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Example research essay topic: Pay Their Debts Deficit Spending - 1,932 words

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Economics: Wealth and Poverty The Era of Prosperity could last forever if only some perils were not involved in it. Let me define and discuss factors responsible for the outbreak of the Great Depression first. The roots of the problem were in the structure of the American economic system. Economists define five major reasons of the economy collapse.

They are: unequal distribution of wealth and income, unequal distribution of corporate power, bad banking structure, foreign balance of payments, and limited or poor state of economic intelligence. Despite rising wages overall, income distribution was extremely unequal. Gaps in income had actually increased since the 1890 s. The 1 % of the population at the very top of the pyramid had incomes 650 % greater than those 11 % of Americans at the bottom of the pyramid.

The tremendous concentration of wealth in the hands of the few meant that the American economy was dependent on high investment or luxury spending of the rich. However, both high spending and high investment are very susceptible to fluctuations in the economy; they are much less stable than peoples expenses on daily necessities like food, clothing, and shelter. Therefore, when the market crashed and the economy tumbled, both big spending and big investment collapsed. From the late 1870 s on, there had been an ongoing movement of consolidations and mergers. During WWI, many would-be competitors were merged into huge corporations like General Electric, making competition nearly nonexistent. In 1929 two hundred of the biggest corporations controlled 50 % of the corporate wealth in America.

This concentration of corporate wealth meant that if just a few companies went under after the Crash, the whole economy would suffer. In the 1920 s, banks were opening at the rate of 4 - 5 per day, but without many federal restrictions to determine how much start-up capital a bank needed or how much of its reserves it could lend. As a result, most of these banks were highly insolvent; between 1923 and 1929, banks closed at the rate of two a day. Until the stock market crash in 1929, prosperity covered up the flaws in the banking system. After the WW I, America turned from debtor nation into a credit nation.

However, debtor nations could pay their debts in form of goods if only the tariffs were lower. The policy of protectionism kept foreign goods out of US; foreign countries couldnt pay their debts and had no money to buy American goods. Also, the fact that most American economists and political leaders in 1929 still believed in laissez-faire and the self-regulating economy made its contribution to the beginning of the depression. To help the economy along in its self-adjustment, President Hoover asked businesses to voluntarily hold down production and increase employment, but businesses couldn't keep up high employment for long when they weren't selling goods. There was a widespread belief that if the federal budget were balanced, the economy would bounce back. Hoovers Administration was also mistakenly committed to remain on the international gold standard.

The Great Depression lasted from October 24, 1929 until the economic recovery of the 1940 s. On October 29, Black Thursday, the stock market crashed heavily, and continued to fall sharply throughout the coming weeks. As a result, the United States and the world were thrown into a decade of poverty and unemployment. For five years prior to the crash, the stock market was characterized by the rising prices. Major reasons for such state included the rising stock dividends, increase in personal savings, relatively easy money policy, the fact that over-production profits were reinvested in new production, lack of stock market regulation, and the psychology of production. People invested in stock in the effort to get fast profits.

Increased personal savings made possible by the increase in wages provided people with the opportunity to invest. People also eagerly took loans to invest in stock. Over-production profits reinvested into new production led only to more over-production. In 1931 a national law-enforcement commission, formed to study the flouting of prohibition and the activities of gangsters, was to report that prohibition was virtually unenforceable; and, with the coming of the Great Depression, prohibition ceased to be a key political issue. In 1933 the Twenty-first Amendment brought its repeal. In the meantime, prohibition and religion were the major issues of the 1928 presidential campaign between the Republican nominee, Herbert Hoover, and the Democrat, Governor Alfred E.

Smith of New York. Smith was an opponent of prohibition and a Roman Catholic. His candidacy brought enthusiasm and a heavy Democratic vote in the large cities, but a landslide against him in the dry and Protestant hinterlands secured the election for Hoover. In October 1929, only months after Hoover took office, the stock market crashed, and the average value of 50 leading stocks falling by almost half in two months. Despite occasional rallies, the slide persisted until 1932, when stock averages were barely a fourth of what they had been in 1929.

Industrial production soon followed the stock market, giving rise to the worst unemployment the country had ever seen. By 1933 at least a quarter of the work force was unemployed. Adjusted for deflation, salaries had fallen by 40 percent and industrial wages by 60 percent. The causes of the Great Depression were many and various. Agriculture had collapsed in 1919 and was a continuing source of weakness.

Because of poor regulatory policies, many banks were overextended. Wages had not kept up with profits, and by the late 1920 s consumers were reaching the limits of their ability to borrow and spend. Production had already begun to decline and unemployment to rise before the crash. The crash, which was inevitable since stock prices were much in excess of real value, greatly accelerated every bad tendency, destroying the confidence of investors and consumers alike. Hoover met the crisis energetically, in contrast to earlier administrations, which had done little to cope with panics except reduce government spending.

