Great Depression and the New Deal - Research Paper Example

Introduction On October 25, 1929, often referred to as the ‘Black Tuesday’, stock prices in the US went on an unprecedented downward spiral, giving rise to what is referred to as the Great Depression. To date, it is the greatest economic and financial crisis in the US history. As a consequence of the Great Depression, unemployment rose, wages fell, businesses failed and industrial activity came to a halt. Farm prices, too, fell steeply. Production decreased by 30 percent and employment fell by 25 percent. In view of lower returns, banks became increasingly conservative in advancing loans. The hastily passed 1930 U.S. Smoot-Hawley Tariff Act was a protectionist measure to shore up local businesses. The Depression hit the rock bottom in 1933. Soon the economic downturn engulfed the entire world. The Global Scene Countries enhanced tariffs and put up barriers to protect the national trade. Increase in barriers led to the decline of 65 percent of the world trade between 1929 and 1932 (Cole & Ohanian, 1999). Level of international investment and the volume of international trade remained depressed throughout the 1930s. By 1932, the European trade had decreased to one-third of its value in 1929. Though no part of Europe remained untouched Poland, Austria and Germany were the worst sufferers. In Germany, the Nazis freed the economy from gold standard and developed interventionist policies in trade and commerce (Clavin, 2000).Compared to others, decline in the US was much more severe and recovery was a lot weaker (Cole & Ohanian, 1999). How Depression impacted economic and political conditions The Great Depression had far reaching impact on the economic and political climate of the US. By 1933, unemployment had soared to 25 percent. Industrial production declined by 50 percent as investments fell by 98 percent. Between 1929 and 1932 the income of the average American family was reduced by 40%, from $2,300 to $1,500. Politically, the federal presence came to play an increasing role in the American life, because of various relief projects launched by the government to bring the tottering masses to their feet. The Depression brought about a major realignment of political forces. Politics came to be dictated by the economic conditions. At the height of Depression, people chose the Democrats over the Republicans that had been the dominating party since the Civil War. A new coalition consisting of big-city ethnics, African Americans, and Southern Democrats committed, to varying degrees, to interventionist government came into being. In the 1930 elections, Democrats took control of the House of Representatives. Republicans lost control over the Senate in 1932. The shadow of the Depression dominated American political life for decades. The dominance of Democratic Party in the House of Representatives, Senate and the White House continued for the next 50 years. The 1932 Elections The presidential elections of 1932 were held in the backdrop of the Great Depression. During the election campaign, Democratic candidate Franklin D. Roosevelt castigated the incumbent Herbert Hoover for being unable to contain the downward spiral of economy. Roosevelt earned a convincing victory carrying all but six states. After his inauguration, Roosevelt began his ‘First 100 Days’ campaign to provide immediate relief to the masses languishing under economic depression. The New Deal Initiatives The series of measures initiated by President Roosevelt to resuscitate the economy is referred to as the New Deal. New Deal consisted of economic and political decisions to boost the economy and morale of the people reeling under the Great Depression. New Deal was implemented in two phases; the First New Deal intended to carry out emergency relief programs began in March 1933 and the Second New Deal was implemented in 1935-36. As a part of the New Deal, Congress passed bills for multitude of facilitation programs like Works Project Administration, Civilian Conservation Corps, National Youth Administration, Farm Security Administration, National Recovery Administration, Public Works Administration, Agricultural Adjustment Act, National Housing Act, Social Security Act and Civilian Conservation Corps. The Congress also passed the Federal Emergency Relief Bill with an appropriation $500 million, which was ratified by Roosevelt. The Social Security Act was enacted to give pensions to the retired citizens. These acts and programs were intended for ensuring reasonable farm prices, generating employment and providing economic and social security to the people. Works Project Administration alone generated employment for 8.5 million people, pumping $ 8 billion into the economy. New Deal also provided employment to writers, actors, and artists treating them as workers. Unemployed dentists set up clinics in schools and teachers set up day care centers (Phillips-Fein, 2002). FERA By 1934, there were more than 11 million unemployed workers on the relief rolls (Hopkins, 1999). Harry Hopkins, the head of Federal Emergency Relief Administration, succinctly summed up the gravity of the situation thus: every time the clock ticked a man lost his job (Hopkins, 1999). Harry Hopkins held the conviction that