Good afternoon, ladies and gentlemen. Welcome to the beginning of the end. This is session 6 of 10, so we're on the downhill slope from this time forward.
We economists are often accused, correctly, of being Philistines and so to take a little bit of the edge off of that ever so valid accusation,
I want to begin this session with a poetry reading that is, oddly enough, relevant to this session's topic, the New Deal.
This is actually a portion of a poem describing, as it were, the New Deal.
A dollar for the services a true producer renders, and a dollar for experiments of governmental spenders.
A dollar for the earners and the savers and the thrifty, and a dollar for the wasters.
It's a case of 50-50.
And we owe that to one, Burton Braley, who has a whole book full of such poems, and that
one struck me especially once upon a time.
It's one of many indications we have that the New Deal was not as wildly popular as
as some historians seem to suggest when they tell the story of the Roosevelt administration.
And Roosevelt became during the 30s and 40s and remains to the present time, I'd say,
the most popular of all American presidents. It may be a little neck and neck with Abraham
I'm Lincoln, but I suspect that if we were to take some kind of a poll, we'd find that Franklin Roosevelt is the most popular American president.
And a lot of observations could be made about that curious fact, but the one I want to make right now is that in reality, a lot of people hated him at the time.
and it wasn't just rich and callous reactionaries.
Sometimes when the historians do recognize that people opposed Roosevelt and the New Deal,
to Deal. They are quick to represent the opponents as Republican vested interests of throwbacks
to the age of laissez-faire, which were hard enough to find by 1933 indeed, Republican
or otherwise. But a great many ordinary people hated Roosevelt or at least disliked him enough
to vote against him in elections. So even though he won reelection three times, some
of those elections were not wildly lopsided. And even in the ones he won most easily, tens
Millions and millions of people voted against him, so it wasn't just a few rich capitalists
who disliked him and his policies, a lot of people did, but nonetheless he certainly perfected
an apparatus for vote buying that succeeded better than any other such apparatus ever
employed in American national politics, and in the circumstances it worked like a charm
to keep him in office until the grim reaper relieved us of the great man.
Let's take a look at the conditions that allowed Roosevelt to gain office and the New Deal policies
to be implemented.
The depression began probably about midway through 1929 if we look at the real economy
as opposed to the financial markets which didn't really crash until the stock market
crash in October. But many of the time series measuring the level of real economic activity
reached their peaks about the middle of 1929. So the economy was already beginning to decline
and then the stock market crash brought everybody's attention to the decline and contributed to
further decline along with many other contributors. But the real gross national product ultimate
failed by approximately 30% between 1929 and 1933 when it hit bottom and then began to bounce back some.
During that slide, real investment spending declined by almost 90% and in fact there was so little investment spending
I'm understanding that it was far from enough to make up for the depreciation of existing capital, so in fact, during those years, the capital stock of the country was wasting away because wear and tear was not being compensated.
The prices fell a great deal for four years straight, and the Gross National Product deflator,
which is a very broad-gauge price index, went down by 22%.
Wholesale prices went down by about 30%.
Consumer prices a little less.
So there was deflation at the same time there was depression.
Unfortunately, many people have attributed causal significance to that association ever since and have come to fear deflation as such,
although it wasn't the deflation as such that was the problem at the time, it was the depression.
The most important index of the depression for most people was the level of unemployment that was reached.
I have here a graph of the unemployment rate measured as a proportion of a civilian labor force.
You can see that prior to 1930, the only time that unemployment rate had moved above 10 percent, starting from 1890 onward, was during the depression of the mid 1890s.
and then it got up into the range of 12 to 14 percent for three or four years in the mid 1890s, but normally the economy had an unemployment rate that bounced around in the neighborhood of five percent and we always expect a dynamic economy to have some unemployment because there are always adjustments being made in economic life, some businesses
The businesses are closing or going broke and their workers have to find new places of employment which they don't do immediately for perfectly good economic reasons.
They sometimes like to spend more time searching for the best opportunity before they accept employment.
So there's always a certain amount of so-called frictional unemployment and it's because some industries may be declining relative to others,
and declining in absolute terms, there's a shedding of labor that then has to relocate
to other employment opportunities. So structural changes that were going on in a growing economy
also contributed to some unemployment. So 5 percent is approximately what we would view
It was about a normal level of unemployment in this economy, but we see now that very quickly in the early 1930s the unemployment rose to heights never reached before, not even approached before.
