The New Deal, John Maynard Keynes, and America’s Economic Recovery

John Maynard Keynes and the New Deal

Thesis Statement: Although some of their policies and ideas were controversial, both Franklin D. Roosevelt and British economist John Maynard Keynes provided an indispensable source of leadership and skill in bringing America out of the Great Depression, Roosevelt with his New Deal, and Keynes with his radical theories and writings that a desperate America could not help but experiment with.

I. The “Roaring Twenties” was a time of economic prosperity for Americans.

A. The prices of crops had risen during WWI, which helped the farmers to thrive.

B. The twenties also brought about a rising in the prices of stocks. Stocks were bought by investors wanting to share in the profits of a company.

II. As the 1920s came to a close, the American economy began to falter and the unstable stock prices foreshadowed the coming economic doom.

A. Crop prices began to decrease, and farmers, along with African Americans and immigrants, moved to the cities to get low-paying factory jobs.

1. As the city population grew, the gap between the rich and the poor grew as well.

B. In September 1929, the prices of stock plummeted suddenly, and on Black Thursday (Oct. 24, 1929), the NY Stock Exchange was estimated to have lost $8 billion in paper money.

1. This crash left investors afraid and unwilling to put money into the failing economy.

a) The unwillingness to spend money caused a depression in the economy (known as the Great Depression).

III. The Depression had a large impact on the lives of Americans and the overall economic well-being of the US.

A. The Depression caused banks and businesses to close; it also caused people to “run” on the banks, or take out all their savings so that when the bank closed, they would not lose all their money.

B. President Hoover thought the best solution to the problem was to leave business alone (a Republican principle).

1. He started the Reconstruction Finance Corporation, which gave aid to the big businesses, rather than directly to the poor. This corporation did not work out.

IV. Franklin Roosevelt won the 1932 election against Hoover, winning 42 of 48 states. He promised to remember the “forgotten man”.

A. As a way to end the Depression, FDR launched his New Deal in March 1933. It aimed to provide cash for the poor and create long term plans for economic revitalization. FDR explained his ideas to the public in his radio “Fireside Chats”.

B. In order to help him carry out his New Deal, FDR surrounded himself with a group of intellectuals and respected economists, “New Dealers”, named his Brain Trust.

V. Roosevelt’s first 100 days in office were dubbed “The First 100 Days”. During this time, a storm of unprecedented legislation was passed, starting the New Deal.

A. The Emergency Banking Act closed all banks and only allowed the financially sound ones to reopen. This “Bank Holiday” ended the practice of running on the banks.

B. He abolished Prohibition, which helped to stimulate the economy by allowing the manufacture and sale of alcohol.

C. The First 100 Days also brought about a series of public-works programs.

1. The Civilian Conservation Corps created jobs by sending men to plant trees in the wilderness.

2. The Public Works Administration and the Works Progress Administration built public buildings, sidewalks, etc.

3. The Agricultural Adjustment Act stabilized crop prices by limiting the amount of crops and livestock farmers could put out.

D. The Securities and Exchange Commission created laws pertaining to the purchase of bonds and stock on the stock market. The Truth in Securities Act also protected the public from fraud in stock issuance (enforced by the Federal Trade Commission).

E. The Federal Housing Administration paid mortgages for struggling homeowners, and the Federal Emergency Relief Act set aside $5 million to give to the poor.

VI. After the First 100 Days, New Deal legislation continued to be passed and welcomed by the public.

A. New Deal legislation was, even after the First 100 Days, focused on social betterment projects.

1. The National Youth Administration gave jobs to college and high school students.

2. The Rural Electrification Administration gave loans to private power companies.

3. The Farm Credit Administration gave loans to bankrupt farmers

4. The Tennessee Valley Authority built a series of dams that brought electricity and prosperity to the impoverished Tennessee Valley Region.

B. New Deal legislation also focused on improving banking and monetary issues.

1. The Glass-Steagall Act set up a system of federal guarantee of deposits, and of commercial and investment banking.

2. The Home Owners Loan Corporation Act gave out 300,000 federally guaranteed loans to struggling homeowners, which allowed the owners to keep their homes.

3. The Kerr-Smith Act of 1934 taxed tobacco sold by farmers who did not sign AAA contracts.

C. In 1935, the Social Security Act was passed, which gave cash to retired people who had worked in commerce or industry. It also gave payments to the families of the retired and set up a system of unemployment insurance.

VII. Monetary policy played a large and controversial role in the New Deal.

A. The Thomas Amendment gave the President the power to coin silver at a rate of 16:1, to issue paper money, and to change the gold content of the dollar.

B. The tax bill of 1934 raised inheritance and income taxes. Income tax rates for incomes of $50,000 were raised by 1%, rates for $100,000 were raised by 6%, and rates of $3,500,000 were raised by 16%. Inheritance taxes were raised by 7%, and taxes were eased on small businesses, while they were raised on larger ones.

C. FDR vetoed the bonus bill, which called for the issuance of paper money unsupported by gold to pay off war veterans.

D. The Revenue Act of 1936/The Wealth Tax Bill allowed the government to take as much as 70% of large incomes.

E. The Banking Act of 1935 gave the Federal Reserve Board the authority to regulate interest rates.

VIII. The New Deal Affected Labor in many ways.

A. The National Labor Relations Act of 1935 gave federal protection to unions by creating the National Labor Relations Board, which gave workers the right to unionize and bargain with bosses.

B. The National Industry Recovery Act assured the same, along with the right of workers to be free from the coercion of employers, the right to freely join organizations, and for employers to comply with maximum hours and minimum wages.

