The New Deal

Franklin Delano Roosevelt’s New Deal was two things: a series of federal programs, projects and reforms enacted in the 1930s and the signature policies that became the core ideas of a U.S. liberal Democratic Party coalition. They combined relief for the unemployed and poor, overall economic recovery and a thorough set of financial reforms to prevent a depression from ever happening again.

When FDR took office on March 4, 1933, he stated his “firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” Unemployment stood at about 25%, farm income nationally had fallen by half since 1929 and close to a million nonfarm mortgages had been foreclosed. There was no protection other than what little families, private charity and local governments could offer; when, to top things off, runs on banks occurred, the institutions closed and people lost all their savings.

For relief, FDR got Congress to approve the Social Security Act of 1935, which established a basic right to an old age pension, insurance against unemployment and aid to poor families with children. In 1939, the Administration added the first Food Stamp Program, which fed 20 million people, in addition to boosting the prices of farm products.

Recovery was a vast set of programs, including a public works program to building government offices, airports, hospitals, schools, roads, bridges, and dams in some 34,599 projects, rural electrification, the Forest Service, Civilian Conservation Corps and the Tennessee Valley Authority. In effect, for a time the government became the largest investor and employer in the United States.

Reforms of the financial sector included the Banking Act of 1933, which established the Federal Deposit Insurance Corporation that still protects average checking and savings accounts, and the companion Glass-Steagall Act, which set up firewalls between the banking, insurance and investment industries. The Securities Exchange Act of 1934, set up the U.S. Securities and Exchange Commission to watch over stock investment activity to keep it transparent and fair.

The three legs of the New Deal stool were designed to interact with one another. Aid to elderly, poor and unemployed people, for example, also served to spur economic activity, as people in need spent out their aid, generating consumer demand and employment. The recovery eased the depth of poverty and unemployment while also generating production and profits. Controls over how profits were invested prevented speculation from wiping out the improvement.

The New Deal did not eliminate capitalism’s boom and bust economic cycles, but it greatly cushioned the effects. The delicate balance required to keep the economy on an even keel was shown in 1937.

The business-leaning Republicans argued that the New Deal was hostile to business growth and spurred strikes caused by the organizing activities of two competing federations that were growing thanks to workers’ fears that without unions they might starve. Buoyed by a return to healthier economic activity by 1936, the GOP in Congress applied the brakes on spending. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938, while manufacturing output fell by 37% from the 1937 peak.

The worst effects of the second downturn in the Depression were technically over by 1939, but unemployment remained high until the U.S. entry into World War II that mobilized many unemployed workers into uniform. After the war, an unprecedented prosperity arose out of the unique historical circumstance that the United States was the only major industrial nation whose infrastructure had not been reduced to rubble.

The Great Depression

The third development that shaped the 1930s and contemporary ideas of the economy, society and policy was the Great Depression, the deepest of the 47 economic downturns the United States has experienced since 1785. It began with the Wall Street Crash of 1929, which ushered in a 12-year period of mass unemployment and pauperization that affected all western industrial nations.

The stock crash began on October 24, 1929, since then known as “Black Thursday,” when the market lost 11 percent of its value, it intensified on on October 28 (“Black Monday”) when the losses added an extra 13 percent decline and peaked on Black Tuesday, October 29, when the market declined further, another 12 percent and a volume of trading that went unmatched for 40 years, as panic took hold.

Much has been written about the event, perhaps the most dispassionate and succinct presentation for the nonspecialist is The Great Crash, 1929 by John Kenneth Galbraith, published long after the smoke cleared, in 1954.

Among the factors that played into the panic, Galbraith explains, was the unrestricted ability to speculate on stocks by borrowing money (known as trading on margin) and a speculative bubble in which investors failed to notice that consumption was beginning to lag behind production. Joseph Kennedy, father of the president, famously recounted that he got out of the market before the crash, when a shoeshine boy offered him a stock tip, his clue that speculation was running amok.

A group of wealthy investors and banks tried to remedy matters and the market briefly regained its value, but another, much longer, steady decline ran from April 1931 to July 8, 1932, when the market closed at the lowest level of the 20th century, with a net 89 percent loss of value for stocks overall. Events in Wall Street caused a panicked run on banks and internationally on the dollar, which was then backed by gold, and business uncertainty led to layoffs.

Between 1929 and 1932, worldwide gross domestic product fell by an estimated 15 percent (worldwide GDP fell by less than 1 percent from 2008 to 2009 during the Great Recession). U.S. unemployment rose to 25 percent (by comparison, the Great Recession peaked briefly at 10 percent) and in other countries it rose as high as 33 percent.

The Depression was actually two downturns. The first was the slump brought on by the crash, from which the U.S. was beginning to recover toward 1935 thanks to President Franklin D. Roosevelt’s New Deal. Then there was a second slump beginning in 1936, brought on entirely by Washington policy when Republicans attempted to cut spending on the programs that were lifting up the economy.

What ended the Depression definitively was the massive government investment in World War II. By 1943 unemployment was at 3 percent. The explanation is simple. Government-financed capital spending rose from 5 percent of all such investment in 1940 to 67 percent by 1943. The United States had found its investor of last resort.