Financing the New Deal

Franklin Delano Roosevelt's New Deal, a series of programs and reforms launched in the 1930s, aimed to combat the Great Depression. Financing this ambitious undertaking required a multi-pronged approach, diverging significantly from prevailing economic orthodoxy.

A core element was deficit spending. Rejecting the traditional belief in balanced budgets during economic downturns, FDR embraced Keynesian economics. This meant deliberately spending more money than the government collected in taxes, injecting demand into the stagnant economy. The rationale was that government investment would stimulate job creation, boost consumer spending, and ultimately increase tax revenues in the long run. This deficit spending was primarily funded through the sale of government bonds. The Treasury Department issued these bonds, essentially loans from the public, promising to repay the principal plus interest at a later date. These bonds were purchased by individuals, banks, and other institutions, providing the government with the necessary funds to finance its programs.

Increased taxes also played a crucial role. The Revenue Act of 1935, often dubbed the "Wealth Tax Act," significantly raised income taxes on high earners, increased estate taxes, and imposed a new tax on corporate profits. While the actual revenue generated by these measures was relatively small compared to overall spending, they served a dual purpose. First, they aimed to redistribute wealth, addressing the growing income inequality that contributed to the economic crisis. Second, they signaled a shift in government policy towards greater regulation of the wealthy and corporations. Furthermore, excise taxes were levied on specific goods, such as alcohol and tobacco, providing another source of revenue.

The creation of the Social Security system in 1935 introduced a new dedicated revenue stream. Social Security taxes, paid by both employers and employees, were earmarked to fund old-age pensions and unemployment insurance. While these taxes were intended to be actuarially sound, in the initial years of the program, they generated a surplus, which was used to finance other New Deal initiatives.

Finally, it is important to acknowledge the role of monetary policy. While not a direct source of funding for the New Deal programs, the devaluation of the dollar, achieved by taking the United States off the gold standard, aimed to stimulate exports and increase domestic prices. This indirectly supported the New Deal by easing the debt burden on farmers and businesses. The government also intervened in the banking system, establishing the Federal Deposit Insurance Corporation (FDIC) to restore public confidence and encourage lending.

In conclusion, financing the New Deal was a complex undertaking that combined deficit spending through bond sales, increased taxes (particularly on the wealthy), the establishment of dedicated revenue streams like Social Security taxes, and strategic monetary policies. This innovative approach, while controversial at the time, laid the foundation for modern fiscal policy and helped to alleviate the worst effects of the Great Depression.