President Franklin Delano Roosevelt assumed office at a time when the United States was suffering the worst economic downturn in the history of the industrialized world, the Great Depression. The downturn went from bad to worse under the previous administration of Herbert Hoover, which had failed miserably to enact policies to solve the problem.
By the time Roosevelt came into power, unemployment was sky high at 24.9 % with an estimated 15 million workers laid off. Half of the country’s banks had failed in the previous four years; despair was widespread and national morale had never been lower. In his inaugural address to the nation, Roosevelt proclaimed that the government would do anything in its power to help ordinary Americans, boldly declaring,
“The only thing we have to fear is fear itself.”
True to his word, Roosevelt passed sweeping reforms called the New Deal, which redefined the role of the Federal Government in the lives of ordinary Americans and transformed the way Governments respond to an economic crisis. Many of the New Deal’s programs still continue today.
The Hundred Days
FDR’s New Deal policies followed the Keynesian Economic theory, which says that the Government should spend more and increase demand to boost growth. The main tools of this theory are increased government spending on infrastructure and providing unemployment benefits.
The first hundred days of the Roosevelt Administration saw a flurry of legislative activity the likes of which had never been witnessed before. Over 15 major bills were passed through Congress in one of the most intense periods of lawmaking in history.
The very next day of his inaugural address, Roosevelt declared a 4 day banking holiday to prevent people from withdrawing their money from banks. Due to the stock market crash of 1929, Banks incurred huge losses since more than 90% of them had investments in the stock market. The situation worsened as many customers started to withdraw their deposits skeptical of the safety of their assets. The contagion of fear spread and soon banks had to liquidate their assets and holding to pay off their customers, as a result, Banks were left with little in cash reserves and were forced to declare insolvency and shut down.
On the 4 day Bank Holiday, Roosevelt presented the Emergency Banking Act, 1933 in Congress and the House passed the Act in astonishing speed, with a mere 40 minutes of debate. According to the Act, the Treasury Department and the Federal Reserve assessed the financial stability of banks before allowing them to reopen.
This was immediately followed by the signing of the Glass-Steagall Banking Reform Act, 1933. Under this law, the Federal Deposit Insurance Corporation (FDIC) was created, which guaranteed depositors that if their banks would collapse deposits upto $2500 would be refunded by the Federal Government. The Act also restricted banks from recklessly speculating depositor's money in the stock market and other risky investments.
The Security and Exchange Commission (SEC) was also created at this time, requiring companies to file financial statements and make shareholder information public, making investing safer for the general public.
The nation breathed a sigh of relief, knowing their deposits were now safe in the bank. Roosevelt’s closest aide, Raymond Moley, exclaimed that capitalism had been saved in eight days. With the banking crisis resolved and confidence in the credit system restored, Roosevelt began rolling out programs to tackle unemployment.
The administration created the Civilian Conservation Corps (CCC) and the Public Works Administration (PWA) to provide employment. The CCC paid unemployed men to work on reforestation and wildlife conservation projects across the country and the PWA lent funds for public infrastructure projects undertaken during that period.
The Second New Deal
Despite economic growth springing back to life, with the United States registering 10.8% growth in 1934, it wasn’t enough to offset the effects of the Great Depression. Roosevelt then proceeded to launch more aggressive reforms collectively called the Second New Deal.
In April, the Works Progress Administration (WPA) was born, instead of lending funds to infrastructure projects like the Public Works Administration (PWA), the WPA directly involved the Federal Government launching infrastructure projects, over $11 billion were spent on 250,000 infrastructure projects and employed 8.5 million.
The most consequential of these acts was the Social Security Act, 1935, which continues to provide pension and unemployment insurance to the elderly and low-income households to this date, and the Fair Labour Standards Act, 1938. The FLSA was a landmark in the United States social development that banned oppressive child labor, set the hourly minimum wage at 25 cents an hour, and maximum workweek at 44 hours.
