What we could have learned from the New Deal in dealing with the recent global recession^**

* Draft Remarks Prepared for Association for Social Economics Plenary Session: What We Learned from the Global Financial Crisis.

Abstract

Modern policy-makers have learned little from the Great Depression and the policy responses of the 1930s. Yet, there is a great deal to learn from the New Deal: quelling the fear and uncertainty of mass unemployment in the pragmatic, experimental process through which the tool for achieving this objective—directed government expenditure—was accepted, even though the New Deal’s public works policies and direct provision of paid employment, rather than being informed by a Keynesian theory of macroeconomic stabilization, were designed to support morale, provide relief from the suffering and uncertainty of unemployment, and serve as a bulwark against more interventionist alternatives. Countering the deep uncertainty in the real sector of the economy thus collided with Roosevelt’s commitment to rein in fiscal deficits, and the resolution of this internal conflict in favor of support for employment and incomes provides the essential, largely ignored lesson of the 1930s.

Keywords:

• Crises
• new deal
• banks
• uncertainty

Notes

* Draft Remarks Prepared for Association for Social Economics Plenary Session: What We Learned from the Global Financial Crisis.

¹ The reference to uncertainty is not novel. Economists have used uncertainty as the explanation of the collapse in output after the Stock Market Break due to the impact on investment (Bernanke 1983), consumption (Romer 1990), and interest rates (Ferderer and Zalewski 1994). In this case the use of uncertainty is more of socio-systemic nature similar to Keynes observations in the Economic Consequences of the Peace about the breakdown of the implicit bargain upon which the pre-WWI system was based, leaving nothing in its place to anchor behavior.

² One of the objectives of Katz Nelson’s book is to show that the success of New Deal policies was dependent on legislative approval via the liberal democratic process as an alternative to authoritarian alternatives and the crucial support of Southern Democrats seeking to defend slavery to produce Congressional majorities and managing of legislation in committee. It is confirming that racial equality is completely absent from New Deal policies.

³ In this regard it is important to note that in addition to the role of Southern Democrats in the success of New Deal policies Thomas Ferguson (1995) emphasizes the importance of what he calls ‘money-driven political systems,’ and especially the impact of changes in the industrial structure of the U.S. economy and the changes in the control of the financial system leading to support for both a more open trading system and measures to support higher levels of aggregate demand to meet the needs of capital intensive and export industries for high volumes. His essay, ‘From Normalcy to the New Deal’ notes the importance of influence of the changes in the dominant financial institutions in providing support for the formulation and rapid acceptance of the bank reforms.

⁴ In the event an emergency order allowed banks to undertake ‘usual banking functions to such extent as its situation shall permit and as shall be absolutely necessary to meet the needs of its community’ (Emergency Regulation No. 10, issued by Secretary Woodin on March 4, quoted in Kennedy 164).

⁵ ‘Glass put his finger on the basic situation, which had had so much to do with the creation of the crisis. This “was the multiplicity of state banks and the lack of proper supervision of them by state authority”’ (Moley 1966: 186).

⁶ Jones recounts a visit he made to J.P. Morgan (Jones, 23) to solicit him to organize New York bankers members of the New York Clearing House to recapitalize the Harriman Bank and Trust Company to avoid its being placed in Class C conservatorship (the only New York bank thus classified). He was met with polite refusal.

⁷ One of the most controversial, and least effective actions which is perhaps best explained by Robey charge of panic. Beard and Smith (op. cit. 111 ff) note that the Agricultural Adjustment Act already provided extensive posers to the President to influence exchange rates through the Federal Reserve. Eccles notes the major fallacy of the argument that it would increase purchasing power in the fact that few people held gold and certainly few of the unemployed (Eccles 1951: 123). However, Moley (1966: 300) links the decision to the response to the Thomas Amendment to the farm bill to remonetize silver or to issue greenbacks to set the price of gold, which he eventually accepted.

⁸ Section 7 of Title I required that ‘every code of fair competition’ gave employees the ‘right to organize and bargain collectively’ and that ‘employers shall comply with the maximum hours of labor, minimum rates of pay, and other conditions of employment, approved or prescribed by the President’ (reproduced in Hosen 1992: 198–109).

⁹ May (146–147) also credits the support for more active fiscal policy based on Keynesian principles to An Economic Program for American Democracy, authored by a group of Harvard and Tufts economists elaborated in 1937 and published in 1939. However, Sandilands notes that at Harvard in January 1932 Currie, along with Ellsworth and White, had already provided support for more active policies in 1932 in a memorandum submitted to Hoover, and most probably was part of the advice he provided to Eccles. See Sandilands and Laidler 2002

¹⁰ Although as Stein (1969: 108–109) notes in his chapter on ‘The Struggle for the Soul of FDR, 1937–1939, Keynes wrote to FDR on at least two occasions exhorting support for Eccles and Hopkins’ position on increased federal spending, but was largely ignored.

¹¹ Again, the point is not about whether the decision to reverse the budget balancing was the cause of the recovery, but about the political process in determination of economic policy. Romer (1992) provides supports against the dominant mainstream opinion that the New Deal more or less laid the groundwork for the natural recovery of the system. It is ironic that apparently Romer’s estimates of the stimulus that would be required to produce recovery after the bailout of the financial system in 2008 were sharply reduced on political grounds.

¹² As a corollary of planning ‘It is self-evident that we must either restore commodities to a level approximating their dollar value of several years ago or else that we must continue the destructive process of reducing, through defaults or through deliberate writing down, obligations assumed at a higher price level.’ The quotations come from a 22 May 1932 speech on receiving an honorary degree at Oglethorpe University (Roosevelt 1932).

¹³ Ironically, the founder of the American Economic Association Richard T. Ely was a part of this social gospel movement. Cf June Hopkins.