Photograph of Franklin Delano Roosevelt.
(Courtesy of the Library of Congress)
The New Deal, Then and Now
by Alan Brinkley
Well before Barack Obama’s election, the New Deal
was emerging as an instructive model for those trying
to understand, and address, what is now known as the “worst
financial crisis since the 1930s.” But is the New
Deal in fact a useful model for our own troubled times?
In some respects, the New Deal – and in particular
its first hundred days – have important lessons
for our time, lessons that President Obama seems already
to have learned. Franklin Roosevelt’s first and
most important contribution to solving the great economic
crisis he inherited in 1933 was to exude confidence
and optimism and to invite frightened Americans to put
their trust in his energy and activism. In his Inaugural
Address, Roosevelt promised “action, and action
now,” and to a large degree he delivered on that
promise. The frenzy of activity and innovation that
marked those first months, a welcome contrast to the
seeming paralysis of the discredited Hoover regime,
helped accomplish the first, and perhaps most important,
task he faced: ending the panic that was gripping the
nation.
Roosevelt also moved quickly and effectively to address
the most dangerous financial crisis of the Great Depression
– a wave of bank failures that was threatening
shut down the financial system altogether. The banks
were in trouble in part because the financial markets
were in trouble; the massive stock market collapse that
began in October 1929 erased massive amounts of wealth
– and because many banks had invested heavily
in the markets, and had leant recklessly to speculative
investors, the banks found themselves without sufficient
capital and in many cases without reserves. The biggest
wave of failures occurred in the weeks just preceding
Roosevelt’s inauguration.
On his first day in office, he proclaimed a “bank
holiday,” and a day later he signed the Emergency
Banking Act, which allowed inspectors to evaluate troubled
banks and decide whether or not they could reopen. Later
in 1933, the Glass-Steagall Act created a barrier between
commercial and investment banking and established the
Federal Deposit Insurance Corporation, which guaranteed
that citizens would not lose their bank deposits even
if a bank failed. Shoring up the banks was one of the
most important achievements of the New Deal. Without
it, an already crippled economy could have spiraled
even further downward. In creating the Securities and
Exchange Commission, he helped make the beleaguered
stock market more transparent and thus more trustworthy.
The New Deal also responded vigorously to one of the
greatest problems of the Depression – an unemployment
rate that had reached twenty-five percent, and in some
cities as much as seventy-five percent. In the first
year of the new administration, Congress created the
Federal Emergency Relief Administration, which tried
to shore up the exhausted state and local relief agencies;
the Civil Works Administration, which hired the unemployed
to work for the government – sometimes on significant
capital projects, and sometimes on menial activities,
but always in ways that channeled money to people who
needed it. At the same time, the Public Works Administration
began what became an almost decade-long process of building
major infrastructure projects, which over time helped
support economic activity in areas that previously had
had no prospect of growth. Two years later, the New
Deal created the Works Progress Administration, the
most extensive federal work-relief program ever created,
which kept an average of two million people employed
throughout its eight-year history.
In 1935, with the Depression still in progress, Roosevelt
launched what has often been called the “second
New Deal,” a period of activism comparable to
the first hundred days, but in many respects far more
productive. It produced the Social Security Act, which
created unemployment insurance, aid to dependent children,
assistance for the disabled, and most important of all,
pensions for older Americans. The “second New
Deal” also helped create the Wagner Act, which
gave unions the right to bargain collectively with employers
and created an enforcement mechanism; over time, it
helped raise wages and benefits for millions of workers
and increased aggregate purchasing power. In 1938, Roosevelt
signed the Fair Labor Standards Act, which created the
minimum wage and the forty-hour work week, which also,
if belatedly, helped increase consumption.
No president had ever before intervened in the economy
as extensively or aggressively as Franklin Roosevelt
did in the 1930s, and the sheer magnitude of his activism
and his legislative achievements awed not only many
Americans, but much of the world.
And yet this impressive array of achievements –
achievements that have had a profound and lasting impact
on the government’s capacity to support and protect
its citizens – did not, in the end, do very much
to end the Great Depression. At no time in the first
eight years of the New Deal did unemployment drop below
fifteen percent. At no time did economic activity reach
levels comparable to those a decade earlier, and none
of the periods of recovery during the peacetime New
Deal lasted very long. So what went wrong? Why did this
bold, active, and creative moment in our history prove
such a failure at its first and most important task?
