The New Deal Was No Deal (part II)

Tudor Smirna · 28 ianuarie 2012

[This is part II of an article previously published in Procesos de Mercado, vol. VII, no. 2, autumn 2010. Read part I, part III, part IV.]

Unemployment and the make-work “cure”

Roosevelt begins his presidency in 1933 with 25% of the work-force unemployed, as a consequence of Hoover’s “laissez-faire” reaction to the 1929 crash. The recipe for reducing unemployment is closely related to the Keynesian idea of putting the necessary “purchasing power” in the hands of labor, that is, fiduciary money to increase real wages and thus to propagate the economic revival. Unemployment is surely a tragic situation for any unemployed person.

But instead of allowing people to enter into mutually advantageous exchanges with their private property and labor skills, that is, instead of letting the free market coordinate towards an economic recovery, Roosevelt chose further regimentation by having the federal, state and local agencies employ people with money coming mainly from the freshly gained inflation power of the Federal Reserve. In his inaugural address Roosevelt declared[1]:

Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources.

Let’s see what are the regulations issued for the planning of these problems. On March 31, 1933, Congress passes the Reforestation Relief Act, establishing the Civilian Conservation Corps (CCC). It provided work for young men in reforestation, road construction and developing national parks. Work camps began to spring up. Until 1941, three million people are reported to have worked on its projects. Historian Ralph Raico cites John A. Garraty to the effect that[2]:

Garraty was compelled to note the striking similarities between the CCC and parallel programs set up by the Nazis for German youth. Both

"were essentially designed to keep young men out of the labor market. Roosevelt described work camps as a means for getting youth ‘off the city street corners,’ Hitler as a way of keeping them from ‘rotting helplessly in the streets.’ In both countries much was made of the beneficial social results of mixing thousands of young people from different walks of life in the camps.... Furthermore, both were organized on semimilitary lines with the subsidiary purposes of improving the physical fitness of potential soldiers and stimulating public commitment to national service in an emergency".

On May 18, Tennessee Valley Authority (TVA) is created as part of the public works program, to construct dams and power plants. On May 12, 1933, Congress passes the Federal Emergency Relief Act, which authorizes immediate grants to states for relief projects. On June 6, 1933, the National Employment System Act is passed. On June 16, on the final of the Hundred Days, the Public Works Administration is created through the National Industrial Recovery Act (NIRA).

On August 5, Roosevelt establishes the National Labor Board introducing the “right” of collective bargaining in an attempt to boost union power and thus to raise wages. On November 8, 1933, the Civil Works Administration is created to give more work for the unemployed. On February 15, 1934, the brand new Civil Works Emergency Relief Administration is charged with the introduction of new programs.

On June 29, 1934, Roosevelt issues an executive order creating the National Labour Relations Board (NLRB). On April 8, 1935, the Emergency Relief Appropriation Act authorized almost 5 billion dollars for immediate relief and increased employment on projects such as the Works Progress Administration (WPA).

This act is renewed in June 1938. On July 5, 1935, F.D. Roosevelt signs the National Labor Relations Act (Wagner-Connery) and in June 1938, Wages and Hours Act is passed in order to limit the work-week and increase the minimum wage.

Agriculture: the cultivation of chaos

In 1933, the high tariffs stipulated by the Smoot-Hawley Act were depressing the internal agricultural market that was in great need of an international market. Instead of lowering the tariffs, Roosevelt thwarted all efforts for international cooperation by having Congress vote additional restrictions on imports (contained in the NIRA) just as Secretary Hull was participating at the London International Economic Conference.[3]

What followed was the high-frequency issuance of acts and creation of agencies aimed at internal planning and control of the agriculture.

It started with the Agricultural Adjustment Act[4] of May 12, 1933. It stipulated the restriction of production and acreage, processing taxes, public acquisitions and subsidies in order to reduce production and stocks of “surplus” crops and thus increase the prices of agricultural products.

Roosevelt is thus engaging in the continuation of the Hooverite “plowing-under” policy. At a time when millions of Americans were starving, Roosevelt’s counselors thought it was a brilliant idea to further impoverish the public by spending their money to increase the price of food, destroy crops already cultivated and turn mass-destroyed livestock into expensive fertilizer.

