A Brief History of Government Involvement in the American Economy

An Examination of the Role Government Played in Economic Growth

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As Christopher Conte and Albert R. Karr have noted in their book,"Outline of the U.S. Economy," the level of government involvement in the American economy has been anything but static. From the 1800s to today, government programs and other interventions in the private sector have changed depending on the political and economic attitudes of the time. Gradually, the government's totally hands-off approach evolved into closer ties between the two entities.

 

Laissez-Faire to Government Regulation

In the early years of American history, most political leaders were reluctant to involve the federal government too heavily in the private sector, except in the area of transportation. In general, they accepted the concept of laissez-faire, a doctrine opposing government interference in the economy except to maintain law and order. This attitude started to change during the latter part of the 19th-century, when small business, farm and labor movements began asking the government to intercede on their behalf.

By the turn of the century, a middle class had developed that was leery of both the business elite and the somewhat radical political movements of farmers and laborers in the Midwest and West. Known as Progressives, these people favored government regulation of business practices to ensure competition and free enterprise. They also fought corruption in the public sector.

Progressive Years

Congress enacted a law regulating railroads in 1887 (the Interstate Commerce Act), and one preventing large firms from controlling a single industry in 1890 (the Sherman Antitrust Act). These laws were not rigorously enforced, however, until the years between 1900 and 1920. These years were when Republican President Theodore Roosevelt (1901-1909), Democratic President Woodrow Wilson (1913-1921) and others sympathetic to the views of the Progressives came to power.

Many of today's U.S. regulatory agencies were created during these years, including the Interstate Commerce Commission, the Food and Drug Administration, and the Federal Trade Commission.

New Deal and Its Lasting Impact

Government involvement in the economy increased most significantly during the New Deal of the 1930s. The 1929 stock market crash had initiated the most serious economic dislocation in the nation's history, the Great Depression (1929-1940). President Franklin D. Roosevelt (1933-1945) launched the New Deal to alleviate the emergency.

Many of the most important laws and institutions that define American's modern economy can be traced to the New Deal era. New Deal legislation extended federal authority in banking, agriculture and public welfare. It established minimum standards for wages and hours on the job, and it served as a catalyst for the expansion of labor unions in such industries as steel, automobiles, and rubber.

Programs and agencies that today seem indispensable to the operation of the country's modern economy were created: the Securities and Exchange Commission, which regulates the stock market; the Federal Deposit Insurance Corporation, which guarantees bank deposits; and, perhaps most notably, the Social Security system, which provides pensions to the elderly based on contributions they made when they were part of the work force.

During World War II

New Deal leaders flirted with the idea of building closer ties between business and government, but some of these efforts did not survive past World War II. The National Industrial Recovery Act, a short-lived New Deal program, sought to encourage business leaders and workers, with government supervision, to resolve conflicts and thereby increase productivity and efficiency.

While America never took the turn to fascism that similar business-labor-government arrangements did in Germany and Italy, the New Deal initiatives did point to a new sharing of power among these three key economic players. This confluence of power grew even more during the war, as the U.S. government intervened extensively in the economy.

The War Production Board coordinated the nation's productive capabilities so that military priorities would be met.

Converted consumer-products plants filled many military orders. Automakers built tanks and aircraft, for example, making the United States the "arsenal of democracy."

In an effort to prevent rising national income and scarce consumer products from causing inflation, the newly created Office of Price Administration controlled rents on some dwellings, rationed consumer items ranging from sugar to gasoline and otherwise tried to restrain price increases.

To learn more about the state of the American economy after the World Wars, read The Post War Economy: 1945-1960