Government Action against the Great Depression

Abstract

According to the liberal economic doctrine which was dominant in the Western world until the 1930s, an economic crisis could best be overcome by private enterprise itself, with the state playing only a minor role. In a depression, when tax revenues were on the decrease — so the argument ran — the state should curtail its expenditure so as to balance its budget even in the crisis period, and should bolster the economy by means of commercial treaties and customs barriers. The liberal theory had not, however, reckoned with such a gigantic and devastating crisis as the one which overtook the world economy in 1929. The impoverishment of wide sectors of the population by large-scale, persistent unemployment made it clear to economists and politicians that this crisis could not be cured by the self-healing powers of the economy itself, but only with government aid and intervention. However the classical instruments of government economic policy in the field of taxation, trade and customs duties, were inadequate for this purpose. They could speed up or slow down an economic development process, but could not turn the tide, as was necessary in this case. In order to escape from the vicious circle (recession in demand — recession in investments — increased unemployment — further recession in demand, etc.), government economic policy needed to make use of new instruments and to intervene directly in the economy.