Arnold Kling  

What Was the New Deal?

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Reading Brad DeLong's latest word on the subject, I find that we seem to agree on the economics, but perhaps not on the history. We both like Roosevelt's policies of going off the gold standard and providing deposit insurance. Where I complain that monetary and fiscal policy were not expansionary enough, Brad says yes, but Roosevelt removed the contractionary bias of the Hoover Administration. Point taken.

But, to borrow a locution from Daniel Gross, "One would be very hard-pressed to find a serious professional historian--I mean a serious historian, not a think-tank wanker, not an economist" who would argue that the New Deal consisted primarily of deposit insurance, going off the gold standard, and taking the foot off the monetary and fiscal brakes. I think that the serious historian would feature the NRA, the SEC, the TVA, Glass-Steagall, the Agricultural Adjustment Act, the Wagner Act, Social Security, ...

Incidentally, Gross promises that his forthcoming book


contains a chapter that argues that the financial infrastructure laid down by the government in the New Deal helped pave the way for the immense growth seen in America's capital markets, banking system, credit industry, and housing markets over the past 70 years.

Robert Higgs has a chapter in his book, Depression, War, and Cold War that takes Bryan Caplan's view, that Roosevelt scared the daylights out of private investors. While 'PGL' jeers, "Might we remind Bryan that investment demand (in 2000$) rose from $11.5 billion in 1932 to $91.1 billion in 1937?", Higgs writes,

both real GDP and real GPI [gross private investment] plunged from 1929 to a trough in either 1932 or 1933, the former by 29 percent and the latter by 84 percent. Both variables recovered rapidly after 1933: by 1937, real national product has regained 96 percent of its loss...and investment had recouped 64 percent of its loss. The "Roosevelt recession" of 1937-38 cut short the recovery...gross investment fell by 34 percent...even in 1941, when stimulus from the defense mobilization had become substantial, real GPI had not quite regained its 1929 level.

So the interpretation of investment data is subject to choice-of-endpoint decisions. Yes, it was higher in 1937 than in 1932, but it was lower in 1939 than in 1930 (at least in the chart in the Higgs chapter).

I have yet to read an economic history of the 1930's that I trust as definitive. I wish I knew what really happened.

UPDATE: Alex Tabarrok weighed in on the anti-New-Deal side of the issue.


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CATEGORIES: Economic History



COMMENTS (16 to date)
Bill Woolsey writes:

After leaving the gold standard, why deposit insurance? While 14 year terms for Fed governors seems sensible, if they forget to act as lender of last resort, maybe a change of personnel is needed.

Alan writes:

Looking for a short, soundbite style sentence to open his book before spending the next few hundred pages on the details and the assessments, I don't see a serious historian finding much fault with "The New Deal took the government's foot off the monetary and fiscal brakes" That was surely both the essence and the common thread.

flix writes:

It doesn't matter what data you look at, with the exception of employement (for obvious reasons)all the charts and records show that the economy really recovered after Roosevelt's death. Investors never stopped being afraid of him after what he did.
His prohibition of private gold savings was akin to the "corralito" in Argentina, when the government confiscated savings in dollars a few years ago.

spencer writes:

Real gdp in 1929 was $865.2 billion real dollars and in 1936 it was $866.6 billion real dollars or back to the 1929 level.

If Higgs can not even get a simple thing like this right why should you pay any attention to anything else he has to say.

spencer writes:

flix -- do you even know when Roosevelt died?

For your information he died in 1945 and soon after the US enter a major post war recession.

Your statement is 100% wrong.

Mike writes:

I guess I'll need to be convinced why leaving the gold standard was such a wonderful idea. The data seems to suggest otherwise:

http://www.theunbrokenwindow.com/Hockey_Stick.htm

spencer writes:

I have a question for Bryan.

How do you reconcile the position that the New Deal scared investors so badly with the point that the stock market more than doubled in the first three years of the Roosevelt administration?

The stock market certainly implied that many investors had a lot of confidence.

