FROM NEW DEAL TO GREEN NEW DEAL, Part 1: Roosevelt Saves Capitalism
Posted on | February 2, 2020 | No Comments
“I pledge you, I pledge myself, to a new deal for the American people.” – FDR in the summer of 1932.
Recent discussions about a proposed Green New Deal encouraged me to review some of my notes on the original New Deal and if it could provide relevant insights into our current situation. The New Deal began in the early 1930s as a response to the economic crash in the late 1920s. It built up momentum during the “Great Depression” of the next decade. It ended, arguably, just before the end of the millennium with the repeal of the Glass-Steagall Act on November 12, 1999 when President Clinton signed the Financial Services Modernization Act. The New Deal was one of the most influential sets of legislation in American history and it set the course of modern US history.
On October 1, 1928, the Dow Industrial Average closed at 240.07. Earlier that year, “the Dow” was increased to thirty stocks from the traditional 12 stocks. The “Roaring Twenties” had been a good decade for many investors. But that was about to end for most.
It would continue to rise over the next year to 381 before beginning its dramatic descent. In October 1929, the Dow began its steep decline as investors hastened to liquidate their positions. From Thursday, October 24 to Tuesday, October 29, the stock market crashed dramatically, eventually falling to just 41.
Capitalism had run into deep trouble. Never before had public confidence been shaken so thoroughly. Unemployment was estimated to have fallen to 25% in the US and England. It was even worse in Germany, which had been strapped with war reparations at the Treaty of Versailles. Political unrest was brewing in democratic political economies around the world. It was little more than a decade earlier that a Communist revolution had occurred in Russia, and many believed that the problems of the industrial economy needed a communist or socialist solution.
In the US, protest marches became frequent. Rent riots broke out as people organized to prevent home evictions and farm foreclosures, often physically. The country was in such dire straits that many believed it could have gone in any political direction. This confusion lapsed into the term of the next President, Franklin D. Roosevelt, who beat Republican incumbent Herbert Hoover and was inaugurated as President on March 4 1933.[1]
Roosevelt moved immediately to save the banking system that had been experiencing significant drains on deposits. He closed the banks until the federal auditors could review the books. Although many were deemed insolvent, he decided to save the remaining banks by signing the Bank Moratorium that suspended acknowledgment of their demise.
After deliberating with Treasury Department officials, former Hoover advisers, and several leading bankers to develop intervention measures and reform practices, Roosevelt reopened many banks. However, he decided to leave them in the hands of their original owners instead of nationalizing them as many thought he might.
The Emergency Banking Act of March 9 allowed the Federal Reserve to make loans to businesses and nonmember banks against the assets that they were allowed to define very broadly. The Reconstruction Finance Corporation, Hoover’s singular response to the economic collapse, was authorized to buy stock in banks and thus provide them with working capital. Three days later, Roosevelt made his first “fireside chat,” in which he made a plea for citizens to redeposit their money. The legislation plus his encouragement were a success, and by the end of the month, he had saved the banking system.
Immediately after the inauguration, Roosevelt took controversial measures to stop the hoarding of gold. In April, Roosevelt took the US off the gold standard and called on Americans to turn in their gold coins for a new gold-backed paper currency. On Jan 31, 1934, the US devalued paper money from $20.67 to $35 for an oz of gold.
In 1935, amidst concerns about the threat of fascism growing in Europe, Roosevelt decided to move US gold reserves from New York to Fort Knox in Kentucky. Moving the gold past the Appalachian Mountains and next to a military tank battalion and training facility reduced the risk of a Nazi attack on Manhattan that might capture significant amounts of gold bullion. Central bank vaults were the primary targets of the Nazis in their early invasion of Czechoslovakia and Poland, as gold was essential to efforts to procure oil and other critical supplies internationally for its war effort.
Despite the boldness and swiftness in which FDR carried out his plan, it was basically a very conservative response to the national disaster. The program he embarked on was to essentially save capitalism. At the time, Russia was firmly in the grip of its Communist leaders, and Hitler and the National Socialists (Nazis) had strengthened their hold on Germany. Many business leaders, ensconced in the rhetoric of laissez-faire and free enterprise economics, were slow to realize the conservativeness of the New Deal. They chastised Roosevelt in the newspapers and on the radio. But he was very popular with the people, including Ronald Reagan, the future US president that would later become one of the New Deal’s fiercest critics.
Over the next few years, the administration established a reformed capitalist system based on the rationalization of business, finance, and labor practices and focused on long-term stability. Banks were separated from their other activities, such as investment banking and stock brokerage, through the Glass-Steagall Act of 1933. The Securities Exchange Act passed the next year created the Securities and Exchange Commission (SEC) to oversee and prevent manipulation and rigging in the stock markets. The Federal Reserve Board in Washington was also given greater powers to oversee the regional Reserve Banks. The Federal Deposit Insurance Corporation (FDIC) was instituted to prevent further bank panics and restore depositor confidence.[2]
Hopefully, the transition to a green economy will not take such a dramatic event as the Great Depression. Tragically, we might be facing a bigger threat with climate change and environmental pollution. The New Deal was central to transiting to a carbon-based industrial model still heavily reliant on manual labor. Coal and oil were central to the New Deal, as was the process of electrification.
A very crucial component of the new economic transition will be “green finance” – how will the Green New Deal be paid for, and what are the ideological implications of the process? Will the current banking system suffice? Can pension funds and other wealth management funds be sufficiently incentivized to make the crucial investments? Will the political will be developed to stop subsidizing fossil fuels? Perhaps most importantly, we’ll have to reconcile the roles of government and the private sector. Specifically, will the Green New Deal be “socialist?” or can capitalism be harnessed for the transition?
Part 2 of this series will discuss an early failure of the New Deal, the National Industrial Recovery Agency’s (NIRA) attempts to administer the economy and a wide range of codes and practices for business and industry.
Notes
[1] The Three Roosevelts. (n.d.). Retrieved February 16, 2020.
[2] McQuail, K. (1982) Big Business and Presidential Power. NY: William Morrow and Company.
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Anthony J. Pennings, Ph.D. is Professor of the Department of Technology and Society, State University of New York, Korea. From 2002-2012 was on the faculty of New York University. Previously, he taught at Hannam University in South Korea, Marist College in New York, Victoria University in New Zealand. He keeps his American home in Austin, Texas and has taught there in the Digital Media MBA program at St. Edwards University He joyfully spent 9 years at the East-West Center in Honolulu, Hawaii.
Tags: Dow Industrial Average > Emergency Banking Act > fireside chat > Fort Knox > Glass-Steagall Act > Green New Deal > New Deal
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Professor at State University of New York (SUNY) Korea since 2016. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, digital economics, and strategic communications.
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