New Deal
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Top right: President Franklin Delano Roosevelt, who was responsible for initiatives and programs collectively known as the New Deal.
Bottom: A public mural from one of the artists employed by the New Deal.
The New Deal was the name that United States President Franklin D. Roosevelt gave to a sequence of central economic planning and economic stimulus programs he initiated between 1933 and 1938 with the goal of giving aid to the unemployed, reform of business and financial practices, and recovery of the economy during The Great Depression. The enactment of New Deal policies lasted from 1933 through 1939.[1][2]
When Franklin D. Roosevelt took office, the nation was deeply troubled. No one could receive a bank loan. The unemployment rate was 25% and higher in major industrial and mining centers. The agricultural sector was possibly in worse shape than the industrial sector. Farmers were having difficulties selling their products and a part of the country known as the dust bowl was experiencing a long lasting drought. Mortgages were being foreclosed by tens of thousands. [3] Unemployment was still high in 1939, with the tide only turning in 1941.[4]
The "First New Deal" of 1933 was aimed at short-term relief programs for all groups. The Roosevelt administration promoted or implemented banking reform laws, work relief programs, agricultural programs, and industrial reform (the National Recovery Administration, NRA), and the end of the gold standard and Prohibition.
A "Second New Deal" (1935–1938) included labor union support, the Works Progress Administration (WPA) relief program, the Social Security Act, and programs to aid the agricultural sector, including tenant farmers and migrant workers. The Supreme Court ruled several programs unconstitutional; however, most were soon replaced, with the exception of the NRA. The Fair Labor Standards Act of 1938 was the last major program launched, which set maximum hours and minimum wages for most categories of workers.[5]
Most of the relief programs were shut down during World War II by the Conservative Coalition (i.e., the opponents of the New Deal in Congress). Many regulations were ended during the wave of deregulation in the late 1970s and early 1980s. Several New Deal programs remain active, with some still operating under the original names, including the Federal Deposit Insurance Corporation (FDIC), the Federal Crop Insurance Corporation (FCIC), the Federal Housing Administration (FHA), and the Tennessee Valley Authority (TVA). The largest programs still in existence today are the Social Security System, Securities and Exchange Commission (SEC), and Fannie Mae.
[edit] Origins
The New Deal represented a significant shift in political and domestic policy in the U.S., with its more lasting changes being increased federal government control over the economy and money supply, intervention to control prices and agricultural production. This was the beginning of complex social programs and wider acceptance of trade unions.[7] The effects of the New Deal still remain a source of controversy and debate amongst economists and historians.[8]
The crash of the U.S. stock market occurred on Thursday October 24, 1929; then, on "Black Tuesday" October 29, the stock market fell even more than it had the week before. These events were the catalyst of a worldwide economic depression.
From 1929–1933, unemployment in the U.S. increased from 4% to 25%, manufacturing output reduced by approximately a third. Prices fell causing a deflation of currency values, which made the repayments of debts much harder. The mining, lumber, and agriculture industries were hit especially hard by the drop in values. The impact was much less severe in white collar and service sectors.
Upon accepting the 1932 Democratic nomination for president, Franklin Roosevelt promised "a new deal for the American people." (The phrase was borrowed from the title of Stuart Chase's book A New Deal published earlier that year):
| “ | Throughout the nation men and women, forgotten in the political philosophy of the Government, look to us here for guidance and for more equitable opportunity to share in the distribution of national wealth… I pledge myself to a new deal for the American people. This is more than a political campaign. It is a call to arms.[9] | ” |
Roosevelt entered office with more than one ideology or plan for dealing with the Great Depression.[10] The "First New Deal" (1933-34) was, in part, a response to the demands of left-leaning political organizations that had coalesced around Roosevelt's campaign. (Not included was the Socialist Party, whose influence was greatly diminished.[11]) Far from being a typical Social Democratic program, however, this first phase of the New Deal was also characterized by fiscal conservatism (see Economy Act, below) and experimentation with several different, sometimes contradictory, cures for economic ills. The consequences were predictably uneven. (See "Recession of 1937 and recovery," below). Whether the New Deal can be credited with the economy's eventual recovery, or blamed for impeding it––and which of its aspects were most effective––thus remains a complicated, and highly controversial, question.
