The Financial Health of the United States - Research Paper Example

?Running Head: FINANCE Financial crises of the 20th century and the way in which the United s government handled the issues of those incidents Name Class University Financial crises of the 20th century and the way in which the United States government handled the issues of those incidents Introduction The financial health of the United States can be compared to the health of a body, sometimes at its peak, sometimes feeling unwell, and on rare occasions, dragged down to a level of illnesses that lays one flat on their back. The 20th century was a time of extreme highs and extreme lows, sometimes filled with the hope of a never ending healthy economy, other times brought back to reality as the economy dived to a low that affected the well-being of many of the citizens in such a way that it changed lives. The government has been responsible to respond to the poor health of the economy, struggling to find a way in which to regain ground so that the millions of those suffering economically could recover. The many avenues towards economic health that the government has taken have been wide and varied, depending on the policies and the platform of those who were in office. The first true crises of the 20th century occurred in 1929 as the collapse of an ill-conceived stock market plan led to the collapse of industry within the United States. The 1930’s was a time filled with the doom of her citizens, the hard economic times creating a void that left many without jobs, without hope, and without enough to sustain their families. The 1940’s saw an economic challenge of a different kind as World War II took a great deal of resources that meant that citizens had to make significant sacrifices. However, the war led into the 1950’s, a time in which the innovations from the technologies that were created from the wartime efforts provided for a surge in commerce, the beginning of a global economy providing for high levels of income for Americans. The 1970’s saw the United States in a state of a recession with many losing their jobs and a notable shift in the way in which employment was viewed became a part of the sociological landscape. Black Thursday On the day that would come to be called Black Thursday, October 24, 1929, the stock market fell 34 points, which represented a 9% drop for the day. The extremity of the day was caused by a selling panic, driving the prices down and losing billions for investors. The simple answer about how it was caused was because of the speculator boom, but the causes were far more complex than the traditional answer to this question. The market was in a highly sensitive state by that fateful day, some of which was due to the real estate decline starting in 1925, some due to simply because the fear of a crash caused a run that caused a crash. The market had come to a high plateau and the fear of the end had caused the inevitable end. The rising stock prices were less due to value than to speculation manipulations. As an example, RCA was worth $1.32 in 1925, $6.15 in 1927, and $15.98 in 1928 before the stock split (Bierman, 1998, p. 9). The 1920’s represented a rise in technological advancements that affected the nature of American life. The automobile industry evolved during this period and the innovations of the Ford company in assembly line management and the level of wage paid to the workers created a working atmosphere in which the middle class was being born. Money was flowing and people were experiencing a new level of comfort that had never before been experienced. However, when the crash took all of that away, the resulting depression plummeted that emerging middle class into a poverty that was unprecedented on American soil. Farmers experienced losses that could never have been predicted, food prices at all time lows. Market Prices as they Plummet (Crewe & Ingram, 2005, p. 20) Homelessness was rife and ’Hooverville’s popped up all over consisting of huts in urban landscapes without electricity, water, or sanitation, named after President Hoover as ultimately, he was blamed by the population for the Great Depression (Crewe & Ingram, 2005, p. 21). The banks began to fail in 1930 as businesses and farmers could not repay their loans, their payments no longer in alignment with their earnings. To make matters worse, a drought occurred in the 1930’s that stretched from Tennessee to Oklahoma, and impacted both crops and livestock. Jobs were short, food was scarce, water was hard to come by, and the whole nation was suffering. The governmental response to the problem was slow to come and held no real relief for the American people. The position that President Hoover held was that the government should not be in the business of bailing out industry and helping people to get jobs. The American public responded with the power of their vote, rejecting the austerity of the Republican party and putting President Franklin Roosevelt into office in 1932. President Roosevelt’s New Deal represented an unprecedented shift in the way in which the people looked to their government for support. According to Milkis and Mileur, “The New Deal should be remembered not as an episode in the long March of American reform…but as a defining time, like the Revolution and the establishment of a new nation, that set the stage for and defined the terms of American politics and government for generations to com” (p. 2). One of the first things that President Roosevelt did was unseat the power of the banking system, closing all banks on March 5 1933 until March 9 1933 under the Trading with the Enemy Act, an unconstitutional move that was remedied with a change to the act changing the language from applying only during wartime, but giving him the power to close the banks during times of crisis as well. The Emergency Banking Act provided for an extension of the time he held the banks closed, giving large numbers of powers to the comptrollers of currency allowing them to restructure banks without bankruptcy proceedings, and gave the government the power to print money backed by government bonds rather than the required amount of gold. Banks that were believed to be sound or supportable were reopened on March 13, 1933 (Powell, 2003, p. 55). The New Deal provided for a great number of changes in the way in which the government serviced its people. The needs of individuals became a primary concern, hunger, housing, employment, and financial stability became the business of the federal government. This represented a shift from the concept of states’ rights and autonomy as the federal government was now providing for the needs of the people through creative legislation that could support those issues. The concept of the regulation of the banks, the market, and of industry was now a central concept, the government controlling and guiding all of these entities towards