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Posted by on Jan 10, 2009 in Economy | 11 comments

On The Great Depression’s End: The New Deal or The War?

I keep hearing that FDR’s New Deal didn’t end (or even prolonged) the depression; World War II ended it. Impossible as it is to prove a negative, NPR’s Planet Money looked at the question of if FDR had done nothing with historian Eric Rauchway. His comments are in line with where I come down on the issue:

Between 1933 and 1937 Roosevelt’s first term in office — when you have THE New Deal in full swing — you have the biggest peace-time expansion of the economy in American History… GDP grows something like 39% in those years. It’s growing at a 9% a year rate. When we think about that, for the U.S.economy to be growing that fast, something must be going not too bad.

So what’s going on is there’s this tremendous rate of economic growth. There’s a recession in ’37 and ’38 but then that rate of growth is resumed. So even if you take the war out of the picture — if you just look at the Roosevelt administration before the war — you are seeing tremendous economic growth.

Emphasis mine. Rauchway on a “better new deal:”

One of the contributing causes of the recession of ’37, ’38 was that Roosevelt pulls back on the economic stimulus that the New Deal was delivering through the WPA in an effort to balance the budget… [we] hadn’t achieved a sufficient recovery to pull out the supports. So a better New Deal [from a Keynesian analysis] would have been one that spent more sooner…

Roosevelt was always fiscally conservative really. He came in as a fiscal conservative wanting a balanced budget and by 1938 he’s still a fiscal conservative wanting a balanced budget and he’s very nervous about what we now call fiscal stimulus. He doesn’t want to do it for any longer than is necessary.

SEE ALSO: Rauchway on Learning From the New Deal’s Mistakes in The American Prospect.

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  • superdestroyer

    But all of the economic growth was due to government spending under price controls. If the government purchases things for above market price, it will make the economy look like it is growing. However, that can only go on for a while before even the government spending cannot be sustained. Hence, a recession.

    The real question is how much did the private sector grow during the first eight years of the Roosvelt Administration.

  • mikkel

    Yeah I have to say that from my understanding, all the government intervention did a lot to prevent breakdown but didn’t actually change the underlying foundations (i.e. too much capacity) and was unsustainable. Then the war came and destroyed most industrial production in Japan and Europe and bingo.

    That and all the technological development. It’s nearly impossible to name one major company that arose in the 50s/60s that didn’t do something that was directly related to what was created for WWII.

    On the other hand I don’t think there is any evidence the New Deal made things worse, except as pure conjecture.

  • SD, your comment seems to make sense, so I’m adopting it, but changing some words.

    But all of the economic growth was due to military and tax cut spending with massive borrowing. If the government purchases things with borrowed money, it will make the economy look like it is growing. However, that can only go on for a while before even the government spending cannot be sustained. Hence, a recession.

    So, borrow and spend has trashed the economy. Now what?

    The dominant financial theme for 30 years has been this “free market” dogma with it’s 3 point strategy.

    Privatize, deregulate and cut social spending.

    It has not worked. Not here, not anywhere it has been tried. Time for a new theme, or at least a different one.

    I’d love to see less government spending too, and more government revenue. But joblessness is reducing payroll taxes and FICA, consumer confidence is grim, retailers are failing by the thousands and investors are not funding much new work. We need jobs. We have neglected infrastructure. There are “shovel ready” projects that can put people to work now. I don’t see how the conservative suggestion of “letting the market decide” can help here. But if the GOP stalls the stimulus and the decline continues, and misery increases, they’re even more foolish and will be more despised than they are now.

  • Jim_Satterfield


    A citation of where your understanding comes from would be nice.

    • mikkel

      Um it’s just a hodgepodge of stuff I’ve read over the years and would take a long time to put things together. Naked Capitalism has had the most, shall I say balanced perspective IMO, in that she is skeptical of claims and common wisdom but has no ax to grind. (I’m also biased because Yves has given a lot more attention to systems theory perspectives on the economy.) She also has a lot of direct experience working with Japan over the past decade and a half where things didn’t work like they were supposed to, and has tried to figure out why. She definitely isn’t opposed to New Deal type interventions on their face, but has written a bit about how she is skeptical whether they actually laid any ground work for recovery. Of course she’s written A LOT more about how our current situation is the exact opposite of back then as we’re the #1 debtor instead of creditor, and how she thinks it’s stupid to not be more concerned about that. She went so far as to say that if Keynes himself were still around he’d be the first to say that “we” (meaning not only the US but the world as a whole) is doing almost the opposite of what he actually suggested.