The New Deal policies drew from many different ideas proposed earlier in the 20th century. Some advocates, led by Thurman Arnold, went back to the anti-monopoly tradition that stretched back to Andrew Jackson and Thomas Jefferson. Supreme Court Justice Louis Brandeis, an influential adviser to many New Dealers, argued that monopolies were a negative economic force, because they produced waste and inefficiency. However, the anti-monopoly group never had a major impact on New Deal policy.[12] Other leaders such as Hugh Johnson of the NRA took ideas from the Wilson Administration, advocating techniques used to mobilize the economy for World War I. They brought ideas and experience from the government controls and spending of 1917-18. Other New Deal planners suggested policy experiments of the 1920s, ideas from efforts to harmonize the economy by creating cooperative relationships among its constituent elements.
Roosevelt formed what he called the Brain Trust, a group of academic advisers to assist in his recovery efforts. Their solutions to the economic crisis called for more extensive government regulation of the economy. Donald Richberg, the second head of the NRA, said "A nationally planned economy is the only salvation of our present situation and the only hope for the future."[13]
The New Deal faced some vocal conservative opposition. The first organized opposition in 1934 came from the American Liberty League led by Democrats such as 1924 and 1928 presidential candidates John W. Davis and Al Smith. There was also a large but loosely affiliated group of New Deal opponents, who are commonly called the Old Right. This group included politicians, intellectuals, writers, and newspaper editors of various philosophical persuasions including classical liberals, and conservatives, both Democrats and Republicans.
[edit] World comparisons
Europe
- The United Kingdom was unable to adopt major programs to stop its depression. This led to the collapse of the Labour Party government and replacement in 1931 by a National Conservative Coalition). Partially as a result there was no equivalent "New Deal" in Britain.
- France was in political crisis and its Third Republic very much contested; the "Front Populaire" government, led by Léon Blum, in power 1936-1938, instigated hefty social reforms. As the coalition united representatives from the centre-left to the communist party, right-wing opposition was very strong and social turmoil marred the Front Populaire term. This division left the country sourly divided in 1938-1939.
- In Germany during the Weimar Republic, the economy spiraled down, leading to a political crisis and the rise to power of the Nazis in January 1933. Economic recovery was pursued through autarky, wage controls, price controls, and spending programs such as public works and, especially, military spending.
- In Benito Mussolini's Italy, the economic controls of his corporate state were tightened; economic growth ended.
- The USSR was mostly isolated from the world trading system during the 1930s—although the decrease in demand forced Joseph Stalin to pursue hardline development policies that led to internal famines and other calamities.
- Spain endured mounting political crises that led in 1936 to civil war.
Canada & the Caribbean
- In Canada, the Conservative Prime Minister R. B. Bennett raised tariffs against the U.S. but lowered them on British Empire goods. This exacerbated the Depression and contributed to the growth of Hooverville-like camps of the unemployed in Canada. Belatedly, in 1935, he proposed a series of programs that resembled the New Deal; they met with the disfavor of both the courts and the populace, leading to his defeat in the elections of 1935.[14]
- The Caribbean saw greatest unemployment during the 1930s because of a decline in exports to the U.S., and a fall in export prices.
Asia
- China was at war with Japan during most of the 1930s, in addition to internal struggles between Chiang Kai Shek's nationalists and Mao Zedong's communists.
Australia & New Zealand
- In Australia, conservative and Labor governments applied orthodox economic principles during the 1930s, cutting government spending and reducing the national debt. It was not until World War II that the government (first conservative, then Labor) introduced Keynesian policies similar to the New Deal such as increasing government taxation and spending; imposing economic regulation; and petrol rationing. These and similar measures remained in place after the war. Labor Prime Minister Ben Chifley outlined these policies in his speech, "The light on the hill"
- In New Zealand, a series of economic and social policies similar to the New Deal were adopted after the election of the first Labour Government in 1935.[15]
South America
- In Getúlio Vargas Brazil, a new Constitution in 1934 adopted a series of policies related to labor rights and social investment, giving the country an economic plan with striking resemblances with American New Deal, but also to European Fascist states, like corporatist provisions in order to decimate organized labor and mediating class conflicts.
