What impact did the Great Depression have on the way government sets policy?
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There were a number of causes of the Great Depression that was triggered by the collapse of the stock market in late October 1929. The American economy had been alternating periods of economic growth with periods of depression since the end of the Civil War, which the destruction of which placed a great burden on the national economy. Among those causes were the protectionist policies put in place by Congress, most notably the Smoot-Hawley Tariff Act of 1930, the precipitous drop in demand for goods, the massive failure of banks across the country, and the devastating drought that created what became known as the Dust Bowl, and which devastated much of the agricultural base of the country.
Prior to the Great Depression, the prevailing economic models postulated that the market, operating with minimal government involvement, would provide the corrections required to address periods of slow or negative economic growth. The scale of the depression that struck in 1929 put to rest for many years the notion that free market capitalism was in and of itself sufficient to address the macroeconomic problems that were subsuming the nation. A British economist named John Maynard Keynes was the leading figure in arguing that the old schools of thought regarding the self-correcting nature of markets was a fallacy, and that the major drop in demand for goods was not only one of the leading causes of the depression, but that the crisis in demand could only be addressed through much greater government intervention in the economy than heretofore had been the case.
The 1932 election of Franklin Roosevelt to the presidency set the stage for the enormous increase in the role of the federal government in the economy. Roosevelt's program for pulling the country out of the Great Depression was called the New Deal, which would revolutionize economic debates in the United States. The New Deal included large-scale government-financed programs designed to radically lower the level of unemployment by putting the unemployed to work on projects like dam and electric power plant construction. In addition to public-works projects, the New Deal included the passage of the Social Security Act, which provided a social safety net for the elderly, the creation of the United States Housing Authority, the Farm Security Administration, and the passage of the Fair Labor Standards Act, which established the minimum wage for the first time and put statutory limits on the number of hours per week employees could be made to work.
Additional innovations included the lowering of barriers to trade, reform of the banking system, and the suspension of the "gold standard," meaning monetary supply would no longer be tied to gold reserves.
The Great Depression had a huge impact on how the government sets economic policy. The fact that many New Deal innovations survive to this day is an indication of the enduring legacy of the depression and the New Deal policies that were introduced to address it.
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