C. Created by Senator Robert F. Wagner of NY, the Wagner Act forced management to bargain collectively with labor.

D. The LaFollette Civil Liberties Committee revealed the secret spying of bosses, and their use of local police to align a community against a group of union organizers, along with their possession of guns and tear gas (used to suppress uprisings).

E. The National Industrial Recovery Act created new business groups to draw up codes for their industries subject to government approval. The act also established the National Recovery Administration, which created minimum wages, maximum hours, collective bargaining, and the punishment of violators of these codes.

IX. Many of FDR’s New Deal policies faced opposition from the court system.

A. The Court declared the Frazier-Lemke Act (aimed to relieve farm debtors) invalid.

B. The Supreme Court also declared that the state of New York could not regulate minimum wages (according to the 14^th Amendment).

C. The Supreme Court also ruled that the National Industrial Recovery Act, on May 27, 1935, was unconstitutional. The ruling had to do with a complaint brought against the NRA by the Schecter Poultry Company. The company said that they couldn’t be bound by the NRA (a federal institution) because they only did its business in NY, and that the NRA gave the executive branch too much power.

D. After the Court had struck down many of FDR’s New Deal programs, FDR accused them of trying to ruin the new deal.

1. In response to the Court’s actions, FDR tried to “pack” the Supreme Court in 1937, and appoint 6 new judges (that supported him) to the bench.

a) This ordeal was defeated in Congress 70 to 20, and it lessened FDR’s popularity.

X. There were many who opposed Roosevelt and his policies.

A. Many people believed that some of the WPA jobs (like hiring artists to paint murals) were useless and wasted time and money. Critics called these jobs “boondoggles”.

1. Critics were given another reason to condemn FDR and his policies when the Recession of 1937 hit the American economy.

a) Roosevelt’s advisors were divided on how to solve the

issue.

b) The policies of John Maynard Keynes influenced FDR and his advisors as they were deciding what path to take in leading the country out of the recession.

B. The Conservative opposition to the New Deal was rooted in the fact that FDR had departed from the promises he made during the 1932 election campaign.

1. Conservatives also formed the Liberty League to oppose the heavy taxation of the rich, greater government spending, business class restrictions, and pro-agricultural, pro-labor legislation.

C. There were many people who publicly voiced their opinions against FDR and the New Deal.

1. Huey Long complained that FDR wasn’t doing enough to end the Depression.

2. Upton Sinclair believed that the government should own all factories and that the rich be taxed more.

3. Charles Coughlin preached that the government should take over every business and employ every worker.

D. As the Depression wore on, many Americans began turning to radical political philosophies. The Fascists and Communists gained a large following in the ‘30’s.

XI. Esteemed British economist John Maynard Keynes’s ideas played an important role in shaking the status quo of economics in the 1930s and 1940s.

A. Keynes was born in Cambridge, England, in 1883. He graduated from Cambridge University and joined the civil service in India, and when this got too boring for him, he worked on overseas finances at Britain’s Treasury during WWI.

B. He was a delegate to the 1918-1919 Paris Peace Conference, where he strongly voiced his opinions against the harsh reparations imposed on Germany. These opinions he voiced in his voice, The Economic Consequences of the Peace.

C. He also wrote the book, The General Theory of Employment, Interest, and Money, in 1936. In this book, he argued that in order to keep employment up, government have to unbalance their economy and run deficits.

D. Keynes also denounced Say’s Law, which was the idea that supply always created its own demand, and that there could never be an insufficient in demand.

E. During WWII, inflation became a large threat and Keynes began to advocate a wage/price interaction, as well as stable union wage claims and the fixing of prices based on these wages.

F. After WWII, Keynes wrote How to Pay for the War, in which he explained how governments should manage the markets when the economy is being pushed to its limits. He also laid out the idea for the World Bank and International Monetary Fund (a group of global banks that could issue their own currency).

XII. Despite New Deal measures, the unemployment rate still remained high in 1938, the year that officially ended FDR’s program.

A. When America entered WWII, its economy began to stimulate again because the demands of the war caused job opportunities to open up in the fields of ship and plane building, for example.

1. Finally, in 1944, the unemployment rate fell below 1%.

The 1920s, for many Americans, was a time of prosperity and economic growth, characterized by a thriving market, a rise in prices (brought about by the end of World War I), and an expanding and changing culture. The year 1920 brought about the ratification of the 19^th Amendment, which granted women the right to vote, and the year 1927 found Charles Lindbergh making the first ever solo flight across the Atlantic Ocean. However “roaring” the 1920s were, though, they came to an almost screeching halt when, in September 1929, the prices of stock on the stock market dropped suddenly, followed by Black Thursday (October 21, 1929), a day in which the New York Stock Exchange was estimated to have lost $8 billion in paper money (Stein, 19). The stock market “crash” of 1929 left investors afraid and unwilling to put money into the failing economy, which caused a spending freeze in the American economy, causing “a terrible snowballing effect” (Stein, 25). Such a “freeze” sent many formerly prosperous Americans to the cities, looking for low-paying factory jobs, thus causing a growing gap between the rich and the poor. This gap, along with the failing economy and lack of spending, combined to bring about the Great Depression, one of the worst economic declines in U.S. history. The Hoover Administration, which had been only mildly successful in improving the economic situation of the country, was ousted in the 1932 election; instead, the country put its faith in the fresh-faced Democratic candidate, Franklin D. Roosevelt (Stein, 42). As he was to prove almost immediately upon his entrance into office, FDR was a man of action, which could be seen most clearly in his First 100 Days and the ensuing New Deal (along with other drastic economic policies influenced by the esteemed economist John Maynard Keynes) that would eventually aid in leading America out of the Great Depression. Although some of their policies and ideas were controversial, both Franklin D. Roosevelt and British economist John Maynard Keynes provided an indispensable source of leadership and skill in bringing America out of the Great Depression, Roosevelt with his New Deal, and Keynes with his radical theories and writings that a desperate America could not help but experiment with.

