Download 1 Chapter 18: Economic Policy I Roots of Government Involvement

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Chapter 18: Economic Policy
I Roots of Government Involvement in the Economy
1. Nation’s first century the national government had a narrow economic role. See 16th
Amendment.
2. Congress became involved in setting economic policy and enacting economic regulation
only after people realized that the states alone could not solve the problems affecting the
economy.
A 19th Century
1. Although the US economic system is a mixed free-enterprise system characterized by the
private ownership of property, private enterprise, and marketplace competition, the
national government has long played an important role in fostering economic
development through its policies on taxes, tariffs, and the use of public lands and creation
of a national bank.
2. 19th C regulatory programs were few except steamboat inspection and regulation and
inspection and trade with American Indians.
3. State governments were quite active in promoting and regulating private economic
activity.
4. Post Civil War the US entered a period of rapid economic growth.
5. New problems resulted from this rapid industrialization: industrial accidents and disease,
labor-management conflicts, unemployment, and the emergence of huge corporations that
could exploit workers and consumers.
6. Another problem was the downturn in business cycles which became more severe in a
new industrial society.
a. Business cycles—fluctuations between expansion and recession that are a part of
modern capitalist economies.
b. During recessions, people lose their jobs and income, and the economy
experiences a low or even negative growth rate.
7. The states with their limited government and range could not help with the problems of
rapid industrialization so people turned to the national government.
8. Laissez-faire—a French term meaning “to allow to do, to leave alone.” It is a hands-off
governmental policy that is based on the belief that government involvement in the
economy is wrong.
9. Based on Adam Smith’s the Wealth of Nations (published in 1776), the doctrine of
laissez-faire holds that government involvement in the economy is wrong and that the
role of government should be limited to the maintenance of order and justice, the conduct
of foreign affairs, and the provision of necessary public works such as railroads or
lighthouses, which are not profitable for private persons to provide.
10. Beyond this individuals should be free to pursue their self-intersts.
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11. Market-based competition and the laws of supply and demand, according to this view,
will control individual behavior and ensure that self-interest does not get out of hand.
12. Reliance on market forces, instead of government, will deliver the greatest amount of
welfare for the greatest amount of people in society.
13. What businesses considered laissez-faire at this time was anything that encouraged
business profits.
14. The first major government effort to regulate business was the Interstate Commerce Act
of 1887 to regulate the railroads. This act required railroad rates to be just and reasonable.
15. Three years later Congress dealt with the problem of “trusts”, the name given to largescale, monopolistic businesses that dominated many industries, including oil, sugar,
whiskey, salt, and meatpacking.
16. The Sherman Anti-Trust Act of 1890 prohibits all restraints of trade, including pricefixing, bid-rigging, and market allocation agreements.
17. It also prohibits all monopolization or attempts to monopolize, including domination of a
market by one company or a few companies.
18. The act was to be enforced by the Anti-Trust division of the Department of Justice, which
was empowered to sue violators in the federal courts.
19. The Interstate Commerce Act and the Sherman Anti-Trust Act marked a break from the
past and were the key legislative responses of the national government to the new
industrialization.
20. During this time government influence in Agriculture also grew with the establishment of
the Department of Agriculture, Homestead Act and the Morill Land Grant Act which
subsidized the establishment of state colleges.
B The Progressive Era
1. The Progressive movement drew much of its support from the middle class and sought to
reform America’s political, economic, and social systems.
2. There was a desire to bring corporate power under the control of government and make it
more responsible to democratic ends
3. Progressive administrations under Theodore Roosevelt and Woodrow Wilson established
or strengthened regulatory programs to protect consumers and to control railroads,
business, and banking.
4. The Pure Food and Drug Act and the Meat Inspection Act both enacted in 1906 marked
the beginning of consumer protection as a major responsibility of the national
government.
5. Congressed passed The Federal Reserve Act (1913), which created the federal reserve
system, Federal Trade Commission Act (FTC) (1914) and Clayton Act (1914) to regulate
banking and business.
6. 1913 16th Amendment allowed for an income tax.
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C The Great Depression and the New Deal
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America’s entry into World War I brought the progressive era to an end.
October 1929, the stock market collapsed and the Great Depression began.
Franklin D. Roosevelt was elected president on the slogan “New Deal”
FDR favored strong government action to relieve economic distress and to reform the
capitalist economic system while preserving its basic features.
The Great Depression and the New Deal marked a major turning point in US history both
in general and economic terms.
1930’s the laissez-faire state was replaced with an interventionist state.
a. Interventionist state—alternative to the laissez-faire state; the government takes
an active role in guiding and managing the private economy.
The New Deal established the national government as a major regulator of private
businesses, as a provider of Social Security, and ultimately responsible for maintaining a
stable economy.
The New Deal brought about a number of reforms in almost every area, including
finance, agriculture, labor, and industry.
Financial Reforms
1. Major New Deal banking laws included:
a. Glass-Steagall Act (1933) separation of commercial and investment banking and
created the FDIC.
b. Securities Act (1933) required that prospective investors be given full and
accurate information about the stocks or securities being offered to them.
c. Securities Exchange Act of 1934 created the Securities and Exchange
Commission. The SEC was authorized to regulate the stock exchanges, enforce
the Securities Act, and reduce the number of stocks bought on margin. (stocks
bought with borrowed money.)
Agriculture Reforms
1. The overall effect of New Deal agricultural legislation was to protect farmers through
extensive government intervention.
Labor
1. Wagner Act (1935)—guaranteed workers’ rights to organize and bargain collectively
through unions or their own choosing. The act
Key Terms:
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Board of Governors, business cycles, deregulation, discount rate, economic regulation, economic
stability, federal budget deficit, fiscal policy, gross domestic policy (GDP), inflation,
interventionist state, laissez-faire, monetary policy, money, open market operations,
protectionism, recession, reserve requirements, social regulation.