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1929 Only the Beginning
Hoover Acts to Keep Wages and Prices Up
Soon after the market crash President Hoover summoned business and labor leaders to the White House. He secured an agreement with industry leaders to maintain employment and with labor leaders to maintain wage rates. It was the first governmental action in response to the crisis.| Intention: By keeping wages and prices up, the president hoped to avoid a slump. | Liberal Line: Huh? President Hoover did that? |
| Outcome: The slump was deepened and extended because businessmen felt constrained from liquidating unsound business plans. | Conservative Line: First thing Hoover did in response to the crash, and it was the wrong thing. |
1930 The Slump Deepens
In the 1930 US Senate Elections the Democrats gained 8 seats from the Republicans. In the 1930 US House Elections the Democrats gained 52 seats. In the 72nd Congress the Republicans controlled the Senate with 48-47 seats, and the Democrats controlled the House with 217-217 seats.
Letting the Banks Fail
A few banks had failed in the fall of 1929 but it was nothing out of the ordinary. About 70 banks had failed every year in the 1920s. Numerous rural banks had failed throughout 1930, over 700 in all, but nobody worried about that. Then on December 11, 1930, the Bank of United States failed. Primarily serving immigrants in New York, it was a Jewish-owned bank. The establishment thought that it could draw a ring around the bank and its portfolio of second mortgages, but it could not. The contagion spread, the stock market fell, and in 1931 banking failures began in earnest. Many of the failing banks were state-chartered banks and outside the Federal Reserve System. Officials hesitated before assisting them, and so they failed, and their failures contracted the money supply. By the nadir of the depression thousands of banks had failed in the United States, and the money supply had contracted from $46 billion in 1929 to $32 billion in 1933.| Intention: Many people, in the crash of 1907, had not liked the experience of relying on J.P. Morgan and the “Money Trust” to act as “lenders of last resort.” They thought that the job should be the responsibility of the federal government. So the Federal Reserve System was created to provide central banking services and serve as a lender of last resort that would provide liquidity in the event of a financial panic. | Liberal Line: President Hoover sat in the White House and did nothing while millions of people suffered. |
| Outcome: Although the Federal Reserve System had been in existence for over 15 years by the time of the market crash of 1929 it had never been tested. And many banks, particularly state-chartered banks, were outside the system. In the event, the leaders of the Federal Reserve failed to do their job, and thousands of banks failed. In consequence the money supply of the United States contracted sharply in a savage deflation. | Conservative Line: First time that the Federal Reserve System was called to execute its role of “lender of last resort” it failed to do the job. As a result millions of Americans lost their savings and suffered ten years of suffering and poverty. |
Tariff Act of 1930
Although President Hoover had pledged to reduce tariffs on imports to the United States in early 1930 Congress sent a tariff bill to the president in the spring. Sponsored by Senator Reed Smoot (R-UT) and Representative Willis Hawley (R-OR) the Smoot-Hawley Tariff Act implemented a plank of the Republican Party platform of 1928. While calling for lower tariffs the president had also promised to protect farmers from the world market. In the end, despite an appeal from over a thousand economists President Hoover signed the bill in June 1930. Nations across the world retaliated in kind.| Intention: High tariffs would protect American manufacturers, American workers, and American farmers from foreign competition. | Liberal Line: Typical Republicans, carrying water for their business and rich-farmer paymasters. |
| Outcome: High tariffs violate Ricardo‘s Law of Comparative Advantage and reduce trade between nations. | Conservative Line: Clueless solons on Capitol Hill busily screwing up the economy. |
1931 Down and Down
1932 Will It Never End?
In the November presidential election campaign, Governor Franklin D. Roosevelt of New York criticized the incumbent President Hoover for increasing government spending, blocking trade, and putting millions of Americans on the dole. Governor Roosevelt won the election in a landslide of 42 states to 6 and a popular vote of 57 to 40 percent over President Hoover. In the Senate elections the Democrats picked up 12 seats, and in the House elections an additional 97 seats. In the new 73rd Congress the Democrats controlled the Senate with 59-36 seats, and in the House with 313-117 seats.
