The Encyclopedia of Libertarianism

New Deal

The New Deal was a package of economic policies adopted in the United States during the 1930s under President Franklin Roosevelt and his political allies in Congress in response to the Great Depression. These policies involved a massive expansion in the size and scope of government, especially at the federal level. Roosevelt identified the New Deal’s goals as the three Rs—relief, recovery, and reform—although we should not ignore a fourth R—reelection. Relief efforts comprised massive government-run “emergency work” programs and direct transfers to the poor, elderly, and unemployed. Recovery efforts hoped to bring the economy back to its potential, although they did not prevent the Depression from lingering until the arrival of World War II. In a survey of economic historians, about half agreed that, despite many policies that helped to correct the economy, “taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression.” Reform efforts created a range of important regulatory agencies and redistributive programs—from the Securities Exchange Commission and the Federal Deposit Insurance Corporation to social security, the minimum wage, and the National Labor Relations Board—that have persisted into the 21st century.

When Franklin Roosevelt was inaugurated in March 1933, the economy was flat on its back. In less than 4 years following its peak in the summer of 1929, real GDP (the value of all final goods and services produced in the economy) had fallen about 27%, industrial output was down 45%, and housing starts plummeted more than 80%, as did the value of stocks comprising the Dow Jones Industrial Average. Simultaneously, the unemployment rate soared from about 3% to almost 25%, overall wholesale prices fell by nearly 37%, agricultural prices fell by more than 50%, and more than 9,000 banks failed—more than a third of the total.

Although economic historians have now concluded that this international catastrophe was caused primarily by the flawed policies of central banks, including the Federal Reserve, in response to a malfunctioning international gold standard, the policymakers of the New Deal did not have the benefit of this hindsight. The varied and sometimes contradictory lessons that were collectively drawn from the Great Depression framed the New Deal. The primary point of agreement shared by the New Deal’s designers was that, although the capitalistic system worked fairly well, it could be unstable and was subject to excesses and inequities. Accordingly, government needed to expand its scope to fix these problems.

The first important New Deal policy was to declare a brief nationwide banking “holiday” and to arrange emergency loans from the government to struggling banks. This step ended the banking panic and was followed in June 1933 by the creation of the Federal Deposit Insurance Corporation (FDIC) to insure individual depositors’ accounts, thereby virtually eliminating the problem of bank runs. Simultaneously, Roosevelt prohibited the export of gold, which effectively took the country off the gold standard. This prohibition was made explicit in June 1933 by legislation that nullified all contractual promises—public or private, past or future—denominated in gold. Abandoning the gold standard and putting an end to bank panics apparently removed the primary factors—a shrinking money supply, deflation, and collapsing consumer and investor confidence—that had been pulling the economy down, paving the way for recovery.

During the First New Deal (the “hundred days” of legislative activity from March 9 to June 16, 1933), Congress also began significant relief activities. The Federal Emergency Relief Administration (FERA) was established to distribute relief funds to the states, much of them in the form of matching grants. During its existence from mid-1933 to the end of 1935, the FERA spent almost $2.7 billion (in an economy whose GDP was $66 billion in 1934), with an average case load exceeding 4 million cases.

The Civilian Conservation Corps (CCC) was established in March 1933, almost immediately putting 250,000 young men to work on reforestation, road construction, national parks, and other projects. By 1940, the CCC had employed about 2.5 million people. In November 1933, the Civil Works Administration was established, but was replaced in July 1935 by the largest of the “emergency work” agencies, the Works Progress Administration (WPA). During its existence, the WPA spent more than $6.2 billion on projects, including construction of more than 650,000 miles of roadway and work on 124,000 bridges, 125,000 public buildings, more than 8,000 parks, and more than 850 airports. The number of federal emergency workers hired by these and other agencies rose from 2.1 million in 1933 to a peak of 3.7 million in 1936—and remained above 2 million until 1941. At its peak, about 7% of the labor force was in these jobs, whose average pay for unskilled workers was only a little below that in the private sector.

