The true conservative seeks to protect the system of private property and free enterprise by correcting such injustices and inequalities as arise from it. . . . I am that kind of conservative because I am that kind of liberal.
—Franklin Delano Roosevelt, 19361
By eleven o’clock on Thursday, October 24, 1929, there was frantic selling in the New York stock market. “Black Tuesday” followed on October 29. The Dow Jones Industrial Average plunged by nearly 13 percent, as sell orders paralyzed the ticker tape system of Wall Street. The collapse of the stock market left individual stocks by mid-November at half of their earlier price.
The stock market declines in the fall of 1929 resulted from attempts by the Federal Reserve to prick a dangerous stock bubble by raising the discount rate (the interest rate at which banks borrow from the Fed) in a series of steps, from 3.5 to 4 percent in February to 6 percent in August. The last rate increase was followed by “Black Thursday.”
At first many assumed that the Depression was an ordinary cyclical recession. In May 1930, President Herbert Hoover said: “I am convinced we have now faced the worst.” But at the end of 1930, a wave of bank failures swept through the United States. In 1931–1932, more than five thousand American banks failed.
On May 11, 1931, the failure of Austria’s largest bank, Creditanstalt, triggered a wave of financial crisis throughout Germany and Central Europe. Many US banks had much of their capital in German securities and were affected by the rippling collapse of the German financial system. In order to provide Germany with temporary relief from the burden of reparations payments imposed on it by the victors of World War I, Hoover ordered a one-year moratorium on debts to the United States by America’s World War I allies. But this was too little and too late to prevent the German banking system from toppling, to the benefit of Adolf Hitler’s National Socialist Party.
By the time the stock market hit bottom in July 1932, the Dow had lost almost 90 percent of the value of its high point in September 1929. From 1929 to 1931, 15 percent of American banks went out of business. At the beginning of 1933, US employment in industrial production had dropped to half of its 1929 level. National income dropped from $83.3 billion to $40 billion between 1929 and 1932. By the time Hoover left office in March 1933, unemployment had increased to 24.9 percent. In the ultimate sign of the failure of American capitalism, 100,000 Americans applied for six thousand job openings in the Soviet Union.2
The Depression discredited the Republican Party, which had dominated American politics since the Civil War, and brought to power a new coalition of Democrats and progressive Republicans led by America’s only four-term president, Franklin Delano Roosevelt (the Constitution was amended, in 1951, after his death to limit presidents to two terms). Just as the Civil War and Reconstruction had been the Second American Revolution, so the New Deal and World War II were a Third American Revolution. In the course of a decade and a half, the New Deal modernized America’s political and economic institutions to better realize the potential prosperity made possible by the second industrial revolution based on electricity and the internal combustion engine. On the foundations laid by New Deal liberals from Roosevelt to Lyndon Johnson, the American middle class experienced its greatest expansion in numbers and growth in prosperity.
WHAT CAUSED THE GREAT DEPRESSION?
What caused the Great Depression? Following earlier recessions and depressions, there had been rapid recoveries. The persistence of the Depression has been blamed on both short-term policy mistakes and long-term structural weaknesses in the American and global economies.
The Depression is sometimes blamed on the passage of the Hawley-Smoot Tariff, which was signed into law by Hoover on June 17, 1930. In a televised debate about the North American Free Trade Agreement (NAFTA) in 1993 with the former independent presidential candidate Ross Perot, Vice President Al Gore displayed a photograph of Senator Reed Smoot and Representative Willis Hawley and blamed the Depression on the tariff that bore their names. According to Jude Wanniski, a proponent of conservative “supply-side economics” in the Carter and Reagan years: “The stock market Crash of 1929 and the Great Depression ensued because of the passage of the Smoot-Hawley Tariff Act of 1930.”3 Richard Cooper, who served as undersecretary of state in the Carter administration, wrote: “The seeds of the Second World War, both in the Far East and in Europe, were sown by Hoover’s signing of the Hawley-Smoot tariff.”4
The Hawley-Smoot Tariff became law in June 1930, with the support of farmers and labor but over the objections of financiers and 1,028 academic economists who signed a petition against it. The bill had been moving through Congress in the summer of 1929 before the crash of the stock market and it was not a response to the Depression, just as it was not a cause.
The tariff became the highest in American history only because duties were set in terms of dollars, not shares of a product’s price, so that when prices of imports collapsed during the Depression, the tariffs rose to levels that the bill’s drafters had not intended, to a peak rate of 59.14 percent on dutiable imports. Had prices remained at 1929 levels, the average tariff on dutiable imports would have been 41.6 percent, a level exceeded by US tariffs for 51 years out of 94 between 1821 and 1914.5
While there was some foreign retaliation against the tariff, this did not cause global trade to collapse. US exports were no more than 7 percent of GNP in 1929. Between 1929 and 1931, US exports fell by 1.5 percent of GNP, while US GNP declined by 15 percent.6 The volume of world trade shrank by two-thirds from the last quarter in 1929 to the first quarter in 1933. The global collapse in trade that came after the passage of the tariff was the result of a sudden, universal drop in demand, not of retaliation against American protectionism. A similar collapse in trade occurred in 2008–2009 at the beginning of the Great Recession, in the absence of tariff wars.
Economists from Milton Friedman on the right to Paul Krugman on the liberal left have dismissed the idea that the Hawley-Smoot Tariff caused or worsened the Depression.7 If the tariff had any effect on the US economy, it was probably a slightly positive one, by substituting domestic for foreign production.8 The demonization of the Hawley-Smoot Tariff persists as a cliché in American discourse because of the fear of American internationalists that the United States will revert to its pre-World War II isolationism and protectionism. In the same way that “Munich”—British prime minister Neville Chamberlain’s agreement with Hitler in 1938—was invoked by the American foreign policy elite as a symbol of appeasement, so “Hawley-Smoot” became a symbol of the protectionist economic strategy that the now-hegemonic United States repudiated following World War II.
Other explanations of the Depression are taken more seriously by scholars. In the 1960s, Milton Friedman argued that the Great Depression was purely the result of the failure of the Federal Reserve to loosen the money supply.9 Others emphasize the decision of the United States to remain on the gold standard after Britain and other countries had abandoned it, a decision that limited America’s flexibility in monetary policy. Yet other economists and historians have criticized explanations of the Depression in terms of mistakes by Federal Reserve or Treasury technocrats because those explanations neglect real factors such as the trade and income imbalances emphasized by many thinkers of the time.10
Theories that attributed the severity as well as the triggering cause to mistakes by government policymakers gained in appeal among academic economists after the revival in the late twentieth century of free-market conservatism. By putting the blame for the prolongation of the Great Depression entirely on mistakes by technocratic policymakers, these theories implied that there had been nothing wrong with the structure of American capitalism in 1929.
That complacent late-twentieth-century consensus is more difficult to defend, however, following the crash of 2008 and the Great Recession that followed. The decades preceding both the Great Depression and the Great Recession were characterized by extreme global trade and currency imbalances—chronic American current account and capital account surpluses before 1929, chronic Chinese current account and capital account surpluses before 2008. And before each crash, there was a dramatic increase in income inequality, with many of the gains to the rich from their disproportionate share of growth being used to engage in speculation that inflated bubbles in stocks, real estate, and other assets.
