CHAPTER NINE

WHY DID NEW DEALERS MAKE EVERYTHING COST MORE IN THE DEPRESSION?

THE NATIONAL INDUSTRIAL Recovery Act (NIRA) was FDR’s biggest bet, his best hope, the flagship of the New Deal.

This scheme for government-enforced cartels was inspired by big bureaucracies that controlled the economy during World War I. Herbert Hoover, Bernard Baruch, and many others had concluded that bureaucracies could work wonders in wartime, and they likened the Great Depression to a wartime emergency. In Europe, the trend was toward government-run economies, and many people in FDR’s administration especially admired Italian fascism. Time magazine even said, “Possibly Italy’s Benito Mussolini will be the Man of the Year when his new Corporative State begins to show results.”¹

In 1931, General Electric president Gerard Swope had begun promoting a similar scheme that won considerable support. Swope, biographer David Loth noted, was “a short, slender man, very quick in his movements, disconcertingly decisive in his speech. . . . Co-workers found him coldly impersonal, impatient and dead set on getting his own way. They said he always was in a hurry. ” ²

Swope’s idea was to have bureaucratic codes, drafted by trade associations, determine how much each company could produce and what the prices would be. The Swope Plan was debated in newspapers and magazines, even assigned to college students.³ But it went farther than Hoover was willing to go, and he dismissed it as “the most gigantic proposal of monopoly ever made in history.” Hoover accused the U.S. Chamber of Commerce, which embraced the Swope Plan, of “sheer fascism.”⁴ Swope refused to take no for an answer, and he continued to have a major impact on the debate about depression policy.

In its effort to do something about the depression, the U.S. Chamber of Commerce formed the Committee on Continuity of Business and Employment, headed by Chamber president Henry Harriman. This committee issued its report in October 1931, embracing Swope’s basic idea and rejecting free markets: “A freedom of action which might have been justified in the relatively simple life of the last century cannot be tolerated today, because the unwise action of one individual may adversely affect the lives of thousands. We have left the period of extreme individualism and are living in a period in which national economy must be recognized as a controlling factor.”⁵

The scheme that emerged from such thinking, the NIRA, was the work of the best brains FDR had assembled. Simon Rifkind, who drafted bills for New York senator Robert F. Wagner, played an important role, as did Leon Keyserling, a lawyer and economist who became an administrative assistant for Wagner. Jerome Frank, a former Chicago lawyer, helped with drafting. Assistant Secretary of Commerce John Dickinson developed ideas. Labor Secretary Frances Perkins was involved. Felix Frankfurter was consulted about the constitutionality of proposed legislation. New York banker James P. Warburg offered an assessment of some of the proposals. Louis Brandeis offered his suggestions. And, of course, FDR’s brain trust—Raymond Moley, Rexford Tugwell, and Adolf Berle—were in the thick of the discussions. ⁶

A number of different plans were proposed, each with its ardent advocate, and it wasn’t apparent how these would come together. Then on April 4, 1933, Alabama senator Hugo Black introduced a bill that would forbid Americans from working more than thirty hours per week. If employers wanted to maintain their current level of output, they would have to hire more people. The idea was to spread the work around, even though this would mean lower incomes for those employed. Labor union bosses backed this bill, but FDR was concerned that if Black’s bill became law, it might become difficult to get enough support for the more ambitious measures he thought were needed. So FDR asked Moley to somehow reconcile the plans and come up with a bill fast.

Moley turned to Hugh S. Johnson, a former cavalryman who was recommended to FDR by Bernard Baruch. “Ruggedly built, rough in demeanor, and skilled in picturesque and vituperative invective,” observed historian Ellis W. Hawley, “he projected an image of the tough-minded troubleshooter who could cut through the guff and get things done.”⁷

Born in Fort Scott, Kansas, in 1882, Johnson went to West Point and served in several U.S. military installations and in the Philippines. He dreamed of fighting in World War I, but he was confined to duty in Washington, D.C.⁸ He helped establish military conscription and mobilize millions of young men. Johnson was also the War Department’s representative on the War Industries Board. He was eager to apply his wartime experience to the Great Depression.

