New Deal

From Citizendium, the Citizens' Compendium
Jump to: navigation, search
This article is developing and not approved.
Main Article
Talk
Related Articles  [?]
Bibliography  [?]
External Links  [?]
Citable Version  [?]
Timelines [?]
Addendum [?]
 
This editable Main Article is under development and not meant to be cited; by editing it you can help to improve it towards a future approved, citable version. These unapproved articles are subject to a disclaimer.

The New Deal was President Franklin Delano Roosevelt's legislative program. As implemented during the 1933-1938 period, it included numerous congressional enactments and presidential orders that were intended to provide economic relief, recovery, and reform. Its purposes were to relieve the suffering of the American people in the throes of the Great Depression, and its execution

(For an annotated list of New Deal measures and institutions see the addendum subpage)
(For the sequence of New Deal legislative measures see the timelines subpage)

Background

Roosevelt first promised "a new deal for the American people" in his acceptance speech at the 1932 Democratic National Convention.

(The background to the New Deal is described in the article on the Great Depression in the United States and its economic implications and international context are described in the article on the Great Depression.)

Overview: the three Rs

The New Deal had three components: relief, recovery, and reform - The Three RS.

The Relief component was intended to put the unemployed to work and help those hardest hit by the depression. It expanded the previous administration's work relief program, and added an extensive further sequence of employment-generating schemes, followed by the introduction of a number of social security and unemployment insurance systems.

The Recovery component was intended to restore confidence in the banks and otherwise to return the country to prosperity by restricting competition, controlling prices and raising real wages, by industrial and farming subsidies, and by infrastructure investment.

The Reform component consisted mainly legislation designed to regulated the conduct of the banks and of the remainder of the financial system.

The New Deal programs

The Financial Sector

The New Deal addressed the financial sector as the first, and probably most important, area for recovery. As the nation was enduring yet another bank crisis at the time of Roosevelt's inauguration, Roosevelt addressed the emergency first with relief measures. Reform measures for both the banking and securities industries followed in June. As recovery measures, these acts were successful in ending the banking crisis and restoring public confidence in U.S. banks.

"Bank Holiday" and the Emergency Banking Relief Act

The exceptionally severe banking crises of 1931-33 led to the failure of large numbers of banks and by March 1933 many of the survivors were on the point of closing their doors to depositors.[1] Just one day into his presidency, Roosevelt declared a "bank holiday," effectively putting all financial transactions to a halt. Four days later, when Congress convened, it passed the Emergency Banking Relief Act in just seven hours. Much of the law had been drafted by Hoover administration officials and provided for reopening sound banks under Treasury Department supervision. Three-quarters of the remaining banks in the Federal Reserve System reopened within the next three days and currency and gold flowed back into them within a month, thus stabilizing the banking system.

Economy Act

As a result of pressure from "deficit-hawks" among its members (who feared that the government's would cause a large departure from the President's election promise of a balanced budget) as well as being a plank in the Democratic Party's 1932 campaign platform, Congress passed the Economy Act which cut the salaries of government employees and cutting pensions to veterans and reduced government expenditure by about $500 million a year.

Banking Act

Many Americans believed that the financial system needed reform and regulation in order to preserve public confidence and maintain economic stability. The Banking Act of 1933 created the Federal Deposit Insurance Corporation which insured individual depositors for up to $5,000. Banks and thrifts need not have been member of the Federal Reserve System in order to participate. The Banking Act also incorporated the Glass-Steagall Act of 1933 which sought to further protect commercial depositors by prohibiting commercial banks from engaging in the more risky activity of investment banking. Lastly, the Banking Act created the Federal Open Market Committee which gave to the Federal Reserve Board of Governors greater powers over monetary policy.

Federal Securities Act

The Federal Securities Act required that financial information in stocks and bonds be fully disclosed. This was at first regulated by the Federal Trade Commission but Congress later created the Securities and Exchange Commission to regulate this market.


Relief programs

The administration launched a series of programmes and agencies to provide work for the unemployed, the largest of which were the Civilian Conservation Corps, the Civil Works Administration, the Federal Emergency Relief Administration the National Youth Administration, and largest of all, the Works Progress Administration (WPA). (The numbers employed by last-mentioned reached 3.3 million in November 1938.[2] and although there had by then been a major reduction in level of unemployment even then amounted to 12.5% of the working population[3].)

Other programmes established the concept of a minimum wage, created insurance for the unemployed, sick and old, established healthcare support systems, and abolished child labor. However, it is often claimed that the most important of the relief measures that were introduced was the Social Security Act of 1935.

