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History of the United States (1918-1945)

 This article is part of the
History of the United States series.
 Colonial America
 History of the United States (1776-1865)
 The coming of the Civil War
 The Civil War
 History of the United States (1865-1918)
 History of the United States (1918-1945)
 History of the United States (1945-1964)
 History of the United States (1964-1980)
 History of the United States (1980-present)
 Demographic history of the United States
 Military history of the United States

Table of contents
1 Aftermath of World War I
2 The Roaring 20s
3 Causes of the Great Depression
4 The Roosevelt administration
5 The First Hundred Days
6 Setbacks of Roosevelt's second term
7 The New Deal and the "broker state"
8 The New Deal and economic relief
9 Conclusions: the legacies of the New Deal
10 World War II
11 Related Topics

Aftermath of World War I

1919 sheet music cover

A popular Tin Pan Alley song of 1919 asked, concerning the United States troops returning from World War I, "How Ya Gonna Keep 'Em Down On the Farm After They've Seen Paree?". In fact, many did not remain "down on the farm", as there was a great migration of formerly rural population to the cities. However agriculture became increasingly mechanized with widespread use of the tractor, so fewer farmers were needed to produce a greater harvest of food.

US President Woodrow Wilson campaigned for the US to join the new League of Nations without success, as the mood of the nation favored a return to isolationism.

The Roaring 20s

In the U.S. presidential election, 1920 the Republican Party returned to the White House with the election of Warren G. Harding, who promised a "return to normalcy" after the traumatic years of World War I.

During most of the 1920s the United States enjoyed a period of unbalanced prosperity: prices for agricultural commodities and wages fell at the end of the war while new industries (radio, movies, automobiles, and chemicals) flourished. The unevenness was also geographic: the standard of living in rural areas fell increasingly behind that of urban and suburban areas which saw dramatic improvements in housing and urban planning. The boom was reflected by the extension of credit to a dangerous degree, including in the Stock Market, which rose to record high levels, which in retrospect after the crash were dangerously inflated.

Jazz music became widely popular with the young (and was widely reviled as unmusical noise by much of the older generation). Dancing was a popular recreation.


Main article: Prohibition

In 1920, the manufacture, sale, import and export of alcohol was prohibited by the Eighteenth Amendment to the United States Constitution in an attempt to alleviate various social problems; this came to be known as "Prohibition". It was enacted through the Volstead Act.

Many states ratified the 18th Amendment while a sizable number of their young men were overseas due to the Great War. Absentee voting by troops overseas was spotty at best.

National Prohibition was ended in 1933 by the Twenty-first Amendment. Prohibition is considered to have been a failure: consumption of alcoholic beverages did not decrease markedly while organized crime was strengthened. It did represent the first instance of a constitutional amendment that directly regulated social activity. The 18th Amendment, then, represented the growing strength of the state in the early 20th century. A federal law regulating the sale or use of a substance was considered so far from the accepted powers of the US Federal Government in 1919 that an amendment to the Constitution of the United States was seen as necessary at the time. Since the 1930s, the US Federal Govenment has regulated and outlawed many substances without additional amendments.

The Federal Government in the 1920s

While in retrospect the 1920s are sometimes seen as the last gasp of Laissez-faire capitalism and small government, the era actually saw an ever increasing role for the Federal Government. In addition to Prohibition, the government took on new powers and duties such as funding and overseeing the new the United States Highway system. Federal epansion of the money supply led to an unpresidented expansion of credit which contributed to both the boom and subsequent bust.

The Coolidge Years

The Harding administration was rocked by the Teapot Dome scandal. It looked like the President himself might be shown to be involved in corruption, but Harding died in office on 2 August, 1923. He was succeeded by his Vice President, Calvin Coolidge.

Coolidge was a taciturn, personally honest New Englander who generally saw his role as to stay out of the way of the booming economy. He was elected to a full term of his own in the U.S. presidential election, 1924 under the slogan "Keep Cool With Coolidge".

Coolidge declined to run again in the 1928 election; the Republican Party nominated engineer and Secretary of Commerce Herbert Hoover, who was elected by a wide margin. Hoover was percived as an intelligent technocrat. He was the only person elected to the US Presidency who previously held neither national nor state elected office nor was a victorious general in war.

Causes of the Great Depression


International finance never recovered from the strains of World War I, which caused a dramatic increase in productivity capacity, particularly outside Europe, without a corresponding increase in sustained demand. Fixed exchange rates and free convertibility gave way to a compromise—the Gold Exchange Standard—that lacked the stability to rebuild world trade.

In 1929 the world's most prosperous nation was the United States. But despite the buoyant optimism in the United States and the apparent economic well-being in other countries, the world economy was in an unhealthy state. One by one, the cornerstones of the pre-1914 economic system—multilateral trade, the gold standard, and the interchangeability of currencies—were crumbling.

