How the New Deal saved the American economy

3216 words (13 pages) Essay

1st Jan 1970 Economics Reference this


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Life in America before 1929 was rich, prosperous, and privileged. Some of society lived wealthy and important lives, with little understanding on the overall economic lives of most citizens. Many people did not know that the weakness in the economic infrastructure would lead to a financial collapse that would be uneven for years to come. From 1929 to 1941, national income and gross national product (the total wealth of the country) were both down by more then half and unemployment rate was high, at least at 25 percent [1] . It took a bold and brave initiative crafted from newly elected President Roosevelt to create the economic wrongs that pulled the country out of its depression. The New Deal sought to promote reform, recovery, and relief through a number of different programs and initiatives. Some of the plans, succeeded, some failed and others developed into the programs instilled today. Ultimately it was Roosevelt’s strong will and confidence that helped inspired America to continue on through the depression. Then, Japan pulled the United States into WWII which began the incredible economic spark in industrial production and manufacturing, the likes of which the world had never seen. The decline of the economy during the Great Depression significantly affected society and the New Deal plan responded by creating policies and reforms designed to fix the economic engine; however, both were important to the development of the American economy and it’s society.

The Great Depression, the worst decline of the American economy, began in 1929, lasted until 1941 and it affected every aspect of American life. American society experienced poverty and unemployment, and a transformation of American politics [2] . Roosevelt won the election of 1932, producing the New Deal and making the Democratic Party the nation’s majority party. The depression was “great” not only in its importance but also in its many and widespread consequences [3] .

The stock market crash of 1929 played a major role in the development of the Great Depression, but it was not the only cause. Previously, the economy had been in trouble and was heading towards a recession. By the late 1920’s, construction and automobiles, two of the most important American industries, were beginning to fail. Inflation and the ideals of over production and under consumption became apparent during this era. Declines in industrial productions followed, and the agrarian market had already been suffering for the past decade [4] . The early signs of difficulty on the stock market reflected fear about the economy on a larger scale [5] .

Known as the roaring 20’s, the economic expansion of the era was strong, but there were problems in the economy which prevented the extent of the decade’s achievements. Seen as a “decade of trends”, society was presented with new opportunities and products. The 1920’s modernized society and focused the attention off of religion, depending more on reason and science. During the decade, the roaring economy developed and prospered but there were still remarkable gaps between the social classes [6] . A significant problem was the distribution of wealth and income in the United States. The unfair distribution of income contributed to the economic troubles apparent by 1929.

The decline of the economy of the late 1920’s was also attached to the dependence and importance put on the prosperity of housing and cars and the failure of new corporations and industries to emerge and develop. Important older businesses like coal, textiles, and railroads struggled to compete throughout the decade and new industries such as electronics and electrical appliances had not developed far enough to spark consumer interest [7] . If these companies would have attracted enough interest, that might have compensated for the failing housing and auto industries even though there wasn’t enough government spending at the local or national level to make up for the poor private investment [8] .

The developing financial issues also comprised another major cause of the Great Depression. America’s credit and banking system was unstable and had little real control. Consumers who had taken advantage of credit during the 1920’s fell steadily into debt, failing to pay their monthly bills. Their motto of “buy now and pay later” was beginning to affect their economic standards as most people slipped into deeper debts [9] . As a consequence, banks repossessed cars, houses, and household goods. Even the supremely wealthy were effected by the downward spiraling of the economy and the stock market crash. Many had significant investments in the market, and quickly lost their fortunes. The “international debt structure” was also becoming problematical because high American tariffs made it hard for European nations to spend money and American loans abroad were helping to maintain Germany’s war reparation payments of World War I [10] .

The economic policies and plans present were not strong enough to deal with the depression. The high tax placed during the 1920’s made it almost impossible for foreign nations to buy American products and repay their war debts. National farm and labor policies during the 1920’s added to the low and unfair earnings of workers and farmers. The Federal Reserve could not control banking practices and there was no discipline over dealings on the stock market [11] . As the depression got worse, the preservation of the gold standard inhibited federal action and the Federal Reserv’es actions to protect the standard fueled the worsening of the depression [12] .