As an immediate result of the stock market crash and resulting Great Depression of 1929, many business and banks closed their doors. As more and more banks began to close, people engaged in the practice of “running” on the bank, where they would take out all their invested savings, so as to prevent bankruptcy when the bank eventually closed. This meant that, in essence, as the economy began faltering, people found more security in keeping all their money under a mattress or in a sock under a loose floorboard rather than in an established bank. In order to stop the practice of “running” on the bank and to halt the negative effects it was having on the deteriorating economy, newly elected President Roosevelt initiated his New Deal, which was a long term plan to help the economy by providing cash for the poor and by instituting lasting plans for economic revitalization (Stein, 29).

Beginning in 1933, the New Deal created a series of agencies that were designed to stabilize, revive, and eventually bring the American economy completely out of the Great Depression. The people that President Roosevelt enlisted to help him come up with and put into effect the various New Deal policies were called collectively the Brain Trust, among them college professors, intellectuals, and respected economists. Included in the Brain Trust were Harry L. Hopkins, known for his unique rapidity, Hugh Johnson, a prominent businessman turned New Dealer, the meticulous and honest Harold Ickes, Frances Perkins, the first woman Cabinet member, and the African-American economist Robert Weaver (Stein, 45). FDR’s New Deal policies were also heavily influenced by the British economist John Maynard Keynes, who believed that massive government spending would cause employment rates to rise and the economy to be revived. Roosevelt, who heeded Keynes’s advice and put his theories to the test on a large scale, implemented hundreds of New Deal policies that called for federal spending to fund public works projects, subsequently creating jobs and allowing investors to put more trust in the faltering economy (Landry).

Also, being such a massive and new policy that would encompass almost every American citizen, the New Deal needed to be “sold” to the public; FDR was able to do this with his Fireside Chats, a series of radio interviews broadcast by the President himself. The chats were very informal, portraying Roosevelt as an old, affable friend sitting and talking by the fireplace, and it was because of the personal feel that these chats had that the New Deal was able to gain large popular support among the common American people (Stein, 47).

Formally commencing the New Deal was an unprecedented period of legislation ratification that would become known to history as Roosevelt’s First 100 Days in office. One of the first measures of the 100 Days was Roosevelt’s Emergency Banking Act, which closed all banks in order to check and see if their records were financially sound. Those banks whose records were deemed sound were authorized to open their doors after the declared “Bank Holiday”, ending the practice of “running” on the bank (Stein, 46). Other legislation passed during the First 100 Days included the ending of Prohibition and the ending of the gold standard in 1933, which improved America’s selling ability because its banks were no longer required to back up every piece of currency with its value in gold. Such measures helped in stimulating the economy; for example, ending Prohibition would allow the sale of alcohol again.

The First 100 Days also brought about the creation of various social betterment programs; for example, the Civilian Conservation Corps (CCC), established in March 1933, created jobs by sending unemployed men to plant trees and cut trails in wilderness areas. The CCC gave jobs to 250,000 struggling young men (18-25 years old), who, while employed, received room, board, and $30 a month, $25 of which was sent back to their families, and $5 of which could be used for spending money (Stein, 52, 55). The Agricultural Adjustment Act (AAA) stabilized crop prices by limiting the amount of crops and livestock farmers could grow, based on the supply and demand principle (the idea that if the supply of something is greater than the demand for it, the price goes down, and vice versa). In accordance with this principle, the AAA sent agents to inspect farms and see if they had produced too much of a certain crop or product; if these farms had in fact produced too much, the government was given the permission to plow under crops and slaughter livestock. Parity was another feature of the Agricultural Adjustment Act, which ensured that a farmer would receive for his products a price that would give them purchasing power equal to that of August 1909-July 1914 (known as the “base period”) (Stein, 19). Also included in the AAA was the Thomas Amendment, which gave the President three specific powers: 1) to coin silver at a rate of 16 (silver): 1 (gold), 2) to issue paper money, and 3) to change the gold content of the dollar. Following what Britain had done in 1931, President Roosevelt chose to put the 3^rd option into action, which he did by stabilizing the dollar at a new value in terms of a specific amount of gold (Stein).

The First 100 Days also brought about the Federal Emergency Relief Act, which set aside $5 million to give to the needy, as well as the Emergency Farm Mortgage Act, which halted foreclosures on farms by allowing farmers to refinance their home mortgages so as to make them easier to pay off. The Securities and Exchange Commission, created in 1934, established laws calling for the publicizing of financial records of corporations who wished to sell stocks and bonds on the stock market. Knowing the financial records of certain companies would allow an investor to determine how much each company was worth, so as to prevent the overvaluing of stocks (a principal cause of the crash of 1929). The Truth in Securities Act also protected the public from fraud in stock issuance by stopping high-powered salesmen from taking advantage of naïve buyers (this act was enforced by the Federal Trade Commission). Lastly, the Works Progress Administration (WPA), founded in 1933, created jobs and improved conditions by building bridges, highways, and sewage systems; the WPA was uniquely liberal in that it gave black and women workers the same wages as men. The WPA also employed writers, artists, and actors by investing in projects to create murals, write local histories and studies, and restore old theatres. Furthermore, The Federal Housing Administration paid mortgagees for struggling homeowners, allowing them to keep their homes (Stein, 55-67).

