The New Deal failed

myp · Apr 18, 2009

A lot of people seem to misguided on what the New Deal really did. A lot of people think it was a success, perhaps because that is what most history books suggest, but upon further scrutiny I think it is clear that the New Deal failed and only prolonged the Depression.

There are several facts supporting my argument and I will begin with a couple (I will probably end up sharing more as I respond to people who disagree with me.)

Anyway, first it is important to look at the depression of 1921. Haven't heard of it? Don't worry, a lot of people haven't. This is because it was a very short depression, having ended in 3-4 years after the government stayed out of the market. The start of the depression say the markets plunge, with the DJIA down about 42%.

Now, compare that to the Great Depression, which was in a very similar market as it was only a decade after the 1921 depression. When the stock market crashed, the DJIA saw a dip of about 47%, close to the 42% of the 1921 depression. What was different is how the government reacted. As we all know, FDR pushed a lot of regulation and the New Deal to try to "fix" the problem, just as Obama is trying to do today. What ended up happening is we had a depression that last over 10 years and took a World War and the restructuring of the global economic structure in order to get out of.

Now you tell me, did the New Deal really work and if so, why was the 20s depression no where near as bad when Harding stayed out of the market?

edit: Just thought I'd add a little more: The New Deal also left us with programs that are turning in to really big problems now. Look at Fannie and Freddie, which were both created by FDR during that period and their role in the housing crisis. Also, look at where social security is headed.

The Parakeet · Apr 18, 2009

You're ignoring some important things though.

If anyone's curious I'll link to the wikipedia page on the 1921 http://en.wikipedia.org/wiki/1921_recession or http://en.wikipedia.org/wiki/Post-WWI_recession

That seemed like a fairly simple problem. We had a boom during WWI and it ended drastically. It was a financial crisis (like we'd had a lot of before) and it wrapped up in a few years by letting the deflation just kinda reset things. The important thing was that the economy's heart seemed to still be strong (there would have still been a lot of post war rebuilding I assume).

*edit - I just read the second wiki and added it. Basically confirmed my suspicions. It was a post-war cool off. The problem was that wages were inflated, unemployment was high, and factories that had been making millions providing weapons were out of business. The factories adjusted, the women left the workforce and opened up jobs, the glut in labor caused wages to fall and prices to adjust. It was one that was perfectly able of fixing itself. The Great Depression had a physical lack of demand, a dead farming market, a dead global market, and a trashed financial district.

The Great Depression was a different monster. It was coupled with a complete collapse of the agricultural system and a series of bank runs.

It was an economists worst nightmare. There just wasn't a market for anything and deflation was so bad that any investment was crazy.

The New Deal probably didn't save the country. It was what it claimed to be. A program that gave a lot of unemployed young men jobs that improved the infrastructure of the United States (good improvements overall). This put money in pockets and restored confidence, which was priceless.

An important thing to look at was the apparent dip that happened in 1938 when Roosevelt listened to conservatives and cut spending. It was obviously having an effect on the economy.

There is one big problem with the theory too. It's generally accepted that WWII got us out of the depression all the way. How is it different than the New Deal? War spending was just the government pumping money into the system. There wasn't even that much foreign money coming into the country (since Britain was wavering on bankruptcy, hence Lend-Lease).

Social security probably deserves its own thread, but it was a good program when it started. It was a guaranteed retirement fund. With a whole lot of people afraid of banks, this was ideal. It was really only bad when we decided that the interest was free money for the government that we could pay back later. Now philosophically, I see no reason why it shouldn't be opt-in, but that's another thread.

myp · Apr 18, 2009

You are undermining how bad the 20s depression was and exaggerating how bad the stock market crash was in comparison.

You said that deflation was very bad making investment almost impossible, but it really wasn't that much off of what it was for the 20s depression. The dollar at the low point during the 20s depression was worth about 90 cents of what it was in 1920 (the year before the depression.) The dollar in 1932 (before the New Deal) was worth about 84 cents of what it was in 1928, the year before the crash. Looking at that raw value of the dollar is best, but even if you look at things like CPI you will notice that the total change during the 20s depression added up to about -17 whereas it added up to about -21 from 1929 to 1932. Again, it is a difference, but not enough to cry deflation. I don't see deflation as a valid argument here.