the goal of recovery. There are many critics who suggest that the New Deal was a salvation, with others contending that it extended the Great depression. Regardless of the affect, it shows a government responding to a crisis, for better or worse, and being proactive towards finding a solution. World War II Where the government acted to support the people and their economic structures during the 1930’s, the people acted in response to the government during World War II. The economy of the nation was beginning to rebound, often associated with the needs for materials and resources to support the war effort. Most often the economic rebound is associated with the Keynesian model blended with monetarist explanations. The business cycle expansion is attributed to enormous government spending, huge budget deficits, and a spurred military economy which had implications on the civilian economy through increased employment, real output and consumption and a lowering of unemployment (Higgs, 2006, p. 62). One of the ways in which unemployment figures dropped was through the draft, young men pulled from employment in private industry and employed into the armed forces. This increased the demand for labor, pulling women into the work force. As well, some of the historically reported economic inclines of the period reflect a GNP that is tainted by the suspension of a real price-cost relationship where the goods that were created for the war effort were concerned. In addition, many of the products that were being produced had never been produced before, thus creating a problem with trying to accurately assess GNP. The government came to its people and asked for sacrifices, and those sacrifices were made in the way of ration coupons, changes in the gender dynamic were employment was concerned, and of course, the most important cost, in American lives. While the economic remedies of the New Deal resulted in a shift in the foundational ideology of the place that the government should hold in the lives of its people, World War II found reciprocity from the people to its government, changing their lives and making sacrifices. The people of the nation were willing to support their government, the authority that was now responsible to them in a new way, in order to support the war effort that had been framed for its tragedy both for the United States through the attack on Pearl Harbor and through the devastation that was occurring in Europe. Prosperity World War II ended in 1945, a tragedy of unprecedented proportions that changed the cultures of a great many nations across the world. The innovations that had taken place in trying to create better war effort had created industries that had never before been conceived. Television, penicillin, aeronautics, and microwaves were all results of the scientific discoveries during World War II. In 1944, President Roosevelt commissioned Vannevar Bush, director of the office of Scientific Research and Development, the office responsible for overseeing military technological advancement during the war, to create studies about the uses of the many advances that had been made for military purposes within the domestic market. A priority was given to translating the advances into civilian improvements which became a cornerstone of the postwar policies (Chesbrough, 2007, p. 26). Whether or not President Roosevelt’s New Deal caused as many problems as it solved, he took action to try and solve the problems, alleviating the suffering of the nation’s citizens. In looking towards the future, he made it the priority of the government to use technology as a resource for economic development. Through finding uses for technological product in the private sector, industries were created, employment was increased, and the 1950’s are now seen as the optimal time of American heritage, a period of prosperity in which the American dream was being realized. Through proactive response to the economic crisis, the perception of these times through the lens of historians, is that the actions of the government positively impacted the American economy. The postwar boom lasted until the 1970’s when the structures of the healthy economy began to fade. Recession The Bretton Woods system was developed at the end of World War II to establish order within the exchange rates of currencies. Monetary exchange rates were based upon the U.S. dollar, the nations of the world setting monetary policies in regard to the value of the dollar. This provided a stability for the global economy so that import and export could be successfully accomplished. In 1971, the U.S. deficit has rose to such a state that it was expected that the United States was going to have to devalue its currency, lowering the value of the dollar. Because of this fear, a large number of people began to take their liquid capital out of the United States, attempting to exchange their dollars for gold. This lead to the United States suspending its convertibility of dollars to gold and implementing a 10% import surcharge, an act that was necessary or the gold reserves would have been depleted. Confidence in the dollar was lost and the system collapsed (Salvatore, 1996, p. 252). Meanwhile, the nations of the world were catching up on technological advancement and beginning to surpass the United States in the production of goods. The amount of imports were displacing American made products, thus creating a problem as employment demands were significantly lowered because of the overwhelmingly lower prices of the imported goods. People were losing their jobs, doors were closing on major streets in the cities of the nation, and companies were suffering from the competition with countries that had lower wages and costs of living, thus creating lower priced goods. Businesses were running on loans, shored up to combat competition they could not exceed. The prime rate soared to 20% by December 1980, changing 47 times during the year previous (Klebaner, 2004, p. 197). In trying to rein in inflation, recessions were experienced in both 1980 and 1981 as the prime rate caused businesses to be unable to make their loan payments. Reaganomics: the folly of trickle down economics When President Ronald Reagan took office in 1981 the country was suffering with hard times do to the fluctuating economy. The lower middle class was suffering the most as their jobs were disappearing, costing them their homes, the food on their table, and the family life of the American dream that was still part of the perceived American experience. Reagan supported lowered taxes, increased defense spending, and a reduction in government regulatory practices. In 1981 he signed into law the Economic Recovery Tax Act of 1981 which was intended to fix a limping tax system in order to encourage and stimulate growth. The act significantly decreased the estate tax and slashed the taxes for business, the effects of the