“There was an unused office in the old State, War, and Navy Building next to mine,” Moley recalled. “I dumped all the plans and correspondence on the desk and told Johnson that this ended my responsibility for industrial-recovery planning unless he wanted to consult me to iron out differences with Dickinson and Perkins. It was a hot day. Johnson took off his coat and tie and plunged into a job that was to make him, next to Roosevelt, the most talked-about member of the Administration during the year ahead. For that office was the birthplace of the National Industrial Recovery Act.” ⁹

Budget Director Lewis Douglas was so excited that he reportedly told FDR: “It is so far reaching, so compelling, so thoughtful, that it 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 this unnecessary.” ¹⁰ Many New Dealers shared his view.

FDR signed the NIRA into law on June 16, 1933. The NIRA authorized the Public Works Administration, discussed in chapter 7, and the National Recovery Administration (NRA), which would conduct the Swope-style industrial planning. Chamber of Commerce president Harriman hailed it as the “Magna Carta of industry and labor.”¹¹ Harriman told members of the Philadelphia Chamber that laissez-faire “must be replaced by a philosophy of planned national economy.”¹² The NIRA was to run for two years.

The man put in charge of the NRA was Hugh Johnson. Time magazine noted that his “scowl, his broad mouth and furrowed brow, his pithy epithets, the daily state of his health and temper, made acres of newspictures, miles of news copy every 24 hours.”¹³ Historian Kenneth S. Davis observed, “‘Old Iron Pants,’ as General Johnson was sometimes called, looked the part he played. . . . His gruff, bearlike charm; the torrential energy and prodding local officials into swifter action; the sense of mingled toughness and harassed sensitivity conveyed by his continuously disheveled appearance (his clothes always looked as though they had been slept in); especially his genius for colorful invective...”¹⁴

Johnson’s number two man was Chicago lawyer Donald Richberg, a former partner with Harold Ickes, known for his hostility to business. He denounced “rugged individualism” and “traders, pawnbrokers and slave-drivers who have sought the mastery of the world for the witless purpose of squeezing more money out of more men.”¹⁵

Johnson, Richberg, and their cohorts occupied offices in the Department of Commerce Building where Herbert Hoover had once worked. Johnson described his quarters as “the worst-planned and least efficient modern office building in the world.”¹⁶ It was curious that Johnson didn’t wonder how the very same government, which he believed could save the world, couldn’t even get a building right.

The NRA sanctioned labor unions as monopoly bargaining agents in a workplace. Section 7(a) provided “the right to bargain collectively through representatives of their own choosing without interference, coercion or restraint on the part of the employer.” “Collective bargaining” meant that if a majority of workers in a company wanted to be represented by a union, then 100 percent of workers must be represented by that union and pay union dues, whether they wished to or not. So 7(a) disregarded the right of individuals to bargain freely on their own.

The NRA pressured labor unions not to strike, but historian Frank Freidel reported that “From the beginning of the NRA, strikes were one of its by-products, as workers sought to attain its specified wages and hours, or began to organize under 7-a. Newspapers gave them large headlines, and middle-class readers, seldom favorable to organized labor, shuddered.” ¹⁷

The NRA empowered labor unions to draft codes requiring that industries pay above-market minimum wages. The theory here, embraced by FDR and his New Dealers as it had been embraced by Hoover, was that the depression was caused by falling wages, and if wages could be forced up, the depression would be cured.

THE “HIGH-WAGE” theory was very much in vogue, but many recognized the fallacies. From across the Atlantic Ocean, in Cambridge, England, economist John Maynard Keynes could see the scheme was thwarting prospects of recovery. In a letter to the New York Times, published December 31, 1933, he wrote: “I cannot detect any material aid to recovery in N.I.R.A., though its social gains have been large. The driving force which has been put behind the vast administrative task set by this Act has seemed to represent a wrong choice in the order of urgencies. The Act is on the Statute Book; a considerable amount has been done towards implementing it; but it might be better for the present to allow experience to accumulate before trying to force through all its details. That is my first reflection—that N.I.R.A., which is essentially Reform and probably impedes Recovery, has been put across too hastily, in the false guise of being part of the technique of Recovery.”¹⁸

