How Franklin D. Roosevelt Financed the New Deal

Franklin D. Roosevelt's (FDR) New Deal is widely recognized as one of the most significant periods in American history. Central to its success was FDR's ability to finance and implement the extensive programs designed to combat the economic crisis of the 1930s.

The Context of Economic Crisis
In the early 1930s, the United States was facing a severe economic depression, characterized by deflation, high unemployment, and a significant decline in the standard of living. During this period, the gold standard was causing deflation, leading to a decrease in overall economic activity. To combat these issues, FDR recognized the necessity of stimulating the economy by increasing the money supply, similar to administering a blood transfusion to ailing organs.

Key Financial Strategies

Increased National Debt
One of the primary mechanisms used by FDR to finance the New Deal was increasing the national debt. Prior to FDR's presidency, the national debt was relatively low. In 1932, the national debt stood at $17 billion, and the debt-to-GDP ratio was at 22%. By 2020, this ratio had skyrocketed to an unprecedented 129%. FDR secured Congress to approve additional borrowing to fund the New Deal programs, which greatly expanded the national debt.

Tax Reforms
Another crucial financial strategy employed by FDR was to implement tax reforms, specifically targeting the wealthy and corporations. In 1936, FDR introduced higher tax brackets for the very wealthy, raising the tax rate on income above $2 million to 79%. This approach was mirrored by many other countries that achieved higher quality of life standards. Before the New Deal, the tax rate on income over $100,000 was set at 56%.

Impact on Economic Growth
FDR's strategies had a profound impact on the economic recovery of the United States. Upon taking office in 1933, the U.S. economy was valued at just $716 billion, significantly lower than it was under Herbert Hoover. By 1940, the economy had grown to over $1.2 trillion, representing a 70% increase from Hoover's presidency. This substantial growth was achieved through increased government spending, driven by higher taxes on the wealthy and corporations.

Changing Tax Rates

Changes in tax rates during the New Deal era provide a clear indication of how the government financed its programs. For instance, prior to the New Deal, the top income tax rate was 56% for income over $100,000. After the New Deal, this rate climbed to 62%, and for the highest-income bracket (over $5 million), it reached a staggering 79%. These increases were particularly significant for those in the highest income brackets.

In comparison, the current top tax rate in the U.S. begins at an income of $628,301 and is taxed at 37%. Adjusted to 2022 dollars, this would equate to the 79% rate that was in effect during the New Deal. During the New Deal, the top brackets were taxed at a progressively higher rate, reflecting the progressive nature of the tax system.

It was particularly noteworthy that in 1931, two years before FDR took office, the top tax rate for income over $1 million (in today's dollars) was 25%. However, from 1932, the top bracket was revised to $1 million (20 million in today's dollars) and taxed at 63%. This shift in tax rates was largely implemented before FDR took office, highlighting the importance of his policies in shaping the overall tax landscape.

Conclusion

The success of the New Deal was heavily dependent on FDR's fiscal strategies, particularly the increasing national debt and higher taxes on the wealthy. These measures helped to stimulate the economy and improve the quality of life for Americans. Understanding these financial strategies is crucial for comprehending the impact of FDR's presidency on American history.