Model Answer
0 min readIntroduction
The Great Economic Depression, triggered by the Wall Street Crash of 1929, was the most severe economic downturn in modern history, impacting global trade, employment, and living standards. Initial responses were largely based on classical economic principles of balanced budgets and limited government intervention. However, as the crisis deepened, governments began to experiment with new policy instruments to stimulate demand and restore economic stability. This shift marked a significant departure from laissez-faire economics and laid the foundation for modern macroeconomic policy.
Initial Responses & Classical Economics (1929-1932)
The initial response to the Depression largely adhered to classical economic thought. This involved:
- Monetary Contraction: The Federal Reserve in the US, fearing inflation, contracted the money supply, exacerbating the deflationary spiral. This reduced credit availability and investment.
- Fiscal Austerity: Governments, believing in balanced budgets, reduced spending and increased taxes, further dampening aggregate demand. The Hoover administration in the US initially resisted direct relief, relying on voluntary efforts.
- Protectionism: The Smoot-Hawley Tariff Act of 1930 in the US raised tariffs on thousands of imported goods, triggering retaliatory tariffs from other countries and drastically reducing international trade.
The Rise of Interventionist Policies (1932-1939)
As the Depression worsened, governments began to adopt more interventionist policies, heavily influenced by the ideas of John Maynard Keynes.
- Monetary Expansion: The Roosevelt administration in the US abandoned the gold standard in 1933, allowing the Federal Reserve to expand the money supply and lower interest rates.
- Fiscal Expansion: The New Deal (1933-1939) implemented large-scale public works programs like the Civilian Conservation Corps (CCC) and the Works Progress Administration (WPA) to create jobs and stimulate demand. These programs directly employed millions of Americans.
- Financial Regulation: The Glass-Steagall Act of 1933 separated commercial and investment banking, aiming to restore confidence in the banking system. The Securities and Exchange Commission (SEC) was established to regulate the stock market.
- Agricultural Adjustment Act (AAA): Aimed to raise farm incomes by reducing agricultural production, though it faced legal challenges.
International Cooperation (Limited Success)
Efforts at international cooperation were limited but significant:
- World Economic Conference (1933): Failed to achieve substantial agreements on trade or monetary policy due to conflicting national interests.
- Tripartite Agreement (1935): Between the US, UK, and France, aimed to stabilize exchange rates, but proved ineffective.
Policy Instruments in the UK
The UK also adopted interventionist policies, though with a different focus:
- Abandonment of the Gold Standard (1931): Allowed for devaluation of the pound, boosting exports.
- Import Duties: Imposed tariffs on imports to protect domestic industries.
- Housing Acts: Government investment in social housing to stimulate construction and employment.
| Policy Instrument | US Response | UK Response |
|---|---|---|
| Monetary Policy | Abandonment of Gold Standard, Expansionary Policy | Abandonment of Gold Standard, Devaluation |
| Fiscal Policy | New Deal – Public Works, Direct Relief | Housing Acts, Government Investment |
| Trade Policy | Smoot-Hawley Tariff Act (Protectionism) | Import Duties (Protectionism) |
Conclusion
The policy instruments deployed to contain the Great Economic Depression represented a significant shift towards government intervention in the economy. While the New Deal and similar policies in the UK did not fully end the Depression, they provided crucial relief, stabilized financial systems, and laid the groundwork for the post-war economic order. The Depression highlighted the limitations of classical economics and the importance of proactive macroeconomic management, influencing economic policy for decades to come. The limited success of international cooperation underscored the challenges of addressing global economic crises without coordinated action.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.