New Deal critics complained that spending on these programs was uneven and had a large political component. For example, New Deal outlays per capita were over six times higher in first-place Nevada—a low-population swing state in which electoral votes could be “purchased” cheaply—than in last-place North Carolina—which, like other poorly funded Southern states, was not likely to vote Republican regardless of federal expenditures. Economic historians have closely investigated where funds from these programs were spent, concluding that the major relief programs roughly followed Roosevelt’s three Rs—with money more likely to go to places harder hit by the Depression—but that spending for political advantage in upcoming elections was a significant factor.

The most widely criticized components of the First New Deal were two related recovery measures designed to boost prices. Many New Dealers argued that excessive and wasteful competition was the cause of falling agricultural and industrial prices and proposed a vast program of national planning and coordination to boost prices largely by reducing supply. The federal government’s economic coordination and planning agencies of World War I served as their templates, and veterans of World War I agencies staffed many key positions.

The Agricultural Adjustment Administration, established in May 1933, calculated the output needed to push agricultural prices up to the relatively high “parity” level of 1909–1914 and converted that quantity into acreage and herd-size estimates. Each state was then allotted its share of output. Farmers who voluntarily reduced acreage or production to the target level were directly compensated by the government, using proceeds from taxes on processors of agricultural commodities. The list of crops thus regulated began with wheat, cotton, corn, rice, tobacco, hogs, milk, and milk products and was expanded in later years. Under 1934 legislation, a degree of compulsion was added as tobacco and cotton farmers faced a punitive tax for exceeding their individual quotas. The act also established subsidized loans for farmers. After the act was declared unconstitutional in 1935, the program was reformulated with continued programs to reduce acreage (“soil conservation”) and establish price floors via government purchases. These policies are credited with boosting farmers’ incomes (at the expense of consumers), but they also led to the displacement of many tenant farmers, especially black sharecroppers in the South.

The second attempt to rein in competition came through the National Industrial Recovery Act of June 1933. Almost immediately, more than 2 million employers signed a preliminary “blanket code,” pledging to pay minimum wages ranging from around $12 to $15 per 40-hour week. About 16 million workers were covered, out of a nonfarm labor force of 25 million. Share-the-work provisions called for limits of 35 to 40 hours per week for most employees. Over the next year and a half, the blanket code was superseded by over 500 codes of “fair competition” negotiated by trade groups within individual industries that employed almost 80% of nonfarm workers. Although the codes gave employees the right to organize unions and bargain collectively, the carrot held out to induce participation was exemption from antitrust laws, effectively allowing businesses to form cartels that substantially increased prices. Within months, however, there was widespread dissatisfaction with the National Recovery Administration (NRA) codes and a lack of compliance by many, so it is not surprising that they were not resurrected after the Supreme Court declared the act unconstitutional in 1935. The NRA appears to have derailed the economic recovery. The jump in prices and wages from late 1933 to early 1934 led to a drop in sales that is estimated to have caused manufacturing output to fall around 10%, prompting significant layoffs.

Fearful that the intermingling of commercial banking and investment banking had played a role in speculation, the stock market crash, and the banking meltdown, the Banking Act of 1933 (the Glass–Steagall Act) banned banks from acting as both lenders and investors in companies and giving them 1 year to decide whether they would specialize in commercial or investment banking. Critics argue that these provisions were an overreaction designed to punish Wall Street for its perceived sins, but this provision remained in place until 1999. To lessen competition among banks, the act also forbade payment of interest on checking deposits and authorized a cap on savings deposit interest rates—policies that stayed in place for decades. Following the grilling of Wall Street insiders by the Senate’s Pecora Commission, the Securities and Exchange Commission was established in 1934 with the goal of eliminating abuses such as insider trading and stock price manipulation. In 1935, control of the Federal Reserve and its monetary policy was moved out of the hands of bankers into those of political appointees, and autonomy by the regional Federal Reserve Banks was essentially ended.

Other important early New Deal programs were designed to take the place of markets that were seen as underperforming, including agencies like the Tennessee Valley Authority (1933–present), the Home Owners’ Loan Corporation (1933–1936), and the Rural Electrification Administration (1935–present).

