FDR’s New Deal

What really caused the Great Depression?  It can be attributed primarily  to two things:

  1. The Federal Reserve restricted the money supply in 1929 after expanding it for year during the Roaring 20s.  They raised interest rates four times from 1928 to 1929 from 3.5% to 6.0%
  2. The Smoot-Hawley Tariff Bill which resulted in an international trade war and brought international trade to a near stand-still

 

President Roosevelt believed that the cause of the depression was lack of demand for products.  While this was a false premise , most of his programs had the goal of increasing demand but his solutions caused just the opposite results.  FDR did not seem to understand that the two best ways to increase demand were to reduce prices and increase the incomes of the consumers.   What his programs actually did were to increase prices while reducing the incomes of consumers.  And, he was attacking the wrong problems.

Let’s look at a few of FDR’s solutions:

The National Industrial Recovery Act – NIRA

This act allowed industries to collaborate to set prices, wage rates and hours worked and write “codes of fair competition” which had to be followed by all companies in their industry.  It allowed laborers to organize and suspended anti-trust laws.  540 “Codes” were written into law and businessmen who failed to comply were put in prison.

What were the results? It reduced competition by forcing low cost producers out of business.  These were usually the smaller companies who competed on price.  It reduced innovation.  It resulted in higher prices which reduced consumption at home and killed exports.  The higher wages paid reduced employment and resulted in more automation which further reduced employment.  During this period auto sales dropped 29% from 1929 levels and prices rose faster than wages.  These were just the opposite results that FDR wanted and dramatically extended the depression.

 

The Agricultural Adjustment Act – AAA

The purpose of the Agricultural Adjustment Act was to help the farmers by raising the price of farm products.  In order to accomplish this the Act paid farmers to not plant on 25% of their land.  The idea was to reduce production and thus increase prices.

What were the results?  The the farmers took their least productive land out of production (often farmed by share croppers) and then used the subsidies to purchase fertilizer and farm equipment for the remaining acreage.  This resulted in increased production, not decreased production.  It also resulted in poor share croppers being kicked off of their farms which increased the unemployment problems.  And, these subsidies were never taken off the books.  Farmers are still paid not to plant crops!

 

The Federal Farm Board

The Federal Farm Board was established to set prices of products and to purchase excess production.  One thing they did was to set the price of wheat at $ .80 per bushel and the price of cotton at $ .20 per pound.

What were the results? The farmers shifted production of other products to wheat and cotton and expanded their acreage as much as possible.  In the first two years the government spent $500 million buying and storing wheat and cotton.  They ended up giving away or selling 250 million bushels of wheat and 10 million bales of cotton.  It also resulted in the planting of fewer other crops like corn and beans.

 

The Resettlement Administration

The Resettlement Administration was charged with relocating families who were displaced by government intervention (i.e. share croppers).

What were the results?  It was a complete failure.  Most of the people who were relocated couldn’t find jobs and therefore couldn’t afford the houses.  Many of the jobs that were created were higher paying government jobs that robbed workers from smaller businesses who couldn’t match the government pay rates.

 

The Emergency Relief and Reconstruction Act

The Emergency Relief and Reconstruction Act spent over $300 million for relief efforts for the unemployed.  It prohibited any one state from receiving over 15% of the funds but this was quickly ignored.  It was funded by business and personal income taxes and excise taxes on virtually everything including cars, cigarettes and movies.

What were the results?  It removed relief control from local governments to the Federal government which was less efficient.   States were encouraged to do a poor job in raising relief money so they could get more Federal funds.  The President used these funds for political patronage and to control the states.  It encouraged those who couldn’t find work to quit trying.  By raising taxes on virtually every product it decreased demand which decreased production and added to the unemployment problems.  This program was replaced by the WPA – see below.

 

Works Progress Administration – WPA

This program was designed to put people back to work on public works projects.  The government spent $4.8 billion on many projects that accomplished very little.

What were the results?  The bottom tax rate was raised from .5% to 5% and the top tax rate was raised from 24% to 79% to pay for this program.  This drained money out of the private sector which reduced consumption and investment.  The jobs created were political patronage jobs used to buy votes for the Democratic party.  The South, which was primarily Democratic, received a very small percentage of the money.  Most of it went to the swing states in order to buy votes.  Workers were often required to register as Democrats and contribute 3% of their earnings to the Democratic party in order to get jobs.  These higher paying public works programs also drained workers from private sector jobs which hurt small businesses.

 

The Air Mail Act

Prior to this act, air mail contracts were let to the three major airlines without bidding because the smaller airlines were not equipped to handle night flights or bad weather.  The airlines had complied with the NRA by setting prices, wages and work standards as FDR wished.  Therefore, it is unclear why the President chose to cancel these binding contracts and give them to the Army Air Corps.  The Army aircraft were not equipped for foul weather like the airlines were.

What were the results?  On the first day, three Army pilots were killed.  By the end of the first week six pilots had died, five were severely injured and eight planes were destroyed.  On March 9 four more pilots were killed bring the total deaths to twelve.