Although it is unsure the exact role the stock market crash played in starting the Great Depression, it terminated the ideas of economic development and decreased consumer spending which was necessary to acquire wealth. The crash did bring down many financial institutions and caused turmoil but it was not the main independent cause of the depression [13] .

By 1931, the depression became worldwide with the collapse of the European economies which therefore, damaged the American economy even more [14] . During the depression, industries, banks and minority groups suffered. People across the nation were deprived of everyday commodities they had become accustomed to. Certain everyday foods and products, like bread and milk, rose in price and became almost unattainable [15] . Because of the Depression, society was forced to conform and adapt to the many disadvantages brought by the decline of the economy. (See Appendix A). Private relief efforts were created in an attempt to solve the crisis, but they never fully brought help for those in need. The Great Depression affected America not only economically, but socially and politically too. Immigration and population trends plummeted and reflected the depression’s impact and the Depression also caused consequences for the political system. In the election of 1932, voters turned the Republican Party out and elected the Democrats [16] . Roosevelt’s presidency produced the New Deal programs and voters responded by making the Democratic party the nations new majority party. The Great Depression lasted for more then a decade and wasn’t over until spending for World War II brought recovery in the 1940’s and although the New Deal did contribute to economic improvement but it was WWII that finally ended the depression [17] .

Becoming the Democratic President in 1932, Franklin D. Roosevelt declared “I pledge you, I pledge myself, to a New Deal for the American people” [18] . What the “New Deal” entailed never became clear during the election, but the phrase represented Roosevelt’s candidacy and later, his presidency. Divided into an ordered series, the New Deal era was separated by the First New Deal of 1933 and the Second New Deal of 1935. The First New Deal was concerned with recovery and relief, its distinctive programs being National Recovery Administration (NRA) and the Agricultural Adjustment Administration (AAA). The Second New Deal gave importance to social reform by creating the Works Progress Administration, the National Labor Relations Act, the Social Security Act, and the Revenue Act of 1935. Designed to meet the crisis of the Great Depression, the New Deal greatly impacted the American people and economy and the enforcement of the New Deal shaped and developed the securities and rights of American society today [19] .

Attempting to deal with the destruction of the Great Depression, the New Deal called for the three R’s- recovery, relief, and reform. Its purpose was to gain economic recovery, to provide relief to the unemployed and to enforce other reforms to prevent another depression from occurring. Economic stability and recovery was the main priority of President Roosevelt and the New Deal. In 1933, when Roosevelt took presidential office, national income and gross national product were both down by more then half and unemployment rate was high, at least at 25 percent [20] . Still by 1940, 10 years after the Great Depression and 7 years after the New Deal, unemployment was still at the depression level and eventually, World War II, not the New Deal, ended the Great Depression.

Although the New Deal did not succeed in diminishing the Depression, it attempted to achieve recovery and improve economic conditions. Implemented in 1933, the National Industrial Recovery Act (NIRA) and the Agricultural Adjustment Act (AAA) used government control to help recover the manufacturing and agricultural areas. Both plans had important limits, failed to help recovery, and were declared unconstitutional by the Supreme Court. Although NIRA and AAA failed, they both contributed to stopping the downward spiral [21] . From 1933 to 1936 the economy improved and the New Deal played a significant role in that expansion. In 1937, Roosevelt turned to a more strict monetary policy, worried about inflation, and confident that the economy was on the right track. Then the recession of 1937-1938 struck, sending the economy down. This “Roosevelt Recession” caused the reviewal of the New Deal policy and the

Government turned towards spending to activate the economy. The economy began to turn up again but not until wartime did the nation reach full production and full employment prosperity [22] .

