Another New Deal?

John Moser

January 1, 2009

The state of the economy and the upcoming presidential inauguration have raised inevitable parallels with 1933, a year when another newly-elected Democratic president faced an even bleaker economic landscape. The circumstances have also reignited interest in a subject that previously was of mainly academic interest: Was Franklin Roosevelt’s New Deal good or bad for the American economy?

Liberals contend that the New Deal saved America from ruin, and gave hope to the millions suffering from the Great Depression. They point to a surge in gross national product between 1933 and 1937, and a sharp decline in unemployment during that same period. Consequently, Marc Ginsberg, writing in the Huffington Post, has called on President Obama to demonstrate “FDR-style leadership” in handling today’s economic crisis.

On the other hand, conservatives claim that the New Deal actually prolonged the economic crisis. They note that private investment remained weak throughout the decade, and the failure of Roosevelt’s policies to bring unemployment below 14 percent (roughly twice where it stands today). True recovery, they argue, only began in 1940, by which time FDR had backed away from his domestic agenda. Roosevelt’s policies may have “alleviated pain,” writes Amity Shlaes of the Council on Foreign Relations, “but did not cure the patient.”

Which side is right? Neither, and both.

What is often overlooked in these analyses is that the New Deal encompassed a whole range of policies. Some of these, such as the abandonment of the gold standard and the introduction of FDIC (which FDR initially opposed), were no doubt helpful. Others, such as the National Recovery Administration—which tried to raise prices by reducing production—were disastrous. Still others, such as the Civilian Conservation Corps, which put unemployed young men to work planting trees, probably had little impact on the economy either way.

But behind the various programs, the New Deal was pursuing two competing goals—to bring relief to the unemployed, and to reform American society by reducing the power of big business, which Roosevelt and his advisers believed was to blame for the country’s economic woes.

The former goal led the administration to spend unprecedented amounts on public works, putting millions of men to work through agencies such as the Public Works Administration and the Works Progress Administration. This spending led to massive federal deficits, made a mockery of Roosevelt’s 1932 campaign promise to balance the budget, and probably did little to bring lasting recovery, but for the millions who found employment through these agencies it meant the difference between a steady paycheck and destitution.

The latter goal was more problematic. It certainly made political sense to demonize the wealthy at a time when so many were in distress, and the campaign against big business no doubt helped secure Roosevelt’s landslide reelection in 1936. However, the President’s frequent attacks on “economic royalists,” support for militant labor unions, advocacy of steep tax increases for those in upper-income brackets, and draconian regulations of industry and finance made entrepreneurs and investors nervous about the future of the free-enterprise system. This led them to shy away from launching new ventures and making long-term investments, which was exactly what was needed for real economic recovery.

The continuing weakness of private investment became obvious in 1937 when Roosevelt, believing that the economic crisis was at an end, made deep cuts in federal spending. It was the equivalent of removing the training wheels from a bicycle, and the results were disastrous. GNP dropped 4.5 percent, and unemployment soared to 19 percent. Robert Jackson, head of the anti-trust division of the Justice Department, blamed it on a “strike of capital.” There was a ring of truth to the charge, but it never occurred to Jackson that investors might have had rational reasons for holding on to their cash.

Free-marketeers often claim that recessions are merely temporary and necessary business corrections, and that prosperity will eventually return if government resists the urge to interfere. They may be right, but in the short term economic downturns cause considerable suffering to large numbers of people, and no politician in a democracy can afford to ignore the distress of significant portions of the electorate. The challenge faced by Franklin Roosevelt in the 1930s, and Barack Obama today, is to cushion the blow of the recession without engaging in the sort of class warfare that undermines the confidence of those with money to invest. Roosevelt was far more successful in the former than the latter. Obama has an opportunity to demonstrate whether he can do better.

John Moser is Associate Professor of History at Ashland University, where he is also Associate Director of the Masters in American History and Government program. His latest book, Right Turn: The Transformation of American Liberalism, was published by New York University Press in 2005.