The US economy had been showing some signs of distress for months before October 1929. Commodity prices had been falling worldwide since 1926, reducing the capacity of exporters in the peripheral, undeveloped economies of Latin America, Asia, and Africa to buy products from the core industrial countries, such as the United States and Britain. Business inventories of all types were three times as large as they had been a year before (an indication that the public was not buying products as rapidly as in the past); and other signposts of economic health—freight carloads, industrial production, wholesale prices—were slipping downward.

The Great Depression is the period of history that followed "Black Thursday", the stock market crash of Thursday, October 24, 1929. The events in the United States triggered a world-wide depression, which led to deflation and a great increase in unemployment. On the global scale, the market crash in the USA was a final straw in an already shaky world economic situation. Germany was suffering from hyperinflation of currency, and many of the Allied victors of World War I were having serious problems paying off huge war debts. In the late 1920s the American economy at first seemed immune to the mounting troubles, but with the start of the 1930s it crashed with startling rapidity.

A maldistribution of purchasing power

A fundamental maldistribution of purchasing power, the greatly unequal distribution of wealth throughout the 1920s, was a factor. Wages increased at a rate that was a fraction of the rate at which productivity increased. As production costs fell quickly, wages rose slowly, and prices remained constant, the bulk benefit of the increased productivity went into profits. As industrial and agricultural production increased, the proportion of the profits going to farmers, factory workers, and other potential consumers was far too small to create a market for goods that they were producing. Even in 1929, after nearly a decade of economic growth, more than half the families in America lived on the edge or below the subsistence level-too poor to share in the great consumer boom of the 1920s, too poor to buy the cars and houses and other goods the industrial economy was producing, too poor in many cases to buy even the adequate food and shelter for themselves. As long as corporations had continue to expand their capital facilities (their factories, warehouses, heavy equipment, and other investments), the economy had flourished. And thanks to pressure from the Calvin Coolidge administration and the business, the Federal Reserve Board kept the rediscount rate low, encouraging excessive investment. By the end of the [920s, however, capital investments had created more plant space than could be profitably used, and factories were pouring out more goods than consumers could purchase.

A lack of diversification

Another factor was the serious lack of diversification in the American economy of the 1920s. Prosperity had been excessively dependent on a few basic industries, notably construction and automobiles; in the late 1920s, those industries began to decline. Between 1926 and 1929, expenditures on construction fell from $11 billion to under $9 billion. Automobile sales began to decline somewhat later, but in the first nine months of 1929 they declined by more than one third. Once these two crucial industries began to weaken, there was not enough strength in other sectors of the economy to take up the slack. Even before, while the automotive industry was thriving in the 1920s some industries, agriculture in particular, were declining steadily. While the Ford Motor Company was reporting record assets, farm prices plummeted, and the price of food fell precipitously. Also prospering during the 1920s were businesses dependent upon the radio industry.

The credit structure

Another factor was the credit structure of the economy. As farm prices plummeted, farmers were deeply in debt—their land mortgaged, and crop prices too low to allow them to pay off what they owed. Small banks, especially those tied to the agricultural economy, were in constant crisis in the 1920s as their customers defaulted on loans; there was a steady stream of failures among these smaller banks throughout the decade. The banking system as a whole, moreover, was only very loosely regulated by the Federal Reserve System. Although most American bankers in this era were staunchly conservative, some of the nation's largest banks were failing to maintain adequate reserves and were investing recklessly in the stock market or making unwise loans. In other words, the banking system was not well prepared to absorb the shock of a major recession.

The breakdown of international trade

Another factor was America's position in international trade. Protectionist impulses led nations to manufacture goods or harvest raw materials at home, although this policy was sometimes more expensive than importing what they needed. Then, to protect home products against competition from foreign imports, high tariff walls, such as the Hawley-Smoot Tariff Act, which raised tariffs on imports in order to protect local producers who were being hurt by foreign competition. The United States led the movement toward higher tariffs. Other nations quickly retaliated with discriminatory tariffs against the United States and each other, resulting in a chain reaction, American foreign trade seriously declined, and the volume of world trade steadily decreased.

The United States was far less dependent on overseas trade than it would later become, but exports formed a significant part of the economy in the 1920s.

Beginning late in the decade, European demand for American goods began to decline. That was partly because European industry and agriculture were becoming more productive, and partly because some European nations (most notably Germany, under the government of the Weimar Republic) were suffering serious financial crises and could not afford to buy goods overseas. But it was because the European economy was being destabilized by the international debt structure that had emerged in the aftermath of World War I.