Bailing Out Businesses with the RFC
The Reconstruction Finance Corporation was created after President Hoover signed the RFC Act of 1932 in January. It was designed to lend to national and state-chartered banks that benefited the public the most. It could lend for railroad construction and crop lands and, after July 1932, to state and local governments.| Intention: The RFC was intended to boost the country’s confidence and help banks resume normal functions. | Liberal Line: Wait a minute! The RFC was a New Deal program! |
| Outcome: The loans made by the RFC helped slow the decline in the money supply, but did not stop the bank failures, nearly 1,500 in 1932. | Conservative Line: Just another bailout program that solved nothing. |
Raising Tax Rates in the Middle of a Depression
By the start of 1932 the Hoover administration had become very concerned about the federal government’s solvency. Federal spending had surged from $3 billion to $7 billion and the surplus of 1929 had become a $4 billion deficit. Something had to be done. The solution was the Revenue Act of 1932 that increased federal income tax across the board, with the top rate increasing from 25 percent to 63 percent. The estate tax was doubled, and corporate income tax rates were raised by 15 percent.| Intention: The increase in taxes was seen as a necessary action to staunch the hemorrhaging of the federal government’s finances. | Liberal Line: Typical President Hoover, trying to balance the budget instead of helping people. |
| Outcome: The expected revenue did not materialize. Government spending continued to increase and the revenues continued to collapse. Spending in fiscal year 1932 was $6.92 billion and the deficit ballooned from 0.8 percent of GDP in 1931 to 6.8 percent of GDP in 1932. | Conservative Line: Hoover’s attempt to increase revenue by increasing tax rates was bound to fail. |
1933 The New Deal
In the famous First 100 Days that followed, Roosevelt rammed through Congress an Emergency Banking Relief Act to take the United States off the Gold Standard and reopen the banks, a Civilian Conservation Corps to give jobs to the unemployed, an Agricultural Adjustment Act to subsidize farmers, a Tennessee Valley Authority Act to build federal dams and electric generating plants, a Securities Act to establish the Securities and Exchange Commission, a Home Owners' Loan Corporation, the Glass-Steagall Act to separate deposit banking and investment banking, and a National Industrial Recovery Act (NIRA) that established a National Recovery Administration to promote economic recovery through price fixing, detailed business regulation, and labor regulation. The NIRA included $3.3 billion of spending stimulus through the Public Works Administration. Congress also repealed Prohibition, the eighteenth amendment to the Constitution.
The National Industrial Recovery Act
The National Industrial Recovery Act was an early New Deal program to end the Depression and restore the economy. It sought to end the downward spiral of wages and prices by fixing them and, the in the words of President Roosevelt, “put people back to work.” It attempted to achieve this by imposing its “codes” on American business and labor. These codes would establish various price codes and regulatory standards on business. On labor the codes included included minimum wage rules, child labor, and maximum hour rules. In other words it sought to bring the vagaries of the market economy under detailed administrative direction from government agencies and their political directors.| Intention: By keeping prices up and by following NRA codes the “purchasing power” of business and workers would be maintained instead of being drained away by destructive competition. Thend recovery could begin. | Liberal Line: The NRA was a well-intentioned effort to right the economy and correct the failures of unregulated business. Although it was overturned by a conservative Supreme Court in 1935 the NRA had probably overstayed its usefulness by then. |
| Outcome: Administrative price and wage fixing conspire to prevent economic actors from doing what they need to do: respond to the millions of the economic signals of the consumers transmitted every day through the price system. It prevents businessmen from doing what they do best, which is to create products and services to meet the demand of the consumers, and it prevents workers from competing freely in the labor market. It is always best to respond to changes in the market sooner rather than later. | Conservative Line: Wage and price controls, by whatever name, never work. Never have, never will. Administrative regulatory agencies always end being captured by the interest they are supposed to regulate. |
1934 Sue the Bastards
But the New Deal zealots also found more humble folk in their sights, the Schechter brothers, who operated a kosher live poultry business in Brooklyn. The New Dealers found them in violation of the business codes of the National Industrial Recovery Act and took them to court. A year later the US Supreme Court overruled the government and found for the Schechters.
In the November Senate elections the Democrats gained 9 seats over the Republicans. In the House elections the Democrats gained 9 seats, the Republicans lost 14 seats, and the new Progressive Party gained representation in the House with 7 seats. In the 74th Congress the Democrats achieved a 69-25 majority, and in the House a 322-103 majority over the Republicans.
