History of Economic Mismanagement - Part III

The 1920s were widely regarded as “good times” by most citizens in the United States of America. The country had risen to defeat the Germans in World War One and was enjoying the fruits of victory. The stock market grew rapidly and the marginal tax rate began to support the growth of bureaucracy throughout the country. Economic ideas had transitioned from the idealistic purveyors of free market capitalism, such as Adam Smith and Jean Baptiste Say, to the romantic communist ideology set forth by Karl Marx and his followers. The good times eventually ended in a recession as share prices fell between 15-20% on October 24, 1929. In an attempt to stabilize the U.S. economy, Congress quickly moved to adopt the Hawley-Smoot Act which was signed by President Hoover in June of 1930. This levy, the highest in U.S. history, subsequently sparked a series of international tariffs by other nations that reduced trade by 66% between 1930 and 1934. The federal funds rate, which began to increase in the spring of 1928, made borrowing difficult or impossible for banks and businesses alike. Additionally, the central bank decreased the money supply in an attempt to stabilize the dollar. This combination of actions resulted in the worst economic conditions in American history. Economic conditions remained dismal as the government experimented with various remedies throughout the 1930s. Following the Bretton Woods Agreement, the Second World War, and the GATT, the United States finally emerged from its greatest economic challenge in its history. (U.S. Department of State, 2009)

The Asian financial crisis is generally believed to have begun in Thailand in 1997. The Thai baht had been pegged to the dollar and supported by direct intervention on the part of the Thai central bank prior to July 2nd of 1997. Despite a crisis that became readily apparent in the currency markets, to be sure, this financial collapse had been long in the making and was systemic in nature. The world-wide economic boom readily embraced many emerging Asian markets. Countries such as Indonesia, Thailand, Malaysia, Philippines, Singapore, and Korea had experienced growth rates in GDP as high as 10% from 1992-1996 while maintaining low rates of inflation. With high growth rates and currencies backed by the dollar, many of these countries saw enormous cash inflows and massive foreign direct investment. Following the economic crisis in Mexico, many more foreign investors dumped money into what appeared to be a more stable and growing market. “These capital inflows fueled a lending boom, which led to excessive risk-taking on the part of banks” (Das, 1999, p. 6). As markets cooled, the asset bubble became apparent, and governments took action. According to Das (1999), the “policy response to these developments was timid and inadequate” (p. 4).