And even though after 1933 the unemployment rate did fall a great deal for several years till 1937, even in 1937 it's barely dipped below 10% in what seemed to be a prosperous year.
In fact, many people in 1937 were talking as if, well, the depression is about over.
You know, we've been growing rapidly for four years now, and unemployment has fallen, and real production has risen, and we're just about out of this.
But still, unemployment was almost 10 percent, and then it popped back up again, and the so-called depression within a depression began in 1937, and on an annual basis was worst in 1938.
and that wiped out much of the progress that people thought had occurred and was
a very deep depression by most standard measures the investment spending almost
collapsed completely for a year or a year and a half and the stock market
fell drastically and it was it was a very big depression if it weren't
If we weren't embedded in this gigantic, long Great Depression, it would be viewed as the third worst business slump in our history.
But most people don't even know it happened because I guess it's a little like getting pneumonia when you're fighting leukemia or something.
You've got bigger troubles going on, and who's going to pay a lot of attention to this other one?
But finally, in the early 1940s, we see the unemployment rate drop and fall to almost disappear during the war.
And that, of course, people misinterpreted, too, by presuming that the government's spending for war purposes
had in a Keynesian type fashion been responsible for economic recovery and this was a bona fide recovery like the ones that take place in civilian circumstances but it was very different because of the war conditions and I'll talk about them in a later talk.
The point of this graph that's, I hope, clear enough is that this was an extraordinary time, and it lasted a long time.
I mean, we look at this, and there's a whole century of experience displayed there, so it doesn't look very long,
but if, say, you were a young person that grew up and started looking for work in the early 1930s,
It must have seemed like forever that it was hard to find a decent job.
In fact, a lot of young people never had a proper job for the whole decade
because there were so many workers looking for jobs that employers had their pick.
They could be very choosy.
And there were all kinds of anecdotes that went around about, say,
A gas station needs somebody to pump gas, so it puts up a sign, help wanted, and a hundred guys show up standing in line to interview for the job, and the gas station owner comes out and says,
All right, everybody's not a college graduate, drop out of the line.
As if that were necessary to do the job, but you could set all kinds of extraordinary conditions and still hire somebody.
Amazing things happened.
Thousands of American engineers, unable to find employment in engineering, went to the Soviet Union
to work in Stalin's industrialization program, building factories in Russia.
Amazing.
And some lines of work in some industries, some places, it wasn't 15% or 20% or 25% unemployment.
It was 50% or 75% unemployment, depending on the specialty.
While real production fell by 30%, construction fell by almost 80%.
So if you were a worker with a construction skill, whether it's architect, engineer, or carpenter, plumber, whatever,
unemployment rates were extraordinary. There just was hardly any construction going on in the early 1930s.
So you had to look for some other kind of work or move to some unusual place and people resorted to all of these measures to try to cope.
They did various inventive and desperate things.
My family had a whole collection of family lore about how my father managed to survive during the 1930s.
And for a while, he chopped wood, and he would chop a quart of wood, and if you know how much that is, it's quite a large stack of chopped wood, for a dollar, he'd get paid for chopping a quart of wood, on one occasion, he and my mother and my older brother, I wasn't born then, but they moved to Arizona and lived in a tent
And picked cotton somewhere in the outskirts of Phoenix because they wanted cotton pickers
out there and that was something they knew about and went out to find work.
So people did extraordinary things and of course many people who weren't as willing
or as able to do extraordinary things, were happy to go on the government dole when government
doles came along and were made available to them. Those were still times when many Americans
thought that was wrong. To go on the dole, period. My family was like that. That was
was just a shameful thing, so they didn't, but even people who had felt that way before,
after years and years and years of hardship, began to say, well, okay, I'll go on the government
Joel. I don't see very many good alternatives. So these conditions were calculated, as it
were, to grind down people's moral sensibilities, to make them more desperate and more willing
to turn to government measures that they otherwise would have objected to, if not on practical
This decade had a profound effect on the character of the American people, for the worse, much for the worse.
Well, after this initial slide went on for four years running and things reached such abysmal depths,
a great many people had grown quite desperate for some way to stop it and improve the situation.
And to understand the New Deal, we really have to understand that sense of desperation
that existed by the time Franklin Roosevelt took office because it was that atmosphere
in which all of these New Deal proposals were put forward and enacted into law and put into
practice. These things were not thrust upon people. In fact, one of the remarkable attributes
of those conditions in 1933 was that the scope of the interest groups and types of people
clamoring for government aid was very, very wide. It wasn't, for example, like the depression
of the 90s when unemployed people and farmers tried to press for government assistance especially.
