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While the New Deal did much to lessen the worst affects of the Great Depression, its measures were not sweeping enough to restore the nation to full employment. Critics of FDR's policies, on both the right and the left, use this fact as a reason to condemn it. Conservatives argue, for example, that it went too far, and brought too much government intervention in the economy, while those on the left argue that it did not go far enough, and that in order to be truly effective, the Roosevelt Administration should have engaged in a far more comprehensive program of direct federal aid to the poor and unemployed. But the New Deal's greatest achievements transcend mere economic statistics, for in a world where democracy was under siege, and the exponents of fascism and communism flourished, the New Deal offered hope and restored the faith of the American people in their representative institutions. It also transformed the federal government into an active instrument of social justice and established a network of laws and institutions designed to protect the American economy from the worst excesses of liberal capitalism.

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After reading the partisan piece above and the rest of the article from which it is quoted, I, not having any background of the America's history, feel confused, even after having read the first 5 articles proposed by Google as result of the question title's search.

Question is: Did Franklin Roosevelt's New Deal lift the United States out of the depression or did the New Deal actually prolong the Depression and cripple American capitalism?

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closed as primarily opinion-based by American Luke, Drux, Steven Drennon Jul 1 '13 at 1:28

Many good questions generate some degree of opinion based on expert experience, but answers to this question will tend to be almost entirely based on opinions, rather than facts, references, or specific expertise.If this question can be reworded to fit the rules in the help center, please edit the question.

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This is one of those things the American Right and Left love to fight about (typically through proxy economists), so there is no single consensus answer to this question. –  T.E.D. Jun 26 '13 at 17:48
    
Very much agree with @T.E.D. 's comment. –  Drux Jun 26 '13 at 17:57
    
Modern historiography insists that there were several New Deals. FDR's first wave of economic legislation was corporatist; his second wave was proto-Keynesian. The economic effects of these policies would all need to be discussed separately. –  two sheds 2 days ago

2 Answers 2

Wow - it would take me a long time to find the appropriate sources to answer this the way I want to. I also feel obliged to admit that I have an opinion on this topic, and I hope that @Samuel Russell or someone from the other side of the aisle will contribute to counterbalance me.

@John Craven is correct that the great depression was a complex, global phenomenon, and Roosevelt's policies are only one factor. I'll agree with Mr. Craven that it would be absurd to credit Roosevelt with sole agency in either direction.

With that disclaimer out of the way, I'll once again reference Niall Ferguson's Ascent of Money. Ferguson points out that the stock market returned to reasonable levels rather quickly. The driver of the depression wasn't the stock market crash, but the US government policy of minimizing liquidity. Banks couldn't loan money to start a business that would employ people. And US Government policy was directly responsible for that. The government feared bank failure more than they feared continued depression, and they required that banks build up and maintain reserves of currency. Banks were unable to lend money, which prolonged the depression.

Contrary to popular opinion, the Great Depression was not caused by the stock market crash of 1929. Rather the consensus among economists is what made the Depression great in the U.S. were the mistakes made by the Fed—especially by its decision, in 1931 and 1932, to allow so many banks to fail. The Fed in 1931 stuck to the principle that it should only lend to institutions facing a temporary shortage of liquidity and that propping up insolvent banks would be throwing good money after bad.

New Yorker

Or

Liquidity shortages destroyed the international monetary system in 1931.

Bank of International Settlement

Milton Friedman and Anna Schwartz argued that steady withdrawals from banks by nervous depositors ("hoarding") were inspired by news of the fall 1930 bank runs and forced banks to liquidate loans, which directly caused a decrease in the money supply, shrinking the economy.

Wikipedia

If the US government had eased monetary policy and supported the banks, they could have reduced the fear of bank runs. Hoarding reduces the money supply; investment strengthens the money supply. Of course the US government couldn't ease monetary policy because they were committed to the gold standard.

Roosevelt's committment to the Gold Standard, which prevented the USA from monetarist tools that could have acted as an engine for growth. Update: @pugsville asks whether Roosevelt took us off the gold standard. Roosevelt took us off the international gold standard. The value of the dollar was still tied to gold, but the value was set based on Roosevelt's whim. The international gold standard was still being defended by the Bank of England. Daniel Drezner in his Foundations of Economic Prosperity points out that Roosevelt took the US off the gold standard without coordination with other countries. Had he coordinated our exit, he could have mitigated the damage to the US and world economic system.

