Introduction to the New Deal Vaughan / Economics 639 1

New Deal Domestic programs enacted between 1933 and 1938 under leadership of President Franklin D. Roosevelt (FDR). Many historians distinguish between first and second New Deal: – First, 1933–34 (includes “100 Days”) – Second, 1935–38 - more “liberal” (i.e., focused on social justice) and controversial. Programs addressed Great Depression with what historians call "3 Rs.” – Relief for unemployed/poor; – Recovery of economy; and – Reform of financial system to prevent another depression. Many historians (David Kennedy, Stanford, for one) believe FDR felt social reform was more important than economic recovery. Consensus of economic literature is most “recovery” programs were ineffective or counterproductive. 2

Key Parts of First New Deal (from Macro/Finance Perspective) Bank Holiday (1933) Suspension of Gold Standard ( ) Glass Steagall Act (1933) – Separation of commercial / investment banking – Creation of FDIC Securities and Exchange Commission (1934) Agricultural Adjustment Act (1933) National Industrial Recovery Act (1933) Tennessee Valley Authority (1933) Other Jobs/Public Works Programs – Civilian Conservation Corps (1933) – Public Works Administration (1933) 3

Key Parts of Second New Deal (from Macro/Finance Perspective) Social Security Act (1935) – Social Security Payroll taxes started 1937 Benefits first paid 1940 – Unemployment Compensation – Aid to Dependent Children Banking Act of 1935 National Labor Relations Act (Wagner Act, 1935) Works Progress Administration (1935) Fair Labors Standards Act (1938) Tax Hikes – Increased progressivity of income tax (1935) – Undistributed corporate profits tax (1936) 4

Closing Thoughts In many respects, New Deal built on foundations laid by Hoover administration. – Hoover’s top advisors drafted plan for reopening sound banks after holiday. – Hoover established Reconstruction Finance Corporation (RFC) in 1932 to help recapitalize banks. – Hoover established Federal Home Loan Bank (FHLB) System in 1932 to provide liquidity to thrift institutions. FDR not a Keynesian. – Remained committed to budget balancing (though it was not as important as many other goals). – Deficits during 1930s did not provide material AD stimulus. 5

Closing Thoughts Why did return to pre-Depression trend take so long (1941/42)? – New-Keynesians: Initial contraction was deep. Fiscal stimulus was virtually nonexistent. Fed doubling of reserve requirements and tax increases interrupted recovery with “Roosevelt Recession” of (AD↓). – “Equilibrium” Economists: “Frictions” from New Deal policies slowed or stymied recovery (AS↓). Consensus: All played a role, except maybe lack of stimulus (still under debate). Recent research has focused on macroeconomic “drag” from New Deal policies. 6

Closing Thoughts FDR Macro/Finance Policy Successes Bank Holiday / Licensing – Restored confidence in banking system Creating FDIC – Permanently put an end to “runs” and the attendant reduction of the money supply. Leaving Gold Standard Creating SEC Jobs programs/public works (?) 7

Impact of New Deal Jobs Programs 8 Difference between blue and red lines is impact of New Deal jobs programs.

Closing Thoughts FDR Macro/Finance Policy Failures National Industrial Recovery Act – Promoted higher prices/wages and lower output when GDP needed to grow and prices/wages needed to be flexible. Banking Act of 1935 – Gave newly created Board of Governors power to set reserve requirements (which was used disastrously in ). “Atmospherics” – anti-business/anti-wealthy rhetoric, frenetic introduction/abandonment of new policies, Supreme Court Packing, etc. – Created policy uncertainty and insecurity about property rights. Agricultural Adjustment Act – Paid farmers not to produce when people were hungry. Miscellaneous Macro/Finance “Drags” – Tax increases. – Labor unrest following Wagner Act. – Introduction of Federal minimum wage. 9

Final Point Macro/Finance policies are characterized as successes or failures here based solely on short-term contribution to recovery. Some “failures” may be considered successes from a long-term social justice standpoint. – Social Security, for example Some “successes” caused major problems later. – Moral hazard in deposit insurance ultimately cost federal government billions in the 1980s. 10