Q. What policy instruments were deployed to contain the great economic depression? [UPSC- 2013]
Ans:
The great economic depression started in USA with the Wall Street Crash between September-October 1929. Major factors behind this was domestic overproduction, unequal distribution of income, falling demand for exports and speculation on the New York stock market. It resulted in ruining of millions of investors, closing down of banks, increased unemployment and poverty. It soon spread to other countries as well and so it became known as the world economic crisis. ©crackingcivilservices.com
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Policy instruments were deployed:
- President Hoover initiative in USA:
- He tried to solve the problem by encouraging employers not to reduce wages and not to lay worker off.
- The government lent money to banks, industrialists and farmers to save them from bankruptcy and urged state governor to create jobs by investing in public works schemes.
- To help farmers, the government began to buy up surplus grain.
- But this only encouraged them to produce even more. The government could not afford to continue the policy. It led to even more surplus grain and fall in prices.
- In 1931 Hoover declared a one year moratorium on war debts. This meant that foreign governments could miss one installment of their debts to the USA in the hope that they would use the money saved to buy more American goods.
- But it made little difference- American exports in 1932 were less than a third of the 1929 total.
- He tried to address the problem of the mass closure of banks by setting up the National Credit Corporation. This was designed to persuade large banks to lend money to smaller banks that were in difficulties.
- Rut large banks were reluctant to lend money for fear that the smaller banks might collapse and be unable to pay back.
- Hoover’s policies made very little impact on the depression. He was against the relief payments to individuals because he believed in self-reliance.
- ‘The New Deal’ of president Roosevelt in USA:
- During the election campaign he had said: ‘I pledge you, I pledge myself, to a new deal for the American people.’ The phrase stuck, and his policies have always been remembered as ‘the New Deal’.
- He gave speeches encouraging new hope: ‘Let me assert my firm belief that the only thing we have to fear is fear itself’.
- It had three aims:
- relief: to give direct help to the poverty-stricken millions who were without food and homes;
- recovery: to reduce unemployment, stimulate the demand for goods and get the economy moving again;
- reform: to take whatever measures were necessary to prevent a repeat of the economic disaster.
- It involved:
- Banking and financial systems:
- It was important to get the banking and financial systems working properly again.
- This was achieved by the government taking over the banks temporarily and guaranteeing that depositors would not lose their cash if there was another financial crisis.
- This restored confidence and money began to flow into the banks again.
- The Securities Exchange Commission (1934) reformed the stock exchange; among other things, It insisted that people buying shares on credit must make a down-payment of at least 50% instead of only 10 per cent.
- The Farmers’ Relief Act (1933):
- This tried to help farmers, whose main problem was that they were still producing too much, which kept prices and profits low.
- Under the Act, the government paid compensation to farmers who reduced output, thereby raising prices. This had some success-by 1937 the average income of farmers had almost doubled.
- The Civilian Conservation Corps (CCC)
- This was a popular Roosevelt idea to provide jobs for young men in conservation projects in the countryside.
- By 1940 about 2.5 million had enjoyed a six-month spell in the CCC, which gave them a small wage ($30 a month of which $25 had to be sent home to the family), as well as food, clothing and shelter.
- The National Industrial Recovery Act (1933)
- This was the most important part of the programme. It tried to get people back to work permanently, so that they would then be able to buy more. This would stimulate industry and help the economy to function normally.
- The Act introduced the Public Works Administration (PWA), which organized and provided cash for the building of useful works- dams, bridges, roads, hospitals, schools, airports and government building- creating several million extra jobs.
- Another section of the Act set up the National Recovery Administration (NRA) which abolished child labour, introduced a maximum eight-hour working day and a minimum wage, and thus helped to create more employment.
- Although these rules were not compulsory, employers were pressured to accept them; those who did were privileged to use an official sticker on their goods showing blue eagle and the letters NRA.
- The public was encouraged to boycott firms which refused to co-operate. The response was tremendous, with well over 2 million employers accepting the new standards.
- The Federal Emergency Relief Administration:
- This provided further relief and recovery, It provided $500 million for dole money and soup kitchens.
- The Works Progress Administration (WPA), founded in 1935, funded a variety of projects such as roads, schools and hospitals (similar to the PWA but smaller-scale projects), and
- the Federal Theatre Project created jobs for playwrights,artists, actors, musicians and circus performers, as well as increasing public appreciation of the arts.
- The Social Security Act (1935):
- This introduced old age pensions and unemployment insurance schemes, to be jointly financed by federal and state governments, employers and workers.
- However, this was not a great success at the time, because payments were usually not very generous; nor was there any provision made for sickness insurance. The USA was lagging well behind countries such as Germany and Britain in social welfare.
- Working conditions:
- Two acts encouraged trades unions and helped improve working conditions.
- The Wagner Act (1935) gave unions a proper legal foundation and the right to bargain for their members in any dispute with management. It also set up the National Labour Relations Board to which workers could appeal against unfair practices by management.
- The Fair Labour Standards Act (1938) introduced a maximum 45-hour working week as well as a minimum wage in certain low-paid trades, and made most child labour illegal.
- Other measures:
- Also included in the New Deal were such measures as the Tennessee Valley Authority(TVA), which revitalized a huge area of rural America which had been ruined by soil erosion and careless farming. It also built dams to provide cheap electricity, and organized conservation, irrigation and afforestation to prevent soil erosion.
- There were loans for householders in danger of losing their homes. The new houses and flats were also build.
- Taxes on the incomes of the wealthy increased.
- Trade agreements signed which reduced American tariff in return of tariff reduction of other party to the treaty. (in the hope of increasing American exports)
- Banking and financial systems:
- Similar kind of the measures were adopted in other capitalist countries. These policies were based on the new Keynesian economics. It was a departure from Laissez Faire.
- The Britain and France also adopted appeasement policy towards Germany, Italy and Japan to avoid war during economic crisis.
- One the other hand, Germany, Italy and Japan adopted aggressive economic policy to reduce the impact of war.
The policies especially ‘the new deal’ of Roosevelt took a long way towards taking economy out of the depression. The millions were benefited in USA. The confidence were restored in government and according to some historians it prevented a violent revolution. However, it was the 2nd world war which finally put an end to the Depression. The war effort brought almost full employment in USA. ©crackingcivilservices.com
