Learning From the New Deal's Mistakes

Any smart historian of the 1930s is a New Deal critic. The Obama administration unquestionably needs to respond more effectively to the current crisis than the Roosevelt administration did to the Great Depression. But not because the "New Deal didn't work," as conservative pundits are now frequently saying -- it did. It didn't go far enough fast enough, and it included some other mistakes from which we can usefully learn, but ignoring its successes will only make things worse.

The most important thing to know about Roosevelt's economics is that, despite claims to the contrary, the economy recovered during the New Deal. During Roosevelt's first two terms, the U.S. economy grew at average annual growth rates of 9 percent to 10 percent, with the exception of the recession year of 1937-1938. As economist Christina Romer (now director-designate of the Council of Economic Advisers) writes, these rates were "spectacular, even for an economy pulling out of a severe recession."

Thus, at the very least, the New Deal did not prevent a "spectacular" rate of recovery. More, we have reason to believe some of Roosevelt's policies enabled it.

For a start, New Deal intervention saved the banks. During Hoover's presidency, around 20 percent of American banks failed, and, without deposit insurance, one collapse prompted another as savers pulled their money out of the shaky system. When Roosevelt came into office, he ordered the banks closed and audited. A week later, authorities began reopening banks, and deposits returned to vaults.

Congress also established the Federal Deposit Insurance Corporation, which, as economists Milton Friedman and Anna Jacobson Schwartz wrote, was "the structural change most conducive to monetary stability since ... the Civil War." After the creation of the FDIC, bank failures almost entirely disappeared. New Dealers also recapitalized banks by buying about a billion dollars of preferred stock.

John Maynard Keynes wrote to Roosevelt in 1938 that these actions were "a prior condition of recovery, since it is no use creating a demand for credit, if there is no supply." Thus, the New Deal made recovery possible.

But we can go even further: New Deal policies not only made recovery possible but got it going. Roosevelt reduced the dollar's value to $35 per ounce of gold (approximately 60 percent of its former value) and, as Romer notes, overseas investment flooded into the country, attracted by these cheaper dollars and stable banks and pushed, as time went on, out of Europe by Hitler's advance. Along with the flood of investment came an increase of durable-goods expenditures and construction -- and private sector jobs.

The increase of jobs also counts as at least a partial success for the New Deal. Excepting 1937-1938, unemployment fell each year of Roosevelt's first two terms. In part, the jobs came from Washington, which directly employed as many as 3.6 million people to build roads, bridges, ports, airports, stadiums, and schools -- as well as, of course, to paint murals and stage plays. But new jobs also came from the private sector, where manufacturing work increased apace.

This basic fact is clear -- unless you quote only the unemployment rate for the recession year 1938 and count government employees hired under the New Deal as unemployed, which conservative commenters have taken to doing. And unless you explain carefully who you're counting as unemployed and why (why, for example, do government road-builders count as unemployed but government file clerks do not?) this is at best cherry-picking and at worst lying.

Still, the New Deal fell far short of perfection. It's quite possible that the economy might have grown even faster than it did and that the 1937-1938 recession might have been averted had Roosevelt avoided some key errors and placed more confidence in fiscal stimulus.

Early on, the New Deal put too much public power in private hands. Conservative critics now focus on the National Recovery Administration, which created government-licensed cartels so that industries could self-regulate. Modern NRA critics have good historical company: Many New Dealers disliked the NRA, and Roosevelt himself eventually admitted it was "pretty wrong." The NRA established boards to set prices, wages, and conditions of work. These boards were supposed to have representatives from management, labor, consumers, and government -- but in practice fewer than 10 percent had labor representatives, even fewer had consumer representatives, and the government representative was normally someone from the ranks of management. One New Dealer noted only two cases when the government enforced codes of behavior on businessmen against their wishes.

As a result, as the historian Andrew Wender Cohen points out, the NRA boards provided legitimacy for businessmen wanting to coerce each other -- as happened when a group of smaller-scale kosher butchers made trouble for the mighty Schechter group -- and generally afforded businessmen an opportunity to collude in price-fixing. Which is why the NRA became unpopular and moribund before the Supreme Court found it unconstitutional early in 1935.

