LIBERTY UNIVERSITY
HELMS SCHOOL of GOVERNMENT
Evaluate decisions and impacts of key government leaders during the New Deal policies,
Eisenhower’s emphasis on a balanced budget, and the final undermining of the Gold
Standard.
Dr. Submitted to Michael Langlois
PLCY 704
Economics and Public Policy
by
Gabriel K Dwanyen
April 11, 2021
1
Introduction
The process of balanced budgeting can be quite rigorous and complex at the level of
government, especially when it involves several political actors, challenging the relationship
between the President and Congress which oftentimes, can make the process much more
complex than it would be. As the result, the prudent fiscal outcome is unsatisfactory due to
political and ideological influences, which over time could impact the economy due to these
decisions. The New Deal approach saw government intervention in the aftermath of the
depression vital to restore stability to the pressing economic challenges of the time. Eisenhower
rose above those existing challenges and consolidated ideas, refuted many, however, yet became
most successful in achieving his fiscal goal (Penner 2014, 10). Stockman (2013) indicated that
Eisenhower’s macroeconomics approach (particularly tax-cut stimulus) and discretionary
spending during his two major recessions profited his administration to achieve the highest fiscal
priority than succeeding administration had benefited off (Stockman 2013, 195). The core of this
paper, however, examines the economic policies of key government officials charged with the
duties of maintaining a stable economy in the face of recession and government bureaucracy.
The New Deal Policies and its Proponents
The period commemorating the New Deal in American political history brought together
the expertise and talents of key government leaders poised at dealing with the impacts of what
was known as the great recession in the American economy. The approach of government was to
implore great political and academic minds through prudent economic policies, to address the
pressing challenges Americans had faced over the course of the worst economic crisis in U.S.
history (Cole & Ohanian 2004, 16). Among the few astute political minds that commandeered
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the reform were the likes of liberal new dealer Franklin D. Roosevelt, who promised the
New Deal approach, the Conservative leader Dwight D. Eisenhower, whose policies advocated a
far-reaching approach to balance the budget, the famous Fed chairman William McChesney,
along with other academics who oversaw public policy decision making during in the attempt to
save the economy from crony capitalism and worsen economic decisions that hurt millions of
Americans during the post-depression years. In the process to save the economy and restore
growth through the application of a sound macroeconomic approach, which might include
balancing the budget through thorough fiscal and monetary policy practice.
To the incoming Democratic President Franklin D. Roosevelt, a set of novel political and
economic policies were essential accruement to end the Great Depression and save capitalism.
To him, the New Deal was a big deal to save the U.S. economy that was strangulated due to its
inability to conduct international trade through export and consequently had laid a huge barring
on the domestic market to retain those goods (Stockman 2013, 137). President Roosevelt had
earlier on rejected his predecessor’s policies of directing funding to troubled assets like banks,
insurance companies, and railroads that were on the verge of collapse, calling it “trickle-down”,
while he demands recovery programs that targeting bottom-up approach and not top to bottom
(Collins, Goldberg & al 2013, 51). Eventually, President Roosevelt’s fiscal policy would direct
billions of dollars from the Recovery Finance Corporation (RFC) to public works, mortgage
modification, and school programs reflective of government centralization (Collins, Goldberg &
al 2013, 51). On his campaign trail, Roosevelt continued his indictment for Hoover’s economic
policies that promoted “private financial speculations, ignored recovery, and reform”, and
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eventually Roosevelt would use a range of New Deal policy aimed at steering credit and capital
away from long-term infrastructure and public works (Penner 2014, 14).
At the start of FDR administration, he quickly targeted the banking crisis using the
original economic policy introduced by President Hoover but stayed long to implement. In the
heart of the crisis, American lost its foreign trade capacity as well faced a severe domestic
banking crisis (Purcell 2014, 60). According to Stockman (2013), Roosevelt's success in reviving
the banking system was not due to a specific New Deal policy but was the original Hoover’s
outgoing Treasury Department plan that it had stayed long to administer (Stockman 2013, 138).
Given this, the real crisis to Roosevelt was to connect the United States to international trading
and open U.S. markets to imports (Stockman 2013, 139). Given the Keynes economic approach
that characterized the depth of the depression and Roosevelt's rejection of Keynesian
macroeconomic theory, restoring the economy to full employment was a difficult proposition
(Gwartney, Stroup et al 2018, 220).
