Get 20% off StudyMode
Read full document


Page 1 of 5
1st case: Fiscal policy During the great depression

The Great Depression is the worldwide economic breakdown that began in 1929 and lasted until 1939. It was the longest and hardest hit to the economy ever experienced by the industrialized Western world. Although the Depression originated in the United States, it resulted in drastic declines in output, severe unemployment, and acute deflation in almost every country of the globe. The fundamental cause of the Great Depression in the United States was a decline in spending; in this case it is called aggregated demand. This led to the decline in production, hence, output deteriorated.

Before the Great Depression the U.S. government did not have a fiscal policy, at least not in the sense that economists have meant for the past two generations. The deficit and the surplus were not tuned by the government in order to achieve full employment rate, and low inflation. This is not to say that the government’s budget was typically in balance. United States’ government borrowed extremely large sum in wartime: a typical pre-World War two would end with total federal debt equal to some three-tenths of a year’s national product. But after a typical war was over the debt would rapidly be redeemed: the War of 1812 debt had been paid off by the 1830s. The Mexican War debt had been extinguished by the early 1850s. The enormous Civil War debt and the less enormous Spanish-American War debt had been extinguished by the eve of World War I. Thus U.S.’s “fiscal policy” before the Great Depression was simple: the federal government borrowed what it could during wartime. It strove thereafter to run peacetime surpluses to reduce the ratio of debt to national product. All this changed with the Great Depression.

During The Great Depression, in 1933, 25 percent of all workers and 37 percent of all non-farm workers were completely out of work. Many people lost their farm and home. United State has to borrow money...