“Signs of the times:
French premier shot and killed by a fanatic.
Five people killed in Chicago Communistic rioting.
Community chest drive opens tomorrow with much greater needs and little chance
of getting it.
Dr. Philo[a Youngstown rabbi] chooses as his topic last night ‘If I were dictator of the
U. S.’ He makes numerous radical statements.”
-- diary entry, May 9, 1932 by Benjamin Roth, from “The Great Depression: a Diary,”
page 53.
Source: Harold Cole and Lee Ohanian, New Deal Policies and the Persistence of
the Great Depression: A General Equilibrium Analysis, Journal of Political
Economy, August 2004. p. 780.
“Federal aid in such cases encourages the
expectation of paternal care on the part of
the government and weakens the
sturdiness of our national character.”
-- Grover Cleveland, vetoing a bill to
distribute $10,000 worth of grain to Texas
farmers after a drought.
Economic upheaval before the great
crash of 1893
• The building of giant factories,
• The rise of big joint-stock companies,
• Very hierarchical organization of labor and the
development of an impersonal labor market,
• Surge of immigrants into the cities,
• The movement of huge numbers of freeing
slaves into the labor force and the destruction
of the plantation economy of the South.
The humblest citizen in all the land when clad in the armor of a righteous cause is stronger than all the whole
hosts of error that they can bring. I come to speak to you in defense of a cause as holy as the cause of liberty—the
cause of humanity…When you come before us and tell us that we shall disturb your business interests, we reply
that you have disturbed our business interests by your action. We say to you that you have made too limited in its
application the definition of a businessman. The man who is employed for wages is as much a businessman as his
employer. The attorney in a country town is as much a businessman as the corporation counsel in a great
metropolis. The merchant at the crossroads store is as much a businessman as the merchant of New York. The
farmer who goes forth in the morning and toils all day, begins in the spring and toils all summer, and by the
application of brain and muscle to the natural resources of this country creates wealth, is as much a businessman
as the man who goes upon the Board of Trade and bets upon the price of grain. The miners who go 1,000 feet into
the earth or climb 2,000 feet upon the cliffs and bring forth from their hiding places the precious metals to be
poured in the channels of trade are as much businessmen as the few financial magnates who in a backroom
corner the money of the world…It is for these that we speak. We do not come as aggressors. Our war is not a war
of conquest. We are fighting in the defense of our homes, our families, and posterity. We have petitioned, and our
petitions have been scorned. We have entreated, and our entreaties have been disregarded. We have begged, and
they have mocked when our calamity came.
We beg no longer; we entreat no more; we petition no more. We defy them!... You come to us and tell us that the
great cities are in favor of the gold standard. I tell you that the great cities rest upon these broad and fertile
prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy
our farms and the grass will grow in the streets of every city in the country…If they dare to come out in the open
field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the
producing masses of the nation and the world. Having behind us the commercial interests and the laboring
interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall
not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.
- William Jennings Bryan, speech, Democratic National Convention, Chicago (1896)
“There are no thrills while he reigned,
but neither were there any headaches.
He had no ideas, and he was not a
nuisance.”
-- H.L. Mencken, on Calvin Coolidge.
Calvin Coolidge in his own words
• “All liberty is individual” – speech, 1924.
• “The chief ideal of the American people is
idealism. The chief business of the American
people is business.”
“Our mass of regulation of public utilities in our
legislation against restraint of trade is the monument to
our intent to preserve equality of opportunity.”
-- Herbert Hoover, American Individualism
Total investment relative to trend, 1934-1939
Source: Harold L. Cole and Lee H. Ohanian, New Deal Policies and the
Persistence of the Great Depression: A General-Equilibrium Analysis, Journal
of Political Economy, 112 (4), August 2004, 779-816.
Private Investment during the first
impression, 1929-1933
• 1931-1933, total corporate profits are actually
negative.
• A now discontinued stock index called the
Standard Statistics Index falls by 80% between
1929-1932.
• Property and proprietary income fall between
1929and 1933 from 41% to 27% of GDP.
Magazines and newspapers are full of articles telling
people to buy stocks, real estate etc. at present bargain
prices. They say that times are sure to get better and
that many big fortunes have been built this way. The
trouble is that nobody has any money. On account of
numerous bank failures, the people who have money
are afraid to spend it and are buying government
securities. From the extreme of speculation in 1929
people have now turned to the extreme of caution.
- Benjamin Roth, July 10, 1931.
The town is stunned by the news that the Home Savings and Loan Company has
suspended payments and would demand 60 day notice of withdrawals. This is
followed quickly by similar announcements from The Federal Savings And Loan
Company and The Metropolitan Savings And Loan Company. All of these loan
companies paid 5 ½ % on savings deposits and earn their money by lending on
real estate. With the coming of the depression people stopped payments on
their mortgages – mortgages became frozen andthe banks had no way to get
cash. Mortgages are a safe investment but cannot be liquidated quickly and are
not a good investment for a bank which has agreed to pay out its deposits on
demand. For the past three days, these institutions have been besieged by
hysterical depositors demanding their money. I am only afraid that the banks
will become more stringent in their collections and that foreclosures will
become the order of the day.
Wheat sells today at $.45 and corn at $.42. This is the lowest since 1855.
I went to the fruit market house this evening. It was almost deserted. The
farmers cannot sell their produce because men are not working and it has
become popular for each family to have its own vegetable garden.
-- Benjamin Roth, August 5, 1931.
The basic money identity
• PV=MQ
Whats the meaning of this queue
Toiling down the avenue?
If by fasting visions come
why not to a hungry bum?
Idle, shamed and underfed
waiting for his dole of bread.
What if he should find his head
a candle of the holy ghost?
A dim or starveling spark at most.
But yet a spark? It needs but one.
A spark can creep, a spark can run;
suddenly a spark can wink
and send us down destructions brink.
It needs but one to make a star,
or light a Russian samovar.
One to start a funeral pyre,
one to cleanse the world by fire.
What if our breadline should be
the long slow march of destiny?
- Florence Converse, “Bread Line,” The Atlantic
Monthly, Jan. 1932.
It is not the function of the government to relieve individuals of their
responsibilities to their neighbors, or to relieve private institutions of their
responsibilities to the public, or local government to the states, or of state
governments to the federal government… It is vital that the programs of the
government shall not compete with or replace any of them but shall add to their
initiative and their strength. It is vital that by the use of public resources and public
credit in emergency the nation shall be strengthened and not weakened… It is only
by this release of initiative, this insistence upon individual responsibility, that there
accrue the great sums of individual accomplishment which carry this nation
forward.
-- Herbert Hoover, August 1932.
Three theories of financial bubbles and crashes
•
•
•
Irrational: They happen because rising markets acquire their own nonsensical
momentum, as investors begin to assume that prices will go up only because they
have for so long, rather than because of market fundamentals. (Believers in this
theory often refer to the popping of these bubbles as “financial panics, while the
preceding bubbles are sometimes called “manias.”)
Rational: They happen because of novelty – a very important, economy-wide new
technological breakthrough, a country undergoing substantial economic reform, or
a country embracing globalization for the first time. This leads to a combination of
great potential overall and great uncertainty about the details, which may
generate these widespread bubbles and sudden crashes. It is a particular kind of
uncertainty that generates these events.
Monetary: Artificially easy money causes speculative pressure on such tangible
assets as stocks and real estate, and an overall artificial economic boom.
Excessively “long” investment from excessively low interest rates, which make it
cheap in terms of future wealth to acquire wealth today, is sometimes said to be
part of the problem. Either way, dubious investment projects are pursued because
investors mistake easier credit for greater availability of savings (the trading of
consumption now for consumption later), since both manifest themselves as lower
interest rates. This continues until investors discover that the demand for much of
the new investment is not there, and the bubble pops.
-20
2008 stock declines and degree of country
transparency
Austria
UK
-40
New Zealand
Switzerland
Canada
US
Japan Germany
Sweden
Australia
Taiwan SpainFrance
Israel
Singapore
Hong Kong
Malaysia
Korea
Brazil
Italy
-60
Indonesia
ArgentinaIndia
Netherlands
Egypt
China
Pakistan
-80
Russia
2
4
6
2008 TI clean-governance rating
2008 stock market decline (pct.)
8
Fitted values
10
So what caused the crash?
• According to the irrational theory, investors’
“animal spirits” shifted downward, after foolishly
sustaining the 1920s boom.
• According to the rational theory, the 1920s were
a period of tremendous technological ferment,
generating a classic potential/uncertainty bubble.
• According to the “Austrian” theory, the easy
money of the late 1920s created the conditions
for a crash.
“The economy of the 1920s underwent major structural
changes. New industries using new technologies became the
leading sectors, and the system of industrial finance was
totally changed. Confidence in prosperity based on these new
industries was not misplaced, but there was no past experience
to evaluate the profitability of emergent companies, such as
GM or RCA. Parallel to the unification of the railroads in the
19th century, utilities in the 1920s were combining to create
regional and national networks.”
- White, Eugene A. “Are There Any Lessons from
History?” In Crashes and Panics: The Lessons from History
(1990).
But what made the depression
“Great”?