But the case against the NRA is not a case that America would have been better without the New Deal: It is a case that the New Deal would have been better without the NRA -- a position at which many New Dealers had arrived by some time in 1934.

The New Deal also moved too slowly and cautiously to provide fiscal stimulus. Massive public works entered the New Deal pipeline early on with the creation of the Public Works Administration. But these big projects took a long time to plan and start. The Civilian Conservation Corps began immediately with the Roosevelt administration, but it employed only young men. Late in 1933, realizing a need for more immediate aid, Roosevelt created the Civil Works Administration, which directly employed some 4 million Americans on public works projects -- but nervous about establishing a permanent precedent, the administration dissolved the CWA in the spring of 1934, leaving American workers to fend for themselves.

Not until 1935 did Roosevelt inaugurate the Works Progress Administration with the goal of giving jobs to the employable unemployed. And even then he disliked direct federal employment -- he cut WPA jobs in 1937 when signs of recovery began to appear, which was much too soon. As Keynes wrote to him, to act as if recovery were assured when it had only just begun was an "error of optimism," and Roosevelt needed to invest more heavily in public works to avert further disaster.

The New Deal tax code was also unkind to ordinary Americans. Roosevelt largely continued Hoover's tax policy, under which much of the federal revenue derived from excise taxes, especially those on alcohol and tobacco, disproportionately affecting the worse off. The controversial wealth taxes of 1935 affected hardly anyone -- famously, the top bracket captured only John D. Rockefeller -- and not until the war did the income tax structure change significantly.

Overall, the New Deal was never truly Keynesian. Not until 1938 did New Dealers adopt a plan of fiscal stimulus, and then they applied the principle timidly, running too small a deficit to matter. Not until the war did budget deficits and government spending grow large enough to produce results.

When New Deal policies did help workers, they disproportionately benefited white men. Construction jobs went to men as a matter of custom, and benefits went to whites as a matter of politics. Still dependent on segregationists for a national majority, the Democrats of the 1930s often yielded local control of New Deal agencies to Southerners unsympathetic to black laborers. Although the New Deal did help African Americans -- enough to make a difference in their voting, as black voters increasingly backed Democrats -- black Americans did not benefit equally to their white neighbors.

Taking these New Deal successes and failings together, we can learn some clear lessons. The 1930s do not offer a case against government intervention; rather, they provide a case against bad government intervention. Good banking and monetary interventions under Roosevelt replaced bad banking and monetary intervention under Hoover, to good effect. Bad price-fixing policy under Roosevelt (NRA) went away, to be replaced by better recovery measures, which, as Keynes observed, could have worked even better had Roosevelt backed them fully. The war's effects provide good reason to believe that if more public money had been put sooner into working Americans' hands, recovery would have been faster.

The Obama administration has hired policy-makers like Lawrence Summers and Christina Romer who understand these lessons in detail. Perhaps more important, the administration -- unlike Roosevelt, or any of its liberal predecessors -- does not absolutely need the South and its conservative white Southerners for political support.

Finally, this account covers only the Roosevelt administration's record at promoting recovery: In another key area, that of enacting reforms meant to prevent or lessen the impact of future downturns, the New Deal deserves much higher marks. The FDIC, a more flexible Federal Reserve Board, the Securities and Exchange Commission, the legalization of collective bargaining, the National Labor Relations Board, and the minimum wage all began during the New Deal and have had a reasonably good record since then. Further, the public works programs provided not only relief but valuable public investment that, as the historian Jason Scott Smith points out, yielded dividends in economic growth for decades afterward.

Perhaps most important, the New Deal brought Americans federal unemployment and old-age insurance, which not only rendered later downturns less severe but made Americans less dependent on the fickle largesse of their employers, if only ever so slightly. And here, too, the Obama administration might take one final historical lesson: Roosevelt's advisers wanted to establish public health care as part of their program to protect Americans from "economic insecurity" but left it out in anticipation of opposition. Let's have hope this new New Deal can be bolder.

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