Market Economy After World War I: Economic Analysis

According to Adam Smith economic principle, laissez-faire, the market economy does not need the intervention of government. The price in the market is decided by the invisible hands, the intersection of demand and supply (Fine, 1964). In contrast, John Keynes stated that in order to increase consumption and investment, the intervention of government is prerequisite (Yearwood, 2013).
After World War I, America experienced unprecedented economic boom. Industrialization and introduction of new technologies assisted the economic growth. Factories and firms were flourished. At that time period, people had a belief that the economy will goes well forever. Therefore people and firms took out loans from the banks to expand their business and to invest
Many of margin investors went bankrupts so they could not payback their loan and many banks closed down. People were started to worry that their bank might be closed down therefore people run to banks to withdraw their savings. Unfortunately, banks were unable to give back their money because banks used deposits for the investment in the stock market. Banks had lack of paper money to pay depositors (Colombo, 2012). As a result, people went under great hardships. People did not have enough money to support their life, their savings were gone and there were lack of job opportunities to earn money. Since people do not have enough money to buy product, demand decreased significantly. Massive layoffs across the country were occurred as not many people buying products. The country was caught in a vicious circle (Tomlinson, 2015). Furthermore, in order to protect local business, American government take protectionism policies that government puts tariffs on imported goods so that people would buy more domestic products. This government policy helped to protect local business but America lost faith and friendship in international markets (Amadeo, 2016) (Wheelock, n.d). These causes led American confronted with the Great Depression. Former president, Hoover, stick with Adam Smith’s theory that government should not directly intervene in the economy. In 1932, Franklin D. Roosevelt elected as the next president. Roosevelt believed that government must intervene in the market to recover. He created federal government programs, which is called as the New Deal, recuing people from the Great Depression. The New Deal was signed in the law, which contains about 50 programs to stabilize the financial system, to increase job positions, and social security (Amadeo,