Now we've got everybody from rich capitalists down through middle class homeowners and farmers
who own land down to unemployed people at the other end of the scale.
Everybody is now clamoring for some kind of aid from the only place they see as capable
of providing it, government.
Many of them had become convinced by 1933 that the market system just had broken down.
Now you look around and say, it doesn't work anymore. Don't tell me old Adam Smith stuff. Look around you.
The machine is busted. The only way out is through government assistance.
Yes, yes, I know, that's not the American way, but this is a different situation.
So they said, okay, what can government do for us? What kind of help can it provide?
Now, when we think about the New Deal, it's hard to hold it in our hand without it slipping away because it's not a coherent thing.
It's not a program or a plan that all hangs together logically.
In fact, very often it seems to be a whole collection of programs that war with one another because one kind of New Deal program has an effect on variable X to move it upward at the same time that another New Deal program has an effect on variable X to move it downward.
So it looks as if this is just a hodgepodge of things that don't make any sense, and I think we need to recognize that ideologically it doesn't make any sense.
That it's a mass of expedience. The only common denominator here is it's all something being done by government.
and in many cases, not all, but many, federal government,
many of the things that had never been done before,
at least at the federal level of government, if at any level.
So we get every kind of political view coming into play here,
with the possible exception of classical liberalism, I suppose.
they didn't have a lot of input into the New Deal but classical liberals were hard to find in 1933
and even people that you might think is not just classical liberal but paragons of classical
liberalism people like some of the professors at the University of Chicago you know Frank Knight
Simons, Viner, you go back and you look at some of the measures that were being proposed
and tried in 1933 and you'll find these guys signing their names to support them. So classical
Social liberalism really didn't have many people manning the barricades at the time.
Some of them came back to life later on and regretted, I think, their having lost the
faith in the pit of the depression.
But we have people of all sorts of views and schemes.
If you just look at Roosevelt's brain-trusters, for example, you've got on the one hand Rexford Tugwell, who's a near-communist, I guess you could say.
He certainly believed in socialism. He was one of the many naive Americans who had taken the ritual journey to the Soviet Union and had come back quite enthusiastic about what he had seen.
We all know how they were toured around and kept out of sight of the reality, but at all events, he believed in planning and nationalization of industry, of central direction by the government.
He wanted the government to even take over land ownership, so that they would have central planning of agriculture.
That's enough to give a Misesian a real headache, but there's Tugwell on the one hand, and then there's Hugh Johnson, who's a cartellizer, a big business flack.
On the other, he certainly doesn't want to eliminate private property in the formal sense, at least.
Although he certainly wants a little fascistic organization for the assistance of his government keepers.
There's Molle, Raymond Molle. Molle doesn't know anything. He's specialized in criminology,
But he's kind of a middle-of-the-road new dealer who's willing to try anything, but not anything real radical.
So these guys are all over the place.
And if you look beyond the brain trust to all the people who are involved in making proposals or implementing proposals,
they range from people who have monetary crank schemes like George Warren,
The Cornell professor who thought if we raised the price of gold, we'd raise the price of everything.
If so facto, just like that. His statistical work had proven it.
To leftover populace who wanted the government to print paper money and give it to farmers.
To big businessmen like Gerard Swope, the head of General Electric Corporation, who wanted to cartelize all of industry and let businessmen run the cartels.
To do-gooders who wanted the government to come on board and set minimally decent conditions for women and children working in industry.
and it just goes on and on, labor unionists, they're all part of the new deal and they obviously are very strange bedfellows ideologically or practically, but they're all in there and so we need to bear that in mind, otherwise we'll never understand how this thing came into being or how it worked.
The second thing I think that is helpful is to recognize the extent to which New Deal programs just brought back to life the programs that had been used during World War I by the Wilson administration.
Now, in some ways, you can see immediately that that's what you would expect because, look, after Wilson left office, the Republicans have had control of the bureaucracy and sometimes the Congress, too, until the New Deal starts.
So now, all of these Democrats who've been living in the wilderness for 12 years are suddenly back, you know, they've left their haunts nowadays, you know, when this happens.
These guys bail out of the Brookings Institution and go back into the Federal bureaucracy.
Well, Brookings had just got started back in those days, so it couldn't warehouse as many Democrats out of office.
