Question

what is the revenue act of 1932? how did it affect the economy?

Answer 1

Given the key roles of financial deflation and the gold standard in triggering the Great Depression, it is not shocking that devaluations of currencies and monetary expansion have been the world's leading causes of recovery. There is a significant connection between the periods when countries dropped the gold standard (or significantly devalued their currencies) and their production experienced renewed growth. For example, Britain, forced off the gold standard in September 1931, recovered relatively early, while the United States recovered considerably later, but did not fully devalue its currency until 1933.

Between 1933 and 1937, the American money supply increased by almost 42 percent. This monetary expansion was largely due to a massive influx of gold into the United States, partly due to the rising political tensions in Europe that followed the Second World War. Monetary expansion increased inflation by lowering interest rates and making credit more widely available. It also generated inflation expectations rather than deflation, thereby giving future lenders greater confidence that if they choose to borrow, their income and earnings would be enough to cover their loan payments.

In promoting recovery in the United States, fiscal policy played a relatively small role. However, the 1932 Revenue Act greatly increased American tax rates in an attempt to balance the federal budget, and by doing so, by further reducing spending, it dealt another contractionary blow to the economy. Launched in early 1933, Franklin D. Roosevelt's New Deal included a number of new federal programs aimed at reconstruction. The Works Progress Administration (WPA), for example, hired the unemployed to work on government building projects, and in a particularly depressed area, the Tennessee Valley Authority (TVA) built dams and power plants.

Nevertheless, relative to the size of the economy, the overall increase in government spending and the government budget deficit was low. This is particularly evident when state budget deficits are included, as those deficits have actually declined at the same time as the federal deficit has risen. As a result, New Deal's new spending policies had little immediate expansionary effect on the economy. This remains an open question whether they may still have had positive effects on consumer and business sentiment.

In fact, some New Deal programs might have hindered recovery. For example, the 1933 National Industrial Recovery Act created the National Recovery Administration (NRA), which required businesses in each sector to follow a code of conduct. Such codes prohibited business-to-business price competition, set minimum wages in each sector and sometimes limited production. Similarly, the 1933 Agricultural Adjustment Act created the Agricultural Adjustment Administration (AAA), which established voluntary guidelines and provided incentives for farmers to restrict production in hopes of higher agricultural prices.