New deal for a new century

2011-12-17 11:27

Michael Hiltzik has recently published what he describes as a ‘modern’ history of Franklin Roosevelt’s New Deal. It is a rich and rewarding read and offers a helpful context to think about what sort of ‘new deal’ our country, and indeed our world, might need as we move into 2012.

The context
What kind of country was the US on July 1 1932 when Franklin Roosevelt, on accepting the Democratic Party’s presidential nomination, said: “I pledge myself to a new deal for the American Party”?

The country was in the grip of the Great Depression that started with the financial collapse of October 1929.

Unemployment was a staggering 22%. The banking system was failing, with 2 298 banks collapsing in 1931.

More than 1 000 families were losing their homes each day of 1933. Manufacturing had been decimated.

Agriculture was in crisis. This was the context in which Roosevelt remarked, in his inauguration speech, in March 1933: “The only thing we have to fear is fear itself.”

How the New Deal changed the US
Starting with a hurricane of legislative and executive action in his first 100 days, and continuing throughout his
12-year administration, Franklin D Roosevelt’s New Deal rewrote the rules of government, society and economy.

Invoking a first world war piece of legislation entitled Trading with the Enemy Act, Roosevelt closed the nation’s banks for a week. In some states banks had already been closed for several months. Businesses printed their own coinage and bank notes.

Roosevelt summoned congress in an emergency session, and submitted an emergency-banking act on Thursday, March 9. It was adopted by the House of Representatives at 4.l5 pm, by the Senate at 7.23pm and signed into law by the president that evening.

The following Sunday, with the banks shut coast to coast all the previous week, Roosevelt – in his first radio broadcast “fireside chat” – urged his fellow citizens that “it is safer to keep your money in a reopened bank than under the mattress”.

As Hiltzik notes, “when banks reopened...on Monday morning, they were again confronted with lines of depositors clamouring for entry – this time to return gold and hoarded currency to their accounts”.

By the end of March $1.2 billion in currency had been returned to the banking system.

In due course the Roosevelt administration and its supportive congress rewrote the rules of banking, with the Glass-Steagall Act preventing retail banks from engaging in investment banking activities. (This act was repealed during Ronald Reagan’s presidency).

The Securities Exchange Commission was created to regulate stock exchange activity. The country was partially removed from the gold standard.

Seeking to address the crisis of especially youth unemployment, in his first month in office, Roosevelt persuaded congress to create the Civilian Conservation Corps, whose first participant enrolled on April 7. By July, 275 000 young men would be at work.

By 1942 when it closed its doors, this programme would have built 200 000km of roads, 46 854 bridges, more than 300 000 soil erosion projects, strung 140 000km of telephone wires, and planted three billion trees.

Addressing the nation’s housing crisis in his second month in office, Roosevelt persuaded congress to create the Home Owners’ Loan Corporation. In its first two years of operations this new federal institution refinanced more than one million home loans, and when it ceased, active lending had financed one in five US homes.

Also in this second month in office Roosevelt and congress created the Tennessee Valley Authority, effectively a new state-owned enterprise, whose primary purpose was to challenge the monopoly of privately owned power utilities.

Finally, in response to the crisis of US agriculture in his third month in office, Roosevelt signed into law the Agricultural Adjustment Act.

This act refinanced agricultural mortgages, and provided financial incentives for US farmers to reduce levels of production that had dramatically depressed the prices of farm products.

In July this legislation was used to destroy 3.5 million bales of cotton, and to slaughter 6 million piglets and 200 000 pregnant sows.

The successes

Hiltzik argues persuasively that the New Deal “instilled in Americans an unshakeable faith that their government stands ready to succour them in times of need...(That it) established the concept of economic security as a collective responsibility”.

He argues further that the federal Social Security System it introduced, currently serving 54 million beneficiaries, is the crowning achievement of this collective responsibility.

It is interesting to note that Social Security is one of the few social entitlement programmes that remain
essentially fully funded today, unlike Medicare and Medicaid.