• Banking collapse (Milton Friedman)
• The economy becomes “stuck” in a long-term
low-output equilibrium (John Maynard
Keynes)
• Both Hoover and Roosevelt increased
uncertainty dramatically through misguided
intervention. (To be taken up in Unit III.)
Source: Milton Friedman and Anna Schwartz, A Monetary History of the
United States (1963)
Keynesian economics:
• Is Newtonian and mechanistic. It suggests
straightforward answers for any kind of
economic slump.
• Ignores the role of prices, which govern
resource allocation among activities, which in
some sense is the whole point of economics.
• Suggested remedies that were tried to a
significant extent.
Two core assumptions of modern
economics:
• People are rational; in other words, they
respond to incentives so as to advance their
interests as they see them.
• Markets clear; at a prevailing price, excess
demand elicits more production at higher
prices, excess supply does the opposite.
• Say's law, or the law of markets, is an economic
proposition attributed to French businessman and
economist Jean-Baptiste Say (1767–1832), which states
that in a free market economy goods and services are
produced for exchange with other goods and services, and
in the process a precisely sufficient level of real income is
created in order to purchase the economy's entire output.
That is to say, the total supply of goods and services in a
purely free market economy will exactly equal the total
demand during any given time period – in modern terms,
"there will never be a general glut,"though there may be
local imbalances, with gluts in one market balanced by
shortages in others.
- Wikipedia definition of Say’s Law
• The Walrasian auctioneer is a notion from
economic theory through which prices are
adjusted to clear excess demand and supply in
each market.
Keynes’ theory of the Depression.
• Ordinarily economy is homeostatic. But in
unusual circumstances, it may be subject to
deviation-amplifying shocks that leave it in
persistent depression.
• Keynes is not crystal-clear on how such a thing
might happen. But he does argue that prices
fail, for a variety of reasons, to properly
coordinate activities across time.
• The interest rate is an intertemporal price, i.e.
a price reflecting the rate at which wealth in
different periods of time trades. A high
interest rate means that to get your hands on
wealth today you must give up a lot of future
wealth, and a low interest rate means the
opposite.
“Collective effort built this; the inference is inescapable;
but we sometimes attempt to avoid the logical further
inference that more collective effort is needed.
Sometimes we say that what we need is more individual
enterprise. No individual ever built a skyscraper.”
-- R. Rexford Tugwell, Thomas Munro and Roy Stryker, American Economic Life(texbook,
1925).
“Take Incomes from where they are and place them where we need them.”
- R. Rexford Tugwell, January 1933.
“Again I witnessed happenings today that will be long remembered in the history of
Youngstown and the state of Ohio. Without any warning this morning 69 banks in Ohio
including three in Youngstown restricted withdrawals to approximately 5% of deposits. All
day in the Union National Bank bedlam reigned with hundreds in line clamoring for
money. There was no violence but I saw one woman faint. The same thing was
happening in every other city of Ohio. The governor immediately called the state
Legislature together to pass a restrictive banking law.”
-- Benjamin Roth, February 27, 1933.
Initial wave of actions
•
•
•
•
Bank holiday
Pecora hearings/securities laws
The gold standard
Taxes and spending.
New taxes under the New Deal
•
•
•
•
•
•
•
•
Reinstatement of beer/wine taxes after Prohibition repealed.
Jan. 11, 1934 – doubling of liquor tax.
Higher gasoline and tobacco taxes.
National Industrial Recovery Act – 5% tax on corporate dividends,
5% tax on “excess profits” higher than 12% of stock value.
Agricultural Adjustment Act taxed food middlemen, and farmers
who violated production quotas.
Revenue Act of 1934 – higher income taxes.
Revenue Act of 1935 – higher estate taxes, specifically targeting
what FDR calls “the transmission from generation to generation of
vast fortunes.”
1936 – Progressive tax on investment, i.e. “undistributed profits.”
New public spending
• Civilian Conservation Corps, March 1933 – put
people to work doing outdoor jobs in national
parks and elsewhere.
• Federal Emergency Relief Act, May, 1933
• Public Works Administration, June 1933 – hired
people to build roads, schools, dams, warships.
Among its projects were Grand Coulee Dam,
Florida Keys causeway, Triborough Bridge in NYC.
• After 1934 election, Emergency Relief
Appropriations Act and Public Works Progress
Administration authorized.
‘Now, my friends, you have heard me read how a great New York newspaper, after investigations, declared
that all I have said about the bad distribution of this nation’s wealth is true. But we have been about our
work to correct this situation. That is why the Share Our Wealth societies are forming in every nook and
corner of America. They’re meeting tonight. Soon there will be Share Our Wealth societies for everyone to
meet. They have a great work to perform.
Here is what we stand for in a nutshell:
Number one, we propose that every family in America should at least own a homestead equal in value to
not less than one third the average family wealth. The average family wealth of America, at normal
values, is approximately $16,000. So our first proposition means that every family will have a home and
the comforts of a home up to a value of not less than around $5,000 or a little more than that.
Number two, we propose that no family shall own more than three hundred times the average family
wealth, which means that no family shall possess more than a wealth of approximately $5 million—none
to own less than $5,000, none to own more than $5 million. We think that’s too much to allow them to
own, but at least it’s extremely conservative.
Number three, we propose that every family shall have an income equal to at least one third of the
average family income in America. If all were allowed to work, there’d be an income of from $5,000 to
$10,000 per family. We propose that one third would be the minimum. We propose that no family will
have an earning of less than around $2,000 to $2,500 and that none will have more than three hundred
times the average less the ordinary income taxes, which means that a million dollars would be the limit on
the highest income.
We also propose to give the old-age pensions to the old people, not by taxing them or their children, but
by levying the taxes upon the excess fortunes to whittle them down, and on the excess incomes and
excess inheritances, so that the people who reach the age of sixty can be retired from the active labor of
life and given an opportunity to have surcease and ease for the balance of the life that they have on
earth.
We also propose the care for the veterans, including the cash payment of the soldiers' bonus. We likewise
propose that there should be an education for every youth in this land and that no youth would be
dependent upon the financial means of his parents in order to have a college education.“
- Huey Long, radio address, April 1935.
Two key assumptions behind the National Industrial
Recovery Act(and much of the first New Deal)
• Production enterprises, private or public, must
inevitably be big. Bigness can be a threat in
unregulated private hands, but can be an
opportunity if properly directed and
controlled.
• Competition is often a socially destructive
force, and cooperation is preferable.
Four key provisions of the National
Industrial Recovery Act
• The federal government was empowered to
regulate hours worked and wages;
• Authorization of closed shops if a majority of
workers voted for union representation;
• The federal government would facilitate and
oversee cartels of labor and management to fix
prices and wages in an effort to stop deflation
and what Roosevelt called “unfair competition
and disastrous overproduction”;
• Massive public works spending.
It [the NIRA] is so far-reaching, so
compelling, so thoughtful, that takes in
every economic factor. I am positive, if it can
be developed, that it will do for our
economic system in a very short time what
could never be done by the public works
scheme. It will make all of this unnecessary.”
-- Lewis Douglas, budget director,
President Roosevelt.
“Planning an economy in normal times is possible
only through the discipline of a police
state…Economic planning on a national scale in a
politically free society involves contradictions that
cannot be resolved in practice. The bones of the
Blue Eagle should be a grim reminder of this
reality.”
-Raymond Moley, FDR advisor and a primary
architect of the New Deal
What is the problem we wish to solve when we try to construct a rational economic
order?
On certain familiar assumptions the answer is simple enough. If we possess all the
relevant information, if we can start out from a given system of preferences and if we
command complete knowledge of available means, the problem which remains is purely
one of logic. That is, the answer to the question of what is the best use of the available
means is implicit in our assumptions. The conditions which the solution of this optimum
problem must satisfy have been fully worked out and can be stated best in mathematical
form: put at their briefest, they are that the marginal rates of substitution between any
two commodities or factors must be the same in all their different uses.
This, however, is emphatically not the economic problem which society faces. And the
economic calculus which we have developed to solve this logical problem, though an
important step toward the solution of the economic problem of society, does not yet
provide an answer to it. The reason for this is that the "data" from which the economic
calculus starts are never for the whole society "given" to a single mind which could work
out the implications, and can never be so given.
- Friedrich Hayek, “The Uses of Knowledge in Society,” American Economic
Review , Sept. 1945, p. 519.
“We must look at the price system as such a mechanism for communicating
information if we want to understand its real function-a function which, of course, it
fulfills less perfectly as prices grow more rigid. (Even when quoted prices have
become quite rigid, however, the forces which would operate through changes in
price still operate to a considerable extent through changes in the other terms of the
contract.) The most significant fact about this system is the economy of knowledge
with which it operates, or how little the individual participants need to know in order
to be able to take the right action. In abbreviated form, by a kind of symbol, only the
most essential information is passed on, and passed on only to those concerned. It is
more than a metaphor to describe the price system as a kind of machinery for
registering change, or a system of telecommunications which enables individual
producers to watch merely the movement of a few pointers, as an engineer might
watch the hands of a few dials, in order to adjust their activities to changes of which
they may never know more than is reflected in the price movement.” – “The Uses of
Knowledge,” pp. 526-7.
