Even as the Court made its peace with Roosevelt’s policies, the momentum of the Second New Deal slowed. The landmark United States Housing Act did pass in 1937, initiating the first major national effort to build homes for the poorest Americans. But the Fair Labor Standards bill failed to reach the floor for over a year. When it finally passed in 1938, it banned goods produced by child labor from interstate commerce, set forty cents as the minimum hourly wage, and required overtime pay for hours of work exceeding forty per week. This last major piece of New Deal legislation established the practice of federal regulation of wages and working conditions, another radical departure from pre-Depression policies.
The year 1937 also witnessed a sharp downturn of the economy. With economic conditions improving in 1936, Roosevelt had reduced federal funding for farm subsidies and WPA work relief. The result was disastrous. As government spending fell, so did business investment, industrial production, and the stock market. Unemployment, still 14. percent at the beginning of 1937, rose to nearly 20 percent by year’s end.
In 1936, in The General Theory of Employment, Interest, and Money, John Maynard Keynes had challenged economists’ traditional belief in the sanctity of balanced budgets. Large-scale government spending, he insisted, was necessary to sustain purchasing power and stimulate economic activity during downturns. Such spending should be enacted even at the cost of a budget deficit (a situation in which the government spends more money than it takes in). By 1938, Roosevelt was ready to follow this prescription, which would later be known as Keynesian economics. In April, he asked Congress for billions more for work relief and farm aid. By the end of the year, the immediate crisis had passed. But the events of 1937-1938 marked a major shift in New Deal philosophy. Rather than economic planning, as in 1933-1934, or economic redistribution, as in 1935—1936, public spending would now be the government’s major tool for combating unemployment and stimulating economic growth. The Second New Deal had come to an end.