Relief, Recovery, Reform:
The Impact of FDR’s New Deal on the US Economy
This paper was written as a part of my English class at Rudbecksgymnasiet in Örebro, Sweden, where we were instructed to write a topic, free of choice, in the field of micro- or macroeconomics. Please note that English is not my primary language. Therefore, I apologize in advance for any linguistic errors.
Most countries in the world suffered from a deep economic depression in the 1930s. The economic crisis first hit the United States, and thereafter, it would spread all around the world. In the American election of 1932, the Democratic candidate, Franklin D. Roosevelt, won the presidency. His message in the presidential campaign was that the government must more actively intervene in economic affairs to increase and stimulate economic activity, which in turn would mitigate the suffering among American citizens. Roosevelt promised a series of programs, projects, and financial reforms that he called The New Deal. This paper describes the background to the crisis, how it developed, and the contents and policies of the New Deal enacted by the Roosevelt Administration. The paper will also discuss how different economists have evaluated the success of the New Deal; that is, if the active government intervention in the economy helped to end the crisis, or if another policy would have been more efficient. This is an important policy question also in the current, ongoing economic crisis in 2022, and therefore a study of the New Deal is of great interest.
Following the First World War, the United States would experience a decade full of economic prosperity and optimism among investors. An increased trend in buying stocks “on margin”[1] and a significant expansion of investment trusts and funds fueled investors to purchase stocks in various American industries, which in turn dramatically drove up the overall prices on the stock market. During the 1920s, the Dow Jones Industrial Average index dramatically increased sixfold — from 63 to 381 points. Between 1925 and 1929, stocks listed on the Dow Jones Index increased in value by over 120% in four years — an average annual growth of over 21% (Bierman, 2008). Abruptly, on “Black Thursday”, October 24th, 1929, prices on American industrial stocks would nosedive. Stocks collapsed by 11.7% just minutes after the opening bell, and the Dow Jones index fell to 230, down 31 points. Over three million individual shares were traded in just the first half hour of the day — overwhelming the stock market exchange. The ongoing chaos would contribute to investors “panic-selling” their stocks, driving down prices on stocks even further. Major industrial companies were dramatically hit; stocks in General Motors lost 15.8%; Standard Oil of New Jersey 20.1%, and AT&T 12.1%. In just 13 trading days following Black Thursday, US stocks lost over 34% of their value, leading to the market hitting its lowest point in American history (Mastracci, 2011).
As a direct consequence of Black Thursday, a severe economic depression hit the United States, later called “The Great Depression”. The main consequence of the economic crisis was a massive increase in the number of unemployed workers. By the time future President Roosevelt would be inaugurated in 1933, approximately 13–14 million Americans — a quarter of the total American workforce — were unemployed. In some major American cities that were dependent on heavy industry, unemployment reached upwards to nearly 75%. Simultaneously, the American Gross Domestic Product (GDP) decreased by 8.5% in 1930, 6.5% in 1931, and plummeted by 13.10% in 1932. Additionally, US exports to Europe and Asia fell by over 50% at the turn of the next decade (“Great Depression”, 2022; Frank and Bernanke, 2007).
Shortly after the Depression hit, incumbent Republican president Herbert Hoover doubled federal spending on public works projects to stimulate employment. Additionally, the President ordered all state governors to expand public work projects in each individual state. Moreover, on January 22, 1932, the Reconstruction Finance Corporation was established to distribute “emergency loans” to banks, agricultural organizations, and industrial corporations that were on the verge of bankruptcy. However, Hoover refused to use the power of the federal government to regulate the stock market, fix prices, and distribute direct benefits for citizens, which he argued would be a step towards a socialist economic system. (National Archives and Records Administration, 2022).
