The New Deal and Its Continued Influence on Economic Policy
The New Deal and Its Continued Influence on Economic Policy
Todd T. De Voe
PLCY704: Economics and Public Policy
Dr. Steven Manley
Liberty University
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 1
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 2
Abstract
Today's scholarship has highlighted the fact that the New Deal programs, taken as a
whole, failed to achieve a lasting recovery from the Great Depression. Indeed, for most of the
postwar (WW2) period, the conventional wisdom was that the New Deal did not end the Great
Depression and that WWII spending made the nation move to economic prosperity. Counter to
some on the left of the political spectrum and FDR sycophants, this idea is not a right-wing
political position. This idea was shared by many to the left of the center, including several former
New Dealers themselves. One of the reasons the New Deal needs to be explored deeper is that
contemporary political and economic theorists on the left are touting the New Deal and modern
monetary theory as a practical and viable way for the federal government to address current
economic problems. Many economists and economic historians of different political leanings
agree that the New Deal has an inflated reputation. These experts maintain that the New Deal had
big chunks that were counterproductive and that the damage done by these undid much of the
good done by the rest. Because of this, the US Economy was still depressed when the Japanese
bombed Pearl Harbor.
Keywords: new deal, FDR, economics, Depression Wilson, Hoover,
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 3
The New Deal and Its Continued Influence on Economic Policy
Introduction
Before exploring the impact of the ""New Deal" is imperative to understand the context
of why the decisions were being made. The Great Depression began with the complete collapse
of the stock market on October 24, 1929, when about 13 million shares of stocks were sold. he
damage was extended on Tuesday October 29th, more than 16 million shares were sold the day
forever known as Black Tuesday. The value of most shares fell sharply, leaving financial ruin and
panic in its wake. here has never been a collapse in the market that has had such a devastating
and long-term effect on the economy. businesses closed and banks failed by the hundreds due to
the collapse, putting millions out of work. ages for those still fortunate enough to have work fell
sharply. he value of money decreased as the demand for goods declined. n Franklin Roosevelt
and the New Deal by William E. Leuchtenburg, the economic plight of seen. in the three years of
Herbert Hoover's Presidency, the bottom had dropped out of the stock market and industrial
production had been cut more than half. y 1932, the unemployed numbered upward of thirteen
million. any lived in the primitive conditions of a preindustrial society stricken by famine.""
Bernstein 572-574)
The Great Depression and The Mood of the Nation
The social mood of the United States and the world was genuinely depressed. bout 15
million people were out of work, equaling one-fourth of the labor force. ages dropped by 50
percent, Hundreds of banks had failed, and Prices for agricultural products dropped to their
lowest level since the Civil War. here were more than 90,000 businesses that failed utterly.
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 4
For millions of United States citizens," the economic outlook was extraordinary hardship.
The urban centers were hit hard, with massive poverty and hunger at levels the United States had
never seen. The former rich were standing in bread lines with the desperately poor. shantytowns
popped up in every major city. Supe kitchens were open, and men in the millions left their
families to travel anywhere to find work. The number of broken families exacerbated the
number of women and children forced out on the street by foreclosure and evictions. here was
no federally financed ""Safety net" of welfare programs to keep people from falling into poverty.
n 1931 alone, more than 20,000 Americans committed suicide.
The New Deal to The Rescue?
In 1931 the American people voted in a new president, Franklin Roosevelt, who brought
an air of confidence and optimism. sing the political capital, he quickly rallied the people to the
banner of his program, known as the New Deal. "The only thing we have to fear is fear itself,"
the President declared in his inaugural address to the nation. He was determined to make
effective changes during his presidency. "Roosevelt moved swiftly to deal with the financial
illness that paralyzed the nation. In his first night in office, he directed Secretary of the Treasury
William Woodin to draft an emergency banking bill and gave him less than five days to get it
ready."" Brown 857-879)
In a certain sense, the New Deal merely introduced types of social and economic reform
familiar to many Europeans for more than a generation. Moreover, the New Deal represented the
culmination of a 1ong-range trend toward abandonment of "Laissez-faire" capitalism, going back
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 5
to the regulation of the railroads in the 1880s and the flood of state and national reform
legislation introduced in the Progressive era of Theodore Roosevelt and Woodrow Wilson.