Behind the Roosevelt Administration's sweeping reforms was the Brain Trust, a group of advisors to FDR. Raymond Moley, Rexford G Tugwell, and Adolph A. Berle, all professors at Columbia University were principal members and advised Roosevelt on the various economic and social problems facing the nation and the possible public policies to combat those.
The Controversy Surrounding the New Deal
The New Deal programs did not pass unscathed, drawing flak from the Republic Party and the liberal wing of the Democrats led by Senator Huey P. Long of Louisiana, who argued that the New Deal had done little to expand welfare to the average American. The conservative Republicans, on the other hand, led by ex-President Herbert Hoover claimed that the New Deal was downright hostile to economic growth and businesses, and would destroy the very foundation and fabric on which the American society was built. Hoover did not share the enthusiasm of fellow Americans, declaring it as Socialist and fascistic, that it would lead the country on a ‘march to Moscow’.
Although Hoover may have been exaggerating, the consensus view in the conservative wing was that FDR had expanded the Federal government’s role beyond what was allowed in the constitution, and believed in Small government, that is, the limited government intervention in certain areas of public policy and private sector.
Franklin Roosevelt often clashed with Supreme Court rulings, which struck down the National Recovery Administration and the Agricultural Adjustment Administration (AAA) as unconstitutional. The NRA worked to improve wages and working hours and prevented businesses from following unfair cutthroat tactics such as reducing prices.
In the 1930s, agricultural prices had fallen to all-time lows due to overproduction, such that farmers would incur losses if they planted their crop. The AAA sought to balance the supply of agricultural products by creating artificial scarcity to prop up prices. Farmers were dissuaded from planting more than a certain amount and were paid to do so.
The members of the Supreme Court including Chief Justice Charles Evans Hughes (center, front row) ruled against President Franklin Delano Roosevelt's New Deal programs.
(MPI / Getty Images)
Four Supreme Court Justices, Pierce Butler, James McReynolds, George Sutherland, and Willis Devanter referred to in the press as the Four Horsemen of Apocalypse worked together to form a conservative majority in court to strike down the NRA and AAA, some of the most significant acts passed by the administration and Congress and other smaller programs.
Legacy of the New Deal
The degree of success attained by the New Deal is something that historians and economists continue to argue over today. When the Second New Deal rolled out, economic growth touched 8.9% in 1935 and 12.9% in 1936 and unemployment fell from 25% in the spring of 1933 to 15% in 1937.
While skeptics argue that the New Deal did not work as the Great Depression lasted for ten years (1929-39) and it was the United States participation in World War II that eventually pulled the economy out of recession, as factories and workers were mobilized to produce military equipment propping up Industrial output and unemployment dropped. However, one crucial fact missed here, is that despite growth in Gross Domestic Product (GDP), the standard of living of the people did not go up.
Nevertheless, before the New Deal, there was no efficient regulation of the US economy, and between the 132 years from 1797 to 1929, the country underwent 33 major downturns, constitution 60 of the 132 years. In contrast, it has been 75 years since the end of the Second World War, and in that time, there have only been 11 recessions, impacting merely 10 out of 75 years.
The signature programs of the New Deal, Social Security, Minimum Wage, the Securities and Exchange Commission (SEC), and Federal Deposit Insurance Corporation (FDIC) continue to exist and impact the lives of millions of Americans.
The New Deal resulted in significant changes in the way Americans perceive the roles and responsibilities of the Federal government. People now look towards the Government and expect it to step in, during economic crisis and times of hardship as a matter of social duty.
The Roosevelt administration set a precedent of direct involvement, that continues to this day. The Obama Administration’s American Recovery and Reinvestment Act, 2009, kicked off government spending to the tune of $831 billion in response to the economic recession of 2008. In recent times, the U.S. Government handed out $1200 to American families to stimulate demand as the economy is battered by the ongoing COVID -19 Pandemic.
Written by Arnav Singh