Comparison and Contrast of Franklin D. Roosevelt’s responses to the Great Depression and Barack Obama’s responses to the Great Depression
Efforts undertaken by the US government to save itself from the effects of the Great Recession have been compared to similar policy measures undertaken during the Great Depression. Undeniably, Obama’s inauguration in early 2009 is comparable to Franklin D. Roosevelt’s infamous one hundred days in presidency. While the later offered a package of New Deal policies aimed at digging the US economy out of the Great Depression, the former’s economic policies were aimed at saving America from the effects of the Great Recession (Chong-Yah, and Hui-Ying 3). The Great Depression of the early 1930s and the Great Recession that began in 2007 contributed immensely to the disruption of the US economy. The leaders in both instances, The Great Depression and The Great Recession, had to design the most aggressive monetary and fiscal policies aimed at delivering the economy from the financial crisis (Blinder, and Znadi 1).
A comparison of the two periods can be undertaken through the examination of specific economic indicators that include but not limited to the rate of bank failures, unemployment rates, economic declines, biggest decline in Dow Jones industrial average, and change in prices. Other significant measures and points of difference include the creation of emergency spending programs, and the rate increase in money supplied by the Federal Reserve government. This can be summarized in the following table:
Change/Measure
The Great Depression
The Great Recession
The rate of bank failures
Approximately 9056 banks failed between January 1930-March1933 representing a 50% failure of banks
57 major banks and financial institutions in the US collapsed (December 2007-May 2009). This represented a 0.6% collapse of financial institutions
The Rate of Unemployment
The unemployment rate stood at 25%, one of the worst in the history of the US
The unemployment rate stood at 8.5% during the Great recession
The Rate of economic decline
The US economy dropped by a massive -26.5% from 1929-1933
In the second quarter of 2008 and the first quarter of 2009, an economic decline of -3.3% was recorded
Decline in Dow Jones industrial average
The largest decline in Dow Jones industrial average from September 3, 1929-July 8, 1932 was - 89.2%
The largest decline in industrial average (Dow Jones) was -53.8% from October 9, 2007 to March 9 2009
The rate of price change
There was a 25% decline in prices from 1929-1933
Interestingly, there was 0.5% increase in prices from December 2007-March 2009
Emergency Government Spending programs
The 1934 budget deficit was increased (a 1.5% increase in GDP)
Through the 2009 American Reinvestment and Recovery Act, the American GDP was increased by 2.5% for years
Federal and State responses
Responses undertaken included raising taxes and cutting down on spending
The federal government created a federal stimulus plan aimed at providing the nation with a fiscal relief to states. Strategically, this was aimed at lessening the impact brought about by tax increases
The Federal Reserve level of money supply increase
The Federal Reserve increased the money supply by 17% in 1933
Franklin D. Roosevelt Strategies and Responses
Roosevelt tenure oath of office in March 1933 was characterized by massive restructuring following the New Deal policies. However, the controversy that surrounded his administration involved the selection of appropriate economic interventionary measures to pursue during the economic recovery process (Kendall 54). Admittedly, his visions were tied to the improvement of the government’s responsibility in enhancing the performance of the economy. He implemented a couple of strategies, majority of which broke the standard rules expected in the American New Deal.
New Rules
First, the creation of the Reconstruction Finance Corporation clearly targeted the bolstering of the American railroads and national banks in addition to providing structural measures for off-budget transactions for the Reconstruction Finance Corporation (Kendall 54). Although his strategic responses negated the advice of professional economists, Roosevelt was willing to listen selectively to professional opinions regarding policy initiatives of his First New Deal.
Making the Government the market Regulator
Second, FDR made the government the sole market regulator after considering opinions from Rexford Tugwell who argue that the Laissez-faire economic regime was characterized by conflict and competition thereby leading to the financial crisis (Paul 15). Tugwell argued that controlling and coordination of market activities was the only way that could enable the government to achieve a centralized planning system and eventually correct economic fluctuations through the coordination of demand and supply. As such, FDR implemented the Agricultural Act of 1933 to implement a restriction on the supply of farm products that were suspected of bringing economic surpluses. Equally, the creation of the National Industrial Recovery Act of 1933 and the National Recovery Administrator empowered the level of government’s bureaucracy and granting of immunity to industrial groups respectively (Paul 15). Eventually, the government was able to control fluctuations in the labor market, reflect business interests, and achieve fair competitions in the market.
Making the Government the price level Guarantor
Third, FDR made the government the guarantor of the price level because he believed economic failures were caused by failures in the general price levels of commodities. Following the advice of Irving Fisher and Warrant George of Yale, the government was advised to adopt an economic program characterized by the implementation of unconventional monetary manipulations. Following the debt-deflation theory created by Fisher, the real debt burden was caused by falling prices. This had led debtors to pay interests on their earlier contracts using their declining incomes. Due to declining liquidity levels, debtors sold their outputs thereby creating a distress on prices. FDR decided to reflate the general price level through the acceleration of the velocity of money circulation and as well, the enlargement of the money supply. This response was followed by the desire to increase the gold price in the economy. The price of gold was raised in October 1933 and by the end of January 1934, the price of gold had risen by more than 70 per cent.
Making the government the Guarantor of Aggregate demand
In April 1938, FDR created the “spend-lend” program that was aimed at spurring economic recovery. This program of aggregate-demand management seemed to provide a solution to the problem of unemployment that had affected the country (Kendall 55; Tcherneva). Major aims of this program included the increase of the level of progressivity of income tax, and incremental of tax receipts to lower income individuals (Tcherneva).
