What We Learn From FDR's New Deal?

What We Learn From FDR's New Deal?

Economics Without The B.S.**: 

[**  Double entendre intended.]

The biggest lesson from FDR’s years as president are two, outlined by David Kennedy in his history ‘Freedom From Fear’; they are: (1) that the federal government has a much bigger role to play in the affairs of the nation and that the people must be involved with that role the government plays; and (2) with the outbreak of hostilities in Europe in particular, but also in Asia, the United States would have to be a more active participant in world affairs and have a role in securing democracy’s standing internationally.

It was FDR’s intent right from the start in 1932 when he was running against President Hoover to make those domestic changes, although he did not make any specific public announcements to that effect.  After the election he had a long period until he took office, about four months (from the November election to the first week in March when he was sworn in) and that was plenty of time for his Brain Trust to go to work and design the architecture of the New Deal. 

One of the very first things the new administration did was address the outflow of gold from government reserves, the gold standard, and the effect on the banking system.  They did this by delinking the dollar to gold, eventually taking the country off the gold standard, devaluing the dollar to other currencies while raising prices domestically when the government bought farm commodities and provided subsidies to farmers.  These inflationary actions at a time of a deflationary spiral had the effect of raising a pricing level that had deteriorated during the depression and re-establishing a pricing level closer to what existed in the mid-1920s.  These actions were done in series with new legislation introduced during the first one hundred days and with executive action that required no new legislation.  It was subsequently followed by further action over the next few years.

Another very important measure taken was to reinforce authority the government already had but was not used by the prior administration – namely giving the Reconstruction Finance Corporation (RFC) a much broader mission to bail out the collapsing banking system and to buttress the sagging industrial production.  President Hoover created the RFC in his last year, 1932, and even appointed a Democrat, Jesse Jones, to head the agency; but, Hoover gave it no charge to do anything.  FDR saw the opportunity, kept Jones on board (from 1933 to 1945), and the RFC under FDR/Jones pumped tens of billions of dollars (in then current dollars) into the economy reviving the banks, rebuilding the industrial sector, and getting it into war production when war broke out.

The use of Jesse Jones is illustrative of way FDR handled people and empowered federal agencies.  Jones started in business in the 19^th Century, moved to Houston at the turn of century and became a successful entrepreneur and industrialist/builder, eventually becoming a leading banker and civic leader.  He lived through the 1908 Panic and participated in the World War I mobilization.  President Hoover never took advantage of this talent and experience, FDR had him as a close advisor, one who visited President Roosevelt each morning in his residence before he started his day in the Oval Office to go over business, like fixing the dollar’s value to gold; or, what bank to save, what bank to let go, or what bank to consolidate with another.  FDR trusted Jones’ arbitrary judgement.  Jones understood the consequences of economic and public policy making in a democratic society composed of various income groups and the vicissitudes of economic behavior during good times as bad.  He was an avid supporter of the President and could articulate FDR’s policies to the business community.

A third thing we can learn from FDR in our present time of a great political divide, is how to garner the strength of the American democratic process.  In 1932 when FDR first ran for president, the Democratic Party was not a unified national party.  It was the Republican Party that was supreme nationally, except for the South.  The Republican Party dominated national politics at the presidential level and in the Senate from the post-Civil War up until 1932; while splitting control of the House of Representatives half the time with Democrats.  It was the failure of Hoover and Republican ideology during the Great Depression that opened the possibility for the Democrats; and, FDR was a master politician who formed a new broad national coalition that made the modern Democratic Party that we still can recognize today with some semblance of the past -- a broad coalition of labor, some business, urban big city populations, rural populist leaning populations, farmers especially small farmers, and even attracting some African-Americans away from the Party of Lincoln.

I like to compare the transition from Hoover to FDR as a transition for Americans from the 19^th Century to the 20^th Century – more specifically the role of the federal government in our society and its connection to the people.  The best example I can think of is the horrendous flooding of the Mississippi River in 1927 wreaking havoc on several states, one of the worst natural disasters of all time even up to today.  Coolidge was president at that time.  His attitude, typical for the 19^th Century, was that the federal government had no role at all in disaster relief or recovery; that it was up to property owners and local governments to take charge.  The Congress at that time did step in and President Coolidge signed the legislation without fanfare.  Oddly enough it was Herbert Hoover, as Coolidge’s Secretary of Commerce, who stepped in the role of providing relief, much like he did after World War I.  But during the Great Depression, President Hoover was a minimalist up until his last year, and then as contemporaries said “He was too little; too late” – and that included what Jesse Jones said of Hoover as his head of the RFC comparing it with his job with FDR.

Nineteenth century Americans viewed success and failure in business and life with some sort of moral narrative and saw the charity system there to provide a backstop during times of need.  The Great Depression overwhelmed our charity system beyond where it could function.  It took Franklin Roosevelt, and Eleanor, to see that the 19^th Century pioneering spirit of Americans was still there in the 1930s and the people just needed a little help to get back on their feet.  And so a social-welfare function of the federal government was created to meet that national calamity.  It took a president stricken with polio in the prime of his life through no fault of his own, to show empathy and bring resources for average working class folks and businesses, who through no fault of their own experienced the personal failure or misfortune during the Depression not as a moral lapse but as a chance happening deserving of another chance to do good once again.

What did we learn from the New Deal?  Well, a lot of mistakes were made in implementing the New Deal; but, overall it provided a blueprint for how the federal government can take a more active role in providing guidance and some degree of regulation in a free enterprise system that values the creativeness and contributions of individual effort in a modern democratic society.  The very best example of this is not the 1930s, but the post-war period of 1947 to 1974 where the Greatest Generation, those who grew up with FDR were in their prime of political leadership.  It is especially the 1960s that will be the most productive period in American history with the lowest gap in income inequality, rates of GDP growth that are double what we have experience in the last twenty years if you just take the good years and leave out all the recessions (2001, 2007 to 2009, and present), and with unemployment numbers that are even better than today (approximately 3.5% during both periods, but an unemployment rate for folks unemployed six months or more which was around 5% back then and is still around 20% as of last year); and a Debt-to-GDP Ratio back then that was declining from 70% to 40% over the ten years of 1960s spending (which included the Vietnam War and Great Society Programs), whereas we are increasing our indebtedness.  By the mid-1960s, the economy was performing at near peak performance; whereas, as good as we have been doing up till this year, we still had a lot of slack in the economy and a continual growing gap of income inequality.  So you be the judge.