Economic Downturns and the Federal Government

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Throughout American history, there have been a number of examples in which the federal government has caused or contributed to economic slumps.

In 1807, in response to British and French acts against neutral shipping, including British impressment of sailors on American ships, President Thomas Jefferson and Congress passed the Embargo Act. It prohibited all American shipping to the outside world to punish Britain and France. Instead it punished the American economy. Exports fell from $108 million to $22 million. Imports fell from $138 million to $56 million. New England ports, like Boston, were especially hit hard.

Panics of 1837 and 1893

About thirty years later, President Andrew Jackson thought the Bank of the United States threatened American democracy. He vetoed its renewal and removed federal revenues from the institution. Jackson also issued the Specie Circular, ordering federal land offices to stop accepting paper money from speculators. The order drained the banking system of gold and silver (specie) and lowered overall confidence in bank notes. When the Bank of England contracted credit, the American economy, with strained specie flows and no national bank, was vulnerable. The Panic of 1837 ensued, and it unleashed a depression that lasted into the 1840’s.

The federal government continued to travel on shaky financial ground into the late 1800’s. The big spending “Billion Dollar Congress” during the Benjamin Harrison administration passed the Sherman Silver Purchase Act (1890). It required the government to purchase 4.5 million ounces of silver each month. This decreased the price of silver, forcing investors to redeem their government notes for gold. With the government’s gold reserves significanty depleting and the overbuilt railroad bubble bursting, the Panic of 1893 was born. A depression with nearly 20% unemployment followed.

Great Depression and Stagflation

In the 1930s, another depression was exacerbated by public policy. President Herbert Hoover, dealing with an economic crisis not of his own doing, made things worse. He got pledges from industry and labor leaders to maintain current wage levels. With this policy, a lot of businesses had no choice but to shut down if they couldn’t cut wages, according to economic commentator Amity Shlaes.

On another front, Hoover supported the Smoot-Hawley Tariff Act, one of the highest tariffs in U.S. history. Hoover viewed it as necessary protection of American products, but business leaders begged Hoover not to sign the legislation. Economists believed it would shut off U.S. sellers from foreign markets. Still, Hoover signed it into law in June 1930. The result: other nations implemented retaliatory tariffs on U.S. goods, cutting off potential markets and sending the country into a deeper slump.

Later in the century, inflation reared its ugly head. According to economist James Hamilton, the high inflation of the 1970s was caused by federal easy money policies and enormous spending for the Vietnam War and Great Society programs. Then President Richard Nixon took the dollar of the gold standard, increasing inflation further. Even Nixon’s wage and price controls were futile against inflation. Combined with increased government regulation and taxes, inflation turned into “stagflation” as economic growth slowed.

From the Embargo of 1807, to panics and depressions, and to inflation of the 1970s, the U.S. government has had its fingerprints on many economic calamities. It may have good intentions, but the public sector can be as ruinous as the private sector.

Sources:

  1. Bailyn, Bernard, et al eds, The Great Republic, DC Heath and Co: Lexington, MA, 1985. (Embargo Act, Panic of 1893)
  2. Howe, Daniel Walker, What Hath God Wrought, Oxford: New York, 2007. (Panic of 1837)
  3. Moore, Stephen, “That 70’s Horror Show,” American Spectator, 2009. (1970’s inflation)
  4. Shlaes, Amity, The Forgotten Man, HarperCollins: New York, 2007. (Great Depression)