The New Deal: FDR’s Big Gamble

Lesson Plan - Get It!

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Great Depression Causes

During the 1920s, Americans began to invest more in the stock market than ever before. People put their entire life savings into stocks, going up for a whole decade.

Many Americans lost everything when the stock market crashed in 1929. Those who still had money pulled everything they had out of the banks, which caused financial institutions to collapse entirely.

By 1929, the world economy had become so interconnected that this also sent shock waves around the world.

Unemployment rose dramatically because companies no longer had the funds to maintain their workforce.

Americans who were still farmers, about 50% at the time, were also decimated. While they may not have lost money in the stock market, global prices for crops fell dramatically as fewer people could afford food.

Drought in the heart of the country in the 1930s aggravated this issue even more, eliminating any source of income for entire states.

In this compounded problem, Franklin Delano Roosevelt (FDR) was elected president in 1932.

John Maynard Keynes

In the early 1930s, British economist John Keynes developed a unique theory for economic recovery.

Traditionally, when the economy was doing poorly, the government would spend as little as possible to avoid worsening the issue. Keynes' theory was that spending as much money as possible on social programs would be the most effective way to get the economy out of a depression.

• As a newly elected president, would you be willing to use your country as a guinea pig for this new theory?

For FDR, the risk was worth it.

First 100 Days

Within only the first few months of Roosevelt's presidency, executive orders established six major relief agencies that fully embodied John Keynes's teachings.

The combination of these actions, detailed below, was named the New Deal because it was a new approach to economic relief.

Emergency Banking Act

To re-establish stability in the American banking system, all banks became insured by the federal government.

This unprecedented federal intervention, while successful in restoring public confidence in banks, was the first major step toward a much more powerful central government than had ever existed in the United States.

Civilian Conservation Corps (CCC)

On the same day, Roosevelt took steps to arrange for the federal government to employ thousands of men to conserve forests and fight forest fires.

This utilized Keynes' idea that the government had to spend more money rather than less. If the government began to employ many Americans, unemployment would also decrease, and the economy would start to move again.

Federal Emergency Relief Administration (FERA)

Expanding employment was not enough, so this agency was created to feed and clothe people experiencing poverty directly.

With $500 million ($10 billion today), soup kitchens were established nationwide. This brought relief to the families who would soon become employed through these other agencies.

Agricultural Adjustment Administration (AAA)

After the stock market crash and ensuing financial collapse, prices for all goods began to plummet because everyone who was now unemployed could not afford to buy them.

This administration ensured that, while the food prices remained low enough for consumers, the farmers who produced it would still receive a fair amount.

It was able to stop the prices of agricultural goods, such as corn and oranges, from plummeting by setting the prices and subsidizing the differences in the market to ensure farmers would earn a manageable income.

National Industry Recovery Act (NIRA)

This act illegalized child labor, which was significantly cheaper than employing an adult. Thus, companies could only afford to hire one adult per household.

The act also allowed companies to earn subsidies for hiring more people. This pushed wages higher and eventually led to more spending in the economy.

Thousands of men were hired to build bridges, roads, and other infrastructure projects.

Tennessee Valley Authority (TVA)

Through this agency and the CCC, dams were built on rivers to generate free hydroelectric power and employ thousands of people nationwide.

Second New Deal

Roosevelt's reforms were expanded in 1935 and 1936, and the Second New Deal, detailed below, was much more controversial than the actions of the First New Deal.

Social Security

Because they lost all their savings, older individuals had to keep working. This led FDR to establish a federal retirement plan.

People paid into Social Security, and the money went directly to retired individuals. This program saved the older generations from losing their homes and having to go back to work.

Wealth Tax Act

This act raised the income tax rate of individuals with incomes over $5 million to 79%. Because the nation was so poor, this only applied to John D. Rockefeller and was seen as directly targeting his wealth.

While both of these initiatives, along with the other aspects of the Second New Deal, helped to stabilize and enrich the economy, they challenged what the courts would accept.

Impact

After these first 100 days, the U.S. government had massively expanded its involvement in Americans' daily lives.

Having broken away from a powerful central government in England, Americans had avoided expanding federal authority as much as possible. For FDR, the Great Depression gave more than enough reason to abandon this principle.

However, many Republicans saw these moves as brazenly unconstitutional. In the years following these executive orders—especially with the additions of the Second New Deal—legal and political opposition intensified.

The Supreme Court struck down several key programs, such as the National Recovery and Agricultural Adjustment Administrations, arguing that they overstepped federal authority.

In response, FDR proposed expanding the Supreme Court—a plan critics called "court-packing"—so he could appoint additional justices supporting his agenda.

Though the plan failed, it pressured the Court, which gradually began to uphold New Deal policies. By 1941, the Court had shifted to align more closely with Roosevelt's vision.

The idea of subsidizing industries and creating massive government employment programs was radical at the time. While it's debated whether the U.S. would have recovered without these efforts, Roosevelt feared the rollback of progress and took bold steps to preserve the New Deal's legacy.

• The U.S. and the world pulled out of the Great Depression during the 1940s, but was it a result of these policies or something even larger?

As we head into the Got It? section, consider the economic impacts of war on an economy.