The Public Works Administration activities of the New Deal renewed and expanded the US’s physical infrastructure in ways that have served successive generations.

The changes introduced to banking and stock markets have eliminated bank runs, and limited bank failures.

The failures
Hiltzik’s detailed account of Roosevelt’s attempt to restructure American industry through the National Industrial Recovery Act and Hugh Johnson’s National Recovery Administration records more failure than success.

This “grand bargain” involved the suspension of anti-trust, or anti-competition regulation, in exchange for wide ranging codes that regulated production, employment, pricing and other aspects of industry.

The semi-voluntary “codes” it envisaged for industry sectors were slow to complete. Instead of transforming the nation’s fractious labour relations they appear to have exacerbated often-violent industrial action.

In a chapter dealing with the New Deal and race relations, Hiltzik makes a compelling case that Black Americans derived little or indeed no benefit from the New Deal.

This history also challenges some myths about Roosevelt’s New Deal. The first is that this was a comprehensive, well-conceived “plan”. In this account it emerges as an overwhelmingly haphazardly constructed product of the president’s pragmatic and often indecisive character.

The second is that it was a great example of “proto-Keynesian” stimulus economics. In the period 1933 to 1937 federal deficits averaged about 4.5% of gross domestic product.

The level of deficit needed to achieve a sustainable recovery (as estimated by a government economist in 1935) was in fact only reached during the war years from 1941 onwards.

Seen through the lens of contemporary American politics, the capacity of both executive and legislative arms of the federal US government to act quickly. and in a bipartisan way in the early years of the New Deal seems deeply enviable.

Roosevelt himself destroyed this pattern of cooperative government with his attempt to pack the US Supreme Court in mid 1937.

This attempted coup d’état lead to what in some ways may have been the greatest failure of all, the creation in a now mistrustful congress of the House Committee on Un-American Activities.

This congressional witchhunt on American individuals, but also on the American values of freedom and fairness, was to last well into the decade of the 50s and has left lingering scars on America’s body politic until today.

Reflections on our own times and challenges

History, as Karl Marx observed, has a tendency to repeat itself, first as comedy and then as tragedy.

Next year promises unusually high levels of uncertainty and anxiety: both globally and at home in South Africa. In terms of the global economy, very slow growth (even in China) if not recession seem most likely.

At home the problems of unemployment, poverty and inequality are at least equal to those that faced Roosevelt

when he took office in 1933.

Here are some insights that suggest themselves for our times.

The first is the importance of confidence and hope in leadership.

Precisely when the threats and challenges we face are immense the leaders we need are those who make solutions seems possible.

Roosevelt clearly made many mistakes, but in both peace-time and war-time he made Americans believe progress, solutions and better times were possible.

In persuading citizens to return their money to the banks rather than demand further withdrawals he created a social compact of shared hope.

The second is social solidarity in the face of adversity.

Again the institution of social security best illustrates this.

Critical in this institution is the careful construction of its financial sustainability.

A third insight is the dignity attached to putting people back to work through well conceived and managed and useful public works programmes.

Perhaps a fourth insight is the value of bipartisan politics in a time of crisis.

Valuable lessons from the New Deal’s failures

The first is the danger of giving too much power to any single arm of government or any individual in power, even a hopeful, charismatic and highly popular president. Tensions between the executive, legislative and judicial institutions of government are for our society (and all others) the best defence against tyranny.

A final vital insight is the cost imposed on a society when government and any important area of society fundamentally mistrust each other. In the case of Roosevelt’s New Deal that mistrust existed at the deepest levels between the executive wing of government and the business community.

Big challenges require social cohesion. Without shared values, shared behaviours and shared achievements this social cohesion will escape us.

As Hiltzik notes in his final words, though significant social and economic progress was recorded throughout the years of the New Deal, “with the exception of total employment, none (of the critical economic measures) managed to reach pre-crash (1929) levels before 1941”.

That is, it took the second world war to end America’s depression. Surely that is not an option.

» Godsell is chairperson of Business Unity South Africa


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