Many of the ideas that FRD was putting into action were not new. tuart Chase, an FDR
advisor, wrote "" New Deal."" (1932). "communists did not need further incentive than the
burning zeal to create a new heaven and new earth...Why should Russians have all of the fun of
remaking a world?"" (Steindl 1023-1025)
Progressives visited the Soviet Union and were proponents of centralized economic
planning. under the Wilson Administration, FDR got a taste of progressive solutions. Under the
World War I government, Wilson sized control of industries, fixed prices, and ran every aspect of
the economy through bureaucracies. he most powerful of them was the War Industries Board,
which regulated 30,000 items from Baby carriages to the length of lather uppers on shoes, and
the number of bags a traveling salesman could carry. ( Ekbladh 47-67)
What was truly novel about the New Deal, however, was the speed with which it
accomplished what previously had taken generations. any reforms were hastily drawn and
weakly administered, with some contradicting others. during the entire New Deal era, public
criticism and debate were never interrupted or suspended; the New Deal brought individual
citizens a keen interest in government.
When Roosevelt took the presidential oath, the banking and credit system of the nation
was in a state of paralysis. its astonishing rapidity, the nation's banks were closed and reopened
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 6
only if the solvent. The administration adopted a policy of moderate currency inflation to start
an upward movement in commodity prices and to afford some relief to debtors. New
governmental agencies brought generous credit facilities to industry and agriculture. he Federal
Deposit Insurance Corporation (EDIC) insured sayings-bank deposits up to $5,000, and stringent
regulations were imposed upon the sale of securities on the stock exchange. Kus 257-265)
Discussion
FD,R as a Wilsonite embraced progressive ideas. He did not have an excellent eat grasp
of economic principle appears it apars that he was moved by any policy that gave the
government more power and although. Although U.S economy rebounded between March 1933
and early 1937, neither expansionary fiscal policy nor Fed actions deserve much credit for that
rebound. FDR's policies did not have a major effect.
The US banking had a history of surviving shocks and surprising that occasional panics,
like those of 1884, 1893, and 1907, witnessed clusters of bank failures, including though not
always limited to failures of rural, banks. between them the 1907 panic and World War I made
matters much worse, by encouraging the creation of many new banks of the weakest sort, setting
the stage for unprecedented bank fatalities.
Most of the banks in the American banking system were connected to agriculture and
vulnerable to market swings. he changes brought by the Panic of 1907 consisted of deposit
insurance schemes set up in eight states (Oklahoma, Kansas, Nebraska, Texas, Mississippi, South
Dakota, North Dakota, and Washington) between then and 1917. according to David Wheelock,
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 7
the premiums banks paid in these systems were small in comparison with, but otherwise
unrelated to, the riskiness of their loans and other investments. insurance therefore subsidized
risky banks in states that adopted it. ( Wheelock )
The common misconception is that FDR.'s fiscal stimulus played a big part in bringing
the Great Depression to an end, but the truth is that its contribution was insignificant.
Economist E. Cary Brown, in his 1956 paper, "Fiscal Policy in the thirties: A
Reappraisal."" concluded that the FDR fiscal policy "seems to have been an unsuccessful
recovery device in the thirties—not because it did not work, but because it was not tried." More
specifically, he argued that the direct effects on aggregate full-employment demand of the fiscal
policy undertaken by all three levels of government were relatively more robust in the thirties
than in 1929 in only two years—1931 and 1936—with 1931 markedly higher than 1936… The
trend of the direct effects of fiscal policy on aggregate full-employment demand is downward
throughout the thirties. Brown 857-879)
Although the federal government's fiscal policy was ""ore expansionary throughout the
thirties than it was in 1929, "in most years after 1933, it was insufficient to offset reductions in
state and local government spending.
It was more than Brown that was making the argument that New Deal fiscal policy was
not exceptionally expansionary. Alvin Hansen wrote in 1941:
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 8
despite the reasonably good showing made in the recovery up to 1937, the fact is that
neither before nor since has the administration pursued a positive expansionist program.""
(Brown 857-879)
Looking at newer scholarship, Christina RRomer's1992 finding that fiscal policy
contributed almost nothing to the recovery of the 1930s. ( Fishback, P. 385-413) Price Fishback
2010 argues that nationwide Keynesian fiscal stimulus was never attempted in the 1930s.
Fishback 385-413)
It is now well-established scholarship that the New Deal did not work as many people
believe. Why didn’t federal government spending grow more than it did? And why was the
growth of federal deficit spending even more modest?