Recovery programmes

The Farm Programs

Several measures were introduced to arrest the fall in agricultural prices that had been causing hardship in the country's farming industry. The first Agricultural Adjustment Act, which was passed on May 12, 1933, created the Agricultural Adjustment Administration. This agency negotiated restrictions on the production of corn, cotton, dairy products, hogs, rice, tobacco, and wheat, and compensated farmers for the crops and livestock that they did not produce from funds raised by a tax on food processing. Since the law went into effect after the 1933 crops had been sown and animals born, the agency had to order that crops be destroyed and livestock slaughtered in order to meet the 1933 production restrictions.

In 1935, the Supreme Court in United States v. Butler ruled the Agricultural Adjustment Act unconstitutional for having one segment of the population directly supported by taxes paid by a different segment. But as this program was working to improve farm profitability, Roosevelt and Congress rewrote the law to meet the Court's scruples. During the program's first three years because of the restrictions on supply, food prices rose and farm incomes increased significantly. The Agricultural Adjustment Act has not been repealed by Congress and has been many times amended, the latest being in the 1990s.

In spite of the success of the program for addressing farm profitability, a Gallup Poll printed in the Washington Post revealed that a majority of the American public opposed the AAA.[4]

Several other agencies were also introduced to help farmers and rural America, including the Resettlement Administration, the Farm Security Administration, the Rural Electrification Administration, and the Tennessee Valley Authority. The government also sponsored rural welfare projects such as the provision of school lunches, the building of new schools, the opening of roads in remote areas, and the transfer of marginal lands to national forests.

Infrastructure Projects

A number of infrastructure projects were created by the Public Works Administration (PWA) [5], that had been established by the National Industrial Recovery Act, and the Tennessee Valley Authority [6]. By June 1934 the Public Works Administration had created over 13,000 federal projects and over2,000 non-federal projects, including rural electrification, canals, tunnels, bridges, highways, streets, sewage systems, and housing areas, as well as hospitals, schools, and universities.[7].

Industrial Policies

The cornerstone of New Deal industrial policy was the National Industrial Recovery Act (NIRA). This law followed the same logic that underpinned the farm programs: excessive competition and overproduction was driving prices down and making producers unprofitable. Business unprofitably lowered wages and employment, which, in turn, reduced demand.[8] To reverse this situation, the NIRA encouraged collusive agreements to refrain from price competition and to strengthen the bargaining power of labor unions.

To manage the collusive agreements among business, the NIRA created the National Recovery Agency (NRA). The NRA worked with business trade associations to develop codes of production for each industry. These codes set production and price limits, quality levels, and other measures for products. Businesses were also asked to accept a "blanket code" covering all industries which set a minimum wage of between 20 and 40 cents an hour, and a maximum working week of 35 to 40 hours. By 1934, National Recovery Agency's codes covered over 500 industries, and nearly 80 percent of private, non-agricultural employment.

NIRA also established the Public Works Administration to employ millions of workers not finding jobs in industry. The NIRA's section 7(a) also required businesses to recognized labor unions when workers organized them and to negotiate collective bargaining agreements with them.

On May 27, 1935, the Supreme Court ruled in Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935) that the National Industrial Recovery Act was an unconstitutional delegation of legislative power, mainly because of Congress had delegated its lawmaking power to NRA to write national economic policy and because of its suspension of the antitrust laws. President Roosevelt objected to the Court’s decision, declaring that "The fundamental purposes and principles of the NIRA are sound. To abandon them is unthinkable. It would spell the return to industrial and labor chaos."

However, in practice the NIRA was an abysmal failure. The trade associations did not write fair and impartial production codes aiming towards overall industrial recovery. Since many trade associations were led by single dominant businesses, the codes tended to favor them to the detriment of the smaller and less powerful producers, and the NRA was powerless to redress this situation. Additionally, some major manufacturers, such as the Ford Motor Company, simply refused to participate at all. Thus when the law was declared unconstitutional and in spite of his public protestations, Roosevelt proposed no wholesale replacement for the act as he had done for the AAA.

Some other aspects of the act, however, were successful to Roosevelt's eyes. As a partial replacement for Section 7(a), Congress passed the National Labor Relations Act also known as the "Wagner Act" which made negotiations with labor unions compulsory, and created the National Labor Relations Board with the duty to enforce the provisions of the Act. In 1938, Congress passed the Fair Labor Standards Act, which created a minimum wage and standard work hours.