      Even strong proponents for intervention like Joseph Stiglitz (whom I personally think is the greatest economist) are stressing the need to have a fundamental reassessment of society’s aims, rather than just fill in the gaps stimulus. While he thinks it’s necessary for government intervention, he’s not of the opinion like Krugman (or an extreme example of Keynes) that all short term stimulus is equal, in that he thinks even if we fix all our infrastructure and whatnot, if we’re not smart we’ll just run out of stuff to do and collapse anyway. So he seems less interested in how much to spend and more interested in what we spend it on.

      That said, I think the societal impacts of the New Deal had a far larger effect perhaps than the economic impacts. By that I mean to say that even if it didn’t actually help much during the Great Depression, the reevaluation of the government’s role had positive effects that laid the framework for post WWII expansion. I feel the same about our current state actually. I think if the government goes out and spends $4-$5 trillion on trying to prop up home values, keeping banks afloat, fixing roads, keeping people shopping, whatever then it won’t really do much…in fact it could even lead to collapse as people will stop supporting us.

      If it goes and helps create more efficient and reliable public transportation, does tons more research into new energy sources, restructures health care, and really lays the ground work for the next 30 years in something of value we can export, then we’ll have a lot more global support and it’ll be a good use of money. However, the latter option might actually create more short term pain.

  • Jim_Satterfield

    Speaking of laying the groundwork for our future…

    One of the things that I have been thinking about and have seen virtually no discussion on is the contribution of readily available and widely distributed broadband and how its expansion via the stimulus package could benefit the country. Lots of people probably don’t realize how much of the U.S. just isn’t wired as well as other countries. Some people would probably be amazed by how many places even in cities aren’t covered by the current providers. I find myself wondering if we wouldn’t be better off with the physical infrastructure that provides the access to modern communications being not the mish-mash of overlapping cables we currently have but one system run by a non-profit whose only job is the construction and maintenance of this infrastructure and providing access to it via a rental system based on bandwidth. The government would have an interest in helping set this organization up and helping negotiate the transition. Then the current providers and anyone else with the capital can compete based on things such as services, innovation and customer service. In addition a system of low cost access like today’s phone lifeline service could be provided. Think what this could mean for not only K-12 education but adult continuing education and training, a reduction in business travel and energy consumption by increasing bandwidth available for videoconferencing and remote medical consultation.

  • superdestroyer


    The problem with your idea is that if the phone companies become wholesalers of broadband while the government becomes the retailer, you establish a technology ceiling. I doubt if the government would become a technology innovator but will spend its time maintaining the current system to keep the price low. In a couple of years every will be complaining that the rest of the world has better systems and that the U.S. is antiquated.

  • Jim_Satterfield

    I’m not referring to the government being the retailer, just an agent for helping to implement the changeover. The “retailer” would be a third party agency that anti-trust wouldn’t apply to because it would be a not-for-profit organization funded by the rents paid by the companies that want access to the system.

  • Broadband is a monopoly. It needs to be rigorously regulated, or nationalized. The corporate focus on maximizing profit above all else, and especially quarterly profit, leads companies to skimp on quality to the minimum that will sell, raising price to the max they can charge and contrary to your premise, SD, an utter lack of innovation. The only reason we have an extensive optical fiber network is that WE paid for it.

    This has become an all too common theme. Taxpayers fund the research and development of innovation, then companies gouge us to use what we created for them.

    Jim, to your point, and mikkel’s, you’re touching on the point that NO ONE wants to talk about. Our gluttonous lifestyle is not sustainable. When people talk about “recovery” it reminds me of a recent cartoon. A guy is talking to his broker. He asks, “How soon can we get back to guilt-free massive consumerism financed on our children’s uncertain future?”

  • superdestroyer


    There is no way tha a single, not-for-profit is going to be able to supply all of the broadband needs. At least currently there are several companies competing in the field. The big leap forward was during the boom where several companies were trying to build infrastructure. And several private companies were doing private research on it.

    If you let the government run it, it will end up like the municple water system with old parts, bad customer service, and no innovation.

  • SD, there is only one cable to my house (anyone have two?) and the city isn’t letting anyone else tear up the street to “compete.” I think you know that DSL and Dish aren’t serious competition for fiber optic cable. So just like the power lines, the computer “line” belongs to a monopoly that delivers lackluster speed compared to, ahem, Korea. And charges me gold standard prices for tin standard access.

    Oh, and bad idea to bring water into this, as companies try to “privatize” water systems so they can gouge us for what comes out of the tap too.

    Back to broadband, The article here describes the telecomm mess and how government “interference” in power transmission finally got America “wired” with electricity, and why the same is needed for Internet:

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