As the economic impacts of the Depression became more noticeable, the American public called for an increase in federal intervention in the economy, which Hoover refused. Hoover’s unwillingness to intervene in the economy would eventually lead to his downfall in the election of 1932. The Democratic Party’s candidate, Franklin Delano Roosevelt, won the election by a landslide — winning 42 out of 48 states and 57.4% of the popular vote. In his acceptance speech during the Democratic Convention of 1932, Roosevelt promised to take initiative to alleviate Americans affected by the ongoing economic crisis, proclaiming that:
“Throughout the nation men and women, forgotten in the political philosophy of the Government, look to us here for guidance and for more equitable opportunity to share in the distribution of national wealth. I pledge you; I pledge myself to a new deal for the American people.” (Roosevelt, 1932)
Shortly after being elected president, Roosevelt began working on his collection of policies he would call the New Deal. Roosevelt would summarize the goals of his New Deal into three R’s: Relief, Recovery, and Reform. The first objective, Relief, was to immediately alleviate unemployed workers and the impoverished by providing them with temporary economic aid and jobs through government programs. Numerous governmental agencies were established to provide skilled and unskilled workers with jobs to stimulate the US economy. One such example was the Civilian Conservation Corps, which provided manual labor jobs for three million young adolescent men whose families had financial difficulties during the Depression. Another example was the Public Works Administration, which supplied employment for laid-off construction workers. The agency focused on building large-scale works intended for public use, such as schools, bridges, and hospitals (Höjer, 1957, p. 291–296).
The second objective of the New Deal, Recovery, was to make the American economy grow and recover to pre-Depression levels. A significant problem that occurred after the Great Depression was a great decrease in the price of crops and livestock, which threatened the profitability of the farming industry. The Roosevelt Administration took many measures to inflate the costs of farming goods, one of which was the creation of the Agricultural Adjustment Administration (AAA), which was created in conjunction with the Agricultural Adjustment Act of 1933. The AAA set up restrictions on the production of crops and livestock and subsided farmers to burn down a portion of their produce to decrease supply. Another measure that the Roosevelt administration took was the ratification of the National Industrial Recovery Act of 1933, which sought to stimulate the production of industrial goods and decrease the supply of common consumer goods to increase prices (Whaples & Parker, 2013, p.8).
The third and final objective of the New Deal, Reform, was to implement appropriate legislation to reform the banking and financial systems to prevent a similar economic crisis to happen in the future. After the stock market crash of 1929, more than 9000 banks in the United States failed and filed for bankruptcy, mainly because there was little to no regulation on the practice of banking, making the industry rather unstable. Immediately after taking office, Roosevelt signed several bills to stabilize the banking system, and to prevent future commercial banks from failing. On March 9th, 1933, the Emergency Banking Act was passed in Congress, which enforced an annual four-day inspection, or “bank holiday”, of all banks in the United States as an attempt to shore up public confidence in commercial banks. To prevent future “bank runs”[2], the Federal Deposit Insurance Corporation was created on June 16th, 1933, which guaranteed deposit savings for every American. On June 6th, 1934, the Securities and Exchange Commission was created to regulate the American stock market exchanges — especially the Wall Street Exchange — and to prevent stock market frauds and abuses (“The New Deal”, 2022).
The Roosevelt Administration’s New Deal represented a major shift in domestic policy in the United States, as the role and power of the federal government expanded more than in any other era in American history. The lasting impacts and legacy of Roosevelt’s policies, such as tighter control over the money supply and banking system; economic intervention and price control in the agricultural industry, and the birth of the welfare state, are still noticeable in the United States to this day. But the question of whether Roosevelt’s New Deal policies helped deal with, prolonged, or worsen the Great Depression, is still an ongoing debate.
In 1995, a survey conducted by Professor Robert Whaples of Wake Forest University found that 51% of academic economists of the Economic History Association disagreed with the statement “taken as a whole, government policies of the New Deal served to lengthen and deepened the Great Depression”, while 49% of recipients agreed. Whaples concluded that Roosevelt’s New Deal policies remain a divided issue among economists mainly due to the sheer complexities of measuring its effects on the American economy (Whaples, 1995, p. 139–154). Prominent economist, libertarian political commentator, and author Dr. Thomas Sowell argues that the Keynesian New Deal policies failed at solving unemployment and prolonged the overall economic impact of the Depression. In an article written in the Washington Examiner, Sowell draws a comparison between federal intervention in the economy after the stock market crash of 1929 and 1987:
“The 1929 stock market crash was followed by the most catastrophic depression in American history, with as many as one-fourth of all American workers being unemployed. The 1987 stock market crash was followed by two decades of economic growth with low unemployment.”