This stream of legislation constituted the First 100 Days of Roosevelt’s term; however, after the First 100 Days, New Deal legislation continued to be passed and altogether welcomed by the public. For example, the National Youth Administration gave jobs to college and high school students, and trained those not in school to become stonemasons, carpenters, and cooks. Similarly, the Farm Credit Administration gave loans to bankrupt farmers, which saved thousands of family farms and brought peace to rural areas. A rather unique New Deal organization, the Tennessee Valley Authority authorized construction of a dam that would quell the violent and destructive flooding of the Tennessee River (Schraff, 62). The set of 35 dams not only stopped the flooding, but also brought water-powered electricity to the impoverished Tennessee Valley region. The undertaking, altogether costing $2 billion, created a 652 mile long inland waterway that connected the South with the Great Lakes, Ohio, Missouri, and Mississippi River systems, allowing barges to bring cars, steel, etc. from the north directly to the Deep South. The TVA also created jobs for the impoverished farmers of the Tennessee Rover Valley, and it brought affordable, federally partitioned electricity to the area (something that had never been done before) (Stein, 61).

Subsequently, the Rural Electrification Administration gave loans to private power companies, which would string power lines to rural, isolated farming villages. Other New Deal legislation included the Kerr-Smith Act of 1934, which taxed the sale of tobacco by farmers who did not sign AAA contracts, a type of federal regimentation that the farm community was not wholly used to (Perkins, 19). Another legislation, the Home Owners Loan Corporation Act, gave out 300,000 federally guaranteed loans to struggling homeowners within the course of one year. With these loans, homeowners were able to pay off their houses over a longer period with lower monthly payments; in all, the act allowed 1,000,000 Americans to keep their homes instead of having them foreclosed on (Stein, 62).

The most historic of all New Deal legislation, however, was the Social Security Act of 1935, which promised a system of social security, of “cradle to the grave” insurance (Dubofski, 267). The Act had three specifications: 1) unemployment compensation was to be handled by the states with 90% of a national payroll tax, 2) old-age pensions would be given by the federal government with taxes upon employees and workers, and 3) assistance for the needy would be provided by grants to the states. Furthermore, the Act originally gave cash to retired people who had worked in commerce or industry, but was later expanded in 1939 to give payments to the families of the retired as well; it also included a program of unemployment insurance, which gave money to the unemployed while they were looking for a new job (Stein, 56). The provisions of the Social Security Act were set to begin in 1942, all of which are still in effect today (however, today, Social Security has been expanded today to include programs like Medicare, which gives health insurance to those over 65) (Schraff, 82). President Roosevelt considered the Social Security Act his greatest achievement during his twelve years in office, and continuously recognized its lasting importance and significance, noting, “If the Senate and House of Representatives in this long and arduous session had done nothing more than pass this [the Social Security Act] Bill, this session would be regarded as historic for all time.” (Leuchtenburg, xvii).

Monetary policy was also a significant, as well as critical part of the New Deal. The Glass-Steagall Act, passed in 1933, created the Federal Deposit Insurance Corporation (FDIC), which guaranteed that the first $5,000 any customer put in the bank would be backed up by the government if the bank failed. The act also forbade banks from participating in investing in the stock market or undertaking land speculation schemes with customers’ money (Schraff, 54). The 1934 Tax Bill raised income taxes by 1% for incomes of $50,000, by 6% for incomes of $100,000, and by 16% for incomes of $3,500,000. Inheritance taxes were raised by 7%, and taxes were eased on small businesses, while they were raised on larger ones (Perkins, 34). Acts like this and The Revenue Act of 1936/The Wealth Tax Bill, which allowed the federal government to take as much as 70% of large incomes, caused a substantial rift between Roosevelt and the rich. The Banking Act of 1935 also gave the Federal Reserve Board authority to regulate interest rates, meaning that when the economy slowed, rates could be lowered to make borrowing easier and to stimulate the economy. The opposite could happen as well when the economy “heated” up (Schraff, 82).

The New Deal not only affected American fiscal policy, it affected and changed the condition of labor as well. During the early New Deal years, unemployment figures were high, which caused workers to fear that they could be fired suddenly and without notice. The 1930s became a time characterized by anger, tension, and strikes in the workplace, most notably a San Francisco Longshoremen’s strike that shut down the whole city in 1934, and a sit-down strike at General Motors that shut down the entire plant. As strikes became more frequent, workers found more security in union and other labor organizations, the biggest one being the American Federation of Labor. The AFL, along with other labor organizations such as the Committee for Industrial Organization, was able to organize unions in all major American industries, as well as win significant gains for labor (Leuchtenburg, xvii-xviii).

In 1935, the National Labor Relations Act gave federal protection to such unions by creating the National Labor Relations Board, which gave workers the right to unionize and bargain with bosses, and which heard and ruled on grievances from workers (Dubofski, 256). The Fair Labor Standards Act also set a minimum wage at 25 cents/hour, a maximum workweek at 44 hours, and forbade children under 16 from working in factories during school hours. The National Industrial Recovery Act was created, which set up the National Recovery Administration (this administration would later be declared unconstitutional by the Supreme Court because of its inability to stimulate the economy and to solve labor disputes) (Schraff, 63). The National Industrial Recovery Act established the right to organize and bargain collectively, the right of laborers to be free from the coercion of employers, the right of laborers to freely join organizations without the fear of losing their job, and the right of the government to force management to comply with maximum hours and minimum wages. More specifically, Section 7(a) of the act, which called for the right to unionize, protected workers from management by allowing them to unionize (Dubofski, 254).

