Roosevelt's Response
FDR liked to get advice from all sides; in addition to the New Economists he was being advised by people who still embraced the classical economics position. Also chipping in were traditional progressives. Roosevelt took bits of advice from each of these sources, essentially trying a little of this and a little of that, whatever seemed like it might work. Much of the advice he took from the academicians was on how to increase demand, and it was good advice. Government clearly had to get more money into the hands of more people to increase the number of consumers. Some of the ways government did this, supported demand, were by setting maximum work week hours, creating unemployment insurance and creating social security, as well as providing additional protection for unions. All of these remedies served to bolster demand, insuring that it could not fall below a certain level.
FDR also moved to strengthen and hence reestablish faith in the institutions of capitalism, banks and stock brokerages. One of his first moves upon assuming office was closing banks until they could be examined by the Treasury Department to determine their soundness. He also centralized power at the Federal Reserve Bank in Washington, giving it greater power to regulate the actions of member banks throughout the country. Further, he created the Federal Deposit Insurance Corporation to insure deposits made in member banks. He also moved to assure protection for people who bought stocks and bonds, with the Truth in Securities Act and the creation of the Securities and Exchange Commission.
Although it was not their intent, the policies suggested by the New Economists to support demand had the effect of revalidating classical economic theory. Classical economic theory had been based upon the assumption that demand would remain fairly constant, and so the economy would be self- correcting. Obviously, in a completely free environment this was untrue; demand did fluctuate, and so the economy was not always able to correct itself. But by putting in automatic responses, government was limiting the swings in demand; it was insuring that even during an economic downturn, money would be in people's hands. Because demand would remain fairly constant due to government's intervention, the classical economic theory would apply; the economy would be self-regulating and able to pull out of downturns in business.
Essentially, the government had added an automatic correction, to protect against drastic swings in the business cycle which might eventually lead to a depression. FDR had also established the beginnings of an active tool of control to allow the government to deal with the business cycle, monetary policy. The banking reforms allowed the government to set minimum reserve requirements for banks, which is essentially a means of controlling the amount of money in circulation. This is undoubtedly the most effective active tool the government can use as added insurance that the business cycles do not become too severe.
FDR tried some of the suggestion offered by the New Economists toward national regimentation, but on the whole he did not embrace the role for government that they suggested. They wanted to build a completely new economic system based on collectivist principles. He took one tentative step toward collectivism with the NRA, but that was short lived. Instead he concentrated on reforms which he thought would help maintain a competitive free enterprise system. At one point in the thirties, Roosevelt met with John Maynard Keynes, a British economist, who like the professors at Columbia proposed a vast extension of the government's economic role. Roosevelt again rejected that role. Though FDR is thought of as a socialist by some people, he really did not seem to embrace the so called "Rational Socialism" utopia.