On Friday, President Trump signed a $2 trillion stimulus package drafted by Congress, CNN reported. The stimulus package will provide Americans with relief during the economic slowdown related to the coronavirus pandemic. FDR’s New Deal involved broader policy strokes.
According to the CNN article, the legislation passed on Friday is the largest of its kind in American history. “It represents a massive financial injection into a struggling economy with provisions aimed at helping American workers, small businesses, and industries grappling with the economic disruption,” it said. “The stimulus package came together after intense and drawn-out negotiations between congressional Republicans and Democrats and the Trump administration that spanned multiple days and involved ongoing talks that stretched late into the night.”
Throughout the 1930s, President Franklin Delano Roosevelt implemented the New Deal, a series of measures set to help America recover from the Great Depression. Its components were multifaceted and its results varied. Now, Americans are wondering if the coronavirus stimulus package will share similarities to it over time.
Banking Triage, Roosevelt Style
One of the most controversial issues of FDR’s New Deal was whether the federal government should intervene in the economy, involving itself in the private business sector.
“Two days after taking the oath of office, Roosevelt announced a bank holiday,” said Dr. Ramon P. Degennaro, CBA Professor in Banking and Finance at The University of Tennessee, Knoxville. “Banks were closed the week of March 6 to March 10, 1933. Simultaneously, Roosevelt asked Congress to approve the Emergency Banking Act, which gave the Treasury Department authority to reopen solvent banks, and to assist others that were underwater.”
Dr. Degennaro said that while government intervening in private business is usually a very risky idea, FDR’s Emergency Banking Act was akin to triage—in other words, it was like getting stitches to close a wound and stop the bleeding.
“The following Sunday evening, Roosevelt held one of his famous radio fireside chats,” Dr. Degennaro said. “He convinced 60 million listeners that the institution of banking in the United States was secure, and a crisis was over. In turn, investors relaxed a bit.”
According to Dr. Degennaro, many feared that Roosevelt would nationalize the banks, as many European nations had done, but private banking continued.
Who Has the President’s Ear?
Unfortunately, some of the decisions made during the New Deal era prolonged the road to economic recovery. A famous example is FDR heeding poor advice from one of his advisers—retired brigadier general Hugh Johnson. According to Dr. Degennaro, Johnson believed the economy grew during World War I because companies refused to obey antitrust laws. Today, we call that crony capitalism. Even still, Johnson was appointed to be the head of the National Recovery Administration.
“He also administered the National Industry Recovery Act,” Dr. Degennaro said. “The National Industry Recovery Act imposed codes of fair competition on each industry. Most industry codes kept businesses from producing as much as they wanted, or investing as much in plant and equipment as they wanted.”
Even more surprisingly, many industries were forbidden from cutting prices without giving prior notice to their competitors and getting approval to do so first. This practice hindered the kind of competition that would benefit consumers and drive price gougers out of business. Dr. Degennaro said that the Supreme Court ruled the National Industry Recovery Act unconstitutional less than two years after it was passed, but the damage had been done.
Worse, FDR continued to follow Johnson’s lax antitrust enforcement, which wreaked havoc on government steel projects.
“Collusion prompted Roosevelt’s own Interior Secretary, Harold Ickes, to complain that he got identical bids from steel firms 257 different times between June 1935 and May 1936,” Dr. Degennaro said. “These bids weren’t just identical; they were 50 percent higher than foreign steel prices. Goverment rules let Secretary Ickes order the steel from German suppliers if the price spread was that big, but Roosevelt canceled the German proposal.”
Following this, Dr. Degennaro said, the U.S. Attorney General announced that the American steel manufacturers would face no prosecution for restraint of trade. “Laws, apparently, were for the little people.”
So far, during the coronavirus pandemic, most of the government’s involvement in economic recovery from the widespread shutdown of businesses and other organizations has been the $2 trillion stimulus package. If the recovery package gets branched out further, only time will tell how additional, new legislation will affect society.
Dr. Ramon P. Degennaro contributed to this article. Dr. Degennaro is the CBA Professor in Banking and Finance at The University of Tennessee, Knoxville. He also served as a Visiting Scholar at the Federal Reserve Banks of Cleveland and Atlanta and for the American Institute for Economic Research. Professor DeGennaro holds a Ph.D. in Finance from The Ohio State University.