[edit] The First Hundred Days
Having won a decisive victory in the United States presidential election of 1932, and with his party having decisively swept Congressional elections across the nation, Roosevelt entered office with unprecedented political capital. Americans of all political persuasions were demanding immediate action, and Roosevelt responded with a remarkable series of new programs in the “first hundred days” of the administration, in which he met with Congress for 100 days. During those 100 days of lawmaking, Congress granted every "request" Roosevelt asked.
[edit] Bank and monetary reforms
With strident language Roosevelt hurled blame at businessmen and bankers: "Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men....The money changers have fled from their high seats in the temple of our civilization."
By March 4, nearly all banks in the country were closed by their governors, and Roosevelt kept them all closed until he could pass new legislation.[16] On March 9, Roosevelt sent to Congress the Emergency Banking Act, drafted in large part by Hoover's Administration; the act was passed and signed into law the same day. It provided for a system of reopening sound banks under Treasury supervision, with federal loans available if needed. Three-quarters of the banks in the Federal Reserve System reopened within the next three days. Billions of dollars in "hoarded" currency and gold flowed back into them within a month, thus stabilizing the banking system. By the end of 1933, 4,004 small local banks would be permanently closed and merged into larger banks. (Their depositors eventually received 86.14 cents on the dollar of their deposits.) In June came the reform which has proved the most significant; Congress created the Federal Deposit Insurance Corporation (FDIC), which insured deposits for up to $5,000. The establishment of the FDIC ended the era of the bank run.
In March and April in a series of Acts of Congress and executive orders Roosevelt and Congress suspended the gold standard for United States currency. Under the gold standard, the Federal Reserve was prevented from lowering interest rates and was instead forced to raise rates to protect the dollar. Actions to suspend the gold standard included Executive Order 6073, the Emergency Banking Act, Executive Order 6102, Executive Order 6111, the 1933 Banking Act and House Joint Resolution 192. Anyone holding significant amounts of gold coinage was mandated to exchange it for the existing fixed price of US dollars, after which the US would no longer pay gold on demand for the dollar, and gold would no longer be considered valid legal tender for debts in private and public contracts. The dollar was allowed to float freely on foreign exchange markets with no guaranteed price in gold, only to be fixed again at a significantly lower level a year later with the passage of the Gold Reserve Act in 1934. Markets immediately responded well to the suspension, although it was assumed to be temporary.[17]
The economy had hit bottom in March 1933 and then started to expand. As historian Broadus Mitchell notes, "Most indexes worsened until the summer of 1932, which may be called the low point of the depression economically and psychologically."[18] Economic indicators show the economy reached nadir in the first days of March, then began a steady, sharp upward recovery. Thus the Federal Reserve Index of Industrial Production hit its lowest point of 52.8 in July 1930 (with 1935-39 = 100) and was practically unchanged at 54.3 in March 1933; however by July 1933, it reached 85.5, a dramatic rebound of 57% in four months. Recovery was steady and strong until 1937. Except for employment, the economy by 1937 surpassed the levels of the late 1920s. The Recession of 1937 was a temporary downturn. Private sector employment, especially in manufacturing, recovered to the level of the 1920s but failed to advance further until the war.