Harvard University economics professor Edward Chamberlin wrote in 1934: “The most obvious error in the high wage theory is its tacit assumption that a high wage rate is identical with a high total volume of purchasing power in the hands of labor. . . . The total spending power of labor is the product of the average wage rate multiplied by the number of laborers employed. High wages accompanied by a large volume of unemployment mean a reduction rather than an increase in this total.” Chamberlin added, “There is no doubt that the tendency to substitute machinery for labor is strengthened by artificially high wages. . . . a rate of wages which is too high may work positive injury to the class it is supposed to benefit.”¹⁹

Blacks were major victims of the NRA. The labor codes were drawn up by craft unions that excluded blacks as members and did everything they could to promote the interests of white workers and to subvert the interests of blacks, who were seen as competition. Above-market wages effectively outlawed price competition in labor markets. Since large numbers of black workers were unskilled, they couldn’t compete on the basis of skills. Their best hope was to offer to work at a lower rate and get on-the-job experience, which would increase their skills and their ability to compete. “Because of the NRA, wages in the South’s largest industry, textiles, increased by almost 70 percent in five months,” reported law professor David E. Bernstein. “Employers responded to such massive wage increases by investing in mechanization and dismissing their unskilled workers.

. . . Southern industrialists called for the government to set a reduced minimum wage for African Americans to preserve their companies’ competitiveness and their workers’ jobs; with some merit, they accused northern industrialists of supporting a relatively high wage scale to retard the flight of low-wage industries to the South.” Some 500,000 black workers were estimated to have lost their jobs because of the NRA minimum wage law.²⁰

Moreover, by sanctioning compulsory unionism, the NRA labor codes effectively excluded blacks from many jobs. As the NAACP’s publication the Crisis reported in November 1934: “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 the employees as the sole representative of labor, and then to close the union to black workers, effectively cutting them off from employment.”²¹ Out of a reported 2.25 million union members in 1933, only about 2 percent were blacks. Despite their differences on other issues, Booker T. Washington, W. E. B. DuBois, and Marcus Garvey were all critical of compulsory unionism.

THE INDUSTRIAL PLANNING portions of the NRA got most of the attention. These mandated that companies cut output and maintain fixed prices. There were some warnings about what would happen. For instance, Harvard University economics professor Edward S. Mason wrote: “The provisions for limitation of output and the raising of prices, if effective, can result only in the further curtailment of our already seriously reduced national income. The power to administer these provisions has not yet been clearly allocated. It may well come to rest in the hands of the trade associations or some other representative of an exclusive business interest. In this case, the codes would serve as the foundation of a cartel type of organization exercising a monopolistic control over price and production.”²²

The first NRA code was developed for the cotton textile manufacturers, many of which were moving from high-cost New England to lower-cost locations in the South. New England labor unions pushed for government-mandated minimum wages that would partially wipe out the cost advantages of the South. The Cotton Textile Institute, dominated by New England firms, agreed to a minimum wage of $13 per forty-hour week in the North and $12 per week in the South; but since this meant increasing costs, they insisted that the NRA maintain minimum selling prices for their goods—in other words, outlaw price competition. In doing so, the NRA disregarded U.S. laws against price fixing.²³

Weeks passed before there were any more codes—probably in part because it dawned on FDR that raising prices would cancel out the effect of raising wages, and he exhorted businessmen to absorb higher labor costs without raising prices.²⁴

Hugh Johnson tried direct mail promotion to businesses. He drafted what was called the President’s Reemployment Agreement, which specified minimum wages between $12 and $15 for a work week up to forty-four hours. The mailing urged businessmen to sign it and become NRA “members.” He concocted a Blue Eagle insignia based on a Navajo thunderbird, together with the slogan “We do our part.” The idea was to have businesses display the Blue Eagle and intimidate dissidents into signing. For further intimidation, he urged consumers to sign pledges that they would buy only from businesses displaying a 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 attempt to trifle with this bird!” Millions of Blue Eagle posters were distributed throughout the country. Johnson touted the Blue Eagle in radio talks, rallies, and parades in a thousand cities and towns. The highlight was a parade of a quarter-million marchers down Fifth Avenue in Manhattan—watched by an estimated 2 million people.²⁵ But outraged at the Blue Eagle propaganda, Henry Ford reportedly said, “Hell, that Roosevelt buzzard! I wouldn’t put that on my car!”²⁶