“Daily the problem of what to do about union labor or
even about a chance to work, confronts the Negro
workers of the country… Seeking to avail itself of the
powers granted under section 7A of the NRA, union
labor strategy seems to be to form a union in a given
plant, strike to obtain the right to bargain with
employees as the sole representative of labor, and then
to close the union to black workers, effectively cutting
them off from employment.”
- Crisis magazine, November 1934.
“The US agricultural program begins with the
slaughtering of millions of hogs so that pork production
will be curtailed and prices go up. Also 20% of all cotton,
wheat, etc. is being plowed under to prevent
overproduction. The US government pays the farmer for
his loss. I don’t see how the destruction of basic food
supplies can bring back prosperity when so many people
are hungry.”
- Benjamin Roth, August 21, 1933
“We had men burning oats when we were importing oats from
abroad on a huge scale, killing pigs while increasing our imports of
lard, cutting corn production and importing 30,000,000 bushels of
corn from abroad… [and] while [agriculture Sec.] Wallace was
paying out hundreds of millions to kill millions of hogs, burn oats,
plow under cotton, the Department of Agriculture issued a bulletin
telling the nation that the great problem of our time was our
failure to produce enough food to provide the people with a mere
subsistence diet. The Department made up four sample diets.
There was a liberal diet, a moderate diet, a minimum diet and
finally an emergency diet – below the minimum. And the figures
show that we did not produce enough food for our population for
a minimum diet, a mere subsistence.”
John T. Flynn, historian, The Roosevelt Myth (1948)
Rice: You are an expert?
Spatz (another poultry trader): I am experienced but not an expert.
Rice: You are not an expert on the effect of competitive conditions upon the prices of
live poultry?
Spatz: I am experienced –
Rice: Are you an expert…
Spatz: I am not an expert about anything.
…
Rice: You have not studied agricultural economics?
Spats: No sir.
Rice: Or any sort of economics?
Stats: No sir.
Rice: What is your education?
Spats: none. Very little. In my business I am the best economist.
Rice: What is that?
Spats: In my business I am the best economizer.
Some economic effects of the NIRA
• Strangling of competition in both labor and
output markets. This sometimes fed back into
other markets that used inputs (e.g., coal)
produced by cartelized industries. Standard
monopoly problem, exacerbated by the
chasing of monopoly rents it caused.
• Uncertainty regarding NIRA rules and the
prices they led to, which frustrates Hayek’s
information role for prices.
Source: Harold Cole and Lee Ohanian, New Deal Policies and the Persistence of
the Great Depression: A General Equilibrium Analysis, Journal of Political
Economy, August 2004. p. 788.
Four Great Depression wage shocks
• July 1933 – FDR orders 20% across-the-board
hike under NIRA authority.
• May 1934 - More increases ordered.
• Minimum wage law took effect in Nov. 1938.
• Minimum wage increased in Nov. 1939.
Wage shocks and industrial production
• Table 12.2: Four month (nonannualized!)
growth rates for industrial production
Before
After
July 1933 wage shock +57.4% -18.8%
May 1934 wage shock +11.9% -15.0%
Nov. 1938 wage shock +15.8% +2.5%
Nov. 1939 wage shock +16.0% -6.5%
Source: http://blogsandwikis.bentley.edu/themoneyillusion/?p=48
"Get the facts straight. The Act provides for two kinds of insurance for the worker. For
that insurance both the employer and worker pay premiums – just as you pay premiums
on any other insurance policy. Those premiums are collected in the form of taxes. The
first kind of insurance covers old age. Here the employer contributes one dollar in
premium for every dollar of premium contributed by the worker; but both dollars are
held by the government only for the benefit of the worker in his old age.”
- Franklin Delano Roosevelt, speech, Wilkes-Barre, Pennsylvania, October 29,
1936.
Mr. Benson: Your insurance company [Travelers] would not think for a split-second of passing on
to 1965 or 1980 a burden such as is contemplated here. In other words you watch your step day
in and month in and year in.
Mr. Williamson: An insurance company must maintain its reserves to meet its current liabilities.
Mr. Vinson: That is sound economic policy, is it not?
Mr. Williamson. That is right.
Mr. Vinson. You would not suggest that we pass the buck on to 1965 or 1980, or even think
about doing it, because there will be 22 Congresses between now and then that could upset the
apple cart.
Mr. Williamson. I think it should be well understood that that is exactly what is being done.
- WR Williamson, insurance company actuary, Travelers insurance Co., in testimony before
Congress, January, 1935.
‘Regulation to prevent recognized evils in business has long been upheld as permissible
legislative action. But fixation of the price at which "A" engaged in an ordinary business, may
sell in order to enable "B," a producer, to improve his condition has not been regarded as
within legislative power. This is not regulation, but management, control, dictation -- it
amounts to the deprivation [p555] of the fundamental right which one has to conduct his
own affairs honestly, and along customary lines. The argument advanced here would support
general prescription of prices for farm products, groceries, shoes, clothing, all the necessities
of modern civilization, as well as labor, when some legislature finds and declares such action
advisable, and for the public good. This Court has declared that a State may not, by
legislative fiat, convert a private business into a public utility. Michigan Comm'n v. Duke, 266
U.S. 570, 577. Frost Trucking Co. v. Railroad Comm'n, 271 U.S. 583, 592. Smith v. Cahoon, 283
U.S. 553, 563. And if it be now ruled that one dedicates his property to public use whenever
he embarks on an enterprise which the Legislature may think it desirable to bring under
control, this is but to declare that rights guaranteed by the Constitution exist only so long as
supposed public interest does not require their extinction. To adopt such a view, of course,
would put an end to liberty under the Constitution.”
Justice McReynolds, Nebbia v. New York, 291 US 502 (554).
“We put those payroll contributions there so
as to give the contributors a legal, moral, and
political right to collect their pensions… With
those taxes in place, no damn politician can
ever scrap my Social Security program.”
- Franklin Delano Roosevelt, cited by
Luther Gilick in “Memorandum on
Conference with FDR Concerning Social
Security Taxation, Summer, 1941,”
www.SocialSecurity.gov/history/Gulick.html
Jurisprudence before and during the
first New Deal
•
•
•
•
•
•
Adkins v. Children’s Hospital (1923) – in an opinion by Justice Sutherland, the Court, 5-3, overturns minimum-wage
law in Washington, DC as “price-fixing.” Rights are seen to be individual, not belong to groups.
New State Ice Co. v. Lieberman (1932) – Justice Sutherland again offered an opinion, leading to a 7-1 decision, that
overturned licensing requirement for ice vendors in Oklahoma as monopolistic.
Panama Refining Co. v. Ryan ( 1935) – Chief Justice Hughes, writing for an 8-1 majority, held that the NIRA
prohibitions on shipping oil across state lines in excess of NRA quotas was an unconstitutional delegation of
lawmaking authority
Schechter Poultry Corp. v. United States - Chief Justice Hughes wrote for a unanimous Court that the NIRA codes
were also in unconstitutional delegation, and that the president had no authority to regulate intrastate commerce,
which is what the Court held the Schechter brothers were engaged in.
Carter v. Carter Coal Co. (1936) – The Bituminous Coal Conservation Act impose a 15% tax on all coal produced,
but producers could get a 90% rebate by participating in an NIRA-style commission designed to set production
quotas, wages, hours etc. Justice Sutherland wrote the 5-4 opinion that indicated that, essentially, interstate
commerce means a person in one state selling a good directly to a person in another state, rather than somebody
producing a resource that eventually ends up, after being resold and processed, in another state. The tax on
coal was unconstitutional because it was clearly designed to punish those who refused to participate in the
commission rather than to raise revenue. The commission also led to the government promoting the interests of
those who participated, and using its power to penalize those who did not.
US v. Butler (1936) – Justice Roberts, writing for a 6-3 majority, overturned the Agricultural Adjustment Act, again
because the sole purpose of the tax on food middlemen was to punish those who didn’t participate in the AAA
quotas. Agriculture was not interstate commerce, regulating agriculture was not a power explicitly authorized for
the federal government by the Constitution, and invoking the “general welfare” clause of the preamble to the
Constitution to justify the regulation would mean the federal government, in essence, could regulate anything.
“The clause thought to authorize the legislation, the first, confers upon the Congress power 'to
lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common
Defence and general Welfare of the United States. ...' It is not contended that this provision
grants power to regulate agricultural production upon the theory that such legislation would
promote the general welfare. The government concedes that the phrase 'to provide for the
general welfare' qualifies the power 'to lay and collect taxes.' The view that the clause grants
power to provide for the general welfare, independently of the taxing power, has never been
authoritatively accepted. Mr. Justice Story points out that, if it were adopted, 'it is obvious that
under color of the generality of the words, to 'provide for the common defence and general
welfare', the government of the United States is, in reality, a government of general and
unlimited powers, notwithstanding the subsequent enumeration of specific powers.' The true
construction undoubtedly is that the only thing granted is the power to tax for the purpose of
providing funds for payment of the nation's debts and making provision for the general welfare.
