Lessons From The New Deal

Robbie MochrieTo become the President of the United States in 1932, Franklin Roosevelt had to overcome the opposition of the two formidable politicians – Al Smith, the conservative Democrat and former Governor of New York, who had lost the 1928 election, and Herbert Hoover, the progressive Republican who had beaten Smith.Appalled by Roosevelt’s pledge to govern in the interests of the “Forgotten Man” – the ordinary worker who had done his job, paid his taxes and looked after his family, but who, in the calamity of the Great Depression, suddenly found himself without work or money while losing dignity and hope, Smith ran a very effective “Stop Roosevelt” campaign up to the Democratic Party convention in Chicago.Just managing to hold on to his pledged support, Roosevelt finally won the nomination – and then showed that he would govern in a new way by immediately flying to Chicago to give a great acceptance speech with its final line, “I pledge myself, I pledge you, to a New Deal for the American People.”That was a slogan, not a promise. With soaring rhetoric which allowed him to stand above many policy contradictions, Roosevelt built and held together a disparate coalition: racist Southerners, conservative Northern bankers, bankrupt Western farmers, jobless urban workers, progressive Democrats who were suspicious of big business, and progressive Republicans, who wanted government to embrace it. Undone by his failure to arrest decline, Hoover simply could not match Roosevelt’s ability to inspire confidence that change was possible.At his inauguration, declaring that “We have nothing to fear except fear itself,” he was still projecting hope – and still trying to work out what the New Deal should involve. The Squire of Hyde Park - soon called "a traitor to his class" - had a long-standing interest in agriculture and conservation. The first substantial act was the creation of the Civilian Conservation Corps. In the frenzy of the First Hundred Days, that was followed by legislation promoting rural development and stabilising agricultural markets.So, the New Deal was Green from its inception.Then, setting aside questions of how to stop banks from failing and making Wall Street honest enough to attract substantial investment, the immediate issue was how government should engage with industry and labour.His Labor Secretary, Frances Perkins knew that FDR never understood trade unions – he thought that they were just a modern form of trade guilds. But in Perkins and Senator Robert Wagner, who promoted the National Industrial Relations Act, he had people who understood their power as a counterbalance to business interests.In 1933, with a pressing need to increase business confidence and restore production, which had collapsed over the previous three years, Roosevelt strongly backed attempts to form a partnership with business. Feted in 1933, the work of the National Recovery Administration was largely excoriated in 1934 and then declared unconstitutional by the Supreme Court in 1935.FDR, an ever flexible, patient experimenter, was ready with a Second New Deal. He had already authorised Perkins and Wagner to work on important legislation covering social security, workplace rights and work relief. He had secured a $5bn appropriation for the new Works Progress Administration, which Harry Hopkins would lead. He agreed with Treasury Secretary, Henry Morgenthau, that it would be possible to carry on running budget deficits into 1936. And he used his closest adviser outside the administration, Harvard law professor Felix Frankfurter to strengthen relationships with the progressive Republican group in Congress.On the purely economic side, Roosevelt had very quickly allowed the dollar to devalue to ensure price stability in 1933 and then, early in 1934, had established its value against gold at $35 per ounce – which it would retain until the collapse of the Bretton Woods system in 1971. That had provided breathing space for American farmers, making it easier for them to export surplus output to Europe.His one point of vulnerability was the traditional fiscal conservatism of the Democratic Party. During his 1932 election campaign, he had criticised Hoover for being profligate by running one. Early on, the New Deal cut government salaries and veterans’ benefits.That made him cautious about accepting the advice offered from across the Atlantic by Frankfurter’s friend, John Maynard Keynes, that recovery would require a deficit of $400m per month. When Roosevelt met Keynes in 1934, he “liked him immensely” but told Perkins, herself a capable economist, that he had not warmed to the “rigmarole of figures”.Yet, he always authorised Morgenthau to find the money which Hopkins would use to fund large scale work relief programmes. By 1935, he was tolerating deficits at the Keynes-recommended level – and sustained growth quickly set in.But his inherent fiscal conservatism meant that he insisted upon setting up old age pensions and unemployment insurance on a fully funded basis, collecting payroll taxes to establish entitlement long before benefits became available.When those taxes came into effect, taking money way from households, spending fell, and the economy went back into recession in 1937. It was a clear demonstration of the power of Keynes' economic analysis.But it was not Keynes who explained what had happened. By 1937, his students had taken his ideas to Harvard. From there, young economists, convinced that Keynes had the right ideas for the time, had taken jobs in the Treasury and the Federal Reserve.Quickly diagnosing the problem, they recommended a further expansion of government spending, so that Roosevelt’s budget from 1938 involved running a deficit. And so, the New Deal acquired just a slight touch of the clipped vowels and RP accent of an upper-class Cambridge academic.Prof Robbie Mochrie is an Associate Professor of Economics at Heriot-Watt University and author of the book "How to Think Like an Economist"