But they found places out there and waited their turn, and now their turn has come again.
And they come back wanting to do the same kinds of things they used to do.
So it's natural that they would want to reinvent the war finance corporation and reinvent the food administration
and Re-Invent the War Industries Board and all the rest of it.
But the other thing that is important and affected far more people
is that many people had come away from World War I with the idea,
which I suggested this morning was planted there by Bernard Baruch and his friends,
that World War I had been an example of very successful government economic management.
So they readily swallowed a kind of analogy which was that World War I was a great national emergency
and we dealt with it with programs of this sort.
We're now in a terrible economic depression which is a national emergency.
So we know how to deal with national emergencies. We've dealt with them before. Let's do it the same way we did last time.
Of course, the analogy was totally far-fetched. The sense in which World War I had constituted a national emergency was totally different from the sense in which the Great Depression constituted a national emergency.
So it was a very faulty logic, but nonetheless it was one that had a kind of gut-level appeal.
And when people thought about proposals they were sometimes easily led to accept those proposals on grounds no stronger than that.
The third element that many of these proposals and programs shared was that they sought to raise prices.
As I said, there had been a lot of deflation somewhere, depending on the price you looked at, between 20 and 30 percent or even more. Farm prices fell by more than 50 percent on average.
So people looked around and of course if you were selling good or service X and its price had fallen, you thought to yourself, I'd be a lot better off if I could get a higher price for what I sell.
The problem is prices are too low.
Well, yeah, for every individual that could be viewed as a problem.
But, of course, it's completely different if all prices have fallen.
And your problem won't necessarily be solved, of course, if all prices are raised.
But people viewed this matter piecemeal.
Farmers said, we need to get farm prices up.
Of course, if prices they paid for labor and materials and equipment and everything else went up accordingly, they wouldn't be any better off.
But they didn't think of it that way. What we're doing is trying to raise farm prices.
Manufacturers are trying to raise the price of cars or refrigerators or whatever they had to sell.
And so people looked at this as a question of price raising. The term was reflation at the time.
They were seeking reflation, and many of the New Deal programs aimed to achieve reflation, in many cases, bizarrely, by supply restrictions.
And again, if you think in terms of partial analysis, if you think in terms of one industry at a time or one commodity at a time, well yes, restricting supply, other things being equal, will cause a higher price to prevail in the market.
But if we have an anti-depression policy that consists of restricting supply across the board,
that's simply ensuring that the whole economy's real output falls even farther.
That's what the depression really consists of, is low levels of producing real goods and services.
Services. So this was a kind of policy guaranteed to fail when implemented on a wide scale.
But that's how it was implemented. And particularly when it worked through the War Industries Board,
which affected most of the manufacturing sector of the economy, it was responsible for drastically
slowing the economy's recovery after 1933. We've seen it did recover some, but without
the National Recovery Administration, it would have recovered much quicker. But people were
trying to raise prices. One other attribute that we see of the events of that period is
is that they gave rise to a great deal of centralization of government activity, functions that had been performed before at some level of government such as relief of the unemployed and the destitute that had been overwhelmingly done by local governments in this country for centuries.
Towns, Counties made efforts to relieve people who were impoverished.
Every county had what used to be known as the poor house where you could house people
who were destitute.
Cities during business slumps would set up soup lines where at least you could go get
something to eat at the expense of the city if you were out of work and didn't have any
food.
During the New Deal, welfare and relief came to be much more centralized at the federal level.
The federal government had never undertaken to provide those kinds of benefits to people before, at all.
It hadn't even been willing to subsidize states and local governments doing so.
But beginning in 1932, when Hoover was still in office, the federal government did begin to make loans.
It turned out they were actually gifts because subsequently the loans were forgiven.
Loans to states so that the states would have the funds to pay for more provision of relief to unemployed and destitute people.
So, in many, many ways, the government became more centralized as a result of the way the New Deal policies were constructed.
I'll come back in a minute to this final aspect having to do with the distinction between the early and the later New Deal.
Now, there's so many things that happened, I can barely even list them, much less say anything intelligent about them in a few minutes here, but I just want to touch on some of the high points and make a few comments that I hope are worthwhile.
Well, as I said, the farmers were suffering disproportionately, and in fact, in some places,
so much so that they were becoming violent. Farmers were having their farms repossessed
when they were unable to make payments on their mortgages, so the mortgage holders,
as the lending agreements provided for, were taking the security when they weren't receiving
In the interest that was due, well, okay, you might say the farmers had agreed to this.
