Wednesday, June 6, 2012

FDR's Disaster

Historians and economists have debated the causes of the Great Depression: there is more than one plausible explanation for the economic downturn which started in late 1929 or early 1930. But in any case, it is clear that one set of causes created the Great Depression, while a second set of causes exacerbated it. If FDR had not instituted his slate of New Deal programs, the Great Depression would not have lasted as long, nor been as severe.

One example is the famous National Recovery Act. Generating cognitive dissonance on a grand scale, Roosevelt argued that the economy would blossom if industry groups were exempted from antitrust laws and allowed to set wages and prices. President Roosevelt was essentially saying that we should build monopolies: an odd enough thought on its own, but even stranger coming from a self-proclaimed progressive who'd supported his uncle's creation of the antitrust legislation. Historian John Steele Gordon writes:

As the disaster of the Great Depression deepened, many economists of the day thought that a major cause was "excess competition." As companies fought for market share, they drove down prices, which put pressure on wages, which reduced purchasing power among consumers, creating a vicious circle. The solution, these economists argued, was the establishment of industry associations that would set minimum prices and standardize work rules and labor conditions.

Essentially, Roosevelt's economic advisors were hoping that across-the-board price increases would stop the Great Depression: inflation as the cure. Government-sanctioned price-gouging of American consumers would, however, only make raise the unemployment rate by reducing demand, and stifle any attempts at economic growth by discouraging new businesses, or innovations in old businesses. Although not an actual monopoly, federally-approved collusion on prices across entire industry groups had the same effect.

The act, signed on June 16, 1933, authorized industrial and trade associations — exempting them from the antitrust laws — to agree on prices, and negotiate among themselves such matters as maximum work hours, minimum wages and labor conditions. The codes that resulted in each industry would have the force of law, as long as President Franklin D. Roosevelt agreed to them. The NIRA, in short, provided for the cartelization of much of the American economy.

Looking for support, Roosevelt found little among free-market capitalists, but was embraced by crony capitalists. Those capitalists who reject the principle of competition in a free market, and instead embrace opportunism - including a willingness to benefit from government regulations which favor them - saw that the National Recovery Act (NRA) would provide them with a windfall.

Many of the biggest and most powerful corporations, or at least their CEOs, endorsed the plan, including Gerard Swope of General Electric and Charles Schwab of Bethlehem Steel. Henry Harriman, the president of the U.S. Chamber of Commerce, actually helped draft the legislation.

Those industrialists who clung to the notion of a truly free market saw the NRA as a sweeping violation of economic freedom, dictating prices to corporations and consumers alike.

But, of course, there were other industrialists who were adamantly opposed, including Henry Ford and Alfred P. Sloan of General Motors. The National Association of Manufacturers also opposed the bill.

Like many New Deal programs, and many progressivist initiatives of earlier eras, the NRA was carried out with a military spirit. Propaganda spread the idea. Enforcement, even though part of the code were supposed to be voluntary, was heavy-handed.

The act established the National Recovery Administration, headed by Hugh Johnson, and its symbol, the blue eagle, and motto, "We Do Our Part," soon became ubiquitous, found in advertisements and store windows across the country. The NRA also produced a blizzard of codes (more than 750 of them, covering 23 million workers) and regulations. Thousands of business practices that had been standard were now forbidden.

Roosevelt's NRA faced a number of difficulties: it represented a repressive curtailment of individual economic freedom; it was unconstitutional; its directives, if followed, would not help the economy, but rather make the Great Depression worse; and it relied on voluntary compliance, which meant that either nobody would comply, or that it would eventually be enforced surreptitiously by Hugh Johnson's ruffians. Cengage's history textbook tells us that

the government decided to limit production through persuasion and association - techniques that Hoover had also favored. To head the National Recovery Administration (NRA), authorized under the National Industrial Recovery Act, Roosevelt chose General Hugh Johnson, a participant in industrial planning experiments during the First World War.

Roosevelt's New Deal wasn't so new: first, he followed in the footsteps of President Hoover, who'd tried the same thing - an attempt at voluntary regulation. Relying on Hoover's notion of associationalism inevitably resulted in either utterly toothless regulations, or a tough persuasiveness which amounted to extortion. Second, FDR hired Hugh Johnson, whose wartime lockdown on economic freedom under Woodrow Wilson amounted to an unconstitutional imposition of a command economy, with freedom of speech being revoked as well. Johnson organized conferences or groups to oversee each industrial sector and

specify prices, wages, and hours throughout the sector. He also asked each conference to restrict production.

The results were predictable: what didn't work during World War One also didn't work during the Great Depression. Constricting economic freedom can only hurt the economy.

In winter and spring 1934, economic indicators plunged downward once again, and manufacturers began to evade the code provisions.

Individuals were willing to risk a physical beating from one of Hugh Johnson's thugs - there was no official government enforcement, since NRA regulations were allegedly voluntary - because there was no other way to put bread on the table, except to violate the NRA guidelines. To try to preserve hope for both economic recovery and for preserving some degree of individual freedom, voters filed a lawsuit, hoping that the Supreme Court would help. John Steele Gordon writes:

Naturally, opponents of the NRA went to court. The case that made it to the Supreme Court was formally titled A.L.A. Schechter Poultry v. United States. The Schechter company was one of a group of New York City kosher wholesale butchers who had been charged with violating the rules established under the NRA code covering the poultry industry. Among the charges that reached the Supreme Court were those involving the sale of an unfit chicken to a local butcher, and the sale of two uninspected chickens. This led Hugh Johnson to dub it "the sick-chicken case."

The Supreme Court's decision in this case would be crucial. If it did not find a way to stop FDR's attempt to control the economy, a major chunk of personal freedom would be permanently lost.

Although the Second U.S. Circuit Court of Appeals had upheld the National Industrial Recovery Act, the Supreme Court reversed, and did so unanimously. Chief Justice Charles Evans Hughes wrote that while Congress had the authority to regulate interstate commerce, it could not delegate that power to the NRA, let alone to private industry. In his concurrence, Justice Benjamin Cardozo called it "delegation run riot."

Not only did the Supreme Court stop FDR's power-grab, but it did so unanimously - a rare show of unity on the divided bench. The opinion made it clear that the federal government had no place in attempting to regulate such businesses:

Further, Hughes ruled that the Schechters' business was too small and inconsequential to have a real affect on interstate commerce, and therefore could not be regulated by the federal government at all.

At this point, the NRA had been ruled unconstitutional, had failed to achieve any positive economic result, and had become widely disliked by the public. Cengage tells us that

by fall 1934 it was clear that the NRA had failed. When the Supreme Court declared the NRA unconstitutional in May 1935, the Roosevelt administration allowed the agency to die.

The NRA, which had become extremely unpopular, was gone, and the voters were glad to see it go. The American public, at first hopeful that something good might come of FDR's New Deal, began to dismiss his bewildering jungle of government programs as "alphabet soup," of which the NRA was the worst.