The Farm Credit Act of June 16, 1933 established the Farm Credit Administration to offer loans to farmers. It is continued through the Crop Loan Act from February 23, 1934. On April 21, 1934, the Jones-Connally Farm Relief Act is introduced for the extension of the Agricultural Adjustment Act, and on April 21, 1934 Congress passes the Cotton Control Act imposing quotas limiting the cotton production of various areas and individuals.

On May 9, 1934 the Jones-Costigan Act authorizes controls on both cane and beet sugar as well as sugar imports. On June 28, 1934 two acts related to agricultural fascism are passed: the Taylor Grazing Act allocated around 8 million acres of public land for grazing and the Tobacco Control Act set mandatory quotas limiting the production of tobacco.

Housing

The 1920’s bubble was also a housing bubble. Just like today, more credits related to the housing market were contracted than in the absence of the monetary expansion. This meant that some of the credits were unsustainable and could not be paid. Farmers were especially exposed and then hit by the crisis and the imposition of tariffs.

Hoover, through his misguided measures, has created an incentive for farmers not to pay their mortgages. Faced with amplified mortgage defaults part of which were stimulated by the Hoover-era legislation, the Roosevelt regime created another series of laws to ease the conditions for bad debtors.

On June 16, 1933, Congress passes the Home Owners Refinancing Act to provide mortgage money and other aid to homeowners. It creates the Home Owners’ Loan Corporation (HOLC). It will go out of business in June 1936 after providing loans for about one million mortgages. The Farm Mortgage Refinancing Act of January 31, 1934 is passed in order to assist farmers in refinancing their mortgages.

On June 12, 1934 the Farm Mortgage Foreclosure Act is introduced in order to help farmers recover property lost to foreclosure. June 28, 1934 National Housing Act establishing the Federal Housing Administration (FHA) to insure loans for construction, renovation or repairs of homes and the Federal Farm Bankruptcy Act places a moratorium on farm mortgage foreclosures.

On May 1, 1935, Roosevelt created the Resettlement Administration (RA) to help farm families relocate and furnish them with loans and new projects. On February 10, 1938, The FHA Administrator chartered the Federal National Mortgage Association (Fannie Mae), of present notoriety.

Taxation and Redistribution

Second to the leap in monetary socialism, this is perhaps the area where the most enduring damage to the economic life was made.

On August 14, 1934, FDR signs the Social Security Act guaranteeing pensions to those retiring at 65 with contributions from both employees and employers. Also provides financial aid to dependent children and blind people and establishes a system of unemployment insurance.

According to John T. Flynn, the contribution for the old-age pension for retired workers amounted from 1934 until 1938 to 6% of payroll, shared by both employers and employees. In 1938, the Congress reduced the rates to 2%, at least until the time of his writing[5]. This redistribution was ultimately a measure bolstering unemployment because employees are the ones suffering the net effect of any kind of payroll taxes.

The employers are pressured by the market to control the cost of wages in accordance with labor’s discounted marginal value product, so that gross wages, including all kinds of tax costs, must be kept below that amount. Otherwise workers must be marginally unemployed.

According to Benjamin Anderson, United States featured in 1934 the highest taxes in the world in the upper brackets. He offers the example[6] of the combined federal and New York State personal income tax rates in 1934: they ranged from 13.5% for incomes of $20,000 to 69.9% for incomes of $5,000,000.

Besides these income taxes, the estate and inheritance taxes took from 0.75% out of property priced at $20,000 and ranging to no less than 60.5% out of properties priced at $50,000,000. On August 30, 1935 Congress passed the Revenue Act, increasing taxes on inheritances, gifts and higher income individuals.

It introduced drastic increases in personal income tax rates and estate taxes; it proposed federal inheritance tax that was eventually dropped from the bill. The result was, again according to Anderson’s analysis, a modification of the personal income tax range from to 2.45% for incomes of $4,000, to 83,2% for incomes of $4,000,000. Estate taxes, on the other hand, ranged from 1% for estates up to $50,000, to 72% for estates priced at $150,000,000.

In June 1936, the Congress approved a $1,773,000,000 soldier bonus out of easy money. In July, 1936, the undistributed profits tax was introduced as a war on savings under the sway of Keynesian ideas, according to which savings are bad for the economy when they go to hoards and not to investment.