Similarly, the Wagner Act, created by senator Robert F. Wagner of New York, forced management to bargain collectively with labor, represented by a union chosen by a secret ballot. Also known as the National Labor Relations Act, it had its own National Labor Relations Board, which took care of administering the Act’s provisions (the Board did not, however, act as a mediator in labor disputes) (Schraff, 80). The Walsh-Healey Public Contracts Act also established the 40-hour workweek and minimum wage for employees making supplies for the government. As can be seen, workers benefited greatly from most New Deal measures; the judicial system supported them, as in the case of Thornhill v. Alabama, which declared picketing a legitimate exercise of free speech, the President supported them in his numerous bills calling for exemptions from antitrust laws, etc., and even the general public began supporting labor during this time upon realizing that the re-stimulation of the economy was dependent on the well-being of labor.

Despite these strong and numerous pro-labor conditions, bosses were able to find loopholes through which to escape the many New Deal measures. They often used spies to report back to them on which workers were involved in union activity, who would then be “blacklisted” by their bosses. Notwithstanding this illegal activity on the part of management, the LaFollette Civil Liberties Committee revealed the secret spying, etc. of the bosses in one of their numerous reports, a shocking revelation for the public. Their reports also uncovered the “Mohawk Valley Formula” used by management, which included using local police to align the community against a group of union organizers, as well as exposed employers’ use of guns and tear gas in order to suppress rebellious workers (Dubofski, 261-263).

As can be expected with any radical program implemented on a large scale, Roosevelt’s New Deal faced a considerable amount of opposition. The Supreme Court proved to be a strong source of dissent to many of the New Deal measures. For example, the Supreme Court invalidated the Frazier-Lemke Act (to relieve farm debtors), and it supported a New York worker who brought suit against the minimum wage law, which she said violated the 14^th Amendment (Perkins, 48). The Court further dealt a blow to the New Deal by supporting the Shecter Poultry Company in its suit against the National Recovery Administration (which in the same case was declared unconstitutional), presented on the grounds that the company could not be bound by the NRA (a federal institution) because the company did its business only in New York (Schraff, 84).

After many of his measures had been struck down by the Supreme Court, Roosevelt became convinced that the Court was aiming to ruin the New Deal by opposing all of its provisions. Subsequently, Roosevelt proposed his “court packing” plan of 1937, in which he recommended that 6 new judges be appointed to the Supreme Court (they would be chosen by him), which would inevitably lessen the anti-New Deal sentiment coming from the judiciary branch. The “court packing” ordeal lessened Roosevelt’s popularity, making many think he was trying to ruin the separation of federal power and institute a dictatorship. Even Roosevelt’s friends in office refused to support the measure, and it was eventually defeated in Congress 70 to 20 (Stein, 86).

In the fall of 1937, an economic recession struck the American economy. Although not as severe as a depression, the recession was worsened by Roosevelt’s unwillingness to spend money, as the government at that time was already millions of dollars in debt. The economic downturn caused a rift within the Roosevelt Administration; some of FDR’s advisors, like his Secretary of the Treasury, Henry Morgenthau, Jr., urged him to balance the budget and abandon the course of great government expenditure as had been taken earlier, while another group, headed by Harry Hopkins of the WPA, urged Roosevelt to unbalance the budget by running a deficit and increasing government spending. Although the former group believed that balancing the budget would increase spending in the private sector, the latter faction was backed up by the already-proven-successful policies of John Maynard Keynes. Keynes, who attributed the 1937 recession to the American economy’s lack of preparation for an increase in investment (as public relief programs helped more Americans get on their feet again, investment and spending altogether increased), had, up to that point, theorized on the effictiveness of government spending in reversing a depression and making up for the lack of investment in the private sector of business (Dillard, 157). Keynes, who also believed that copious government expenditure would cause a re-stimulation of the economy, had a large impact on both Roosevelt and the advisors who helped coach him out of the recession of 1937, and although FDR was at first reluctant to spend more money in order to rebound from the events of 1937, he eventually recognized the need for more government expenditure, as called for by Keynes. Thus, in March 1938, Roosevelt announced a plan for a new federal outlay agenda, which, within the course of just months, would help to significantly improve America’s economic situation (Blum, 715).

Critics, who dubbed the period the “Roosevelt Recession”, said that the failing economy was proof that the New Deal had failed, blaming its failure on FDR and uniting Southern Democrats and Republicans against the president (Schraff, 57). Cynics and other detractors, galvanized further by the recession of 1937, carped at Roosevelt’s New Deal policies, which they thought were sluggishly passed and altogether disadvantageous. They continually criticized the Works Progress Administration, which invested millions of dollars in public works programs, including sometimes the building of sidewalks in remote areas of cities, or the hiring of artists to paint murals. Hecklers called these jobs “boondoggles”, or useless jobs that wasted time and money. The Agricultural Adjustment Act was also attacked for ruining crops (for example, by putting kerosene on oranges) without letting the hungry take advantage of the surplus. Conversely, subduing the voice of the opposition, the Federal Surplus Relief Corporation turned slaughtered pigs into frozen pork to give to the hungry, and Roosevelt authorized the War Department to create “rolling kitchens” to feed the starving. Roosevelt could also argue that although some jobs created by the New Deal were considered “useless”, the organizations that funded the new jobs were heralded by workers, whom were given a second chance by such programs (Schraff, 60).

