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Q6. Great Depression changed the role of governments. Comment. How did the Great Depression lead to abandoning Laissez Faire Governance?

After Great depression there was a growing realization that the laissez faire economics of the nineteenth century was ineffective and that governments must play a proactive role in reviving their national economies and looking after the welfare of their citizens.

John Maynard Keynes, realized that neither individual businesses nor families have the resources to help themselves or each other out of the downward spiral of depression and the modern industrial state was the only institution with the power and resources to help both businesses and families and to revive a national economy.

In order to maintain stability, the state should tax high and spend low in prosperous times in order to build up treasury surpluses.  During times of economic hardship, governments would tax low and spend their surpluses to provide jobs for families in such things as public works programs.  The money earned from those jobs would lead to increased sales for businesses and an overall revival of the economy.  Governments would then go back to taxing high to restore their surpluses in anticipation of the next economic downturn.

While governments generally did assume larger roles in trying to solve the Depression, they did it in different ways.  governments started strict regulation of banking, trade as well as stock market industry. Taxation on rich increased significantly. The United States, under Franklin Delano Roosevelt, set up the New Deal, which supported vital industries, banks, agriculture, and public works to provide jobs and stimulate the economy.  It also set up a social safety net, Social Security, which provided relief for the aged and unemployed.

Britain reversed its earlier austerity policy of cutting government salaries and public works, and funded new industries such as shipping, electricity, and, later, armaments as the clouds of World War II loomed on the horizon.  In both cases, the United States and Britain were in better positions to act when war came.

More fascist governments, such as Germany, Italy, and Japan, followed more aggressive and militant policies.  They embarked on rapid rearmament programs that provided jobs, but poured money into weapons industries that are unproductive unless they are used in the one thing for which they are suited: war.  Japan was especially hard hit by the Depression since it had virtually no natural resources and had lost the trade needed to buy them.  This situation prompted a military takeover of the government and an invasion of China to secure a food and resource base.  In both Europe and Asia, these events were already undermining the collective peace and laying the foundations for World War II.

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