At some point following in the 1930s, Americans hope that their political leaders would
respond quickly to the urgent economic crisis the country was engulfed with. The advent of the
New Deal and the promises New Dealers championed about economic recovery was all itself
hope for millions who were unemployed. Stockman (2013) indicated that New Deal policies did
not address the fundamental causes of the Depression and policies rather enhanced the
unnecessary prolongation of the terrible state of millions of citizens (Stockman 2013, 169). As
Cole & Ohanian (2004) notes, weak recovery is festered by low output, real consumption, and
hours of work. He asserted further that real domestic product remained at 27% below the trend
after 1939 and 39% in 1933; private work hours of 27% in 1933, resonate at 21% in 1939 (Cole &
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Ohanian 2004, 780-781). The presence of these large negative shocks that triggered 1929 to
1933 economic downturn – including monetary stocks, productivity, and banking stocks became
positive after 1933, it was, however, puzzling why such prolongation to recovery when these
positive stocks should have fostered recovery right in the 1930s (Cole & Ohanian 2004, 781).
President Roosevelt New Deal policies, however, became suspicious of the slow pace to
which recovery was measured. Stockman (2013) points out that Roosevelt’s cartelization New
Deal policies limited competition in the product market and increase labor bargaining power
which kept the economy depressed after 1933 (Stockman 2013, 137-138). Policies such as the
National Recovery Acts, established by President Roosevelt in June 1933 granted the president
the authority to institute industry-wide codes intended to abolish biased trade practices,
diminish unemployment, create minimum wages, and maximum hours, and guarantee the right
of labor to bargain collectively (Stockman 2013, 170). The codes became the operating
regulation for all firms, but those codes required presidential approval and they were only
granted to those industries if they were willing to raise wages and permit collective bargaining
with an independent union (Cole & Ohanian 2004, 784). Hence, the act suspended antitrust law
that proscribed unlawful merger and business practices, as the individual firm was encouraged
to assume business practices that limited competition and raise prices (Hirsch 2000, 60). Thus,
the NRA introduced policies that dictated the attitude of businesses by shaping industry codes
and attempted the regulate the nation’s financial hierarchy to prevent competition.
Public policies during Roosevelt’s regime dominated society as government centralized
programs depicted the direction of the economy in diverse ways. Stockman (2013) noted that
the Agricultural Adjustment Act (AAA) of 1933 wrecked American farms, created
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farm debts grudgingly high at $10 billion through 1933 (Stockman 2013, 180). The AAA became
an antimarket scheme, incapable of assuaging the incessant farm depression. What the AAA did
was provided farm subsidies in exchange for curbed agricultural production, which made
farmers incapable of cultivating their farmlands “and manipulated farm product prices by
buying and temporarily withholding products from the market” (Lumen, Boundless U.S History).
Stockman (2013) asserted that the policy destroyed the shrunken remnants of the U.S. farms
economy even as global depression materialized in the early 1930” s (Stockman 2013, 180).
Besides, were several other programs the New Deal championed regarding their effort
to stimulate the economy. The Tennessee Valley Authority 1933 was the first large-scale public
works project which created short and long-term jobs by building and operating a hydroelectric
project in the valley of the Tennessee River. Public works projects were an essential component
of the job creation program under the New Deal. The Federal Emergency Relief Administration
was a Hoover’s initiative and created local and state government jobs, mostly unskilled, while
the Civilian Conservation Corps put large numbers of men at work in natural resources projects
(Price 2017, 45). Though this list is not exhaustive of FDR New Deal policies, it gives an idea of
how the government became involved in controlling and regulating the economy. At the crux of
these policies was a far overreaching government policy of crony capitalism that characterized
the New Deal Era.
Presence of Keynesian Economics During the Great Depression
Among several theories developed during the Great Depression to explain the nature of
the prolonged unemployment and method to restore economic recovery was Keynesian
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economics. The theory developed in the 1930s by the British economist John Maynard Keynes
holds that total spending in the economy could potentially affect output, employment, and
inflation (Agarwal 2010, 54). The concept further asserts that spending motivates firms to
supply goods and services and if total spending fell, consumers and investors become unsure
about the survival of their firms, and firms may pull back on production (Gwartney, Stroup et al
2018, 220). This implies that Keynes's macroeconomic view of government’s spending,
borrowing, and taxing policies are relevant tools in managing economic crises such as the
depression of the 1930s (Gwartney, Stroup et al 2018, 223). This theory indicates that when
firms generate greater economic output due to higher spending, it stimulates the economy. In
the Keynesian theory, he rejects the view that lower wages and interest rates would get the
economy back on track and eliminate unemployment (Penner 2014, 48). Keynesian indicates
that reduced wages lead to lower income which could over time negatively impacts aggregate
demand within the economy (Gwartney, Stroup et al 2018, 220).
Besides, Keynes rejected the proposition that reduced interest rates will stimulate the
economy and argued as well that when people and firms become pessimistic about themselves
and their future, market transaction dwindles, and investment fails (Agarwal 2010, 49).