The strongest opposition to Roosevelt and the New Deal, however, came from the right, and was mostly rooted in the fact that Roosevelt had so departed from the promises he made during his 1932 election campaign. For example, in 1932, he promised to cut back government spending; however, New Deal programs had, by the mid-1930s, put the US $8 billion further into debt (Leuchtenburg, xxiv). The Conservatives formed a group opposed to Roosevelt’s heavy taxation of the rich, expansion of government spending, business class restrictions, and pro-labor, pro-agriculture legislation, called the Liberty League (Perkins, 29). H.L. Mencken, in commenting on Roosevelt’s insincerity, encapsulated the popular Conservative stance against Roosevelt’s policies, “If he [Roosevelt] became convinced tomorrow that coming out for cannibalism would get him the votes he so sorely needs, he would begin fattening a missionary in the White House backyard come Wednesday.” (Leuchtenburg, xxv). Governor Huey Long of Louisana complained that his ideas were better than the presidents’, claiming that his program of free homes, free education, cheap food, and the division among the people of 1/3 of the nation’s money was best for the country (Schraff, 74). Doctor Francis Townsend advocated that $200 per month should be given to those over 60, who would be required to spend the money so as to stimulate the economy. Upton Sinclair also believed that the government should own all factories, that the rich should be taxed more, that everybody over 60 be given a $50 per month pension, and that people should live on big, communal, cooperative farms.

Perhaps the most sadistic of Roosevelt’s critics, however, was the Reverend Charles Coughlin, head of a radio station in Detroit, Michigan. Claiming that all bankers are devils and that the government should “take over everything and employ everybody” (Schraff, 76), Coughlin blamed the Depression on Communism, Jewish bankers, and avaricious stockbrokers. Although his career was short-lived, he was able to make a name for himself as a compelling demagogue (a leader who gets their power by appealing to the passions of the masses) before his lectures became conspicuously anti-Semitic and the Catholic Church ordered him to step down (Stein, 80).

As the opposition to the New Deal gained strength, radical movements, especially those that had originated in Europe, acquired a greater following in the United States. As Americans began to look at the recent success Germany had had in coming out of their depression, they began to wonder what was wrong with their own country. This caused many Americans to turn to Fascism, a transition clearly outlined in Lawrence Dennis’ book, The Coming of American Fascism (Schraff, 76). Others believed that the continued economic disappointment in America would bring about a Communist revolution. At the 1934 Communist party convention, Langston Hughes read the poem he had written in opposition to the New Deal, taken here from William E. Leuchtenburg’s book, The New Deal, “’Cause the pot’s still empty, and the cupboard’s still bare, and you can’t build a bungalow out o’air—Mr. Roosevelt, listen! What’s the matter here?” (Leuchtenburg, xxiii)

The anti-New Deal sentiment and the emergence of radical movements in America helped not only to shape the culture of the U.S. and the direction it was taking in its journey out of the Great Depression, but influenced the 1936 election as well. In the election, the Democrats, who had nominated Franklin Roosevelt for reelection, promised a balanced budget, a housing program, anti-monopoly laws, and a strong national government that would deal with wage problems, maximum hours, child labor, and working conditions. On the other hand, the Republicans, who had nominated Alf Landon, endorsed old age and unemployment payments by a general, direct tax, pledged to protect the right to organize and bargain collectively without interference, endorsed minimum wage and maximum hours, and denounced federal power and the “priming the pump” method of government spending (spending money to re-stimulate the economy). Despite speculation, FDR scored the greatest landslide victory in U.S. history, receiving the most votes any candidate had ever received, and the greatest percentage of the popular vote received by any candidate. The Communists and Fascists also won significant percentages of the population, although not enough to sway the election or put them in the lead (Perkins, 52-53).

In a time that called for experimentation with new, radical economic policies, the New Deal was not entirely by itself in being a completely new and innovative economic policy. During the early to mid-1920s, the accepted school of thought concerning supply and demand was Say’s Law, which said that supply always creates its own demand, and that there could never be an insufficiency in the demand of an economy. Esteemed British economist, John Maynard Keynes, almost shattered his country’s (and subsequently, the world’s) fiscal status quo by radically denouncing theories like Say’s Law, saying that an insufficiency (as laid out in Say’s Law) could in fact exist, and even have an impact as great as to pull down production (Galbraith, 2).

Keynes was born in Cambridge, England in 1883; his father, John Neville Keynes, was a noted economist, and his mother, Florence Ada Keynes, was the mayor of Cambridge. As a young man, Keynes attended Eton Prep High School, and later graduated from Cambridge University (Reich). While in college, Keynes was greatly influenced by the semi-secret club he joined, called the Apostles, where he met and studied with the philosopher G.E. Moore, whose Pricipia Ethica encouraged much of Keynes’s work (Parker, 36). After graduating from Cambridge University, Keynes enlisted in the Civil Service (ironically, his lowest mark on the Civil Service Exam was in economics), and later became editor of the Economic Journal in 1911 (Fonseca). After leaving the Civil Service, Keynes worked on overseas finances at Britain’s Treasury during World War I, and in this position, he decided to balance the French economy by having Britain buy paintings at low prices for the National Gallery.

