It seems apparent that Hoover’s relative inaction and budget tightening policies prevented recovery from the Great Depression, but there has been much debate over FDR’s actions under the New Deal. Hannsgen and Papadimitriou (2009) argue that when FDR took office, the economy was in great distress, and therefore restoring economic health took several long years. It was not, as some have argued, that New Deal policies were ineffective.

The main criticisms of the New Deal have been directed at policies regarding cartelization and unionization.7 Hannsgen and Papadimitriou state that those who criticized the 1933 National Industrial Recovery Act (NIRA) and the 1935 National Labor Relations Act (NLRA) for preventing clearing in the labor market and perfect competition by promoting the minimum wage and cartelization had unrealistic views of the economy’s ability to return to competitive equilibrium. Galbraith (1994) elaborates on this view: firms cut prices due to declines in demand; price reductions brought about wage reductions and unemployment. The NIRA was designed to stop this process by maintaining employment and therefore demand.

However, whether or not these policies worked, Dobbin (1993) points out that governments, including those of the US, France, and Britain, reversed traditional industrial policies to escape the downturn. To some degree, these policies were experimental. For a short time, and a short time only, the US rejected antitrust policies and attempted cartelization under the 1933 NIRA, France rejected statism and attempted liberalism, and Britain rejected pro-small firm policies and attempted monopoly building. In the US, cartelization was abandoned in 1935 while labor protection remained.

Although there has been some criticism of New Deal policies on grounds other than cartelization and establishment of the minimum wage, as in Powell (2003),8 prominent economists such as Paul Krugman, Christina Romer, and James Galbraith have generally supported FDR’s fiscal spending programs, which prove successful when tested empirically.

Importantly from a scholarship perspective, the Great Depression refuted Say’s Law. Income from production of supply was hoarded and credit was not extended; supply was unable to create its own demand (Galbraith 1994). And to this end, Keynes prevailed. John Maynard Keynes, in fact, wrote his most important work, The General Theory of Employment, Interest and Money (1936), at the tail end of the Great Depression. His work, although theoretical, justified government economic intervention. After the Great Depression, government spending became a feature of macroeconomic policy in response to economic downturns. This new mentality of domestic and international policy coordination lasted until the 1970s and provided vital financial security.


  • 1. As in the UK, France, Italy, and so on.
  • 2. Britain, Italy, and Japan were in recession in the 1920s.
  • 3. In the context of a credit crunch accompanied by deflation, borrowers face a debt-deflation cycle as elaborated by Fisher (1933). In this situation, real debt increases as deflation increases the value of the currency.
  • 4. See Bernanke (2002).
  • 5. “Hot money” earned its name during the Great Depression, describing invisible capital flows from Europe to the United States, and was discussed in the work of Robert Warren (1937) and Charles Kindleberger (1937).
  • 6. The purpose and mandates of these institutions are described in detail in Pehle (1946).
  • 7. As in Cole and Ohanian (2000) and Taylor (2002).
  • 8. Powell criticizes almost every New Deal policy for various reasons.
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