The 1930’s marks a real change in federal government responsibility, power, and spending. Much of this change can be listed under the title of FDR’s New Deal. These changes vary from tax rates to banking regulations to labor laws. It is important to understand that many of the political changes that were made during the 1930’s are still a very powerful part of our lives over 70 years later.
During the 1930’s there were dozens of new government agencies and economic regulations passed. These include, but are not limited to Fannie Mae, Federal Deposit Insurance Corporation(FDIC), Civilian Conservation Corps, Civil Works Administration, Federal Housing Administration, Securities Exchange Commission, National Recovery Act, Fair Labor Standards Act(Federal Minimum Wage), Social Security Act, Smooth-Hawley Tariff Act, etc. If you have been paying attention to our current economic crisis I am sure you have heard of Fannie Mae(Yes this was on Glenn Beck, but watch it for Thomas Sowell), the FDIC, the Securities and Exchange Commission, and Social Security. All of these programs were started throughout the 1930’s. These agencies and laws dealt with helping home owners, subsidizing farmers, regulating wall street, minimum wage, increasing tarriffs on foreign goods, and even setting the prices of goods and services.
While most of the above changes were initiated during the four term(yes a four term president) presidential reign of FDR, some were instituted under the Hoover administration. Most notable the Smooth-Hawley Tariff Act. This act was signed into law by Herbert Hoover in June of 1930. It raised foreign tariffs on imports to the US to “historically high levels” and likely contributed to US exports going from $1,334 million in 1929 to $390 million in 1932, due to foreign contries retaliating by raising their tariffs on US imports. The reason I mention this act under the Hoover administration is because most people are taught the Herbert Hoover was a free market enthusiast, his actions show differently and we will devote a future blog post to this.
Another interesting change in the federal government was in taxes and non-wartime spending. One would think that the last thing that the federal government would want to do would be to raise taxes during one of the most painful periods in our economic history, but that is exactly what happened. In 1929 the top marginal tax rate was 25% for those earning $100,000 and above, that’s about $1.2 million in 2010 dollars. The bottom marginal tax rate started for incomes of $4,000($50,000 in 2010 dollars) which were taxed at 1.5%. By 1941 the marginal tax rate for those making $100,000 had risen to 69%. The top marginal tax rate had changed to incomes of $5 million, these earners had to pay a federal income tax of 81%. Not only did the top marginal tax rate increase, but the bottom did as well. The bottom marginal tax rate in 1941 started at $2,000(an income of $4,000 in 1929 was a little over $3000 in 1941 dollars) and earners at this level had to pay 10%. So not only were the wealth facing higher income taxes, but the poor were as-well.
Unlike the tax increases of the 1930’s, it should be no surprise that government spending drastically increased. In 1929 total federal government expenditures made up 1.3% of Gross Domestic Product, by 1941 federal government expenditures rose to 7.1% of GDP. For the time period this was a huge increase for a non-wartime period. Interestingly, federal government expenditures as a part of GDP today are about 20%.
So, this is a glimpse at what the 1930’s looked like when looking at the US government. Spending increased, taxes increased, federal power increased, and economic freedom and prosperity decreased. We will discuss later on the impact of all of this on the economy later on.
We will discuss the recession of 1920-1921 in the next blog.
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