[edit] Economy Act
The Economy Act, drafted by Budget Director Lewis Douglas was passed on March 14, 1933. The act proposed to balance the "regular" (non-emergency) federal budget by cutting the salaries of government employees and cutting pensions to veterans by fifteen percent. It saved $500 million per year and reassured deficit hawks such as Douglas that the new President was fiscally conservative. Roosevelt argued there were two budgets: the "regular" federal budget, which he balanced, and the "emergency budget," which was needed to defeat the depression; it was imbalanced on a temporary basis.[19]
Roosevelt was initially in favor of balancing the budget, but he soon found himself running spending deficits in order to fund the numerous programs he created. Douglas, however, rejecting the distinction between a regular and emergency budget, resigned in 1934 and became an outspoken critic of the New Deal. Roosevelt strenuously opposed the Bonus Bill that would give World War I veterans a cash bonus. Finally, Congress passed it over his veto in 1936, and the Treasury distributed $1.5 billion in cash as bonus welfare benefits to 4 million veterans just before the 1936 election.[20]
At least until John F. Kennedy in 1960, New Dealers never fully recognized the Keynesian argument for government spending as a vehicle for recovery. Most economists of the era, along with Henry Morgenthau of the Treasury Department, rejected Keynesian solutions and favored balanced budgets.[21]
[edit] Farm and rural programs
Roosevelt was keenly interested in farm issues and believed that true prosperity would not return until farming was prosperous. Many different programs were directed at farmers. The first hundred days produced a federal program to raise farm incomes by raising the prices farmers received, which was achieved by reducing total farm output. The Agricultural Adjustment Act, created the Agricultural Adjustment Administration (AAA) in May 1933. The act reflected the demands of leaders of major farm organizations, especially the Farm Bureau, and reflected debates among Roosevelt's farm advisers such as Secretary of Agriculture Henry A. Wallace, Rexford Tugwell, Lewis C. Gray and George Peek.
The aim of the AAA was to raise prices for commodities through artificial scarcity. The AAA used a system of "domestic allotments," setting total output of corn, cotton, dairy products, hogs, rice, tobacco, and wheat. The farmers themselves had a voice in the process of using government to benefit their incomes. The AAA paid land owners subsidies for leaving some of their land idle with funds provided by a new tax on food processing. The goal was to force up farm prices to the point of "parity," an index based on 1910-1912 prices. To meet 1933 goals 10 million acres (40,000 km2) of growing cotton was plowed up, bountiful crops were left to rot, and six million baby pigs were killed and discarded.[22] The idea was the less produced, the higher the price for consumers, and therefore a higher income to the farmer. Farm incomes increased significantly in the first three years of the New Deal, as prices for commodities rose.[23] One historian said that consumers bore the brunt of higher food prices and were "horrified with its policy of enforced scarcity."[24] A Gallup Poll printed in the Washington Post revealed that a majority of the American public opposed the AAA.[24]
The AAA established an important and long-lasting federal role in the planning on the entire agricultural sector of the economy and was the first program on such a scale on behalf of the troubled agricultural economy. The original AAA did not provide for any sharecroppers or tenants or farm laborers who might become unemployed, but there were other New Deal programs especially for them.
Many people lived in severe poverty, especially in the South. Major programs addressed to their needs included the Resettlement Administration (RA), the Farm Security Administration (FSA), the Rural Electrification Administration (REA), the Tennessee Valley Authority (TVA) and rural welfare projects sponsored by the WPA, NYA, Forest Service and CCC, including school lunches, building new schools, opening roads in remote areas, reforestation, and purchase of marginal lands to enlarge national forests.
In 1936, the Supreme Court declared the AAA to be unconstitutional, stating that "a statutory plan to regulate and control agricultural production, [is] a matter beyond the powers delegated to the federal government..." The AAA was replaced by a similar program that did win Court approval. Instead of paying farmers for letting fields lie barren, this program instead subsidized them for planting soil enriching crops such as alfalfa that would not be sold on the market. Federal regulation of agricultural production has been modified many times since then, but together with large subsidies it is still in effect in 2009.
In 1933, the Administration launched the Tennessee Valley Authority, a project involving dam construction planning on an unprecedented scale in order to curb flooding, generate electricity, and modernize the very poor farms in the Tennessee Valley region of the Southern United States.
[edit] Repeal of Prohibition
In a measure that garnered substantial popular support for his New Deal, Roosevelt, on March 13, 1933, moved to put to rest one of the most divisive cultural issues of the 1920s. Just nine days later he signed the bill to legalize the manufacture and sale of alcohol, an interim measure pending the repeal of Prohibition, for which a constitutional amendment (the Twenty-first) was already in process. The amendment was ratified later in 1933. States and cities gained additional new revenue, and Roosevelt secured his popularity in the cities, which were overwhelmingly wet. [25]
[edit] Puerto Rico
A separate set of programs operated in Puerto Rico, headed by the Puerto Rico Reconstruction Administration. It promoted land reform and helped small farms; it set up farm cooperatives, promoted crop diversification, and helped local industry. The Puerto Rico Reconstruction Administration was directed by John Flores Sr. from 1935 to 1937.
