Smiley – Progressivism and the New Deal

Progressivism
and the New Deal
W. Gene Smiley

Regional
Meeting of The Philadelphia Society
October 8, 2005
Milwaukee, Wisconsin
The Pfister Hotel

Thank you for inviting me to join this discussion
on Progressivism and the New Deal. I can’t pretend to be an authority on
progressivism but, I think, I do know something about the economics of the New
Deal, so I’m going to focus on that issue.

It
would be nice to think that the New Deal of the 1930s is no longer viewed
through rose-colored glasses that hide its true nature. But, as almost any
academic can tell you, this still seems to be the general perception. A recent
news article said, “Where the New Deal offered government aid to bring the
nation out of an unemployment morass, Mr. Bush’s ëownership society’
offers increased individual choice and responsibility as an answer to the
financial needs of the modern age”[i]
and the article then goes on to criticize the Bush program. In reality, the New
Deal’s aims, to the extent that there were some consistent aims to the New
Deal, were to reform the American economy and to provide some relief. And,
rather than promote recovery, or “bring the nation out of the unemployment
morass,” in fact, the New Deal delayed the recovery keeping many Americans
unemployed and impoverished throughout the 1930s. Perhaps more importantly,
those “reforms” of the New Deal linger on today continuing to harm the
American economy.

The
New Deal drew upon the earlier Progressive initiatives started by Theodore
Roosevelt, Woodrow Wilson, Robert La Follette and others, especially economists
at the University of Wisconsin.[ii]
The passage of laws creating the Federal personal income tax and a central bank
in the form of the Federal Reserve System, both in 1913, cleared the way for the
Progressive and later New Deal programs. Some of the reforms enacted by the
Roosevelt administration in the first part of the New Deal were extensions of
previous Progressive reforms or proposals. The centralized planning of the War
Industries Board of World War I reappeared in the National Recovery
Administration. Various agricultural reforms proposed, but not passed, in the
twenties appeared in the first Agricultural Adjustment Act. But all of these had
common themes of distrust of “unfettered free markets” and distrust of
private businessmen. Technocrats and government officials, not driven by their
greedy desires, could plan and direct markets much betteróso that
“everyone” could benefit rather than just the few. The banking laws to
separate commercial and investment banking, to stop interest payments on demand
deposits and limit interest payments on savings and time deposits and to control
the securities industry through the Securities and Exchange Commission reflected
this distrust of the private sector.[iii]

But,
the primary initiatives of the first New Deal were the Agricultural Adjustment
Act and the National Recovery Administration, which was part of the National
Industrial Recovery Act. The first AAA was to be nothing less than a fundamental
reform of the agricultural sector in order to correct farm markets. The
government would now determine what appropriate prices were by calculating
“parity” prices. The government would then ensure that those prices
prevailed by benefit payments from revenues collected through processing taxes,
by limitations on productionówhether the farmers wanted to limit their
production or notóby purchasing “excess quantities” through nonrecourse
loans and by suspending the antitrust laws so that processors could cooperate
through marketing agreements to pay the farmers higher prices. Such activities
were to stabilize farming and raise the incomes of the farmers. Clearly all of
this had to be government directed and the USDA quickly became the agency to
oversee these programs. Left alone, agricultural markets were too chaotic and
would not provide farmers with the incomes they truly deserved. The answer to
government planners was simpleóhave the federal government step in, reduce
production, raise prices, and generate the incomes farmers deserved, by, of
course, having nonfarmers pay higher prices for the farmers’ produce. It was,
by design, a program designed to transfer income from nonfarmers to farmers.

When
the first AAA was ruled unconstitutional in January 1936, the Soil Conservation
and Domestic Allotment Act continued to pay farmers not to farm, and the 1938
Second Agricultural Adjustment Act reinstituted parity prices, nonrecourse loans
and government storage of excess commodities to stabilize and raise
pricesóHenry Wallace’s concept of an “ever normal granary.” All of this
continued to assume that income would be transferred from nonfarmers to farmers
if the government, through the USDA, organized and directed agricultural
markets.

