Keynesian Thought and Roosevelt's New Deal

Keynesian Response to Economic Crisis

In response to those who insisted on a downward adjustment of wages to increase production, Keynes argued this approach was flawed. He believed that recovery would not occur without government action.

The Role of Government Spending

Keynes argued that the main problem of the economy was the lack of demand stemming from declining investment. He proposed that the state increase spending on activities that employ many workers.

This would generate a deficit, but Keynes argued this was not a problem because increased demand would stimulate the economy. The initial spending, transformed into wages and goods, would create new demand in other sectors (the Keynesian multiplier).

The Keynesian Multiplier

Through the expansion of total production, the government could increase tax revenues and reduce or cancel the initial deficit.

Prioritizing Demand and Investment

Keynes advocated for improved pay conditions to increase the purchasing power of the working class. He argued that prosperity depended primarily on investment and consumption, not savings.

The New Deal Economic Plan

The New Deal was an economic plan implemented by Roosevelt after his election victory in 1932 to overcome the crisis. The most important measures sought to combat falling prices (deflation).

• Combating Deflation and Boosting Agriculture

  With the Agricultural Adjustment Act, the AAA was established to reduce agricultural production and recover prices.

• Industrial Recovery and Infrastructure

  The National Industrial Recovery Act (NIRA) promoted price agreements between firms and major infrastructure projects, which would reduce unemployment and increase demand. The TVA built large hydroelectric dams.

• Banking Reform and Monetary Policy

  Strict state control was established over banks to ensure their financial soundness, while federal insurance (like the FDIC) guaranteed the accounts of small investors in case of bank failure. Monetary policy included devaluing the dollar in 1934.

• Labor Rights and Social Security

  The National Labor Relations Act of 1933 recognized the freedom of association for workers, established a minimum wage, and maximum work hours per week. The Social Security Act created Social Security and unemployment assistance benefits.

Impact and Limitations of the New Deal

Business opposition and lack of confidence contributed to a withdrawal of private investment. Roosevelt's policies contributed to economic stability but did not achieve sustained growth. Income levels in 1939 failed to reach 1929 levels.

Significant recovery did not occur until 1939, spurred by the outbreak of war in Europe which stimulated industrial production.