Deficit Spending & Unemployment

Government spending and deficits became a major issue early in FDR's second term.

Administration decisions about spending had drastic consequences - consequences that spurred debate about the connection between government expenditures and economic growth.

That debate continues today.

1933-1937: New Deal Spending

During his first term, FDR vastly expanded the Federal Government's role in the nation's economy. Unprecedented jobs programs like the CCC and WPA put millions of people to work. Federal spending - and budget deficits - increased dramatically.

By 1937, the economy showed marked improvement. Between 1929 and 1933, unemployment had risen from 3.2 percent to almost 25 percent. Under Roosevelt, it declined to 14.3 percent. From 1929 to 1933, America's Gross National Product (GNP) fell an astounding 50 percent. Under FDR, it increased every year and, by 1937, was approaching pre-Depression levels.

1937-1938: Roosevelt Recession

In 1937, FDR made a fateful decision about Federal spending.

Though unemployment remained very high, it had declined steadily during his first term. By the fall of 1937 it stood near 14 percent. FDR believed the economy had turned a corner and Federal stimulus spending was no longer needed. A fiscal conservative at heart, he supported deficit spending only as an emergency measure. Now, he believed the emergency was receding.

In September, he announced major spending cuts aimed at balancing the Federal budget. Fearing inflation, he also supported action by the Federal Reserve to tighten credit.

The results were disastrous. As spending fell and interest rates rose, economic activity dropped steeply. By March 1938 unemployment had jumped back up to 19 percent. FDR's critics called it the "Roosevelt Recession."

1938: FDR Changes Course

As the economy fell deeply into recession, FDR reversed course.

In April 1938, he asked Congress for massive increases in public works spending and pressured the Federal Reserve to lower lending rates. By June, the economy stabilized. But unemployment remained high.

High unemployment contributed to large Democratic losses in the 1938 mid-term elections. In the new Congress, Republicans and conservative Southern Democrats blocked efforts to expand the New Deal. This conservative coalition hindered FDR for the rest of his presidency.

The crisis of 1937-1938 led influential administration figures to consider the new theories of economist John Maynard Keynes. Keynes argued governments should run large budget deficits during recessions to stimulate demand. Traditional economists disagreed, believing deficits undermined business confidence and hurt the economy. Keynesian economics became a hallmark of postwar liberalism.

1939-1945: Wartime Spending

During the 1930s, John Maynard Keynes developed an economic theory that recessions could be reversed by massive government spending, even deficit spending. This spending would fill the void left by business cutbacks. Keynes's theory was tested vividly during World War II.

When the war began in September 1939, FDR increased defense spending to prepare the nation should it be drawn into the conflict. Government expenditures rose further to support Roosevelt's "Lend-Lease" program, which provided military assistance to nation's fighting the Axis Powers.

As military spending rose, the government ran ever larger budget deficits. The spending stimulated activity throughout the American economy. Unemployment fell from 19 percent in 1938 to 9.9 percent in 1941. When America entered the war, spending increased further. By 1944, economic activity - and the expansion of the armed forces - drove unemployment down to 1.2 percent.