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Gailbraith and Panitch: Is a New “New Deal” Possible?

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James K. Gailbraith and Leo Panitch discuss the 80th anniversary of the election of FDR and the significance of the New Deal.

James K. Gailbraith and Leo Panitch discuss the 80th anniversary of the election of FDR and the significance of the New Deal.


PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

It’s been 80 years since the election of Franklin Delano Roosevelt and the New Deal. On the occasion of that, we are doing a series of interviews with various economists, discussing, debating the significance of the New Deal. And in this series we’re going to ask the overall question: is a new New Deal possible given today’s politics?

Now joining us to discuss this first of all is Professor James K. Galbraith. He’s the Lloyd M. Bentsen Chair in Government and Business Relations at the LBJ School of Public Affairs at the University of Texas, Austin. He’s the author of the book The Predator State, and more recently Inequality and Instability: A Study of the World Economy Just Before the Great Crisis.

And also joining us, from Toronto, is Leo Panitch. He’s the Canada Research Chair in Comparative Political Economy and a distinguished research professor of political science at York University in Toronto. He’s the author of Global Capitalism and the American Empire, and he coauthored the book with Sam Gindin titled The Making of Global Capitalism.

Thank you both for joining us.

So, Leo, let me start with you. Before we get into this sort of big question is a new New Deal necessary and if so is it possible, let’s talk about the original New Deal, its significance, the historic context of it. So please kick us off.

LEO PANITCH, PROF. POLITICAL SCIENCE, YORK UNIVERSITY: You have to understand how the severity of the Depression had enormous impacts politically. People forget that in the week before the inauguration, the Nazis had taken power to rule by decree. The Communist Party in Germany was banned on March 1, just three days before the inauguration. And at home, the demonstrations that had begun in 1930 by the unemployed, often led by the Communist Party, ran all the way through 1932. I mean, they would reach their peak in ’34.

And Roosevelt’s inauguration address reflected this. He had ran on a balanced budget policy, but the address was full of rhetoric like the rulers of the exchange of mankind’s goods have failed, the practices of unscrupulous money changers stands indicted in the court of public opinion, the solution to the Depression lay in the extent to which we apply social values more noble than mere profits. So he was endorsing some of the radical sentiments behind the protest, at least rhetorically.

And that encouraged further protests, even though, you know, when the first legislation that you were listing was introduced—it was significant, certainly, especially in agriculture, and successful in agriculture, not in industry, but Roosevelt opposed the granting of trade union rights as part of that legislation, which was going to protect prices of the corporations, and he was opposed to the introduction of labor rights in that legislation.

JAY: James, let’s step back just one step. The cause of the crisis and the crash in ’29, the differences and similarities to the crash in ’08?

GALBRAITH: Okay. Let’s start with the fact that in 1929 there was no sense that industrial capitalism was necessarily a permanent phenomenon. It was a relatively recent development, less than, say, a century old, and it had been subject over the decades before the crisis to an ongoing series of panics, crashes, and depressions. And much of Europe, of course, its fate was very much up in the air. There had been the Bolshevik Revolution in Russia in 1916 and the upheavals following the First World War, and ultimately the rise of fascism and Naziism were underway, just as Leo had said, at that particular moment. So this was a situation in which the entire, let’s say, fate of the system was uncertain, very different in most people’s psychology from the experience of the 60 years leading up to 2008.

This was very different from, let’s say, the psychology underpinning the Western industrial and financial capitalism of the last 50 or 60 years, which most people have grown up with under the presumption that it’s a permanent system.

A second major difference was that in 1930, when the Depression occurred, there was basically—there was very little by way of a federal economic presence in the economy to deal with it. The scale of the government itself was very small, less than 10 percent of total output, and much of what we now know by way of the powers of central banking had not really been developed either. And the Federal Reserve, for that matter, was still by then, you know, a fairly new institution. So there was a need for a massive amount of institution building, which is what the New Deal in effect accomplished.

I would not put a lot of weight on what happened, actually, in the monetary—in the actions of the central bank. Most of what was done was done by newly created agencies—deposit insurance, the regulation of the financial system through the Securities Exchange Commission, the new regulatory agencies that were created, and the vast programs of positive construction and employment that were created over this period.