Raymond Moley remarked that “Nothing like this, short of war, had been seen in any nation since Peter the Hermit and others incited the Crusades. It submerged all the other activities of the New Deal. Indeed, it almost became synonymous with the New Deal.” ²⁷

Many people were uncomfortable with these tactics. According to pro-FDR historian Kenneth S. Davis, critics cited “the disgust and cynicism that had colored the long-term popular reaction to the propaganda fervors of the Great War” and “pointed to unwholesome similarities between the Blue Eagle and the fasces of Mussolini’s Italy, the swastika of Hitler’s Germany.” FDR, however, backed Johnson, and in one of his fireside chats claimed that the NRA “gives us the means to conquer unemployment.”²⁸

Much as Gerard Swope had envisioned, each code was drafted by a corporation lawyer who worked for an existing trade association or an association specifically formed to help business owners protect their interests. Proposed codes were judged by an industrial advisory board that had the most influence, by a labor advisory board that had less, and by a consumer advisory board that had virtually no influence at all. Altogether, the NRA produced 550 codes, 200 supplementary regulations, and 11,000 administrative orders that affected 2.3 million employers and 16 million workers.²⁹ Moley observed that “The concept of recovery as distinguished from reform was forgotten, and the codes, hurriedly drawn, embodied restrictions upon and concessions by industries that had been the subject of debate for many years.” ³⁰

There were some 1,400 NRA compliance enforcers at fifty-four state and branch offices. They were empowered to recommend fines up to $500 and imprisonment up to six months for each violation.³¹ On December 11, 1933, for instance, the NRA launched its biggest crackdown, summoning about 150 dry cleaners to Washington for alleged discounting.³² In April 1934, forty-nine-year-old immigrant Jacob Maged of Jersey City, New Jersey, was jailed for three months and fined for charging 35 cents to press a suit, rather than the 40 cents mandated by the NRA dry cleaning code. Abraham Traube, the president of the Cleaners and Dyers Board of Trade, who had a hand in drafting the code, defended the get-tough policy on discounters by saying, “We think that this is the only way to enforce the NRA. If we did the same thing in New York City we would soon get the whole industry in line.”³³

It’s hard now to believe how tenaciously officials interfered with the minutiae of American business. There were NRA codes for artificial flowers and feathers, fabric, auto equipment, mattress covers, light sewing (except garments), breakfast furniture, retail drugs, retail farm equipment, retail solid fuels, rock crushers, truckers, retail lumber and building materials, undergarments and negligees, upholstery and decorative fabrics—NRA officials drafted codes that told these and other industries what to do, and FDR gave each of the codes the force of law by issuing them as executive orders. ³⁴

Journalist Henry Hazlitt reported in the December 1933 American Mercury, “The corset and brassiere industry, while permitting manufacturers or wholesalers to contribute up to 50 percent of the net cost of a retailer’s advertising space, prohibits them from paying any of the cost of advertising on ‘corsets, combinations, girdle-corsets, or step-in corsets which are advertised for retail sale at less than $2, or on brassieres which are advertised for retail sale at less than $1.’ ”³⁵

“The case becomes much more serious,” Hazlitt continued, “when it involves price fixing in a basic industry, for example, that of lumber. Under the code in this industry an agency is set up known as the Lumber Code Authority, Inc., to administer the agreement and to undertake the task of controlling (i.e. restricting) production, and the task of ‘cost protection.’ The latter, of course, simply means the fixing of prices. The Authority, it is to be observed, is not permitted to fix maximum but only minimum prices. It must not allow such prices to fall below ‘the cost of production.’ . . . It can fix a very substantial minimum price. . . . The home-owner whose house is going to cost him considerably more than heretofore will be glad to notice that foreign buyers will not have to pay these high prices for American lumber: export sales are explicitly excluded from the minimum-price provisions. In other words, where American lumber interests have to meet foreign competition, they will consent to the indignity and the hardship and horrible injustice of selling below cost of production. Anyway, they can take it out of the American consumer.” ³⁶

Ironically, Title I of the NIRA, having to do with industrial codes, undermined Title II, which set up the Public Works Administration, by making construction materials more expensive. The government (PWA) bought materials needed for roads, dams, ships, and other projects from companies whose prices were higher than they would otherwise have been because of the government-enforced codes.³⁷ In terms of value for money, taxpayers were overcharged.

