New Deal

:Alternative meaning: New Deal (United Kingdom)

The New Deal and economic relief

The New Deal and Keynesian economics

In the early 1930s, before John Maynard Keynes wrote The General Theory of Employment, Interest, and Money, he advocated public works programs and deficits as a way to recover the British economy from the Depression. Although he never mentioned fiscal policy in The General Theory, and instead advocated the need to socialize investments, Keynes ushered in a theory-driven rather than a policy-driven revolution. In order to keep people fully employed, governments would need to run deficits when the economy was slowing because the private sector would not invest enough, according to Keynes.

Related Topics:
1930s - John Maynard Keynes

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Keynes's visit to the White House in 1934 to urge Roosevelt to do more deficit spending was a debacle. A dazed, overwhelmed Roosevelt complained to Labor Secretary Frances Perkins, "He left a whole rigmarole of figures ... he must be a mathematician rather than a political economist." Keynes, equally frustrated with the encounter, later told Secretary Perkins that he had "supposed the President was more literate, economically speaking."

Related Topics:
White House - 1934 - Frances Perkins

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As the Depression wore on, Roosevelt tried public works, farm subsidies and other devices to restart the economy, but he never completely gave up trying to balance the budget. Unemployment remained high throughout the New Deal years, possibly as a result of this approach.

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The recession of 1937 and recovery

The Roosevelt administration came under new assault during his second term, which played host to a new dip in the Great Depression, starting in May of 1937 and continuing through June of 1938, causing unemployment, at 14.3% for 1937, to rise to 19.0% for 1938 (in the United States, monthly jobless figures were not compiled prior to 1948). The administration reacted by launching a rhetorical campaign against monopoly power, which was cast as the cause of the new dip. The president appointed an aggressive new direction of the antitrust division of the Justice Department, which some economists blame for depressing economic activity further. This effort lost its effectiveness once World War II, a far more pressing concern, began.

Related Topics:
May - 1937 - June - 1938 - Unemployment - United States - 1948 - World War II

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The administration's other response to the deepening of the Great Depression in 1937 had more tangible results. Ignoring the protests of the Treasury Department and responding to the urgings of the converts to Keynesian economics and others in his administration, Roosevelt embarked on a new attempt at providing an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938, an effort to increase mass purchasing power. In 1938, Roosevelt thus embraced the program put forward to him by that bewildering British "mathematician."

Related Topics:
Great Depression - 1938

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At the time, few Americans were much aware yet of the ideas of John Maynard Keynes, the economist whose theories would soon transform economic thought throughout much of the world. Roosevelt explained his program in a fireside chat in which he argued that it was up to the government to "create an economic upturn" by making "additions to the purchasing power of the nation." This shift in administration policy was a huge milestone in the history of Keynesian economics, giving it increased legitimacy. Although the New Dealers themselves did not realize it at the time, the administration helped establish the basis for new forms of federal fiscal policy, which would in the postwar years give the government new powers for regulating economic growth.

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World War II and the end of the Great Depression

The Depression, however, continued until the U.S. entered the Second World War; Roosevelt, once committed to war in Europe and Asia, then had little choice. Under the special circumstances of war mobilization, massive economics spending seemed to boost economic performance, which won over even many Republicans. These events magnified the role of the federal government in the national economy. In 1929 federal expenditures accounted for only 3 percent of GNP. Between 1933 and 1939, federal expenditure tripled, and Roosevelt's critics charged that he was turning America into a socialist state. However, spending on the New Deal was far smaller than on the war effort. In the first peacetime year of 1946, federal spending still amounted to $62 billion, or 30 percent of GNP. Wartime spending and other measures were able to provide an enormous output. Between 1939 and 1944 (the peak of wartime production), the nation's output almost doubled. This, along with the conscription and death of soldiers, meant that unemployment plummeted—from 14 percent in 1940 to less than 2 percent in 1943 as the labor force grew by ten million. The war economy was not run on the basis of free enterprise, but was the result of government/business sectionalism, of government bankrolling business.

Related Topics:
Second World War - GNP - Socialist - 1939 - 1944

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In the opinions of many economists, it was the deficit spending of World War II, not the New Deal, that finally ended the crisis of the Great Depression. Nor did the New Deal substantially alter the distribution of power within U.S. capitalism; and it had only a small impact on the distribution of wealth among the population.

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