From New Deal to Wartime Economy

From New Deal to Wartime Economy

As Roosevelt’s critics gained momentum, the president’s advisers debated the cause of the reversal. Business leaders suggested that increased taxes for the wealthy and corporations reduced the amount of money that would have been available for investment. Most of Roosevelt’s advisers believed that programs such as the WPA were working and should be renewed with greater vigor, arguing that budget deficits were less of a threat than prolonged depression. Many on the left argued that the Depression was simply self-perpetuating until the nation’s wealth was more evenly balanced and more Americans could afford to stimulate the economy by making discretionary purchases. Secretary of the Treasury Henry Morgenthau Jr. had been the strongest advocate of balancing the budget and remained steadfast that the downturn was the result of low investor confidence due to the ruinous debt that kept mounting and the inflationary policies of the past few years.

Elements of each of these competing perspectives overlapped in ways that showed at least some fundamental agreement that the lack of consumer spending was thwarting recovery. Each perspective also agreed that the nation’s economic policy must create a favorable business environment, although each differed on the best method to encourage investment. John Maynard Keynes, a relatively unknown economist from England, had been providing unsolicited advice to the president for several years. Although Roosevelt only partially subscribed to Keynes’s ideas, the economist believed that the New Deal had created a laboratory that would validate his ideas about the ability of government to use fiscal policy and deficit spending to promote economic growth.

Keynes argued that if the government placed more currency into circulation via projects such as the WPA and permitted banks to borrow at lower interest rates, the economy would recover much quicker. Following this Keynesian economic theoryA school of economic thought based on the work of John Maynard Keynes, which recommends utilizing the power of the federal government to influence the economy. Keynes himself proposed that the US government should borrow money to create jobs programs, thereby placing more money into the hands of consumers who would stimulate economic growth., Congress approved an additional $3.5 billion for the WPA and other New Deal programs. Followers of Keynesian theory believed that the government needed to borrow and spend on a much larger scale given the severity of the Depression, arguing that short-term deficits to “prime the pump” of the nation’s economy would pay off in the long run by creating millions of jobs. Once these workers were confident again in their ability to purchase discretionary items, Keynesians argued, consumer demand would recover, leading to prosperity for US businesses.

Figure 7.22

This 1939 sign advertises the availability of credit for consumer purchases—one of many ways that retailers sought to increase the number of customers. Once the United States entered the war in December of 1941, rubber became a scarce item.

The political Left and Right continued to disagree about the causes of the Great Depression, as well as the legacy of the New Deal. Those on the Right believed that Roosevelt’s meddling prevented the natural recovery by enacting higher taxes and discouraging investment by favoring unions. The mainstream Left found myriad examples to support their allegations that the New Deal actually favored big business at the expense of smaller companies and consumers. Those on the Far Left believed that the Capitalist system should have been allowed to collapse in favor of a planned economy operated by the government. Dissident groups such as the American Communist Party gained members during the Depression. However, the 1939 announcement of a partnership between Hitler and Stalin led to a crisis of faith among most fellow travelers.

Most Americans would rally behind their president as the war neared America’s shores. In the years between 1936 and 1941, however, Roosevelt would struggle to keep his own party from splintering along the fault lines of race and region. For many wealthy Americans, Roosevelt betrayed his own patrician class by propping up labor unions and supporting taxes designed to redistribute wealth. For white Southerners, Roosevelt also betrayed his race by meeting with black leaders and seeking the support of Northern black voters. Conservatives in the South did not abandon the Democratic Party; instead, they sought to reclaim it. By their perspective, Roosevelt had violated the long-standing gentleman’s agreement that provided solid Democratic counties in exchange for an understanding that Democratic leaders would permit the white South to police its own race relations.

Roosevelt offered only the most timid support for the basic rights of African Americans to participate in his New Deal. However, from the perspective of whites inside and beyond the South who believed no black man or woman should be hired by government programs if there were still jobless white applicants, FDR appeared to be promoting a dangerous brand of change. Demagogic politicians combined racial fear-mongering with lingering suspicions about the growth of federal power over state’s rights to create a conservative coalition that would block all future efforts to expand the New Deal. For example, in 1938, Georgia’s Walter George labeled FDR’s supporters as “scalawags” and likened federal intervention in the South to Sherman’s March. He and other Southern Democrats called on all loyal whites to resist the “liberal” FDR just as their Confederate forefathers had resisted Yankee invaders.

The wartime rhetoric reflected the current mood of the nation, even if it was completely out of touch with reality and deeply conflicted with the economic self-interest of many of George’s followers. By 1937 and 1938, international affairs increasingly dominated the president’s agenda. Adolf Hitler had seized control of the German government in 1933 and was leading an expansionistic campaign that threatened the security of Europe. Further east, the Japanese invaded China as the first step in the creation of a Pacific empire.

The kind of deficit spending Keynesian economists recommended did not occur until the invasion of Poland led European governments to cry out for American grain and manufactured goods. Before this time, governments around the world feared the consequences of borrowing money, while those who controlled access to credit were chastened by the worldwide depression of the 1930s. Only the emergency of war, and the short-term perspective it fostered, altered these attitudes in ways that would lead to increased borrowing and spending. The United States likewise abandoned all restraint and borrowed heavily to create its own arsenal of democracy. The wartime spending spurred economic growth but also created unprecedented deficits and saddled the nation with a postwar debt many feared might bankrupt the nation.