History of the 20th Century: Is Roosevelt Neutral - Research Paper Example

History of the 20th Century Name: Prof : Subj. : Date : Is Roosevelt neutral? Inaugurated in 1933, four years after the onset of the Great Depression of 1929, the 32nd President of the United States, Franklin Delano Roosevelt, will have to choose between active involvement in international affairs and domestic reconstruction. The United States during that time is having trouble in unemployment and socio-economic disorders and majority of Americans were more interested in their domestic affairs than the crisis around the world. With a wide-ranging demand to focus on prosperity at home, the American government adopted the Neutrality Act in 1935-1937 that would prevent them from assisting either side of any international conflict (Kent, 2006). However, the onset of crisis in Europe in 1938 seems to soften the wisdom of strict neutrality of the Roosevelt administration and in 1939, while concentrating on economic recovery, Roosevelt made a statement saying that although the nation was neutral, he is not advising the American people to remain still in the face of Nazi aggressions. He then tried to extend aids to allies in Europe and Asia that was also under attack by the Japanese. President Roosevelt even went as far as amending the Neutrality Act itself, and strengthening the U.S. armed forces despite of strong opposition from the isolationist groups (FDR Museum and Library, 2006). Franklin D. Roosevelt, as a person and president, was never neutral in the face of international conflict. In fact, he also signed the 1941 “lend-lease” bill in order to furnish aids to nations at war. Although America is neutral in the sense that it was not actually at war and still at peace, it is however supporting the cause of democracy through arms and aids. Roosevelt’s brand of neutrality is in fact fighting a war on a distance, launching indirect attacks on its enemies while enjoying peace at home. The Crash of ‘29’ The “Black Thursday”, the day in our history when the New York Stock Exchange experiences 30% value decline of the Dow Jones Industrial Average. October 24, 1929, a Thursday, signals the end of the thriving American industrial economy. Five days later, comes “Black Tuesday”, the beginning of the longest and intense economic slump and the onset of the “Great Depression” in the United States. Thousands of investors grimly watched their fortunes descend that suddenly turned paper millionaires into vagabonds in just a matter of hours (Boldin 2001). Many believed that the crash on Wall Street was an important factor in putting the American economy off-balance and the root of other difficulties that left a dark spot in history. Historians mostly agree that it is just a symptom of the Great Depression rather than a cause. To determine the impact of the crash, it is important to understand the Bull Market situation of the 1920’s, and how Wall Street functions at the time. During that time, the value of Dow stocks increased more than five times its usual value, reaching a peak of 381.17 in September 3, 1929. Therefore, many investors and those with knowledge in stock trading saw the great opportunity to make a fast fortune on Wall Street. There was extreme enthusiasm among investors believing that the only direction for the stock market is up and America’s economy is in great shape, where 20% yearly returns on stocks will be common. There were numerous unregulated and unscrupulous stocks investments. Small investors who were trying to earn paper profits were buying stocks for a little as 10% of the face value and some were barrowing additional capital with stocks as collateral. However, since stock prices reached levels that “could not be justified by future earnings” (Romer, 2003), a slight downward trend in the prices triggers panic, and investors who lost their confidence were force to sell their stocks at a loss and as a result; the stock market bubble burst and many individuals lost their savings in an instant. The stock market was already showing unfavorable patterns in the latter part of the 1920’s but investors took it for granted. The stocks value drop estimate in 1929 is around $30 billion, which is about 30% of the Gross Domestic Product during that time. This drop brought a very negative impact on the economy and created a banking panic resulting to further economic depression in the following year. The deteriorating prices of stock create bankruptcies and closures of businesses resulting in massive unemployment and misery. Though many economic analyst and historians believed that it is not the lone contributor to the depression, they all agree it has the greatest and more severe impact in the depression that followed (Kent 2006). On the other hand, Romer (2003) believed that the primary cause of the Stock Market crash is the tight U.S. monetary policy. Between 1920 and 1929, the interest rates were increase by the Federal Reserve, to control the rapid rise of stock prices. However, the high interest rates affected interest-sensitive spending, evident in areas like construction and automobiles purchases that in turn decreased production. In addition, the growth of the construction industry in the middle of the 1920 has resulted in excess supply of houses resulting in the sudden drop of construction in the following year. The crash substantially reduces American aggregate demand and purchases of goods and investments fell harshly. The uncertainty of future income generated by the financial crisis made consumers stay away from purchasing durable goods and the extreme decline in spending became evident in the late months of 1929 through 1930. A year later, as an aftermath of the crash of ‘29’, loosing their confidence in the stability of banks, depositors made simultaneous cash withdrawals resulting in waves of banking panics across America. In need of cash, the banks were obliged to liquidate loans in order to acquire the necessary cash for their depositors. Quick loan liquidation can cause even stable banks to fail and these widespread irrational banking panics no doubt devastated the American banking system. The amount of currency people like to hold is not proportional to the currencies deposited in banks. The ratio is one of