The Second New Deal took shape in 1935 following the 1934 midterm elections in which the Democrats added to their majorities in the House and Senate. The election was a mandate, Roosevelt said, and proved "that we are on the right track." The Second New Deal added two pillars to the nation's political economy: the Social Security Act, which established old-age insurance, unemployment insurance, and welfare benefits for widows and orphans, and the Wagner Act, which provided federal mechanisms for organizing unions and for collective bargaining in private industry. Over the long term, these proved to be the most politically potent of the New Deal measures.
Little needs to be said about the popularity of Social Security and the difficult challenges faced even today by reformers who would adjust the system. The Wagner Act greatly facilitated the formation of unions in major industries in the late 1930s much to the consternation of big business. Union membership expanded in the United States, from around one million in 1935 to nearly 10 million in 1940 and continuing upwards through the 1960s--a period during which industrial unions were key elements of the Democratic political coalition.
With these measures, Roosevelt laid the basis for the New Deal's long-running political appeal and influence. They established a precedent for building political majorities through federal programs and employment. Here, then, was a legacy of the New Deal that, in retrospect, was far more influential than its various regulatory measures.
The legislative breakthroughs of 1935 marked the high point of the New Deal. Roosevelt, in keeping with his political practice, saw the landslide election of 1936 as a mandate to make another bold step, this time in taking on the Supreme Court which had declared unconstitutional his farm program and NIRA and seemed on the verge of striking down both the Wagner and the Social Security Acts. Roosevelt's proposal to expand the Court to give him as many as six new appointments drew immediate opposition from members of Congress and the public, who appeared ready to draw the line on the New Deal when it came to fundamental alterations of the Constitution. The court-packing plan was a fiasco for Roosevelt and effectively marked the end of the creative period of the New Deal.
Fortunately for Roosevelt, Justice Owen Roberts switched his vote in key decisions in 1937, turning a 5-4 majority against the New Deal into a similar majority in support. An early sign of this shift was the Court's decision in April 1937 to uphold the constitutionality of the Wagner Act. When conservative justice Willis Van Devanter retired at the end of the 1937 term, FDR was given the appointment he needed to place his own stamp on the Court.
Though critics and supporters alike have said that the New Deal laid the foundations for the American welfare state, it is more accurate to say that it set up a social insurance state. The enduring pillars of the New Deal--old-age insurance, deposit insurance, unemployment insurance--were not redistributionist measures but insurance provisions compatible with traditional notions of individual responsibility. Even the welfare provisions of the Social Security Act were drawn up to aid only widows and orphans. The New Dealers were borrowing from the various insurance provisions that were enacted in Germany in the 1880s under Bismarck who saw in them a means to outmaneuver the socialists who were calling for more extreme measures on behalf of workers. In the battle within the New Deal--between the collectivists and planners on the one hand and the advocates for traditional ideals of individual responsibility--the individualists clearly had their way on the most important questions.
Despite their best efforts, however, the New Dealers were unable to pull the economy out of depression. While it began to grow again after 1933 and the unemployment rate fell to 14 percent by 1937, a recession that year provoked Roosevelt and fellow New Dealers into ever more extreme attacks on the business community. Roosevelt denounced the rich for bringing about the recession through a "capital strike"--precisely the kind of nonsense that would later give the New Deal a bad name among business leaders. Many economists argue that New Deal policies, to the extent that they promoted unionization and imposed new taxes on business, created an environment that discouraged business investment and thus impeded full recovery from the Depression.
The New Deal was based on a couple of propositions about the Depression that appear in retrospect to have been highly questionable. The first was that the Depression was a crisis of overproduction that led to falling prices and unemployment, a proposition that was the basis for the industrial codes of the NIRA and of the New Deal's agricultural programs, which sought to limit farm production even as people around the country were in need of food. The second proposition was that the crisis had been caused by the malfeasance of bankers and stock manipulators in tandem with the monopoly power exercised by industrialists, a conviction which encouraged much of the anti-business rhetoric of the New Deal. This latter proposition was incorporated into the official histories of the period written by luminaries like Schlesinger (The Crisis of the Old Order) and Galbraith (The Great Crash). When these two propositions were joined, they suggested that the old order of individualism and competition was discredited and should be replaced by a system of managed capitalism. Though this was not the actual agenda of the New Deal as it developed, it was thought by some to be the logical next step beyond it.
The Great Depression was actually caused by the restrictive interest-rate policies followed by the Federal Reserve Board in 1928 and 1929. Milton Friedman and Anna Schwartz pioneered this interpretation in their Monetary History of the United States (1963). The economic crisis, which they termed "the great contraction," was triggered when the Federal Reserve Board began to tighten interest rates in 1928 to discourage speculation in stocks and then continued a tight money policy even after the stock market collapsed and banks began to fail. Things were exacerbated by the failure of the monetary authorities to step in with infusions of capital to rescue failing banks and by political decisions like the Smoot-Hawley tariff bill which shut down trade and led to more restrictive credit policies around the world. The New Deal attacks on big business were nothing more than so much flailing in the wind.
This interpretation of the Depression is held by no less a figure than Ben Bernanke, the current chairman of the Federal Reserve Board and a careful student of the crisis. At a testimonial occasion to mark Milton Friedman's 90th birthday, Bernanke went so far as to say to the economist: "Regarding the Great Depression, you were right. We [the Federal Reserve Board] did it. We're very sorry. But thanks to you, we won't do it again."
In the end, the constitutional system that Roosevelt sought to alter imposed its limits on the New Deal, casting aside its more extreme measures while digesting its more constructive elements. By the time Republicans returned to power in the 1950s, New Deal programs were no longer seen as radical or even controversial. If Roosevelt did not "save" capitalism, he at least steered it through its greatest crisis by engineering a package of moderate and constructive reforms that, for the most part, met the test of time. For this reason alone, he richly earned the admiration of Americans at the time and a place in the pantheon of America's great presidents.
James Piereson, a senior fellow at the Manhattan Institute, is the author of Camelot and the Cultural Revolution: How the Assassination of John F. Kennedy Shattered American Liberalism (Encounter Books).