Keynes was later selected to be a delegate to the 1918-1919 Paris Peace Conference, where he strongly voiced his opinion against the harsh reparations imposed on Germany (Reich). Further voicing his opinions against the reparations forced upon Germany, Keynes wrote his book, The Economic Consequences of the Peace, arguing that Germany could not possibly pay the reparations and that the payments would impoverish Germany and economically threaten the rest of Europe. In 1913, Keynes wrote his first book, a book on Indian currency, and in 1921, he published his Treatise on Probability, which denounced the classical theory of probability. In 1925 and 1926, Keynes wrote two pieces in which he spoke out against laissez-faire economy, and in 1929, he wrote a pamphlet advocating the use of public works to create jobs and reduce unemployment rates. During these years he also spoke out on how to solve Germany’s reparations problems, and he condemned the English Treasury’s fear of deficit spending. In 1930, he published his Treatise on Money, which set forth the Wicksellian Theory of Credit Cycle, which advocated a liquidity preference theory of interest (investors will demand high interest rates because of the risk that is taken in investing money on the Stock Market). This book led to the creation of a Cambridge economist reading group, known to the world as The Circus. The Circus gave reports of their discussions to Keynes, who used their ideas to help him reform his own ideas (Fonseca).

Keynes’s Essays in Persuasion, published in 1931, also condemned the idea of returning Britain to the gold standard, and in 1936, Keynes wrote the book, The General Theory of Employment, Interest, and Money, in which he put forth a theory of a demand-determined economy that had virtually no unemployment. The book also condemned the effectiveness of price flexibility as a way to cure unemployment, it introduced the idea of uncertainty and expectations in economics, and it put forth the idea of using monetary policy to avoid recessions and control economic booms (Reich). In his General Theory, Keynes also argued that in order to keep employment rates up, governments have to run deficits when the economy is slow, meaning that governments have to “unbalance” their budgets in order to pick up the slack of private companies who are unwilling to invest (Parker, 36).

Many of Keynes’s ideas helped to influence America during the Great Depression, namely, FDR and his New Deal. In 1933, Keynes wrote a letter to FDR in which he denounced the NRA and urged the President to make up for the lack of demand in the U.S. by implementing more public expenditure. Keynes suggested also that the U.S. government borrow money, so as to avoid raising taxes as they increased their spending (Galbraith, 2). Keynes wrote another letter to Roosevelt in 1938, urging an ambitious public works program that would help the country out of the recession it was facing at the time (Perkins, 66). Although these letters encouraged deficit spending, a practice Roosevelt had chided Hoover for using in the 1932 election, they proved critical in eventually causing Roosevelt to take up the practice of deficit spending (Reich). Fortunately, this practice proved extremely successful, for it was deficit spending that helped America out of the Roosevelt Recession of 1937, and it was also deficit spending that helped stabilize levels of production and keep the business cycle in check during World War II (Galbraith, 1-3). It was not until after the War had ended, however, that America decided to fully cement the practice of using a deficit into their economy, which they did in the Employment Act of 1946. This act made the government responsible for promoting maximum employment, production, and purchasing power, and it also put the government in charge of manipulating the economy in order to avoid recessions and “overheating” (Reich). Keynes also influenced Roosevelt’s policies, especially during the New Deal, through his “priming the pump” idea. This was the principle that in order to get out of a depression, the government must spend money, just as a farmer drawing up water from a well must add water to the top; this idea was a fundamental part of Roosevelt’s New Deal policies (Schraff, 91).

As the Great Depression came to a close and World War II began, Keynes remained a popular and influential voice in the economic world. During World War II, when inflation threatened the stability of the world economy, Keynes advocated stable union wage claims and for the fixing of prices to be based on those wages so as to avoid inflation (Galbraith, 3). His book, The Economic Consequences of the Peace, written years earlier in response to the harsh reparations payments forced upon Germany after World War I, was extremely influential in the peace making of World War II (Reich). The victors of World War II heeded Keynes’s advice and, rather than economically subjugated the losers, invested money to make trading partners out of the losers and build middle-class democracies in the defeated nations. Keynes wrote another book in response to World War II, entitled, How to Pay for the War, in which he explained how governments should manage its markets when the economy is being pushed to its limits (Parker, 36). In the book, he also identified the inflationary gap idea, which Keynes said was created by a rationing of resources during the war, and he laid out the idea for the World Bank and International Monetary Fund (IMF) (Fonseca). Subsequently, the World Bank and IMF created a group of multilateral agencies of economies that were free from American domination (Parker, 36). These nations would become global banks that could issue their own currency (bancor), and that could stabilize the world economy for long-term growth. Accordingly, governments would manage currency exchange rates, and prices were to be stabilized by publicly controlled “buffer” stocks. The World Bank and IMF would also oversee the White Plan system, which called for the creation of fixed exchange rates for the dollar, and for the dollar to be matched to gold (Fonseca).

The Keynesian Revolution and the collective impression that John Maynard Keynes left on the world of economics split the monetary world in two (Fonseca). Keynes’s belief that the government should oversee and influence the market in a way that benefited all, and his idea that the government’s influence on the economy should prevent as much toiling and suffering as possible were completely revolutionary to the world in the 1920s and 1930s. His “revolution” against conservatives, whom he referred to as “old gentlemen tightly buttoned up in their frock coats, who only need a little friendly disrespect to be able to bowel over like ninepins” (Parker, 36), gained a huge following among the world’s youth, and eventually led to the Neoclassical economic belief in the determination of prices, outputs, and income distributions though supply and demand (Parker, 36).