[edit] Reform
[edit] Business, labor, and government cooperation
Besides all the programs for immediate relief, the John Flores embarked quickly on an agenda of long-term reform aimed at avoiding another depression. The New Dealers responded to demands to inflate the currency by a variety of means.[26] Another group of reformers sought to build consumer and farmer co-ops as a counterweight to big business. The consumer co-ops did not take off, but the Rural Electrification Administration used co-ops to bring electricity to rural areas, many of which still operate. [27]
From 1929-33, the industrial economy had been suffering from a vicious cycle of deflation. Since 1931, the U.S. Chamber of Commerce, the voice of the nation's organized business, promoted an anti-deflationary scheme that would permit trade associations to cooperate in government-instigated[28] cartels to stabilize prices within their industries. While existing antitrust laws clearly forbade such practices, organized business found a receptive ear in the Roosevelt Administration.[29] The Roosevelt Administration, packed with reformers aspiring to forge all elements of society into a cooperative unit (a reaction to the worldwide specter of business-labor "class struggle"), was fairly amenable to the idea of cooperation among producers.[30]
The administration insisted that business would have to ensure that the incomes of workers would rise along with their prices. The product of all these impulses and pressures was the National Industrial Recovery Act (NIRA) which was passed by Congress in June 1933. The NIRA established the National Planning Board, also called the National Resources Planning Board (NRPB), to assist in planning the economy by providing recommendations and information. Fredric A. Delano, the president's uncle, was appointed head of the NRPB.[31]
The NIRA guaranteed to workers the right of collective bargaining and helped spur some union organizing activity, but much faster growth of union membership came before the 1935 Wagner Act. The NIRA established the National Recovery Administration (NRA), which attempted to stabilize prices and wages through cooperative "code authorities" involving government, business, and labor. The NRA allowed business to create a multitude of regulations imposing the pricing and production standards for all sorts of goods and services. Most economists were dubious because it was based on fixing prices to reduce competition; the NRA was ended by the Supreme Court in 1935, and no one tried to revive it.[32]
To prime the pump and cut unemployment, the NIRA created the Public Works Administration (PWA), a major program of public works. From 1933 to 1935 PWA spent $3.3 billion with private companies to build 34,599 projects, many of them quite large.[33]
[edit] NRA "Blue Eagle" campaign
Roosevelt believed that the severity of the Depression was due to excessive business competition that lowered wages and prices, which he believed lowered demand and employment.[34] He argued that government economic planning was necessary to remedy this:
”...A mere builder of more industrial plants, a creator of more railroad systems, an organizer of more corporations, is as likely to be a danger as a help. Our task is not...necessarily producing more goods. It is the soberer, less dramatic business of administering resources and plants already in hand."
To limit competition and raise the bargaining power of labor, the NIRA was created. At the center of the NIRA was the National Recovery Administration (NRA), headed by former General Hugh Samuel Johnson. Johnson called on every business establishment in the nation to accept a stopgap "blanket code": a minimum wage of between 20 and 45 cents per hour, a maximum workweek of 35 to 45 hours, and the abolition of child labor. Johnson and Roosevelt contended that the "blanket code" would raise consumer purchasing power and increase employment.
