FDR’s New Deal: The Making of Modern America

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In the aftermath of the Great Depression, America was in tatters. And yet, it was precisely this crisis that created the desire for necessary reform. America did not simply recover but emerged from the ashes like a phoenix – better and stronger than ever before. This was in large part due to President Roosevelt’s transformative collection of legislation, which he termed the ‘New Deal for America’.

In 1932, the Great Depression was at its height. Since the Wall Street Crash of October of 1929, the US economy had been in a sharply downward spiral: unemployment soared towards 25%. Across the country, shanty towns built by the homeless and unemployed were dubbed ‘Hoovervilles’, after the then-President Hoover’s vehement opposition to all federal relief efforts for the unemployed and poor. Amidst the crisis came a Presidential election. 

Hoover’s opponent was Franklin Delano Roosevelt. He had been governor of New York, the epicentre of the depression, from 1929 to 1932, where he fought the effects of the depression with an employment commission. He had also boldly endorsed unemployment insurance when it was a fringe academic idea (in the United States, at least – many other western nations had already implemented it in some form).

Roosevelt ran his Presidential campaign on the platform of a ‘New Deal for America’, promising to bring the same assistance federally as he had given to New York. He won in a landslide, taking 57% of the vote and losing in only six states, giving him an electoral college victory of 472 to 59. America was clearly eager for the change he promised.

Commonly, the New Deal is thought of in two phases, the First and Second New Deals. The priority of the First New Deal was to reform and stabilise the financial system. Until this was done, no meaningful attempt at recovery or reform could be made. However, in order to understand these reforms, the underlying causes of the Great Depression must also be explained.

The trigger for the Great Depression was the Wall Street Crash of October 1929, which saw the market fall over 30% in a single day. Due to a lack of regulation, companies did not have to release honest figures, and so share prices became vastly inflated. Once the bubble burst,  consumer and business confidence was crushed and spending plummeted. 

Firms that had been affected by the Wall Street Crash began to default on their loans, as did the employees they had to let go. Without full repayments, and thus with depleted resources, the ability of banks to lend out more was severely damaged. Furthermore, as all banks were allowed to invest in the stock markets, the cratering of share values had devastated their funds.

Therefore, many banks started to collapse. Savers, fearing that the same might happen to their banks, rushed to withdraw their savings, leading to infamous ‘bank runs’. Ironically, these runs were a self-fulfilling prophecy, as banks’ resources were decimated further, leading to even more bank failures. Indeed, 7,000 banks collapsed between 1929 and 1932.

These bank failures exacerbated existing problems with the money supply, which declined by one-third within that same timeframe. Banking collapses meant there were fewer creditors to supply investment capital for firms to expand production. Furthermore, many of those who had withdrawn money in bank runs had not spent it but stashed it, meaning it never re-entered the economy.

Prices thus had to be cut to create demand. Such cuts led to reductions in profits; falling profits meant companies cut their production; lower production meant job redundancies; redundancies meant less money was being earnt to spend on goods. This was a vicious cycle, for which government intervention was sorely needed.

In the first 100 days of Roosevelt’s Presidency, 15 major acts were passed to reform the financial sector. The first of these was the Emergency Banking Act of 9 March 1933, only five days after the inauguration of the President. All bank deposits became federally insured. Account holders no longer had to fear losing everything to a banking collapse, and so the run on the bank virtually disappeared as a phenomenon. Many who had previously withdrawn their money lined up to deposit it once again. Less than ten banks failed per year from 1933 onwards, vitally stabilising the financial system.

More economic reforms followed. Roosevelt’s government wanted to increase the money supply. However, the ‘Gold Standard’ – which linked the value of the US dollar to gold – mandated that 40% of the money supply was backed by the value of US gold reserves. Therefore, Roosevelt suspended the Gold Standard; the money supply was no longer constricted, allowing prices to rise and ending years of crippling deflation.

Commercial banks (those which could accept deposits from savers) were barred from trading stocks, reducing the possibility of collapse. The Securities Act created the Securities and Exchange Commission (SEC), requiring that companies accurately report profits and losses and ensuring that stocks could not become so overvalued as to cause another Wall Street Crash. The checks and balances essential to prevent predatory or reckless financial practices were only first instituted by the New Deal.

In the 90 years since the New Deal, no recession has been as damaging as the one it combatted. The contraction caused by Covid-19 was one-third that of the Great Depression; the Global Financial Crisis of 2007-2009, one-sixth. US unemployment has never reached half its 1930s level. 

The first phase of the New Deal also involved enormous government-funded job creation programmes. While some of the jobs created were true ‘Keynesian employment’ – nothing but a method for injecting fiscal stimulus into the economy – there were also many key infrastructure projects built using this labour. Two separate administrations were set up to plan and fund these developments – the Public Works Administration, responsible for smaller, local projects, and the Works Progress Administration, in charge of larger scale projects. Between them, nearly 10 million were returned to the workforce in the short term, building schools, hospitals, bridges, roads and even national parks.