The New Deal never officially ended, rather, it “faded away” as FDR’s relationship with Congress, Republicans, and Southern Democrats deteriorated. Roosevelt’s popularity also worsened among the American people, especially after the Court-Packing scandal and the Roosevelt Recession of 1937. The end of the New Deal can also be attributed to the coming of World War II, which caused Americans to refocus their attention on foreign policy, and, after 1941, in winning the war. Also, the reform spirit that had accompanied the New Deal began to die down after 1938, and the New Deal relief programs were no longer needed with the coming of wartime prosperity. The gradual “fading away” of the New Deal was caused as well by the ebbing of Democratic power in Washington; they eventually lost control of Congress in 1946, and the party also experienced a shift in Democratic leadership to the Southern, more Conservative Democrats (Perkins, 70).

Although the New Deal gradually and ultimately died out, the social, cultural, and political effects it had in America were everlasting. The New Deal set a precedent for future politics that made the government responsible for health, welfare, and employment, centralized federal power, expanded presidential power, and increased the influence of organized groups on society and politics. The New Deal also made great demands on the average citizen to get involved in the government and its programs, which caused common citizens to be more aware of and personally connected to their federal government. For example, when Americans referred to “the government” before the New Deal, they were referring to their town or local government. After the new Deal, however, people began to refer to the national government as “the government”, as we do today (Rozwenc, vi). The New Deal, nonetheless, created a large rift between social classes and pitted them against each other, and as a direct result of the power struggle between labor and management throughout the 1930s, social and class tensions became characteristic of the American culture (Perkins, 75).

After the outbreak of the Great Depression, Americans became tired of President Herbert Hoover, who continued to deny to his people the gravity of the threat facing the American economy as a result of the Great Depression; they also became weary of the Old Order (the Republican principle that advocated a large gap between the rich and the poor) that Hoover supported. Hoover was associated with the poverty and destitution that characterized America during the days of the Depression, and the impoverished shacks where the poor and jobless congregated came to be known as Hoovervilles. Hoover was so unpopular, in fact, that in the 1932 Presidential election, he failed to even win his own home state of Iowa. This is why, when he first came into office, Roosevelt had the rather testing job of reviving the ruinous American economy and the downtrodden American people. Roosevelt was able to do this and more with his New Deal, which solved the American economic problem by making available to the people many social benefits and by restoring faith in American democracy (Leuchtenburg, xiv). In fact, the New Deal was described, by Adolf Berle in William E. Leuchtenburg’s book, The New Deal, as aiming to:

“Introduce a power of organization into the economic system which can be used to counterbalance the effects of organization gone wrong; and to make sure that the burdens of readjustment are equitably distributed, and that no group of individuals will be ground to powder in order to satisfy the needs of an economic balance.” (Leuchtenburg, xv)

Although many critics argued that the New Deal was expensive and complicated, and that 8,700,000 people still remained unemployed in 1939, the New Deal lives on in history as the program that saved the American economy, democracy, and legacy (Schraff, 93).

By the time the New Deal legislation had ended in the antebellum period, it had restored the American standard of living and the vision of America as the “promised land”. It had also saved American democracy and prevented tyrannical government, as was the case in Germany, Italy, and Russia pre-World War II society. It also gave the unemployed hope during the darkest hours of the Great Depression, and created lasting programs for social betterment (Rozwenc, vi). In summing up the effects of the New Deal and its legislation, Roosevelt vindicated, in William E. Leuchtenburg’s book, The New Deal,

“Compare the scoreboard which you have in Pittsburgh now with the scoreboard which you had when I stood here at second base in this field four years ago. At that time, as I drove through these great valleys, I could see mile after mile of this greatest mill and factory area in the world, a dead panorama of silent black structures and smokeless stacks. I saw idleness and hunger instead of the whirl of machinery. Today as I came north from West Virginia, I saw mines operating, I found bustle and life, the hiss of steam, the ring of steel on steel—the roaring song of industry.” (Leuchtenburg, xxii)

However effective and radical the New Deal was, though, it eventually, as all great things have to do, came to and end at the outbreak of World War II. In December 1941, Roosevelt was forced to ignore the policy of isolation he had followed so closely and that had been so revered by the American citizenry in the late 1930s, and enter World War II on the side of the Allies (Leuchtenburg, xxvi). Although participation in the war violated the United States’ isolation policy, mobilization and the creation of a wartime economy helped to stimulate the American financial system. The demands of the war caused job opportunities to open up, especially in the fields of ship and plane building, and by 1944, the unemployment rate fell below 1%, a figure that had not been seen since the outbreak of the Great Depression (Stein, 106). It was not only World War II that helped America out of the Great Depression, however; John Maynard Keynes and his theories played a key role in leading America out of the Depression as well. His revolutionary ideas condemning laissez-faire economics had never before been heard of in the fiscal world, and his theories concerning the laws of supply and demand and “priming the pump” were, in the case of America and the Great Depression, just crazy enough to work. For, if it were not for “priming the pump” America would not have invested billions of dollars in public works projects, and the New Deal would have failed miserably.

It was also John Maynard Keynes, strongly in favor of the middle class and the common man, who was responsible for helping to close the gap between the rich and the poor in America and raise employment rates. It was because of the New Deal and the man that helped to shape it that America was able to get itself back on its feet again after the blow it had been dealt by the Great Depression, and it was because of the New Deal and Keynes that the Blue Eagle (the symbol of the National Recovery Act) was able to fly high for years after the New Deal had ended and, some time after Keynes’s death, President Richard Nixon was able to proclaim, in Reich’s online article, “We are all Keynesians now.” (Reich)

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