A New Era in Capitalism
“We have always known”, said Franklin D. Roosevelt at the beginning of his second term of office, “that heedless self-interest was bad morals. We know now that it is bad economics.”
In 1932 Roosevelt had been elected President in a landslide victory by an America facing economic catastrophe. He had persuaded them that he could save the country and bring back prosperity. He gave them the New Deal, a vast imaginative conception of national replanning and reconstruction which changed the face of America and which had repercussions all over the globe.
The economists are still arguing about the New Deal, but there is little doubt that its revitalizing effect upon the American economy, and upon the American people, enabled that great country to meet the gigantic military and economic challenge of the Second World War.
The New Deal also marked the end of an economic era. There had been depressions in the past, terrible ones, but economists believe that there will never be another of the same magnitude as that which hit America and the world in the 1930s; for the experience of the New Deal has taught governments how to contain and alleviate the economic recessions to which all capitalist societies by their very nature are exposed.
The great depression had its roots in the First World War. Until 1917 the United States had kept scrupulously free from European entanglements. The Monroe Doctrine of 1823, combined with George Washington’s warning against entangling foreign alliances, held until the end of the nineteenth century when the United States annexed Hawaii and assisted the Cubans to revolt against the Spanish rule. It went completely by the board in the First World War, for even though America teetered on the brink until 1917 it was busily trading with the embattled nations, particularly the Allies.
In Europe agriculture contracted sharply during the war and American farming expanded in order to fill the gap. In 1918 the United States was exporting agricultural produce in vast quantities and their farming industry was at its peak. After 1918, however, agriculture in Europe soon got back on its feet, and the demand for American farm produce fell.
Instead of cutting back their output, the American farmers, by using more mechanization and less labour, increased their yield with the result that they were in serious trouble in the middle twenties with prices falling on an overburdened market.
While this was going on, other sections of the community were enjoying an unprecedented boom, for there was plenty of post-war leeway to make up. In particular the motor industry flourished, as did its dependent industries such as steel, rubber, oil and road building. Railroads and shipping were prospering. Capital investment was running at a high level. There was little or no unemployment; for most of the decade it was less than two per cent.
This prosperity was not confined to America. It was shared to a certain extent by the rest of the world. But the centre of wealth was now in America which felt itself on the crest of a wave, with exports, particularly of raw materials, growing healthily all the time. America granted extensive credits to other countries in order to boost its own rapidly expanding industries. It was during the twenties that it first became a great creditor country, and American money, American goods, American films and American know-how spread all over the world.
And so the great boom was on. America believed it had found the secret of permanent prosperity, despite the few warning voices which were raised.
American farmers, however, bitterly complained that they were not sharing in the general prosperity and their economic problems really lay at the heart of the trouble. In 1926 they were asking the government to come to their help by buying their massive surpluses of grain, cotton and tobacco, and there was a long administrative wrangle over farm relief.
Another disturbing feature of the boom was the fact that wholesale price levels were falling steadily. This was combined with enormous expansion and a rise in the value of stock exchange securities to heights which were out of all proportion to their true worth. It was this dizzy rise in stock exchange prices which finally broke the boom, and triggered off the remarkable economic collapse of 1929.
But these ominous signs were seen only by the few. The American people generally saw before them such golden prosperity and wealth as had never before been dreamed. Everybody bought stocks and shares, the prices of which soared to incredible heights in the great bull market of Wall Street. Brokers’ offices swarmed with crowds of investors, most of whom were people in ordinary jobs. Clerks, elevator-men and waiters outnumbered the capitalists in their rush to invest their savings in shares which they could sell the next day at a profit. Up and up went the shares. People mortgaged their houses to buy securities, the market value of which was ever increasing. It seemed that they could not lose, and that they had discovered the key to untold wealth. Shares bought one day were sold the next at a large profit which was immediately invested in more over-priced shares.