The Second New Deal under the more radical 74th Congress enacted a sweeping array of more extensive “reform” measures. The most important of these reforms almost certainly was the Social Security Act, which established the Old Age Insurance program popularly called Social Security and that soon became a pay-as-you-go system, using payroll taxes to pay benefits to elderly retirees. In 1939, amendments added a program to provide dependents’ and survivors’ benefits—akin to private-sector life insurance—and the program was renamed Old Age and Survivors Insurance. The Social Security Act also established the federal-state unemployment insurance system and federal welfare aid to the poor and blind.

Perhaps more important at the time was the Wagner Act, which created a federal agency, the National Labor Relations Board (NLRB), with the power to investigate and decide on charges of unfair labor practices and to conduct elections in which workers would decide whether they wanted to be represented by a union. If the workers voted in favor of a union, it became the workforce’s collective bargaining agent, and the employer was required to bargain with it “in good faith.” Organized labor became a key component of the New Deal coalition, and, under the encouragement of the openly pro-union NLRB, its ranks grew rapidly, rising from about 3 million in 1934 to almost 9 million in 1940 (about 27% of the nonfarm labor force). Although the organizing effort sparked some violence, basic industries such as automobiles and steel were soon largely unionized. Placing a right to collective bargaining above private property rights, in 1936 and 1937, New Deal–supporting governors and other elected officials in Michigan, Ohio, Pennsylvania, and elsewhere refused to send police to evict sit-down strikers who had ignored court injunctions by seizing control of factories. These actions by some states allowed the minority of workers who actively supported unionization to use force to overcome the passivity of the majority of workers and the opposition of the employers.

The New Deal philosophy had a clear element of class warfare, seemingly wresting power and resources from the rich and giving them to those with fewer resources in the form of collective bargaining rights, government transfers, and, under the Fair Labor Standards Act of 1938, minimum wages and overtime premiums. The New Deal coalition attacked “economic royalists” and threatened to “soak the rich” as the top federal income tax rate climbed from 25% in 1931 to 79% in 1936. Critics complained that the government’s rhetoric and actions caused investors to fear for the security of their property rights, pointing to the 60% jump in investment after electoral defeats for the New Deal coalition in 1938.

The most important legacy of the New Deal is probably the substantial expansion of the scope of government that it brought. Economic historian Robert Higgs has argued convincingly that this response to the Great Depression brought with it accommodative court rulings, ideological changes within the electorate, bureaucratic self-interest in maintaining programs, loss of understanding of what can be accomplished in the private sector, and simple inertia that together permanently ratcheted up the size of the government.

 

Further Readings

Alexander, Barbara. “National Recovery Administration.” Robert Whaples, ed. EH.Net Encyclopedia, 2001.

Bordo, Michael D., Claudia Goldin, and Eugene N. White, eds. The Defining Moment: The Great Depression and the American Economy in the Twentieth Century. Chicago: University of Chicago Press, 1998.

Couch, Jim, and William F. Shughart II. The Political Economy of the New Deal. Cheltenham, UK: Edward Elgar, 1998.

Fearon, Peter. War, Prosperity and Depression: The U.S. Economy, 1917–45. Lawrence: University Press of Kansas, 1987.

Fishback, Price V. Government and the American Economy: A New History. Chicago: University of Chicago Press, 2007.

———, Shawn Kantor, and John Wallis. “Can the New Deal’s Three R’s Be Rehabilitated? A Program-by-Program, County-by-County Analysis.” Explorations in Economic History 40 no. 3 (October 2003): 278–307.

Higgs, Robert. Crisis and Leviathan: Critical Episodes in the Growth of American Government. New York: Oxford University Press, 1987.

Rosen, Elliot. Roosevelt, the Great Depression and the Economics of Recovery. Charlottesville: University of Virginia Press, 2005.

Weinstein, Michael. Recovery and Redistribution under the NIRA. Amsterdam: North-Holland Publishing, 1980.

Originally published .