Congressional Consideration of New Deal Legislation - Essay Example

Nicholas Andersh 11/26/08 Pol 320-A Introduction: The economic stability of today is in a catastrophic that is causing millions of citizen’s financial hardships. People’s savings are being wiped out, homes are constantly going into foreclosures, and American’s dreams are being deferred if not erased. The financial situation of not only our country, but the world as a whole is leaving people from across the globe, from Kandahar to Karachi anxious on how we shall overcome this financial calamity. While President-elect Obama and his incoming administration has big plans on how to jump start our economy, one must only look to our past to see a situation that was similar to ours presently. It wasn’t but 50 years ago that America was engulfed in the “Great Depression”. Political pundits and members of Congress alike compare our current situation as the worst economic climate since the Great Depression. While the times of that era were certainly tough, the strength and enduring spirit of the American people proved to be resolute and we as a country rose from the ashes like a phoenix. While the spirit of the American people has an ethereal reason on why we overcame the Great Depression, any well-versed scholar of American history knows that it was indeed President Franklin Delanor Roosevelt’s New Deal that catapulted our country out of the economic abyss. “We have had recessions before and we will have them again; and always, when we do, we can be thankful to the New Deal. For nearly half a century, its innovations in the thirties have helped to keep recession from deepening into depression.”1 Reasons for the Great Depression The Great Depression lasted from the end of 1929 to the early 1940s, beginning in the United States but slowly spreading to other countries as well, because they had become economically dependent on each other. This era is a widely studied and thoroughly examined time in American history. There are numerous underlying reasons for the Depression, and there are many theories on why it occurred. Some of the seeds that gave root to the Great Depression can be linked to events far before the time of that gloomy era. “The roots of the Great Depression can be traced back to the world war of 1914-1918 and even beyond. Some authorities describe it as the ultimate collapse of the industrial revolution, with the machine devouring the man…..Between 1920 and 1930 economists ceased pondering the question of ‘America’s capacity to produce,’ which had preoccupied them for fifty years and turned belatedly to “America’s capacity to consume, about which they had much to learn2.” During the period before the Depression, while productivity in manufacturing rose sharply, the profits from such productivity did not translate into lower prices or higher wages, but into speculative activities. As a result, the economy produced more and consumed less because consumers did not have enough income and the unequal distribution of wealth during the 1920s caused the Great Depression.3 Income distribution was also restricted due to the development of monopolies. The farm sector was allowed to lag behind, remaining static at $9 billion, while corporate profits were shooting high, as a result, the value of farm lands decreased from $80 billion to around $55 billion, causing farmers to leave their lands and flock to the cities for employment.4 The overinvestment in heavy industrial capacity as compared to wages and earnings from independent businesses, such as farms, was the root cause of the Great Depression. Classical economic theories have generally argued in favor of a non interventionist policy to be followed by Government during a recession. The reason is that if consumption falls due to savings, it also leads to a corresponding fall in interest rates, which functions as a spur for investment activity into production because capital becomes inexpensive. Keynes however explained the Great Depression on the basis that a fall in interest rates does not necessarily fuel investment. Since businesses make investments based on their expectations of earning a profit, any lowering in consumption that appears long term will cause lower expectations of sales5. When this happens, the economy can be thrown into a Depression. Another important causal factor attributed to cause the Great Depression was debt. According to Irving Fisher, the availability of too much credit leads to a case of over-indebtedness, which in turn leads to increased speculation: “Easy money is the great cause of over-borrowing.”6 Irving argues that when over indebtedness occurs, this leads to liquidation, through the alarm caused to debtors, creditors or both, causing distress selling and triggering off a chain of events including fall in prices. The stock market exchange crash on October 24, 1929 may have been caused by the rush to liquidate assets and pay off debts. This macroeconomic theory put forward by Irving Fisher to explain the Great depression has also been revived during the present time by the current Chairman of the Federal Reserve Board, Ben Bernanke.7 The New Deal Legislation During the first 100 days after President Roosevelt