Industrial production in 1920 was about 6 when put on a scale where 2002=100. During the 20s depression it dipped to the 4s. In 1928 it was in the 7s, it dipped to 4 in 1932. http://research.stlouisfed.org/fred2/data/INDPRO.txt

In the 1920s, there were many farm bankruptcies also (I'll add that a lot of that was thanks to the government's land binge of 1919-1920)- this number peaked in 1927, before the stock market crash and the DOW dip, and even at this high point, it was still lower than bankruptcy rates for all American businesses. Farm income was still higher throughout this whole period than it had been before WWI. Farmers were not miserable and this period's agricultural downplay is also very exaggerated, especially when compared to the 1920s. Also, let me add that Hoover gave into farmers asking for price regulations, which Coolidge had previously denied, which made it even that bad. Even at that low point, it wasn't much worse than earlier that decade though. Farm prices fell by about 40% from 1928 to 1932. They fell about the same amount from 1920 to 1921:
http://chestofbooks.com/finance/eco...mic-Problems/images/Farm-prices-1909-1921.jpg
http://en.wikipedia.org/wiki/File:US_Farm_Prices_(1928-1935).JPG (its wikipedia, but it is based off of information from the US Bureau of Labor Statistics)

As for there not being a market for anything- I can say the same about the early 20s because you said yourself that WWI had a lot of excess demand, which all died down.

Non-farm unemployment rose by about 11% during the 20s depression and about 23% from 1928 to 1932. Please note that the farm employment situation was a lot better than the general employment situation, meaning these numbers for both the depressions would be lower.

http://www.oldamericancentury.org/promos/755px-US_Employment_Graph_-_1920_to_1940.svg.png

Also, if you look at unemployment from 1932 to 1933, when the New Deal was implemented, you will see that unemployment actually went down. There was no need for a New Deal, it only extended things. As for WWII, I am not saying that is what got us out of the depression, although it did help. It was really the restructuring of the world economy that got us out.

Anyway, even if it was WWII that got us out, it may be government spending, but I for one certainly don't think it is worth it. Do you? Your other government spending didn't work as explained above, so all you have left now is the world war. Would you really support starting a world war to get out of a depression? I'm guessing not. Face it, the history books either lied or the historians writing them didn't understand the market situation- The New Deal failed.

The Parakeet · Apr 18, 2009

Most history books have been stating that it was just there for support. Things have generally shaken out poorly for it. It was there to give people hope and provide a bottom while the restructuring occurring. Plus, if I remember correctly, very few of his programs really went through. The only big one was a plan for the $10 a day building bridges and parks thing.

My only real problem is your argument that it extended it. It might not have helped, but it didn't really hurt anything. It just pumped some more money out there (which might explain the lower deflation levels

). The rise in spending was proportionally big, but I thought it just went up to 8.8% of our GDP (from 2.2%).

The nature of them is very important. The Great Depression was one of an agricultural crash (dust bowl), a worldwide crash, a stock market crash, a banking crash, and all the beautiful chaos that followed.

The 1920s weren't that unexpected or strange. It was a cool down after war. It was simple logic that nothing special was required to get people through it. It would just take some time to get everything sorted back out. They fixed the problem by shifting their supply to consumer goods that the returning soldiers wanted. Even that had limited effects. That's actually why we were pumping money into the system this time around. We just didn't want deflation to start up and put us in the same rough spot. Not here to talk about that though *sorry*.

That wasn't an option in the Great Depression. People weren't buying things and the market had just truly collapsed (bank runs, stock market crash, foreclosure, etc.) There wasn't a magical way to fix the Depression. It was deflation fear at its finest. There wasn't any way to break it, except by pumping new money into the system.

I haven't looked at the numbers before, so I'll take your word for it. The deflation scare of the 1920s would have been broken by the rise of cars and radios (new things that people really wanted to buy at whatever price they were). If such a technological breakthrough had spurred spending in the 1930s, then it would have probably had a similar effect.

curious · Apr 24, 2009

myp said:
edit: Just thought I'd add a little more: The New Deal also left us with programs that are turning in to really big problems now. Look at Fannie and Freddie, which were both created by FDR during that period and their role in the housing crisis. Also, look at where social security is headed.

The problem with Freddie and Fannie had to do with greedy people who found a way to get bigger and bigger bonuses.

Fannie and Freddie did exactly what they were supposed to do. They were two of the most successful programs to come out of the new deal. What they do is increase the amount of money available for mortagages. If a bank loans someone $100,000 on a thirty year mortgage, it won't have that money available to lend to another homebuyer for a long, long time. If that mortgage is sold to a government entity (Freddie and Fannie) at a slightly reduced interest rate, then they have the $100,000 to lend again. If it weren't for Fannie and Freddie, we would be, like the French, a nation of renters.

Originally a mortgage that was bought by either organization had to meet very high standards. Over time those standards were loosened. They were also both put under pressure during the 80's to accept some lower quality loans in order to free up some mortgage money for lower income people. That started the whole sequence of ever more complicated and mysterious packaging of loans.

The New Deal had nothing to do with the problems with Fannie Mae and Freddie Mac. If they hadn't been privatized and has stayed government entities, none of these issues would have arisen.

(Disclosure: I worked in their IT department from December of 1985 to July of 1990. I quit the day I qualified for a pension. I hated the place.)

Ralph47 · Jan 26, 2018

I agree it is MUCH better to have Republicans in power! :giggle:

Plus, it was the war that brought America back. So support all wars!

The New Deal failed

myp

The Parakeet

myp

The Parakeet

curious

Ralph47

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