The spread of Covid-19 around the world has hit the global economy hard and increased pessimism about the prospect of another Great Depression. Looking back at the past history, it is not difficult to find that after each economic crisis, there has always been the rise of "government interventionism." The Great Depression, which began in the United States in the 1930s, is typical of this phenomenon.
The most famous depression in history is thought to have begun with the stock market crashes on October 24 and 29, 1929, known as “Black Thursday” and “Black Tuesday” respectively. From May 1929 to July 1932, in just three years, the industrial production of the United States dropped by 55.6%, and the GDP dropped from USD 104.4 billion to USD 41 billion. During the depression, about 100,000 Americans lost their jobs every week, and by 1932 the number of unemployed had reached 13 million.
During the period of rapid economic development, it was widely believed that the market mechanism is the "invisible hand", which can fully mobilize the economic vitality, while the intervention of the government will only lead to inefficiency and waste. During the Great Depression, Herbert Hoover, then U.S. President, opted for a less intrusive form of contractionary policy, balancing the budget by cutting spending and raising taxes.
Hoover's choices undoubtedly exacerbated the crisis. By the end of 1931, desperate people in the countryside were living off weeds, and people in the city were rummaging through garbage for food scraps. As early as during World War I in 1919, Hoover organized the aid to post-war Europe. At that time, Germany, Switzerland, France, and other European countries named streets and squares after him to thank him, which also accumulated political leverage for Hoover when he became President of the United States. But when the Great Depression hit, Americans in distress dubbed the shantytowns where the people left homeless by the Great Depression "Hoovervilles."
Not surprisingly, in the 1932 election, Hoover was soundly defeated. Franklin Roosevelt took office as President of the United States and began to implement the "New Deal", whose policy core was the three R's: Relief, Recovery, and Reform. The New Deal was implemented from 1933 to 1938.
The main contents of the "First New Deal" (1933-1934) include: First, dealing with overproduction. In June 1933, Congress passed the National Industrial Recovery Act (NIRA). With the goal of restoring industrial production, the act placed all aspects of production under the supervision of the state to reduce blindly production and let the state intervene. In 1935, the U.S. Supreme Court ruled that the act was unconstitutional, and the act was invalidated. Second, dealing with agricultural overproduction. In 1933, the Agricultural Adjustment Act (AAA) was enacted, with the goal of using a "domestic allotment" system to set the total output of agricultural products such as corn, cotton, dairy, pork, and rice. In 1936, AAA was declared unconstitutional by the High Court. But in 1938, a tougher version of the AAA was passed and became the basis of modern American farm policy. In the late 1920s, the United States faced massive outflow of gold, and the Federal Reserve had to raise its discount rate to stop the outflow, causing monetary tightening. To solve this problem, the federal government suspended the gold standard by a series of laws and executive orders in March and April 1933 and banned the export of gold. These measures ensure that the Federal Reserve system can increase the money supply in response to economic demand.
To create demand and alleviate unemployment, the Public Works Administration (PWA) established under the NIRA organized and financed infrastructure projects such as government buildings, airports, hospitals, schools, roads, bridges, and dams. From 1933 to 1935, the PWA spent USD 3.3 billion. In addition, in order to stabilize the financial system and reduce financial risks, the U.S. government has successively promulgated the "Glass-Steagall Act", "Securities Act", "Securities Exchange Act" and other bills.
The "Second New Deal" (1935-1938) mainly includes: further public works projects, banking consolidation, labor rights protection (including the establishment of minimum wages and maximum working hours), the establishment of a social security system (including the promulgation of the "Social Insurance Law", the "National Labor Relations Act", etc.).
On the whole, the Roosevelt administration created the possibility of economic rebalancing by intervening in the market supply and demand for industrial and agricultural products forcibly but effectively. At the same time, during the Great Depression, the financial system exposed a series of problems, and the Roosevelt administration took a number of measures, including the reform of the gold standard system. This guaranteed the efficiency and stability of the financial market, and provided valuable experience for the subsequent economic crisis decision-making, including the timely use of the central bank as a lender of last resort in case of a bank run. In addition, Roosevelt's New Deal also established the social security system, which provided some financial security for those who suffered from the Great Depression and subsequent economic crises.
The effect of the New Deal can be said to be remarkable. In 1934, the U.S. GDP grew by 16.9% rapidly. Between 1933 and 1941 the economy expanded at an average annual rate of 7.7%. However, it is also argued that even in 1940, the U.S. GDP did not return to 1929’s level, and continued to face unemployment rates of about 15%.
From the Great Depression in the 1930s to Roosevelt's New Deal, it is not difficult to see that when the country enters the stage of rapid development, it often pursues liberal policies and advocates the reduction of government intervention. When entering a crisis, the government is often required to intervene in the market to stimulate demand and create a loose monetary environment, thus leading the economy out of the crisis. In such an economic cycle, the change of the government's role and counter-cyclical measures undoubtedly test the judgment and governance ability of the government.
After the Great Depression, "big government" intervention in the United States lasted until the late 1970s, during which time there was stagflation that was difficult for Keynesians to explain. In an era of steady economic growth, the idea of free markets came into the mainstream, leading to monetarism led by Milton Friedman that emphasized the role of aggregate money supply, less government intervention, and more liberalism. The development of these free-market ideas laid the ideological foundation for the American policy shift. It was not until the Reagan administration in the 1980s that the United States completely established a free market system.
The history from the Great Depression to the rise of "government interventionism" is still relevant in 2020. Covid-19 has once again plunged the global economy into a crisis. In order to systematically bail out people and businesses in crisis, even countries such as the United States and the United Kingdom, which place the most emphasis on free markets, have had to step up efforts to deal with a major crisis that free markets can no longer bear alone. The UK government is preparing to launch a financial rescue package, the "Project Birch", to bail out strategically important companies. This is an example of government intervention.
Final analysis conclusion:
The Great Depression of the United States in the 1930s drove the birth of the "Roosevelt New Deal" model in which the government intervened more in the economy. Now, more than 80 years later, the global economy, including the United States, is again at risk of a recession caused by the pandemic, bringing back the model of increased government intervention.