Don Boudreaux writes:

Spencer,

I don't understand why you believe that the stats you cite in your comment in this thread prove that Bob Higgs got something wrong. The quotation from Higgs (in Arnold's original post) seems quite consistent with the stats that you mention in your comment.

John Thacker writes:

Real gdp in 1929 was $865.2 billion real dollars and in 1936 it was $866.6 billion real dollars or back to the 1929 level.

If Higgs can not even get a simple thing like this right why should you pay any attention to anything else he has to say.

Higgs got a simple thing like that correct:
"by 1937, real national product has regained 96 percent of its loss..."

How do you reconcile the position that the New Deal scared investors so badly with the point that the stock market more than doubled in the first three years of the Roosevelt administration?

Spencer, you're completely ignoring the recession of 1937-1938, which Higgs mentioned and which definitely occurred. Was that recession due to some New Deal programs? It certainly wasn't matched in many European countries.

Spencer, did you even read the post you're commented on, either the quote from Higgs, or this one from Professor Kling: "Yes, it was higher in 1937 than in 1932, but it was lower in 1939 than in 1930."

Higgs agrees that by the beginning of 1937 that GDP was back to its 1929 level. He just considers the recession of the next two years as well.

flix writes:

"flix -- do you even know when Roosevelt died?

For your information he died in 1945 and soon after the US enter a major post war recession"

Maybe that's why I said after his death.
Perhaps you should look at the 1940s and 1950s Real GDP data to cite just one example and compare it to pre-depression levels.
Also worth comparing: Trade levels, good consumption, non-govt investment, the dow(in CONSTANT/real money terms)....
You might just find out something.

flix writes:

Spencer:
Also, when you look at the data for 1946-50, you could make a little experiment: Don't include government spending as part of GDP. Don't include soldiers as "employed". Look just at private employment, consumption, investment, trade (not including lend/lease)... whatever.
It's just a suggestion, but do tell me if you see anything interesting.

K writes:

Looking at the 1940s for data about economic policies is worthless. The major countries spent the first half destroying things and killing people and suppressing non-essential production and consumption.

And some had began earlier in the 1930s. After 1945 most were in a daze for quiete some time.

The 1930s are another matter.

flix writes:
Looking at the 1940s for data about economic policies is worthless. The major countries spent the first half destroying things and killing people and suppressing non-essential production and consumption.

What? You mean killing people and destroying property is not an economic policy? tut, tut! Most USA presidents (of the last 150yrs) might disagree.
Also anyone who thinks that pyramid-building, ditch-filling, make-work government "recovery" programs that stimulate aggregate demand actually create wealth.

K writes:

flix: I think you may be too subtle for me, I miss the point.

If you regard WW2 as economic policy I have no response. I regard WW2 as the absence of any useful economic information or activity. I also regard it as a complete severing of the 1930 economies from those after the war.

In contrast the 1930s show governments all over the world intervening, in measured ways, in the free market and employing people directly - usually in some sort of public works.

I said not one word about those activities creating wealth. But there is where meaningful studies can be done.

The same studies are much harder to do in the 1940s although Britains Labor government policies after 1945 are a good source of information. And the start of recovery in the utterly devastated West Germany.

TGGP writes:

Spencer, why should we listen to you when you dismissed Higgs in the comment section at Marginal Revolution for something he addresses immediately in the abstract of the page I linked to? If Spencer can't be bothered to read that, why should we bother reading "anything else he have to say"?

flix writes:
I said not one word about those activities creating wealth.
K, Sorry, that comment was not aimed at you. Surely you see why it's relevant to the topic 'though. As to the difficulty of comparing data from the '40s, I agree. Nevertheless it's vital to see that for many countries the 1930s "recovery" was fuelled by rearmament financed by government debt, what happened in th '40s was not a coincidence.

Just one example: Germany owed billions of Reichsmarks in "Mefo" bills and other debt instruments to Poland and Czechoslovakia. It spent the money on building up the Luftwaffe and Wehrmacht, ending unemployment in the process.

The debts were due to be repaid in 1940.
Why was anyone surprised with what happened in 1939?

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