In the years preceding the crash of 1929, a growing number of thinkers and reformers were concerned about the implications of the maldistribution of income for the functioning of the new mass-production economy. Before John Maynard Keynes made the idea of government spending to maintain aggregate demand academically respectable, William Trufant Foster and Waddill Catchings, in a series of influential books in the 1920s, popularized the idea of using relief or public works programs to get purchasing power into the hands of consumers.11 Edward Filene, the founder of the Century Foundation and Filene’s department store, with its Automatic Bargain Basement (later Filene’s Basement), argued that the translation of business profits into stock speculation rather than consumption by workers damaged the economy: “At a time when more buying was the need of the hour, [capitalists] were still calling upon the masses to refrain from buying goods, and to invest their savings in more production; and when industries languished from want of customers, they advised reducing wages, a process which must result in a further falling off of sales.”12
This analysis was shared by Marriner Eccles, the Utah banker whom Franklin Roosevelt appointed as chairman of the Federal Reserve, a post he held from 1934 to 1948. In his memoirs, Eccles argued that insufficient purchasing power by middle- and low-income Americans was the underlying cause of the Depression: “As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth—not of existing wealth, but of wealth as it is currently produced—to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929–30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. . . . Had there been a better distribution of income from the national product—in other words, had there been less savings by business and the higher-income groups and more income in the lower groups—we should have had far greater stability in our economy. Had the $6 billion, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.”13
Employee compensation as a percentage of net income in manufacturing was 77.6 percent in 1923 and 75.3 percent in 1929; as a share of the economy in general, employee compensation was 77.9 percent in 1923 and 72 percent in 1929.14 Because the employee share of compensation did not dramatically decline in the 1920s, some have dismissed theories based on underconsumption and maldistribution. But those theories rested on the claim that, from the beginning of the industrial era several generations earlier, the maldistribution of wealth had contributed to destabilizing cycles of boom and bust, which might have been moderated by greater consumption by the many and less saving and speculation by the few.
A historical event as cataclysmic as the Great Depression need not have had a single cause. An event or trend can trigger an economic collapse that is ultimately caused or prolonged by underlying structural defects of the economy.
“THE MOST GIGANTIC PROGRAM OF ECONOMIC DEFENSE AND COUNTERATTACK”
In his 1932 campaign for reelection, President Hoover declared that “we might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.”15 The journalist Walter Lippmann agreed: “The policy initiated by President Hoover in the autumn of 1929 was something utterly unprecedented in American history. The national government undertook to make the whole economic order operate prosperously. . . . [T]he Roosevelt measures are a continuous evolution of the Hoover measures.”16
Partisan Democratic propaganda convinced later generations that Hoover had been a believer in laissez-faire who did nothing while the economy crumbled. In fact, Hoover believed that government had a duty to intervene in economic downturns. In 1929, Hoover supported and Congress passed a stimulative tax cut, justified in Hoover’s view by an anticipated federal surplus.17 He supported reductions in interest rates by the Federal Reserve. In November 1930, Hoover sent state governors, including New York governor Franklin Roosevelt, a telegram with an exhortation to “energetic, yet prudent, pursuit of public works.” He called on federal agencies to expedite public work projects and sought an additional $423 million from Congress for the Federal Public Building Program.18 Under Hoover the Commerce Department created a Division of Public Construction that increased ship-construction subsidies and asked Congress for additional public-works appropriations.19
In April 1930, he signed a bill that provided $575 million for new roads and asked Congress for an additional $28 million for building bridges.20 Among the public works projects that were launched were the San Francisco Bay Bridge, the Los Angeles Aqueduct, Boulder Dam (later Hoover Dam), and the Grand Coulee Dam on the Columbia River, which the Roosevelt administration later completed. Hoover negotiated with Canada to create the Saint Lawrence Seaway, but construction did not begin until World War II as a war measure.
At the same time, he addressed the problems of mortgage debt and labor market conditions. Hoover called for reforming bankruptcy laws to prevent bankruptcies.21 In 1930, he sought to tighten the labor market by reducing immigration, accelerating deportation of “undesirable” aliens, and urging young people to leave the labor market for school.22
Nor did Hoover neglect the depressed farm sector. His panacea for the depressed agricultural sector was cooperative marketing associations. As president, he signed into law the Agricultural Marketing Act, which created the Federal Farm Board. The FFB sought to hold up prices by persuading cooperatives to keep wheat off the market—indirectly at first, by loans to the cooperatives, and then by buying surplus wheat directly, through the FFB’s National Grain Corporation, later the Grain Stabilization Corporation. The FFB undertook similar programs in the cotton, wool, livestock, dairy, and tobacco industries. These had the perverse effect of encouraging overproduction, and the Roosevelt administration combated price deflation with the opposite policy of encouraging the removal of land from production and the plowing under of crops and slaughtering of livestock.
When the Depression deepened in 1931 and 1932, Hoover departed even further from laissez-faire economic orthodoxy. In international policy, as noted earlier, Hoover declared a moratorium on debt repayments from Britain and France, which was intended to help Germany in its economic troubles. In October 1931, Hoover backed the creation of the National Credit Corporation, funded by banks to help other banks in distress. New York bankers agreed to contribute $500 million to the National Credit Corporation only if Hoover agreed to ask Congress to create something along the lines of the War Finance Corporation of World War I to recapitalize troubled banks.23 The first chairman of the new Reconstruction Finance Corporation (RFC) was Eugene Meyer, the former chairman of the Federal Reserve and a member of the War Industries Board during World War I. By the time that Roosevelt was inaugurated in March 1933, the RFC had issued more than $2.9 billion in loans. More than a billion went to banks, while agricultural credit corporations received nearly $500 million, with $453 million going to state and local governments and $360 million going to the railroads.24
Increasing liquidity, the objective of the establishment of the RFC, was also the purpose behind the creation of the Federal Home Loan Bank Act of July 1932. This created a system of twelve regional home-loan banks to help struggling homeowners and to revive the stricken housing industry by rediscounting home loans. The Hoover administration and Congress also expanded the Federal Farm Loan Bank System, which had been created in 1916.
This kind of large-scale state capitalism, which Hoover only reluctantly supported, marked a departure from his associationalist ideal of self-help by business and banking with moral support from government. What Hoover called the “new individualism” could go up to the edge of an invisible line that only he perceived; if it crossed the line, then in his opinion it became “socialism” or “fascism.” An example of this phenomenon was his reaction to the Swope Plan, a 1931 proposal by Gerard Swope of General Electric for a combination of government-enforced cartelization of industries with mandatory company-based employee-benefit programs like those of GE. The plan was modeled on the War Industries Board of World War I, when Swope had worked with the head of the WIB, Bernard Baruch. The Chamber of Commerce put forth a plan with a similar combination of antitrust revision under government supervision. The liberal writer Stuart Chase, who coined the term “new deal,” called for a Peace Industries Board modeled on the War Industries Board.25 But the addition of an element of compulsion made this version of associationalism intolerable to Hoover, who denounced the Swope plan as “the most gigantic proposal of monopoly ever made in history.”26
HERBERT HOOVER AND “THE BITTER-END LIQUIDATIONISTS”
A central part of Hoover’s program for combating the Depression was to persuade employers not to cut wages. To this end he held conferences with business leaders and barraged them with pleas to maintain wage rates. He boasted, “For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered. . . . They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest wages in the world.”27 The British economist John Maynard Keynes approved of the Hoover administration’s policy of defending wage rates.28
Then and later, the naive idea that a policy of allowing wages as well as prices to fall will cure a depression appealed to many who failed to understand that Depression was caused by a collapse of aggregate demand.29 A downward deflationary spiral would reduce wages and prices even further. As wages fell, demand would shrink, leading businesses to cut prices further, while cutting wages further. The reductio ad absurdum of this panacea is an economy in which everyone is employed, nobody is paid, and everything is free. In the real world, long before the cycle of wage and price cuts had gone very far, there would be riots in the streets or the government would be overthrown.
