The Aftermath Of Fiscal Policy

With troubling incidents like the stock market crash of 1929, reform was highly necessary to never have a relapse of these events in the future. Historian Allan Nevins says that the New Deal was the epiphany the government needed to possess greater responsibility for the economic welfare of its citizens. It made the government initiate attempts to reorganize the economic turmoil and restore the people’s faith in banking system which was successful with the Emergency Banking Relief Act and Bank Holiday. Congress allotted for the Treasury Department to weed out the unfit banks and reopen the stable banks, significantly lowering bank failures. Especially with measures like the Glass-Steagall Act it offered assurance and insurance to citizens with a compensation of 5,000 dollars in the case of an inconvenience of their bank and since the creation of the FDIC there were no incidents in which a depositor has lost its insured funds. Many of the legislations passed under the Reform point remained for fifty years to prove the reliability and effectiveness like the Securities and Exchange Commission that regulated stock market activities and prevented another large scale crash to occur, keeping the economy at bay. And the Social Security Act of 1935 to reinforce the sensation of

The Glass-Steagall Act effectively built a Chinese wall between commercial and investment banking wherein the commercial banks were not allowed to trade securities or take part in the insurance business. It also prohibited the commercial banks from payment of interest on demand deposits and from engaging in inter-state operations. The act implemented Regulation Q which put ceilings on the interest rates the banks could pay on their time deposits say savings deposits. Regulation Q prevented the competitive interest rate wars that didn’t allow rates to reach unreasonably high levels. If rates had not been regulated then the banks would have been forced to lend at higher rates to remain profitable which would have led to riskier investments by them and failure problems would have followed. Looking at the evidence we see that from 1930 to 1933 more than 9000 commercial banks failed whereas, from 1934 to 1973 only 641 U.S banks were closed.[1] The act

After the tragic Stock Market Crash of 1933, America had plunged into a deep depression. Over 9,000 banks nationwide were closing their doors. After the Stock Market Crash, President Herbert Hoover was in office working ceaselessly to fix what was left of the economy. However, his effort did not seem to be enough. In the election of 1933, Franklin D. Roosevelt won by a landslide. Roosevelt stated, “This nation asks for action and action now,” and he did just that.(Barbour, 82) He saved countless families from poverty that was spreading like wildfire across the U.S. Federal Deposit Insurance Corporation (FDIC) is a portion of the New Deal formulated by Franklin D. Roosevelt to help save America from poverty caused by bank failures. “Roosevelt’s New Deal preserved the American democratic capitalist system.” (Schlesinger 137)

The emergency legislation that was passed within days of President Franklin Roosevelt taking office in March 1933 was just the start of the process to restore confidence in the banking system. Congress saw the need for substantial reform of the banking system, which eventually came in the Banking Act of 1933, or the Glass-Steagall Act. The bill was designed “to provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes.” The measure was sponsored by Sen. Carter Glass (D-VA) and Rep. Henry Steagall (D-AL). Glass, a former Treasury secretary, was the primary force behind the act. Steagall, then chairman of the House Banking and Currency Committee, agreed to support the act with Glass after an amendment was added to permit bank deposit insurance.1 On June 16, 1933, President Roosevelt signed the bill into law. Glass originally introduced his banking reform bill in January 1932. It received extensive critiques and comments from bankers, economists, and the Federal Reserve Board. It passed the Senate in February 1932, but the House adjourned before coming to a decision. It was one of the most widely discussed and debated legislative initiatives in 1932.

The Banking Act of 1933 was vital to the nation. As the country was based on a gold standard, the government was only able to inject supplies of currency based on gold in-hand. Prior to the Banking Act of 1933, people had been hoarding supplies of gold due to their fear of the market’s instability. The government needed to inject liquidity into the market, so these supplies of gold were needed. Banks could not make loans without this liquidity. The government established the “Federal Deposit Insurance Corporation,” which would ensure the people’s deposits in banks up to $5,000. This would lead to increased confidence in the banks, as they people’s money would be secured by the government. Banks, with these increased deposits, could loan out more money

The people began to lose faith on capitalism and FDR restored some of that faith with his fireside chats, telling American citizens, his plan and explain how banks work. FDR focused on the banks that closed and to reopen them. The Emergency Banking Act Mach 9, 1933 attempted to stabilize the banking system. Also, Federal Reserve Board was created to regulate banking and it also established the Federal Deposit Insurance Corporation (FDIC) which insurance the money of depositors up to 2500 and in 1935 permanent agency. Because of FDR’s charm and the use of radio was able to restore some faith in banks and banks started to open. In 1934 the Securities Exchange Act which created the Securities and Exchange Commission (SEC) which would regulate Wall Street prevents misuse and insider information. Also, banks began offering credit low interest rate tried to encourage businesses to borrow and invest which in turn would create jobs. The Reconstruction Finance Corporation (RFC) provided financial support to state and local government loans went to bank, railroads, and other business to improve the economy. The RFC was implemented by President Hoover and later adopted by President Roosevelt. Roosevelt was able to restore the banking system earning him

Financial historians have disputed the rational for reforming the banking system in the US as a result of the 1920s banking crisis. Calomiris (2010) argue that there may have been political self-interest incentives as to why the Glass-Steagall Act was enacted. Firstly Steagall had bargaining power as Chairman of the banking committee in the House of Representatives. Second, the Pecora Hearings populist politicians including Henry Steagall advocated in favour of small banks contributing in making large bank disliked amongst the public. And finally deposit insurance was introduced as a temporary system allowing for easy approval in the Congress.