Thus, the international debt structure was a fifth contributing factor to the Depression. When the war came to an end in 1918, all European nations that had been allied with the United States owed large sums of money to American banks, sums much too large to be repaid out of their shattered economies. That was one reason why the Allies had insisted (over Woodrow Wilson's objections) on demanding reparation payments from Germany and Austria. Reparations, they believed, would provide them with a way to pay off their own debts. But Germany and Austria were themselves in deep economic trouble after the war; they were no more able to pay the reparations than the Allies were able to pay their debts.

The debtor nations put strong pressure on the United States in the 1920s to forgive the debts, or at least reduce them. The American government refused. Instead, American banks began making large loans to the nations of Europe. Thus debts (and reparations) were being paid only by poling up new and greater debts. In the late 1920s, and particularly after the American economy began to weaken after 1929, the European nations found it much more difficult to borrow money from the United States. At the same time, high American protective tariffs were making it more difficult for them to sell their goods in American markets. Without any source of foreign exchange with which to repay their loans, they began to default. The collapse of the international credit structure was one of the reasons why the Depression spread to Europe (and grew much worse in America) after 1931.

The high tariff walls critically impeded the payment of war debts. As a result of high US tariffs, only a sort of cycle kept the reparations and war-debt payments going. During the 1920s the former allies paid the war-debt installments to the United States chiefly with funds obtained from German reparations payments, and Germany was able to make those payments only because of large private loans from the United States and United Kingdom of Great Britain and Northern Ireland. Similarly, American investments abroad provided the dollars, which alone made it possible for foreign nations to buy American products.

By 1931 the world was reeling from the worst depression of all time, and the entire structure of reparations and war debts collapsed.

In the scramble for liquidity that followed the Great Crash, funds flowed backed from Europe to America and Europe's fragile economies crumbled.

The Roosevelt administration

Dorothea Lange's Migrant Mother, depicts destitute pea pickers in California, centering on a mother of seven children, age thirty-two, in Nipomo, California, March 1936.

The Great Depression and the elections of 1932

The Wall Street stock market crash had ushered in a world-wide financial crisis. In the United States between 1929 and 1933 unemployment soared from 3 percent of the workforce to 25 percent, while manufacturing output collapsed by one-third. Worldwide, governments in desperation governments worldwide sought economic recovery by adopting restrictive autarkic policies—high tariffs, import quotas, and barter agreements—and by experimenting with new plans for their internal economies. Britain] adopted far-reaching measures in the development of a planned national economy. In Nazi Germany economic recovery was pursued through rearmament, conscription, and public works programs. In Mussolini's Italy the economic controls of his corporate state were tightened. Observers throughout the world saw in the massive program of economic planning and state ownership of the Soviet Union what appeared to be a depression-proof economic system and a solution to the crisis in capitalism. In the United States, upon accepting Democratic nomination for president in 1932, Franklin D. Franklin D. Roosevelt promised "a new deal for the American people," a phrase that has endured as a label for his administration and its many domestic achievements.

Unlike other many other world leaders in the 1930s, however, Roosevelt entered office with no single ideology or plan for dealing with the depression. This "new deal" would be often contradicting, pragmatic, and experimental. What many considered incoherence of the New Deal's ideology, however, was the presence of several competing ones, based on programs and ideas not without precedents in the American political tradition.

The New Deal, drawing heavily on the experiences of its leaders, reflected the ideas, and was influenced by the programs, that Franklin D. Roosevelt and most of his original associated had absorbed in their political youths early in the progressive era, had absorbed while serving in the Woodrow Wilson administration, and had absorbed holding other offices in the 1920s. From the progressive era, the New Dealers borrowed the era's opposition to monopoly, move toward government regulation of the economy, and were influenced by the dispelling of age long notions that poverty was a personal moral failure rather than a product of impersonal social and economic forces. From the Wilson administration their ideas about government mobilization were shaped efforts by efforts to mobilize the economy for the Great War. And from the policy experiments of the 1920s, New Dealers picked up ideas from efforts to harmonize the economy by creating cooperative relationships among its constituent elements.

The New Deal consisted of many different efforts to end the Great Depression and reform the American economy. Most of them failed, but there were enough successes to establish it as the most important episode of the twentieth century in the creation of the modern American state.

The First Hundred Days

The "bank holiday" and the Emergency Banking Act

Roosevelt's ebullient public personality, conveyed through his declaration that "the only thing we have to fear is fear itself” and "fireside chats" on the radio did a great deal alone to help restore the nation's confidence.

The desperate economic situation, combined with the substantial Democratic victories in the 1932 elections, gave Roosevelt unusual influence over Congress in the first months of his administration. He used his leverage to win rapid passage of a series of measure to prop up the tottering banking system, reform the stock market, aid the unemployed, and induce industrial and agricultural recovery. With the banking crisis looming and with Congress desperate in a mood to do virtually anything the new president suggested, Roosevelt might well have taken bold steps, such as nationalizing the banking system. Instead, he worked to shore up the existing financial institutions and to revive confidence in the economy.

