The Magazine

Facing Capitalism's
Greatest Crisis

The New Deal turns 75 as the United States faces another credit crisis requiring government measures to restore confidence.

Mar 31, 2008, Vol. 13, No. 28 • By JAMES PIERESON
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Viewed in this context, Roosevelt's New Deal measures do not appear quite so radical. He would eventually say in response to critics that it had been his own actions "which saved the system of private profit and free enterprise after it had been dragged to the brink of ruin." He had a point. Among the industrial nations of the time, the United States was one of the few that did not eventually take the socialist path. From the distance of seven decades, it seems fair to suggest that the New Deal did far more to modernize and stabilize American capitalism than it did to undermine it.

Roosevelt's first term is conventionally divided into two periods: the so-called First New Deal, which was largely enacted in 1933 during Roosevelt's first hundred days in office, and the Second New Deal of 1935, in which Roosevelt pushed into territory that went well beyond the immediate economic crisis of the time.

The First New Deal was made up of measures designed to stabilize the banking system, to restore agricultural production, and to provide relief to the destitute. Few of them were radical in nature, and there was no clear ideological pattern.

Reversing the cascade of bank failures was an especially high priority for the New Deal, and in the process Roosevelt modernized the American banking system. He took the United States off the gold standard (one of the last nations to do so), provided for a system of deposit insurance, regulated the public sale of securities by requiring the registration of stocks and the disclosure to markets of pertinent information, and created a wall of separation between commercial and investment banking--the latter arising from the conviction that many bank failures had been caused by inappropriate speculation in stocks.

Most of these reforms, though crafted to deal with the immediate crisis, remain with us today. Deposit insurance, securities regulation, and the federal regulation of banks remain pillars of the modern system of credit and capital. The abandonment of the gold standard, while criticized by bankers at the time as an attack on sound money, is generally viewed as a necessary step to reverse the credit contraction. Central bankers, when faced with speculative attacks on their currencies, generally responded by raising interest rates and tightening credit in order to preserve exchange values in relation to gold--moves which only worsened the Depression. (The Glass-Steagall Act, which separated commercial from investment banking, was repealed in 1999.)

The New Deal is closely associated among critics with large-scale public employment programs and with heavy-handed regulatory initiatives that sought to create a centrally managed economy. What is important to note is that none of these highly controversial programs survived Roosevelt's terms in office, and they cannot be regarded as parts of the New Deal legacy.

Two major public employment programs, the Civilian Conservation Corps (CCC)--the model for Lyndon Johnson's poverty program--and the Public Works Administration (PWA), were erected during Roosevelt's first hundred days. The CCC created more than 1,000 work camps to provide jobs for the young in various conservation efforts (reforestation, flood control, and management of public parks). The PWA put unemployed adults to work building roads, dams, and public buildings. These programs were augmented in 1935 by the Works Progress Administration, which also employed several million workers in the late 1930s. Yet all of these programs were out of business by 1943, when mobilization for the war made them unnecessary.

One clear exception to the pattern of legislation under the First New Deal was the National Industrial Recovery Act (NIRA), which created a regulatory body (the National Recovery Administration) with broad powers to regulate wages, prices, and competitive practices. The act originated in the belief that the Depression had been caused by price cutting and unfair competitive practices in major industries (yes, competitive price cutting was thought to be unfair). NIRA reflected the corporatist outlook of Roosevelt advisers like Rexford Tugwell who believed that some form of economic planning was needed to prevent another collapse. The planners had their way as they hammered out complex wage and price codes in consultation with major manufacturers and labor unions. Yet the system rapidly proved to be too complex to be workable. NIRA is an obvious source of the New Deal's reputation for ham-fisted regulation. It was also short-lived; in 1935 the Supreme Court struck it down, by unanimous decision, as an unconstitutional delegation of power from Congress to the executive branch.