As I’ve mentioned in an earlier post, I’m currently reading Freedom From Fear, by David M Kennedy. It’s the Pulitzer prize winning history of the period of time encompassing the Great Depression and World War II. Earlier, I’d written about the causes of the Great Depression and Herbert Hoover’s response to it. In this post, I’ll talk about Franklin Roosevelt and the New Deal. Just as a warning, I’m not going into the alphabet soup of all of the new acts and programs that were started. It quickly becomes confusing and if you’re so interested, I’d advise reading Freedom From Fear (or just reading the New Deal Wikipedia entry).
Like most Americans, I know about the New Deal and can point to things like Social Security as one of its products. I really couldn’t tell you how effective it actually was at fighting the Great Depression or, for that matter, when it really even ended. This book, mammoth as it is, goes into great detail.
One fact that I learned was that the Great Depression not only caused economic pain for many but also exposed economic pain for so many others. During the economic booms of the 1920s, a good third of the population was left behind. Some 40,000,000 people lived in poverty. There was the rural poor, some ninety percent of them still living in houses with no indoor plumbing or electricity. There was the elderly, no longer able to work but with no social net to help them. They were fortunate if they had relatives that they could live with. There were the people of color that were almost entirely ignored. The sharecroppers in the South were in bondage to landowners that was little different than slavery.
It was also in the Great Depression that we got to see the dark side of American individual exceptionalism. If our national ethos was that people that became rich did so because they worked harder, smarter, or were just better than everyone else, what does it say when such great numbers of the population fall into poverty so dire that they have trouble getting food and shelter and might go years without full time work? Even during this time when the structural problems of unfettered capitalism became so publicly exposed, the general attitude among many was still that somehow this large bulk of unfortunate Americans somehow became stupid or lazy. Interestingly enough, this attitude was often shared among the unfortunate as well. This attitude was a big reason why the New Deal went to substantial lengths to ensure that only the ‘worthy’ poor would qualify for assistance.
When FDR was inaugurated in 1933, the country was at a crisis point. Some five thousand banks had failed, exposing the weakness of the American banking system. Unemployment was somewhere around forty percent. Those lucky to be employed often faced reduced hours or a cut in hourly pay. This led to reduced spending. Reduced spending led to increased unemployment and reduced wages, which in turn led to further reduced spending.
Into this stepped FDR. His buoyant and apparently inexhaustible optimism and energy was a tonic that the country needed. The first 100 days of his administration, working in a special Congressional session, was a whirlwind of activity. In comparison to the torpor of our country’s national mood, this energy proved infectious.
There wasn’t a consistent economic philosophy in the New Deal programs. At various time, the administration encouraged inflation and price controls, deficit spending and budget balancing, promoting consumption and discouraging investment, and farm acreage reduction and land reclamation. This reflected the fact that FDR himself did not have a consistent economic philosophy. A real world politician, he was constantly trying to balance competing interests. This balance led to practices that often seemed contradictory.
If there was a consistent theme surrounding the New Deal programs, it would be security. This would take multiple forms.
There was bank security. The Glass-Steagull Act separated conventional banking from the riskier investment banking. Banking accounts were now federally guaranteed. This minimized the possibility of future bank runs. Even before the Great Depression, there would be on average several hundred bank failures a year. After the passage of the act, there would be fewer than ten a year.
There was finance security. The wild west era of Wall Street came to a close. Firms now had to publicly disclose their financial statements and have them independently audited. This made the buying and selling of securities more fair and rational.
There was housing security. Before, there was hardly any home ownership. It usually required the buyer to pay the full amount or put a significant percentage down and pay off within a couple of years. Now, independent appraisals were required. The FHA guaranteed mortgage loans. Lower down payments were required and mortgages could be paid off over a thirty year period. Home ownership increased from one quarter of Americans to closer to two thirds.
There was work security. Unemployment insurance became available. Work relief programs put millions of people (everyone from plumbers to artists) to work on the government payroll. For those too old to work, an old age pension was now provided. Interestingly to me, there was, besides the obvious humanitarian benefit, a more practical benefit to youth labor laws as well as old age pensions. One of the big causes of the Great Depression was overproduction. This overproduction of goods led to unemployment and lowered wages. By removing the elderly and the very young from the labor pool through these laws, it reduced the labor pool, which in turn drove up demand for labor, which in turn increased wages, which in turn increased consumption, which addressed the overproduction problem. Instead of the deflationary vicious cycle, this enabled a more benevolent consumption cycle.
What’s interesting here to me is that none of this was particularly radical. At best, what the New Deal did was to put some guard rails that made capitalism more honest and less risky. In doing so, not only did capitalism survive but these very guard rails made it healthier. They provided a level playing ground with rules that allowed many more people to participate and to flourish within the system.
The New Deal was certainly not perfect. For instance, during the 1930s, the unemployment rate was never below fourteen percent. That’s amazing to contemplate. It took World War II to set the US on its course to become an economic juggernaut.
The New Deal was brutal to sharecroppers. Sharecroppers, working in abject poverty, eked out a living farming land that others owned. To solve the overproduction problem, the New Deal paid land owners not to farm. Since the sharecroppers didn’t own the land, they were often summarily evicted from their land by the landowners who were being paid by the government not to farm.
Sharecroppers were disproportionately Black. In another blow to Black Americans, the original Social Security excluded farm workers and domestic workers. You probably only need one guess to figure out which population was overrepresented in these occupations.
The New Deal was over by 1937. FDR overreached with his attempt at packing the Supreme Court. The legislature rebelled against this. At the same time, conservatives had begun to unite against further programs. For example, there was serious misgivings about establishing a minimum wage. This was especially unpopular in the Southern states, where Southern politicians believed that their lower wages were their only advantage against the much more powerful and prosperous North. After 1937, FDR never again really had the initiative for further programs.
From a broad perspective, the New Deal ushered in several new ideas. The federal government became much more activist. It was no longer shy about aggressively intervening into situations that previously would have been handled, if at all, at a state level or, more commonly, letting Adam Smith’s invisible hand somehow eventually sort it out. By taking a broader approach, new segments of the population, like rural communities and immigrants, began to see the role that the federal government could have and thus began more actively participating in the political process. Finally, setting a level playing field and a set of consistent rules led to outcomes that allowed the benefits of capitalism to be spread more widely.
dorkenstein 