Tag Archives: New Deal

The Hundred Days.

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            Elected as President in November 1932, Franklin D. Roosevelt (FDR) took the oath of office on 4 March 1933.  His inaugural address mixed optimism with slashing attacks on those whom he blamed for the country’s problems.  He would seek “broad Executive powers to wage war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.” 

            Good for his word, FDR launched an astonishingly fast transformation of the government and its policies.  This first sprint became known as “the Hundred Days.”  He ordered banks closed to halt panics; called Congress into a special session beginning on 8 March 1933; sent Congress new banking laws that were passed and returned to FDR for his signature in less than a day; sent Congress a bill to reduce government spending, including cuts to the pensions of military veterans; and sent Congress a bill to begin repealing Prohibition. 

            FDR began the regulation of the markets for stocks and bonds with the Securities Act of [May] 1933.  In 1935, it was followed up in the Creation of the Securities and Exchange Commission (SEC) to make sure banks complied.  The Banking Act of 1933 (commonly called the Glass-Steagall Act) required the separation of commercial and investment banking. 

            Early on, FDR adopted a policy of promoting inflation, chiefly with the aim of reducing the burden of debt on borrowers.  On 18 April, he issued an Executive Oder regulating the outflow of gold from the United States; shortly thereafter Congress passed a resolution abolishing the anti-inflationary “gold clauses” in public and private contracts.  In July, he told the American representatives to an international economic conference to refuse to “peg” the dollar to any fixed exchange rate.  In November, FDR would order government purchases of gold to pump paper currency into the economy.  By January 1934, the currency had been devalued by 40 percent.  Thereafter, the Gold Act of 1934 empowered the Treasury to manage both domestic credit and the international value of the dollar. 

            He then turned to revolutionizing basic government policies on the economy.  He had been persuaded of the merits of central planning of the economy.  On 16 March 1933, FDR sent Congress a bill to create an Agricultural Adjustment Administration (AAA) that would restrict the massive production that had created a glut on the market.  The AAA would limit farm production in order to raise the price of key staple crops—and therefore the income of farmers.  The markets were drowning in corn, wheat, cotton, and hogs.  Production would be cut back.  The Agricultural Adjustment Act passed Congress on 12 May. 

            At the same time, FDR pushed for a National Industrial Recovery Act (NIRA).  As in agricultural policy, the bill broke with the traditional reverence for the “free market” and “laissez-faire.”  The Act encouraged business sectors to organize markets, production, and prices to stop over-production and stabilize prices.  To these measures was added a Public Works Administration to put the unemployed back to work until business revived.  Mixed in with the NIRA’s planning element were other long-sought reform goals: shorter working hours, higher pay, the right to unionize, an end to child labor.  The NIRA passed on 16 June. 

            There was much else.  TVA; CCC; FDIC; “relief,” later with a work requirement added.    The point is that FDR moved fast and broke with all sorts of precedent.  People saw him acting with energy and confidence, even if no one knew if it would work.  It was worth a shot. 

The Depression.

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            By late 1929 the American economy had reached the saturation point in its ability to consume new goods.  The number of new cars registered began to fall sharply and new houses being constructed fell off as well.  These were warning signs of an economic slowdown.  As the American economy slowed, the Stock Market began to fall.  The fall of the Stock Market was more a symptom than a cause of the problem.  From 1929 to 1931 the American economy went into a deep spiral.  Demand for goods fell off, producers cut back on the number of workers and on the amount of raw materials.  The unemployed suddenly spent less and farmers and miners saw their incomes shrink even further, so they spent less.  Falling spending by ordinary consumers then drove down demand even further, setting off a new turn of the spiral.  People who couldn’t pay back the loans they had contracted in happier times lost their homes or farms or businesses.  Banks collected farms and houses and businesses they couldn’t then resell. The banks themselves went bankrupt too.  Most countries had little or no unemployment insurance.  If you lost your job, you had to get another one or starve.  There weren’t any jobs to be found.  People got desperate.  They demanded government action, or they moved elsewhere in search of work, or they tried to organize protest movements and political movements.  All existing institutions were called into question. 

            This crisis quickly spread to the rest of the world.  Americans stopped importing, but insisted on collecting the loans they were owed by other countries.  These countries first tightened up their own economies to try to pay back the loans, then defaulted on the loans rather than drive themselves into complete collapse.  Countries went off the existing system of international payments.[1]  This caused international trade to decline sharply, throwing more people out of work.  Nobody but the Soviet Union—a non-capitalist country that traded very little with the rest of the world—managed to ride out this crisis without suffering economic hard times.[2]  In many places, people concluded that the government would have to accept responsibility for insuring prosperity in the future, as well as peace and security.[3] 

            Many people questioned the systems of capitalism and representative government.  All they seemed to offer was the “freedom to starve.”  Democracy failed in Germany and Adolf Hitler came to power.  It teetered on the edge of collapse in France.  In the United States, Franklin D. Roosevelt became president and launched a program called the “New Deal.”