Hoover understood this. In his memoirs, he claimed that Treasury Secretary Andrew Mellon prescribed harsh medicine in November 1929: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”30 Whether Mellon actually said this or not is not clear. In public, Mellon repeated the administration’s philosophy in May 1931: “In this country, there has been a concerted effort on the part of both government and business not only to prevent any reduction in wages but to keep the maximum number of men employed, and thereby to increase consumption.”31
Hoover rejected the liquidationist school: “Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom. . . . We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.”32 In light of the tendency of free-market libertarians, at the time and during the Great Recession, to argue that deflation should be allowed to run its course in a depression, it is interesting to note that the influential libertarian economist Friedrich Hayek, in a 1979 interview, agreed that deflation must be stopped by government action: “I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression.”33
HOOVER’S POLICY MISTAKES
Hoover anticipated many of the policies of the Roosevelt administration, such as support for maintaining wages, and worked with Congress, sometimes reluctantly, to create some of the institutions that played a central role in the New Deal, such as the Reconstruction Finance Corporation. Hoover wrote that “after coming to the Presidency, almost the whole of Roosevelt’s credit supports were built upon our measures.”34 In 1948, the economist Henry Simons of the University of Chicago wrote: “The N.R.A. [National Recovery Adminsitration] is merely Mr. Hoover’s trust policy and wage policy writ large. The agricultural measures and many other planning proposals are the logical counterpoint and the natural extension of Republican protectionism.”35 Rexford Tugwell, a member of Roosevelt’s brain trust, later said: “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.”36
This does not mean, however, that the New Deal was merely a continuation of Hoover’s policies. Hoover was right to try to fight deflation, an effort that Roosevelt continued. But Hoover made several basic mistakes that Roosevelt corrected. His most important mistakes were supporting the gold standard and raising taxes dramatically in an ill-timed attempt to balance the budget in 1932.
The gold standard required a country’s central banks to raise interest rates, with contractionary effects on the economy, to prevent the outflow of gold, which served as the basis for the nation’s bank reserves. Following a run on the dollar in 1931, the Federal Reserve, instead of ignoring the gold standard and acting as a lender of last resort to failing banks, worsened the crisis by making credit scarce, in order to prevent an outflow of gold. Eventually, in the spring of 1932, the Fed injected a billion dollars of new money into the economy, after Congress had passed the first Glass-Steagall Act, which lowered the amount of gold the Fed needed to hold to back the dollar. While this helped, it was too little and too late. Only the abandonment of the gold standard by the Roosevelt administration in 1933 gave the government the freedom of action it needed. Britain, which abandoned the gold standard in 1931, suffered less than the United States during the Depression.
Another mistake was Hoover’s support for the Revenue Act of 1932, the most dramatic increase in taxes in peacetime in American history. In his December 1930 address to Congress, Hoover said: “Prosperity cannot be restored by raids upon the Public Treasury.” Hoover supported a mild stimulus in 1929 only because the federal budget was then in surplus. During a depression caused by a collapse of aggregate demand, premature attempts to balance government budgets only contract demand further, by raising taxes and cutting spending. In Hoover’s defense, it should be pointed out that Roosevelt denounced him during the 1932 campaign for doing too little to balance the budget. Although Roosevelt recognized the need to run deficits during his first few years in office, his fiscal conservatism led him to support a premature attempt to balance the budget in 1937, which tipped the United States back into recession.
HOOVERVILLE
Hoover’s greatest failure was not of policy, but of leadership. He had many of the virtues of a great leader but lacked the mysterious quality of charisma. Introverted and reserved, he was incapable of inspiring the American people at a time when hope was most needed.
Federal relief programs might not have cured the Depression, but they would have convinced citizens that the leaders in Washington cared about the millions of unemployed and suffering Americans. Early in the Depression, on February 3, 1930, after rebuking the request of the Conference of Governors for a billion-dollar federal appropriation, Hoover said: “I am willing to pledge myself that if the time should ever come that the voluntary agencies of the country, together with the local and state governments, are unable to find resources with which to prevent hunger and suffering in my country I will ask the aid of every resource of the Federal Government.”37 But even when roughly one in five Americans was unemployed, Hoover rejected more than minimal intervention in the economy by the federal government: “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.”38
Hoover continued to insist that relief was a matter for voluntary charities and state and local governments. Only reluctantly did Hoover choose not to wield the veto when Congress, which had been captured by the Democrats in 1930, passed the first federal relief legislation, the Emergency Relief and Construction Act, in July 1932. The act allowed the RFC to provide $300 million in loans to the states that could be used for relief. The act also provided for more public works spending and the creation of regional agricultural credit corporations to lend money to farm cooperatives.
Ironically, Hoover had become a celebrity for his role in administering relief in Belgium during World War I. This “volunteer effort” in fact derived four-fifths of its money from the governments of Britain and France, until the United States declared war in April 1917 and provided all the funding.
Hoover’s attempts to minimize the severity of the Depression were intended to boost business and consumer confidence, but they seemed callous. Homeless men called “hoboes” traveled on freight cars from place to place in search of work or charity. Hoover remarked: “The hoboes . . . are better fed than they have ever been. One hobo in New York got ten meals in one day.”39
Public contempt for the president was expressed in satire. Freight cars were renamed “Hoover Pullmans” and shantytowns for the homeless became “Hoovervilles,” while lesser game animals eaten reluctantly by the hungry, including armadillos and opposums, were “Hoover hogs.” A “Hoover purse” was an empty, turned-out pocket.
A parody of the Twenty-third Psalm was widely circulated:
Hoover is our shepherd
We are in want
He maketh us to lie
Down on the park benches
He leadeth us beside the still factories
He disturbeth our soul
He leadeth us in the path of destruction for his party’s sake
Yea, though we walk through the valley of depression
We anticipate no recovery for those who are with us
Thy politicians and diplomats frighten us
Thou preparest a reduction of our salary in the presence of our enemies
Our expenses runneth over
Surely poverty and unemployment will follow us
And we will dwell in mortgaged homes forever40
In the winter of 1931–1932, several marches took place in Washington, including more than a thousand national hunger marchers and another group of fifteen thousand led by Father James Cox. Democrats and progressive Republicans called for direct federal relief programs or greatly expanded public-works spending, only to meet Hoover’s opposition.
In the spring of 1932, when veterans of World War I called the “Bonus Army” marched on Washington to demand the payment of promised bonuses immediately instead of in 1945 or to their families upon their deaths, Hoover ordered the US Army under General Douglas MacArthur to destroy their camp near the Capitol. Although stories that soldiers had butchered infants and children were false, the nation was shocked by the use of bayonets and tear gas against the unemployed in the nation’s capital. In his memoirs, Hoover wrote: “As abundantly proved later on, the march was in considerable part organized and promoted by the Communists and included a large number of hoodlums and ex-convicts determined to raise a public disturbance.”41
THE NEW DEAL COALITION
By 1932, the American people were ready for a “new deal.” The New Deal was not primarily a movement of the Left. It was an alliance of several groups—international bankers and international businesses, workers in the industrial core, farmers, and local champions of economic development in the southern and western periphery.42 (A fifth interest group, the consumer movement, was vocal but not politically significant until the end of the New Deal era in the 1960s and 1970s.)
Each of these groups that coalesced in support of Franklin Roosevelt’s Democratic Party during the Depression had its own reason to oppose the Lincoln-to-Hoover Republican coalition that dominated the federal government between the Civil War and the Depression. The international bankers and multinational businessmen wanted the United States to move away from protectionism toward free trade. The industrial workers wanted to share more of the profits of American industry, by means of higher wages, benefits, and shorter hours. The farmers wanted to rig agricultural markets to reduce volatility and increase their incomes.