It is a simple answer; the New Deal did not usher in a Keynesian fiscal revolution.
instead, as Julian Zelizer remarks in his essay on the subject, fiscal conservatism…remained
normative for most of the New Deal."" Zelizer points out that FDR himself held orthodox views
about fiscal policy, making a point of picking Treasury secretary's whose views were even more
orthodox. ZELIZER 331-358)
It was only after 1938, when the economy had been laid low by the 1937-38 depression,
and the New Deal was ending, that the Roosevelt administration finally abandoned its
commitment to limited spending and a balanced budget. (Perry and Vernengo 349-367)
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 9
The Hoover Administration was on a spending spree prior to losing the White House to
FDR. Hoover presided over what was then the country’s biggest peacetime budget deficit. DR
merely carried on the precedent Hoover had set. During the presidential campaign, FDR really
meant it when he railed against Hoover's" "Reckless spending" "(The greatest spending
administration in peacetime in all our history"" and budget deficits. (Fishback 385-413)
The Impact of The New Deal Myth
Davis Stockmen contends that the New Deal did little to end the Great Depression. t may
have even prolonged it. The Keynesian view of the Great Depression suggests that fiscal policy
was, at best, of secondary importance to Recovery. The New Deal, if it is not explicitly seen as
harmful in the New Keynesian perspective, as it is in many modern popular views of the Great
Depression.
Considering Keynes's influence on New Deal policies, one will conclude that Keynesian
economics is a failure. Even though I am not a proponent of Keynesian economics, it would be
wrong to blame his ideas for the New Deal's failure despite what one reads everywhere. The
New Deal was not particularly Keynesian."" It was, in some ways, a quite un‐Keynesian.
Bernstein 572-574)
As we discussed earlier, even the progressive wing of the democrats was fiscally
conservative, and even New Deal proponents dismissed the claim that Keynes influenced FDR's
thinking.
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 10
Leon Keyserling, in support of the New Deal and drafted some of the primary legislation,
wrote, with all due respect to Keynes, I have been unable to discover much reasonable evidence
that the New Deal would have been greatly different if he had never lived, and if a so-called
school of economics had not taken on his name."" (Steindl 1023-1025)
The Over Statement Keynes
Any account of Keynes's role in shaping the New Deal policies is overstated. Despite his
stature in Great Britain at the time, Keynes was not well known in the United States. t was not
until he published his book “General Theory" in 1936 that American policymakers knew about
him. DR was not looking for outside counsel. He came to the office with his group of corps
advisors.
FDR's advisors were divided into groups, the Planners and the Trust Busters were the
most influential. The Planners were led by Rexford Tugwell, and the Trust-busters, were led by
Harvard law professor Felix Frankfurter. The philosophy of the Trust-Busters was the ideal of
perfect competition. They envisioned breaking up large financial institutions and corporations.
in contrast, the Planners wanted to transfer control from the individual business owner to the
select board of bureaucrats. The government board would manage the corporation in the public
interest. Fishback, Price V., Kantor, and Wallis 278-307)
The one ideal they both held in common, the Great Depression, was an opportunity to be
exploited to make a fundamental and radical change in how the United States business and
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 11
finance sectors functioned. he consensus today is that these ideals did not have much or any
impact on the economic Recovery. ( Wheelock )
The reforms that the Brain Trust wanted to make only had a slight relation to policies
aimed at enhancing aggregate spending that later became identified with Keynesian economics.
he simple truth is that, when it came to fiscal and monetary policy, most of FDR's closest
advisors, including members of the original Brain Trust, were not Keynesians even in a loose
sense. ( Romer 757-784)
FDR received Keynesian advice from his brain trust called the inflationist. In addition,
he had two other groups of advisors, called Trust-Busters and planners, influencing his thinking.
It is essential to discuss this group's most influential members. either of them supported
the New Dealers. Irving Fisher and Cornell agricultural economist George Warren. Henry
Morgenthau, FDR's second Treasury Secretary, became a critical member of the anti-new dealers
in the administration. Moreover, as fiscal conservatives, Fisher, Warren, and Morgenthau
favored suspending the gold standard. moreover, otherwise trying to raise prices using what may
loosely be called a "monetary" policy. FISHBACK, PRICE V., HORRACE, and KANTOR 36-
71)
Expansionary fiscal policy, particularly large-scale spending on public works, had its own
New Deal proponents; however, there is no evidence that they came to their economic ideas
because of Keynes. Wallis and Benjamin 97-102)
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 12
To Understand some of the decisions and rejections he had about Keynes, FDR,
according to many sources, never read Keynes. he General Theory Keynes' seminal work was
released in 1936. Keynes' arguments appeared to have influenced Trust-Buster Felix Frankfurter.