.. From the accepted doctrine that the United States is a government of delegated powers, it
follows that those not expressly granted, or reasonably to be implied from such as are
conferred, are reserved to the states or to the people. To forestall any suggestion to the
contrary, the Tenth Amendment was adopted. The same proposition, otherwise stated, is that
powers not granted are prohibited. None to regulate agricultural production is given, and
therefore legislation by Congress for that purpose is forbidden. It is an established principle that
the attainment of a prohibited end may not be accomplished under the pretext of the exertion
of powers which are granted.“ - U.S. v. Butler, 297 U.S. 1 (1936)
Jurisprudence before and during the
first New Deal
•
•
•
•
•
•
Adkins v. Children’s Hospital (1923) – in an opinion by Justice Sutherland, the Court, 5-3, overturns minimum-wage
law in Washington, DC as “price-fixing.” Rights are seen to be individual, not belong to groups.
New State Ice Co. v. Lieberman (1932) – Justice Sutherland again offered an opinion, leading to a 7-1 decision, that
overturned licensing requirement for ice vendors in Oklahoma as monopolistic.
Panama Refining Co. v. Ryan ( 1935) – Chief Justice Hughes, writing for an 8-1 majority, held that the NIRA
prohibitions on shipping oil across state lines in excess of NRA quotas was an unconstitutional delegation of
lawmaking authority
Schechter Poultry Corp. v. United States - Chief Justice Hughes wrote for a unanimous Court that the NIRA codes
were also in unconstitutional delegation, and that the president had no authority to regulate intrastate commerce,
which is what the Court held the Schechter brothers were engaged in.
Carter v. Carter Coal Co. (1936) – The Bituminous Coal Conservation Act impose a 15% tax on all coal produced,
but producers could get a 90% rebate by participating in an NIRA-style commission designed to set production
quotas, wages, hours etc. Justice Sutherland wrote the 5-4 opinion that indicated that, essentially, interstate
commerce means a person in one state selling a good directly to a person in another state, rather than somebody
producing a resource that eventually ends up, after being resold and processed, in another state. The tax on
coal was unconstitutional because it was clearly designed to punish those who refused to participate in the
commission rather than to raise revenue. The commission also led to the government promoting the interests of
those who participated, and using its power to penalize those who did not.
US v. Butler (1936) – Justice Roberts, writing for a 6-3 majority, overturned the Agricultural Adjustment Act, again
because the sole purpose of the tax on food middlemen was to punish those who didn’t participate in the AAA
quotas. Agriculture was not interstate commerce, regulating agriculture was not a power explicitly authorized for
the federal government by the Constitution, and invoking the “general welfare” clause of the preamble to the
Constitution to justify the regulation would mean the federal government, in essence, could regulate anything.
“The clause thought to authorize the legislation, the first, confers upon the Congress power 'to
lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common
Defence and general Welfare of the United States. ...' It is not contended that this provision
grants power to regulate agricultural production upon the theory that such legislation would
promote the general welfare. The government concedes that the phrase 'to provide for the
general welfare' qualifies the power 'to lay and collect taxes.' The view that the clause grants
power to provide for the general welfare, independently of the taxing power, has never been
authoritatively accepted. Mr. Justice Story points out that, if it were adopted, 'it is obvious that
under color of the generality of the words, to 'provide for the common defence and general
welfare', the government of the United States is, in reality, a government of general and
unlimited powers, notwithstanding the subsequent enumeration of specific powers.' The true
construction undoubtedly is that the only thing granted is the power to tax for the purpose of
providing funds for payment of the nation's debts and making provision for the general welfare.
.. From the accepted doctrine that the United States is a government of delegated powers, it
follows that those not expressly granted, or reasonably to be implied from such as are
conferred, are reserved to the states or to the people. To forestall any suggestion to the
contrary, the Tenth Amendment was adopted. The same proposition, otherwise stated, is that
powers not granted are prohibited. None to regulate agricultural production is given, and
therefore legislation by Congress for that purpose is forbidden. It is an established principle that
the attainment of a prohibited end may not be accomplished under the pretext of the exertion
of powers which are granted.“ - U.S. v. Butler, 297 U.S. 1 (1936)
The retail merchants had a big Easter season. Yesterday
in Cleveland streets were crowded with people in new
clothes and I saw more gardenias than in many years.
Also the roads were filled with thousands of glittering
new automobiles. It is clear that at last after a long
depression that people are again spending money.
- Benjamin Roth, April 13, 1936
Nearly every banker I visit gives the numerous illustrations drawn from among the
customers of his own institution of business concerns which have abandoned expansion
plans because of the penalties and rigorous, as they see it, of the UP tax. Moreover, in
numerous instances I encounter the businessmen themselves. Let me cite briefly
examples.
(1) In New Orleans is a banker who has $30,000 to set up his business. He is completely
discouraged about starting them in business because if they lose money, they stand a
loss of 100%, and if they make money, they cannot build a business institution into a
constantly increasing unit by adding surplus without paying a penalty rate and they
cannot distribute to themselves as stockholders without paying a personal income tax
so high that it is a discouragement to their business initiative and interest in operating
a business at all.
(2) The president of a very substantial concern in Kansas City with branches in more than
a dozen states has had in contemplation the establishment of a selected number of
new branches – which would mean the employment of construction labor and the
permanent addition of employees to the payroll of his company. He has abandoned
all his plans for a new branches due almost entirely he says, and I think honestly, to
the UP tax.
- Interdepartmental memo, United States Department of the Treasury, October 9,
1937.
And so it was to win freedom from the tyranny of political autocracy that the American
Revolution was fought. That victory gave the business of governing into the hands of the average man, who
won the right with his neighbors to make and order his own destiny through his own government. Political
tyranny was wiped out at Philadelphia on July 4, 1776. Since that struggle, however, man's inventive genius
released new forces in our land which reordered the lives of our people. The age of machinery, of railroads;
of steam and electricity; the telegraph and the radio; mass production, mass distribution - all of these
combined to bring forward a new civilization and with it a new problem for those who sought to remain
free.
For out of this modern civilization economic royalists carved new dynasties. New kingdoms
were built upon concentration of control over material things. Through new uses of corporations, banks and
securities, new machinery of industry and agriculture, of labor and capital - all undreamed of by the Fathers
- the whole structure of modern life was impressed into this royal service.
There was no place among this royalty for our many thousands of small-businessmen and
merchants who sought to make a worthy use of the American system of initiative and profit. They were no
more free than the worker or the farmer. Even honest and progressive-minded men of wealth, aware of
their obligation to their generation, could never know just where they fitted into this dynastic scheme of
things.
It was natural and perhaps human that the privileged princes of these new economic dynasties,
thirsting for power, reached out for control over government itself. They created a new despotism and
wrapped it in the robes of legal sanction. In its service new mercenaries sought to regiment the people,
their labor, and their property. And as a result the average man once more confronts the problem that faced
the Minute Man.
- Franklin Roosevelt, acceptance speech for nomination for second term, Philadelphia, June 27,
1936.
The hours men and women worked, the wages they received, the conditions of their
labor - these had passed beyond the control of the people, and were imposed by this new
industrial dictatorship. The savings of the average family, the capital of the small-businessmen,
the investments set aside for old age - other people's money - these were tools which the new
economic royalty used to dig itself in.
Those who tilled the soil no longer reaped the rewards which were their right. The
small measure of their gains was decreed by men in distant cities.
Throughout the nation, opportunity was limited by monopoly. Individual initiative
was crushed in the cogs of a great machine. The field open for free business was more and more
restricted. Private enterprise, indeed, became too private. It became privileged enterprise, not
free enterprise.
An old English judge once said: "Necessitous men are not free men." Liberty requires
opportunity to make a living - a living decent according to the standard of the time, a living
which gives man not only enough to live by, but something to live for.
For too many of us the political equality we once had won was meaningless in the
face of economic inequality. A small group had concentrated into their own hands an almost
complete control over other people's property, other people's money, other people's labor other people's lives. For too many of us life was no longer free; liberty no longer real; men could
no longer follow the pursuit of happiness.
Against economic tyranny such as this, the American citizen could appeal only to the
organized power of government. The collapse of 1929 showed up the despotism for what it was.
The election of 1932 was the people's mandate to end it. Under that mandate it is being ended.
- FDR, second-term nomination acceptance speech
“Roosevelt! You’re my man!
When the times come
I ain’t got a cent
You buy my groceries
And pay my rent!”
- A young Richard Wright, at the first meeting of the
New York Writers Project (1935), reporting on the song
people were singing “where I come from.”
“After eight years of ‘pump priming’ and other trick
methods of bringing back prosperity, it is my
conclusion that none of them are any good. In our
capitalistic system we must let the forces of
competition and demand and supply work things out
in a natural way. No man or group of men is smart
enough to control prices or supply and demand or
currency in a nation so large as ours.”
- Benjamin Roth, March 1, 1938.
A brief history of strike injunctions
•
•
•
•
•
•
They are equitable relief, i.e. an order for an action (stopping a strike, e.g.) rather
than monetary damages.
Equitable relief began in 14th-century England, when law enforcement proved
inadequate to protect people from violence.
From 1880-1932, data on 524 state and federal injunction cases have been
collected. Most involved disputes among workers (although an employer was
often the plaintiff). Suits by employees against unions were not unknown (21/524
cases).
Biased courts seems unlikely as an explanation for the dominance of suits against
unions, given that unions themselves were often influential in legislatures.