Sowell claims that the Reagan administration’s decision to cut taxes, deregulate businesses, and let the free market recover without any governmental intervention — policies completely contrary to what the Roosevelt administration implemented in the 1930s — was the main reason why the American economy recovered quickly after the crash of 1987 (Sowell, 2010). On the contrary, Professor Steven Conn of Miami University argues that the New Deal programs helped alleviate hundreds of thousands of American workers and greatly improved American infrastructure and transportation. Conn continues by arguing that the agencies created as part of the New Deal policies, such as the SEC and FDIC, contributed to a “set of long-term structural changes to the economy whose impact lasted well beyond the Great Depression” (Conn, 2009).
To conclude, it is evident that there is no consensus among economists on whether the New Deal policies implemented in the 1930s to combat the Great Depression were successful or not. It is also evident that it is highly disputable among economic scholars whether the New Deal policies are appropriate in today’s society as countermeasures towards economic crises.
Footnotes
[1] Buying stocks “on margin” is a high-risk practice where investors loan money from a bank or brokerage to invest in securities, stocks, or bonds. This, in turn, amplifies return — gains and losses — on investments (Chen, 2021).
[2] A “bank run” occurs when many customers withdraw their deposits from a bank simultaneously, often in fear of default.
Bibliography
Books
Frank, R., & Bernanke, B. (2007). Principles of Macroeconomics (3rd ed). McGraw-Hill.
Höjer, T. (1957). Nya Tidens Världshistoria. Svenska Bokförlaget.
Whaples, R & Parker, R. (2013). Handbook of Modern Economic History, Routledge.
Journals
Whaples, R. (1995). “Where Is There Consensus Among American Economic Historians? The Results of a Survey on Forty Propositions”. The Journal of Economic History, 55(1), 139–154. Retrieved October 27, 2022, from http://www.jstor.org/stable/2123771
Online Sources
Bierman, H. (March 26, 2008). The 1929 Stock Market Crash. Economic History Encyclopedia. Retrieved October 19, 2022, from http://eh.net/encyclopedia/the-1929-stock-market-crash/
Chen, J. (April 21, 2021). Buying on Margin. Investopedia. Retrieved October 19, 2022, from https://www.investopedia.com/terms/b/buying-on-margin.asp
Conn, S. (2009) “Guess What? The New Deal Worked!” Origins: Current Events in Historical Perspective. Retrieved November 5, 2022, from https://origins.osu.edu/history-news/guess-what-new-deal-worked?language_content_entity=en.
“Great Depression”. (October 19, 2022). In Wikipedia. Retrieved October 19, 2022, from https://en.wikipedia.org/wiki/Great_Depression
Mastracci, A. (October 24, 2011). “The Great Crash of 1929, some key dates”. Financial Post. Retrieved November 3, 2022, from https://financialpost.com/personal-finance/the-great-crash-of-1929-some-key-dates.
National Archives and Records Administration (2022) “The Great Depression”. Hoover Presidential Library. Retrieved November 3, 2022, from https://hoover.archives.gov/exhibits/great-depression
Roosevelt, F.D. (July 2, 1932) “Acceptance Speech at the National Democratic Convention”. Teaching American History. Retrieved November 3, 2022, from https://teachingamericanhistory.org/document/acceptance-speech-at-the-democratic-convention-1932/.
Sowell, T. (2010). The myth of how the Great Depression was resolved. Washington Examiner. Retrieved October 27, 2022, from https://www.washingtonexaminer.com/thomas-sowell-the-myth-of-how-the-great-depression-was-resolved
“The New Deal” (November 4, 2022). In Wikipedia. Retrieved November 5, 2022, from https://en.wikipedia.org/wiki/New_Deal