after visiting Keynes at Cambridge in early December, Frankfurter encouraged Keynes to write
an open letter published in the New York Times. Cole, Harold L and Ohanian 779-816)
The President did not have the reaction Frankfurter was hoping for
‘You can tell the Professor, that regarding public works, we shall spend in the next fiscal
year nearly twice the amount we are spending in this fiscal year, but there is a practical limit to
what the Government can borrow."" rom that terse reply and other evidence, William Barber
concludes that Keynes's ideas ""had little impact on Roosevelt's thinking."" (Price Fishback
1435-1485)
In May 1934, FDR and Keynes had an hour meeting. After the meeting, FDR was less
impressed with Keynes's economic theory. Keynes walked away with an opinion of the
President as well. He told Alvin Johnson, the New School's director, who was an economist, ""
do not think your President Roosevelt knows anything about economics."" Cole and Ohanian
779-816)
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 13
Conclusion
In this paper, it has been established that the New Deal extended the Great Depression.
In addition, there is evidence that poor people suffered more under the New Deal. s established,
the majority of the Brain Trust that surrounded FDR were fiscal conservative, and the President
himself was concerned about ensuring programs had proper funding. ZELIZER 331-358)
New Deal programs were financed by tripling federal taxes from $1.6 billion in 1933 to
$5.3 billion in 1940. Excise taxes, personal income taxes, inheritance taxes, corporate income
taxes, holding company taxes, and so-called ""excess profits" taxes all went up. (Cole and
Ohanian 779-816)
The most important source of New Deal revenue were excise taxes levied on alcoholic
beverages, cigarettes, matches, candy, chewing gum, margarine, fruit juice, soft drinks, cars, tires
(including tires on wheelchairs), telephone calls, movie tickets, playing cards, electricity, radios
— these and many other everyday things were subject to New Deal excise taxes. These taxes
financed the New Deal on the backs of the middle class and the poor. ( Cole, Harold L. and
Ohanian 779-816)
New Deal revenue from excise taxes brought more money to the Treasury Department
than combined personal and corporate income tax. n 1942 with the start of World War II, income
taxes brought in more revenue under FDR.
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 14
The New Deal taxes did not help with creating jobs. The New Deal was the cause of
prolonged unemployment. 7% higher business taxes in the 1930s meant that large and small
businesses did not have the capital to grow jobs. Social Security made payroll more expensive,
which discouraged hiring. Boyd 150-167)
Other New Deal programs destroyed jobs, too. for example, the National Industrial
Recovery Act (1933) cut back production and forced wages above market levels, making it more
expensive for employers to hire people — blacks alone were estimated to have lost some
500,000 jobs because of the National Industrial Recovery Act. (Kus 257-265) The Agricultural
Adjustment Act (1933) cut back farm production and devastated black tenant farmers who
needed work. he National Labor Relations Act (1935) gave unions monopoly bargaining power
in workplaces, leading to violent strikes and compulsory unionization of mass production
industries. Unions secured above-market wages, triggering significant layoffs, and helping to
usher in Depressionepression938. Wallis and Benjamin 97-102)
What about the good supposedly done by New Deal spending programs? hese did not
increase the number of jobs in the economy because the money spent on New Deal projects came
from taxpayers who consequently had less money to spend on food, coats, cars, books, and other
things that would have stimulated the economy. his is a classic case of the seen versus the
unseen; one can see the jobs created by New Deal spending but cannot see jobs destroyed by
New Deal taxes. (ZELIZER 331-358)
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 15
His National Industrial Recovery Act forced consumers to pay above-market prices for
goods and services, and the Agricultural Adjustment Act forced Americans to pay more for food.
moreover, FDR banned discounting by signing the Anti-Chain Store Act (1936) and the Retail
Price Maintenance Act (1937). Boyd 150-167)
Poor people suffered from other high-minded New Deal policies like the Tennessee
Valley Authority monopoly. Its dams flooded an estimated 750,000 acres, an area about the size
of Rhode Island, and TVA agents dispossessed thousands of people. poor black sharecroppers,
who did not own property, did not receive compensation. (Cole and Ohanian 779-816)
The intent of the New Deal might not have intended to harm millions of poor people,
prolong depression made it harder for private organizations to survive, none the less that is what
happened. We should evaluate government policies based on their actual consequences, not
good intentions.
THE NEW DEAL AND ITS CONTINUED INFLUENCE ON ECONOMIC POLICY 16
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