The overwhelming majority of cases involved union violence – it was charged in
82.9% of the cases, and enjoined in 70.5% of the total. Not casual violence either
– destruction of property, assault, widespread property destruction.
Employers almost never tried to enjoin peaceful strikes, and almost all injunctions
banned only violence or threats of violence.
“"To his most honored and most gracious Lord, the Chancellor of England, showeth
your poor servant, William Lonesdale, of Scarborough, merchant, that whereas the
said William hath divers times by sea and by land, brought divers merchandise, to-wit,
herring, kippered and salted, and other fish and victuals from the port of Scarborough
in the County of York to the town of Yaxley in the County of Huntington, to sell them
there as well he might, to the great relief of all the country round the said town of
Yaxley; and because he sold his merchandise at a less price than other merchants of
the said town of Yaxley did there, Richard Suffyn, Thomas Clement and William Childe
of Yarwell, and many other evil-doers, of their covin, lay in wait with force and arms to
kill the said William Lonesdale, and they assaulted him, beat him and ill-treated him,
and left him there for dead, so that he despaired of his life; May it please your most
gracious Lordship to send for the said parties by writs of our Lord the King, to answer
in his Chancery, as well for the said misdeeds as for other thing which then shall be
alleged against them: For God and in way of charity.“ (10 Selden Society, Selected
Cases in Chancery No. 23)
“A few minutes after midnight two men by the names of Caldwell and Ball, workmen, were returning to the shops for the
night, where they were lodged and boarded. At the intersection of Cass and Twelfth streets, which was a block from the
gates to the shops, and a less distance from the company's tracks, was an electric light. Men could be easily identified. As
Caldwell and Ball approached the point named they saw five or six men. Most of them they recognized as strikers. Bail
believed there was to be trouble, but Caldwell thought not. The pickets stopped them, and asked them where they were
going. Caldwell said, "To the shops." Then Caldwell said, "I tell you, boys, we don't want any trouble. Now, I just come last
Thursday, and as soon as I get money enough I will go back to Chicago." Immediately Caldwell was struck in the jaw,
knocking him into the ditch. Bail started to assist Caldwell, when two men jumped on him. He got loose; and started to
run, and fell down, where, he was hit with a club. He finally got away, and threatened to shoot the assailants, but ran
away, and then he was stoned. After Caldwell was down; he was either struck or struck at with a club. Caldwell, got up,
walked inside the gates, and in a few minutes was dead; murdered. This. generally is the evidence of Bail. George, L.;
Perkins, a striker, testified that Bail and Caldwell were going to the shops. The pickets headed Bail and Caldwell off two or
three times as they would turn from one side of the street to the other.; He says Caldwell said: "It is just like this boys, we
come from New York, without knowing there was a strike, and our baggage is in' there, and I swear to God that we will go
in there and come out tomorrow and bring our "baggage put with us." Caldwell was begging for his life. He had been in
the shops, and was not from New York. He was, from Chicago. This witness says there were five of them, in addition to
Bail and Caldwell. Some of the evidence is to the effect that there were six. He says that this is ail that was said. Then
Caldwell was knocked into the ditch a foot and a half deep. The men present were as follows: George Perkins, a striker;
Henry Spellman, a striker; John Spellman, not a striker, but a son of Michael Spellman; R. Chadwick, a striker; John
McKenna, not a striker, but evidently a sympathizer. Bail says that Charles Pospisil, a striker, was present. This Pospisil
denied. It was John Spellman who knocked Caldwell into the ditch. Who struck Caldwell afterwards, the witnesses differ.
John Spellman at the time was working for an independent contracter, who had a contract for building for the railroad
company. But he was not in the employ of the company. He without doubt was in sympathy with his father, a striker, and
his fellows. Be all this as it may, Caldwell was murdered, and murdered because he wanted to work in a place vacated,
and murdered as a result of picketing. John Spellman is under arrest for the crime. “
- UNION PAO. B. 00. V. RUBF et al. (Circuit Court, D. Nebraska. November 8, 1902.)
The denial by some employers of the right of employees to organize and the refusal by some
employers to accept the procedure of collective bargaining lead to strikes and other forms of
industrial strife or unrest, which have the intent or the necessary effect of burdening or
obstructing commerce by
(a) impairing the efficiency, safety, or operation of the instrumentalities of commerce;
(b) occurring in the current of commerce;
(c) materially affecting, restraining, or controlling the flow of raw materials or manufactured or
processed goods from or into the channels of commerce, or the prices of such materials or
goods in commerce; or
(d) causing diminution of employment and wages in such volume as substantially to impair or
disrupt the market for goods flowing from or into the channels of commerce.
The inequality of bargaining power between employees who do not possess full freedom of
association or actual liberty of contract, and employers who are organized in the corporate or
other forms of ownership association substantially burdens and affects the flow of commerce,
and tends to aggravate recurrent business depressions, by depressing wage rates and the
purchasing power of wage earners in industry and by preventing the stabilization of competitive
wage rates and working conditions within and between industries.
- US Code 29.7.151, National Labor Relations Act
The National Labor Relations Act
(Wagner Act):
• Prohibited firing or refusing to hire union members;
• Banned the hiring of replacement workers during a
strike;
• Required a representation election be held if 30% of
the workers requested it;
• Gave powers to the National Labor Relations Board,
already established by executive order in 1934, which
had ruled that year that a company must negotiate
with only one union. The order also moved labor
disputes from the courts to the NLRB.
Cracks in the Wall
•
•
•
•
•
•
•
•
Wright v. Vinton Branch, 300 U. S. 440 (1937), upheld federal law that allowed courts to grant
extensions of up to three years after farmers defaulted on mortgages.
West Coast Hotel v. Parrish upheld a Washington state law that set a minimum wage for a 40 hour
work week. Explicitly overturned not just Sutherland’s Adkins decision from 1923, but the
Morehead case just one year prior. Van Devanter had retired and been replaced by Hugo Black,
part of the majority.
Virginia Railway Corp. v. Federation upheld Railway Labor Act, which mandated that the railroad
negotiate with a union.
National Labor Relations Board v. Jones & Laughlin Steel Corp. (1937) upheld the National Labor
Relations Board. The steel company admitted to firing 10 workers for union activity, and the Court
agreed that this “affected” interstate commerce, and Congress thus had the right to regulate it.
In Apex Hosiery Company v. Leader, Court held that the Sherman Antitrust Act did not apply to
unions, in this case even to workers who had occupied and vandalized the factory and assaulted
workers in the course of a strike designed to secure a closed shop. They so held even though the
act outlaws all “conspiracies in restraint of trade.”
In U.S. v. Carolene Products (1938), the Court distinguished between fundamental liberties in the
Bill of Rights and non-fundamental economic liberties historically inherent in the common law. A
federal law banning interstate shipment of any milk containing fats other than milk fat, whether
labeled or not, was upheld.
Carmichael v. Southern Coal and Coke Co. (1937) upheld Social Security.
(In 1960, in Flemming v. Nestor, Court would hold that Social Security implies no contractual rights.)
“The Constitution does not speak of freedom of
contract. It speaks of liberty and prohibits the
deprivation of liberty without due process of law.
In prohibiting that deprivation, the Constitution
does not recognize an absolute and uncontrollable
liberty.“
- Justice Hughes, West Coast Hotel Co. v.
Parrish, 300 U.S. 379, 391
“Even in the absence of such aids, the existence of facts supporting the legislative
judgment is to be presumed, for regulatory legislation affecting ordinary commercial
transactions is not to be pronounced unconstitutional unless, in the light of the facts
made known or generally assumed, it is of such a character as to preclude the
assumption that it rests upon some rational basis within the knowledge and
experience of the legislators. “
- United States v. Carolene Products Co., 304 U.S. 144 (1938), 152
Two approximately true things about
the interwar global economy
• The roaring 20s were primarily a US
phenomenon.
• The depression was considerably worse in the
US than in most other countries.
• Thus, a working hypothesis: the Depression
started in the US, spread to other countries,
and was made worse in the US by mistakes
that happened here and didn’t happen there.
Source: Barry Eichengreen, “The Origins and Nature of the Great Slump Revisited,”
Economic History Review 45 (2), May 1992, 213-239.
The Great Depression in Britain
•
•
•
•
•
•
During the 1920s, in only one year did unemployment fall below 10%.
Britain reentered the gold standard at the prewar level in 1925, despite having created substantial
amounts of money during the war. (US unemployment bottomed out at 2.9% in 1925.)
Its adherence to the gold standard meant that Britain was initially powerless to engage in
expansionary monetary policy, because then they would suffer a loss of reserves, a flight to the US.
However, it did not suffer a banking crisis to nearly the extent the US did, because its banks were
highly concentrated with many branches.
And the British left the gold standard very early, in September 1931. This was in part because a
political dispute over whether or not to spend a lot of money and cut wages prompted capital
flight. Leaving the gold standard under a new government coincided with a significant decline in
wages in the public sector and in government spending overall, a grand political bargain. Exiting the
gold standard was followed by a sharp decline in interest rates and by a significant depreciation of
the British currency, causing a modest revival in economic growth.
The depression was not uniform. It was much worse in northern England, where coal, shipbuilding
and steel were very important industries that lost market share after World War I to South African,
Australian, and Scandinavian producers. In some cities unemployment reached over 50%. Southern
England, home of such newer industries as cars and electrical goods, was considerably less
affected.