The local economic elites in the South and West, resenting the treatment of their states as resource colonies by northeastern bankers and absentee capitalists, wanted the federal government, acting as state capitalist, to guide credit and manufacturing industries to their parts of the country. Among the members of this faction were a number of powerful Texans who surrounded Roosevelt. His vice president, John Nance Garner, known as “Cactus Jack,” was a conservative who turned against him and was dropped from the vice presidential spot on the ticket in 1940 in favor of the more liberal Henry Wallace. Garner famously described the vice presidency as not “worth a pitcher of warm spit.” Roosevelt worked closely with Sam Rayburn, an East Texas populist who served as majority leader in the House from 1937 to 1941 and as the longest-serving Speaker of the House in history, 1941 to 1961, with interruptions during brief periods of Republican control in 1947–1949 and 1953–1955. Roosevelt and Rayburn promoted the career of a dynamic young Texan politician named Lyndon Johnson.
The most powerful Texan of all during the New Deal years was Jesse Jones. A rich banker, Jones had helped to make Houston a leading port city, investing in some of the city’s first skyscrapers. Having turned down Woodrow Wilson’s offer to be secretary of commerce, Jones agreed to direct the American Red Cross during World War I. From 1933 to 1945, he ran the Reconstruction Finance Corporation and, from 1940 to 1945, served as commerce secretary. Because of his position at the center of New Deal state capitalism, he was given the title “The Emperor Jones,” a reference to a play by Eugene O’Neill. Under Jones, the RFC, originally created during the Hoover years to recapitalize banks, funded both New Deal agencies such as the Works Progress Adminstration (WPA; renamed the Works Projects Administration in 1939) and industrial-mobilization projects during World War II.
The New Deal was a social revolution as well as an economic revolution. Just as it united the “outs” of economic policy, so it empowered ambitious Americans from ethnic groups or regions who were despised and marginalized by the elite white Anglo-Saxon Protestants (WASPs) of the Northeast and Midwest. By discrediting the old WASP oligarchy, the Depression made possible a more meritocratic society, even if racial integration had to wait until the civil rights revolution a generation later. Jewish Americans including Benjamin Cohen, Jerome Frank, and David Lilienthal, Irish Americans like FDR’s political fixer Tommy “the Cork” Corcoran and Joseph Kennedy, the father of the future president, businessmen from the future Sun Belt like George and Herman Brown of Texas—whose Brown and Root construction firm became Halliburton—the Italian American banker A. P. Giannini and the Mormon banker Marriner Eccles: all these outsiders broke into citadels of power from which people with their backgrounds had been excluded.
A diverse and discontented crowd was waiting in the wings of American politics. The failure of Herbert Hoover would give them their chance onstage.
A DISCIPLINED ATTACK UPON OUR COMMON PROBLEMS
In 1930, the Democrats captured the House. In 1932, they captured the Senate and the presidency.
“With this pledge taken,” Franklin Roosevelt vowed in his first inaugural address on March 4, 1933, “I assume unhesitatingly the leadership of this great army of our people dedicated to a disciplined attack upon our common problems.”43 On becoming president, Roosevelt broke with the policy of Hoover in a number of areas and took bold measures which, in the view of many historians, ended the downward spiral of deflation and set the US economy on the road to recovery.
In April 1933, Roosevelt invoked emergency powers to ban the private holding of gold and remove the United States from the gold standard. Immediately after his inauguration, on March 6, Roosevelt shut down the national banking system by proclaiming a federal bank holiday (earlier some states had declared similar holidays). On March 9, Congress passed the Emergency Banking Act, which allowed the Federal Reserve in effect to insure bank deposits. In his first fireside chat by radio on March 12, Roosevelt explained the system to the American people. When the banks opened again the next day, depositors who had been hoarding cash stood in line to return it. In the next two weeks, half of the hoarded cash in the country was deposited in the banks.44
The temporary insurance of bank deposits became permanent with the Glass-Steagall Act of 1933, which also reorganized the Federal Reserve, separated commercial and investment banking, and created deposit insurance by establishing the Federal Deposit Insurance Corporation (FDIC). An old Jeffersonian panacea favored by southern and western politicians that enabled small one-unit banks to hold smaller capital reserves, deposit-insurance schemes at the state level had failed, both before the Civil War and in the early twentieth century, with every recent effort collapsing in the 1920s.45
Roosevelt thought that deposit insurance was a crackpot idea. So did Senator Carter Glass, who lent his name to the Glass-Steagall Act and who preferred liberalized interstate branch banking along with higher reserve requirements and the government as lender of last resort. The provision for deposit insurance was not introduced until late in the bill’s evolution, on April 4, 1933, at the insistence of Glass’s counterpart in the House, Representative Henry B. Steagall of Alabama. In spite of Roosevelt’s misgivings, deposit insurance eliminated bank panics.
The inclusion of deposit insurance made it necessary to separate commercial banks, which would be insured by the government, from investment banks, which would not be. Brandeis and his allies had long supported the separation of commercial and investment banking, on the basis of their hostility to investment bankers like the late J. P. Morgan Sr. The Rockefeller interests supported the measure, which happened to cripple their rival, the House of Morgan, by forcing J. P. Morgan and Company to turn itself into two entities—a commercial bank that kept the name of J. P. Morgan and Co. and an investment bank, Morgan Stanley. The Democrats also exploited popular anger at bankers to pass the Securities Exchange Act of 1934.
Abandoning his campaign pledge to balance the budget, Roosevelt engaged in deficit spending. In the introduction to the first volume of his presidential papers, FDR wrote: “To balance our budget in 1933 or 1934 or 1935 would have been a crime against the American people. To do so we should have had to make a capital levy that would have been confiscatory, or we would have had to set our face against human suffering with callous indifference.”46 Deficit spending continued until 1937, when Roosevelt and Congress repeated Hoover’s mistake by prematurely trying to balance the budget, throwing the country back into recession.
While Hoover as president had vetoed federal relief programs, Roosevelt as governor of New York had presided over the first state relief program funded by bonds, the New York Temporary Emergency Relief Administration (TERA). Its head, the social worker Harry Hopkins, went on to lead the Federal Emergency Relief Administration (FERA) that was created in the spring of 1933. Roosevelt’s fiscal policy, though on a much larger scale than under Hoover, was still far short of what was needed. But taken together, his policies arrested and reversed the death spiral of the economy.
Whatever the merits of particular elements of the Roosevelt program, the result was dramatic: the decline of the American economy reversed around the time of Roosevelt’s “Hundred Days” of decisive activity. What followed between 1933 and 1937 was the most rapid peacetime growth in American history. Although his program fell short of what was needed to eliminate lingering unemployment, Roosevelt was far more successful than Hoover.
THE BLUE EAGLE
When Roosevelt was elected, there were a number of competing alternatives for a recovery program: massive public-works spending; wage-and-hours laws to increase purchasing power; increasing output through relaxation of antitrust laws; loans to industry or guarantees against losses; and even antitrust measures (some argued that monopoly had caused the Depression). Roosevelt was spurred to action when the Senate passed the Thirty-Hour Bill of Senator Hugo Black of Alabama, a law that sought to promote work sharing by mandating a thirty-hour workweek. Roosevelt thought that the Black bill was too radical, but rather than oppose it directly he preferred to sideline it by setting forth his own recovery plan.
What became the National Industrial Recovery Act (NIRA) was cobbled together from the efforts of two groups: one led by General Hugh Johnson, a veteran of the WIB, and supported by brain trust member Raymond Moley, budget director Lewis Douglas, and Donald Richberg. The other team included New York senator Robert Wagner, labor secretary Frances Perkins, undersecretary of commerce John Dickinson, and Jerome Frank.47 The NIRA drew on several alternatives to please several constituencies. It provided antitrust relief to industries, fostered minimum wages and hours to be determined by trade associations and labor representatives, and included a modest public works program in the form of the Public Works Administration (PWA).