Prosecuting Businessmen
The identification of traitors or scapegoats performs a unifying function in human society during times of stress. Since the decline of transcendental religion the political elites have instinctively targeted the business elite during economic hard times when the people are anxious and afraid. The Roosevelt administration was not slow to adopt this prop to its power. Three prosecutions symbolized this spirit of retribution: the prosecution of Samuel Insull for mail fraud, the prosecution of Andrew Mellon for tax evasion, and the prosecution of the Schechter brothers, kosher butchers of Brooklyn.Samuel Insull was a Briton who had come to the United States to work with Thomas Edison and the development of electric generation, distribution, and marketing. But his highly levered Chicago Edison (today Commonwealth Edison) failed during the crash, and New Dealers like Interior Secretary Harold L. Ickes were anxious to make an example of him. He was prosecuted on mail fraud and antitrust charges but found not guilty on all charges.
Andrew Mellon was a banker, philanthropist, art collector, and Secretary of the Treasury from 1921 to 1932. Three presidents had served under him, it was said.
The Justice Department attempted and failed to obtain an indictment of tax evasion. The Roosevelt administration tried again in a two year civil action, which continued after Mellon’s death. He was exonerated.
Responding to charges that the National Recovery Administration was a bureaucracy out of control, the administration pressed a case against a firm of kosher chicken butchers in Brooklyn run by the Schechter brothers. The government accused the brothers of violating NRA codes and pressed the case up to the US Supreme Court. In 1935 the Supreme Court struck down the case on the grounds that the Schechters did not engage in interstate commerce.
| Intention: In the awful shambles of the crash ordinary Americans lost their life savings, their jobs, their homes, and their farms. Vast corporations had crumbled into bankruptcy yet wily speculators had made millions. It was not just bad luck that had brought these misfortunes, it was fraud and sharp practice. Those who had brought the United States to the brink of ruin should have to pay for their crimes. And no longer should businessmen, big and small, run roughshod over the consumer and the worker. | Liberal Line: The modern economy was just too complicated to be run by a cabal of bankers on Wall Street. It needed proper supervision and regulation by public officials, educated people without conflicts of interest. |
| Outcome: The prosecutions sent a message to all businessmen and promoters. You could be next. Sensibly, businessmen drew in their horns and reduced their risk. If a failed business was a criminal affair, then why stick your neck out? | Conservative Line: The choice of Insull and Mellon as scapegoats proves the economic ignorance of the New Dealers. How about the Federal Reserve officials that bungled monetary policy? How about the congressmen who racked up import tariffs and help collapse international trade? But it also indicates their political opportunism. Why not blame the businessmen? It''s worked every time it''s been tried. |
1935 Labor and Social Security
The Social Security Act inaugurated a government pension system funded by a 2 percent tax on the first $3,000 of payroll income to begin in 1937. The act also included unemployment insurance, aid to the states for health and welfare programs, and the Aid to Dependent Children program.
