Keynesian Economics and the New Deal: Crisis to Recovery

Keynesian Economic Solutions

John Maynard Keynes argued that economic crises were not temporary and that recovery would not arise spontaneously if governments did not intervene. He posited that the core economic problem was a lack of demand, which preceded a fall in investment. Consequently, entrepreneurs lacked the incentive to increase production and employment.

Keynes proposed that the state should increase public spending (e.g., public works). The state would generate a spending deficit, but as the state spent, demand increased. This increase was not only by the amount of expenses incurred but also amplified through a Keynesian multiplier effect. This initial outlay, processed through wages and goods, created new demands in other sectors. Eventually, the state could increase tax revenue, thereby reducing the initial deficit.

Keynes also called for improved pay and conditions to increase workers' purchasing power. He posited that the role of capitalists was to invest, and the role of workers was to consume.

The New Deal: Roosevelt's Response

The New Deal was a comprehensive recovery plan associated with Keynesian theories. This economic program, implemented by President Franklin D. Roosevelt, aimed to overcome the Great Depression and mitigate its severe social effects. It proposed increased state intervention. While the New Deal aimed to stimulate the economy, the initial approach involved significant public spending, not deficit reduction through spending cuts.

New Deal measures sought to combat deflation (a decrease in prices) and established bodies to regulate production and prices. Key initiatives included:

• Under the Agricultural Adjustment Act, the Agricultural Adjustment Administration was created to reduce agricultural production and stabilize prices.
• The National Industrial Recovery Act established official bodies, including the National Recovery Administration, to promote agreements within industries.
• The Public Works Administration was established to promote large infrastructure projects. A notable project within this initiative was the Tennessee Valley Authority.

To prevent banking crises and speculative practices, Roosevelt established rigid state control over banks to ensure their financial solvency. He also created the Securities and Exchange Commission. He implemented a monetary policy that devalued the dollar.

The New Deal recognized the freedom of association (e.g., for unions), established a minimum wage, and created Social Security (providing basic services and assistance).

However, these extensive interventions generated business distrust, leading to scarce private investment. Nevertheless, Roosevelt's policies significantly contributed to stabilizing the economy. In 1939, with the outbreak of World War II in Europe, the development of the arms industry was incentivized, further boosting economic recovery.