US_Ch7_webquest-2-tax-cuts

=**Did business failures and tax cuts cause the Great Depression?**=

Many modern sources buy into the myth about what caused the Great Depression - including your textbook. Many of these modern historians believe that big business had all of the wealth with the rich getting richer at the expense of everyone else. However, most economists disagree. Economic research shows that business was the least important factor in causing the massive downturn. It was the government that was most damaging. Why is this the case? It's because most modern historians base their "economic analysis" on John Maynard Keynes's //General Theory of Employment, Interest, and Money// in 1936 or Keynesian regurgitations, such as John Kenneth Galbraith's //The Great Crash, 1929// written in 1955.

Here's the myth: Tax cuts proposed by Andrew Mellon caused massive speculation (wealthy stock buyers bidding up prices of stock and then selling when stock prices are high so they make a lot of money and everyone else loses out). This led to the uneven distribution of wealth - or rich got richer and poor got poorer because of the evil capitalists. Big banks got involved by putting depositors' money in the stock market and lost it, which led to bank collapses. Franklin D. Roosevelt came to the rescue with the New Deal and put Americans back to work.


 * 15. Are you of the belief that FDR brought the U.S. out of the Great Depression with the New Deal or were you before reading this myth?**

The first major challenge to the Keynesian/Galbraith model came from Nobel Prize winner Milton Friedman and his associate Anna Schwartz in //Monetary History of the United States//. The Depression's main culprit - the Federal Reserve. From 1929 to 1932, the Federal Reserve stood by and allowed the money supply to fall by 1/3 and therefore did not stop bank collapses. As far as speculation goes, there was some...but not a large amount that would be a factor like those who buy into the myth believe. If you need more of an explanation about speculation, click here - if not, keep reading. Though there was some speculation, studies show that it was minimal and investments did reflect real market value of a company. Also, people were well informed as to what stocks they were buying. One of the biggest causes of the Stock Market crash was that the Federal Researve did not increase the money supply as the economy grew.


 * 16. What was one of the biggest causes of the Stock Market crash?**

Extreme income inequality is also blamed. In economic growth, the rich do get richer, but there is risk involved. Business owners take a risk when they try to expand their business because if that business venture fails, a lot of money is lost by that business owner. Moreover, it's not only the rich that get richer...standard of living improves for all workers when we're in good economic times. In reality, daily life improved for everyone. The average unemployment rate in the 1920s was 3.5% and in 1926 it was an unheard of 1%. Income increased and prices were falling. Also, 3/4 of non-farm households got electricity; air travel increased; more than 11 million families bought homes in the 1920; auto production soared 225%; radios became a common household item; electric power production rose by 300% from 1900 to 1929.

This growth was primarily because of business, but it was the Mellon tax cuts that encouraged American entrepreneurs to invent new goods and take the risk in expanding business. Furthermore, the Mellon tax cuts actually got the rich to pay MORE in taxes. How is that possible if the income tax rate was lowered??? Here's how - when business owners (the rich) had to pay less in taxes, they invested their money and expanded their businesses, which means that they had to pay......TAXES....not income taxes but other taxes. As a result, business owners saw businesses grow and they could hire more people. With more people working, more goods could be bought and with more goods being bought, there was more money coming in to the government in...TAXES...not income taxes but other taxes. Plus...when business owners increase income, there is more money that can be taxed even if it's at a lower rate. Even though the Mellon tax cuts lowered the income tax rate for everyone, the government actually got MORE revenues. You see...when taxes are increased on businesses, they are less willing to take risks. When businesses pay less in taxes, they take risks, expand and hire, and the economy improves...a lesson to learn from history. It's important to note that cutting government spending is also necessary. So, according to history, when government cuts taxes and spending, the economy grows. The statistics don't lie!!!


 * 17. A common belief is that increasing taxes will bring in more money for the government. However, what lesson can be learned from Andrew Mellon on how government can truly raise revenue and see good economic times?**

Overall, the problems that brought on the depression were the following: As you'll learn next chapter, Franklin D. Roosevelt's New Deal did not lead America out of the depression.
 * As nations around the world got off of the gold standard, investors took their gold out of the U.S. banks, which meant there was less gold in reserves. When Americans went to get their money out or redeem their money in gold, banks didn't have enough gold in reserve and banks failed. In other words, if all Americans today wanted to get gold for all of their money, there wouldn't be enough gold. This is one of the problems with having money backed by something that is limited in terms of a resource.
 * There was a weakness in agriculture. There were too many farmers for there to be profits, but rather than allow unproductive farmers to leave agriculture, the government continued to artificially increase prices. When farmers began to go bankrupt, farm banks began to fail.
 * The Smoot-Hawley Tariff increased txes on imported goods. This was the other major problem along with the Federal Reserve. This tariff led to uncertainty in business and an increase in prices, which helped to trigger the Stock Market crash. Then, Hoover increased other taxes - should never been done in a struggling economy. Hoover attempted to help by creating the Reconstruction Finance Corporation to loan money to banks, but it actually made matters worse by publicizing borrowing banks.


 * 18. What was the problem in the area of agriculture?**
 * 19. What was the other biggest cause of the Stock Market crash?**


 * 20. Overall, what did you learn from this web quest?**

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