The New Deal’s Capitalist Lessons for Joe Biden

In American politics, we talk a great deal about the New Deal, particularly in times of economic crisis. But our collective memory of its contents typically fails to include its most powerful parts.

The New Deal’s alphabet soup of job programs still loom large, and was doubtlessly a saving grace for millions of working men and their families. However the macroeconomic impact of President Franklin Roosevelt’s direct government employment programs was dwarfed by what I call the “Other New Deal”: low-cost government loans, ambitious housing insurance programs and tax subsidies that spurred major industries. Together, this resurrected private investment and loosened credit markets — the heart of the capitalist system — for businesses and everyday people.

As President Biden begins his presidency with razor-thin Democratic congressional majorities that could stymie future spending plans, these undersold successes of the New Deal provide him with a historical blueprint for how to creatively “Build Back Better.”

Take the Reconstruction Finance Corporation, or R.F.C., which was led by Jesse Jones, the Texan lumberman, developer and banker. Jones held a dim view of Eastern bankers, who believed they had already invested in everything worth doing. This glut of savings — that is, idle capital — could not be profitably invested, or so the bankers thought. (Somewhat similarly, despite the stable economy of the past decade, we’ve witnessed a glut of private savings as financiers focus on speculation in property and stocks .)

Housed under the R.F.C. were new organizations like the Federal Housing Administration, the Rural Electrification Administration and the Defense Plant Corporation. These agencies did not spend taxpayers’ money, but drew on that idle bank capital to finance large projects geared toward the public good.

Through low-interest rates loans and the unprecedented use of insurance underwritten by the U.S. government itself, these lending systems laid the foundation for the 20th-century American middle class and the nation’s ability to win the industrial battle that was World War II. Tens of billions of dollars (nearly a trillion today) were borrowed by the R.F.C. for reinvestment. Even more in private investment was promoted through insurance programs.

In just a few years, the Federal Housing Administration spurred the housing boom. The Rural Electrification Administration transformed an energy grid in which 10 percent of rural homes had electricity into one that by 1950 provided 90 percent of rural America with power. The Defense Plant Corporation, meanwhile, facilitated the large-scale growth of the U.S. electronics and aerospace industries. And the R.F.C. did all of this while making a (modest) profit for the government.

While the underlying finances (tax relief, relaxed lending terms, loan insurance) looked roughly the same, the enterprises could not have been more varied. They supported small-town banks, as well as rural cooperatives and the largest corporations. Many big businesses and institutional investors did not believe in Roosevelt’s audacious egalitarian motivations. But with the prospect of their money sitting idle and the government guarantees of security in place, they lent anyway.

If, for instance, the Biden Treasury Department worked with the Federal Reserve to set up low-interest-rate lending facilities that prioritized rural and minority small businesses fighting to reopen after the pandemic or that prioritized clean energy businesses, then the country could witness a similar recovery boom in the 2020s.

While certain mature industries like aerospace do not need public investment, today’s parallels to the 1930s can be blindingly obvious. The lack of rural broadband access looks a lot like the state of rural electricity in the early 20th century. And the wages of service workers today are as depressed as those of the manual laborers of the 1930s. During the Depression, about one-third of families on government relief had a breadwinner who had worked in construction. By 1934, the construction industry was one-tenth of its size in the late 1920s.

But as a result of the F.H.A.’s ingenuity, the industry came back: Local banks, contractors and developers in Texas could, for the first time, receive loans from New York, as long as they followed broad rules — a facet of the global financial system that we now take for granted.

Rural Electrification Administration-backed electrical cooperatives connected the countryside to the city, both economically and culturally. Rural Americans, who then accounted for about half the population, could now buy radios made in city factories, but also listen to the same programs, helping to stitch the country together.

Before the Defense Plant Corporation, more people worked in candy manufacturing than in aerospace. Over five years, the agency facilitated loans and tax relief to aerospace industries equivalent in size to half of the entire existing invested capital in manufacturing.

Alongside aerospace came investments in downstream industries — aluminum, electronics, synthetic rubber. In Los Angeles, for example, aerospace employment rose from near zero to 40 percent of the work force in a few years. And though the U.S. military was the largest buyer of planes, the Defense Plant Corporation’s investments set the stage for the American-led jet age to come.

The New Deal’s financially centered programs also had their failures: chiefly, the unapologetically racist nature of its lending system. Still, these failures should be warning flags, not cause to ignore the underlying possibilities of such policies.

The largest failure of this Other New Deal, perhaps, was that these programs were so successful that they appeared, in time, inevitable: Prosperous suburbs, a modern energy grid and American dominance in aerospace are not seen as government creations in the same way as our loveliest public parks and stadiums.

In history classes, students tend to learn less about the Other New Deal, both because of its complexity and because its capitalist solutions do not fit neatly within liberalism’s celebration of Keynesian spending. Yet it holds lessons for this year’s recovery.

If we’re going to rebuild as a more dynamic society, it would be good to keep in mind that much of the New Deal wasn’t liberalism gone wild but radically moderate, rejiggering capitalism’s tools for socially progressive ends, and doing so without undermining capitalism itself — an imperfect system still better than everything else humanity has tried.

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