The US government took further actions to prolong the depression.

Economists agree that the Smoot–Hawley Tariff Act increased the severity of the Great Depression.1

The mind boggglingly short sighted Smoot Hawley act inhibited trade with other nations, further inhibiting the ability of US industry to recover from the depression. Smoot-Hawley vies with the gold standard for the title of "Stupidest economic policy of all time!".

Roosevelt adopted the idea of raising the price of gold to inflate the currency and reverse the debilitating deflation of prices. The idea came from Professor George Warren of Cornell University. When Roosevelt told Morgenthau he was thinking of raising the price of gold by 21 cents, his entourage asked him why. "It's a lucky number", Roosevelt said. "Because it's three times seven." As Morgenthau later wrote, "If anybody knew how we really set the gold price through a combination of lucky numbers, etc., I think they would be frightened."

Wikipedia citing Shlaes

The US government pursued other policies that numbed the economy and the modern mind. For example, prosecuting illiterate immigrants for the crime of selecting their own chickens rather than accepting the chicken that the government had decided they should receive. Taking that case to the supreme court qualifies as a microeconmic policy which is guaranteed to arrest growth. No sane individual is going to want to take out a loan to start a business if they can't permit the customer to choose their goods.

Did the US government prolong the depression through primitive, bizarre and uninformed macroeconomic policies? Yes, absolutely. Having said that, remember that John Maynard Keynes hadn't yet written the seminal work on macroeconomic policy. And no matter what flaws I ascribe to Roosevelt, the opposition didn't have a solution that worked any better.

The US government, like all governments, assumed that the future would be dominated by planned, centralized economies. They assumed that central government control of demand was the only resolution to any macroeconomic problem. And their assumption seemed to be true. The New Deal was a demand stimulus, and the ultimate resolution to the economic economic crisis was driven by centrally planned demand (a war). But I align with those modern economists who believe that the crisis would have been shorter and less severe if the government had employed monetary policy, eased liquidity, and stimulated growth, rather than avoiding monetary policy, restricting liquidity, and intimidating growth.

As I said at the beginning, I'm not trying to hide my bias; the best you can hope is that Mr. Russell will provide an opposing viewpoint.

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There are many "schools" of economists, most of which can actually be defined by their answer to this exact question. This answer I believe belongs to the Monetarists. –  T.E.D. Jun 26 '13 at 17:54
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I'll plead no contest to that charge. I would be interested to know what school advocates setting the value of gold based on today's lucky numbers or last night's bridge hand. <grin> –  Mark C. Wallace Jun 26 '13 at 17:59
    
I suspect that if you look into it, you'll find that story to have been invented FDR's detractors. It would make a good question on sceptics (or here I suppose, failing that). –  T.E.D. Jun 26 '13 at 18:17
    
I started to ask the question, then realized that if I failed to do the google search first, @Carlo_R would (rightfully) make me eat crow. I don't like crow, so I checked, and found the source - H. Morgenthau/Amity Shlaes. –  Mark C. Wallace Jun 26 '13 at 18:36
    
Urgh, sadly I mostly do firm level stuff (Labour history) and don't deal with aggregate problems at this level. I can't provide an informed answer in relation to US monetary and fiscal policy. I can note that the expansion of working class living standards in the 1940s removed the preconditions for the particular kind of crisis that happened in the late 1920s; and, that after Keynes and the development of aggregate analysis theories capitalism was far better served by economists than it was during the depression itself. –  Samuel Russell Jun 27 '13 at 2:19

The short answer is that no, Roosevelt did not lift the USA out of the Great Depression with the New Deal. The Great Depression was a world-wide phenomenon, and was not going to just go away because one government decided to do a bunch of things, however helpful those things were. The economy did begin to pick back up in the mid-30s, but it looked like it was going to be a slow recovery, and there were several speedbumps along the way (speedbumps that seem to coincide pretty closely with attempts to shrink the New Deal).

In the end, the thing that brought the US and the rest of the world out of the Great Depression was the massive increase in government expenditure that we know today as World War II.

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