Economic Development, Federal Involvement in (Issue)

views updated

ECONOMIC DEVELOPMENT, FEDERAL INVOLVEMENT IN (ISSUE)

While it may have certainly escalated with President Franklin D. Roosevelt and the New Deal and grown even more in the last half of the twentieth century (some economists say to the point of gross intrusion), federal involvement in economic development actually began with the earliest English settlements. Throughout American history, the federal government intervened in response to political pressure exerted by state, local, and national constituencies for such things as the capturing and preservation of rents, the mediation of market failure, and the attainment of private goals when private action proved impossible. But what has changed from the nineteenth to the twentieth century is that while government intervention was once seen as a question of last resort, today on the eve on a new millenium, it is too often seen as the first fix.

During the colonial period, government at all levels acted in the public interest, and could set the "just" price for milling and the price of bread, regulate the purity of beer, establish reasonable ferry charges and grant monopoly franchises. They could set wages and even require work. In the process, many colonial regulations were established into the "common law." To enforce this web of complex rules and regulations, colonial governments used constables, wardens and even gaugers. While many of the colonial regulations had disappeared by the time of the American Revolution (1775–1783), the Revolution itself did little to interrupt institutional continuity, and English common law remained the foundation of American law, as the Supreme Court repeatedly affirmed. The American Revolution only changed the form but not the nature of government.

While some economists see a period of laissez faire in the late eighteenth and early nineteenth-centuries and mark the period as that of a "market revolution," the federal government remained a potent force in the economy nonetheless. Nowhere was this more clearly demonstrated than in the history of banking. The federal government established the First and Second Banks of the United States as central banks with effective power to regulate commercial banks chartered and licensed by state governments. The existence of a "national" or "central" bank raised numerous issues of constitutionality, states rights, federal power, scope and purpose, and national currency. After the Bank War, the Panic of 1837, and the demise of the Second Bank of the United States, the question of a central bank wasn't seriously raised again until the financial insecurities and social displacements of industrialization at the beginning of the twentieth century forced the government to establish the Federal Reserve Bank in 1913.

But for well over a century, the dispute raged between advocates of a decentralized banking system and proponents of a strong central bank. The former argued that a national bank was dangerous because it concentrated the power of granting loans and expanding currency into the hands of a relatively small group of men who would follow private rather than national interests. But proponents of a central bank disagreed. They argued that a central bank was necessary to enlarge the national manufacturing base, maintain a stable currency, and keep up with the demands of a country whose boundaries and peoples increasingly pushed westward. For them, a central bank could keep the amount of currency in circulation flexible and provide the capital and credit needed to meet the demands of population increases, territorial expansion, and heavy industrialization.

As the central bank today, the Federal Reserve, established after the Panic of 1907, has two basic functions. Along with other federal agencies, it helps assure the financial soundness of private banks. As lender of last resorts, it protects banks against insufficient funds (liquid assets) when those banks are forced to cover the withdrawal demands of their depositors. Secondly, the Federal Reserve monitors and controls the national money supply. It can order changes in the percentages of bank assets held as reserves which in turn changes the ability of banks to create money by making loans. Moreover, it can change the money supply directly by buying and selling government bonds in the market.

By the time the Federal Reserve System was established in 1913, the financial insecurities and social displacements of industrialization appeared to have settled the long pressing questions of constitutionality, and state rights, but no one could have imagined the degree to which the government would become involved in the economic development of the United States at the end of the twentieth century.

One way it was assisted in this role at the beginning of the century was its regulation of the railroad industry and in breaking up monopolies. When the National Grange, Farmers' Alliance, Greenback Party and eventually the Populist Party flexed their political muscles in the last two decades of the nineteenth-century, Congress finally responded in 1887 with the Act to Regulate Commerce. It assigned the federal government the role of market arbiter. The act prohibited rate discrimination among rail shippers buying identical service, and also forbade rate discrimination between long and short hauls unless a specific exemption was granted. It also established the Interstate Commerce Commission to ensure enforcement. Between 1903 and 1913, Congress passed a series of laws, especially the Elkins Act, the Hepburn Act, and the Mann-Elkins Act, that broadened considerably the ICC's statutory authority.

In addition to regulating commerce, the federal government also became involved in trade and breaking up monopolies. On October 15, 1914, Congress passed and President Woodrow Wilson signed the Clayton Antitrust Act which was designed to strengthen the Sherman Antitrust Act of 1890 by fully codifying specific illegal antitrust activities. The Clayton Act forbade a corporation from purchasing stock in a competitive firm, outlawed contracts based on the condition that the purchaser would do no business with the seller's competitors, and made interlocking stockholdings and directorates illegal. It also contained provisions designed to make corporate officers personally responsible for antitrust violations. The Clayton Act also declared that labor unions were not conspiracies in restraint of trade, thus exempting them from provisions of the bill. To carry out and enforce the Clayton Act and the Sherman Act, Congress created the Federal Trade Commission in a related measure.

With the advent of New Deal legislation, the federal government passed comprehensive legislation affecting the nations banking, industry, agriculture, and labor that were all directed primarily toward one of three goals: recovery, reform, or relief during the Great Depression. The National Industrial Recovery Act (NIRA) and the Agricultural Adjustment Act (AAA) addressed recovery; the Civilian Conservation Corps (CCC) and the Federal Emergency Relief Administration (FERA) relieved some of the suffering of the unemployed and destitute; and the Securities and Exchange Act of 1934 and the Glass-Steagall Act of 1933 attempted to reform institutions that were considered "failed." Most economists agree that many of the New Deal's structural reforms were misguided or inefficient. For example, minimum wages eliminated jobs for some unskilled workers. And farm programs have led today to a situation twhere there are more employees of the Department of Agriculture than there are full-time farmers. Moreover, the farming industry has still not contracted sufficiently to bring supply and demand into equilibrium.

The New Deal did however mark a watershed period for national economics. Not only was the scope of the government forever increased, the New Deal also represented a complete restructuring of the American economy and a complete reform of its institutions. From the New Deal onward, the federal government assumed responsibility for the relief of the poor and for unemployment. It gave farmers protection from fore-closure, and it guaranteed farm prices rather than allowing the market to do so.

Today, perhaps no other issue has raised as much concern over the federal government's involvement in economic development as the military-industrial complex. It is industry which has devoted itself to the production of goods to supply weapons and other materials to the Pentagon, and it has formed a matrix of government spending, foreign initiatives, and ideological commitments. Within both the government and the market, the voices of private business and the military have only grown stronger since World War II (1939–1945). By the 1970s private business and the military had developed a formal and comfortable relationship of mutual support. Since the 1950s especially, military calls upon national resources have vastly increased, and for the most part, leading corporations have been the principal beneficiaries of that demand. While payrolls, research grants and political influence have been large enough to ensure a consensus for the system, the whole complex has been underwritten by a popular and almost unassailable anticommunist ideology. But some conservatives fear that the military-industrial complex keeps military spending at a level higher than that dictated by the strict needs of national defense. They claim that it leads to economic dislocation at home and dangerous tensions abroad, and that the separate parts of the military-industrial complex will prove countervailing.

With these and other issues that tie the federal government's role more intricately into economic development, any attempts to diminish their size or existence will meet with sustained and continued opposition.

See also: Glass-Steagal Act, Greenback Party, Hepburn Act, Mann-Elkins Act, Military Industrial Complex, National Grange, New Deal, Populist Movement