost always grossly counterproductive—was very appealing to many world leaders, Hoover included. Unfortunately, the law of comparative advantage was then and still is now not widely understood (as in, conservative complaints about “sending jobs overseas”).

Therefore, given a time machine, the way to cure the Great Depression (or even prevent it altogether) would be a) to strengthen stock margin and bank reserve requirements, at least to the levels seen today, i.e., 50% and 20%, respectively; b) to allow for expansion of the money supply when needed; c) to further allow the issuance of government debt instruments; d) to drop all trade barriers and create a worldwide free-trade zone similar to today’s NAFTA or EU; e) allow wages to rise and fall as the market dictates; f) “cool off” an overheated economy by raising the federal interest rate (and being prepared to lower it again if a contraction was observed, and perhaps most importantly of all, g) not adopt the attitude that failing financial institutions should be allowed to sink or swim.

Q3. Monetary policy, including the gold standard, under Hoover and Roosevelt. There are basically two types of currency, assuming the currency itself has no intrinsic value (i.e., paper currency or low-value-metal coin). One is that which is backed by valuable assets, such as a gold certificate, which could be exchanged for the equivalent worth of gold at any time. The other is called “fiat” currency (Latin for “let there be”), which has no intrinsic value either itself or in exchange but rather, only that value given to it by the marketplace.

Under the Hoover administration as well as almost all before it, the U.S. was on a gold standard. The destabilizing factor in the 1920s was that all the European nations had war debts to repay; Germany, in particular, was beset by the need to make war reparations. The hyperinflation that resulted in Germany created an effective collapse in the German economy, which rippled throughout the world as was a major cause of the Great Depression (as well as Hitler’s rise to power). The expansionist monetary policies that were needed to heal the ailing economies of Europe were all but prohibited by the gold standard: governments could not simply create money to meet the needs of creditor nations.

Many scholars have attributed the Great Depression in large part to the worldwide gold standard. For example, Eichengreen (1992) stated that “As early as 1929, the international monetary system began to crumble…Payments problems spread next to the industrialized world” (3). The trouble was that debt-saddled nations had no alternative but to devalue their currencies, which eventually led to many countries, starting with Austria and Germany, suspending the convertibility of their currencies into gold, meaning that their debts would be paid with a hyperinflating currency or not at all. Needless to say, this made an already dire situation even worse.

In the U.S., there was at the same time (1931) a rush by commercial banks to convert Federal Reserve notes into gold, which decreased the amount of currency in circulation as well as depleting the government’s supply of gold. Nonetheless, the Hoover administration did very little to combat this problem, and Congress as well was reluctant to abandon the gold standard and “float” the dollar. Eichengreen and Temin (1997) said that “We argue that the most important barrier to actions that would have arrested or reversed the decline was the mentality of the gold standard” (5). This mentality, that fiat, or “floating” currency was inherently of less worth than gold-backed currency shackled the U.S. in taking the drastic steps that were necessary to repair the economy. One gingerly step away from this mindset was the Roosevelt-administration-sponsored Gold Reserve Act of 1934, nationalizing all gold holdings and forcing banks to reverse the depletion of the money supply of 1931.

The gold standard obsolesced in part because the actual wealth of the nation increased much faster than its gold supply, forcing a distortion one way or the other: under-or over-valuation of the nation’s currency, depending on what compensatory measures were adopted. The government’s ability to ameliorate the Great Depression was severely hampered by the professed need to adhere to the gold standard. Therefore, with our time machine, we should a) take the U.S. off the gold standard; b) adopt a liberal policy toward European debtor nations to help them stay solvent; c) allow significant increases and decreases in the national money supply, by increasing the power and authority of the Federal Reserve; d) allow the market to set the price of gold; e) incentivize international trade, particularly with Europe, and above all, f) do as much as possible to underscore in the minds of the public that the gold standard was obsolete and hampered growth.

Works Cited

Eichengreen, Barry. “Golden Fetters: the Gold Standard and the Great Depression, 1919-1939.” Oxford University Press, 1992.

Eichengreen, Barry J., and Peter Temin. “The Gold Standard and the Great Depression.” No. w6060. National Bureau of Economic Research, 1997.

Liebovich, Louis. “Bylines in Despair: Herbert Hoover, the Great Depression, and the US News Media.” Greenwood Publishing Group, 1994.

Ohanian, Lee E. "What–or who–started the great depression?" Journal of Economic Theory 144.6 (2009): 2310-2335.