The Great Depression in France
• France expected heavy reparations from Germany after the war. After
1923 they were not forthcoming, as Germany defaulted. This caused fiscal
chaos throughout the decade, including a big tax hike in 1924.
• Like the US, France continued to adhere to the gold standard until very
late (1935). This caused interest rate pressures in other countries, who
had to defend their currency against gold outflows to the US and France.
• After the crash spread from the US, France adhered to a very orthodox
policy. They maintained a balanced budget to the extent they could,
allowed liquidation to proceed. When a new government allowed the
deficit to increase in 1934-1935, there was a speculative attack on the
French currency, putting a stop to that policy.
• But a leftist government came to power in 1936 and adopted a big
spending policy and, in response to a wave of strikes and factory
occupations, wage increases of 7 to 15% during a deflationary time.
The Great Depression in Japan
•
•
•
•
•
•
Japan had a very unstable economy, with several panics, from 1920 to 1931.
But it exited the Depression very early. Why?
While it had gone on to gold at prewar parity (like the British in 1925) in 1929, an
increasingly militaristic government (the Prime Minister had been shot in
November 1930) went off the gold standard in 1931.
The government also destroyed labor unions, and repressed wages.
The exit from the gold standard allowed the government to decrease interest rates
several times from 1931 to 1933. Exports increased substantially. Contrary to
conventional wisdom, newer research suggests that the increase in exports, and
not increased military spending, was the more important part of increased
demand. Import tariffs increased during this period, however.
By the mid-1930s there was increased production of chemicals and machinery,
partly at the behest of the military, but there was nothing like the NIRA. There was
no industrial planning until the invasion of China in 1937.
Period
Average annual
growth in gross
fixed capital
formation
Average annual
growth in gross
national
expenditure
1900-13
4.8
1.9
1913-19
8.4
6.2
1919-31
-.7
1.6
1931-37
8.3
6.2
1937-44
6.2
-1.3
Source: Cambridge History of Japan, Vol. 6: The Twentieth Century (1988), p. 452.
The Great Depression in Canada
• Canada did have a roaring 20s.
• Unlike the US, a major program of deficit spending began almost
immediately, after the 1930 election, and lasting until 1932. It had
almost no effect.
• Canada also did not suffer from bank failures, primarily because its
banks were allowed to open branches elsewhere, and therefore
tended to be much bigger and more diversified.
• But very heavy dependence on commodity production and linkage
to the US hurt Canada badly. By 1932, only the US had suffered a
bigger drop in industrial production than Canada.
• Canada also had significant labor unrest, which started much
sooner than that in the US.
The Great Depression in China
•
•
•
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•
China was a much poorer country, with a much less sophisticated economy. It would thus not be
subject necessarily to an uncertainty-driven crash like that of the US.
It also had a peculiar monetary system. The Chinese money was convertible into silver. The fact that
silver could be brought into and out of the country freely, and that people could use non-coined
silver as money, lent stability. During the warlord era between 1911 and the late 1920s, warlords
were basically prevented from debasing the currency because of this.
The absence of both the use of gold and of the rigid metallic standard prevailing in other countries
meant that there was little deflation between 1929 and 1931. There was in fact a stock boom in
1929 and 1930.
Silver was treated like a commodity globally, and as its price declined in the early part of the
depression China got a de facto currency devaluation.
But from 1931 to 1934 the economy began to fall after Britain and the US left the gold standard. In
1934, thanks to US demand for silver by the US Mint, silver began to exit China. There was fear of a
major devaluation.
The Depression thus arrived at last in earnest. There was a major stock panic in 1934-1935 in
Shanghai.
Lacking modern government institutions and money, the Chinese government confined itself to
providing liquidity to the financial system, encouraging Chinese companies to maintain their debt
payments, and providing marketing help and technology to silk, cotton and other companies.
Perhaps as a result, China hit bottom quickly after the stock panic, in June 1935 and the economy
grew until war broke out with Japan in 1937.
Things roughly suggested by the
international experience
• The gold standard transmitted economic
plague worldwide.
• The US had unique sins – FDR’s erratic
decision-making, the NIRA/NLRA in particular.
(The US also had a near-unique boom in the
1920s, perhaps explaining why it started
there.)
The fascist Great Depression
What Is Fascism?
• “A genus of political ideology whose mythic core in its
various permutations is a palingenetic form of populist
ultra-nationalism.” – Roger Griffin
• “A mass movement that combines different classes but is
prevalently of the middle classes, which sees itself as
having a mission of national regeneration, is in a state of
war with its adversaries and seeks a monopoly of power by
using terror, parliamentary tactics and compromise to
create a new regime, destroying democracy.”– Emilio
Gentile
• “At the end of the 20th century, fascism remains probably
the vaguest of the major political terms.” – Stanley G.
Payne.
• “Everything in the State, nothing outside the
State, nothing against the State.” – Benito
Mussolini
The true traits of fascism, based on its
historical record.
• Its belief that liberal democracy and bourgeois society have
been failures, destroying the spirit of the nation and
creating problems that the systems themselves cannot
solve, with class conflict primary among them.
• Its belief in collectivism, the idea that a society in which
people strive together collectively will always be better
than one in which individualistic chaos prevails.
• Belief in the ability of a charismatic leader, perhaps
bolstered by glorifying art and architecture, to will society
to a better future. The party too is often glorified.
• A glorification of the military, and the use of military
methods to solve problems.
“The state recognizes and safeguards individual
property rights so long as they are not being
exercised in a way which contravenes the
prevailing collective interest.”
- Silvio Longhi, fascist senator and
“procurator general”
“The sentiment of nationalism exists and
cannot be denied.”
- Benito Mussolini
Some elements of the program of the Fasci di
Combattimento, established on March 23, 1919
• “The abolition of the Senate and the creation of a
national technical Council on intellectual and manual
labor, industry, commerce and culture.”
• A minimum wage.
• The creation of government bodies run by workers’
representatives.
• Forcing landowners to cultivate their lands or else have
them seized and given to cooperatives of veterans and
farmers.
• The obligation of the state to properly educate “the
proletariat.”
• “A large progressive tax on capital.”
Excerpts from the 1920 Nazi platform
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•
•
•
•
•
•
The first obligation of every citizen must be to work both spiritually and physically. The activity of individuals is not
to counteract the interests of the universality, but must have its result within the framework of the whole for the
benefit of all.
We demand the nationalization of all (previous) associated industries (trusts).
We demand a division of profits of heavy industries.
We demand an expansion on a larger scale of old age welfare.
We demand the creation of a healthy middle class and its conservation, immediate communality of the great
warehouses and their being leased at low cost to small firms, the utmost consideration of all small firms in
contracts with the State, county or municipality.
We demand a land reform suitable to our needs, provision of a law for the free expropriation of land for the
purpose of public utility, abolition of taxes on land and prevention of all speculation in land.
We demand substitution of a German common law in place of the Roman Law serving a materialistic world-order.
The State is to care for the elevating national health by protecting the mother and child, by outlawing child-labor,
by the encouragement of physical fitness, by means of the legal establishment of a gymnastic and support
obligation, by the utmost support of all organizations concerned with the physical instruction of the young.
We demand freedom of religion for all religious denominations within the state so long as they do not endanger
its existence or oppose the moral sense of the Germanic race. The Party as such advocates the standpoint of a
positive Christianity without binding itself confessionally to any one denomination. It combats the Jewishmaterialistic spirit within and around us, and is convinced that a lasting recovery of our nation can only succeed
from within on the framework: common utility precedes individual utility.
Only a member of the race can be a citizen. A member of the race can only be one who is of German blood,
without consideration of creed. Consequently no Jew can be a member of the race.
“We have endeavored to depart from the external, the superficial, endeavored to forget
social origin, class, profession, fortune, education, capital and everything that separates
men, in order to reach that which binds them together.”
-- Adolf Hitler, undated, cited in David Schoenbaum Hitler’s Social Revolution: Class and
Status in Nazi Germany, 1933-1939 (1980), p. 62.
“We are socialists. We are enemies, deadly enemies, of today’s capitalist economic system
with its exploitation of the economically weak, its unfair wage system, its immoral way of
judging the worth of human beings in terms of their wealth and their money, instead of
their responsibility and their performance, and we are determined to destroy the system
whatever happens!”
- Gregor Strasser, Nazi ideologist, in Roger Griffin, ed. Fascism (1995), p. 123.
Theodore Roosevelt during the 1912
campaign
• “The effort at prohibiting all combination has substantially
failed. The way out lies, not in attempting to prevent such
combinations, but in completely controlling them in the
interest of the public welfare.”– Roosevelt himself.
• “The New Nationalism rightly maintains that every man
holds his property subject to the general right of the
community to regulate its use to whatever degree the
public welfare may require it.”– Roosevelt himself.
• The America “that Roosevelt dreamed of was always a sort
of swollen Prussia, truculent without and regimented
within…” a “Tammany Nietzsche” big on “the duty of the
citizen to the state, with the soft peddle upon the duty of
the state to the citizen.” – HL Mencken (1920)
“If any trait bubbles up in all one reads about
Wilson, it is this: he loved, craved, and in a sense
glorified power.”
