What Was the New Deal?

By Geoffrey Migiro on March 11 2019 in World Facts

Construction of the first New Deal Greenbelt Town in Maryland.
Construction of the first New Deal Greenbelt Town in Maryland.

The New Deal was a sequence of projects which President Roosevelt instituted during the Great Depression which helped restore the country’s prosperity. These projects included financial regulations and reforms and various public work projects which were enacted from 1933 to 1936 in the United States. The New Deal offered various safeguards and constraints in the banking sector and efforts to promote the economy after the sharp decline of prices. Some of the reforms and programs President Roosevelt instituted include:

Banking Reforms

Initially, the American economy was destabilized by the failure of the banks and the credit crunches. The leading cause of the crash was huge losses incurred in investment banking which was followed by bank runs. The bank run is caused by the massive withdrawal of deposit due to the public believing that the banks will become insolvent. As the public withdrew their deposits, the possibility of loan defaults increased which promoted further withdrawals. Bank runs eventually shrunk the monetary supply which in return affected the economy. As the economic and credit activities decreased, the prices deflation occurred which caused further contraction of the economy. Over 40% of the banks in the United States failed from 1929 to 1933, and this was one of the main contributors to the Great Depression.

Herbert Hoover thought of a bank holiday, but his idea was rejected since it would cause panic. Therefore President Roosevelt addressed the Americans and told them the cause of the bank crisis and what his administration was planning to do. He then closed all the American banks until the Emergency Banking Act could be passed. He introduced it to the Congress on March 9, 1933, and it passed on the same day. The bill stipulated a way to reopen all the sound banks, but under the supervision of the treasury and a federal loan was made available to them. Over 75% of the sound banks under the Federal Reserve System opened their doors to the public within the first three days, and billions of the hoarded cash were deposited. By 1933 over 4,000 small banks merged to create larger ones with a deposit of $3.6 billion. The Glass Steagall Act introduced the FDCI (Federal Deposit Insurance Corporation) which helped insure the bank’s deposits of over $2,500, therefore, ending the risk of bank runs.

Monetary Reforms

As per the gold standards, the Roosevelt administration kept the policy of dollar convertible to gold. President Roosevelt suspended gold outflow by prohibiting people from exporting gold unless under treasury’s license and everyone with gold coins was required to exchange them at a fixed price. Treasury stopped exchanging gold for dollars and gold was no longer a valid American legal tender for debt in the public and private contracts. The Federal Reserve allowed the dollar to float freely in the currency market with no guaranteed gold price. The 1934 Gold Reserve Act increased the gold’s nominal cost to $35 from $20.67 per troy ounce. These regulations made it possible for the Federal Reserve to increase the dollars in circulations to the required level.

The 1933 Securities Act

Before the 1929 Wall Street Crash, there were no regulations at the federal level and all the firms, including the ones whose securities were traded publicly, never published their reports regularly. Some even produced misleading statements which were based on some chosen data and to avoid the repeat of the Wall Street crash, the securities act was enacted in 1933. The bill stipulated that all the firms had to publish their profit and loss statements while disclosing their balance sheets. All these reports were to be vetted by an independent auditor. The Securities and Exchange Commission was established to assist in regulating the stock market and stop corporate abuse when it comes to securities sales and also corporate reporting.

Rural and Farm Programs

The rural areas were of high priority to President Roosevelt and Henry Wallace (the secretary of agriculture). The president believed that the recovery of the economy depended on increasing the prices of farms and the improvement of agriculture. The majority of the individuals in the rural areas lived in severe poverty, and most of the programs which addressed their needs were the Forest Service, NYA (National Youth Administration), and CCC (Civilian Conservation Corps) among others. His projects included reforestation, opening roads in various remote regions, construction of new schools, and school lunches.

Under the 1933 Farmers Relief Act, the government paid farmers who lowered their output thus raising the price of their produce. The act helped double the income of all the farmers by 1937. Roosevelt believed that the United States would not become prosperous until the farming industry became successful again. The established AAA (Agricultural Adjustment Administration) was established in May 1933. Using artificial scarcity, the AAA raised the prices of food, and they paid land subsidies to farmers who left part of their farm idle. The last main New Deal legislation on farming was the Farm Tenancy act which was passed in 1937 which established the FSA (Farm Security Administration).

The government started the Food Stamp Plan in 1939 which was a welfare program for the poor living in the urban areas. It provided stamps for them to use when purchasing foodstuff at various retail outlets. The plan survived until 1943 and then it was later restored in 1961. The Food Stamp Plan was active until the 21st century when some controversies came up claiming that it helped the wholesalers, farmers, grocers, food producers, and the poor. It gained support from the conservatives and the liberals.

Social Security Act

By 1935 very few states had effective old age insurance laws, and most of them were underfunded which meant that they were worthless. Only Wisconsin had an effective program, and the United States was the only industrialized nation where employees faced depression without a social security system. The New Deal established universal unemployment insurance, welfare benefits for the needy, and a comprehensive retirement pension system. Even though it was conservative as compared to the social security programs of European nations, the 1935 act was the first time the government took care of the disabled, dependent children, temporarily unemployed, and older citizens.

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