For eight decades, the debate over the relationship between the American people and their government has turned on the fulcrum of the New Deal, which redefined it so fundamentally.
Yet by focusing on public spending and the future of the social safety net, the 2012 presidential campaign is opening the New Deal to more scrutiny than it has faced in years. So it may be especially important now to remind ourselves what the New Deal was, and how it developed as a response to the misery of the Great Depression. Adding to the necessity of dispelling the mists of time, the New Deal remains one of the most poorly understood and myth-encrusted policy initiatives ever. Was it a success or a failure? The plot of a dictator? A socialist bridgehead? A paragon of progressive government or a harbinger of oppressive federal interference in American life? A lifeline to the “forgotten man,” or an anchor dragging him beneath the waves?
The New Deal physically reshaped the United States. To this day, Americans still rely on its works for transportation, electricity, flood control, housing and community amenities. The output of one agency alone, the Works Progress Administration, stands as a magnificent bequest to later generations — comprising, among many other projects, 1,000 miles of new and rebuilt airport runways, 651,000 miles of highway, 124,000 bridges, 8,000 parks, and 18,000 playgrounds and athletic fields.
Meanwhile the monumental projects of the Public Works Administration employed thousands of men at a time and ordered millions of dollars of materials and finished goods from factories coast to coast: In Washington State, Grand Coulee Dam put 8,000 men to work starting in 1933; in Florida, the exemplary project was the Overseas Highway, 127 miles of causeways and bridges connecting the mainland and Key West, built on the remains of a railroad line destroyed by hurricane in 1935.
The transformative power of this effort is inestimable. But while much of Franklin Roosevelt’s legacy rests upon the New Deal’s physical works, even more rests upon the transformation of the nation’s social and economic structures. FDR and the New Dealers did not think about government in the limited terms of their predecessors, as an agency of national defense and little else. They did not perceive it as an antagonist of the common man, an enemy of liberty, or an entity interested in its own growth for growth’s sake. The condition of the American people when the New Dealers assumed office demanded ameliorative action against a uniquely cataclysmic economic event, and this they strived to deliver.
By eliminating bank runs even in times of economic crisis, federal deposit insurance cut the number of bank failures from the peak of 4,000 in 1933 to nine the next year. The Securities Exchange Act of 1934 established the Securities and Exchange Commission and professionalized an industry burdened in the aftermath of 1929 with a reputation for crookedness, thus building the foundation for the explosive growth of the U.S. capital markets and corporate economy ever since.
The New Deal instilled in Americans an unshakable faith that their government stands prepared to succor them in times of need, by establishing social welfare and economic security as collective responsibilities. Social Security, by any measure the outstanding domestic achievement of the Roosevelt Administration, today serves 54 million beneficiaries. Its 1960s addendum, Medicare, sprang organically from the same sense of America’s social bonds.
In the spring of 1938, when an unexpected recession revived fears of economic collapse and undermined Americans’ confidence in the New Deal, Franklin Roosevelt took to the radio waves for his 12th fireside chat. He acknowledged that the course of recovery had been dealt a severe setback, but he also reminded Americans of all they had gained in the previous five years. “Your money in the bank is safe,” he said. “Farmers are no longer in deep distress … dangers of security speculation have been minimized … and government has an established and accepted responsibility for relief.”
That was the view from 1938. But even today, the New Deal is a work in progress. Bank failures periodically surge because of outbreaks of imprudent management inadequately monitored by federal regulators, as in the savings and loan crisis of the 1980s and the financial crisis of 2008. Business reforms of the ‘30s have proven unequal to chicaneries of later generations, and must be regularly updated. The physical infrastructure bequeathed by the ‘30s has crumbled from inattention.
To study the ‘30s is to be struck by the parallels between the economic and political conditions of those years and today. The Great Depression and the “great recession” of 2008 shared such causes as excessive speculation in housing and financial assets, inadequate regulation of financial institutions, and imprudent behavior by the management of major banks and investment houses. Corporate wealth was concentrated in too few hands, and the business community wielded what many believed was excessive influence in Washington. Roosevelt had no effective model for fighting the worst economic downturn in his generation’s experience. Barack Obama did have a model: The New Deal.
It’s an imperfect model, in part because the original New Deal was not formulated as a stimulus program in the modern sense — as government pump-priming across all sectors of the economy, financed by borrowing. The New Deal spent aggressively, but chiefly to keep men and women working while its longer-horizon programs of industrial and agricultural rehabilitation proceeded.
Pump-priming was a novel idea in the 1930s — its most famous exponent, John Maynard Keynes, was not well-known in the U.S. at the time and met FDR only once, an encounter that left neither participant impressed with the other. Indeed, Roosevelt was a reluctant disciple of pump-priming and never a complete convert to the cause. This was a consequence partially of his innate fiscal conservatism, a mindset that in many respects mirrored Herbert Hoover’s, and partially of the sheer novelty of fiscal stimulus.
From 1933 through 1937, the federal deficit — the sine qua non of government economic stimulus — averaged less than $3.2 billion a year, or about 4.5 percent of gross domestic product. That was significantly below the $5 billion to $6 billion annual deficit that the few Keynesians in Washington thought was needed to achieve sustainable recovery. New Deal fiscal policy turned explicitly stimulative only in 1938, when a surge of federal spending promptly brought the so-called “Roosevelt recession” to an end. Still, throughout the New Deal, programs such as work relief and government construction helped to maintain or increase consumer demand, the quintessential element of any stimulus package.
During most of the New Deal period the U.S. economy expanded strongly. Real gross national product grew at a blistering pace averaging 8 percent a year between 1933 and 1937. Unemployment fell steadily from 1933 to 1938, then briefly reversed, and resumed its steady decline in 1939, bottoming out at 1 to 2 percent during the Second World War. Some 10 million more Americans were employed in 1937 than in 1932, an increase of 25 percent in the labor force. The stock market, too, responded positively: From Roosevelt’s inauguration to early 1937, the Dow Jones Industrial Average nearly quadrupled, a performance unmatched in any other four-year time span.
The New Deal’s most important accomplishment in the economic sphere may have been the liberation of American fiscal policy from the shackles of the past — notably the gold standard. Decoupling the dollar from gold, as FDR did in the first months of his administration, facilitated expansionary fiscal policy to the benefit of almost every president since.
The Great Depression exposed the economic orthodoxy of the 19th century as obsolete for the 20th. The gold standard and many other tenets of business and finance were revealed as antique superstitions, as unequal to the challenge of fighting economic collapse as the nostrums of medieval doctors were to fighting disease.
The search for remedies required improvisation. But it could not wait for a final diagnosis: People had to be fed and sheltered and found employment, the economic system had to be protected from whatever diseases of greed and imprudence had been identified, and the transition begun to a governmental structure suited to the new world.
What is surely beyond debate is that the Depression marked an upheaval in American history, and the New Deal a turning point in the relationship between government and the governed. Its legacy lives on: that shining ideal that American government should serve the people, all the people, and that none should be forgotten.
Contact Hiltzik, a columnist for the Los Angeles Times, at email@example.com.