act taking place over the course of time (Ackerman & Reagan, 1982, p. 6). One might ask this helps to put a roof over the heads of a family and food in their mouth. That is the problem with this response to the economic needs - it doesn’t. Reaganomics was not designed to address the physical needs of the citizens, but instead lived upon the float of rhetoric in order to make broader changes. As quoted by Ackerman and Reagan (1982), in response to the question as to how to raise defense spending, cut income taxes, and balance the budget, David Stockton said “The whole thing is premised on faith,’ Stockton explained. ‘On a belief about how the world works. The inflation premium melts away like the morning mist. It could be cut in half in a very short period of time if the policy is credible. That sets off adjustments and changes in perception that cascade through the economy.” (p. 1). In other words, that by saying that it will work and in creating a belief system in which it does work, it will work. The illusion of the economy can be transformed by the beliefs of a new cult through policies that simply insist that it will work, rather than working in reality. The use of the concept of trickle down economics, as an example, for a theory behind many of the policies did nothing to address the needs of the working poor. Trickle down economics suggests that by helping a corporation through tax breaks, the effect will trickle down. However, it just doesn’t. In a country that is founded on shareholder policies of corporate governance, the advantages of tax cuts to a corporation are going to benefit the shareholders, not the employees. In a stakeholder model of corporate governance, trickle down policies might have worked, but when the focus of corporate policy is towards the owners, the profits will be attended long before the needs of the workers (Persky, Felzenshtain, & Carlson, 2004, p. 13). The advantages that were gained by trickle down economics were not experienced by the American workers, their lives not made better by policies intended to help their employers. The Reagan response to the recession was to widen the gap between the rich and the poor, the middle class struggling for a position somewhere in between as they found themselves slipping down the economic slide toward poverty. Through deregulation, tax decreases, and the hope of stimulating growth without policies that will actually create real growth, the impoverished have increased greatly since that time, the rich becoming a stronger force within the country with 79% of the country only earning 51% of the income after 1989, their share of the income decreasing throughout the years of President Reagan’s administration. The widened gap between those with and those without caused a shift in the way in which the country viewed the American dream. No longer was it about getting a good job at a factory so that a person could have a car, a house, and a family because people no longer trusted that those jobs existed and that they would last throughout a lifetime. Conclusion Government response to economic crisis is vital in creating an appropriate recovery. In addition, government response will also provide a framework through which the culture will view the position of government within the life of the country. During the New Deal, President Roosevelt proposed hard lined, proactive policies that made reforms in the lives of the poor as much as in the economic structure of the country. When the opportunity came to benefit from a war in which the country had made significant sacrifices, he promoted studies in which to define how best to use those technologies to benefit the citizens of the country, a true form of economic stimulus that supported the economic stability of the country for almost twenty years. The nature of government within the framework of culture was changed in that the responsibility of the government to the health and well-being of the individual was considered through programs that responded to the needs of those who were suffering. The health of the country that lasted from the 1950’s through the 1960’s provided an idealized version of the American culture, a place in which the dreams of consumerist prosperity were realized and families were able to live in an idealized universe of secure employment, material comfort, and relative assurances that this would continue. While those assurrances seemed secure, the collapses that were experienced during the 1970’s and the recessions that impacted families during the early 1980’s changed the point of view that people had about their employers. No longer was it assumed that a job would last a lifetime, providing a pension at the end of their life and securing their future. The safety net dropped and many thousands of people fell to the floor, never to fully stand up and recover from the great loss of the trust between employer and employee. The response of the Reagan administration was vastly different than that of President Roosevelt. The New Deal was designed to save the economy, but it was also designed to addressed the needs of those who were suffering. Reaganomics had no such policies attached, the needs of those suffering from the collapses within the economy not addressed other than to hope that what he did for the corporations would somehow cause a benefit to the lower level workers. While this would have been nice, it held no reality. The shifts that have been experienced by the nature of governmental response to economic hardship in the last 20 years of the 20th century created a population that no longer has faith in their employers, an adversarial relationship that consists of employees lacking loyalty and who move from company to company in order to secure the best possible situation rather than working toward the overall success of one company to whom they are stakeholders. Entrepreneurial ambitions, a belief that every person should vote in regard to a mythical six figure income that they will one day earn, and a lack of trust in the government has evolved from a government that does not respond to the worker, but is now mostly responsive to big business. References Ackerman, F., & Reagan, R. (1982). Reaganomics. Boston: South End Pr. Auerbach, R. D. (2008). Deception and abuse at the Fed: Henry B. Gonzalez battles Alan Greenspan's Bank. Austin: University of Texas Press. Bierman, H. (1998). 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FDR's folly: How Roosevelt and his New Deal prolonged the Great Depression. New York: Three Rivers Press. Salvatore, D. (1996). Schaum's outline of theory and problems of international economics. New York: McGraw-Hill. Shamah, S. (2003). A foreign exchange primer. Hoboken, NJ: J. Wiley. Wilber, C. K., & Jameson, K. P. (1990). Beyond Reaganomics: A further inquiry into the poverty of economics. Notre Dame: University of Notre Dame Press. Read More