To mobilize political support for the NRA, Johnson launched the "NRA Blue Eagle" publicity campaign to boost his bargaining strength to negotiate the codes with business and labor. The NRA negotiated specific sets of codes with leaders of the nation's major industries; the most important provisions were anti-deflationary floors below which no company would lower prices or wages, and agreements on maintaining employment and production. In a remarkably short time, the NRA won agreements from almost every major industry in the nation. Six months after the NRA went into effect industrial production dropped twenty-five percent. According to some economists, the NRA increased the cost of doing business by forty percent.[35] Donald Richberg, who soon replaced Johnson as the head of the NRA said:
There is no choice presented to American business between intelligently planned and uncontrolled industrial operations and a return to the gold-plated anarchy that masqueraded as "rugged individualism."...Unless industry is sufficiently socialized by its private owners and managers so that great essential industries are operated under public obligation appropriate to the public interest in them, the advance of political control over private industry is inevitable.[36]
By the time it ended in May 1935, industrial production was 22% higher than in May 1933. On May 27, 1935, the NRA was found to be unconstitutional by a unanimous decision of the U.S. Supreme Court in the case of Schechter v. United States. On that same day, the Court unanimously struck down the Frazier-Lemke Act portion of the New Deal as unconstitutional. Some libertarians such as Richard Ebeling see these and other rulings striking down portions of the New Deal as preventing the U.S. economic system from becoming a planned economy corporate state.[37] Governor Huey Long of Louisiana said, "I raise my hand in reverence to the Supreme Court that saved this nation from fascism."[38]
However, soon after, on June 27 1935, the NLRA was passed, which gave even more power to unions. It forced employees to join unions if a majority of employers voted in favor of unionizing and prohibited business management from declining to engage in collective bargaining with the unions. The Act also established the National Labor Relations Board (NLRB) to enforce the rules of the NLRA and enforce wage agreements.
Employment in private sector factories recovered to the level of the late 1920s by 1937 but did not grow much bigger until the war came and manufacturing employment leaped from 11 million in 1940 to 18 million in 1943.
[edit] Legislative successes and failures
In the spring of 1935, responding to the setbacks in the Court, a new skepticism in Congress, and the growing popular clamor for more dramatic action, the Administration proposed or endorsed several important new initiatives. Historians refer to them as the "Second New Deal" and note that it was more radical, more pro-labor and anti-business than the "First New Deal" of 1933-34. The National Labor Relations Act, also known as the Wagner Act, revived and strengthened the protections of collective bargaining contained in the original NIRA. The result was a tremendous growth of membership in the labor unions composing the American Federation of Labor. Labor thus became a major component of the New Deal political coalition. Roosevelt nationalized unemployment relief through the Works Progress Administration (WPA), headed by close friend Harry Hopkins. It created hundreds of thousands of low-skilled blue collar jobs for unemployed men (and some for unemployed women and white collar workers). The National Youth Administration was the semi-autonomous WPA program for youth. Its Texas director, Lyndon Baines Johnson, later used the NYA as a model for some of his Great Society programs in the 1960s.
The most important program of 1935, and perhaps the New Deal as a whole, was the Social Security Act, which established a system of universal retirement pensions, unemployment insurance, and welfare benefits for poor families and the handicapped.[40] It established the framework for the U.S. welfare system. Roosevelt insisted that it should be funded by payroll taxes rather than from the general fund; he said, "We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program." One of the last New Deal agencies was the United States Housing Authority, created in 1937 with some Republican support to abolish slums.
[edit] Defeat: court packing and executive reorganization
Roosevelt, however, emboldened by the triumphs of his first term, set out in 1937 to consolidate authority within the government in ways that provoked powerful opposition. Early in the year, he asked Congress to expand the number of justices on the Supreme Court so as to allow him to appoint members sympathetic to his ideas and hence tip the ideological balance of the Court. This proposal provoked a storm of protest.
In one sense, however, it succeeded; Justice Owen Roberts, switched positions and began voting to uphold New Deal measures, effectively creating a liberal majority in West Coast Hotel Co. v. Parrish and National Labor Relations Board v. Jones & Laughlin Steel Corporation thus departing from the Lochner v. New York era and giving the government more power in questions of economic policies. Journalists called this change "the switch in time that saved nine." Recent scholars have noted that since the vote in Parrish took place several months before the court-packing plan was announced, other factors, like evolving jurisprudence, must have contributed to the Court's swing. The opinions handed down in the spring of 1937, favorable to the government, also contributed to the downfall of the plan. In any case, the "court packing plan," as it was known, did lasting political damage to Roosevelt and was finally rejected by Congress in July.
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