This fantastic over-pricing of stocks and shares was not based on profits or dividends, but rather upon a wave of business optimism which was founded on the delusion that the country had discovered the secret of permanent prosperity. Wall Street’s tidal wave of inflated share prices was largely borne upon billions of dollars of margin accounts. There was far more money and credit available than there was trade. The stock market became an immense credit-inflated bubble, which was bound to burst.
The authorities were aware of the dangers of the situation as early as 1928, but they were unable to damp down the speculation fever in Wall Street. Warnings that the whole thing was a financial Tower of Babel set upon the most precarious foundations went unheeded. In fact the authorities expected a collapse, and thought that in some ways it would be a good thing.
But when it did come in October, 1929, they had no idea of the enormity of the approaching disaster, and that it would bring with it the biggest depression of the century.
Fortunes were lost overnight in Wall Street. Many ruined speculators committed suicide. Some are said to have leaped from the skyscrapers into the streets below.
More disastrous than the Wall Street collapse was what followed. Foreign trade fell, factories closed, banks failed, mortgages were foreclosed, commodity prices fell, and unemployment soared to alarming figures. The bottom of the depression was reached in 1932. By that time it was world-wide, and it was estimated that there were thirty million people unemployed in the world as a consequence of it.
The United States, with a total of fifteen million workless, was the centre of this great depression which moved outwards in waves which were felt all over the world. The contraction of American industrial production, the cutting of dollar loans and investment overseas, spelt depression everywhere. The American economic problem was domestic and had its roots in the land. While the United States were unaffected by international change;; in foreign trade, the reverse was the case in other countries who were therefore defenceless against the cold wind of the great depression.
It was to repair this economic sickness in the domestic life of the nation that Roosevelt was elected in 1932. At that moment the country felt itself on the brink of disaster, and the first thing Roosevelt did was to restore its morale. His eloquence and his confidence fired the imagination of the people in the same way as Churchill’s did when Britain stood before another abyss in 1940.
During the week before Roosevelt took office in March, 1933, more than fifteen hundred million dollars had been withdrawn from the banks by panic stricken hoarders. The day after he took office Roosevelt issued a proclamation closing the banks and putting an embargo on gold.
He then outlined his three objectives: restoring prosperity by “re-establishing the purchasing power of the people”, bringing about a proper balance between the agricultural and industrial sides of the economy, and eliminating abuses and excesses from the American economic system. He took America off the gold standard, abolished Prohibition which had caused nationwide corruption and crime, and inaugurated an immense programme of public works.
The New Deal, given to America by Roosevelt and his famous Brains Trust, ranks as one of the greatest economic experiments ever made in a capitalist country.
The New Deal itself was a whole series of measures aiming at righting the economic wrongs. There was a New Deal for the farmers, for Labour, for Old Age pensioners, for controlling Wall Street. There was an anti-trust New Deal, a Recovery New Deal to “prime the pump” of the economy. The New Deal included great public works schemes of roads, housing, bridge and dam-building.
The greatest and most imaginative of these schemes was the Tennessee Valley Authority, an immense reclamation scheme for the benefit of the farmers of the Tennessee Valley, which was also aimed at providing new industries with cheap electric power.
As Roosevelt himself put it, he had faith that “we can make, by democratic self-discipline, general increases in wages and shortening of hours, sufficient to enable industry to pay its own workers enough to let those workers buy and use the things that their labour produces”. This was the core of his philosophy. This was what the New Deal was intended to do.
“The basic things expected by our people are simple,” he said. “They are, equality of opportunity for youth and others, jobs for those who can work, security for those who need it, the ending of special privileges for the few, the preservation of civil liberties for all, the enjoyment of the fruits of scientific progress in a wide and constantly rising standard of living.”
In June, 1933, Congress authorized the President to spend $3,300,000,000 on public works to create employment. He was also empowered to enforce a code of fair competition in business practice. Workers were free to belong to a union of their choice.