Then
consider the NRAóthe centerpiece of the Roosevelt Administration’s
industrial reforms. Roosevelt’s team concluded that “overproduction” or
“underconsumption” was the root of the problem in the industrial sector. The
solution lay in reducing production and redistributing income away from
businessmen, who saved too much, toward workers who consumed more of their
income. Doing this required fundamental reforms in the operation of businesses.
Chaotic competition had to give way to coordinated cooperation. The answer to
the government planners in 1933 was simple. Control had to be taken away from
the businessmen and vested in industry boards where technocratsóengineers,
economists, technicians and other “experts”ócould advise government
officials who would direct the plans of each industry. This would eliminate
wasteful competition and excessive production and create a healthy economy that
could benefit everyoneónot just the “rich.” The “overproduction” was
to be solved by reducing and coordinating production. This involved reducing the
hours of work by labor and machinery, controlling and reducing investment,
simplifying production, controlling and equalizing prices and costs and raising
wage rates relative to profits to reduce “underconsumption.” In short,
American industry was to be organized in giant cartels controlled or monitored
by objective, unbiased government officials. Business owners could no longer be
trusted to operate the enterprises that they ownedóor had owned. Rexford
Tugwel,l and others among the planners, had little patience for those who
worried about the loss of freedom such a program entailedóthey were only
concerned with building a fairer and better society, as they envisioned that
society. The federal regulation of other industries such as radio via the FCC,
aviation by the CAB, and interstate trucking, interstate pipeline and interstate
bus transportation as well as the interstate railroads by the ICC were all
consistent with the concept of government control of major industries.

Apparently,
the New Dealers never recognized the lack of internal consistency of these
various programs. To raise farmers’ incomes, farm prices were to be raised
relative to the prices of commoditiesóincluding processed foodóand services.
To raise laborer’s incomes, wages had to be raised relative to the prices of
the commodities and services they produced, especially food prices. To ensure
adequate profits for businesses, the prices of the commodities and services they
produced had to be raised relative to labor costs and to agricultural prices. If
all prices and wages are increased, universal gains are impossible. Real gains
require increased productivity and production by farmers, laborers, and
businesses, but there is no evidence that this was ever an objective of the New
Deal programs.

As
we now know, these programs were failures. In the midst of poverty and hunger,
hogs and cotton were destroyed to reduce excessive production and raise prices.
Farmers were coerced into obeying the laws of the first AAA. In the industrial
sector, the vigorous expansion that had begun, after the banking crisis was
stopped in March of 1933, ground to a halt as the NRA began to take effect in
the fall of 1933. For the two-year life of the NRA the recovery ceased and the
United States’ economy continued to suffocate in depression conditions. In
May, 1935 the Supreme Court ruled the NRA unconstitutional and in January 1936
it ruled the first AAA unconstitutional. Roosevelt initially chose to bide his
time, expecting that business conditions would deteriorate and worried business
leaders would initiate a call for a new NRA.

To
Roosevelt’s dismay, the long awaited recovery finally began. Business
production accelerated once firms were released from the shackles of the NRA
codes. Though the planners continued to push their agenda in some minor
programs, Roosevelt now turned to a second set of voices, the antitrusters, who
believed that a vigorous, healthy economy could be established by breaking up
larger businesses to create smaller competitive firms, and by creating a set of
welfare reforms. To control the two institutions that he perceived to have
thwarted his plans, Roosevelt proposed legislation to give him control over the
Federal Reserve System and the Supreme Court. The proposed Banking Act of 1935
contained a provision allowing the President to appoint and remove the Chair and
Vice-Chair of the Fed. Because of public outcry over this, the provision was
eliminated from the final bill. Roosevelt’s 1937 attempt to “pack the
Supreme Court” brought an even louder protest from the public and cost him
considerable support.