He extracted promises from manufacturers to maintain production. He signed legislation providing generous additional sums for public works. He also signed the infamous Smoot Hawley Tariff of 1930, which raised duties by as much as 50 percent. These steps failed to ease the depression, however, while the tariff helped to export it. International trade had never recovered from World War I. Europe still depended on American sales and investments for income and on American loans to maintain the complicated structure of debt payments and reparations erected in the 1920 s.

After the crash Americans stopped investing in Europe, and the tariff deprived foreigners of their American markets. Foreign nations struck back with tariffs of their own, and all suffered from the resulting anarchy. In the 1930 elections the Democratic Party won control of the House of Representatives and, in combination with liberal Republicans, the Senate as well. Soon afterward a slight rise in production and employment made it seem that the worst of the depression was over.

Then, in the spring of 1931, another crisis erupted. The weakening western European economy brought down a major bank in Vienna, and Germany defaulted on its reparations payments. Hoover proposed a one-year moratorium on reparations and war-debt payments, but, even though the moratorium was adopted, it was too little too late. In the resulting financial panic most European governments went off the gold standard and devalued their currencies, thus destroying the exchange system, with devastating effects upon trade. Europeans withdrew gold from American banks, leading the banks to call in their loans to American businesses.

A cascade of bankruptcies ensued, bank customers collapsing first and after them the banks. Hoover tried hard to stabilize the economy. He persuaded Congress to establish a Reconstruction Finance Corporation to lend funds to banks, railroads, insurance companies, and other institutions. At the same time, in January 1932, new capital was arranged for federal land banks. The GlassSteagall Act provided gold to meet foreign withdrawals and liberalized Federal Reserve credit. The Federal Home Loan Bank Act sought to prop up threatened building and loan associations.

But these measures failed to promote recovery or to arrest the rising tide of unemployment. Hoover, whose administrative abilities had masked severe political shortcomings, made things worse by offering negative leadership to the nation. His public addresses were conspicuously lacking in candor. He vetoed measures for direct federal relief, despite the fact that local governments and private charities, the traditional sources for welfare, were clearly incapable of providing adequate aid for the ever-rising numbers of homeless and hungry.

When unemployed veterans refused to leave Washington after their request for immediate payment of approved bonuses was denied, Hoover sent out the army, which dispersed the protesters at bayonet point and burned down their makeshift quarters. Hoover's failures and mistakes guaranteed that whoever the Democrats nominated in 1932 would become the next president. Their candidate was Governor Franklin Delano Roosevelt of New York. He won the election by a large margin, and the Democrats won majorities in both branches of Congress. The New Deal established federal responsibility for the welfare of the economy and the American people.

At the time, conservative critics charged it was bringing statism or even socialism. Left-wing critics of a later generation charged just the reverse that it bolstered the old order and prevented significant reform. Others suggested that the New Deal was no more than the extension and culmination of progressivism. In its early stages, the New Deal did perhaps begin where progressivism left off and built upon the Hoover program for fighting the depression. But Roosevelt soon took the New Deal well beyond Hoover and progressivism, establishing a precedent for large-scale social programs and for government participation in economic activities. Despite the importance of this growth of federal responsibility, the New Deal's greatest achievement was to restore faith in American democracy at a time when many people believed that the only choice left was between communism and fascism.

Its greatest failure was its inability to bring about complete economic recovery. Some economists, notably John Maynard Keynes of Great Britain, were calling for massive deficit spending to promote recovery; and by 1937 the New Deals own experience proved that pump priming worked, whereas spending cutbacks only hurt the economy. Roosevelt remained not persuaded, however, and the depression lingered on until U. S. entry into World War II brought full employment. One area that Miller focuses on as being problematic is government fiscal policy, which consists of taxation and spending.

According to him, the US government has subscribed to the traditional philosophy of fiscal policy, which involves deficit spending and tax cuts during periods of recession in order to minimize unemployment, and reduce government spending during periods of expansion to combat inflation. Milbergs basic criticism of this policy is that historically, it has done little to combat recession due to time lags in fiscal policy implementation. Instead, it has put inflationary pressure on the expansions that follow a recession and has fostered a continuous and permanent increase in government expenditures which were originally supposed to be temporary. Monetary policies are demand-side macroeconomic policies.

Their work is to encourage or discourage spending on goods and services. Economy-wide recessions and booms do not reflect fluctuations in the economy's productive capacity. As you can see, the transition from the Era of Prosperity to the Great Depression was rapid and unexpected and the major reason for such dramatic change was the structure of the US economy and with its imperfect system of regulations in combination with the new consumption psychology, badly developed banking system, and overoptimistic behavior of producers, investors, and consumers.


Free research essays on topics related to: pay their debts, unequal distribution, market crashed, deficit spending, stock market

Research essay sample on Pay Their Debts Deficit Spending

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