Q2: There are multiple conditions that occurred in the US that aided in the economic downturn leading to the Great Depression. Prior to the stock market crash of 1929, a classical approach, advocated by Adam Smith, was how America felt its political and economic system functioned. Adam Smith’s classical approach is embedded in the concept of a laissez-faire economic market, which suggests that the US would thrive if left alone (lecture). This approach requires a noninterfering government and allows individuals to follow their own self-interest, which was supposed to keep economic order (Cochran & Malone). Additionally, as discussed in lecture, this theory assumes that markets are inherently stable, self-adjusting and self-regulating, and have the ability to allot resources based on needs of individuals, and guarantee full employment to support growth (lecture). To sum up, it was widely believed that the economy would grow and prosper if market forces were left alone by the government.
Although economic downturns had occurred in recent decades leading up to the crash, the presidents prior to Roosevelt did nothing to address the deflation in prices, the reduction of investments or unemployment because it was believed that they could do nothing and should not intervene (lecture). Therefore, with no monetary policy, no political interference in the economy, support for a laissez-faire market and with no economic policy, the US was, in multiple ways, contributing to the creation of the Great Depression (Cochran & Malone). Additionally, during the 1920’s many people bought consumer goods and made investments with borrowed money, which increased debt and aided in the stock market crash of 1929. When the Great Depression occurred many banks failed, there was high unemployment, the GDP dropped by half, there was price deflation, and a loss of family farms (Cochran & Malone/lecture).
When FDR was elected into office it was clear he had to do something to help with the harsh conditions in the country. The concepts behind the New Deal were drawn from the theories of John Keynes, which were an attempt to understand the causes of the Great Depression (Cochran & Malone). Although he appreciated capitalism, Keynes felt the 1930’s exposed the flaws of a laissez-faire policy. He endorsed the idea of a partnership between the government and businesses to run the economy and if need be, it could act as an employer and a procurer of goods to create growth and emphasized the idea of aggregate demand (Cochran & Malone). Keynes asserted that market economies are inherently unstable, do not self-adjust, and argued that government intervention and spending is critical during economic struggles. He felt the government should employ fiscal and monetary policy to keep inflation and unemployment low and encourage full employment and economic growth (Cochran & Malone).
After the Great Depression, the US government was placed in the center of the economic life of the nation...