The New Deal saved this country from the Great Depression. The depression was caused by over zealous enthusiasm in the stock market. The lack of adequate supervision by regulation of trades in the stock market and the permitted overoptimistic loans by banks and investors were the primary causes. This lead to high consumer debt. When the GDP fell for two straight months in the late summer of 1929, it started to cause a lack of confidence in the market. An in October the lack of confidence turned into a panic and a run on the banks.
The recession of 2008 was caused by the over zealous enthusiasm in the stock market. The lacks home loan requirements by banks and mortgage companies. The unregulated default swaps of bundled home mortgages. This was caused by the 1999 repeal of the Glass-Steagall Act which regulated stock trades that was enacted in the New Deal. This lead to large amounts of consumer debt just like in 1929, which ended in lower demand for consumer goods. An like in 1929 when factory output declined and the GDP remained flat for two straight months confidence started to wane. An investors started to try to sell their bundled mortgage assets. Because of the lack of regulation and adequate record keeping, no one knew what they were worth. Also like in 1929 the banks did not have adequate reserves to cover their losses, they did not even know what the losses where. So within a human life time the same set of circumstances in the US economy lead to a massive down turn in the economy.
The response of the US federal government in 1929 by the Hoover administration was to try to balance the budget and stay with the gold standard. Plus to allow the banks to stay open and fail. From 1929 to 1933 40% of banks failed (9,490 out of 23,697). This caused the remaining banks to call in loans, most could not be paid. An hold onto what money they had in reserve. This lead to a even more spiraling downward of employment. The massive unemployment caused huge emigration of people back to European countries. The monetarist view of the economy was not working.
When Roosevelt took office in March 1933 he closed the banks. He keep them closed till he could pass regulatory legislation. In that same month the Emergency Banking Act was drafted and signed into law. It allowed the strongest banks to reopen under treasury supervision. An smaller weaker banks were closed and consolidated into larger banks. In the end most depositors got 85 cents on the dollar. This lead to the Glass-Steagall Act that limited commercial bank securities activities and affiliations between commercial banks and securities firms to regulate speculations. It also established the Federal Deposit Insurance Corporation (FDIC). The act insured deposits to bring an end to the risk of runs on banks. In the 1920‘s more then 500 banks a year would fail. After this act less then 10 a year. This brought stability to the banking economy. In April a series of laws and executive orders the government suspended the gold standard. This stopped the out flow of gold from the treasury. The US would no longer pay out gold on demand for the dollar. Gold would no longer be considered valid legal tender for debts. the Gold Reserve Act in 1934 raised the price of gold to 35 dollars a troy ounce. This allowed the the Fed to increase the money supply needed in the market. It is believed that this raised production 25%. In 1934 the US Securities and Exchange Commission was established. The commission regulated the stock market and prevented corporate abuses relating to the sale of securities and reporting. Though this stabilized the banking economy it was not enough to bring the country out of depression. Unemployment was still very high.
Even though Roosevelt was philosophically in favor of balanced budgets he called John Maynard Keynes to the White House in 1934. Mr. Keynes supplied endless amounts of figures to show Roosevelt the need for deficit spending to stimulate the economy enough to bring up employment and end the depression. After careful review of Mr. Keynes figures with many in and out of government Roosevelt reluctantly adopted the Keynesian model of deficit spending to stimulate the economy. This lead to a large number of government programs some of which are still with us today.
The Reconstruction Finance Corporation – gave loans to big businesses to build projects. Ended in 1954.
Closed the banks in 1933 to consolidate them into stronger institutions and establish regulations. Ended in 1933.
Abandonment of the gold standard in 1933. The dollar no longer tied to value of gold. Can float with international markets.
Civilian Conservation Corps. employed unskilled men to work in rural areas. Ended in 1942.
Homeowners Loan Corporation took over loans to keep people in their homes. Individuals payed back to the government. It also kept banks open.
Tennessee Valley Authority was formed in 1933 to build dams and supply electricity to the Tennessee Valley.
Agricultural Adjustment Authority was enacted in 1933 to raise farm prices and reduce over output.
National Industrial Recovery Act was enacted in 1933 to set up codes of conduct to reduce unfair competition. Also raised wages and set price controls.
Public Works Administration was enacted in 1933 to build large public work projects with private contractors. Ended in 1938.
Federal Deposit Insurance Corporation enacted in 1935 and was setup to protect the deposits of individuals to a set amount.
Glass-Steagall Act enacted 1933 and was to regulate investment banking. It was repealed in 1999.
Securities Act enacted 1933 and formed the Security and Exchange Commission which codifies standards for the sale and purchase of stock.
Civil Works Administration established in 1933 to create temporary jobs. It ended in 1934.
Social Security Act enacted in 1935 and was to protect the elderly and handicapped with financial assistants. It was paid for by employee and employer contributions.
Works Progress Administration established in 1935 to provide work for men and women in useful construction projects. It also included artists and musicians. It was over 2 million strong and ended in 1943.
National Labor Relations Act enacted in 1935 and formed the National Labor Relations Board which supervises labor relations between businesses and workers. During the depression it favored unions.
Federal Crop Insurance Corporation established in 1938 and was to insure farmers against crop and livestock loss.
Surplus Commodities Program enacted in 1936 and was to give surplus food to the poor. It is now known as the Food Stamp Program.
Fair Labor Standards Act enacted in 1938 and established maximum hours of work and minimum wage to be paid.
Rural Electrification Administration was established to provide utilities (electric, telephone, water, sewer) to rural areas in the US. This was done by public private partnerships.
Farm Security Administration established in 1935 to help poor farmers with economic and educational programs. Still exists as the Farmers Home Administration.
The implementation of the programs were the backbone of the New Deal. The underlying purpose of the programs was to regulate commerce by preventing excessive speculation and illegal activity. An forming strict banking regulations to help protect them from failure and securing assets of depositors. These measures help build confidence of the public in the government. In the 1930's these market regulations were not enough to stimulate the private sector to get the bulk of labor-force employed. That is why the for-mentioned Keynesian programs were enacted. It is the deficit spending (government investment) in the people of the country, that brought the nation out of depression. This investment stimulated growth in the economy by increasing demand for the goods and services by the now expanded labor-force.
The downturn in 1937 was due to the Federal Reserve tightening monetary policy. The Federal Reserve doubled the amount of reserves required from August 1936 to May 1937. This greatly constricted the money supply. An in doing so greatly reduced production and raised unemployment from 14% to 19%. The Roosevelt Administration countered by embarking on a 5 billion dollar spending program in the spring of 1938. Abandoning his efforts to balance the budget. By the beginning of the Second World War the US economy was recovering. Though there were still many unskilled individuals out of work. The build up to war increased demand for workers of all types.
The training and skills that many developed during the war were used to continue employment after the war was over. Yes the war help end the Great Depression, but the Keynesian economic model help set the framework for the recovery. An the prosperity that followed in the decades after.
The economic problems we face today are not exactly the same but there are many similarities in the economy to that time. I believe that the Keynesian model would work in bringing the economy back. The problem of the stimulus in 2009-2010 was it was only to banks. We need the programs like the Civilian Conservation Corp., Works Progress Administration and the Public Works Administration to bring the bulk of the workforce back to employment. For this will create demand for goods and services and stimulate economic growth. From the bottom up. What the first decade of the twenty first century has shown us is that trickle-down economics doesn't work! ONLY when there is close to full employment is the nation's economy in an upturn.
We as a nation must come to realize that huge disparity in wealth within the country is not sustainable. It erodes the fabric of our democracy.