On March 6, two days after taking office, he issued a proclamation closing all American banks for four days until Congress could meet in a special session. Ordinarily, such an action would cause widespread panic. But the action created a general sense of relief. First, many states had already closed down the banks before March 6. Second, Roosevelt astutely and euphemistically described it as a "bank holiday." And third, the action demonstrated that the federal government was stepping in to stop the alarming pattern of bank failures.

Three days later, Franklin D. Roosevelt sent to Congress the Emergency Banking Act, a generally conservative bill, drafted in large part by holdovers from the Hoover administration, designed primarily to protect large banks from being dragged down by the failing smaller ones. The bill provided for Treasury Department inspection of all banks before they would be allowed to reopen, for federal assistance to tottering large institutions, and for a thorough reorganization of those in greatest difficulty. A confused and frightened Congress passed the bill within four hours of its introduction. Three-quarters of the banks in the Federal Reserve System reopened within the next three days, and $1 billion in hoarded currency and gold flowed back into them within a month. The immediate banking crisis was over.

The Economy Act

On the morning after passage of the Emergency Banking Act, Roosevelt sent to Congress the Economy Act, which was designed to convince the public, and moreover the business community, that the federal government was in the hands of no radical. The act proposed to balance the federal budget by cutting the salaries of government employees and reducing pensions to veterans by as much as 15 percent.

Otherwise, Roosevelt warned, the nation faced a $1 billion deficit. The bill revealed clearly what Roosevelt had always maintained: that he was at heart a fiscal conservative as his predecessor. And like the banking bill, it passed through Congress almost instantly—despite heated protests by some congressional progressives.

At least until after the Second World War, New Dealers never fully recognized the value of government spending as a vehicle for recovery, and their efforts along other lines never succeeded in ending the Depression. Most economists of the era rejected his idea and favored balanced budgets. In fact, in the 1932 presidential election, Franklin D. Roosevelt had blasted Herbert Hoover for running a deficit, and dutifully promised he would balance the budget if elected.

The Agricultural Adjustment Administration (AAA)

The celebrated first Hundred Days of the new administration also produced a federal program to protect American farmers from the uncertainties of the market through subsides and production controls, the Agricultural Adjustment Administration (AAA), which Congress passed in May 1933. The AAA reflected the desires of leaders of various farm organizations and Roosevelt's secretary of agriculture, Henry A. Wallace.

Relative farm incomes had been falling for decades. The AAA included reworkings of many long-touted programs for agrarian relief, which had been demanded for decades. The most important provision of the AAA was the provision for crop reductions—the "domestic allotment" system of the act, which was intended to raise prices for farm commodities. Under this system, producers of seven basic commodities (corn, cotton, dairy products, hogs, rice, tobacco, and wheat) would decide on production limits for their crops. The government would then, through the AAA, tell individual farmers how much they should plant would plant and would pay them subsides for leaving some of their land idle. A tax on food processing would provide the funds for the new payments. Farm prices were to be subsidized up to the point of parity.

The most controversial component of the anti-deflationary domestic allotment system was the large-scale destruction of existing crops and livestock to reduce surpluses. At a time in which many families were suffering from malnutrition and downright starvation, it was a difficult measure. However, gross farm incomes increased by half in the first three years of the New Deal and the relative position of farmers improved significantly for the first time in twenty years.

The AAA was the first program on such a scale on behalf of the troubled agricultural economy, and it established an important and long-lasting federal role in the planning on the entire agricultural sector of the economy.

Other initiatives

The First Hundred Days also saw the creation of a new federal regulatory agency to oversee the stock market, the Securities and Exchange Commission (SEC), a reform of the banking system that included a system of insurance for deposits. But the most successful in alleviating the miseries of the Great Depression were a series of relief measures to aid some of the 15 million unemployed Americans, among them the Civilian Conservation Corps (CCC), the Civil Works Administration (CWA), and the Federal Emergency Relief Administration (FERA). The early New Deal also began the Tennessee Valley Authority (TVA), an unprecedented experiment in flood control, public power, and regional planning.

Roosevelt also moved in his first days in office to put to rest on of the divisive cultural issues of the 1920s, supporting and then signing a bill to legalize the manufacture and sale of beer—an interim measure pending the repeal of prohibition, for which a constitutional amendment (the Twenty-first) was already in process. The amendment was ratified later in 1933.

The National Industrial Recovery Act (NIRA)

Roosevelt realized that these initial actions were nothing but stopgaps, that more comprehensive government programs would be necessary. In the roughly three years between the Great Crash and Roosevelt's First Hundred Days, the industrial economy had been suffering from a viscous cycle of deflation. Since 1931, the US Chamber of Commerce, the then and now the voice of the nation's organized business had been urging the Hoover administration to adopt an anti-deflationary scheme that would permit trade associations to cooperate in stabilizing prices within their industries. While existing antitrust laws clearly forbade such practices, organized business found a receptive ear in the Roosevelt administration.

