Some questions to keep in mind:

1. What role did the unequal distribution of wealth play in sustaining the Depression?
2. What techniques did FDR use to boost his popularity? Was he successful?
3. Compare Hoover's philosophy of government to FDR's. Were there any salient differences?
4. Explain the concept of "the broker state." How did FDR go about doing the duties of a modern president?

Cracks in the Economic Foundation

After the Great Crash, the American public sought a scapegoat for the economic collapse. Some held President Hoover responsible, others targeted the "three B's"--brokers, bankers, and businessmen. But the cause of the Great Depression could not be attributed to one individual or even a group of people. The roots of the Great Depression were in the very structure of the American economy, namely:

1. Unequal distribution of wealth and income.

Despite rising wages overall, income distribution was unequal. Gaps in income had actually increased since the 1890s. The 1% of the population at the very top of the pyramid had incomes 650% greater than those 11% of Americans at the bottom of the pyramid. The tremendous concentration of wealth in the hands of a few meant that continued economic prosperity was dependent on the high investment and luxury spending of the wealthy. However, both the high spending and high investment of the time, much like today, were susceptible to economic fluctuations; they were much less stable than people's expenses on daily necessities like food, clothing, and shelter. Therefore, when the market crashed and the economy tumbled, both big spending and big investment collapsed, as well.

2. Unequal distribution of corporate power.

From the late 1870s on, there had been an ongoing movement of business consolidations and mergers in the United States. During WWI, many potential commercial competitors merged into huge corporations like General Electric and eliminated competition in major American industries. In 1929, two hundred of the biggest corporations controlled 50% of the nation's corporate wealth. This concentration of corporate wealth meant that if just a few companies went under after the Crash, the whole economy would suffer.

Some quick definitions:

Trust - A combination of firms or corporations, that is now illegal, organized for the purpose of reducing competition and controlling prices throughout a business or industry.

Holding company - A company that controls other companies. During the 1920s, holding companies came to replace trusts.

3. Bad banking structure.

In the 1920s, banks were opening at the rate of four to five per day, but without many federal restrictions to determine how much start-up capital a bank needed or how much it could lend. As a result, most of these banks were highly insolvent. Between 1923 and 1929, banks closed at the rate of two a day. Yet, until the stock market crash in 1929, the nation's seemingly inevitable prosperity helped concealed the potentially fatal flaws in the American banking system.

4. Foreign balance of payments.

World War I had turned the United States from a debtor nation into a creditor nation. In the aftermath of the war, both the victorious Allies and the defeated Central Powers owed the United States more money than it owed to foreign nations. The Republican administrations of the 1920s insisted on payments in gold bullion, but the world's gold supply was limited and by the end of the 1920s, the United States, itself, controlled much of the world's gold supply. Besides gold, which was increasingly in short supply, countries could pay their debts in goods and services. However, protectionism and high tariffs kept foreign goods out of the United States. Recall from Lecture 15 that the Hawley-Smoot Act (1930) set the highest schedule of tariffs to date. This protectionism produced a negative effect on United States exports: if foreign countries couldn't pay their debts, they had no money to buy American goods.

5. Limited or poor state of economic intelligence.

Most American economists and political leaders in 1929 still believed in laissez-faire and the self-regulating economy. To help the economy along in its self-adjustment, President Hoover asked businesses to voluntarily hold down production and increase employment, but businesses couldn't keep up high employment for long when they weren't selling goods. There was a widespread belief that if the federal budget were balanced, the economy would bounce back. To balance the budget demanded no further tax cuts (although Hoover lowered taxes) and no increase in government spending, which was disastrous in light of rising unemployment and falling prices. Another problem with economic practices of the day was the commitment of the Hoover administration to remain on the international gold standard. Many analysts implored Hoover to increase the money supply and to devalue the dollar by printing paper money not backed by gold, but the president refused. Going off the gold standard was one of Roosevelt's first actions when he entered the White House in 1933.

Franklin Delano Roosevelt

"It is my contention that no one should be allowed to write about FDR who did not experience that era. It really is one of those cases of you had to be there. Roosevelt may be a myth...today, but 60 years ago that myth looked more like hope. In his fireside chats, he turned our Philco radios into shrines, and when he said that America could not afford to live with one-third of a nation ill-housed and ill-fed, we thought he would do something about it. And he did" (Daniel Schorr, "The FDR 'Myth': You Had To Be There," Christian Science Monitor, 25 October 1996, 19).

The presidential campaign of 1932 was not merely a clash of two personalities. President Hoover himself said:

"This campaign is more than a contest between two men. It is more than a contest between two parties. It is a contest between two philosophies of government."

For one, the two candidates disagreed on Prohibition, Roosevelt advocating a repeal of the Eighteenth Amendment (which had outlawed the manufacture and sale of alcohol since 1919). But Prohibition was small potatoes compared to the issue of unemployment and the role of government in aiding the economy.

What the ---- did FDR Stand For?

• Strong stand on public power
• Promised to reduce federal expenses
• Promised to balance the budget

Roosevelt did not explain how the government could both aid the public and balance its own books while operating on a reduced budget, but the American public trusted him. On Election Day in 1932, 57.4% of the electorate voted for Roosevelt (or, perhaps more accurately, cast their ballots against Hoover).