the ultimate responsibility for welfare of the citizens lay with the federal government. The Keynesian and Monetarist explanations The Keynesian argument as propounded by the economist John Maynard Keynes traces the cause of Depression to fall in demand. The demand could be restored to large increases in government spending. The Monetarist explanation squarely blames the inability of Federal Reserve System to prevent bank failures and to maintain a large enough money supply (Caldwell & Dirscol, 2007). Keynesian economics also point to under-consumption and overinvestment those results in an economic bubble. Gold Standard One plausible reason for the economic depression was the return of the European nations to the gold standard after the World War I. Under this arrangement, each country agreed to exchange a given amount of its currency for an ounce of gold. As a result, each currency had a fixed rate in terms of other currencies. The banks of nations used the gold reserves to back up the reserves for the loans. On the other hand, because of the operations of the gold standard, the banks also lost a lot of gold to other countries. Consequently, they could advance only limited number of loans to businesses. Businesses cut back on production, laying off workers and reducing supply orders. The situation was worst for the countries that lost large amounts of gold (Caldwell & Dirscol, 2007). In the US, in order to stop the outflow of gold and attract foreign depositors, the Federal Reserve Bank raised the interests on gold. The increased interests rates discouraged borrowing, leading to more business failures and job losses. Banks were unable to collect loans. Recovery began only after the President Roosevelt scrapped use of the gold standard. Different perspectives on New Deal The New Deal was not without its share of criticism and controversy. It was criticized by left and right wingers of the political spectrum. New Deal was vehemently opposed by ideologues subscribing to different ideologies. These ideologues cast a long shadow on New Deal policies and programs through their impressive speeches. One such ideologue was Louisiana Senator Huey Long. Long held the view that the New Deal was not doing enough to mitigate poverty. The most vociferous critic of the New Deal in the northern states was Charles Coughlin, a Catholic priest. Through his popular radio broadcast, he declared that Roosevelt was ‘anti-God’. It is ironical that he started his tirade with a pro-Roosevelt stand calling the New Deal as Christ’s Deal. However, later on, he turned against Roosevelt and espoused extreme right wing views. His views on economic issues were that of an orthodox Christian. Coughlin called for nationalization of banks and fixing of minimum wages for the poor. While Coughlin achieved nationwide fame other Christian denomination did witness an average 5% gain in membership but it was far less than what the clergy expected. In fact, the church membership had declined in the pre-Depression days, which was interpreted as a general decline in piety throughout the country. Clergy had hoped that depression beaten people would rush back to the church seeking forgiveness for their folly. The articulate James Townsend was another vociferous opponent of the New Deal. Despite their best efforts these ideologues could not earn mass following. However, it is said that most of the 16 million votes polled by Alf Landon, the Republican candidate, in the 1936 election were owed largely to, the anti-New Deal sentiment whipped up these ideologues. Roosevelt also faced opposition from his Democratic Party colleagues from the south like Al Smith. Besides, a large section of businessmen and traders also opposed the New Deal policies. The right-wingers accused Roosevelt of ditching his own class. The most vociferous condemnation of the New Deal came from southern conservatives who saw New Deal clauses as infringement of their rights. For them, the New Deal was unduly pro-worker, pro-black and pro-unionization. The conservative movement was led by Martin Dies from Texas. The consistent opposition to New Deal by Republicans proved instrumental in halting the reform movement to an extent (Brundage, n.d.) The popularity of New Deal waned with the second bout of Depression in 1936-37. In the 1940 elections, Roosevelt scarped past his Republican rival by a margin of mere 5 million votes. Republicans, however, made it clear that they were against the economic policies of Roosevelt and not against the social reforms carried out under the New Deal. The judiciary too opposed programs of the New Deal and struck down some important legislation one by one. Supreme Court declared that the law to provide minimum wages to women in New York State was against the constitution. When Roosevelt tried to steam roll the judiciary through a congressional act, his move was stonewalled by the Senate Judicial Committee. Owing to sharp severity of decline in 1929-1933 period, and slow recovery between 1934-1939, the per capita output in 1939 was 11 percent below its 1929 level (Cole & Ohanian, 1999).The experience of 1930s continues to influence the beliefs of macroeconomists, policy recommendations, and research agendas (Bernanke, 1995). Conclusion During the most