Lesson Plan - Get It!
- Economic recessions had been addressed many times before, so what was so "new" about Roosevelt's economic recovery plan, the New Deal?
Great Depression Causes
During the 1920s, Americans began to invest in the stock market more so than ever before. People put their entire life savings into stocks that had been going up and up for an entire decade.
When the stock market crashed in 1929, many Americans lost everything. Those who still had money pulled everything they had out of the banks, which caused financial institutions to collapse entirely.
Because the world economy had come to be so interconnected by 1929, this sent shock waves around the world as well.
Unemployment rose dramatically because companies no longer had the funds to maintain their workforce.
Americans who were still farmers, about 50% at the time, were also decimated. While they may not have lost money in the stock market, global prices for crops fell dramatically due to fewer people being able to afford food.
Drought in the heart of the country in the 1930s aggravated this issue even more, eliminating any source of income for entire states.
It was into this compounded problem that Franklin Delano Roosevelt (FDR) was elected president in 1932.
John Maynard Keynes
Image by Walter Benington, via Wikimedia Commons, is in the public domain.
In the early 1930s, British economist John Keynes developed a unique theory for economic recovery.
Traditionally, when the economy was doing poorly, the government would attempt to spend as little as possible to avoid making the issue worse. Keynes' theory was that spending as much money as possible on social programs would be the most effective way to get the economy out of a depression.
- Would you be willing, as a newly elected president, to use your country as a guinea pig for this new theory?
For FDR, the risk was worth it.
First 100 Days
Image, #47-96:1471 in the Franklin D. Roosevelt Presidential Library & Museum, is in the public domain.
Within only the first few months of Roosevelt's presidency, executive orders established six major relief agencies that fully embodied the teachings of John Keynes.
The combination of these actions, detailed below, was named the New Deal because it was a new approach to economic relief.
Emergency Banking Act
In order to re-establish stability in the American banking system, all banks became insured by the federal government.
This unprecedented intervention by the federal government, while successful in restoring public confidence in banks, was the first major step toward a much more powerful central government than had ever existed in the United States.
Civilian Conservation Corps (CCC)
Image, #48223762(27) in the Franklin D. Roosevelt Presidential Library & Museum, is in the public domain.
On the same day, Roosevelt took steps to arrange for thousands of men to be employed by the federal government to conserve forests and fight forest fires.
This utilized Keynes' idea that the government had to spend more money rather than less. If the government began to employ many Americans, unemployment would also go down and the economy would begin to move again.
Federal Emergency Relief Administration (FERA)
Expanding employment was not enough, so this agency was created to directly feed and clothe the poor.
With $500 million ($10 billion today), soup kitchens were established all over the country. This brought relief to the families who would soon become employed through these other agencies.
Agricultural Adjustment Administration (AAA)
After the crash of the stock market and ensuing financial collapse, prices for all goods began to plummet because everyone who was now unemployed could not afford to buy them.
This administration made sure that, while the prices for food remained low enough for consumers, the farmers who produced it would still receive a fair amount.
It was able to stop the prices of agricultural goods, such as corn and oranges, from plummeting by setting the prices and subsidizing the differences in the market to ensure farmers would earn a manageable income.
National Industry Recovery Act (NIRA)
This act illegalized child labor, which was significantly cheaper than employing an adult. This meant that companies could only afford to hire one adult per household.
The act also allowed companies to earn subsidies for hiring more people. This pushed wages higher and eventually led to more spending in the economy.
Additionally, thousands of men were hired to build bridges, roads, and other infrastructure projects.
Tennessee Valley Authority (TVA)
Image, #48223669(89) in the Franklin D. Roosevelt Presidential Library & Museum, is in the public domain.
Through this agency, as well as the CCC, dams were built on rivers to gain free hydroelectric power as well as to employ thousands of people all over the country.
Second New Deal
In 1935 and 1936, the Second New Deal was added to Roosevelt's reforms. These additions, detailed below, were much more controversial than the actions of the first New Deal.
Because they lost all their savings, older individuals had to keep working. This led FDR to establish a federal retirement plan.
People would pay into Social Security, and that money would go directly to retired individuals. This program saved the older generations from losing their homes and having to go back to work.
Wealth Tax Act
Image, via Wikimedia Commons, is in the public domain.
This act raised the income tax of individuals with an income over $5 million to 79%. Because the nation was so poor, this was only applicable to John D. Rockefeller and was seen as directly targeting his wealth.
While both of these inititives, along with the other aspects of the Second New Deal, helped to add stability and wealth to the economy, they were obviously challenging what would be accepted by the courts.
Image by Nicholas Robbins, #03-46 in the Franklin D. Roosevelt Presidential Library & Museum, is in the public domain.
After these first 100 days, the U.S. government had massively expanded its involvement in the daily lives of Americans.
Having broken away from a powerful central government in England, Americans had avoided expanding federal authority as much as possible. For FDR, the Great Depression gave more than enough reason to abandon this principle.
However, many Republicans saw these moves as brazenly unconstitutional. In the years following these executive orders, many court cases began to challenge the constitutionality of FDR's actions, encouraged even more by the additions of the Second New Deal.
Read The New Deal in Decline, from Digital History, on the many challenges the New Deal faced, and pay attention to what FDR wanted to do in response.
At the time, the ideas to subsidize industries and employ large numbers of people were completely new. And while the nation likely could have recovered without these specific actions, FDR feared the repeal of the entire New Deal.
To prevent that, he wanted to increase the size of the Supreme Court, which would allow him to appoint new Democratic justices. Although this idea was not well received by either political party, by 1941 he had moved the court in line with his political philosophy anyway.
- It was during the 1940s that the U.S. and the world pulled out of the Great Depression, but was it a result of these policies or something even larger?
As we head into the Got It? section, consider the economic impacts of war on an economy.