The New Deal has always been one of my favorite topics of study in American history and more recently, my studies in economics. John Maynard Keynes, the father of Keynesian economics, was correct in his ideas that drastically contrasted traditional laissez-faire economic theories. Keynes’ ideas are ideally exemplified by the New Deal legislation under President Franklin Roosevelt in the 1930s.

 

In 1929, the unemployment rate in the U.S. was around 3%. By 1932, it had risen to over 23%. Herbert Hoover’s methods had proven ineffective, and America’s future looked dismal until Roosevelt entered the oval office in 1933. Boasting plans for a “new deal for the forgotten man,” Roosevelt completely overturned traditional methods of economic governance through methods of Keynesian economics. Roosevelt instituted fiercely government-regulated economic policies to restore order and balance to the American people, starting with the unemployed.

 

Keynes strongly advocated for government involvement in economic affairs, especially during periods of high unemployment and recession. To decrease unemployment, Keynes recommended increasing spending along with providing government programs with the sole purpose of job stimulation.

 

In the famous first Hundred Days of Roosevelt’s presidency, that is exactly what occurred. Government agencies like the Works Progress Administration (WPA), Civilian Conservation Corps (CCC), and the National Recovery Administration (NRA) were founded. The WPA and CCC’s purposes were to help provide emergency aid, temporary jobs, and construction work. The NRA dealt with wages, hours, collective bargaining, safety regulations, trade practices, and child labor laws. To aid the agricultural industry that was also struggling, the Agricultural Adjustment Administration (AAA) was founded in 1933. The agency’s goal was to regulate crop production to raise prices and also provide subsidies to farmers in need. The table below depicts how the New Deal’s utilization of Keynesian economics drastically reduced unemployment from 1933-1941.

 

 

While stimulating the job market through government investment in agencies, Roosevelt was able to increase net public spending as well as demand for products and employment. Overall, this reduced unemployment and gave the U.S. government control over the economy like it had never seen before. Keynes’ theories promoted government influence of aggregate demand to encourage spending, which would in turn decrease unemployment and help economic recovery. “The stimulation of output by increasing aggregate purchasing power is the right way to get prices up; and not the other way round” (An Open Letter to President Roosevelt). A decrease in spending would reduce aggregate demand and purchasing power, furthering unemployment and causing less expenditure as the unemployment rate increases. Keynes’ theories and the New Deal enactment of them did the opposite.

 

In addition, to further increase government involvement and regulation over the U.S. economy and prevent another stock market crash, the Federal Deposit Insurance Corporation and Securities and Exchange Commission (SEC) were formed. The FDIC provided government insurance to banks that were members for their deposits, while the SEC regulated the stock market to protect the American people from duplicitous activity by investors.

 

Roosevelt’s execution of Keynesian economic policy through the New Deal brought the United States out of one of its darkest eras. It also set the precedent for a new brand of global economic practices that were at the opposite end of the spectrum from traditional laissez-faire economics.

Keynes and the New Deal