So an entire system was built that had never previously existed and gave us an economy with a very strong presence of the federal government. And ultimately, as the New Deal progressed, that was extended to very large social insurance programs, which also had never previously existed, Social Security on a continental scale being the lead thing in the 1930s. And then added to that in the 1960s we had the work of the New Frontier, and especially of the Great Society, which extended this especially into health care, where we got Medicare, we got Medicaid, we got a major public presence in what became an increasingly important part of the economy, particularly as the older population grew relative to the West. So that was the situation that we faced in 2008—very different climate of expectations and a much stronger frame of public institutions to deal with the problems, and capable of dealing with them often in ways which were practically automatic, in the sense that tax revenues dropped, public spending went up, and people’s incomes were not going to collapse the way they did in between 1930 and 1933. So all of that was very much to the benefit of the world in which we live today.

The problem that we have, I think, is that it also deprived us of a sense of urgency and a sense of the possibility of need for major reforms. So we in effect fooled ourselves into believing that the economy would recover in full, returning us to the pre-2008 levels of prosperity, even pre-2000 levels of prosperity, without or with very minor or temporary interventions. We did in fact face a system-threatening—in many ways a system-destroying crisis, but we faced it without the sense that it was such. And so we did much less, and what we did in the last five years was designed to be temporary. It was in anticipation of a return to normal which hasn’t occurred. And so we have many people who are now becoming to realize a bit late that their expectations are going to be very badly disappointed.

And now we have a rather difficult moment, in which we, I think, recognize that we didn’t do what we should have done, and yet we obviously do not have the political—we’re not in a moment where the political mobilization exists or the climate of crisis exists that permits us actually to move in the right direction—quite the contrary, where it looks as though we’re moving distinctly in the wrong direction and will continue to do so for the indefinite future.

JAY: Leo, same question: the reason for the crash in ’29 and how that compares to ’08.

PANITCH: Well, economists are still disputing what were the exact causes of the Great Depression. John Kenneth Galbraith’s great book on the “Great Crash” is really worth reading. And you will find in it that many of the same players who were at the source of the crisis in 2007-2008 were in the story, and not least Goldman Sachs, in ’29. It was triggered by a financial crisis.

One of the reasons, in my view, that it occurred when it occurred—it might have occurred—it would have been a crisis in any case. James is right that there was series of crises in capitalism in that period. One of the reasons was that the Fed had been trying to make the gold standard work when the international system had gone back on it in ’26 by keeping interest rates low, in order to protect the British pound, essentially. And when that helped produce the enormous bubble in the stock market, when they tried to restrain that, that then led to the cascading fear that brought about the financial crisis.

Part of what was going on, however, was democracy. It was—you know, this was now taking place in a period where workers had got the right to vote, where unions were emerging and on strike. There were elements of democracy. And applying the gold standard, the automatic austerity that had been used to deal with the currency crises earlier was no longer possible. And the rulers of the world didn’t understand that. The pragmatists—and they were pragmatists, the people who were behind Roosevelt’s [incompr.] trust knew—and I think James got it right—that you couldn’t go back any longer to a small-sized, competitive, laissez-faire, small individual enterprise economy, which often in a very utopian way American radicals had looked to, and they were attempting to protect the industrial economy that they now realized was here for good, and they were protecting it by a very corporatist means of keeping prices up and allowing, now legally, corporations to set their prices together to prevent a massive decline in prices.

Now, in exchange for that, certain trade union rights were initially opened up, although Roosevelt wasn’t very keen on this—this eventually led to the Wagner Act. But I think one has to say they were pragmatically intervening, developing state capacities, exactly as James said, capacities that had never existed, most impressively in terms of agricultural regulation. But they were pragmatically saving capitalism. They were saving the private institutions. Sure, J. P. Morgan had his comeuppance, but the separation of investment banking from commercial banking, from insurance companies, and from trust companies, which provided mortgages, so that those watertight compartments introduced in the banking legislation was as much about protecting private banking as doing away with it, that much more about [incompr.] So an incubator was created which protected especially private finance.

But that was advantageous, of course, to the whole capitalist economy in the context of the types of interventions that were made to provide jobs through direct public investment, like the Tennessee Valley Authority, through the Work Projects Administration. They were trying to run a balanced budget, but off-budget they were borrowing a lot in order to put people to work directly, and that was a massive advance and a direct response to the radicalism, as well as the seriousness, of the problem at the time.

Now, it’s important we recognize that Milton Friedman’s great work—and Ben Bernanke is his student—was that we didn’t have to have this radicalism if only we’d had a monetary policy which would have increased the money supply rather than restrict it in the face of the Depression. And to some extent that is what is being followed today. And it has worked. I disagree with James. I think in capitalist terms, and at the expense of perpetuating enormous inequality of power and income, etc., it has worked to prevent what happened between 1929 and ’33.