Part of the explanation was a result of actions the
New Deal took, but a larger part of the explanation
was a result of things the New Deal did not do.
Some of the New Deal’s most important initiatives
were, in fact, active obstacles to recovery. The National
Recovery Administration, created in 1933 to help stabilize
the volatile economy, was enormously popular for a time,
mostly because the NRA created the illusion of bold
and forceful action. The NRA sought to organize industries
through “codes” that would allow corporations
to cooperate with one another in keeping production
low and prices up. The code authorities were almost
impossible to administer, and the NRA was in many ways
highly ineffective. But the NRA was even worse when
it worked as it was supposed to do, because its goal
was exactly the opposite of what the economy needed.
Instead of expanding economic activity, the NRA worked
to constrict it – artificially raising
prices just as purchasing power was falling. It was
a deflationary force in an economy already suffering
severe deflation. The Federal Reserve Board –
operating under classical economic assumptions –
saw the economic wreckage around them and responded
by raising interest rates so as to protect the solvency
of the Federal Reserve Bank itself. No one today would
even consider high interest rates in a deflationary
economy, but the 1930s Fed had not absorbed the new
economic ideas that were gradually receiving attention.
Milton Friedman wrote (with Anna Schwartz) an essay
on the Depression in the 1960s that they entitled “The
Great Contraction.” They placed much of the blame
for this contraction on the flawed monetary policies
of the Fed.
But the more important failure of the New Deal was
what it did not do. The only way to break the economic
deadlock that had paralyzed the American economy in
the 1930s was to shock it back to life by enormously
expanding economic activity – quickly and decisively.
Instead, the New Deal wavered and quibbled – spending
large sums of money with one hand while reducing spending
with the other. One of the first acts Congress passed
for Roosevelt in 1933 was the Economy Act, which slashed
government spending in areas that helped reduce economic
activity. It cut the salaries (and in some cases the
jobs) of government employees, and it dramatically reduced
payments to World War I veterans, taking $500 million
from the economy in a single stroke. The Social Security
System, so valuable over the long term, was in the short
term also a drag on the economy. It began collecting
taxes in 1936 but paid out no benefits until the 1940s.
In 1937, deluded by a weak economic recovery, Roosevelt
(urged on by his Treasury Secretary) set out to balance
the budget through severe spending cuts. The result
was a sudden and dramatic economic downturn –
a recession within a Depression that produced some of
the highest levels of unemployment and lowest levels
of production of the decade.
In the aftermath of the 1937-1938 depression, Roosevelt
launched a new $5 billion spending plan to try to shock
the economy back to life. This infusion of funds did
help undo the some of the damage that the 1937 budget
cuts helped to create, but it only helped the economy
recover to the weak and fragile condition of a year
earlier. Nevertheless, the idea of spending as an antidote
to recession – an idea that had never found much
favor in the past even among the most progressive figures
in the New Deal – now began slowly to find legitimacy.
American economists were now eagerly reading Keynes
and imagining more robust uses of fiscal and monetary
powers to stimulate growth. It is possible, although
by no means certain, that even without a war, the New
Deal would have embarked on a spending program large
enough to push the economy to somewhere close to full
employment. But in the end, the Great Depression –
an unprecedented crisis that had stubbornly resisted
the efforts of two presidential administration over
twelve years to restore prosperity – came to an
end only because of the massive and inevitable spending
required by the greatest and most terrible war in human
history.
Economic orthodoxy – which rested on the assumption
of scarcity and gave high priority to balanced budgets
and fiscal prudence – was a powerful force in
the 1930s despite its failures, just as the rollicking
and now staggering orthodoxy of free and unregulated
markets is today. The great achievements of the New
Deal helped pave the way to an understanding of how
to address severe deflation, but it never itself came
to a point where it could use the tools at its disposal
aggressively and effectively enough or quickly enough.
As the Obama administration tackles a new financial
catastrophe, it makes sense to look at the history of
the New Deal – as the President reportedly is
doing. There is much to learn from it – not just
from its achievements, but also from its failures.
Alan Brinkley is the Twentieth
Provost and the Allan Nevins Professor of History at
Columbia University in the City of New York.
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