Much nonsense has been written by conservative and libertarian critics of the New Deal about the alleged origins of the NIRA in Italian Fascism. When FDR pushed General Hugh Johnson, its first head, out of the leadership of the National Recovery Administration, the erratic general invoked the “shining name” of Benito Mussolini.48 Roosevelt, who despised Hitler, described the Italian dictator at one point as “that admirable Italian gentleman.” Mussolini’s invasion of Ethiopia and alliance with Nazi Germany embarrassed a number of people, including the composer and songwriter Cole Porter, who changed the lyrics to his song “You’re the Top!” to leave out the line “You’re the top! You’re Mussolini!”49
Among Mussolini’s earlier admirers was Winston Churchill, who praised “Fascismo’s triumphant struggle against the bestial appetites and passions of Leninism.”50 In his book Liberalism, published in 1927 after Mussolini had seized power in Italy, one of the heroes of modern libertarian critics of Roosevelt and the New Deal, Ludwig von Mises, wrote: “It cannot be denied that [Italian] Fascism and similar movements aimed at the establishment of dictatorships are full of the best intentions and that their intervention has for the moment saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history.”51
None of this is relevant, because the actual origins of the NIRA lay in the Wilson administration, not the Mussolini regime. The NIRA revived the WIB of World War I under a new name. The trade associations that were supposed to write industry-wide codes under government supervision were a version of the commodity sections and war-service committees of the WIB. The denial of the Blue Eagle emblem to uncooperative firms was merely a revival of the technique of shaming companies into compliance that had been used by the WIB during World War I. Hugh Johnson was the former deputy of Bernard Baruch at the WIB.
Roosevelt declared in his inaugural address: “It is high time to admit with courage that we are in the midst of an emergency at least equal to that of war.” He invoked World War I associationalism as the model for recovery on April 7, 1932, when he called “for plans like those of 1917 that build from the bottom up not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”52 Like the Reconstruction Finance Corporation (RFC), a reincarnation of the War Finance Corporation of World War I, and the Home Ownership Loan Corporation, the major programs of the New Deal were inspired by wartime agencies. Jesse Jones, whom Roosevelt appointed to head the RFC, was a veteran of the WIB, as was George Nelson Peek, who directed the agricultural equivalent of the NIRA, the Agricultural Adjustment Administration (AAA). The Securities and Exchange Commission (SEC) was based on the Capital Issues Committee during World War I.
In addition to the WIB, the precedents for the NRA included the Swope Plan of General Electric’s Gerard Swope. While Hoover had denounced the Swope Plan for government-sponsored cartelization, Roosevelt began consulting with Swope while he was still governor of New York. The trade associations that Hoover had sponsored as secretary of commerce were another inspiration. Rooseveltian “corporatism” was Hooverian associationalism with teeth.
One foreign precedent that influenced American New Dealers of the 1930s was the trade board or wages council, an institution that had been adopted in other English-speaking democracies a generation before the Depression. In 1896, the Australian state of Victoria established wage boards to set wages in industries with impoverished and exploited workers. By 1911, all the Australian states except for West Australia had adopted the system. Similar reforms were undertaken in New Zealand. Following a study of the Australian and New Zealand systems by the British Parliament, Winston Churchill, then a member of Parliament in the Liberal Party and the president of the Board of Trade, introduced the Trade Boards Act of 1909 that created boards made up of representatives of employers, workers, and the general public to set wages and standards in “sweated” professions employing chiefly poor women, such as lace making and box making. In the form of “wage councils,” the trade board system was expanded to cover other industries in Britain. Under Churchill’s law, the wage rates suggested by the tripartite boards became compulsory when approved by the president of the Board of Trade. The similarity to the NRA codes, which became compulsory when approved by the president of the United States, was pointed out in the Atlantic in February 1934 by the British political theorist Harold J. Laski, who observed: “In principle, they [the codes] are nothing more than the British system of trade boards against sweating in industry; and the wonder is that men can still be found to inspect their well-tried habits in a mood of panic.”53
In promoting the NIRA, Franklin Delano Roosevelt was following in the footsteps, not of Benito Mussolini, but of Woodrow Wilson, Bernard Baruch, Gerard Swope, Herbert Hoover, and Winston Churchill.
DID THE NIRA IMPEDE RECOVERY?
The NIRA offered industries a relaxation of antitrust policy in return for their agreement to provide minimum wages to workers. Roosevelt hoped that trade-association codes would eliminate businesses that relied on inadequate wages: “No business which depends for existence on paying less than living wages to its workers has any right to continue in this country.”54 Henry Harriman, head of the Chamber of Commerce, agreed: “We must take out of competition the right to cut wages to a point which will not sustain an American standard of living, and we must recognize that capital is entitled to a fair and reasonable return.”55
The claim that the NIRA retarded recovery by imposing minimum wages in different industries is not taken seriously, except by those whom Hoover derided as “die-hard liquidationists.” If labor unions cause unemployment, by raising the cost of labor, then the 1930s should have been prosperous, because unions were weak and included few workers, and the 1950s, when a third of the workforce was unionized, should have suffered from a depression.
John Maynard Keynes made a more subtle and persuasive argument against the NIRA. Roosevelt had expressed the hope that the NIRA codes, by raising aggregate demand, might promote short-term recovery in a July 24, 1933, radio broadcast: “If all employers in each competitive group agree to pay their workers the same wages—reasonable wages—and require the same hours—reasonable hours—then high wages and shorter hours will hurt no employer. Moreover [it] makes more buyers for his product.”56
Keynes politely demurred, in an open letter to the president in 1933, published in the New York Times: “You are engaged on a double task, Recovery and Reform;—recovery from the slump and the passage of those business and social reforms which are long overdue.” He warned that “even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action, before you have had time to put other motives in their place.” The NIRA, he suggested, was a distraction: “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.” Keynes wrote: “I do not mean to impugn the social justice and social expediency of the redistribution of incomes aimed at by N.I.R.A. and by the various schemes for agricultural restriction. The latter, in particular, I should strongly support in principle.”
The alternative favored by Keynes was deficit-financed public expenditure on a scale comparable to that of wartime: “But in a slump governmental Loan expenditure is the only sure means of securing quickly a rising output at rising prices. That is why a war has always caused intense industrial activity. In the past orthodox finance has regarded a war as the only legitimate excuse for creating employment by governmental expenditure. You, Mr President, having cast off such fetters, are free to engage in the interests of peace and prosperity the technique which hitherto has only been allowed to serve the purposes of war and destruction.” He suggested projects “which can be made to mature quickly on a large scale, as for example the rehabilitation of the physical condition of the railroads. . . . Could not the energy and enthusiasm, which launched the N.I.R.A. in its early days, be put behind a campaign for accelerating capital expenditures, as wisely chosen as the pressure of circumstances permits? You can at least feel sure that the country will be better enriched by such projects than by the involuntary idleness of millions.”57
While praising him in public, Keynes privately said that Roosevelt “had about as much idea of where he would land as a pre-war pilot.”58 In hindsight, Keynes was right that the NIRA was a measure of long-term reform that distracted the energy and attention of the Roosevelt administration and Congress from more urgent recovery measures. Roosevelt, though, had not been impressed with Keynes in his meetings with him and, until the late 1930s, he was not persuaded by the British economist’s argument for large-scale deficit spending during a depression. In his “forgotten man” speech in April 1932, candidate Roosevelt rejected proposals for massive government deficit spending: “People suggest that a huge expenditure of public funds by the Federal Government and by State and local governments will completely solve the unemployment problem. But it is clear that even if we could raise many billions of dollars and find definitely useful public works to spend these billions on, even all that money would not give employment to the seven million or ten million people who are out of work. Let us admit frankly that it would only be a stop-gap. A real economic cure must go to the killing of the bacteria in the system rather than to the treatment of external symptoms.”59
THE BLUE EAGLE FALLS TO EARTH
The NIRA did not last long enough to do much good or harm. Hugh Johnson’s erratic personality and flamboyant style made him a poor choice to head a controversial program. When he was appointed to head the NIRA agency, Johnson told friends: “It will be red fire at first and dead cats afterward. This is just like mounting the guillotine on the infinitesimal gamble that the axe won’t work.”60 The general described the NIRA as a “Holy Thing . . . The Greatest Social Advance Since Jesus Christ.” He removed “I” from the National Industrial Recovery Administration to make the acronym NRA, following a Business Week article that mocked NIRA as “Neera, My God To Thee.”61
On May 27, 1935, the Supreme Court ruled in the case of A. L. A. Schechter Poultry Corp. v. United States that the NIRA was unconstitutional on two grounds: Congress lacked the power to regulate intrastate commerce and had sought to delegate too much discretion to the president. The occasion for the ruling was a suit brought by the Schechter family poultry business in Brooklyn, New York, which had been accused of selling diseased meat. The NRA’s Blue Eagle, it was said, had been defeated by the “sick chicken.”62 In January 1936, the Supreme Court struck down the Agricultural Adjustment Act (AAA), the equivalent of the NIRA in agriculture; in 1938 Congress re-created it in a second bill that passed constitutional muster.
