ECON 3200-002 THE NEW DEAL

ECON 3200-002 5

ECON3200-002: THE NEW DEAL

TheNew Deal was introduced by F. D. Roosevelt in a bid to transform theAmerican history by helping rise back on its feet after it hadcrashed during the Great Depression(Rooseveltinstitute.org, 2014).Wall Street terrible failed and crumbled down and the bankingindustry collapsed. After Roosevelt was unanimously elected aspresident, he set to introduce a set of acts and regulations thatwere geared towards the recovery of the economy. Two of the keyfinancial regulations were the Economy Act and the Emergency BankingAct(Rooseveltinstitute.org, 2014).

TheEconomy Act was passed by Congress on 15thMarch 1933. The act foresaw the reduction of salaries for everyonewho worked for the government, including the Armed Forces by 15%. Theexpenditure of the departments within government was also cut off by25%. Roosevelt’s government managed to save approximately $1billion which was used to fund the New Deal. One of the mostoutstanding of financial regulations was the Banking Act, betterreferred to as the Glass-Steagall Act of 1933 (Topics.nytimes.com,2014). In order for the Act to succeed, it required the American citizens’to regain their faith in their local banks it was their willingnessto get their savings back to the banks that enabled the Act tosucceed. Roosevelt played his role by engaging in conversations onradio such as in his “side chats” to assure the people that therewas no course for further panic(Rooseveltinstitute.org, 2014).He explained to them that the banking system was being supported bythe Federal Deposit Insurance Corporation that had been newlyestablished.

TheNew Deal is described as the most legislative period in the AmericanHistory. Beside the Glass-Steagall and Economy Acts were backed up byother legislations that sought to solve the issues of cutthroatcompetition, moral hazard and information asymmetry. In a way ofaddressing unemployment, the New Deal through the Federal EmergencyRelief Administration offered direct aid to states to assist thosewho had been forced out of work by providing jobs. Later, in 1935,Roosevelt formed the Work Progress Administration that remuneratedall kinds of people(Rooseveltinstitute.org, 2014).The deal was expensive but it succeeded by making a huge emotionaland economic difference.

TheNational Recovery Administration, on the other hand, attempted toregulate the rampant unbridled competition, whose effects wereforcing prices and leading to deflation. It sought to stabilizeprices, wages and working hours through fair competition. The projectwas a huge success. At the same time, the agricultural AdjustmentAdministration was working to stabilize the prices in theagricultural sector. It did that by paying farmers so that they wouldproduce less. Another important milestone in the New Deal was thestructural reform. The National Labor Relations Board was formedthrough the Wagner Act in 1935. It gave workers the right toconducted fair election for agents who were to bargain, collectively,for them.

TheNew Deal, however, was not effective in all circles it failed fromthe economic perspective. In his book, “The General Theory ofEmployment, Interest and Money,” economist John Keynes argued that“depressions would not disappear of their own accord (1936).” Hefurther made the proposition that the aggressive actions that thatwere meant to jumpstart economic activities were necessary, but theactions ought to have come from the private sector. The New Dealworked counterproductively in many of its aspects. According toKeynes (1936), a move such as the Agricultural AdjustmentAdministration’s expenditure in taking land out of circulation sothat production is reduced and prices rise, was counterproductive andwould not have lasting effects. Keynes was aggrieved by the New Dealscourse of action which left out business people. The NRA did notencourage private investment or expansion. This move halted deflationbut it failed in that it did not help in creating jobs. Besides, thefiscal policy, as proposed by Keynes, was never implemented this wasa miserable failure of the New Deal.

Thefinancial sector underwent various changes during and after the1970s. One of the most significant changes was the separation ofinvestment banking from commercial banking(Broddus, 1985).The Glass-Steagall Act had barred banks from most investment bankingactivities such as underwriting (Topics.nytimes.com,2014).The act was amended in 1970 to separate the two. Another significantchange was the restriction of banks from paying interests on theirdemand deposit with the Federal Reserve(Broddus, 1985).Instead, the Federal Reserve was authorized to place ceiling rates onthe banks’ time deposits(Broddus, 1985).To the present day, the financial sector has seen many changes inwhich technology has played a pivotal role. The inception of debitand credit cards, the ATM and online banking have aided in reducingtransaction costs. They also have a positive impact on the monetarypolicy as they reduce actual household balances. The electronicinteraction between central banking and commerce is also a majormilestone that has enhanced the financial sector.

References

Broddus,A. (1985). Financial Innovation in the United States: Background,current status and prospects. Retrieved fromhttps://www.richmondfed.org/publications/research/economic_review/1985/pdf/er710101.pdf

Keynes,J. (1936). Thegeneral theory of employment, interest and money.[United States: s.n.

Rooseveltinstitute.org,.(2014). TheNew Deal | Roosevelt Institute.Retrieved 14 November 2014, fromhttp://rooseveltinstitute.org/policy-and-ideasroosevelt-historyfdr/new-deal

Topics.nytimes.com,.(2014). Glass-SteagallAct (1933).Retrieved 14 November 2014, fromhttp://topics.nytimes.com/top/reference/timestopics/subjects/g/glass_steagall_act_1933/index.html