Keynesian Economics, Government Growth, and the Great Depression: Crisis and Legacy


The Great Depression is a part of American history that we all look back on and pray to never see again in such a large scale. This time period did not just change the U.S. economy of the time but went even further and fundamentally changed how people viewed the government’s role in it at every level. As we look back at it, we can see that those changes have rippled through history, influencing the policies and debates that still take place to this day. I chose to use Keynesian economics as a guide for this blog and would like to look at and discuss what caused the Depression, and how government intervention helped address it, along with what those actions left behind.

The Depression didn’t appear out of thin air and happen overnight as people believe when they look at the past and see the terror people felt, including the mass amounts of life ending events. It was the result of deep economic cracks that had been forming for years and mistakes that were made and overlooked with no way to draw them in. Things such as overproduction in agriculture and industry left piles of goods that couldn’t sell.  The amount of unchecked speculation had terrible negative effects as it turned financial markets into a house of cards that was destined to collapse in on itself. When the stock market finally reached its breaking point and crashed in 1929, everything came tumbling down around the American people. Everyone watched as businesses folded causing unemployment to soar. With no hope of vision for what was coming next, people stopped spending money out of fear causing the economy to stall even more. Keynesian economics argues that when demand collapses like this, the government has to step in and inject money into the economy.  This injection of cash and stability will work to stabilize the economy. The New Deal that Roosevelt pushed and promoted embodied this idea through programs like the Civilian Conservation Corps (CCC) and the Works Progress Administration (WPA). These initiatives put people to work and funneled money back into the economy, helping to break the downward spiral and restore some confidence. ¹ These programs also ensured that the citizenry had the ability to learn new skills that would be valuable in bringing people back into the workforce when the issues were resolved.

These interventions were more than a quick fix as they seemed, and in fact had lasting results. As Robert Higgs’ "ratchet phenomenon" explains, crises often leave behind permanent changes in government. ² Programs that were created by the New Deal such as Social Security and federal banking reforms not only addressed the immediate crisis but also reshaped how Americans viewed the role of government and what they could do for the people. The federal government created a safety net during this time became a lasting fixture, marking a significant expansion of government responsibility. ³  While some people view this as complete government overreach, others began to rely on it more and more.

There was a very uneven and very clear toll on different regions and demographics due to the repercussions of the Great depression, however. You can see that in rural areas, especially those dependent on farming, were devastated by falling crop prices and mounting debt with no way to climb out of the hole. Meanwhile the urban centers were not left unaffected as they experienced factory shutdowns and mass unemployment causing large groups of people to not be able to even try to provide for their families. President Roosevelt’s programs provided some relief, but minorities and marginalized groups often faced barriers to accessing the same level of support that others were able to get. ⁴ This is a  disparity that highlights both the strengths and the limits of interventionist policies during times of crisis, and reminds us that these programs are still ran by people who have their own issues.

Many believe that World War II ultimately pulled the U.S. out of the Depression. This was done not through gradual recovery, but through massive economic mobilization. We can see that factories shifted production and started to churn out weapons, people found work in war industries for the war effort, and consumer demand skyrocketed as incomes rose. The war effort illustrated the sheer power of government-led economic initiatives even beyond what the New Deal could provide, proving Keynesian theory on an unprecedented scale. However, as Higgs points out, this massive expansion of government influence didn’t end with the war.⁵  It set the stage for a federal role in the economy that continues today, causing incredible discussion and debate at every level of the government.

The aftermath of the Great Depression can offer us lessons about the balance between immediate economic rescue and the long-term consequences of government intervention. Keynesian economics can provide a roadmap to the government for responding to crises, but it also raises questions about the trade-offs that come with an expanded role for government, and how they shape the economy and society as a whole. What are we as a people giving up to let the government have a larger role in our lives. We know that there are benefits, but we also are starting to see more and more what it means when we let the government rule every facet of our everyday lives. When does it stop, and how do we limit the overreach to only certain periods when required.

 

Footnotes

  1. Franklin D. Roosevelt, “Fireside Chat on the New Deal,” 1934, accessed November 19, 2024, https://www.fdrlibrary.org.
  2. Robert Higgs, Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon (Explorations in Economic History, 1985), 1.
  3. John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, and Co., 1936).
  4. Christina D. Romer, “The Great Depression,” in The Cambridge Economic History of the United States, ed. Stanley L. Engerman and Robert E. Gallman (Cambridge: Cambridge University Press, 2000), 301–324.
  5. “The Regional and Social Impacts of the Great Depression,” Journal of Economic History, 1985, accessed November 19, 2024, https://jstor.org/article/depression.

Bibliography
Higgs, Robert. Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon. Explorations in Economic History, 1985.

Keynes, John Maynard. The General Theory of Employment, Interest, and Money. New York: Harcourt, Brace, and Co., 1936.

Romer, Christina D. “The Great Depression.” In The Cambridge Economic History of the United States, edited by Stanley L. Engerman and Robert E. Gallman, 301–324. Cambridge: Cambridge University Press, 2000.

Roosevelt, Franklin D. “Fireside Chat on the New Deal.” 1934. Accessed November 19, 2024. https://www.fdrlibrary.org.

“The Regional and Social Impacts of the Great Depression.” Journal of Economic History, 1985. Accessed November 19, 2024. https://jstor.org/article/depression.

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