But,
the antitrust and welfare programs were initiated. Though the federal personal
income tax was already progressive, Roosevelt’s “soak-the-rich” tax
changes made it much more progressive and, as a by-product, punished business
owners and the wealthy, most of whom had not supported Roosevelt. Many
businesses had retained corporate profits. In the eyes of the New Dealers,
retained corporate profits were anathema because they made corporate managers
less answerable to stockholders and external lenders and furthered the
concentration of wealth and power. The answer was simple as far as the Roosevelt
administration was concernedóimpose an excess profits tax to confiscate any
undistributed corporate profits and let the government put these funds to
productive usesópunish big businesses for not paying out all of their profits
to stockholders and to the workers.

Under Robert Jackson and later Thurman Arnold the
Anti-Trust Division of the Justice Department was newly invigorated and began
aggressively applying the antitrust laws. Firms that only a short time earlier
had been encouraged to get together and plan and cooperate now found that such
previously legal activity was a hallmark of illegal antitrust behavior. Sheer
size itself, independent of how acquired, made a firm guilty of violating the
antitrust laws as the 1911 “rule of reason” was overturned. Alcoa found
itself to be a victim of this new approach. The new labor laws again changed how
firms could operate as the Wagner Act required firms to recognize and bargain
with industrial labor unions. In 1938, the Fair Labor Standards Act mandated
minimum wages and overtime wages for working more than a standard week of 40
hours. The Wheeler-Rayburn Act was intended to dissolve the large holding
companies in the electric utility industry. To enable small retail businesses to
compete with the emerging chains, the Miller-Tydings (or Fair Trade) Act
exempted resale-price maintenance agreements from the antitrust laws and the
Robinson-Patman (or Anti-Chain-Store) Act prohibited manufacturers from price
discriminating in favor of larger buyers. These were all intended to bring about
the Brandeis/Frankfurther idyllic vision of an economy of small, independent
businesses.

The centerpiece of the expanded Welfare state was
the Social Security Act of 1935, an act that actually created unemployment
insurance, funds for the aged, crippled, blind, and dependent mothers and their
children, and old-age “insurance.” The last is, of course, misnamed because
the original act says nothing about “insurance” and the discussion before
Congress says nothing about “insurance.” It was a bill to provide income for
the elderly funded by a tax now called the Social Security tax. Only after it
was passed, did the administration suddenly begin to call it “insurance,”
something that it is clearly not and never was. Though, initially, there were
some ideas about building up a true trust fund from which to make the payments
to the elderly, this was quickly tossed aside and the program became simply a
transfer program. The elderly could now reduce their reliance on their own
assets or the generosity of their family, because the federal government was
committed to creating their income safety net. Though ultimately, workers pay
almost all of the social security tax, at first it did hit businesses with what
was a new tax and required additional diversion of firms’ resources to collect
and send in this tax.

By early 1937 the recovery had stopped and by May a
new contraction had begun. The 1937-1938 depression was short, but severe and
generated a stock market crash just as severe as the 1929 crash. This was a
shock, as most analysts did not think a depression within a depression could
occur. The recovery from the 1937-1938 depression was again agonizingly slow and
by 1940 the economy was about where it was in early 1937. The 1930s became a
decade without growth. On average income per person in 1939 was just about the
same as average income per person in 1929.

The theme of this conference is “The Ownership
Society,” the slogan President Bush has developed to organize his domestic
agenda of returning decision making to families and individuals. This, of
course, assumes that families and individuals have property and the rights to
make decisions concerning that property. Private property rights provide the
foundation for a free market society, without private property free markets
simply can’t exist. Now, let me tie this back into the New Deal.

Why was the recovery from the Great Depression so
long, actually not being completed until 1946?[iv]
Many different reasons have been proposed to explain why, by the start of the
Second World War, little recovery had occurred. For example, work relief
programs did retard the decline in the measured unemployment rate since all
those employed on government relief programs were counted as unemployed.
Difficulties in reallocating funds from older, slower growing industries to the
younger, expanding industries may have slowed down the recovery in private
investment; and, residential construction may have been severely hampered by the
collapse of the speculative boom in housing construction during the twenties and
abandonment of those projects.