To the degree the NRA succeeded in raising consumer prices, it intensified the problems of the poor. Eleanor Roosevelt admitted, for instance, that people in Minnesota had difficulty obtaining coal to heat their homes “because of freight rates and a rise in price attributed to the NRA—it now costs $4 a ton.”³⁸

Businesspeople, many of whom who had originally embraced the NRA, turned against it. Historian Robert M. Collins wrote, “Small businessmen complained bitterly that the competitive edge often enjoyed by smaller firms would be destroyed by NRA compulsion to accept unionization and pay higher wages while being barred from meaningful price competition. . . . durable goods producers found that the codes merely resulted in higher prices for materials without any corresponding advantages. . . . the NRA’s labor provisions antagonized businessmen of every stripe. . . . The resulting burst of labor activism caused more work stoppages in 1933 than the nation had experienced in any year since 1921. In 1934 nearly one-seventh of the national work force was involved in industrial conflict.”³⁹

One of the most common complaints was that NRA codes stopped companies from expanding their output and hiring people. “Relatively new and rapidly recovering industries such as aircraft production and chemicals,” reported economist Michael A. Bernstein, “were opposed to NRA guidelines that hampered aggressive action by newcomers. Even within the iron and steel industry, a sector in which the large majority of producers favored NRA controls, smaller firms resisted and protested the efforts of the code authority to restrict capacity expansion, price competition, and marketing offensives.” Within the petroleum industry, Bernstein continued, “the large integrated producers favored NRA regulation, especially of output and pricing levels, in order to bolster profits. Smaller independent firms were implacably opposed to such restrictions. In their view, the opportunity to compete offered by depression circumstances could be exploited only by price offensives and marketing practices that were explicitly prohibited by NRA guidelines.” Similarly, Bernstein added, “A split developed between the textile firms in the North and those in the South. The latter were younger, leaner, more mechanized, producing for the faster-growing markets of the interwar period, and served by an unorganized labor force. The attempt by the Cotton Textile Institute, the industry’s trade association, to implement cooperative agreements to fight the depression was thwarted by the split that developed between the northern and southern mills.” ⁴⁰

ON MARCH 7, 1934, FDR responded to complaints by issuing Executive Order 6632 appointing the National Recovery Review Board.⁴¹ Headed by famed defense attorney Clarence Darrow, then seventy-seven, it was to investigate whether the NRA, having done so much to throttle competition, was promoting monopoly. A principal finding: “[In] virtually all the codes we have examined, one condition has been persistent . . . the code has offered an opportunity for the more powerful . . . interests to seize control of an industry or to augment and extend a control already obtained.”⁴²

Opponents of the NRA became more outspoken. Virginia’s Democratic senator Carter Glass protested the NRA code that applied to newspapers. He wrote Johnson, “I just want to tell you, General, that your blue buzzard will not fly from the mastheads of my two newspapers.” Johnson replied, “We will make an exception of your case. If your newspapers do not wish to display the Blue Eagle they will not be disturbed.” But this infuriated Glass: “I do not appreciate your willingness to make exceptions of my newspapers. If this act is constitutional, you have as much authority to enforce it against me as you have against any other person, but because it is not constitutional you have no right to enforce it against anyone. . . . because your job is to enforce the act, you have no authority to make exceptions. I want you to try and enforce it on me. I invite you to send your assistant [Donald Richberg]. But before you send him I want to tell you that when he comes he will be requested to leave, quietly. If he refuses to leave quietly, I will see to it, personally, that he is thrown out.”⁴³