- Historian Walter McDougall, Promised Land,
Crusader State: the American Encounter with the
World since 1776 (1997), page 128.
“The President is at liberty, both in law and in conscience, to be as big a man as he can. His
capacity will set the limit; and if Congress be overborne by him, it will be no fault of the
makers of the Constitution,…but only because the President has the public behind him and the
Congress has not.”
Woodrow Wilson, Constitutional Government in the United States (1908).
“Government is not a machine, but a living thing. It falls not under the theory of the universe,
but under the theory of organic life.”
Wilson, Congressional Government
“Governments does now whatever experience permits or the times demand.”
Wilson, The State
Only a very gross substance of concrete conception can make any impression upon the
minds of the masses. They must get their ideas very absolutely put, and are much readier
to receive a half truth which they can promptly understand than a whole truth which has
too many sides to be seen all at once. The competent leader of men cares little for the
internal niceties of other people’s characters; he cares much – everything – for the external
uses to which they may be put….He supplies the power; others supply only the material
upon which the power operates…It is the power which dictates, dominates; the materials
yield. Men are as clay in the hands of the consummate leader.”
- Wilson, Leaders of Men (1890)
“I am an advocate of peace, but there are some splendid
things that come to a nation through the discipline of
war.”
Wilson, 1912 (speaking of Spanish-American war)
World War I enabled:
• The War Industries Board to substantially reorganize private
industry, and nationalize railroads, set prices, enable
cartels, prioritize access to food and raw materials. Some
30,000 items were subject to its dictates.
• Conscription.
• Unprecedented propaganda, through the Committee on
Public Information
• Crackdown on dissent, through the Sedition Act, which
outlawed “uttering, printing, writing, or publishing any
disloyal, profane, scurrilous, or abusive language about the
United States government or the military”; the Espionage
Act, which targeted not espionage but draft protesters; the
American Protective League, a proto-secret police.
Under the War Industries Board, ”baby carriages were standardized; traveling salesmen
were limited to two trunks; and the length of uppers on shoes was cut down. It was such a
regimentation of the economy as had never before been known, and it later served as a
model for the New Deal.”
- Samuel Eliot Morrison et al., The Growth of the American Republic (1980), page
378.
“Here is your schedule for eating for the next four weeks which must be rigidly
observed, says SC Findley, County Food Administrator:
Monday: wheatless every meal.
Tuesday: meatless every meal.
Wednesday: wheatless every meal.
Thursday: breakfast, meatless; supper, wheatless.
Friday: breakfast, meatless; supper, wheatless.
Saturday: porkless every meal; meatless breakfast.
Sunday: meatless breakfast; wheatless supper.
Sugar must be used very sparingly at all times. Do not put sugar in your coffee unless
this is a long habit, and in that case use only one spoonful.”
“Woe be to the man or group of men that
seeks to stand in our way…It is in no sense
a conscription of the unwilling: it is, rather,
selection from a nation which has
volunteered in mass.”
- Wilson, 1917
“Have you met this Kaiserite?... You find him in hotel
lobbies, smoking compartments, clubs, offices, even
homes… He is a scandal-monger of the most dangerous
type. He repeats all the rumors, criticism, he hears about
our country’s part in the war. He’s very plausible… People
like that… through their vanity or curiosity or treason they
are helping German propagandists sow the seeds of
discontent.”
- CPI wartime propaganda poster (emphasis added).
The legacy of World War I
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Tax levels – federal taxes never more than $762 million before war; never les than $3.64 billon after.
(Public debt rose from less than $1 billion before war to $25 billion at its end.)
Tax base – a permanent shift from consumption taxes (including tariffs) to income, profit and estate
taxes as primary sources of federal revenue;
Rent controls by local governments;
Price supports for farmers;
Railroads were returned to private ownership, but the Interstate Commerce Commission controlled
their rates for decades. Railroads were subject to labor mediation by Railway Labor Board;
The War Finance Corporation was continued after the war. Instead of making loans to the war
effort, which was now unnecessary, it made loans to the big agriculture businesses and rural banks.
It finally ended under Coolidge in 1925, but was the inspiration for Hoover’s much more extensive
Reconstruction Finance Corporation;
Government management of the economy taught many more businessmen the value of working
with the government to engineer special contracts and restraints on competition. Businessmen
seemed to appreciate the order and ease of a government-managed economy rather than the
chaos of unfettered market competition;
Progressives became convinced of the virtues of government ownership of transportation,
electricity, communications, and price controls to prevent profiteering.
The mutual admiration between collectivists on both
sides of the Atlantic in the 1920s
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Mussolini appeared in a movie, The Eternal City, with Lionel Barrymore among others. Released in
1923, it favorably depicted the Fascist coming to power.
Journalists at mainstream publications wrote admiring profiles of Mussolini in places like McCall’s,
McClure’s, The New York Times and the New York Tribune.
Columbia University established Casa Italiana in 1926, which basically became a platform for
Fascism.
Will Rogers, of all people, described Mussolini, after meeting him, as “some wop,” and said “I am
pretty high on that bird.”
Lincoln Steffens, muckraking journalist who crusaded against corruption (most famously in 1906’s
The Shame of the Cities) went to the Soviet Union in 1925 and said “I have been over to the future,
and it works.”
He would soon begin referring to the “Russian-Italian method” of collectivist planning, and declared
that “God formed Mussolini out of the rib of Italy.” Western democracy, in contrast, was run by
“petty persons with petty purposes.”
Mussolini several times expressed admiration for the American pragmatist political theorist William
James.
In 1927 many progressives, including Tugwell and other future FDR advisors and numerous labor
leaders, made a largely admiring visit to Stalin’s USSR, with many of them even meeting Stalin and
Trostky in person.
The mutual admiration between collectivists on
both sides of the Atlantic in the 1930s
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In 1933, Columbia Pictures released a successful fawning documentary called “Mussolini speaks.”
The Cole Porter song “You’re the Top,” from Anything Goes, is altered by P.G. Wodehouse when it goes to London. “You're an
O'Neill drama, You're Whistler's mama” is changed to “You're Mussolini, You're Mrs. Sweeney.“ This is seen as unremarkable.
In 1934 an official Nazi newspaper depicts FDR as possessing “irreproachable, extremely responsible character and immovable
will,” and as a “warm-hearted leader of the people with a profound understanding of social needs.” The New Deal had properly
targeted “the uninhibited frenzy of market speculation” by adopting “National Socialist strains of though in his economic and
social policies.” Hitler sent a private letter to FDR that year congratulating him on his “heroic” efforts, which were “followed by
the entire German people with interest and admiration.” He told the US ambassador that a favorite Nazi slogan, “The Public
Weal Transcends the Interest of the Individual,” was very much in tune with FDR’s policies. He also told The New York Times (July
10, 1933), “I have sympathy with President Roosevelt because he marches straight toward his objectives over Congress, over
lobbies, over stubborn bureaucracies.”
In a review of the book by Roosevelt in the early 1930s, Mussolini praises Roosevelt for acknowledging that America’s economy
cannot “be left to its own devices,” and diagnoses the coming economic changes in America as “a sea change resembling that of
fascism.” In interview with the German writer Emil Ludwig, he says that “America itself is abandoning [liberal democracy].
Roosevelt is moving, acting, giving orders independently of the decisions or wishes of the Senate or Congress. There are no
longer intermediaries between him and the nation. There is no longer a parliament but an ‘état majeur.” There are no longer
parties but a single party. A sole will silences dissenting voices. This has nothing to do with any demo-liberal conception of
things.”
Tugwell, after visiting Italy, 1934: “I found Italy doing many of the things which seem to be necessary…Mussolini certainly has the
same people opposed to him as FDR has. But he has the press controlled so they cannot scream lies at him daily.”
A British diplomat, reporting on FDR, described a near cult of personality developing among Americans: “Every house I visited –
mill worker or unemployed – had a picture of the President…He is at once God and their intimate friend; he know them all by
name, knows their little town and mill, their little lives and problems. And though everything else fails, he is there, and will not
let them down.”
“I have never been able to escape altogether from its relentless logic. We have seen the
fascisti in Italy and a number of clumsy imitations elsewhere, and we have seen the Russian
communist party coming into existence to reinforce this idea. I am asking for a liberal
fascisti, for enlightened NAZIs. And do not let me leave you in the slightest doubt as to the
scope and ambition of what I am putting before you, these new organizations are not
merely organizations for the spread of defined opinions...the days of that sort of
amateurism are over --- They are organizations to replace the dilatory indecisiveness of
democracy. The world is sick of parliamentary politics...The fascist party, to the best of its
ability, is Italy now. The communist Party, to the best of its ability, is Russia. Obviously the
fascists of liberalism must carry out a parallel ambition on a still vaster scale...They must
begin as a disciplined sect, but they must end as the sustaining organization of a
reconstituted mankind.”
- H.G. Wells, 1932
“So why should Russians have all the fun of
remaking a world?”
Stuart Chase, A New Deal (1932), p. 252.
The fascist economics of the NIRA?
• It was clearly collectivist. But what kind?
