Influential Economic Policies

Why This Matters

Understanding economic policies isn't just about memorizing dates and programs—you're being tested on how the American government has responded to economic crises, managed growth, and balanced competing priorities like stability vs. flexibility, free markets vs. regulation, and domestic needs vs. global engagement. These policies reveal the evolving relationship between government and the economy, a central theme that connects the Progressive Era through the Great Society and beyond.

Each policy represents a choice point: when markets failed, did government expand or contract its role? When inflation spiked, what tools did policymakers reach for? Don't just memorize what each policy did—know what problem it solved, what economic philosophy it reflected, and how it connects to policies that came before and after. That's what earns you points on FRQs.

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Crisis Response Policies

When economic catastrophe strikes, government intervention often expands dramatically. These policies emerged from moments of acute crisis and fundamentally reshaped expectations about federal responsibility for economic welfare.

The New Deal

• Depression-era intervention (1933-1939)—President Franklin D. Roosevelt's sweeping response to the Great Depression, representing the largest peacetime expansion of federal power in American history
• Created lasting institutions including the Social Security Administration, the Securities and Exchange Commission (SEC), and the Works Progress Administration (WPA), which employed millions
• Established the modern welfare state—shifted expectations permanently toward government responsibility for economic security and countercyclical spending

The Glass-Steagall Act

• Separated commercial and investment banking (1933)—designed to prevent the speculative excesses that contributed to bank failures during the Depression
• Restored depositor confidence by creating firewalls between risky investment activities and ordinary savings accounts
• Partial repeal in 1999 removed key protections, and many economists link this deregulation to increased risk-taking before the 2008 financial crisis

The Great Society Programs

• Johnson's war on poverty (1964-1968)—aimed to eliminate poverty and racial injustice through expanded federal programs during a period of economic prosperity
• Created Medicare and Medicaid—permanently expanded healthcare access for the elderly and poor, now among the largest federal expenditures
• Built on New Deal precedents while extending government intervention into education (Head Start), housing, and civil rights enforcement

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Monetary System Architecture

These policies established the rules governing money itself—how currency is valued, who controls its supply, and how the system responds to economic shocks. Monetary policy operates through interest rates and money supply rather than direct spending.

The Federal Reserve System

• Central bank established in 1913—created after the Panic of 1907 to provide a "lender of last resort" and elastic currency supply
• Controls monetary policy through setting interest rates, reserve requirements, and open market operations that influence inflation and employment
• Crisis management role proved critical during the 2008 financial meltdown, when the Fed deployed unprecedented tools to prevent systemic collapse

The Gold Standard

• Fixed currency to gold value—provided predictability in international trade but limited government flexibility to respond to economic downturns
• Abandoned by Nixon in 1971—the shift to fiat currency allowed more responsive monetary policy but removed an automatic check on inflation
• Contributed to 1970s stagflation as the transition period saw both high inflation and economic stagnation, challenging traditional economic models

The Bretton Woods System

• Post-WWII monetary framework (1944)—pegged international currencies to the U.S. dollar, which was convertible to gold at $35$ per ounce
• Created the IMF and World Bank—established institutions for international monetary cooperation and development lending that persist today
• Collapsed in 1971-1973—U.S. trade deficits and inflation made the fixed exchange rate unsustainable, ushering in the current era of floating exchange rates

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Market Philosophy Policies

These policies reflect fundamental debates about government's proper economic role. Supply-side economics emphasizes production incentives; demand-side focuses on consumer spending power.

Reaganomics

• Supply-side tax cuts (1981)—reduced top marginal income tax rates from 70% to 28%, based on the theory that lower taxes would stimulate investment and growth
• Deregulation and spending shifts—paired with reduced business regulation but increased defense spending, contributing to growing federal deficits
• Mixed legacy on inequality—economic growth accelerated, but critics point to widening income gaps and tripled national debt as lasting consequences

Progressive Era Reforms

• Response to industrial capitalism (1890s-1920s)—addressed monopolies, unsafe products, and labor exploitation through new regulatory frameworks
• Created regulatory agencies including the FDA, Federal Trade Commission, and state-level labor boards that established government as market referee
• Foundation for later intervention—the Progressive belief that government should correct market failures directly influenced New Deal and Great Society architects

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International Economic Engagement

American economic policy increasingly operates in a global context. These policies shaped how the U.S. economy connects to international markets and institutions.

The Marshall Plan

• European recovery aid (1948-1952)—provided over $12 billion$ (approximately $130 billion$ in today's dollars) to rebuild Western European economies after WWII
• Strategic economic diplomacy—aimed to prevent communist expansion by demonstrating capitalism's capacity for prosperity and cooperation
• Created lasting trade partnerships—rebuilt economies became major U.S. trading partners, establishing the foundation for transatlantic economic integration

NAFTA (North American Free Trade Agreement)

• Trilateral free trade bloc (1994)—eliminated most tariffs between the U.S., Canada, and Mexico over a 15-year implementation period
• Increased trade volume dramatically—North American trade tripled, but manufacturing job losses in certain U.S. sectors sparked lasting political backlash
• Template for globalization debates—arguments over NAFTA's costs and benefits continue to shape discussions of trade policy and economic nationalism

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Quick Reference Table

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Self-Check Questions

1. Which two policies both expanded the federal social safety net, and what different economic conditions prompted each?

2. Compare the Gold Standard and Bretton Woods System: what stability mechanism did they share, and why did both ultimately fail?

3. If an FRQ asks you to explain how government responded to the Great Depression, which three policies would you reference, and what different aspects of recovery did each address?

4. How do Reaganomics and Progressive Era Reforms represent opposing philosophies about government's economic role? What specific mechanisms did each use?

5. The Glass-Steagall Act was passed in 1933 and partially repealed in 1999. What does this policy arc reveal about changing attitudes toward financial regulation, and how might you connect it to the 2008 financial crisis?