crucial stage of New Deal, World War II broke-out. The din of the opponents and proponents of the New Deal got lost in the din of the war. The opponents of the New Deal left a mixed bag of legacy. With their opposition to the Roosevelt’s program they inspired some of the most enduring elements of the American political system like the Social Security, while succeeding in stone-walling the attempts of Roosevelt to transform the federal-state structure. Stock market speculation, reckless banking practices, and concentration of wealth in a few hands were said to be the causes behind the economic depression. However, it is also surmised that recession of the magnitude of the Great Depression can recur if the inequities in supply and demand, trade imbalances, unfair trade practices, the gap between the rich and poor are not set right (Eichengreen, 1992). Annotated Bibliography Bernanke, B. S., (1995). The macroeconomics of the Great Depression: a comparative approach. Journal of Money, Credit & Banking, 27(1), 1+. It is a study of macroeconomic factors responsible for the Great Depression. The interconnectivity of the causes of the Depression, in various countries is proved empirically through analysis of the primary and secondary data. The author concludes that the evidence for monetary shocks playing a key role in the worldwide depression is compelling. Brundage, F. (n.d.). Opposition to the New Deal. Retrieved August 31, 2009 from www.dlt.ncssm.edu/lmtm/docs/opp_newdeal/script.doc Brundage’s is a simple essay about the major socio-economic and political events of the Great Depression and the New Deal era. Brundage sets forth various opinions put forth by ideologues to the left and right of the political spectrum regarding the New Deal. Brundage also writes about how Roosevelt brushed aside criticism with his pragmatism. Caldwell, J., & Dirscol, T. G. (2007). What caused the Great Depression? Social Education, (71) 2, 71+ The authors briefly sketch the socio-economic conditions that prevailed before the onset of the Depression. The authors, then, trace the causes of the Depression in the Keynesian explanation, the Monetarist explanation and the International explanation. In the conclusion, the authors instigate the teachers and students to derive their own explanations for the Great Depression in broader framework of three general theories studied in the article. Clavin, P. (2000). The Great Depression in Europe, 1929-39. Retrieved August 31, 2009, from http://www.historytoday.com/MainArticle.aspx?m=14072&amid=14072 The author studies the rise of the US as an economic power after the WW I vis-à-vis the circumstances prevalent in Europe. According to Clavin, the Wall Street Crash, and adoption of gold standard, for currency exchange, by the European countries were two predominant causes of the Depression. Cole, H.L., & Ohanian, L.E. (1999). The Great Depression in the United States from a neoclassical perspective. Federal Reserve Bank of Minneapolis Quarterly Review, 23(1), 2-24. The authors conduct an empirical examination of the causes of the Great Depression from a macroeconomic perspective. The authors present plausible solutions to hitherto considered puzzling behavior of the macro-economic indicators. Finally the authors conclude that the New Deal policies and programs were responsible for the recovery of economy in mid-1930s. Eichengreen, B., (1992). "IT" can happen again. Challenge 35(6), 14. In this journal article, the author draws interesting parallels between trade, industry, and the overall economic scenario of the late 80s and early 90s with those of the Great Depression. Eichengreen warns that in case measures are not taken in time to align America’s long run fiscal goals and domestic and foreign economic policy, a disaster of the magnitude of the Great Depression can occur again. Hopkins, J. (1999). The road not taken: Harry Hopkins and New Deal Work Relief. Presidential Studies Quarterly.29 (2), 306. The author critically analyses the role played by Harry Hopkins, the chief of Federal Emergency Relief Administration and a close confidante of President Roosevelt, in alleviating economic distress. The author studies the constraints that Hopkins had to face as a relief administrator. It is also a brief account of how Hopkins carried out his duties in face of criticism. Though Hopkin’s ideas and plans were integrated into the social security measures, a lot of what he had envisaged didn’t go beyond the drawing board stage. A staunch capitalist, however, Hopkins was in favor of a federal guarantee for a regular income earned through dignity of job. Phillips-Fein, K. (2002). A New New Deal. The Nation. 275(23), 6 The author of the article gives a call for another New Deal for the city of New York in the aftermath of the World Trade Center bombings. The author makes a mention of Mike Wallace’s book ‘A New Deal for New York’. The writer hopes that the twin tower bombing could focus the attention of the nation to New York City’s longstanding political and economic difficulties. Phillips-Fein briefly summarizes the New Deal public works program that helped build the city’s infrastructure while providing gainful employment to thousands of needy people grappling with economic recession. Read More