the primary reasons for the 31% money supply decline in the United States in 1929 to 1933. Consequently, one-fifth of banks in existence at the beginning of the decade were out of business in 1933. Furthermore, the Federal Reserve did not do much to control the banking panics. In fact, it has raised interest and purposely constricted money supply in 1931. Many experts believed that the Federal Reserve decision caused stern effect on output since the decline in the money supply depressed spending. For instance, people will naturally think wages and prices will be lower in the future whenever they detect the rapid decline in actual prices and money supply. They would normally expect deflation, and as a result, they would lessen their spending and eventually would hesitate to barrow fearing that future wages would not be enough to pay for the loan (Romer 2003). President Hoover plays an important role in the failures of government to challenge the crisis effectively. In 1930, Hoover refuses to grant the petition of the Conference of the Governors for one billion dollar emergency federal relief. However, in February of 1931, for the first time since 1929 crash, Hoover did let go of his “devotion to the principle of voluntary relief” (Rothbard 2000), and made a statement that if the time comes when voluntary agencies can no longer find funds, he will “ask aid of every resource of the Federal Government” (Rothbard 2000). However, just a few months later like always, Hoover was attacking short selling in the wheat market. He argues that these speculators were depressing prices and destroying confidence. Unaware and perhaps no pure knowledge of the market, Hoover did not realized that for every short seller there is always a long buyer contemplating the rise. This is the reason why in the fall of 1929, the Stock Exchange Authorities probably influenced by Hoovers curios charge on short seller, controlled short selling. Consequently, the stock prices went down lower than they normally would. Hoover is ignorant that short seller’s profit taking is one of the major supports for stock prices throughout a decline. In another situation, he also tried to impose on the public a manufacturer’s sales tax. For him, the great increase in estate tax is “economically and socially desirable” (Rothbard 2000). He has no idea that taxes on capital like estate tax, is the worst possible tax logically speaking in getting rid of depression. Hoovers amazingly foolish programs were criticize by the St. Louis Chamber of Commerce saying; government’s high level of taxation constitutes as one of the main deterrents of business recovery. Furthermore, the Atlanta Constitution labeled the 1932 tax act as the “most vicious tax bill ever saddled on the country in time of peace” (Rothbard 2000). In the summer of 1932, Hoover himself admitted that his public works program had failed. Suddenly, he is now in favor of Federal grants-in-aid in place of Federal public works. He then publicly stated his opposition on non-self-liquidating public works, and consequently stops his long useless experiment. The crash of 1929 did a great negative impact on the economy however, there were a few good lessons learned from the experience and a few notable outcomes. For instance, the crash enables the creation of the Securities and Exchange Commission to police Wall Street of anomalous investment transactions. Investors will not have better protection against fraud and other financial anomalies. Economist and financial experts became more aware and begun researching techniques to prevent another mishap. Investors learned to be more responsible and more concern about the economy rather than huge profits. Although many had shone away from stock investing, a lot of knowledgeable and responsible new breed of investors are coming in. The October 19, 1987 “Black Monday” is a proof that the Securities and Exchange Commission is doing their job and many investors nowadays are truly responsible. Although Dow value was down by 23%, it had a small impact on the economy and quickly stabilized a year later (Boldin, 2001). In addition, it has impressively aborted the “cumulative downward spiral in businesses and prices” (Stern 1995). The key points learned in history are the total abolition of protectionist legislation since protectionism hampers domestic industries competitiveness. More importantly, the decline in money supply is the major cause of economic failures and therefore the Federal Reserve should be more responsible to uphold money stock growth. Furthermore, they should also protect and ensure the stability of the banking system. “Confidence is key” (Stern 1995); lenders must give barrowers much opportunity so they can maintain their businesses and prosper. References Boldin Michael, 2001, “The Stock Market Crash of 1929”, National Council on Economic Education, , Date of Access: 06/07/07, www.e-connections.org/lesson10 /cluesheet3c.pdf FDR Presidential Museum and Library, 2006, “Franklin D. Roosevelt - The 32nd President of the United States”, Franklin D. Roosevelt Presidential Library ,4079 Albany Post Road ,Hyde Park, New York 12538 ,1-800-FDR-VIS, Marist College, 3399 North Road, Poughkeepsie, NY, , Date of last access: 06/07/07, http://www.fdrlibrary.marist.edu/fdrbio.html Kent J., 2006, “World History Since 1917”, The London School of Economics and Political Science, University of London External Programme, The External Programme Publications Office University of London, Stewart House,32 Russell Square London WC1B 5DN United Kingdom, Web site: www.londonexternal.ac.uk, Published by: University of London Press © University of London 2006, Printed by: Central Printing Service, University of London, England Romer Cristina, 2003, “Great Depression”, Berkeley, , Date of Access: 06/08/07, www.econ.berkeley.edu/~cromer/great_depression.pdf Rothbard Murray, 2000, “American Great Depression”, Fifth Edition, The Ludwig von Mises Institute, 518 West Magnolia Avenue, Auburn, Alabama 36832, ISBN No.: 0-945466-05-6 Stern Gary, 1995, “Achieving Economic Stability: Lessons from the Crash of 1929”, Federal Reserve Bank – Minneapolis, Supplementary Materials, University of Nebraska at Omaha, , Date of Access: 06/08/07, ecedweb.unomaha.edu/ve/library/AES.PDF Read More