How FDR defined himself:

• Democrat with a capital D
• Christian with a capital C
• Wilsonian in international affairs
• Gentleman

Roosevelt was most committed to being well-liked and to getting ahead. He was charming and very successful in using radio to bring his message to the American public, making him the first modern media President. FDR also understood his own limitations as a man of ideas, so he chose well-qualified intellectuals and business people for his staff. This so-called "Brain Trust" included such luminaries as Labor Secretary Frances Perkins, who graduated from Mount Holyoke College in 1902 and was the first female cabinet member in United States history.

Like his distant cousin, Theodore Roosevelt, FDR knew what the public would and would not accept. FDR was a pragmatic politician, not an intellectual or an idealist. He culled his policies from the suggestions of members of his "Brain Trust," based on which seemed most politically viable. One example of FDR's pragmatic use of the presidency--and of the public's faith in their leader--was the National Bank Holiday. By the time he came to office, 5,000 banks had failed and 47 of the 48 states had declared "bank holidays," stopping some or all bank activity. Some liberal members of Congress wanted FDR to nationalize the banks, but FDR had no intention of taking such a radical step. Instead, he declared a "national bank holiday," closing all banks, purportedly in order to give inspectors time to review their solvency. FDR declared that only those banks in sound financial health, those which had passed inspection, would be allowed to reopen. Most banks were only closed for ten days, so, of course, only a very few were actually investigated. Nonetheless, when the banks reopened, the American public entrusted them with their money once more, which actually made the banks solvent. Merely by restoring public confidence in the banking system of America, Roosevelt saved it at no cost to bankers or to the government.

The First Hundred Days

At the beginning of his administration, Roosevelt convened Congress in a special session and launched the New Deal with an avalanche of bills. Historians refer to this period as the "Hundred Days." Roosevelt introduced a new notion of the presidency whereby the president, not Congress, was the legislative leader. Most of the bills he proposed set up new government agencies, called the "alphabet soup" agencies because of their array of acronyms.

AAA (Agricultural Adjustment Act)--Designed to help American farmers by stabilizing prices and limiting overproduction, the AAA initiated the first direct subsidies to farmers who did not plant crops. The United States Supreme Court later declared the AAA unconstitutional and an unnecessary invasion of private property rights.

CCC (Civilian Conservation Corps)--A public works project, operated under the control of the army, which was designed to promote environmental conservation while getting young, unemployed men off city street corners. Recruits planted trees, built wildlife shelters, stocked rivers and lakes with fish, and cleared beaches and campgrounds. The CCC housed the young men in tents and barracks, gave them three square meals a day, and paid them a small stipend. The army's experience in managing and training large numbers of civilians would prove invaluable in WWII. Wisconsin was a beneficiary of the CCC; one of the organizations many local projects was trail construction at Devil's Lake State Park.

TVA (Tennessee Valley Authority)--One of the most ambitious and controversial New Deal projects, the TVA proposed building dams and power plants along the Tennessee River to bring electric power to rural areas in seven states. Although the TVA provided many Americans with electricity for the first time and provided jobs to thousands of unemployed construction workers, the program outraged many private power companies.

NIRA (National Industrial Recovery Act)--The NIRA established the NRA (National Recovery Administration) to stimulate production and competition by having American industries set up a series of codes designed to regulate prices, industrial output, and general trade practices. The federal government, in turn, would agree to enforce these codes. In return for their cooperation, federal officials promised to suspend anti-trust legislation. Section 7A of the NIRA recognized the rights of labor to organize and to have collective bargaining with management. The NIRA was the most controversial piece of legislation to come out of the Hundred Days and many of its opponents charged it with being un-American, socialist, even communist, even though it did not violate the sanctity of private property or alter the American wage system.

"It's purchasing power, stupid."
or
Why the NIRA failed.

Whether radical or conservative, the NIRA ultimately failed for three reasons:

1. The NRA assumed businesses would police themselves. The codes, established in the interest of protecting workers and consumers, were ultimately drawn up by the largest companies. This hurt small businesses.
2. Corporations rarely respected the rights of labor to organize. Because of the number and complexity of the codes, the federal government never enforced labor's right to collective bargaining.
3. The NRA attacked recovery from the wrong direction. It tried to stabilize prices by lowering production, rather than redistributing money to American consumers and encouraging them to purchase goods.

Within two years, the Supreme Court declared the NIRA unconstitutional.

"The Broker State"

During his first two years in office, FDR promoted a new vision of the executive branch; he viewed himself as an "honest broker" who would negotiate among competing interests. The president would mediate conflicts while balancing the interests of one group against another. His older cousin TR had held a similar idea of the presidency, but FDR expanded this concept of the broker state. However, the idea of the broker state has two inherent flaws:

1. Presidents tend to get weaker the longer they are in office, because they have to make tough choices that alienate particular interest groups.
2. The strongest interest groups can pressure even the most forceful broker. This was true in FDR's administration, when the NIRA and AAA favored big business and big agriculture.

The New Deal

Ultimately, we can roughly divide Roosevelt's years in office in the 1930s into two periods:

1. The First New Deal (1933-1935) was characterized by relief of the immediate problems of unemployment.
2. The Second New Deal (1935-1937) was characterized by reform. Increasingly, members of Congress and others called for fundamental reform of society, not just relief of the symptoms of social and economic problems.

What was the Second New Deal about? Who formed its policies? Did either of those New Deals solve the problems of the Depression? These are tantalizingly important questions. So important, in fact, that we'll take them up in Lecture 20: "Dr. New Deal Becomes Dr. Win-the-War."