Keynesian notes that a reduced interest rate or rate near zero would be impossible to stimulate
the economy and the presence of these factors during the 1930s have made it so hard for the
restoration of full employment (Gwartney, Stroup et al 2018).
Eisenhower and his Economic Policy
7
Unlike Roosevelt, Eisenhower was committed to the fiscal policy of budget discipline
even in the face of two mild recessions which impeded fiscal policy to budget balancing.
Eisenhower was determined to guide government spending in another direction from those of
his predecessor who laid a huge weight of government money on the military. As Jay (2012)
indicated he championed a “New Look” policy that included long term changes he wanted to
implement in the United States economy (Jay 2012, 90) Core in his policy agenda was to cut
down on government expenditures and reduce Truman’s request for the fiscal year beginning in
1953. One of Eisenhower’s main tactics in going about this was the reduction in military
spending (Jay 2012, 43). Eisenhower did not disqualify the importance of the military at the
time, he felt that excessive spending or government overarched actions of national defense
were not just a waste of government’s resources, but Big Government, a self-defeating stimulus
to inflation and a form of statism that would rather make economic recovery much more
difficult. Since the maintenance of nuclear weapons for retaliation on Soviet advances took a
huge toll on government coffer, preceding regimes had allocated an elephant share budget to
the maintenance of American military superiority. Nuclear weapons were a more efficient use
of money than was training the military.
However, Eisenhower considered balancing the budget a sacrosanct duty that required
government attention given the deterioration nature of the U.S. budget and huge deficit over the
last 60 years (Penner 2014, 3). He was ready to regulate the government’s spending and reduce
tax as well cut on programs that took an unnecessary huge share of government’s money
(Stockman 2013, 213). There was an increase in newer family formation during and after the
Korean War. In the initial and middle stages of the boom, the use of credit increased
8
dramatically, the result in part in the liberalization of credit terms (McClenahan 2011, 55). On
defense, he cut down the Pentagon budget and funds directed to the St. Lawrence Seaway and
the interstate highway system (Penner 2014, 5). Stockman (2013) indicated that Eisenhower did
not hesitate to wield the budgetary knife and blade on the Pentagon. (Stockman 2013, 213).
However, Eisenhower did not cut down on social security programs, which is considered the
most important achievement of the New Deal, rather he addressed the alarming military budget
he had inherited from his predecessor Truman and invested in infrastructure (Stockman 2013,
214).
Balancing the Budget
Balancing the budget was Eisenhower’s singular most vital objective of his
administration. Many scholars however noted that he succeeded quickly in balancing the budget
and reversing the recessions his predecessors grappled with (Penner, 2014, 5). The success of
Eisenhower’s fiscal and monetary policies was hinged mostly around regulating wartime budget
to $370 billion by fiscal 1956 from the original $515 billion (Stockman 2013, 215). Why
Eisenhower’s campaigned for fiscal rectitude during his administration's Cold War period,
balancing the budget was a difficult prospect. According to Freidman (2015) budget deficit
between 1954 to 1955 was at 0.3% to 0.8% GDP (Freindman 2015, 21). It is a common practice
that most government’s economic policies during the face of major economic crisis such as
recession and depression, spending are increased, and the stimulus package is provided for
economic recovery (Stockman 2013, 223). Eisenhower, however, did not resort to these policies
of discretionary spending and higher tax stimulus (Stockman 2013, 223). Eisenhower
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remained focused on maintaining a fiscal discipline limited government spending and directing
budget in areas that were relevant to restore growth and facilitate market activity. “The economy
bounced back from recession with a vengeance, growing 7.1 percent in calendaryear1955. The
growthallowed budget surpluses in both the 1956 and 1957 budgets. Yet another recession
beginning in August of 1957 put both the 1958 and 1959 budgets into deficit. The large 1959
deficit played an important role in inducing Eisenhower to strive hard for budget balance in
1960” (Penner 2014, 3)
Eisenhower and the Keynesian Economics
Eisenhower’s fiscal policy did not utilize the essential tools of Keynesian economics embraced
by leading liberal lawmakers but rather concentrated on reducing heavy government spending
and increasing taxes to address inflation thereby stimulating the economy in vital ways. In his
February 17, 1953 speech, President Eisenhower noted that:
“The fact is there must be balanced budgets before we are again on a safe and sound
system in our economy. That means, to my mind, that we cannot afford to reduce taxes,
reduce income until we have in sight a program of expenditures that shows that the
factors of income and outgo will be balanced. Now that is just to my mind sheer
necessity” (Morratta 2013)
Changes in expenditure and tax regulation are indicative of the direction of fiscal policy.