 

FERA Camps – AKA the CCC

Veterans were hired in the FERA camps to work on various projects.  Basically, this was a make work program for the veterans.

What were the results?  256 Veterans were killed in a FERA Camp in the Florida Keys during a hurricane.  The government knew that a massive hurricane was going to hit the Keys but made no effort to evacuate the Vets.  They had no shelter and no evacuation plan.

Tennessee Valley Authority – TVA

The TVA built hydroelectric dams in the Tennessee Valley area to provide electricity for poor rural areas.  They only served 2% of the population at the expense of the other 98%.

What were the results?  In the 50 years after the TVA, Tennessee lagged behind the surrounding states in economic development.

 

Glass-Steagall Act

Separated banks from investment companies and insured bank deposits up to $2,500.

 

What were the results?  Separating banks from investment companies was a good idea because depositor’s funds could no longer be used to by the banks for speculation.  However, the deposit insurance allowed banks to make riskier loans because they knew if the loans went bad that the Federal government would bail them out.  And, because all banks paid the same rate for the insurance, the less risky banks had an incentive to make riskier loans in order to compete with poorly run banks who were doing the same.

 

Securities and Exchange Act

Increased reporting requirements for publically traded companies.

What were the results?  The red tape and penalties were increased to the point that legitimate investors were scared off and new business starts declined.

 

Fair Labor Standards Act

Established a minimum wage of $ .25 per hour and increased it to $ .40 per hour over seven years.  This bill was supported by the New England textile companies who wanted to be able to compete more effectively with the low cost Southern textile mills.

What were the results?  Regulated minimum wages prevents the freedom of contract between employers and employees.  It drives up the cost of the products produced and makes US goods more expensive than foreign products.  Minimum wages  increase unemployment because employers are not willing to hire unskilled workers who do not return a profit to the company.  It also results in more automation which adds to unemployment.

Social Security

Social security was never designed to be a retirement plan for workers.  It was designed to raise taxes to fund FDR’s socialist programs.  The employer and employee each contributed 1% of the first $3,000 of wages.  At the time, the life expectancy of Whites was 60 years and of Blacks was 48 years.  That meant that, on average, no one would collect Social Security.  It also meant that most of those who did collect would be White which would be partially paid for by Blacks.

What were the results?  It reduced disposable income and thus reduced consumption which resulted in less sales and more unemployment.  The Social Security program was used by Congress to solicit votes by constantly raising the benefits.  Private pensions have returned an average of 8% per year while Social Security has only returned 2% per year. Social Security funds have been used by Congress to pay for numerous other programs and now it is broke.  Now Social Security has an unfunded liability of $16.7 trillion.  In addition, the unfunded liabilities of the Prescription Drug Program are $22.1 trillion and Medicare is $88.0 trillion.

[Source – WWW. USDebtClock.org   12-12-2013]

 

The Wagner Act – National Labor Relations Act – 1935

The Wagner Act had some positive and negative features.  On the good side, employers were not allowed to stop unions from organizing, they could not fire any employee because they were a union member, and they were required to bargain collectively with union representatives.  On the bad side, if 30% of employees in an industry wanted a union they could vote for unionization and all of the employees in that industry would be represented by one union.  Strikes could not be stopped and the employer could not hire replacements.

What were the results?  In 1936 there were more strikes than at any time in the US history (just what the country needed in the middle of a depression).  The union contracts increased costs for US companies which were passed on to customers, many of which could not afford them.  It made the US less competitive with foreign producers and thus hurt exports.  This in turn led to more automation which increased unemployment.

 

Undistributed Profits Tax

During the Depression most businesses were holding on to as much cash as possible because they never knew what the Administration was going to do next (sound familiar?).  FDR wanted these funds available for taxes so he passed the Undistributed Profits Tax.  This required businesses to distribute their profits as dividends which would be taxable to the recipients or to pay a tax on the undistributed profits.  Either way, the government would get the tax revenues.

What were the results?  Businesses capital was depleted which resulted in less expansion and greater unemployment.

 

What was the bottom line of President Roosevelt’s New Deal?

   While most of Europe recovered from the Depression in three years, the United States didn’t recover until after World War II.  FDR’s programs increased taxes and regulations which drained money from the private sector resulting in less sales, less manufacturing and fewer jobs.  His legacy is still with us today with Social Security, government mandated unemployment, farm subsidies, minimum wage and overtime laws, the undistributed profits tax, the National Labor Relations Act, the Tennessee Valley Authority and numerous Supreme Court decisions that have changed the direction of this country forever.

   In a statement to the House Ways and Means Committee in 1939, Henry Morgenthau, Jr., FDR’s Treasury Secretary said:

   “We have tried spend money.  We are spending more than we have ever spent before and it does not work.  And, I have just one interest, and if I am wrong … somebody else can have my job.  I want to see this country prosperous.  I want to see people get a job.  I want to see people get enough to eat.  We have never made good on our promises … I say after eight years of this administration we have just as much unemployment as when we started … And an enormous debt to boot.”

 

 

This information was taken primarily from the book New Deal or Raw Deal by Burton Folsom, Jr.