• It brought labor and management, and the
management of many firms within a particular
industry, together to solve problems collectively,
through councils quite similar to those in Italy and
Germany. It was the government as warm, loving
father and provider of common ground (fascism) rather
than government as brutal liquidator and replacer of
the capitalists (communism).
• Reminiscent of Mussolini’s corporatism, NIRA codes
were designed to strengthen the big businesses that
wrote them.
“Fascist planning does not involve the introduction of force as a new principle, and
quantitative measurements of coercion and freedom are impossible. Any new scheme of
planning has to be pursued with the power of the state. It is essential to have these general
principles clearly understood, both by way of answering the liberal or conservative attack
on fascism as a phenomenon of coercion, in contradistinction from liberal capitalism, a
system of freedom, and by way of meeting the counter proposals of innumerable schools
of socialists and liberal reformers who would solve our social problems without involving
themselves with the problems of government and coercion…When planning enters the
realm of reality, it enters the realm of force and coercion. And this is seen in the cases of
millions who are forced to suffer privation and humiliation under liberal capitalism, as well
as in the cases of millions under the authoritarian systems who are forced to accept various
impositions of the state plan. The idea that one social plan gives freedom while another
imposes coercion is like the idea that the difference between a horse and a cow is that the
one has a head while the other has a tail.”
- Lawrence Dennis, The Coming American Fascism, 1936.
Hugh Johnson’s, and the NIRA’s, eccentric
authoritarianism.
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Constant use of warlike metaphors – “This is war – lethal and more menacing than any other crisis
in our history”; “It is women in homes – and not soldiers in uniform – who will this time save our
country. They will go over the top to as great a victory as the Argonne. It is zero hour for
housewives. Their battle cry is “Buy now under the blue Eagle!’”; “When every American housewife
understands that the Blue Eagle on everything that she permits to enter her home is a symbol of its
restoration to security, may God have mercy on the man or group of men who attempted to trifle
with this bird!” (FDR once stated that “In war, in the gloom of night attack, soldiers wear a bright
badge on their shoulders to be sure their comrades do not fire on comrades. On that principle
those who cooperate in this program must know each other at a glance.” Campaigned against
“slackers” and “chiselers.”
Organizing vast rallies – spoke to thousands at Madison Square Garden, organized a giant NRA Day
parade in Manhattan that was to that time the biggest in the city’s history (even bigger than the
one Charles Lindbergh got).it took 10 hours, included 250,000 people with military planes
overhead, perhaps 1 million people watching. Sympathetic Roosevelt historian Arthur Schlesinger
described it as “transforming a government agency into a religious experience.”
Tens of thousands of schoolchildren were brought to the Boston Common to take an oath,
administered by the mayor: “I promise as a good American citizen to do my part for the NRA. I will
buy only where the Blue Eagle flies.” In San Francisco, 8000 schoolchildren were organized into the
shape of a giant blue Eagle.
Johnson distributed a well known Fascist economics text – The Corporate State, by Raffaello
Viglione – to his staff.
The general use of the police power to attack people for charging particular prices, especially prices
that were too low.
The Civilian Conservation Corps
• 2.5 million young men were enlisted.
• They were told to report to army recruiting
stations; drilled and marched like soldiers;
reported to Army NCOs; had reveille and taps
at the beginning and end of the day.
Propaganda
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Rallies, parades, the “4 minute men,” all organized by government.
Federal Writers Project – sent thousands of writers around the country to
document American history, including through oral narratives from surviving
slaves, and to produce travel and culture guides.
Federal Theater Project – commissioned actors, directors, etc. to create and
produce plays all over the country.
Works Progress Administration – among many other tasks, commissioned
creations of public art, e.g. murals.
It was motivated in part by the belief that the art market – painting prices had
collapsed in the early 1930s – was just another failure of overproduction. By
soliciting art projects, the government could run the arts “industry” better than
the art market could. It also sought to “democratize” art and take it beyond the
museums. Propaganda, in other words, was not the only objective.
But it was one of them. Cultivating sympathy for social-democratic projects and
class consciousness was clearly visible in some of the writing and theater work.
Such work was not rare, particularly in theater.
The Communist movement in the US, small but not trivial, did actually endorse
participation in the projects.
The utopian New Deal
• The Tennessee Valley Authority – a gradually expanding
authority originally meant to provide power that private
utilities allegedly couldn’t, then the seizer of those same
utilities, and also a radical social experiment, with a
planned city called Norris, with a cooperative school, a
planned green design, a set of ethical rules for workers to
follow. Run initially by the collectivist enthusiasts David
Lilienthal and Arthur Morgan.
• Resettlement Administration – run by Rex Tugwell, it
bought land and settled displaced farmers there, providing
them with public housing, eventually often turning them
into wage farmers instead of plot owners. These were
collective farms in every meaningful sense; crops were
often grown in total instead of individually
“It’s alright, I guess. But the thing I can’t
figure out is how a man tells his own
chickens apart, running them all together
like they do there.”
- Unnamed farmer, to an economist
visiting the collective farm at Casa Grande,
Arizona
The New Deal depicted as anti-fascist
• During the soak-the-rich phase of the New Deal in
1937, when tax revenues were not what they were
expected to be, Treasury Secretary Henry Morgan
Morgenthau said, “The question is whether we are
going to have a Fascist government in this country or a
Government of the people, whether rich men are going
to be able to defy government and refuse to bear their
burdens.”
• Sinclair Lewis (who had written Babbitt in criticism of
the bourgeois 1920s) in 1935 wrote a novel (often
judged to be terrible now) called It Can’t Happen Here.
It suggested that America could easily turn fascist if
Roosevelt were rejected.
“Perhaps I can best illustrate the change that I am talking about by putting it this way-that we have been extending
to our national life the old principle of the local community, the principle that no individual, man, woman or child,
has a right to do things that hurt his neighbors….Many years ago we went even further in saying that the
Government - State Government or national Government - would have the right to impose increasing taxes on
increasing profits because of a simple principle that very large profits were made at the expense of neighbors and,
therefore, should at least to some extent be used through taxes for the benefit of the neighbors. Now the
extension of the idea of not hurting our neighbors is recognized today as no infringement on the guarantee of
personal liberty - personal liberty to the individual…I think it is within this understanding of the deeper purposes of
things today that the National Recovery Act we have heard so much about is proceeding, and that that Act is being
accepted by the people of the country with the understanding of what it is all about…Now, my friends, that is a
matter of dollars and cents. But it is also true that the people, through government, are insisting as a permanent
part of American life - not just for one year or two years - that individuals and associations of individuals shall
cease doing many things that have been hurting their neighbors in bygone days. We are engaged today, as you
know - not just the Government in Washington, but groups of citizens everywhere - in reviving all kinds of human
relationships, and in making these reviews we are asking an old question in a new form. We are saying, "Is this
practice, is this custom, something which is being done at the expense of the many?“ And the many are the
neighbors. In a national sense the many, the neighbors, are the people of the United States as a whole.
…
When I was Governor of the State for four years I used to do a good deal of talking about local government, and
just as long as I live, whether I am in Washington or Dutchess County, I am afraid I shall not be able to get over
the habit. I used to tell people that we have in this State more than 13,000 local units of government. You were all
interested; but I did not notice that you did anything about it. I used to tell people when I was Governor about the
fact that there were over 950 highway departments in the State of New York. You were interested, but I did not
notice that you did much about it. I talked to you about the six or eight different layers of government that you
lived under, Federal, State, county and town, electric-light district, sewer district and fire-department district, etc. even sidewalk districts and I don't know how many other kinds of districts - and about how you were paying taxes
in all of them. But we have not done much yet along that line. We have not done much to reorganize in our local
government what you and I know to be an outworn system built up in the days of the oxcart and unchanged in the
days of the automobile. Some day - because I have always been an optimist, I believe it will occur during our
lifetime - some day the people of the State of New York and the county of Dutchess will do something about it.”
Pres. Roosevelt, extemporaneous speech, 8/26/33, Vassar College
Because of the New Deal:
• Farmers, labor unions, the Chamber of Commerce and other
commercial special-interest groups become a permanent presence
in Washington.
• The “FDR coalition” becomes a longstanding force in American
politics.
• Americans develop the belief that unemployment is the single
biggest economic problem for the government to address. The
unemployment rate becomes synonymous with the quality of
economic policy.
• Many also develop the permanent belief that redistribution of
wealth from less (“economic royalists”) to more deserving people is
a proper function of government.
• Independent regulatory power becomes a permanent, arguably
extraconstitutional part of the US government.
“Looked at now, [the New Deal] makes a confusing picture. It was a hodgepodge
of good intentions, of bold promises and glittering hopes – a desire to produce
recovery, to create abundance while at the same time causing scarcity to get
prices up; to help labor, to help the little business man and to help the big
business men – all save a few who behaved badly to Mr. Roosevelt personally;
to spend as much as possible and to tax as little as possible; to boost prices but
not to diminish purchasing power; to raise wages and profits, too; to save the
farmer, to save the railroads, to save anybody who could be saved with a
subsidy; to make everybody happy and win everybody’s good opinion and, in
the process of doing this, to adopt any idea which was presented by anybody
with a friendly face and which seemed at a glance to have a chance to work.”
John T. Flynn, “Mr. Hopkins and Mr. Roosevelt,” Yale Review, June 1939.