took office, immediate measures were introduced to boost the economy and all banks in the country were closed until such time as new legislation could be passed8. This first set of New Deal legislation aimed to bring about a short term economic recovery and included measures such as banking reform laws, work programs and programs for emergency relief, agricultural programs and industrial reforms, as well as the introduction of a federal welfare State. During March and April of 1932, through a combination of Acts of Congress and executive orders, Roosevelt and Congress also suspended the gold standard for United States currency, to which the markets responded very well9. Some of these included the Emergency Banking Act, the 1933 Banking Act, House Joint Resolution no 192 and Executive Order Nos: 6073, 6102 and 611110. The gold standard did not allow for lowering of interest rates in order to preserve the value of the dollar, but when it was removed, the dollar was allowed to find its place and fluctuate in foreign exchange markets. The second phase of the New Deal Program introduced in 1935-36 included the Social Security Act, the WPA relief program and other programs to aid farmers11. However, when Roosevelt later tried to consolidate Government authority further in the second phase of New Deal programs in order to introduce a more proactive role for Government through implementation of radical, more-labor and anti-business programs, he was not so successful because there was a storm of protest from Conservatives. Many of the relief programs introduced by the New Deal faced resistance from Conservatives and were shot down during World War II. The National Recovery Administration which was created in 1933 was also one of the New Deal Programs and allowed industries to create codes of fair competition and help workers by setting out minimum wages. The Supreme Court however, declared that the NRA was unconstitutional in the case of Schechter Poultry Corporation v United States12. The Supreme Court also struck down other parts of the New Deal and many libertarians in the United States, such as Governor Huey Long of Louisiana applauded the Court’s action as preventing the United States from becoming a planned economy fascist State13. Lawson has argued that the underlying principle to the New Deal was the vision of a “cooperative commonwealth.”14 Roosevelt’s New Deal legislation did not merely comprise a bunch of government programs and legislation implemented in a piecemeal fashion to respond to changing economic conditions. Lawson argues that the New Deal legislation and programs were firmly rooted in the belief that the State can function as an agent that can balance individual liberty with communal welfare, so that the lot of the common man was improved and prosperity could be shared. New Deal policies favored a direct Government role in managing the economy such that State power was used to compel self sacrifice so that national economic recovery was facilitated. Lawson also notes however that early initiatives on the New Deal favored a centralized, comprehensive planning approach. But it was difficult to achieve the necessary collaboration for a cooperative commonwealth under the system existing at the time, especially with a Conservative Supreme Court, a militant labor movement and limited levels of success in helping the hardest hit victims of the Depression. This produced a shift in the New Deal strategy, to work within the existing system by using a decentralized approach but using regulation in order to balance conflicting interests and this approach was more successful Zelizer points out that Roosevelt’s New Deal administration was largely comprised of fiscal conservatives, and he argues that this tradition of liberalism and fiscal conservatism was crucial in the development of the New Deal State15. He is of the view that most accounts of the New Deal coalition do not give sufficient importance to the influence of orthodox Conservative ideas in the New Deal administration. But fiscal conservatism played a significant part in contributing to aspects that boosted the performance of the economy, such as balanced budgets, minimal levels of Government debt, low inflation and a stable currency, private capital investment and high savings, all of which remained the norm during the New Deal period. Zelizer also points out that despite the pressures to spend in order to boost up the economy during the Depression, the President was aware that fiscal conservatism was supported by investors and the business community, economic think tanks and most of the voting public; as a result he did not choose to immediately implement measures that called for a more widespread intervention by the Government that would increase the federal deficit. According to Douglas, the State inevitably destroys the rights of the individual to initiate and invest in new businesses and in the exercise of “economic independence.”16 As opposed to this, those who support consumption adhere to the theory that the Great depression was caused by a lack of consumption, therefore it is spending rather than investment that is likely to promote a healthy economy. It was only in April of 1938 