In May 1935, after the Supreme Court struck down the NIRA as unconstitutional, Justice Louis Brandeis told FDR’s aide Thomas Corcoran: “You go back and tell your President that this Court has told him it is not going to permit the centralization of power. . . . Furthermore, . . . I warn you to send back to the states all those bright young men you have brought to Washington. It is in the states where they are needed.”63 Roosevelt denounced the decision as a “horse and buggy” interpretation of federal economic power. The decision inspired Roosevelt’s unsuccessful and unpopular “court-packing” plan to enlarge the Supreme Court’s membership in order to dilute the influence of the reactionary justices.
Within a few years, the Schechter opinion was effectively reversed. Its attempted ban on delegations of congressional power to the executive was ignored by later courts, which tolerated significant grants of discretion to presidents and executive-branch agencies by Congress. And its prohibition of federal minimum wage laws in “intrastate” commerce was overruled in United States v. Darby (1941), which upheld the minimum wage created by the National Labor Relations Act of 1935. Far from saving America from statism, the Schechter decision was a last gasp of reactionary nineteenth-century Jeffersonian ideology in the federal judiciary.
In her anti–New Deal polemic The Forgotten Man, the conservative journalist Amity Shlaes tried to turn the case into a libertarian melodrama, portraying the Schechters as poor, struggling immigrants victimized by a tyrannical federal government.64 In reality, A. L. A. Schechter was not a struggling small business, but the largest of the firms in Brooklyn’s kosher slaughterhouse industry, making more than a million dollars a year, in part by using low wages to undercut its rivals. Nor were the Schechters victims of Gentile anti-Semites in the federal bureaucracy, as some conservatives have claimed. Orthodox rabbis helped to draft the NRA poultry code and the critics of the Schechters included groups that represented their rivals, including the Official Orthodox Slaughterers of America.
Notwithstanding their collision with the NRA, the Schechters, like most Jewish Americans in the 1930s, were ardent supporters of FDR. In 1936, a New York Times headline read: “ARCH-FOES OF NRA VOTE FOR NEW DEAL; ALL 16 BALLOTS IN THE SCHECHTER FAMILY WENT TO PRESIDENT, POULTRY MAN REVEALS.” The Times quoted Joe Schechter: “I wonder if it would be possible to congratulate President Roosevelt through the newspapers and tell him that sixteen votes in our family were cast in his favor.”65
FROM THE WRECKAGE OF THE NIRA
While many historians have distinguished a second New Deal from the first New Deal, this ignores the continuity between the NIRA and subsequent programs. Much of the New Deal’s lasting legacy consisted of pieces of the shattered NIRA, which were pried from the wreckage and re-created as separate programs. A number of the industry-wide code authorities of the NIRA, for example, were re-created in the form of commissions that oversaw regulated industries, from bituminous coal and oil to aviation and trucking. These will be discussed in chapter 13.
The collapse of the NIRA led the Roosevelt administration to seek the goals of union recognition, minimum wages, and social insurance directly, by means of government regulation and provision, rather than indirectly, by means of trade-association agreements. The Wagner Act of 1935, a free-standing equivalent of section 7(a) of the NIRA, gave unions the right to engage in collective bargaining. The Fair Labor Standards Act (FLSA) of 1938 created a national minimum wage and instituted the eight-hour day. Conservative Democrats in the South exempted the occupations in which most black Americans worked, such as agricultural work and domestic work, but they were gradually added later in successive revisions of the act.
The Wagner Act and the statutory minimum wage created by the FLSA in 1938 were poor substitutes for a more flexible and adaptable system that might have evolved over time in the United States, if the NIRA had survived. In Britain, Germany, and other European countries, statutory minimum wages for a long time were limited to a few sweatshop industries, like those supervised by Churchill’s trade boards. France was one of a few European democracies to adopt a national minimum wage from an early period, for the same reason that the United States did—the proportion of workers who belong to unions has always been much lower in France than in Central and Northern Europe.66
The weakness of unions in the United States is often blamed on the Taft-Hartley Act of 1947, which weakened the Wagner Act, or the failure to organize the American South, or hostile attitudes toward unions by courts and government agencies, beginning with the presidency of Ronald Reagan and his Republican successors. But in every other modern democracy where substantial portions of the private sector workforce are unionized, NIRA-style employers associations, called “peak associations,” bargain at the national or regional level with labor representatives. Most of the democratic countries with such tripartite government-business-labor sectoral wage-setting systems have seen their productivity increase at roughly the US rate over the last half century. There is, however, one difference—thanks in large part to higher levels of unionization, the distribution of income in those countries is far less unequal and there is greater upward economic and social mobility than in the United States.
“NO DAMN POLITICIAN CAN EVER SCRAP MY SOCIAL SECURITY PROGRAM”
The Social Security Act of 1935 created a comprehensive system of shared federal-state responsibility for unemployment insurance, means-tested welfare for the poor, and—in a radical break with tradition—a purely federal public pension for the elderly. Corporate opposition was muted because Social Security, a contributory program in which higher earners enjoyed higher benefits, was far more conservative than populist alternatives like the Townsend Plan, which would have given every retiree two hundred dollars on the condition that he or she spend it within the month. The first Social Security check, check number 00–000–001, was issued in the amount of $22.54 on January 31, 1940, to Ida May Fuller, a retired schoolteacher and legal secretary in Brattleboro, Vermont, who had gone to high school in Rutland, Vermont, with Calvin Coolidge.
Roosevelt insisted on paying for old-age pensions with a payroll tax, rather than general revenues or another dedicated tax, because that would destroy the “relief attitude.” He explained to his adviser Luther Gulick, who doubted that payroll taxes alone could sustain Social Security in the long run, “I guess you’re right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.”67
PRESIDENT ROOSEVELT WANTS YOU TO JOIN THE UNION
By the time of his second presidential race in 1936, Roosevelt, who believed he was saving American capitalism, was baffled and embittered by the hostility of most of the American business community to the New Deal. The rift between Roosevelt and business grew deeper as American labor grew more militant.
In 2006, a retired coal miner named Jack McReynolds told a reporter: “I have three pictures side by side in my house: John L. Lewis, Franklin Delano Roosevelt and Jesus. . . . I draw Social Security on account of FDR. I draw a pension on account of John L. Lewis, and I’m going to Heaven because of Jesus.”68
The members of this Trinity did not necessarily get along. Roosevelt, like other patrician progressives, was not a wholehearted champion of unions.69 Many of his allies shared the view of his secretary of labor, Frances Perkins, who said she would rather pass a law than organize a union.70 For his part, Lewis, the flamboyant president of the United Mine Workers, turned against Roosevelt because of the US entry into World War II and wartime labor policy.