The Roosevelt administration, packed with reformers aspiring to forge all elements of society into a cooperative unit (a reaction to the worldwide specter of "class struggle"), was fairly amenable to the idea of cooperation among producers. Desperate for salvation, many businesspeople even demanded that the government enforce such trade associate agreements on pricing and production. But the administration insisted on additional provisions that would deal with other economic problems as well. Many, after all, remembered that in the 1920s wages increased at a rate that was a fraction of the rate at which productivity increased, remembering that production costs were falling while wages were rising slowly and prices remained constant.

The Roosevelt administration, under increasing pressure to do more to alleviate unemployment, and alarmed at the increasing militancy of the trade union movement and the political pressures of radical, dissident challenges as Huey Long, Father Charles E. Coughlin, and even the Communist Party, insisted that business would have to ensure that the incomes of workers would rise along with their prices. Against this backdrop, the product of all these impulses and pressures the National Industrial Recovery Act (NIRA), the most important undertaking of the first Hundred Days, which Congress passed in June 1933.

It guaranteed to workers of the right of collective bargaining and helped spur major union organizing drives in major industries. And responding to business clamor for anti-deflationary trade associate agreements, the NIRA established the most important, but ultimately least successful provision: the a new federal agency known as the National Recovery Administration (NRA), which attempted to stabilize prices and wages though cooperative "code authorities" involving government, business, and labor.

In case consumer buying power lagged behind—thereby defeating the administration’s initiatives—the NIRA created the Public Works Administration (PWA), a major program of public works spending designed to alleviate unemployment, and moreover to pump needed funds into the economy.

The new program was hailed at its inception as a miracle. Indeed, it had something for everyone. Just as business leaders hailed it as the beginning of a new era of cooperation between government and industry, labor leaders hailed it as a "Magna Carta" for trade unions.

At the center of the NIRA was the National Recovery Administration (NRA), headed flamboyant former general and businessman Hugh S. Johnson, who sought to generate public enthusiasm for the NRA. He called on every business establishment in the nation to accept a stopgap "blanket code": a minimum wage of between 20 and 40 cents an hour, a maximum workweek of 35 to 40 hours, and the abolition of child labor. Johnson and Roosevelt contended that the "blanket code" would raise consumer purchasing power and increase employment. Social reformers were won over by the elimination of notorious, exploitative sweatshops and the abolition of child labor. To generate enthusiasm for the blanket code, Johnson devised a symbol—the NRA Blue Eagle, to be proudly displayed in commercial establishments by employers who accepted the provisions of the blanket code. Blue Eagle flags, posters, and stickers, with the slogan "We Do Our Part," rapidly became visible in every part of the country.

The massive mobilization behind the NRA had practical motivations: Johnson needed extraordinary public and corporate support to gave enough bargaining strength to negotiate the codes with business and labor. As the campaign was going on, Johnson had to negotiate specific sets of codes with leaders of the nation’s major industries; the most significant of which were which were anti-deflationary floors below which no company would lower prices or wages and agreements on maintaining employment and production. However, cooperation was a great burden; a firm could, after all, violate such codes in search for a competitive advantage. In the short run, enough support among key sectors of society was generated. Thus, in a remarkably short time, Johnson won agreements from almost every major industry in the nation.

These and other early initiatives created broad popular support for the Roosevelt administration and halted the rapid unraveling of the financial system. They did not, however, end, or even significantly abate, the Great Depression.

Setbacks of Roosevelt's second term

Historians on the right and left have generally been disappointed with Roosevelt's second term. On the right, there have been charges of an executive dictatorship since the 1930s. Since the 1960s, New Left historians, on the other hand, have chronicled a series of missed opportunities, inadequate responses to problems in the New Deal, which they argue might have saved capitalism from itself, but failed to help—and in many cases actually harmed by squandering a historic opportunity—those groups most in need of assistance. However, the liberal accomplishments of the 1930s can be understood only in the context of the often- crippling, rigid constrains of the time within which the New Deal was operating. And indeed the New Deal was not just a products of its liberal backers a product of the pressures of its conservative opponents.

Although Roosevelt's landslide reelection in 1936 produced large Democratic majorities in both houses of Congress and predictions, which led to predictions of great new achievements from the president's supporters, the administration encountered a long string of frustrations. Ambitious reform ideas often floundered because of bureaucratic constraints, such as the absence of a government bureaucracy with sufficient strength and expertise to administer them.