The Great Depression was the worst economic downturn in the United States. The attitudes of citizens before the Depression were much different than they were during and after the catastrophic crash of the economy. Before the economic collapse, the government took little to no responsibility for people’s financial security. They had very little power before the collapse. The mindset of citizens was to take care of themselves. It was not the government’s job to look after citizens. After the economy crashed, people’s attitudes changed. People started looking towards the government to pull the country out of the Depression. By 1933, close to fifteen million American citizens were unemployed and around half of the banks in the country had failed.

Even before FDR had taken his oath of office, the Glass-Steagall bill had been in the works. Representative Henry Steagall had proposed deposit insurance as a means of saving failed banks. This was not a new idea. Several states had initiated deposit insurance schemes in the 1920s, when bank failures were on the rise. During the depression, however, states lacked the capital resources to rescue their own state-chartered banks, to say nothing of the many smaller banks. Steagall realized that opposition to a federally insured deposit system would come from the large banks, which would resent parting with revenue for the sake of their weaker competitors. By the spring of 1933, however, even the major banks were willing to support this idea, rather

The Glass Steagall Act was passed on 1933, which is also known as The Banking Act to tighten regulation on the way banks did their business. This act was written as an emergency measure when about 5,000 banks failed during the Great Depression. Banks mostly failed because of the way they would invest with money. The act prohibits banks from investing money on investments that turn out to be risky. Banks could no longer sell securities or bonds. The act also created Federal Deposit Insurance Corporation (FDIC) to protect the deposits of individuals, which is still used to this date. The FDIC in this era insures your deposits in your bank up to $250,000. This gave the public confidence again to deposit their money in the bank. In 1933

On March 9th 1933, Congress signed and passed the Roosevelt Emergency Banking Act. This bill called for the banks who would not be able to recover and sustain to be shut down. For the others, a massive facelift in the terms of reorganization. In Theodore Roosevelt’s very first fireside chat, he told the American people that it was safe to use the banks again. In fact, he encouraged the public to put their money back into the banks. By the end of March 1933, more than 75% of the banks were back up and running, which speaks volumes about this individual reforms success. This was great for the future of the country, which made so many Americans happy, but it did absolutely nothing for the thousands of families who had already had their entire life savings robbed from them.

President Warren Harding and President Calvin Coolidge were the Presidents during the roaring 20s and they favored large businesses and helped those businesses by making tax cuts that encouraged business expansion. While the rising of these big businesses did help in decreasing unemployment, they also played a role in the increase of the cost of living. This higher cost of living made the Great Depression worse. Another lapse of judgement by the government pertained to both the stock market and the federal banking system. In the 20’s banks were allowed to invest in land and the stock market with very little government regulations. The banks were using the people’s money to invest in unstable and unpredictable endeavors. When the stock market crashed, the banks had no money to give back to the people who stored their money in the banks.

After the stock market crashed in 1929, Americans began to scramble to the banks to withdraw their money. As a result, thousands of financial institutions failed. This became known as the Great Depression. In 1933, President Roosevelt created the Federal Deposit Insurance Corporation, which would insure deposits to a certain limit with money pooled by other banks. This not only meant that people’s money was safe, but it boosted the confidence of the citizens. Taking action against the bank failures

The New Deal first addressed the Bank failure in American which was one of the major causes of the Great Depression and lack of trust by the American people towards the banks. “The prolonged banking crisis, acute since at least 1930, with roots reaching back through the 1920s and even into the days of Andrew Jackson, was at last over and Roosevelt, taking the full credit was a hero” (Kennedy 248). President Franklyn Roosevelt through his New Deal bank reform and Policies was able to convince the American people to trust the bank again by depositing their money in the bank instead of keeping it at home. The Banking Act of the 1933 also forms the FDIC was signed into law by President Franklyn Roosevelt, in other to protect the Bank depositor and provide stability to the failing banking system which was a way to stabilize the American economy. Through the New Deal banking policies Americans begin to deposit their money into the bank again without fear of losing their money if the Bank fails. President Franklyn Roosevelt was able to re-establish the trust of the American people in the banking system and grow the economy through his banking reform policies and protection of the

For any economy, fiscal policy has two primary goals, an economic goal and a social goal. Regarding the economic goal, fiscal policy has to ensure suitable and sustainable economic growth rates that maintain unemployment rate at its natural level and at the same time do not generate inflationary pressures. At social level, on the other hand, fiscal policy has to ensure a degree of equity regarding the distribution of incomes in the economy, and to direct considerable part of available resources toward essential investments that provide necessary goods and services consumed mainly by the vast majority of population.