Failing to achieve full recovery, the New Deal did provide relief for millions of unemployed Americans. The Federal Emergency Relief Administration (FERA) provided direct financial aid beginning in 1933 and was supported by the Civilian Conservation Corps (CCC) and the Civil Works Administration (CWA), which both provided work relief in the form of government jobs and projects. In 1935, the largest New Deal relief act, the Works Progress Administration (WPA) provided work for millions. At the same time, the Social Security Act gave public assistance to the elders and unemployment insurance [23] .

Never fully succeeding in giving relief aid to those who needed it, the New Deal represented the acceptance of federal responsibility for providing relief. With the support of the federal government, millions of Americans were helped though hard economic times. Roosevelt and the New Deal also provided another kind of relief in addition to jobs and projects, they gave relief for the spirit [24] . Through his “fireside chats” over the radio, Roosevelt spoke to Americans and expressed his concerns and optimism. By means of his “chats”, Roosevelt was able to keep the American people informed and updated about the progression of his programs and the position of the American economy [25] . The New Deal programs provided proof that the government and the president cared. Lifting the spirits of the American people and filling them with hope and optimism during times of depression was one of the governments major achievements [26] . (See Appendix B).

The New Deal also sought to implement reforms to prevent another depression. The Banking Acts of 1933 and 1935 and the Federal Deposit Insurance Corporation (FDIC) strengthened the banking system. The Securities and Exchange Commission (SEC) stabilized the stock market and attempted to make it safer. Other regulatory systems, like the Federal Communications Commission (FCC) sought to improve parts of the economy. The Wagner Act allowed labor to organize effectively and the Revenue Act of 1935 and other New Deal tax laws tried to make taxation more fair and to increase government profits. The New Deal also brought institutional reform, including accepting federal responsibility for relief. The Fair Labor Standards Act (FLSA) established minimum wages and maximum hours and the Farm Security Administration (FSA) helped small farmers and migrant workers. The Home Owners Loan Corporation (HOLC), the Federal Housing Administration (FHA), and the Farm Credit Administration (FCA) all insured homes and farms, while the United States Housing Authority (USHA) began to provide public housing [27] .

Many of Roosevelt’s New Deal programs have made a substantial impact on America today. Several of the programs that still exist today, offer benefits and protections for the people of American society. The National Pension System is designed after the Social Security Act which pays out old age pensions and has been expanded to aid other minority groups. The system is funded through the taxes paid by the working class. Created by the Wagner Act, the National Labor Relations Board (NLRB) oversees labor practices and investigates problems between management and labor. The Agricultural Price Supports plan pays farmers to grow crops for domestic use rather then export. The Federal Deposit Insurance Corporation (FDIC) was created for the protection of savings. The FDIC insures banks deposits of up to $100,000 and replaces the deposits if banks close. A federal agency called the Securities and Exchange Commission tracks the stock market and was purposed for the regulation and stabilization of trades [28] .

Americans have celebrated the New Deal reform that provided aid for the poor and unemployed and strengthened the country’s economic ideals. People have championed Roosevelt and have viewed the New Deal as changing and improving the nation. With Americas entry into the war, the economy continued to improve. As production increased to fuel and support the war, the era of the Great Depression ended and ipso facto so did the New Deal [29] .

Like any functioning machine, the United States economic machine is faced with many moving parts, viscosity, human operators, and the potential for breakdown. As with all things mechanized, one is always looking to evolve mechanically. The US constantly faces the ideals of economic evolution, the prospect that everything evolves to serve and become better. The Great Depression amplified the many mechanical failures in the system and those various flaws were attempted to be corrected and prevented through Roosevelt’s New Deal. The New Deal slowly yet deliberately fixed the economic engine by providing a “safety net” to the elderly, improved labor conditions, subsidized farming activity, and insured depositor’s money in national banks. These initiatives restored American confidence and allowed people to continue developing society. Many of the economic adjustments presented by the New Deal improved American life and the United States economy. These fixes and improvements allowed America to become the world’s most important economic powerhouse.

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