Political constraints were crippling both in Congress and among the public at large, where conservative inhibitions remained strong. However, the Supreme Court would perhaps be the most formidable opponent. Several crucial New Deal programs, moreover, violated conservative constitutional theory; the NRA, the AAA, and others were invalidated by the Supreme Court, which was dominated by conservatives with a narrow view of the interstate commerce clause of the Constitution, the basis of much New Deal legislation.

However, emboldened by the triumphs of his first term, Roosevelt set out in 1937 to consolidate authority within the government in ways that provoked powerful opposition. Early in the year, he asked Congress to expand the number of justices so as to allow him to appoint members sympathetic to his ideas and hence tip the ideological balance of the Court. In one sense the proposal succeeded; two of the existing justices, almost certainly in response to the threat, switched positions and began voting to uphold New Deal measures, effectively creating a liberal majority. But the "court packing plan," as it was known, did lasting political damage to Roosevelt and was finally rejected by Congress. At about the same time, the administration proposed a plan to reorganize the executive branch in ways that would significantly increase the president's control over the bureaucracy. Like the Court-packing plan, executive reorganization from those who feared a "Roosevelt dictatorship" and failed in Congress; a watered-down version of the bill finally won passage in 1939.

In the spring of 1935, responding to the setbacks in the Court, a new skepticism in Congress, and the growing popular clamor for more dramatic action, the administration proposed or endorsed several important new initiatives. The National Labor Relations Act, also know as the Wagner Act, revived and strengthened the protections of collective bargaining contained in the original (and now invalidated) NIRA. New relief programs, of which the most prominent was the Works Progress Administration (WPA), created hundreds of thousands of jobs for the unemployed. But the most important achievement of 1935, and perhaps the New Deal as a whole, was the Social Security Act, which established a system of old-age pensions, unemployment insurance, and welfare benefits for such protected groups as dependent children and the handicapped. It established a framework that shaped the American welfare system through the remainder of the country.

The New Deal and the "broker state"

Government, labor, and business arbitration

Despite the dismal record in aiding marginal farmers and African Americans, among others—contrasted with its often frequent generosity toward certain business interests—the effect of the New Deal was to elevate and strengthen new interest groups so as to allow them to compete more effectively for the interests by having the federal government evolve—albeit in an ad hoc, perhaps unintentional manner—into an arbitrator in competition among all elements and classes of society, acting as a force that could mediate when necessary to help some groups and limit the power of others. By the end of the 1930s, American business found itself competing for influence with an increasingly powerful labor movement, one that was engaged in mass mobilization and sometimes militant action; with an organized agricultural economy, due to decades of agrarian organization and agitation dating back to the farmers associations and populist revolt of the late nineteenth century; and with aroused consumers. The New Deal accomplished this by creating a series of state institutions that greatly, and permanently, expanded the role of the federal government in American life. The government was now committed to providing at least minimal assistance to the poor and unemployed; to protecting the rights of labor unions; to stabilizing the banking system; to building low-income housing; to regulating financial markets; to subsidizing agricultural production; and to doing many other tings that had not previously been federal responsibilities.

Thus, perhaps the strongest legacy of the New Deal, in other words, was to make the federal government a protector of interest groups and a supervisor of competition among them. As a result of the New Deal, American political and economic life became much more competitive than before, with workers, farmers, consumers, and others now able to press their demands upon the government in ways that in the past had been available only to the corporate world. Hence the frequent description of the government the New Deal created as the "broker state," a state brokering the competing claims of numerous groups.

The liberal assumptions that the New Deal acted as the foe of private business interests have been challenged. After all, in many cases New Deal efforts were intended to enhance the position of private entrepreneurs—especially their concerns over inflation—even, at times, at the cost of some of the liberal reform goals that some administration officials espoused. Since the 1960s New Left historians have chronicled a series of missed opportunities, inadequate responses to problems in the New Deal, which they argue might have saved capitalism from itself, but may have failed to help—and in many cases actually harmed by squandering a historic opportunity—those groups most in need of assistance. Enhanced the positions of some previously disadvantaged groups, but did little or nothing for many others, especially blacks, sharecroppers, and the urban poor.

Thus, it did not transform American capitalism in any genuinely radical way. Except in the field of labor relations, corporate power remained nearly as free from government regulation or control in 1945 as it had been in 1933. But the New Deal did create the rudiments of the American welfare state, though its many relief programs and above all through the Social Security system. The conservative inhibitions New Dealers brought to this task ensured that the welfare system was limited. Even the most progressive New Dealers were somewhat great suspicions about federal power, expansive welfare benefits, and large-scale government expenditures.

The “broker state” and marginalized interests

However, this so-called "broker state" would offer much less influence to those groups either too weak to demand assistance or not visible enough to arouse widespread public support. But it did lay the ground work for the "broker state" to be expanded in the future, mostly through the work of the next wave of liberal reform—the civil rights movement and the Great Society—to embrace groups marginalized in the New Deal coalition, especially racial and ethnic minorities.

