Business Cycles in the Progressive Era and New Deal
The idea that government should use fiscal policy during an economic downturn, deliberately running a budget deficit to stimulate the economy, existed in the US before the Great Depression. We have seen in earlier chapters that Thorstein Veblen believed that military spending by the government had stimulated the economy during the Spanish-American War and Wesley Mitchell favoured the use of expenditures on public works to counteract the decline in spending that brought on a recession. During the 1920 presidential election campaign the Democratic Party candidate for vice-president, Franklin Roosevelt, had presented a programme of fiscal stimulus from government spending. This approach was also considered at the Presidential Conference on Unemployment called by Herbert Hoover as Secretary of Commerce. Bills to implement this counter-cyclical policy were introduced in Congress several times in the 1920s, but they were not enacted (Rothbard 2000, pp. 2881–911). By the early 1930s the theory behind government spending programmes during a recession was ‘pump-priming.’ When a pump loses the pressure needed to draw water up from a well, it is necessary to pour water down the pump to get it started again. With foresight, a bucket of water will be left next to the pump to prime it. In a similar way, government would keep a reserve of money to get the economy started again. But when the initial priming does not work, the metaphor of pump-priming breaks down, for it involves a constant flow of water from multiple buckets to keep priming the pump and no one keeps that much water available.
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