This was the National Industrial Recovery Act (the N.R.A.), the most startling measure of the New Deal, for it gave the government power to control the entire industry of the country, to decide wages and hours and conditions of employment. The industries were not taken over, as in the case of Socialist countries, but representatives of it were invited to Washington to work out codes of business practice and fair dealing. This act aroused the implacable hostility of big business.
The farmers who had been in a state of near armed revolt in 1932 benefited most from the New Deal. In order to restrict output —for it was the collapse of agricultural prices in 1929-30 which was mainly responsible for the severity of the depression, Roosevelt gave farmers quotas and benefit payments for restricting output. Farmers were paid to leave land fallow. This had the side-effect of increasing productivity later, for it was good for the land.
The New Deal, although it revitalized the economy in many ways, and gave a very necessary boost to morale, did not all work smoothly, and was strongly opposed in many quarters. Roosevelt’s genius lay rather in initiating than in executing. He had to rely on other people to carry out his inspired schemes. His Agricultural Adjustment Administration under Henry A. Wallace was a great success, but he was less fortunate with the N.R.A. which he hoped would raise both prices and wages and thus increase purchasing power.
This section of the New Deal aroused violent opposition from some sections of the community on both constitutional and economic grounds. The public complained of rising prices, and after a short period of recovery economic difficulties once more increased. In 1936 the Supreme Court held the N.R.A. to be unconstitutional, and Roosevelt’s enemies rejoiced.
But in the November of that year the electorate returned Roosevelt to the White House for his second term with a sweeping majority which was a complete national endorsement for the New Deal.
Roosevelt had now fully earned the antagonism of big business. Some economists believe that it was this antagonism between big business and the government which held back America’s recovery, as it had the effect of depressing business confidence and retarding investment.
From the first Roosevelt attacked Wall Street and its “heedless self-interest”. Big business replied with an unyielding and lasting antagonism to the New Deal and the man responsible for it. Wall Street did not attempt to, and perhaps it could not, overcome the crisis itself by the working of the free market, and thus stave off the reforms which were forced upon it. Instead it waged something like a religious crusade against the New Deal and wanted to persuade the world that Roosevelt was practically trying to bring about red revolution, whereas the New Deal was no more drastic and radical than the legislation of the Liberal Government of 1906 in England.
The New Deal altered the face of America, and its repercussions were world-wide. It gave the rich and the privileged classes of America an even greater fright than the depression did.
Whether it solved the crisis and lifted America out of the great slump is even now being argued. By 1937 unemployment was still at seven millions, and although consumption had been stimulated by government expenditure, private investment was still stagnant. In 1939 war in Europe gave an unplanned, if anticipated, boost to industry.
The New Deal marked the end of uninhibited and uncontrolled capitalism. It showed that when a country like the United States faces serious depression, only the most drastic government action can save the economy. The New Deal has taught governments how to avoid such economic disasters as happened in the 1930s.
- The Living New Deal Project, a digital database of the lasting effects of the New Deal founded in the Department of Geography at the University of California, Berkeley
- The Smithsonian American Art Museum’s Exhibition “1934: A New Deal for Artists”
- Art, Culture, and Government: The New Deal at 75. Library of Congress, American Folklife Center Documentation of March 13–14, 2008 Symposium including webcasts of presentations
- Hannsgen, Greg E.and Papadimitriou, Dimitri B. Lessons from the New Deal: Did the New Deal Prolong or Worsen the Great Depression? Working Paper No. 581, The Levy Economics Institute of Bard College. October 2009.
- New Deal by Alan Brinkley on History.com
- Robert E. Burke Collection. 1892–1994. 60.42 cubic feet (68 boxes plus 2 oversize folders and one oversize vertical file). At the Labor Archives of Washington, University of Washington Libraries Special Collections. Contains material collected by Robert E. Burke on the New Deal from 1932 to 1959.