As Anderson argues[7], it had little effect since corporate savings kept being, at least on paper, very low or even negative since 1929. In June 1937, another $556,158,000 was given for the soldiers, in cash and bonds of US Life Insurance Fund[8].

Manufacture and Industry

On June 16, 1933, Congress passes the National Industrial Recovery Act. The Roosevelt era was an era of distrust in the private property order and of government’s ambition to replace private initiative with national planning. Historian John T. Flynn argues that Frederick Delano Roosevelt saw in Mussolini’s fascist social regimentation a good example for United States.

Out of the New Deal forest of agencies, NRA is outstanding for its purposes, mostly similar to Mussolini’s corporatist regime. While President Hoover has organized a host of conferences urging the owners of the industries to collude voluntarily in order, on the one hand, to decrease unemployment (by keeping wages up!) and, on the other hand, to keep prices from falling and start increasing them again to pre-crash levels, the Roosevelt Administration aimed at the same results through this veritable “crown” of the Hundred Days.

In spite of the existing anti-trust policy of punishing monopolists, it was high time, according to Roosevelt’s Brain Trust, to mandate “cooperation instead of competition.” Agreements for limited production, cross-industry control of prices, outlawing of child labor, a maximum of 40 hours of work per week, and a minimum wage ranging from 12 to 15 dollars were desired.

These objectives were going to be achieved “voluntarily” through the codes that each industry needed to write for itself, under the guidance of the NRA. In the words of John T. Flynn[9]:

The NRA provided that in America each industry should be organized into a federally supervised trade association. It was not called a corporative. It was called a Code Authority. But it was essentially the same thing. These code authorities could regulate production, quantities, qualities, prices, distribution methods, etc., under the supervision of the NRA…. The second phase was to sign up separate industries into the corporative code authorities. Over 700 codes were created. Business men were told to come to Washington and "write their own tickets," as Roosevelt said. They could scarcely believe their ears.

The voluntarism of the NIRA is of Orwellian double-talk fame. The industry owners who would not comply “voluntarily” faced prison and public humiliation.

On February 2, 1934 Roosevelt established by executive order the Import-Export Bank of Washington to encourage commerce between the U.S. and foreign nations. Protectionism is another bad policy of the New Deal. One of the oldest truths established by economists is that the country engaging in free trade stands to gain irrespectively of how the other countries are responding to this free-trade policy.

Since any voluntary exchange is benefiting the parties engaged, it is of no consequence whether this exchange will be followed by another exchange or not. Instead of abandoning protectionism unilaterally and thus alleviate the Depression Roosevelt’s New Deal increased the protectionist measures.

The NIRA was accompanied by several other measures.[10] On August 26, 1935, FDR signed the Public Utilities Act giving federal agencies new powers of regulating the gas and electric companies.

The Robinson-Patman Act, introduced in 1936 as an amendment to the Clayton Antitrust Act, was designed to protect small grocery stores from the bigger chain stores that were in a position to make economies of scale and transfer them to the consumers through reduced prices.

The Miller-Tydings Retail Price Maintenance Act, dated August 17, 1937 was also designed to come to the rescue of the small businesses. On June 23, 1938, the Congress passed the Civil Aeronautics Act, a cartelization instrument, protecting established flight companies from potential competition.


[1] Source: Franklin D. Roosevelt, Inaugural Address, March 4, 1933, as published in Rosenman (1938), pp. 11–16.

[2] Raico (2001).

[3] Anderson (1979), p. 326, Flynn (1948), p. 52.

[4] Source: http://publicpolicy.pepperdine.edu/faculty-research/new-deal/legislation/aaa051233.htm

[5] Flynn (1948) pg. 59-60.

[6] Anderson (1979), p. 366.

[7] Anderson (1979), pg. 372-382. See table on page 377. On page 376, Anderson states that “beginning with 1930 there had been an uninterrupted series of years where corporate surpluses were depleted instead of being added to, years of gigantic corporate deficits instead of additions to corporate surpluses.”

[8] Anderson (1979), p. 428.

[9] Flynn (1948), pg. 43-44.

[10] Powell (2009).


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