Eisenhower believed that this was an important approach to deal with the problems of the
recession and restore economic growth. Gwartney, Stroup et al (2018) note that Eisenhower's
economic policy went contrary to Keynesian economics that supports increased spending
financed by borrowing speed recovery from a severe recession (Gwartney, Stroup et al 2018,
224). The Keynesian view asserts that in times of recession, private sector spending will
10
decrease, consequently, the government must expand spending to reignite the private sector
(Gwartney, Stroup, et al 2018, 224). Gwartney, Stroup et al (2018) posited because of the 2008 to
2009 recession, Keynesian argued that expanded spending was vital to stimulating aggregate
demand even when the interest rate was at a minimum zero percent but failed to kindle private
investment (Gwartney, Stroup et al 2018, 224). In short, Eisenhower was having nothing to do
with the Keynesian economic idea yet emerged with the rebound to a strong economy (Stockman
2013, 229-230).
In contrast, critics of Keynesian economics argued that increased spending and expanded
debt will lead to stagnation of the economy and make recovery impossible in the event of a
recession. Gwartney, Stroup et al (2018) note that increased borrowing and upward interest rates
reduce net export and aggregate demand, and larger outstanding debt will reduce consumption
because of anticipation of higher future taxes and slow down long-term growth (Gwartney,
Stroup et al 2018, 245). Also, critics indicate that government spending is generally driven and
triggered by pollical order than economic considerations (Gwartney, Stroup et al 2018, 245). So,
it is the likely hood that political decisions would often attract favoritism, which would misdirect
the proper efficiency of proper resource allocation (Gwartney, Stroup et al 2018, 245). Lastly, the
Keynesian theory asserts that when the government put more money into the economy or spend
more on special projects, grant, or stimulus, businesses and organized groups spend more time
lobbying for government funds (Stephen 2017, 14). Consequently, the resource will be attracted
to rent seeking, and productivity will be slowed and impeded to provide consumers goods and
services required in a basic system. The result is cronyism, favoritism, and political corruption
(Gwartney, Stroup et al 2018, 245).
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Regarding tax cuts, Keynesian economists believe that to recover from a recession, a
government should increase spending than cut tax because to them, increased spending would
expand GDP more than tax reductions. These economists believe that 100% of the increase in
government purchases will be redirected into the economy, whereas tax reduction will be saved
or spent abroad” (Gwartney, Stroup et al 2018, 245). Keynesian therefore indicate that there will
be a multiplier effect in economic recovery when government increases its spending and
increases its tax proportion (Gwartney, Stroup et al 2018, 245). Meanwhile, Eisenhower's
economic policy played counterclockwise to Keynesian’s. Why Ike refrained from massive
government spending especially on defense, he did not cut tax. He maintained a regular flow of
income from revenue generation through tax and amass surplus from holding back on spending.
Eisenhower realized that increased spending and expanded debt in a recession would exert
negative effects on the economy and make recovery rather difficult, so he chose to hold back in
areas that did not reflect significant economic importance. Eisenhower remained firmed on
spending to the nick of a budget surplus in fiscal 1956 and 1957 and proposed a balanced budget
during his tenure (Stockman 2013, 229). His budget for 1954 reduced former president Tuman’s
proposed expenditures by $5 billion and he cut the $10 billion deficit nearly in half (Stephen
2017, 22).
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Conclusion
The period of profound economic interactions in American history and the rise of novel
political actors and economic policies ushered in the beginning of the New Deal movement in
the 1930s. The key proponent of the New Deal was President Roosevelt who delivered a new
message in the face of the world’s worse depression, proposed policies that he thought would
actively stimulate the economy and give back jobs to millions of unemployed Americans.
Unfortunately, it seems that the New Deal policies that promised immediate economic recovery
did not appear to accomplish the needed revival but rather prolong recovery due to policies that
rather promoted government overreach, cronyism, and statism Stockman 2013, 23. His action to
confiscate gold from every citizen residing in the U.S. thus diminishing the nation’s currency and
gold standard abroad did not play well for his political image (Stockman 2013, 140). In the area
of social security, many experts have noted that FDR New Deal policy made tremendous
achievement (Penner 2014, 5).
The ascendency of President Dwight D. Eisenhower shifted the pendulum in a direction
that created significant economic reform in macroeconomic economics. Ike inherited a huge
government deficit, a big defense budget, and excessive economic policies, and crony capitalism.
What Ike’s economic policies became in the wake of two mild recessions was balancing the
budget, which meant that he became meticulous about expanded government spending and tax
cut. Eisenhower’s fiscal policies regulated spending and maintained tax at the level that
promoted revenue generation. As Ike's economic policies rejected the premise of the greatest
economic thought of the time, the Keynesian economy, Eisenhower rose to great recognition,
though opposed by people of his party, became successful in balancing the budget recovery of
the economy during the period of recession.
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