But in the mid-1930s Lewis distributed signs that read: “President Roosevelt Wants You to Join the Union!” Across the country, prounion workers clashed with employers and their security forces. In 1935, there was the largest wave of strikes since the early 1920s, involving more than a million workers and more than two thousand work stoppages.71
At the American Federation of Labor (AFL) convention in Atlantic City in 1935, Lewis, frustrated with the organization’s commitment to craft unionism instead of industrial unionism, punched one of his opponents, William Hutcheson of the Carpenters Union. At a meeting in November in Washington, DC, Lewis, Sidney Hillman of the Amalgamated Clothing Workers, and David Dubinsky of the International Ladies’ Garment Workers Union formed a new organization, the Committee for Industrial Organization, which broke away from the AFL in 1938 to become the Congress of Industrial Organizations (CIO). The competition of the two federations, which would be reconciled and merge in 1955, accelerated the campaign for unionization.
Union organizers employed a new and powerful technique, the sit-down strike. Without giving any warning, employees who wanted to join a union stayed inside the factory or store and simply stopped working, to paralyze the business.
When they tie the can to a union man,
Sit down! Sit down!
When they give him the sack, they’ll take him back,
Sit down! Sit down!
When the speed-up comes, just twiddle your thumbs,
Sit down! Sit down!
When the boss won’t talk, don’t take a walk,
Sit down! Sit down!72
The climax of the struggle came in January 1937, when sit-down strikers took control of the General Motors plant at Flint, Michigan, as well as others in Cleveland, Atlanta, and elsewhere. Although GM chairman Alfred Sloan bitterly opposed negotiating with the union, behind-the-scenes pressure by President Roosevelt led GM president William Knudsen to recognize the United Auto Workers (UAW) on the forty-fourth day of the strike, February 11, 1937. US Steel signed a union contract with the Steel Workers Organizing Committee (SWOC) later that year, but several of the smaller firms called “Little Steel” held out until 1942. Only the urging of his wife Clara led Henry Ford, a bitter foe of organized labor, to allow Ford to be unionized in 1941.
FROM BRAINS TRUSTERS TO TRUST BUSTERS
In his first few years in office, Roosevelt had been influenced by his brains trust advisers Adolf Berle and Rexford Tugwell, whose vision of centralized government-business cooperation was closer to Theodore Roosevelt’s New Nationalism than to the decentralist New Freedom of Wilson and Brandeis. Following the collapse of his plan for a national unity program based on harmony among business, labor, and government, Franklin D. Roosevelt fell under the influence of the Brandeisian wing of the New Deal Democrats such as Thurman Arnold, Thomas Corcoran, Robert Jackson, and Benjamin Cardozo. Many of them were protégés not only of Brandeis but also of the influential Harvard law professor Felix Frankfurter, whom Roosevelt appointed to the Supreme Court in 1938. Their critics called the disciples of Frankfurter “the Happy Hot Dogs.”
Dismissing the Keynesian analysis that held that a lack of demand was the problem, they claimed that business was prolonging the crisis by hoarding cash. Their proposed cures for the Depression were a tax on retained earnings to force business to disgorge its savings and a vigorous application of antitrust policy.
Angry at the opposition of business leaders to the New Deal, the president lashed out at “economic royalists” in his 1936 speech to the Democratic National Convention. “The real truth of the matter is, as you and I know,” Roosevelt wrote Wilson’s former adviser Colonel Edward Mandell House, “that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson—and I am not wholly excepting the Administration of W.W. [Woodrow Wilson]. The country is going through a repetition of Jackson’s fight with the Bank of the United States—only on a far bigger and broader basis.”73 Repudiating his earlier support for business-government collaboration, he sided with liberal critics of monopoly. He welcomed exposés of industrial concentration by the Temporary National Economic Committee (TNEC), established by Congress in 1938.
The Brandeisian faction influenced FDR’s claim in a speech to Congress in 1938 that the cause of the recession that started in 1937 was not contractionary federal policy but monopoly: “Among us today a concentration of private power without equal in history is growing. This concentration is seriously impairing the economic effectiveness of private enterprise as a way of providing employment for labor and capital and as a way of assuring a more equitable distribution of income and earnings among the people of the Nation itself.”74
Roosevelt appointed Arnold to the Justice Department, where he began a vigorous series of antitrust prosecutions. In his five years at the Justice Department’s Antitrust Division, Arnold was responsible for half of the antitrust lawsuits filed since the Sherman Act was passed in 1890.75 Arnold was from Laramie, Wyoming, and his antitrust team at the Justice Department was dominated by other westerners—Tom Clark from Texas, later attorney general and a Supreme Court justice, Wendell Berge of Nebraska, and Corwin Edwards of Nevada.76 Arnold blamed eastern monopolies for the underdevelopment of his native West. In 1941, he wrote: “For the past twenty years the economy of the South and West has been developing along colonial lines. The industrial East has been the Mother Country. . . . The colonies have furnished the Mother Country with raw material. The Mother Country has been exploiting the colonies by selling them manufactured necessities at artificially controlled prices.”77
THE MISTAKE OF 1937 AND THE ROOSEVELT RECESSION
In 1937, repeating the mistake made by Hoover when he sought to balance the budget in 1932, President Roosevelt joined his treasury secretary, Henry Morgenthau, in supporting legislation in Congress to balance the budget by cutting spending and raising taxes. Roosevelt told Congress in his annual address on January 6, 1937: “Your task and mine is not ending with the end of the depression.” On April 2, Roosevelt said at a press conference: “I am concerned—we are all concerned—over the price rise in certain markets.” The next day the Wall Street Journal reported “a change in the trend of the government’s recovery measures away from the emphasis which has been placed upon stimulation of industrial activity and the recovery of prices.”78
Marriner Eccles, the chairman of the Federal Reserve, decided to double bank reserve requirements between August 1936 and May 1937. The contractionary effect of tighter fiscal and monetary policies was worsened by the Treasury’s program of sterilizing gold inflows (that is, preventing them from becoming part of the monetary base and expanding it).79 Finally, in 1936, Congress passed a large bonus for veterans, overriding the veto of President Roosevelt, as it had earlier, in 1930, overridden the veto of President Hoover. The first part of the veterans’ bonus was distributed in June 1936; then half that amount was distributed in June 1937, after which this form of stimulus ceased. The result of these measures was a second sharp recession, the Roosevelt Recession, that erased many of the gains of the previous Roosevelt Recovery.
In this troubled period of his presidency, Roosevelt came to believe that a group of powerful capitalists was deliberately sabotaging the economy—a belief that the role of the Du Ponts and other rich families in funding the anti–New Deal Liberty League made plausible. As labor organizers battled company police forces and local police at plants throughout the country, Alfred Sloan of General Motors and other leading executives resigned from the NRA’s Business Advisory Council (BAC) and joined the American Liberty League. Founded by major corporations, the Liberty League brought Republicans and conservative Democrats like Roosevelt’s former New York ally Al Smith together in a campaign to discredit the New Deal as “socialistic” and “fascistic.” Smith, in a 1936 address to the Liberty League, said, “It’s all right with me if they want to disguise themselves as . . . Karl Marx, or Lenin, or any of the rest of that bunch, but what I won’t stand for is allowing them to march under the banner of Jefferson, Jackson, or Cleveland!”
Roosevelt blamed the recession on a conspiracy by American capitalists, rather than on premature budget balancing. Then-chairman of the SEC William O. Douglas recounted his conversation with FDR during the “Roosevelt recession”:
“What about this market?” he asked.
“Markets are two-way streets,” I replied.
“But this one is going down as a result of a conspiracy.”
“Whose conspiracy?”
“Business and Wall Street against yours truly.”
