The New Deal and the State and Local Governments

By Higgs, Robert | Freeman, March 2008 | Go to article overview

The New Deal and the State and Local Governments


Higgs, Robert, Freeman


Until the twentieth century the average American in peacetime had little contact with the federal government, except for the post office, and the federal government's policies and actions affected most people only indirectly-for example, through land-disposition policies or the tariff's effect on commodity prices. State and local governments provided nearly all the government services the citizens needed, wanted, or merely endured: definition and enforcement of private property rights; construction and maintenance of roads, streets, sewers, water-supply systems, bridges, canals, and most other economic infrastructure; provision of most schools and some universities; regulation of many economic activities and much personal behavior; and so forth.

In the late-nineteenth and early-twentieth centuries, governments at all levels never spent more than 9 percent of gross national product (GNP) during peacetime. Of the total, local governments spent the biggest share, the federal government somewhat less, and state governments less still. In 1927, for example, local governments accounted for 56.7 percent, the federal government 30.4 percent, and state governments 12.9 percent.

Employment figures mirrored the spending breakdowns. In 1929 state and local governments combined employed 2.6 million persons, more than a million of them in education, whereas the federal government employed only 981,000 persons, including 267,000 in the military and many of the others as postal workers. (At that time, the total U.S. labor force numbered roughly 48 million.)

With the onset on the Great Depression and the advent of the New Deal, the structure of government underwent drastic change. People who know anything at all about these years understand that government became both larger and more centralized, yet few appreciate exactly how and why the overall structure of government changed or what consequences flowed from this change.

In mid-1929 the economy began to contract, and as the contraction continued, business failures and unemployment increased, and relief rolls lengthened. Cities and counties, which had traditionally borne the responsibility for public relief of the destitute, faced increasing demands for relief spending. At the same time, however, their revenues were shrinking, as property values fell and hence property-tax receipts, the major source of local government funds, fell along with them. In addition, tax delinquencies increased, and borrowing became more difficult. More and more cities and counties found themselves in a fiscal squeeze. States provided some assistance, but they faced similar difficulties as their own property-tax and other receipts dropped. Three states-Arkansas, Louisiana, and South Carolina-defaulted on their debts, and by the end of 1933, approximately 1,300 local governments also had defaulted and many other state and local governments verged on default.

Everyone looked increasingly to the federal government to save the day, and even before Franklin D. Roosevelt's election, Congress began to respond. In July 1932 the Emergency Relief and Construction Act was passed, providing $300 million to be lent to the states (and thence to cities and counties) for relief. Everybody understood that these loans probably would never be repaid, and eventually they were indeed written off. This statute constituted, as it were, the first big leak in the federal relief dam. After Roosevelt took office in March 1933 the dam burst.

When it did, the federal government's expenditures increased rapidly relative to those of the state and local governments. In 1932 the shares of the federal, state, and local governments in total government spending (net of intergovernmental grants and receipts) were 32.4, 16.3, and 51.3 percent, respectively; in 1934, they were 38.8, 16.7, and 44.5 percent; and in 1940, they were 45, 17.4, and 37.6 percent. Notice that the state share did not fall; indeed, it rose slightly.

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