The most notable group to receive much less influence than others in the broker state was African Americans because the Franklin D. Roosevelt administration did not see American blacks as a potent interest group capable of seriously challenging the discriminatory forces against them. While the Roosevelt administration, unlike that of the previous Democratic president—Woodrow Wilson —did not move to increase government discrimination against African Americans, it did relatively little to help lift the social standing of African Americans. To the administrations credit, Roosevelt appointed an unprecedented number of African Americans to second-level positions in his administration, perhaps due to the influence of his wife, Eleanor Roosevelt, a vocal advocate of easing discrimination. And African Americans did benefit in significant though limited ways from New Deal relief programs, due, in large measure, to the efforts of Harold Ickes, who sought to ensure that such programs did not exclude blacks. As a result, by 1936 more the vast majority were voting Democratic; this was a stark change from 1932, just four years earlier, when the vast majority of African Americans were voting Republican. The New Deal thus established a political alliance between African Americans and the Democratic Party that survives to this day.

Franklin D. Roosevelt, not viewing African Americans as a critical interest group, believed that other matters were far more pressing than racial discrimination. Never willing to lose the support of Southern Democrats, he declined to support legislation making lynching while—perhaps hypocritically—denouncing lynching in speeches. He declined to advocate banning the poll tax. Aside from this measure he refused to use the relief agencies to challenge local patterns of discrimination; the NRA tolerated widespread practices of paying blacks less than whites; blacks were largely excluded form employment at the TVA; the FHA refused to provide mortgages to blacks moving into white neighborhoods; and the AAA was ineffectual in protecting the interests of black sharecroppers and tenant farmers.

The New Deal and economic relief

Deepening depression

John Maynard Keynes coined a term—"the paradox of thrift"—to describe the deepening of the Great Depression after 1929. The paradox of thrift indicates that when people decide to save more this may end up causing people to save less. The increased savings (reduced spending) due to the panic following the stock market crash of 1929 left markets saturated, contributing to price deflation, perpetuating the Great Depression. When people decided to save more (spend less) businesses responded by cutting back on production and laying off workers. Businesses, cutting back on investment spending because they were pessimistic about the future as well, were also doing their share of causing a reduction in aggregate expenditures, reducing their investments, setting in motion a dangerous cycle: less investment, fewer jobs, less consumption and even less reason for business to invest. The lower aggregate expenditures in the economy contributed to a multiple decline in income well below full employment. The economy may reach perfect balance, but at a cost of high unemployment and social misery. At the lower income levels during the Great Depression savings was much lower than before—hence, the paradox of thrift. As a result, economists were increasingly calling for government to avoid the pain in the first place by taking up the slack.

The New Deal and Keynesian economics

In the early 1930s, before John Maynard Keynes wrote The General Theory, he was advocating public works programs and deficits as a way to get the British economy out of the Depression. Although Keynes never mentions fiscal policy in The General Theory, and instead advocates the need to socialize investments, Keynes ushered in more of a theoretical revolution than a policy one. Keynes's basic idea was simple. In order to keep people fully employed, governments have to run deficits when the economy is slowing because the private sector won't invest enough. Many politicians, however, failed to understand his idea.

As the Depression wore on, Franklin D. Roosevelt tried public works, farm subsidies and other devices to restart the economy, but he never completely gave up trying to balance the budget. As a result, unemployment remained high throughout the New Deal years; consumption, investment, and net exports—the pillars of economic growth—remained low. With fiscal policy, however, government could provide the needed increased spending by decreasing taxes, increasing government spending, increasing individuals’ incomes. As individuals incomes would increase, they would spend more. As they spent more, the multiplier process would take over and expand the effect on the initial spending. Expansionary fiscal policy thus involves decreasing taxes or increasing government spending to counteract cyclical unemployment and slow growth during a recession.

It was World War II, not the New Deal, that finally ended the crisis. Nor did the New Deal substantially alter the distribution of power within American capitalism; and it had only a small impact on the distribution of wealth among the American people.

[Keynes's visit to the White House in 1934 to urge President Roosevelt to do more deficit spending was a debacle. A dazed, overwhelmed Roosevelt complained to Labor Secretary Frances Perkins, "He left a whole rigmarole of figures… he must be a mathematician rather than a political economist." Keynes, equally frustrated with the encounter, later told Secretary Perkins that he had "supposed the President was more literate, economically speaking."

