capitalism

354 New Deal
New Deal critics complained that spending on these
programs was uneven and had a large political component.
For example, New Deal outlays per capita were over six
times higher in first-place Nevada—a low-population
swing state in which electoral votes could be “purchased”
cheaply—than in last-place North Carolina—which, like
other poorly funded Southern states, was not likely to vote
Republican regardless of federal expenditures. Economic
historians have closely investigated where funds from these
programs were spent, concluding that the major relief programs
roughly followed Roosevelt’s three Rs—with money
more likely to go to places harder hit by the Depression—
but that spending for political advantage in upcoming elections
was a significant factor.
The most widely criticized components of the First New
Deal were two related recovery measures designed to boost
prices. Many New Dealers argued that excessive and
wasteful competition was the cause of falling agricultural
and industrial prices and proposed a vast program of
national planning and coordination to boost prices largely
by reducing supply. The federal government’s economic
coordination and planning agencies of World War I served
as their templates, and veterans of World War I agencies
staffed many key positions.
The Agricultural Adjustment Administration, established
in May 1933, calculated the output needed to push
agricultural prices up to the relatively high “parity” level of
1909–1914 and converted that quantity into acreage and
herd-size estimates. Each state was then allotted its share of
output. Farmers who voluntarily reduced acreage or production
to the target level were directly compensated by the
government, using proceeds from taxes on processors of
agricultural commodities. The list of crops thus regulated
began with wheat, cotton, corn, rice, tobacco, hogs, milk,
and milk products and was expanded in later years. Under
1934 legislation, a degree of compulsion was added as
tobacco and cotton farmers faced a punitive tax for exceeding
their individual quotas. The act also established subsidized
loans for farmers. After the act was declared
unconstitutional in 1935, the program was reformulated
with continued programs to reduce acreage (“soil conservation”)
and establish price floors via government purchases.
These policies are credited with boosting farmers’ incomes
(at the expense of consumers), but they also led to the displacement
of many tenant farmers, especially black sharecroppers
in the South.
The second attempt to rein in competition came through
the National Industrial Recovery Act of June 1933. Almost
immediately, more than 2 million employers signed a preliminary
“blanket code,” pledging to pay minimum wages
ranging from around $12 to $15 per 40-hour week. About
16 million workers were covered, out of a nonfarm labor
force of 25 million. Share-the-work provisions called for
limits of 35 to 40 hours per week for most employees. Over
the next year and a half, the blanket code was superseded
by over 500 codes of “fair competition” negotiated by trade
groups within individual industries that employed almost
80% of nonfarm workers. Although the codes gave employees
the right to organize unions and bargain collectively, the
carrot held out to induce participation was exemption from
antitrust laws, effectively allowing businesses to form
cartels that substantially increased prices. Within months,
however, there was widespread dissatisfaction with the
National Recovery Administration (NRA) codes and a lack
of compliance by many, so it is not surprising that they
were not resurrected after the Supreme Court declared the
act unconstitutional in 1935. The NRA appears to have
derailed the economic recovery. The jump in prices and
wages from late 1933 to early 1934 led to a drop in sales
that is estimated to have caused manufacturing output to
fall around 10%, prompting significant layoffs.
Fearful that the intermingling of commercial banking
and investment banking had played a role in speculation,
the stock market crash, and the banking meltdown, the
Banking Act of 1933 (the Glass–Steagall Act) banned
banks from acting as both lenders and investors in companies
and giving them 1 year to decide whether they would
specialize in commercial or investment banking. Critics
argue that these provisions were an overreaction designed
to punish Wall Street for its perceived sins, but this provision
remained in place until 1999. To lessen competition
among banks, the act also forbade payment of interest on
checking deposits and authorized a cap on savings deposit
interest rates—policies that stayed in place for decades.
Following the grilling of Wall Street insiders by the
Senate’s Pecora Commission, the Securities and Exchange
Commission was established in 1934 with the goal of eliminating
abuses such as insider trading and stock price
manipulation. In 1935, control of the Federal Reserve and
its monetary policy was moved out of the hands of bankers
into those of political appointees, and autonomy by the
regional Federal Reserve Banks was essentially ended.
Other important early New Deal programs were
designed to take the place of markets that were seen as
underperforming, including agencies like the Tennessee
Valley Authority (1933–present), the Home Owners’ Loan
Corporation (1933–1936), and the Rural Electrification
Administration (1935–present).
The Second New Deal under the more radical 74th
Congress enacted a sweeping array of more extensive
“reform” measures. The most important of these reforms
almost certainly was the Social Security Act, which established
the Old Age Insurance program popularly called
Social Security and that soon became a pay-as-you-go system,
using payroll taxes to pay benefits to elderly retirees.
In 1939, amendments added a program to provide dependents’
and survivors’ benefits—akin to private-sector life
insurance—and the program was renamed Old Age and