Evolution of the Fiscal Policy in the United States

As defined in the article “Monetary and Fiscal Policy” Fiscal policy is the way through which the government controls the levels of spending with the aim of monitoring the economy. It is a similar strategy to the monetary policy which is employed by the central bank that aims to control the amount of money in circulation. These strategies are used in combination in order to steer the economy of a country in a certain direction.

According to the article “Monetary and Fiscal Policy” the role of the government in the economy extends beyond the regulation of specific activities. The government is responsible for managing the economy of the country, maintaining reasonable and stable prices for commodities and at the same time maintaining high employment levels. The government employs the use fiscal policy in determination of the reasonable levels of spending and taxes.

Before the occurrence of the Great Depression in the early 1930s, the government used the laissez faire approach in controlling the economy. The government did not have any influence on the economy and was not involved in the major decisions made concerning the economy. The government employed the non-interference policy which later led to the Great Depression and the collapse of the United States economy.

As explored by Hetzel (2006) the twentieth century was marked by horrific disasters including the great depression as well as widespread progress. In the early part of the century, the economy of the United States was affected by the two world wars that almost put western civilization on the verge. After the Second World War, there was an increase and spread of democracy which in turn raised the standards of living. During the twentieth century monetary instability was mainly affected by the social upheaval and the political situation of the country.

In the United States, the great depression that occurred in the 1930s produced human misery. One of the reasons for the Great Depression was the downfall of the banking sector. The banks were not monitored in areas of lending and the investments they made. Since the economy was not controlled by the government before the great depression, their lending rate was very high and they made questionable investments as well as investing their client’s money in the stock exchange. When the stock market crashed, the banks lost a lot of money. The great depression was later followed by the great inflation of the 1970s. This period was characterised by price controls and spawned wages which trampled on the due process (Hetzel, 2006). In 1979, the United States enjoyed a period of economic stability which was as a result of monetary stability.

In conclusion, the biggest problem that faced fiscal policy makers in the twentieth century was the level of involvement of the government in the economy. After the Second World War, there was a great deal of interference in the economy by the government in order to revive the economy of the United States. It is widely accepted that a certain degree of government interference is necessary for there to be a vibrant economy in which the population is dependent on.

Reference

Hetzel, R. (2008). The Monetary Policy of the Federal Reserve: A History. USA: Cambridge University Press. Print.

“Monetary and Fiscal Policy.” Retrieved (January 3, 2011) from HYPERLINK “http://usa.usembassy.de/economy-policy.htm” http://usa.usembassy.de/economy-policy.htm