New Deal

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 during the Great Depression.

(For an annotated list of New Deal measures see the addendum subpage)

(For the sequence of New Deal legislative measures see the timelines subpage)

Origins

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

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 return the country to prosperity by direct government intervention in its economy. It included programmes of financial assistance to banks and mortgage-lenders, subsidies to farms and busineses, the encouragement of trade union membership, and the maintenace of wage levels.

The Reform component included the creation of the Federal Deposit Insurance Corporation, which had the immediate purpose of restoring confidence in the country's banks and the longer term purpose of regulating their conduct; and the setting up of the Securites and Exchange Commission to regulsate other parts of it financial system.

A review of the programs

Emergency measures

The "Bank Holiday" and the Emergency Banking Act

The exceptionally severe US 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 After the President's four-day closure of the banking system he put before Congress the Emergency Banking Act much of which had been drafted by officials of the previous administration. It provided for the reopening sound banks under Treasury supervision, and made provision for substantial federal loans to those that. 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. (Their depositors eventually received 85 cents on the dollar of their deposits.) Despite Presidential opposition, Congress also created the Federal Deposit Insurance Corporation which insured deposits for up to $5,000, - and which put an immediate stop to the plague of "runs" on banks.

The 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), Congress passed the Economy Act which cut the salaries of government employees and cutting pensions to veterans by 40 percent, and reduced government expenditure by about $500 million a year.

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. and although there had by then been a major reduction in level of unemployment even then amounted to 12.5% of the working population.)

Other programmes established the concept of a minimum wage, created insurance for the unemployed, sick and old, established healthcare supprt 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 industy. The first Agricultural Adjustment Act, which was passed enacted on May 12, 1933, created the Agricultural Adjustment Administration. This agency imposed negotiated limits on the production of corn, cotton, dairy products, hogs, rice, tobacco, and wheat, and compensated farmers from funds raised by a tax on food processing. It also ordered crops to be destroyed and livestock to be slaughtered. Over the next three years, food prices rose, and farm incomes increased significantly A Gallup Poll printed in the Washington Post revealed that a majority of the American public opposed the AAA. Several other agencies were also introduced to help the farming community, 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) , that had been established by the National Industrial Recovery Act, and the Tennessee Valley Authority . 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..

Industrial policies

The principal features of the industrial policies adopted were the stimulation of production in commercial organisations by the funding of "public works" projects, the reduction of deflation by stabilisation of prices and wages. In pursuit of the latter objective, New Deal agencies encouraged collusive agreements to refrain from price competition and the strengthening of the bargaining power trade unions in order to improve their wage-bargaining ability. The principal enabling legislation for those policies was the National Industrial Recovery Act, and its main implementing agencies were the Public Works Administration, the National Planning Board and the National Recovery Agency. (When the "National Industrial Recovery Act was declared unconstitutional by the Supreme Court, it was replaced by the National Labor Relations Act - known as the "Wagner Act" - in order to continue the work of strengthening trade union power.)

To prime the pump and cut unemployment, the NIRA created the Public Works Administration (PWA), a major program of public works. From 1933 to 1939 PWA spent $6 billion with private companies to build 34,500 projects, many of them quite large.

Johnson called on every business establishment in the nation to accept a stopgap "blanket code": a minimum wage of between 20 and 40 cents an hour, a maximum workweek of 35 to 40 hours, and the abolition of child labor. Johnson and Roosevelt contended that the "blanket code" would raise consumer purchasing power and increase employment.

Roosevelt nationalized unemployment relief through the Works Progress Administration (WPA), headed by close friend Harry Hopkins. It created hundreds of thousands of low-skilled blue collar jobs for unemployed men (and some for unemployed women and white collar workers).

Constitutional implications

Objections

By 1934, the Supreme Court began declaring significant parts of the New Deal unconstitutional. The programs were quickly fixed to pass muster, but in 1937 Roosevelt stunned the nation by a surpise proposal to pack the Supreme Court by adding five new justices. The proposal failed and Roosevelt permanently alienated many conservative Democrats; however the Supreme Court started upholding New Deal laws. Justices then started retiring, allowing Roosevelt to selected a majority of the Court. By 1942, the Supreme Court had almost completely abandoned its "judicial activism" of striking down congressional laws. The Supreme Court ruled in Wickard v. Filburn that the Commerce Clause covered almost all such regulation allowing the necessary expansion of federal power to make the New Deal "constitutional".

On May 27 1935, the NRA was found to be unconstitutional by a unanimous decision of the U.S. Supreme Court in the case of Schechter v. United States.

In 1936, the Supreme Court declared the AAA to be unconstitutional, stating that "a statutory plan to regulate and control agricultural production, [is] a matter beyond the powers delegated to the federal government..." The AAA was replaced by a similar program that did win Court approval. Federal regulation of agricultural production has been modified many times since then, but together with large subsidies it is still in effect in 2007.

