How does the United States Federal Government deal with financial crises? - Essay Prowess

How does the United States Federal Government deal with financial crises?

How does the United States Federal Government deal with financial crises?

Introduction

As much as the US Federal governments operates the most robust financial system in the world, it has had to grapple with five major periods of acute economic depression the first being the economic crisis of 1792 and the most recent being the financial crisis of 2007-2009. It is important to note that these experiences that the US federal government has had with these major economic depression have helped legislators and regulators to institute measures which have resulted in the US being the global economic and financial powerhouse.

The US federal government has had to institute different measures to deal with each case of economic depression it has experienced. One has to look into the historical context on economic depression in US history to critically understand how it deals with financial crisis. Economic depression is a period where a country’s economy suffers a prolonged and severe decline in economic activity that tends to go on for two years or longer[1]. An economic depression involves a situation where economic factors like rising unemployment rates, lack of credit facilities, declining economic output levels, debt defaults, decline in commerce and trade and continued unpredictability in the valuation of a country’s currency. Economic depression cause pain, anger, reduced investor and consumer confidence further dilapidating economic activity. This research paper seeks to look into means with which the US Federal Government has dealt with periods of economic depression from the first financial crash on 1792 to the most recent mortgage crisis of 2007-2009.

The Economic Depression of 1792

America’s first chief financial officer was Alexander Hamilton. As the country’s first national Treasury Secretary he sought to have the US government establish a central bank that could rival the central banks in Europe more so in the Netherlands and Britain[2]. He sought to have the young US government realize the creation of a robust financial system where federal debt could amass the IOU’s of all federal states such that the new American bonds could be purchased or sold in open markets enabling the federal government access inexpensive borrowing protocols. He also envisioned the creation of a publicly owned American central bank.

News on the proposed establishment of an American central bank was well received by American investors. The First Bank of America (BUS) offered a total of 10 million dollars worth of shares of which 80% was to be offered to investors. The first auction was held in July of 1791 and was oversubscribed in just over one hour[3]. As Hamilton’s vision came to fruition, he was able to have both debt required and the central bank. These two had been designed to relate with each other symbiotically. As such, for an investor to receive a share of the BUS valued at 400 dollars, he was required to purchase a single share certificate also known as scrip for 25 dollars and the remaining three quarters in federal bonds[4]. This plan ensured that investors would increase the demand for the US federal government’s debt and also allow the bank to realize a substantial wedge of secure assets. The plan was quite appealing on paper but in the real market situation, the price of share certificates driven by high demand rose to more than 30 dollars by August 1791. By December 1791, the First Bank of the United States was fully operational.

However, two main issues put Hamilton’s blueprint for a strong federal financial system in jeopardy. For starters, the BUS instantaneously dwarfed all other banks and as such in two months had offered investors over 2.7 million dollars in credit facilities, more specifically, new loans[5]. The huge amount of credit in the major American cities of Philadelphia and New York led to increased specula

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