When the economy collapsed in late 1929 the United States, like other industrial nations, was plunged into what could only be thought of as a kind of economic and political nightmare. While conditions were difficult everywhere, in the US the disaster which befell the economy was particularly jarring, given the high expectations which the nationís past successes had given rise to. For the national product of the richest nation on earth to plunge by more than 50% and for nearly 15 million American workers to be unemployed was scarcely believable. Many observers perceived that something much more serious than a downturn in the business cycle had occurred. To them it seemed more likely that a fundamental structural change had taken place. Prominent economists suggested that the historical upward trend in US output and income had come to an end. Others suggested that the situation was even worse, that western capitalism had run out of steam. Long-term decline, or at best stagnation could lie ahead.
In this atmosphere, the traditional Republican position with respect to economic policy and, particular, the role of government in the economy became untenable, enabling Franklin Roosevelt to enjoy an easy victory over the incumbent, Herbert Hoover, in the presidential election of 1932. Rooseveltís aggressive program of government intervention to restore the economy, the New Deal, may have been more important for its symbolic than its actual impact on the economy, but it marked a turning point in American public policy. The role of government in the economy became much more direct and social policy moved away from the traditional American emphasis on individualism, and more toward the kind of acceptance of collective responsibility for meeting the needs of citizens found in the industrialized countries of Western Europe.
Rooseveltís initiatives began with measures to unite Americans in an effort to restore confidence in the system. In his first New Deal (1933-35) his administration tried to set up agencies through which small businesses and farmers would be able to manipulate prices so as to maintain their income levels. (Many believed that the depression had been caused by "over" production and "excessive" competition.) These measures proved ineffectual, however, and many were struck down by the Supreme Court as being unconstitutional. A second New Deal (1935-38) was more radical. A vastly expansionary monetary policy was pursued. Large-scale relief spending to support the unemployed and an expansionary monetary policy were pursued to stimulate spending. Farm prices were supported by an elaborate administrative apparatus. The Federal Reserve System was brought under stronger central control. Stock exchanges were subjected to increased regulation. Industrial relations were brought under government supervision and supportive measures were adopted which facilitated labor organization, smoothing the way for the emergence in 1938 of a new industrially-based umbrella labor organization, the Congress of Industrial Organizations, which soon became strong enough to challenge the more conservative AFL for control of the American labor movement. Private utility companies were subjected to regulatory control and government-supported agencies, such as the huge Tennessee Valley Authority, were established to supplement and set standards for rates and service levels. Minimum wages and maximum hours of work were established. Social security legislation was enacted to provide pensions to the aged and disabled, payments to single mothers, unemployment insurance.
If all this suggested a basic restructuring of the American system of economic and political organization, developments in other industrialized countries were far more radical. The responses to the crisis of the 1930s in Europe included the rise of Fascism and the adoption of various forms of democratic socialism. The attention of Americans, however, remained on the domestic situation. To the extent that developments elsewhere were seen to be potentially dangerous, the predominant American response was to retreat into isolationism. During the mid-1930s the US government actually enacted legislation (the Neutrality Acts) designed to keep the US out of any possible involvement in an external conflict.