Defeat: Court Packing and Executive Reorganization

Roosevelt, however, emboldened by the triumphs of his first term, set out in 1937 to consolidate authority within the government in ways that provoked powerful opposition. Early in the year, he asked Congress to expand the number of justices on the Supreme Court so as to allow him to appoint members sympathetic to his ideas and hence tip the ideological balance of the Court. This proposal provoked a storm of protest.

In one sense, however, it succeeded; Justice Owen Roberts, switched positions and began voting to uphold New Deal measures, effectively creating a liberal majority in West Coast Hotel Co. v. Parrish and National Labor Relations Board v. Jones & Laughlin Steel Corporation thus departing from the Lochner v. New York era and giving the government more power in questions of economic policies. Journalists called this change "the switch in time that saved nine." Recent scholars have noted that since the vote in Parrish took place several months before the court-packing plan was announced, other factors, like evolving jurisprudence, must have contributed to the Court's swing. The opinions handed down in Spring 1937, favorable to the government, also contributed to the downfall of the plan. In any case, the "court packing plan," as it was known, did lasting political damage to Roosevelt and was finally rejected by Congress in July.

At about the same time, the administration proposed a plan to reorganize the executive branch in ways that would significantly increase the president's control over the bureaucracy. Like the Court-packing plan, executive reorganization garnered opposition from those who feared a "Roosevelt dictatorship" and it failed in Congress; a watered-down version of the bill finally won passage in 1939.

Political implications

Roosevelt's energetic public personality--"the only thing we have to fear is fear itself," and his "fireside chats" helped restore confidence.

Fiscal Conservatism

The New Deal tried public works, farm subsidies and other devices to reduce unemployment, but FDR never completely gave up trying to balance the budget.

Fiscal conservatism was a key component of the New Deal, as Zelizer (2000) demonstrates. It was supported by Wall Street and local investors and most of the business community; mainstream academic economists believed in it, as apparently did the majority of the public. Conservative southern Democrats, who favored balanced budgets and opposed new taxes, controlled Congress and its major committees. Even liberal Democrats at the time regarded balanced budgets as essential to economic stability in the long run, although they were more willing to accept short-term deficits. Public opinion polls consistently showed public opposition to deficits and debt. Throughout his terms, Roosevelt recruited fiscal conservatives to serve in his administration, most notably Lewis Douglas the Director of Budget from 1933 to 1934, and Henry Morgenthau Jr., Secretary of the Treasury from 1934 to 1945. They defined policy in terms of budgetary cost and tax burdens rather than needs, rights, obligations, or political benefits. Personally the president embraced their fiscal conservatism. Politically, he realized that fiscal conservatism enjoyed a strong wide base of support among voters, leading Democrats, and businessmen. On the other hand there was enormous pressure to act–and spending money on high visibility programs attracted Roosevelt, especially if it tied millions of voters to him, as did the WPA.

The Economy Act of 1933, passed early in the Hundred Days, was Douglas' great achievement. It reduced federal expenditures by $500 million, to be achieved by reducing veterans’ payments and federal salaries. Douglas cut government spending through executive orders that cut the military budget by $125 million, $75 million from the Post Office, $12 million from Commerce, $75 million from government salaries, and $100 million from staff layoffs. As Freidel concludes, "The economy program was not a minor aberration of the spring of 1933, or a hypocritical concession to delighted conservatives. Rather it was an integral part of Roosevelt's overall New Deal." Revenues were so low that borrowing was necessary (only the richest 3% paid any income tax before 1942.) .

Morgenthau shifted with FDR, but at all times tried to inject fiscal responsibility; he deeply believed in balanced budgets, stable currency, reduction of the national debt, and the need for more private investment . The Wagner Act met Morgenthau’s requirement because it strengthened the party’s political base and involved no new spending. In contrast to Douglas, Morgenthau accepted Roosevelt’s double budget as legitimate–that is a balanced regular budget, and an “emergency” budget for agencies, like the WPA, PWA and CCC, that would be temporary until full recovery was at hand. He fought against the veterans’ bonus until Congress finally overrode Roosevelt’s veto and gave out $2.2 billion in 1936. His biggest success was the new Social Security program; he managed to reverse the proposals to fund it from general revenue and insisted it be funded by new taxes on employees. It was Morgenthau who insisted on excluding farm workers and domestic servants from Social Security because workers outside industry would not be paying their way.

A major result of the full employment at high wages was a sharp, permanent decrease in the level of income inequality. The gap between rich and poor narrowed dramatically in the area of nutrition, because food rationing and price controls guaranteed a reasonably priced diet to everyone. Large families that had been poverty-stricken in the 1930s had four or five or more workers, and shot to the top one-third income bracket. Overtime made for huge paychecks in the munitions factories; white collar workers were fully employed too, but they did not receive overtime and their salary scale was no longer much higher than the blue collar wage scale.

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