that the tide began to turn against fiscal conservatism and towards spending, due to the widespread belief that the lack of consumption due to availability of spending income for the common man was what had caused the Depression in the first place17. Roosevelt was then able to gain greater levels of support for his more radical New deal proposals to increase Government spending despite the risk of a deficit. Conclusions The New Deal provides several useful lessons that are relevant even in today’s financial context. The Great Depression was a serious financial setback that also extended to other countries due to the economic interactions between various countries. In a similar way, the global financial crisis that is currently in place was also sparked off by a near crash at the Stock exchange. The New Deal legislation demonstrated how Government regulation and spending was able to fuel the economy and get it going again, especially measures such as the removal of the gold standard and the regulation of banks. The current financial crisis has been caused by escalating debt and may be seen to be a direct consequence of the successive deregulation that has taken place under Republican administrations. The Dow Jones Industrial Averages declined 4.4% by 504 points, registering the worst drop since the 9/11 attacks and the worst financial crisis since the Wall Street crash of 1929 prior to the Great Depression18. The successive deregulation included the 1999 Financial Services Modernization Act, which eliminated all regulatory restraints on Wall Street’s banking conglomerates. The Glass Steagall Act which was introduced as a part of the New Deal legislation was specially meant to deal with the atmosphere of corruption, manipulation and insider trading that had caused the stock market crash of 1929 in the first place, but this Act was also repealed.19 But the instigation of yet another financial crisis only demonstrates all too clearly that such crises can only be prevented with effective regulation as was instigated under the New Deal legislation. As Lawson has pointed out in his book, the development of the decentralized, regulatory approach under the New Deal legislation was an incomplete achievement of the vision of the cooperative commonwealth, but it was effective in achieving the necessary economic recoveries. President Roosevelt was able to achieve a balance between maintaining individual enterprise while also ensuring that the needs of the community were met. In meeting the current financial crisis, it may be necessary to examine the New deal legislation yet again and implement similar fiscal protective measures to ensure effective financial regulation. According to Zelizer, fiscal restraint was an integral part of the New Deal legislation, but the recent wave of deregulation has eschewed fiscal conservatism in favor of promoting risky speculative behavior that has instigated the financial crisis. President Roosevelt was able to achieve that optimum blend of Conservative and Liberal policies through the New Deal legislation, by ensuring that both sides were represented in arriving at conclusions and framing legislation to revive the economy of the United States. This is perhaps one of the most important lessons that current lawmakers can learn from the New Deal legislation, so that they can put aside their differences and work together at achieving a balanced, fiscally conservative policy coupled with regulation in much the same manner and President Roosevelt and Congress did, to restore the health of the American economy. Bibliography Bernanke, Ben S, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression", The American Economic Review (The American Economic Association) 73 (3): 257-276 Burns, Helen M, 1974. “The American Banking Community and New Deal Banking Reforms: 1933-1935”, Greenwood Press Cabell, B.H and Mitgang, Herbert, 2000. “From the crash to the blitz: 1929-1939”, Fordham University Press Chossudovsky, Michael, 2008. “Global financial meltdown”, http://www.globalresearch.ca/index.php?context=va&aid=10268; Dorfman, Joseph, 1959. “Economic mind on American civilization: 1865-1918”, Augustus M Kelley Publications Eliot, Thomas H, 1992. Recollections of the New Deal. Boston: Northeastern University Press. Fisher, Irving, 1993. “The Debt-deflation theory of Great Depressions”, Econometrica, 1:337-257 Keen, Steve, 2001. “Debunking Economics”, Pluto Press Australia Ltd Lawson, Alan, 2006. “A Commonwealth of hope: The New Deal response to crisis”, John Hopkins University Press Lewis, Douglas, 1935. “Can Government spending cure unemployment?” The Atlantic Monthly, 156:408-12 Leuchtenburg, William E, 1963. “Franklin D. Roosevelt and the New Deal, 1932-1940”, Harper Perennial Meltzer, Allan H, 2004. “A History of the Federal Reserve: 1913-1951”, University of Chicago Press Schlesinger, Jr, Arthur Meier, The Politics of Upheaval: 1935-1936, the Age of Roosevelt, Volume III, Houghton Mifflin Books Schechter Poultry Corporation v United States (1935) 295 U.S. 495 Zelizer, Julian E, 2000. “The forgotten legacy of the New Deal: Fiscal conservatism and the Roosevelt administration, 1933-1938”, Presidential Studies Quarterly, 30(2): 331-352 Read More