The effects of the New Deal programs

Social implications

It is widely accepted, however, that - in the short term, at least - the New Deal averted, a great deal of poverty-induced suffering. Before the creation of the New Deal, America did not have a national social security system such as were then common in Europe, but only scattered locally-administered provisions comparable to the Elizabethan poor law [9]. By 1933, the incomes of millions of American families had fallen below subsistence level. and but for New Deal relief, many would have died of starvation. Objective evidence on the subject is scarce, but studies using such statistics as had been available at the time suggest that the New Deal raised fertility rates, reduced death rates [10] and crime rates [11] compared with what would have happened without it.

Political implications

The New Deal's constitutionality

The rationale of the National Industrial Recovery Act, in particular implied the permanent [12] abandonment of the existing system of free-market capitalism. It encountered bitter opposition by the business community, and it was frequently challenged as unconstitutional.

In 1935, in the landmark case of Schechter Poultry Corp. v. United States,[13] the Supreme Court ruled unanimously that the National Industrial Recovery Act was an unconstitutional delegation of congressional authority. The following year, in United States v. Butler,[14] it declared the Agricultural Adjustment Act of 1933 to be "a matter beyond the powers delegated to the federal government." In addition, on the same day that it handed down the Schechter decision, the Court ruled against Roosevelt's firing of a Federal Trade Commission official Hoover had appointed in the case of Humphrey's Executor v. United States.[15] While this was not a ruling on the constitutionality of any New Deal initiative directly, it undermined the program's assumption of an expansive role for the federal executive branch and threatened the president's capacity to press forward with his programmatic agenda.

In 1937, President Roosevelt responded with a proposal to "pack" the Supreme Court by adding five new justices. The court packing proposal failed, but the Court subsequently began upholding New Deal legislation, and by 1942 it had nearly abandoned its earlier judicial activism.

Economic implications

Recovery

The extent to which the New Deal hastened or hampered America's recovery from the Great Depression is a matter of continuing controversy. There are, nevertheless, a few aspects of the question on which there is some semblance of a consensus. For example, few would now question the proposition that the restoration of confidence in the banking system was a necessary condition for recovery, or the success of Roosevelt's actions in that respect. But there is evidence to suggest that the effect of the National Industrial Recovery Act was to delay recovery [8] by introducing a seriously damaging reinforcement into the "stickiness" of wage-determination. Opinions differ concerning the effectiveness of the New Deal's fiscal stimulus, but since that stimulus was in any case, small by comparison with the downturn [16], that question is not now considered to be of overwhelming importance compared with the other issues that arise.


(For a more detailed examination of the economic consequences of the New Deal, see the article on the Great Depression, and its Tutorials subpage [2] and for a summary of the relevant economic statistics see the Tutorials subpage of the article on the Great Depression in the United States [3].)

References

  1. for details, see "Bottom" in Time Magazine (March 13, 1933) online at [1]
  2. According to Nancy Rose' Put to Work.
  3. Darby, Michael R.Three and a half million U.S. Employees have been mislaid: or, an Explanation of Unemployment, 1934-1941. Journal of Political Economy 84, no. 1 (1976): 1-16.
  4. Barry Cushman, Rethinking the New Deal Court (New York: Oxford University Press, 1998), 34.
  5. PWA - Public Works Administration,The Columbia Encyclopedia, Sixth Edition, 2001-05]
  6. TVA - Tennessee Valley Authority: From the New Deal to a New Century]
  7. McJIMSEY, George. The Presidency of Franklin Delano Roosevelt, American Presidency Series. University Press of Kansas, April 2000. ISBN 978-0-7006-1012-9
  8. 8.0 8.1 Harold L. Cole, "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," Federal Reserve Bank of Minneapolis Research Department Staff Report XXX, February 2003.
  9. James Patterson: The Welfare State in America, 1930-1980, British Association for American Studies 1981
  10. Price Fishback, Michael Haines, and Shawn Kantor: Births, Deaths, and New Deal Relief During the Great Depression, NBER Working Paper 11246, September 2002
  11. Ryan Johnson, Shawn Kantor and Price V. Fishback: Striking at the Roots of Crime: The Impact of Social Welfare Spending on Crime During the Great Depression. NBER Working Paper 12825, January 2007
  12. The President introduced it as a change "for all time" as reported in the article on the National Recovery Administration
  13. 295 U.S. 495 (1935)
  14. 297 U.S. 1 (1936)
  15. 295 U.S. 602 (1935)
  16. Paul Krugman: New Deal economics, New York Times February 20, 2009