This constituted a decisive moment in the development of modern governments.  The historian John Garraghty has written an interesting book comparing the response to the Depression of the American “New Deal” and Nazi Germany.  One would expect that they were very different from one another.  Wrong: there were a lot of similarities.  The main difference was that Nazi Germany was more effective at putting people back to work.  The both increased government control of the economy.  They both spent a lot of money to put the unemployed back to work.  One thing that people discovered, during the Depression and later in the Second World War, was that deficit spending offered the best way out of the slump.  We’re still living with the consequences of that discovery. 

[1] The Gold Standard. 

[2] Well, more accurately, it didn’t suffer hardships as a result of the Depression.  Stalin’s drive for rapid industrialization inflicted severe hardship on almost all Russians. 

[3] If you look at the—so far—failed efforts to repeal and replace the Affordable Care Act/Obamacare, you can see that Americans have now concluded that it is the duty of the government to insure health care at a low cost to consumers. 

Annals of the Great Recession XII.

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Does History teach “lessons”? Amity Schlaes certainly thinks so. Her book on the Great Depression of the 1930s is both history and prophecy.[1]

Standard histories of the Great Depression focus on all those millions of people whose lives were destroyed by the economic collapse of 1929-1932, and who were rescued by the policies of the New Deal of 1933-1940. Schlaes takes a different approach. She focuses on the people who found no solution to their problems in the New Deal or who found themselves stifled by the New Deal. Some of her cases are fascinating, but ridiculous. “Bill W,” the founder of Alcoholics Anonymous, and Father Divine, a now-forgotten campaigner against racism, undoubtedly pursued solutions rooted in individual behavior rather than in collectivist action. But the New Deal wasn’t trying to deal with alcoholism or racism.[2] It was trying to deal with a mind-bending economic collapse.

Schlaes is on more solid ground when she deals with political and economic issues. On the one hand, Schlaes is undoubtedly correct that the New Deal utterly failed to revive the American economy. Unemployment remained high throughout the decade, while the stock market—a barometer of activity in the real economy, regardless of what one thinks of brokers—remained low. Only the massive deficit spending for the Second World War and the sequestering of much of the earnings for later consumer spending restored prosperity. Still, the New Deal put a safety net under a collapsing economy.  Both this achievement and the role of deficit spending in long-term prosperity are ignored or under-played by Schlaes.

On the other hand, she brings out the essential pessimism of the New Deal—FDR’s smile aside. Schlaes argues that many New Deal figures had been influenced by foreign authoritarian and collectivist models in the Twenties. Mussolini’s Italy and Bolshevik Russia had impressed intellectuals who went on the shape the debates of the Thirties.[3] These people tended to be repelled by the supposed chaos and injustice of the market economy. The National Recovery Administration tried to regulate prices, wages, hours, and even processes.[4] Schlaes insists upon the New Deal’s emphasis on redistribution over economic growth; its creation of a regulatory state with bureaucrats run-amok; its early commitment to creating a planned economy; its creation of constituencies tied to the government by economic interest; and its attempt to judicially punish the representatives of an alternative vision.[5]

Curiously, the book came out in 2007, before the Great Recession and the election of Barack Obama as President. Since 2008, Americans have witnessed—cheering or hissing—the flight from Keynesianism by both Republicans and Democrats; the President telling Americans that the person who own a business “didn’t make that” business; and the attack on “millionaires and billionaires” who “tanked the economy.” Seems like old times.

[1] Amity Schlaes, The Forgotten Man: A New History of the Great Depression (New York: HarperCollins, 2007)

[2] Indeed, the New Deal was founded on racism. Much of its electoral base was in the South, where Democrats both excluded blacks from voting and counted blacks for purposes of representation. Hugo Black, appointed to the Supreme Court by FDR, had been a Klansman. Richard Nixon’s “Southern Strategy,” much decried by all right-thinking progressive people, amounted to catching the Democrats skinny-dipping and running away with their clothes.

[3] Schlaes is hardly alone in doing this. See: Paul Hollander, Political Pilgrims: Travels of Western Intellectuals to the Soviet Union, China, and Cuba 1928-1979 (1981) for many funny or revolting stories.

[4] Like the justices of the Supreme Court at the time, Schlaes has a good deal of fun with the “straight killing” of chickens in the Schechter case.

[5] Examples include the “show trials” of Samuel Insull and Andrew Mellon and the disparaging of Herbert Hoover.