The Wagner Act
The Wagner Act, sponsored by Senator Robert F. Wagner (D-NY) legislated a legal framework for the relations between employer and employee. The act legalized the right to strike, barred employers for firing worker for their union activities, and required them to negotiate in good faith with a union once it had been certified as a bargaining agent by the National Labor Relations Board.| Intention: The vast economic forces unleashed by the industrial revolution had fallen hardest upon those forced by their limited bargaining power to work for subsistence wages in dark and dangerous mills, mines, and factories. It was a matter of justice to provide beneficial legislation to allow workers to protect their interests by organizing in labor unions so that they could bargain with their employers as a unit rather than as helpless individuals. | Liberal Line: The [[Wagner Act]] was one of the great landmarks of progressive legislation providing protection to working people from the unregulated capitalist economy. Without the protections of labor law workers would be powerless against their employers. |
| Outcome: The English common law had established centuries of precedent against “combinations in restraint of trade,” meaning both combinations of businesses and combinations of workers. But the entry of working men into politics in the 19th century meant that this ancient precedent began to encounter opposition. In the landmark [[Commonwealth v. Hunt]] the Massachusetts Supreme Judicial Court, following the election returns, ruled that unions were legal and workers had a right to strike. The [[Wagner Act]] established a national legal framework in which union and employer relations could be formalized. But the granting of monopoly privileges has a simple effect. It allows certain workers the opportunity to charge monopoly prices for their labor. And in the aftermath of the [[Wagner Act]] wages rose substantially, especially in unionzed sectors like steel and autos. In the context of the Great Depression this meant creating more unemployment and extending the depression. The [[Wagner Act]] must be considered partly responsible for the sharp [[Recession of 1937]]. | Conservative Line: Unions are a combination in restraint of trade, monopolies that almost always work in behalf of powerful special interests and against the interest of the consumers and the general interest. But clearly many workers regard labor unions as an essential bulwark against the power of the market. The question is: how much monopoly bargaining right can society tolerate? Seventy years after the [[Wagner Act]] we can see that all power corrupts, even union power. Union power helped destroy the basic steel industry, the automotive industry, and, through government employee unions, has helped develop bloated and ineffective state and local governments. |
| Intention: The notion of old age government pensions was pioneered by the Germans in the 1880s and by the 1930s had become a central idea of progressive politics in all western nations. Social Security provided a guarantee that older Americans “would have something to live on” after they were too old to work. | Liberal Line: Social Security is one of the great social gains that liberals have given to the American people. It has rescued senior citizens from poverty and provided them with the dignity that a life of work demands for every citizen. |
| Outcome: The Social Security Act placed a tax of 2 percent on labor at a time when unemployment in the United States exceeded 15 percent. Raising the cost of labor at a time when millions of people were out of work was not a policy likely to get more people back to work. The new tax had to have contributed to the sharp and painful [[Recession of 1937]]. | Conservative Line: The great Winston Churchill said, in connection with his nurse, Mrs Everest, that he was proud “to have had a hand in all that structure of pensions and insurance†which is so much of a help to “poor old women.†Conservatives just wish that the program had been handed off to the investment industry where it could have become a genuine savings program rather than a simple transfer of income from the working people to the older generation. |
1936 Buy the Election
In the presidential election campaign, President Roosevelt swept the election in a landslide of 46 states to 2 and a popular vote of 61 to 37 percent over Kansas Governor Alf Landon. In the Senate elections the Democrats picked up 5 net seats, and in the House elections an additional 12 seats. In the new 75th Congress the Democrats reached a high water mark, controlling the Senate with 76-16 seats, and in the House with 334-88 seats.
1937 Back into the Abyss
1938 Turning Away from FDR
In the off-year elections of the Roosevelt second term the president's party suffered its first losses since 1928. In the Senate elections the Democrats lost 6 seats to the Republicans. In the House elections the Democrats lost 72 seats, the Republicans gained 81 seats, and the Progressive Party lost 6 seats. In the 76th Congress the Democrats maintained a commanding 68-23 majority in the Senate and a substantial 262-169 majority in the House.
1939 Economy Revives
Meanwhile, after the Republican surge of 1938 it was time for payback, and Congress passed the Hatch Act which forbade federal employees from engaging in political activities. The bill was sponsored by Senator Carl Hatch (D-NM) after disclosures about employees of the Works Progress Administration using their positions to win Democratic votes.
With isolationism a political factor Congress passed a Neutrality Act requiring all belligerents in the World War to pay cash for munitions (i.e., "cash and carry"). In practice this policy favored Britain and France since they had control of the oceans.
1929-1939: “A Decade that will live — in stupidity.”
Why Stuck on Stupid?
Seventy years ago the leaders of both US political parties turned away from the policies that had created an economic powerhouse we call the Roaring Twenties. For ten long years Americans suffered through wrenching economic dislocations: deflation, inflation, a four-year economic contraction, endless unemployment, mindless political experiments, and ruthless attacks on businessmen for political gain as their leaders stayed Stuck on Stupid.
Today, after a twenty-five year economic boom, Americans are once more faced with a political elite that wants to monkey with success. It wants to raise tax rates. It wants to restrict trade. It wants to increase government power.
It’s time to look back and remind ourselves how it came to be, starting in 1929, that America got itself Stuck on Stupid. Otherwise it could happen again.
— Christopher Chantrill
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