The recession of 1937 and recovery

But Keynes would perhaps be vindicated. The Roosevelt administration was under assault during FDR's second term, which presided over a new dip in the Great Depression in the fall of 1937 and continuing through most of 1938. It was, in the largest measure, a result of a premature effort by the administration to balance the budget by reducing federal spending. The administration reacted by launching a rhetorical campaign against monopoly power, which was cast as the cause of the new dip. The president appointed an aggressive new direction of the antirust division of the Justice Department, but this effort lost its effectiveness once World War II, a far more pressing concern, began.

But the administration's other response to the 1937 deepening of the Great Depression had more tangible results. Ignoring the vitriolic pleas of the Treasury Department and responding to the urgings of the converts to Keynesian economics and others in his administration, Roosevelt embarked on an antidote to the depression, reluctantly abandoning his efforts to balance the budget and launching a $5 billion spending program in the spring of 1938, an effort to increase mass purchasing power. In 1938 Franklin D. Roosevelt thus embraced the only new idea he had not yet tried—program put forward to him by that that bewildering British "mathematician." Although few Americans were much aware yet of the ideas of Keynes, the economist whose theories would soon transform economic thought throughout much of the world, they were gradually seeing that the spending program of 1938 was yielding results. Franklin D. Roosevelt explained his program in a fireside chat in which he finally acknowledged that it was therefore up to the government to "create an economic upturn" by making "additions to the purchasing power of the nation." This shift in administration policy was a huge milestone helping to legitimize Keynesian economics. Although the New Dealers themselves did not realize it at the time, the administration helped establish the basis for new forms of federal fiscal policy, which would in the postwar years give the government a series of important tools for promoting and regulating economic growth.

World War II and the end of the Great Depression

But it was not until the US entered World War II, however, did Roosevelt try Keynes' idea on a scale necessary to pull the nation out of the Great Depression; Roosevelt, of course, had little choice now. Even granted the special circumstances of war mobilization, it seemed to work exactly as Keynes predicted, winning over many Republicans even. When the Great Depression was brought to an end by the Second World War, business had been reinforced by government expenditures. New Deal programs sought to stimulate demand and provide work and relief for the impoverished through increased government spending, baked up later by the British economist John Maynard Keynes. In 1929 federal expenditures were only 3 percent of GDP. Between 1933 and 1939, federal expenditure tripled, and FDR's critics charged that he was turning America into a socialist state. However, spending on the New Deal was far smaller than on the war effort. In the first peacetime year of 1946, federal spending still amounted to $62 billion, or 30 percent of GDP. In short, federal expenditures went from 3 percent of GDP in 1929 to about a third in 1945. The big surprise was just how productive America became: spending financially cured the depression. Between 1939 and 1944 (the peak of wartime production), the nation's output almost doubled. Consequently, unemployment plummeted—from 14 percent in 1940 to less than 2 percent in 1943 as the labor force grew by ten million. The war economy was not so much a triumph of free enterprise as the result of government/business sectionalism, of government bankrolling business. While unemployment remained high throughout the New Deal years; consumption, investment, and net exports—the pillars of economic growth—remained low. It was World War II, not the New Deal, which finally ended the crisis. Nor did the New Deal substantially alter the distribution of power within American capitalism; and it had only a small impact on the distribution of wealth among the population.

Conclusions: the legacies of the New Deal

Although the New Deal did not end the depression, all in all it helped to prevent the economy from decaying further by increasing the regulatory functions of the federal government in ways that helped stabilize previous trouble areas of the economy: the stock market, the banking system, and others. It also produced a new political coalition that sustained the United States Democratic Party as the majority party in national politics for more than a generation after its own end. Also laying the foundations for the postwar era, Franklin D. Roosevelt and the New Deal helped enhance the power of the federal government as a whole. Roosevelt also established the presidency as the preeminent center of authority within the federal government. By creating a large array of protections for various groups of citizens—workers, farmers, and others—who suffered from the crisis, enabling them to challenge the powers of the corporations, the Roosevelt administration generated a set of political ideas—known to later generations as New Deal liberalism—that remained a source of inspiration and controversy for decades and that help shape the next great experiment in liberal reform, the Great Society of the 1960s.

World War II

For details, see the main World War II article.

Isolationist sentiment in America had ebbed, but the United States at first declined to enter the war, limiting itself to giving supplies and weapons to the United Kingdom, the Republic of China, and the Soviet Union. American feeling changed drastically with the sudden Japanese attack on Pearl Harbor, and the United States quickly joined the British-Soviet alliance against Japan, Fascist Italy, and Nazi Germany, known as the "Axis Alliance". Even with American participation, it took nearly four more years to defeat Nazi Germany and Japan. Though the Soviet Union suffered far more casualties than its allies, America's active involvement in the war was vital to preventing an eventual Axis victory.

By a vote of 65 to 7, the United States Senate on December 4, 1945 approved US participation in the United Nations (the UN was established on October 24, 1945 to serve as a body to help prevent future world wars).

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