Last week, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Lessons of the New Deal” in which witnesses reflected and commented on key economic parallels between the Great Depression and the New Deal and the present economic crisis. The following witnesses appeared before the Committee:

Panel One

Panel Two

The panelists generally agreed that there are many important lessons to be derived from the Great Depression with regard to the economic and fiscal policies implemented during that time to promote recovery. Ms. Romer expressed the view that the severity of the current economic crisis did not compare to the Great Depression on many levels. For example, unemployment during the Great Depression reached nearly 25%, while unemployment was only 8.1% as of February 2009. She remarked that the implementation of fiscal measures that were a “bold break from the past,” including President Roosevelt’s emergency spending, was a key factor in promoting recovery during the Great Depression. She also noted that emergency fiscal spending is one lesson that President Obama has taken to heart, as exemplified by the passage of the American Recovery and Reinvestment Act less than 30 days after the Inauguration.

Dr. Galbraith acknowledged that the New Deal marked the implementation of sweeping regulatory legislation, including the institution of “federal deposit insurance so as to put an end to panics and runs, the passage of the Glass-Steagall Act separating commercial from investment banking, and the creation of the Securities and Exchange Commission, and the end of the gold standard.” He also acknowledged that much of the framework of the New Deal was not focused on fiscal expansion, but on “the creation of a comprehensive network of social insurance and social protections, the construction of institutions for collective action inside the population including trade unions.” Dr. Galbraith emphasized “that the New Deal was not an effort to return the country to the prosperity of the 1920s,” but rather a recognition that “the conditions of that period could not be re-created, set about to do something quite different, and did so with very considerable success.”

Dr. DeLong pecifically identified four macroeconomic policies that were applied during the Great Depression under the New Deal, including “conventional monetary expansion, quantitative easing, banking-sector recapitalization and regulation and fiscal policy expansion,” that played a substantial role in the nation’s economic recovery. He noted, however, that it was hard to determine which of the four macroeconomic policies were most instrumental in promoting the nation’s recovery, since the Great Depression did not provide much quantitative evidence of the “balance of power between monetary, banking, and fiscal policy.”

Dr. Winkler characterized the New Deal as “a multi-faceted attempt to deal with different elements of the catastrophe in ways that sometimes seemed haphazard and occasionally were contradictory.” He noted that, even though “the New Deal enjoyed some notable accomplishmentn,” in many ways it “failed to promote full-scale economic recovery.” Dr. Winkler acknowledged, however, that one important lesson learned from the New Deal that can be applied today is the government can make a difference and that fiscal stimulus measures are essential and "can promote recovery.”