The Tennessee Valley Authority was an example of one such employment programme: it employed over 9,000 people to build 16 dams across the Tennessee River valley, generating hydroelectric power (at a price 30% below the national average) for seven of the most deprived states.

Under Roosevelt’s stewardship, the economy was recovering – GDP had rebounded by around 10% in both 1934 and 1935, and prices were finally rising again – but the spectre of unemployment still loomed. In spite of the numerous government jobs programmes, 20% of the working population remained jobless. It became clear that economic recovery would not in itself provide the relief necessary to the millions of Americans unable to find work. Thus, there was a second series of policies to combat the depression, often termed the Second New Deal. These were the revolutionary reforms that truly improved the lives of the average American.

The Social Security Act of 1935 is one of the most important pieces of legislation in US history. Previously, unemployment insurance had existed in one state (Wisconsin). The New Deal brought it to the whole of the US, providing much-needed relief to nearly 10 million unemployed job seekers. Furthermore, retirement pensions were extended to all, whereas before they had only been available in 12 states.

Even today, this remains the basis of the US welfare system. Roosevelt had made sure to fund the welfare system in such a way that scrapping it would not be politically feasible for future administrations, ensuring its lasting effects. By funding social security and benefits through payroll taxes, a tax on firms, it could not be portrayed as beneficial to the people to end benefits, since the taxpayer was not paying for the policies directly in the first place.

Labour reform was another key component of the Second New Deal. The Wagner Act, passed in 1935, allowed workers to unionise and negotiate freely with their employers without fear of being fired. The Fair Labor Standards Act of 1938 was particularly radical: workers could not be compelled to work more than 44 hours per week, and a minimum wage of 25¢ per hour was set. By contrast, the United Kingdom did not implement a minimum wage until 1998, emphasising the progressive nature of this policy, especially for the time. The wages of 300,000 workers were increased, and 1.3 million had their hours fairly reduced.

Despite the New Deal’s vast positive legacy, it is not uncontroversial. The most common criticism is that of federal overreach from those who believe in small, local government and states’ rights, usually Republicans. The Agricultural Adjustment Act, which regulated agricultural production and prices, was struck down by the Supreme Court in 1936, which concluded that such interference was “beyond the powers delegated to the federal government.” Roosevelt responded by trying to force Supreme Court justices over 70 into retirement. While this bill failed, the Court was more amenable to New Deal policies in the future. Even when states were given a choice over implementing policies, such as the Social Security Act, this was only an illusion – the bill was engineered to disadvantage any state that opted against its uptake.

However, federal control, even if distasteful to some, was necessary to push through the New Deal’s sweeping changes. The real benefits of the New Deal for real people undoubtedly outweigh the nebulous concepts of balance of power between federal and state government. In fact, the success of the New Deal, and its reliance on the federal government, is an argument for greater centralisation in policymaking.

The most potent criticism of the New Deal is that it failed to end the depression – or possibly even prolonged it: the Great Depression did not end until the advent of World War Two. Indeed, the numbers bear this out: unemployment did not drop below 10% in the US until 1941, the year they entered the war, at which point anti-unemployment New Deal policies had been in law for eight years. Since the initial purpose of the New Deal was to end the depression, surely this represents a total policy failure?

However, the necessity of ending the Great Depression was to alleviate the immense suffering it caused. Under Roosevelt, there were no more ‘Hoovervilles’; unemployment did fall considerably, even if it did not quite return to normal levels; and those who could not find a job were, by 1935, receiving unemployment benefits to help them get by. The 1936 election was a ringing endorsement of all that the New Deal had done for the common people: Roosevelt won with an even larger majority than his first, an astounding 46-state, 523-to-8 victory with 60% of the popular vote.

This would not be the last electoral victory that the New Deal would win for the Democratic Party. They would hold the Presidency for 28 of the 36 years from 1933 to 1969. Furthermore, the one Republican President in that time, Eisenhower, said, “Should any party attempt to abolish social security … you would not hear of that party again,” acknowledging the new, moderate political consensus that had emerged around the New Deal – a consensus that lasted until 1981 and Ronald Reagan’s accession to President. 

The reforms, policies and effects of the New Deal are easy to take for granted today, when they have been sacrosanct for nearly a century. But the New Deal was once just that; it once required a bold step, at a time when advocating for many of these ideas was little short of career suicide for any credible politician. The legacy of that bold step is praiseworthy, and Roosevelt’s ‘New Deal for America’ has truly lived up to its name.

Leuchtenberg, W., 1963. Franklin D. Roosevelt and the New Deal. HarperCollins Publishers.

Smith, J., 2007. FDR. Random House.