President Calvin Coolidge gave his final State of the Union address in December 1928, saying, “No Congress of the United States ever assembled…has met with a more pleasing prospect than that which appears at the present time.” His last term had conquered the highest record of economic prosperity the nation had ever seen but as we all know, stability was not on the agenda in the coming years. It is simple economics that when prices stop rising and when the supply of people who were buying for an increase are exhausted, the ownership on margin would be worthless and everyone in the market would want to sell. This bubble had to burst but who would be willing to do it? The consequences of action – suppressing the bubble- seemed almost as terrible as the consequences of inaction – letting it burst on its own.

The only people who were capable of making such decisions were the President, the Secretary of the Treasury, the Federal Reserve Board in Washington, the Governor of New York, and the Federal Reserve Bank of New York. Andrew W. Mellon, Treasury Secretary under President Hoover had a history in banking so he was an advocate of inaction because he would probably lose his business (and money). On the other hand, the Federal Reserve lacked the means to stop the boom. The only instruments of control the Fed had available were open market sales of government securities and the manipulation of the discount rate. In sum, after a decade of foreign peace and extremely high economic times, economists foresaw a burst but the government could not do a thing to suppress it. Why was that?

In order to answer that we must look at the history of economics as it relates to policy making. Let’s start with the Scottish philosopher and pioneer of political economy, Adam Smith (1723-1790) who famously wrote An Inquiry into the Nature and Causes of the Wealth of Nations (1776). There he discussed the idea of the “Invisible Hand,’ meaning when an individual pursues his self-interest he indirectly promotes the good of the society. His exact words were, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” Under this political economy, there is nobody to blame when the economy crashes. To put into context, the public owned the economy and the stock market was privately funded at the time of the crash thanks to the timeless teachings of Adam Smith.

Then, an Englishman named John Maynard Keynes changed the way governments handled the economy forever. His General Theory of Employment, Interest, and Money (1936), was by far the most influential work published by an economist of the twentieth century. Keynes offered answers to the Great Depression to policy makers that would at least smooth out the busts of the business cycle. He turned away from individual growth and prosperity and more towards macro-economics. In a pamphlet titled “The End of Laissez Faire” published in 1926, he wrote, “It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened.” He called for individuals to act though the agency of the state as an equally legitimate mean of pursuing the collective interest. Keynes wanted the government to step in and spend as a means of maintaining demand and generate investment during slumps instead of waiting for the market to take its toll and adjust which could never happen.

President Roosevelt was dealt an awful hand going into his presidency and for the majority of the 1930s, his slogan was the 3 R’s, Relief, Recovery, and Reform. Before the New Deal, unemployment was around 25%, one-third of all employed persons were downgraded to working part-time and around 50% of the nation’s work-power was not being used. Not to mention there was no insurance on deposits at banks so when thousands of banks closed, depositors lost all their savings. There was no national safety net, no public unemployment insurance, and no Social Security. When Roosevelt accepted the 1932 Democratic nomination he promised “a new deal for the American people.” His legacy is shown in his fiscal policy, banking reform, monetary reform, regulation on securities, repeal of prohibition, public works, farm and rural programs, the housing sector, trade liberalization, the Social Security Act, Works Progress Administration, tax policy, the Housing Act of 1937, the list goes on and on. His administration represented significant and groundbreaking shifts in politics and domestic policy. It led to an increased federal regulation of the economy which still exists today.

President Eisenhower increased spending once again in regards to education, infrastructure and the space program among other programs. Of course he wanted the government to align more to his political philosophy – resist the intrusion of government into matters better handled by private efforts – but the economic downturn of 1957 did not allow for many spending cuts. The President was forced to renew excise taxes and there was no scope for a reduction of taxes. In the end, unemployment compensation extended from 26 to 52 weeks because it was a more direct and equitable way to ease the impact of recession than a tax reduction.

President Kennedy asked for tax cuts of $4 billion in fiscal 1964 and twice that for fiscal 1965. Kennedy also drastically altered the personal tax brackets into more dividends which was more favorable to low-income families than to the upper brackets. He wanted to keep the total administrative budget expenditure other than defense, space and interest from rising at all. Lower taxes were applicable to high birth rates of the early postwar years which resulted in larger families, higher demand for furniture, TV sets and appliances. People welcomed Keynesian economics but lower taxes under the Kennedy administration were also welcomed since unemployment was around 5% (normal).

When President Johnson launched the Great Society to the graduating class of the University of Michigan in 1964, the nation was still healing from the assassination of JFK and people wanted to hear something that would uplift them and make them excited for the future. He called for improvements in cities, the environment and education. He quoted President Wilson when he said, “Every man sent out from his university should be a man of his Nation as well as a man of his time.” The Great Society was not a final objective but a “destiny where the meaning of our lives matches the marvelous products of our labor.” With such diction, it was nearly impossible to not have the drive to achieve greatness.

Along with Frederick Hayek, economist Milton Friedman was not in agreement with Keynesian economics – high taxes and government intervention of the economy. Both of them were advocates of individualism and personal enterprise and capitalism as a way to grow the economy. He promoted monetarism, the idea of a natural rate of unemployment and governments could only increase employment if they increase aggregate demand. Even though he opposed the Federal Reserve System he admitted a steady and small expansion of the money supply was appropriate.

In conclusion, people needed immediate help and sufficient work during the Great Depression and so government spending on important programs such as the TVA were created but once unemployment decreased to feasible rates, taxes were cut and spending decreased. Taxes have almost continued to decrease since Kennedy and any increase on social programs like the New Deal have been difficult to pass since FDR.