It certainly hasn’t worked in the sense of shifting the balance of class forces in a way that happened in 1935, 1936, etc., but one needs to remember that Roosevelt did his truce with big business—and the New Dealers called it that in 1938. What was introduced before the Great War was a very, very mild Keynesianism, not an ambitious one at all. And the more radical elements in these new administrative agencies, in the Department of Commerce, in the Treasury itself that had come in during the Depression to the state were largely marginalized. It was the very pragmatic and not very radical Keynesians who were left administering the American state by 1938.

GALBRAITH: [inaud.] on this point.

JAY: Yeah, go ahead.

GALBRAITH: Milton Friedman came along in 1964 with a book, along with Anna Schwartz, which makes the case that had the Federal Reserve kept the money supply from falling, the Depression would not have occurred. And to that I say, if wishes were horses, beggars would ride. I think the reality of the situation was that you had a panic that engulfed the banking system. People rushed to take their deposits out, this system of credit collapsed, and there was nothing in practice that the Federal Reserve could have done to deal with that. And so I don’t believe for a minute that there was a mechanical process whereby an ostensibly all-powerful central bank could have forestalled the Depression, given the institutional situation that existed and the industrial situation. [crosstalk]

PANITCH: I agree with that. I agree with that, James. I don’t think the institutional capacity [crosstalk]

GALBRAITH: Now, let me just make the point. It seems to me that the New Dealers correctly recognize that you needed a much larger array of stabilizing institutions. And they took that route. They had no confidence in the Federal Reserve’s ability to handle this.

And they—you know, the Federal Reserve was brought to heel and became a cooperating player, and continued so up until 1951, but it was not in the most successful period, in the period of war mobilization. It was definitely a secondary and cooperating player, not a lead one. And that seems to me to have been its proper role.

Now, what the Federal Reserve could and did do in 2008 was to provide massive amounts of liquidity, so as to keep institutions that were functionally insolvent from collapsing. In conjunction with the extension of further increase of deposit insurance, which was a very important bit of what the Congress did at the end of 2008, raising those limits to a quarter of a million dollars, that forestalled what otherwise would have been a—could have been a massive financial panic. But it does not bring you to the point where the financial sector is back at work financing job-creating recovery or financing the expansion of business. What [incompr.] is exactly the thing that hasn’t happened.

So I think we’re seeing very clearly the limitation of the ability of the central bank—. And, actually, I think right now, after you look at the central bank chairman, Bernanke is a middle-of-the-road figure, but other figures on the central bank are probably as progressive as any appointees have been at that institution since the ’30s and ’40s. But it is its ability to influence the course of events, even though it has, you know, declared that it wants to maintain actually a very reasonable employment target and will maintain low interest rates—being able to control the rate at which banks can borrow from the government is not the same thing as being able to control the rate at which banks actually make loans to the public and to small businesses in particular [crosstalk]

JAY: Yeah, yeah, yeah. Yeah, what—yeah, Leo, Leo, what about that? The liquidity has helped stop the banks from crashing, but it hasn’t done very much for the economy.

PANITCH: No. I think that the lesson that Bernanke learned—and he wrote his scholarly work on this—was that you could keep private banking going. The Depression wouldn’t have been prevented, and the institutional capacity wasn’t there then, but he learned that what you have to do when there’s this scale of a financial crisis, with knock-on effects on the economy around the world immediately—yes, he has been applying in that sense Friedman’s lesson. But it—if you save the private banking system, that certainly doesn’t mean (and the Depression showed us this lesson) that the banks will necessarily put what’s—that liquidity into investment. And they haven’t. And they didn’t during the Depression.

So the lesson that needs to be learned is: to get us out of this situation (it’s not as severe as the situation was in ’33), one cannot rely simply on saving the private banking system. And one of the problems—.

GALBRAITH: Well, that’s certainly correct. We agree on that. But I just want to come back on this, because I think Bernanke’s position actually was, before the crisis, that they did have the power to prevent a long-term slowdown departure from potential GDP that in fact they didn’t have the power to prevent. So I think Bernanke fostered a exaggerated view of the Federal Reserve’s power in this matter.

JAY: Okay. So hang on one sec, guys. So we’re going to move to a second segment, and the question we will pick up on is: if then all this liquidity the Fed’s putting into the banks is not going into the economy, which is why many people are saying there needs to be a new New Deal and people are saying it needs to be a new green deal, well, if that’s what’s needed, is it possible given the politics of today? And that’s the question we’re going to take up in part two of our interview.

Thank you, gentlemen, for joining us.

And thank you for joining us on The Real News Network.

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