“Mr. President,” I replied, “You are dead wrong. The market is going down because you cut spending.”80
In an attempt to win Roosevelt back from the Brandeisian trustbusters, Adolf Berle teamed up with Morgan partner Thomas Lamont to form a committee that included Owen Young, Rexford Tugwell, and Charles Taussig of the Roosevelt administration, John L. Lewis of the CIO, and Philip Murray of the steelworkers’ union. After the group met at the Century Association in New York, Lamont had an encouraging meeting with Roosevelt, but the Brandeisians killed the initiative by arranging for bad press about the meeting.81
Finally Roosevelt was persuaded by his allies to overcome his initial suspicion of the novel theories of the British economist John Maynard Keynes, who argued that large-scale spending by government was necessary to overcome deficiencies in aggregate demand. Keynesianism influenced the Works Financing Bill or “Spend-Lend” Bill. Introduced in 1939 by Senator Alben Barkley of Kentucky, the bill was backed by Federal Reserve chairman Eccles and shaped by his deputy Lauchlin Currie, who drew on a report by John Kenneth Galbraith and Griff Johnson.82 In his memoirs Currie wrote: “The real importance of the bill, however, was in giving the Government a permanent means, outside the budget [emphasis in original], of varying highly desirable expenditures to compensate for excessive variations in private expenditures—another built-in stabilizer. It is almost impossible to conduct proper compensatory policy in timing and volume through the regular routine of new legislation and appropriations.”83 But the conservative backlash against the New Deal was well under way and the Works Financing Bill was the first major spending bill backed by Roosevelt that went down to defeat.
THE SUCCESS AND FAILURE OF THE NEW DEAL
In the United States, the Depression consisted of two recessions—the first from 1929 to 1933, followed by a recovery and then a second recession in 1937–1938. The period from FDR’s inauguration in 1933 until 1937 was one of rapid recovery, in which the economy grew at 8 percent a year. Between 1938 and 1941, the economy grew at more than 10 percent a year.84
The four-year period between 1934 and 1937 saw economic growth at a rapid pace with no parallel in US history, outside of wartime. The 25 percent deflation from 1929 to 1933 was followed by 11 percent inflation from 1933 to 1937.85 When Americans employed in work-relief programs are included among the employed, unemployment plunged under the New Deal from 21 percent when FDR took office in 1933 to 9 percent in 1937. If work-relief program employees are counted as unemployed, the numbers are slightly higher but the dramatic improvement remains the same. The ill-advised attempt to balance the budget created the Roosevelt Recession, boosting unemployment to 13 percent.86 Even with the setback of the 1937–1938 recession, unemployment was down to 11.3 percent in 1939.
When the unprecedented speed of the recovery between 1933 and 1937 is considered along with the rapid decline in unemployment, it is impossible to argue that the New Deal made the Depression worse. On the contrary, even before the disastrous attempt in 1937 to balance the budget prematurely, the federal government in the 1930s spent too little to combat the Depression, not too much.
The title of the January 1937 Life two-page photo-spread told the story: “What President Roosevelt Did to the Map of the U.S. in Four Years with $6,500,000,000.” The map depicted the Los Angeles aqueduct and the Grand Coulee, Fort Peck, and Norris dams, the Triborough Bridge and Midtown Tunnel in New York City, a public school in Fort Worth, Texas, and Dinosaur Park and the spectacular Trans-Mountain Highway in Glacier National Park in northwestern Montana.87
The WPA alone between 1935 and 1943 was responsible for 572,000 miles of rural roads; 67,000 miles of urban streets; 31,000 miles of sidewalks; 122,000 bridges; 1,000 tunnels; 1,050 airports; 1,500 sewage treatment plants; 500 water treatment plants; 24,000 miles of sewers; 19,700 miles of water mains; 3,300 stadiums; 5,000 athletic fields; 12,800 playgrounds; 36,900 schools; 1,000 public libraries; 2,552 hospitals; 2,700 firehouses; 900 armories; 19,400 state and local government buildings; 416 fish hatcheries; and 7,000 miles of firebreaks.88 In his autobiography, An American Life, Ronald Reagan wrote: “The WPA was one of the most productive of FDR’s alphabet soup agencies because it put people to work building roads, bridges and other projects.”89 The National Youth Administration (NYA) provided assistance to four and a half million young Americans, ranging from work relief to work-study programs, benefiting poor black Americans in particular in spite of political concessions to white racism. The Civilian Conservation Corps (CCC) put unemployed men to work in conservationist projects like reforestation.
All of this, however, fell short of what was needed to provide a stimulus for the American economy commensurate with its problems. Federal credit programs like the RFC and federal employment programs like the WPA and CCC were helpful but inadequate. In a 1940 study for the government, Galbraith concluded that 13 to 15 percent of the total number of unemployed workers were employed by federal public-works programs, with another 18 to 21 percent engaged in work-relief construction jobs.90 Even worse, the federal government’s expansionary fiscal policies failed to offset the contractionary effects of state and local budget cuts and tax increases in all but two of the seven years beginning in 1933.91 The states responded to the revenue shortfalls caused by the Depression by raising sales and excise taxes, including gasoline taxes, and personal and corporate income taxes.92
In 1956 the economist E. Carey Brown concluded: “Fiscal policy, then, seems to have been an unsuccessful recovery device in the ’thirties—not because it didn’t work, but because it was not tried.”93
While the New Deal failed to pull the US economy completely out of the Depression before World War II, Roosevelt succeeded in rescuing American capitalism by reforming it. Although the New York patrician did his best to identify himself with Jefferson and Jackson, the heroes of the Democratic Party of his day, Franklin Roosevelt, like his cousin Theodore, arguably was a progressive nationalist in the tradition of Hamilton, Clay, and Lincoln. Roosevelt’s speechwriter Robert Sherwood suggested that the New Deal “was, in fact, as Roosevelt conceived it and conducted it, a revolution of the Right, rising up to fight its own defense.”94
Whether he was an enlightened conservative or a pragmatic liberal, Roosevelt excelled in evoking the hatred of the privileged and the admiration of ordinary Americans. During the Depression, a North Carolina farmer declared, in all sincerity, “I’m proud of our United States and every time I hear the ‘Star-Spangled Banner’ I feel a lump in my throat. There ain’t no other nation in the world that would have sense enough to think of WPA and all the other A’s.”95 “Dear President,” a furniture maker in Paris, Texas, wrote in 1936. “Know you are the one & only President that ever helped a Working Class of People.”96 A North Carolina millworker was more pungent in his praise: “Mr. Roosevelt is the only man we ever had in the White House who would understand that my boss is a son-of-a-bitch.”97
A more eloquent tribute came from Roosevelt’s most important protégé and successor, Lyndon Johnson. In October 1964 in South Gate, California, President Johnson, recalling FDR’s 1933 inaugural address, explained why Roosevelt’s leadership had been so important:
I remember the first President I ever saw, and the greatest President I ever knew. I saw him stand up one day in his braces, with pain in his legs, and anguish in his face, but vision in his head and hope in his eyes. I saw him talk to almost this many people, maybe more. It was a rainy, cold day in March 1933. The banks were popping in the country just like popcorn, just like firecrackers going off at Christmastime. They were closing.
The railroad men had come running down to Washington and the insurance companies and all these captains of finance, all these smart conservatives, and the roof had caved in. People were burning their corn. Cotton was selling for 5 cents. You couldn’t find a job and relief lines were longer than from here to that airport I landed at, and that is 15 miles away.
But this man stood up in that time when things weren’t near as good as they are today, with the braces on his legs, out of his wheelchair, and he grabbed that microphone, and he stuck his chin up, and his jaw out, and he said, “The only thing we have to fear is fear itself,” and he electrified a nation, and he saved a republic.98