The New Deal:an Impossible Experiment
Posted on June 1st, 2009 by askain
“No one can guarantee that policymakers will take advantage of the lessons of history” with this sentence Gene Smiley finished his book about the Great Depression in the decade of 30.
This history demonstrates that in a society complex and varied as America is impossible to implement a radical planification and collectivize the country as well.
“Roosevelt was not a deep thinker-he was a politician”,said Smiley.Roosevelt understood little about how the economic funcioned and little about economic ideas. He appreciated common sense,but comon sense is not a good tool to implement complex economic policies,it serves only to negotiate and manipulate public opinion.
Roosevelt sought help at Columbia University and he was supported by radical planners: former journalist Louis M. Howe, Frances Perkins, Harry Hopkins, Raymond Moley, Adolf Berle or Rexford Tugwell an economics professor and more radical planner and collectivist type of national economic planning.
The first action of Roosevelt and his advisers was to control the banks and all foreign exchange transactions.The devaluation of the dollar by nearly 70 per cent tended to raise both the prices of imported goods and the price of U.S. exports.
Another measure was to achieve a participatory democracy at the grassroots with the support of the people.But that was incompatible with the coercitive projects to reduce production and raise prices.The experiment descentralization were little better,because little power and decisions realizable as large corporations.
The radical ideas of control and a project that was to transfer essentially income from nonfarmers to farmers was not the expected adjustment.The same happened to the industrial recovery. There was a conflict with the relief work objectives of the project and reduce production and increase the incomes of the workers who consumed more and saved less, but this bill was unconstitutional.
Hugh Johnson, a representative of the military in the war industries of World War I,supported by radical planners, wanted to control the big companies to enter at the social projects.These advisers had little confidence that a competitive market system could coordinate economic activities and restore full employment in the economy with the codes of fair competition, but the representatives of the worker and the consumers did not accept these ideas.
The other project is called the National Recovery Administration codes with the goal of a relationship between the companies’s goals and the social objective.
General Johnson did not understand that the basic goal of large corporations is profit. This adviser believed that if the companies did not support the NRA codes these companies would be unpatriotic, which was an insult to the entrepreneurs.
NRA Codes project was criticized by the CEOs of corporations.The NRA’s goal was to cartelize American industry and reduce the ability of independent firms to decide on prices,production,and investment.
Then August 21, 1934 Johnson resigned and losing the support of President Roosevelt. The President attempted to reorganize the NRA (National Recovery Administration) and the anti-trust program.but no group received what is really wanted and recovery aborted ,1935-1939. In 1937 the State of the Union address,the president hinted at a resurrection of the NRA.In June the Senate Judiciary Committee reported out the bill with a recommendation so negative that no attempt was made to resurrect it.
The battle over Roovevelt’s court-packing bill consumed an entire congressional session and split the Democratic party.It cost the president some of his support and helped destroy his aura of invincibility.In the spring of 1937 many observers had argued that a contraction was remote because the economy back to where it has been in 1934 and shook everyone;s confidence in the economy and the New Deal.
What caused the depression within a depression? There were,in fact, two different primary sources that were jointly responsible for this new contraction: the actions of the Federal Reserve System,and the rapid rise in wage rates and labor costs during the great unionization drives in early 1937.By the fall of 1937 the profits of manufacturing firms had fallen sharply and were expected to fall even further-and the stock market crashed.Then the NRA was declared unconstitutional.
The main problems were with time deposits, and insurance or provide temporary relief for the mortgage debts and securities markets.
With regulating the massive unemployment, many families depend on government relief. Federal money grants were not high, and also the use of “parity” prices with production and marketing controls reduced supply quotas.
Roosevelt wanted the farm program and other program be voluntary and the administration be decentralized so that farmers themselves would determine its direction and magnitude (a “grass-root democracy). In the 1930s the Roosevelt asministration abruptly and dramatically altered the institutional framework which private business decisions were made -not just once but several times.The effect was to retard the recovery from the Great Depression of 1929-1933.
Conventional economic theory did not seem capable of explaining why the depression had ocurred or why was so long and severe.But the experience led an English economist to propose a new theory to explain the depression and how to get out of it. The name of the economist was John Maynard Keynes.
Keynes took a different approach.Rather than considering individual markets,he examined aggregate sector of the economy-specifically the household sector,the business sector, the government sector,and the rest-o-the world.Aggregate consumer, aggregate investment,aggregate governments spending.
Keynes argued that the key to understanding the perfrormance of the economy was to determine why aggregate demand was sometimes insufficient to employ all the economy’s resources.To do that,one had to look Gross National Product(GNP)and Gross National Income (GNY).
Keynes argued that consumption spending depended on income; consuption spending alone could not determine the level of income and the economic activity.Investment was determined by the expected profitability of new capital.and this depended primarily on interest rates,expected prices,and other costs of what was produced.
Government spending,on the other hand,was determined by social priorities.Because investment did not depend directly on income it had the power to determine the level of income. If investment spending fell -because,for example,business leaders became more pessimistic about expected profits,and GNP and GNY would decline.
In severe depression,Keynes argued, lower interest rates did little to spur additional investment spending.The Federal Government could do this directly by increasing aggregate demand to beging increasing GNP and could do this without increasing taxes.
The decreased taxes would lead to additional disposable income for consumers and business and thus to increases in their spending (fiscal policy). Monetary policy is the other half of the twin tools of macroeconomic policy.
This provides some hope that we have learned something from the 1930s. Finally,the 1930s are not a testimonial to the fundamental problems of market-oriented economies. What failed in the 1930s were governments and and its contradictory policies.