Reduction in War Spending
FDR realized that enormous spending on war programs provided little remedy to cushion the problem and hence, he made some changes to his new deal programs. He convinced the congress to limit federal spending to only those items that will enable it to win the war.
Barrack Obama’s Responses to the Great Depression
Obama’s government and responses to the great recession encompassed the implementation of aggressive monetary and fiscal policies. The strategic responses involved bipartisan and multifaceted contributions from various sectors of the economy including the congress and the Federal Reserve. While critics argued that Obama’s policies were effective or misguided, it is undoubtedly that they brought some positive changes to the economy given that the US economy has made substantial progress since the dark days experienced during the financial crises. At the height of the financial crisis, the Real GDP was declining at an annual rate of 6% while the monthly job losses averaged 750,000 (Blinder, and Znadi 2). Currently, the financial system is responding well to responses as evidenced from the steady increase in the GDP.
Obama’s responses to the Great Depression were aimed at the stabilization of the sticky financial system and as well, the mitigation of the burgeoning recession (Blinder, and Znadi 2). The responses included the following:
Establishment of Credit Facilities
These facilities were aimed at the provision of liquidity to financial markets and institutions. The measures included lowering of interest rates and the adoption of zero-interest policies. As such, massive quantitative easing was established in 2009 and 2010 whereby Treasury bonds and securities were purchased (Chong-Yah, and Hui-Ying 4). There was also an increase in the level of deposit insurance limits and ways of guaranteeing bank debts.
Troubled Asset Relief Program
This program was created to inject the much-needed capital into the national financial institutions. With 19 largest banks being ordered to conduct stress tests, the government was capable of determining their level of capital sufficiency needed to withstand adverse economic circumstances.
Economic Stimulus packages and Tax rebates
Obama’s government implemented these measures in order to jump-start the economic recovery process that depended on the creation of a series of fiscal stimulus measures. For instance, lower and middle-income households received tax rebates in 2008 followed by the enactment of the American Recovery and Reinvestment Act (ARRA). In all these measures, an estimated 7% of the total GDP was expected to be utilized in the economic stimulus (Blinder, and Znadi 2).
Financial Bailouts
The government set up a $700 billion financial bailout kitty that targeted key financial institutions. It was also aimed at aiding the restoration of financial stability of key financial institutions. This included preventing the collapse of the motor industry by implementing an orderly bankruptcy of Chrysler and General Motors through liquidation.
Combating foreclosure disclosure crises
Even though the government under the TARP program has been unsuccessful in combating foreclosure crises in residential mortgages, the strategy has encouraged mortgage servicers and owners, and as well, home owners to achieve a modification to their home ownership strategies.
Summary and Conclusions
Franklin D. Roosevelt’s responses to the Great Depression and Barack Obama’s responses to the Great Depression are more less the same despite the differences in time and as well, the differences in the intensity of the financial crisis. In both instances, the leaders were faced with difficult circumstances to warrant desperate measures. Even at the worst of circumstances, FDR and Obama were forced to implement fiscal and monetary policies even if critics had strongly objected them.
Comparisons
Both Obama and FDR used the power of the government and used it to manipulate changes in the economy. While FDR made the government the sole regulator of market activities despite oppositions from proponents of a Laissez-faire economy, Obama used the power of the Congress to implement bipartisan and multifaceted contributions from various sectors of the economy. Equally, both leaders studied the economy in order to influence the aggregate demand and supply.
Bank failures are other key measures that were used by Obama and FDR in determining their strategic responses. This determined the level of credit facilities offered by their governments towards the restoration of the economy. For instance, both governments during the great depression and great recession implemented emergency financial rescue and spending programs such as the Troubled Asset Relief Program by Obama and Agricultural Act of 1933, National Industrial Recovery Act of 1933 and the National Recovery Administrator by FDR.
Differences
FDR’s responses were against the Keynesian school of thought because FDR was not willing to create jobs by stimulating the economy through increased public spending. Obama’s strategies utilized Keynesian notions thereby enabling the government to manage its debt deficit. While FDR was believed in the implementation of fiscal responses, Obama seemed willing to incur increased debt burdens in his efforts to stimulate the economy. This is evidenced in Obama’s injection of close to $3 trillion towards solving unemployment and tax cut issues, and as well, the expansion of the stimulus package. Another major difference between Obama’s responses and FDR’s responses entailed the roles played by the leaders in the realization of their economic policies. FDR’s New Deal program seemed to deliver increased results when compared to the Obama’s strategy.
Undeniably, the Great Recession and the Great Depression will go down as the worst economic periods in the History of the United States. While the economy managed to recover from the Great Depression, it is yet to recover fully from the impacts of the Great Recession. However, the financial system is responding slowly to Obama’s responses.
Work Cited
Blinder, Alan and Znadi, Mark. How the Great Recession was brought to an End. July 27, 2010
Chong-Yah, Lin, and Hui-Ying, Sing. The Great Depression, the Great Recession, and the
Next Crisis. The Open Access, Open-Assessment E-Journal. 4 2010, 1-47
Kendall, John, "A Companion to Franklin D. Roosevelt,” Reference Reviews, 26. 1, (2012) pp.54
– 55
Paul, Evans, "What Caused the Great Depression in the United States?", Managerial Finance,
23.2, (1997), pp.15 – 24.
Tcherneva, P. “Permanent on-the-spot job creation—the missing Keynes Plan for full
employment and economic transformation.” Review of Social Economics, forthcoming.
2011. Print