But, the primary explanation for the slow recovery
of private investment spendingówhich is the key to economic recoveryólies in
what Bob Higgs calls “regime uncertainty.”[v]
The New Deal, in its many variations, inconsistencies, and 360 degree swings
ravaged the confidence of businessmen. They became increasingly uncertain that
their property rights in “their” capital would be protected and
maintainedóin Bob Higgs’ words, uncertain about the continuation of the
current “regime” of private property rightsóthey became less and less
willing to make investment, especially longer-term investments in structure and
machinery. Only short-term investments with a quick payoff were viewed as
desirable. The changes in tax laws and new taxes, confiscation of private
property, sharply increased business regulation, new definitions and
applications of antitrust laws and the increase in threatening rhetoric from the
Roosevelt administration all combined to create uncertainty and reduce a
business owner’s rights over property. Though we know now that the United
States did not become a socialist state in the 1930s that was not so obvious to
business decision-makers at the time. Higgs marshals considerable evidence in
support of this explanation. Thus, we now understand that worries about the
continuation of an “ownership society” and rising uncertainty about what
ownership really meant stretched out the depression to previously unimaginable
lengths.

As Roosevelt relaxed his war on private property
and private business in 1940, recovery began to accelerate. However, it was not
until the end of the Second World War that the American economy again moved into
the flower of full production and employment.

Though “regime uncertainty” for businesses has
subsided. Other New Deal programs have continued to plague the American economy.
It was not until the late 1970s that transportation regulation
diminishedóthough not completely ending. Deregulation of long-distance
telecommunications did not occur until the early 1980s. And local governments
then took over some of these regulatory functions by handing out local
monopolies to cable television providers. Each time that competition begins to
rise, it seems that some level of government moves in to try to snuff out the
competition.

I don’t see much hope of eliminating the federal
income tax systemóand a flat tax is still not an elimination of the income
tax. Nor do I foresee an elimination of the Federal Reserve System. In 1998
Congress approved a “freedom to farm” bill that supposedly would eliminate
all the farm subsidy programs in about 5 years. Today, seven years after
enactment, the federal government’s intervention and subsidization of farming
is greater than ever. One can only hope that the growing complaints from
third-world countries about agricultural subsidization by the United States and
Europe will have some effect in eliminating the New Deal agricultural programs.

Social Security, and its offspring, Medicare, has
become the New Deal elephant weighing all of us down today. Not forseeing the
decline in the birthrate and the rise in the average lifespan, the New Dealers
created a monster that threatens to swallow up everything. President Bush’s
proposal to privatize the Social Security accounts is certainly a step in the
right direction in removing this New Deal albatross, but I don’t think that it
goes nearly far enough in creating an “ownership society.”

We have made some progress in removing the New Deal
programs that have threatened to entangle and strangle us, but it is not nearly
enough. The creation of a rich, vibrant, and growing free society
requires that we continue to remove those dead weights that hold us down and
limit our freedoms.

Thank you.

Endnotes

[i] Peter Grier, Staff Writer
of the Christian Science Monitor, February 03, 2005, found at: http://www.csmonitor.com/2005/0203/p01s04-uspo.htm.

[ii] For example, see William
Anderson, “The Legacy of Progressivism,” January 16, 2000, posted at http://www.mises.org/story/364.

[iii] Much of this and the
following information is drawn from Gene Smiley, Rethinking the Great
Depression (Chicago, 2002).

[iv] On the reasons why World
War II did not end the depression, but extended the recovery period to 1946
the following studies by Robert Higgs and Lowell Gallaway and Richard Vedder.
Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of
American Government (New York, 1987), and Robert Higgs, “Wartime
Prosperity? A Reassessment of the U.S. Economy in the 1940s,” The
Journal of Economic History (March 1992), 41-60. Richard Vedder and
Lowell Gallaway, “The Great Depression of 1946,” The Review of
Austrian Economics (1991), 3-31, and Richard Vedder and Lowell Gallaway,
Out of Work: Unemployment and Government in Twentieth-Century America
(New York, 1993).

[v] Robert Higgs, “Regime
Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity
Returned After the War,” Independent Review (Spring, 1997),
561-590.