The best-known opponent of the NRA was Henry Ford, who had initially been sympathetic to FDR. “We know that President Roosevelt wants to do the right and helpful thing,” Ford remarked. He remained discreetly silent as Hugh Johnson secured agreement from General Motors and Chrysler to draft a code for the automobile industry. Ford refused to sign it. Johnson claimed that Ford nonetheless “approves of everything done and being done by this administration,” a statement that Ford subsequently denied. When Johnson was asked what would happen to employers who refused to sign a code, he snapped, “They’ll get a sock in the nose!”⁴⁴

Because General Motors and Chrysler had signed the auto industry code, their dealers displayed Blue Eagle posters, stickers, and other propaganda materials. Johnson made clear that the government would purchase motor vehicles and anything else for that matter only from Blue Eagle businesses that had signed an NRA Code.

This led to some embarrassment when a Ford bid for 500 trucks, ordered by the Civilian Conservation Corps (CCC), was reportedly $169,000 less than the next lowest bid, from Dodge Brothers. The NRA policy meant suppressing low-cost suppliers like Ford and passing along excessive costs to taxpayers, who had enough of their own problems to worry about in the depression. Ironically, Dodge reportedly paid lower wages than Ford.⁴⁵ The CCC went with Ford, the low bidder.

Determined to suppress resistance to the NRA, FDR issued Executive Order 6646 on March 14, 1934. His language was considerably less charming than in his fireside chats on the radio: “No bid will be considered unless it includes or is accompanied by a certificate duly executed by the bidder stating that the bidder is complying with and will continue to comply with each approved code.”⁴⁶

Johnson urged the public not to buy from a refusenik like Ford. “I think the American people will crack down on him when the Blue Eagle is on the other cars,” Johnson said. Many newspapers joined the effort to intimidate Ford. The Cleveland Plain Dealer, for instance, editorialized, “In a fight between the eagle and the flivver, who wins? Our bet is on the eagle . . . because the bird of the air rather than the bird of the roads has the moral backing of the public.” The New York Daily News warned, “If Mr. Ford can tell it [the New Deal] to go to hell and get away with it, it won’t be long before some of the other big boys will do the same thing.”⁴⁷

Henry Ford still refused to sanction the NRA with his signature, and some Americans openly admired his courage. The New York Times reported that Ford “now has become the bright and shining knight of the motor capital, which watches with approval of some hopefulness his latest tilt with generally accepted standards in his defiance of the NRA.” Humorist Will Rogers remarked, “When you start jerking the Fords out from under the traveling public, you are monkeying with the very foundations of American life.”⁴⁸

Apparently the public was more concerned about the quality and price of their cars than they were about the NRA, because Ford car sales were up for the year, even though the company could no longer sell to the U.S. government or anybody else who accepted federal money. Ford “had maintained his independence, and he must have suspected that his defiance was not without advertising value,” reported Allan Nevins. “Every day brought him reminders of the unique position he had achieved. It was reflected in news stories. Long-standing Ford customers praised his cars. Men, women, and children told him their troubles, sent him poems of praise, and begged for aid in an immense variety of projects. The assumption that Henry Ford could meet any practical problem and even achieve the impossible was widespread and persistent.” When Ford was announcing his plans for the next year, which involved selling a million cars, he remarked that the country would be better off “if American industrialists would just forget these alphabet schemes [all the New Deal bureaucracies] and take hold of their industries and run them with good, sound, American business sense.”⁴⁹

DESPITE MOUNTING FAILURES and complaints about civil liberties violations, in 1934 FDR still had high hopes for the NRA, but he was increasingly concerned about Johnson being drunk in public and flaunting his mistress, Frances Robinson. Johnson wouldn’t leave gracefully, so in August, FDR fired him. Richberg took over the NRA.

In February 1935, FDR asked Congress that it be extended another two years, but both conservative businesspeople and “progressives” like Senator William Norris didn’t want any more of the NRA. The Senate supported a ten-month extension, which FDR considered unacceptable.⁵⁰

Opposition to the NRA grew stronger and stronger by the time the U.S. Supreme Court struck it down as unconstitutional on May 29, 1935. Economists at the Brookings Institution declared that “the NRA on the whole retarded recovery.”⁵¹ Raymond Moley was among the framers of the NRA who later acknowledged the error of his ways: “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.”⁵²