This was a term of the contract they'd entered into.
But that's a hard thing to stomach, particularly if this is a farm that you've lived on your
whole life.
Maybe your parents lived there.
Maybe you were born there.
This is not just a farm.
It's not just a piece of security for a loan. It's, on the one hand, your livelihood, and on the other, maybe, it's a lot more than that.
So a lot of these farmers took offense to having insurance companies or bankers come around with the sheriff and tell them, you've got to get out of here.
This is not your land anymore, it's not your farmhouse, and particularly out in the Midwest,
some of them became violent, and when the sheriff came around or when the bankers came
around to tell them they were going to be put off of their property, they threatened
to shoot these people, and in some cases, they resorted to going after them, beating
In 1932-34, 25 states passed stay laws on mortgage obligations, and that allowed people
People who were in a position to be foreclosed on, to have more time to repay, and in some
cases actually change the terms of what they owed.
This was a classic case of what you might call interference with the obligation of contract,
to use the words of the United States Constitution, and in fact it was precisely this sort of
The thing, actually, this event applicable to farm mortgages that had caused the trouble
that led the framers of the Constitution to put that language in there to begin with,
because it was not the first time that this situation had arisen and the debtors had prevailed
on state governments to help them out, to give them more time or to scale down what
and what they owed and had brought forth some plausible argument.
They came forward and they said, look, I borrowed this money, sure enough.
But when I borrowed it, you know, the money was worth a lot less than it is now.
So these banks are asking me to repay $100.
That's a lot more real purchasing power than I borrowed from them or that I promised to
Repay, so that's not right. And it's often in these changes, in these situations where
the price level is fluctuated violently, that we see these kinds of conflicts between borrowers
and lenders, because that's precisely what gets deranged. These contracts have an inter-temporal
dimension. They're all premised on somebody's forecast of what the price level will be in
in the future when certain money obligations are due and if people misforecast and make
mistakes they get themselves in deep economic trouble and that's what the farmers had done
who tended to be debtors and found themselves with real repayment obligations much greater
than they had expected they would have even without that they would have been having enough
have trouble. Things were difficult as it was, but that made their situation much worse.
So these states did pass the mortgage moratoria, and they were challenged on constitutional
grounds and taken to the U.S. Supreme Court, which actually ruled that the states could
do that. It was one of those less than crystal clear decisions, but the upshot of it was
that the U.S. Supreme Court did not strike down the Minnesota Moratorium Law, which was
the one under challenge and therefore all the others that were like it at the time.
Businessmen were losing money hand over fist in most cases. In 1931, 32, 33, net corporate
profits were negative every year. It didn't mean every single business in America lost
money of course, but it meant that if you take all the losses, they're bigger than all
and all the gains. So, there had never been anything like that before. There had never been a time when net earnings of business were negative three years running.
So, businessmen, everybody from General Electric and General Motors down to Mom and Pop, were very apprehensive about their ability to remain in business.
and of course the failure rate of businesses skyrocketed in those years and many people did in fact go broke and lose their investments.
So businessmen were in all sorts of ways clamoring for some kind of bailout and eventually that pressure coalesced in large part
in support of the National Industrial Recovery Act, passed in the spring of 1933, administered
by the National Recovery Administration, NRA, which authorized businessmen to get together
and form so-called codes of fair competition.
If you apply Higgs' Rule of Political Rhetoric to this term by simply reversing it in order
to find its actual meaning, what you find, of course, is that these were all intended
to suppress competition, and they did that in endless variety of ways. Each industry
Industry had a different kind of regulations, it concocted, and even though supposedly workers
and the public were involved along with businessmen in writing these codes, they were written
almost exclusively by the bigger business owners in each industry, eventually some 750
of them were written and approved by the government, and it didn't do any good to have principles
Because if you didn't get together in your industry and write one, the government would impose one on you.
So the New Deal lawyers would sit down and if you and the nuts and bolts industry hadn't produced a code of fair competition,
they would write one and impose it on you that was legally binding.
So, of course, all businessmen decided it was better to try to design this thing ourselves
than to have these young Harvard grads in Washington, D.C. do it and force it on us.
So that's what people did and they, in some cases, suppressed competition by imposing
standardization on products because, of course, one of the ways that people compete is by
by differentiating their products.
My product's designed differently or performs differently from yours.
It's better.
Well, I mean, I'll compete your product.
If we're going to cut competition, we've got to get rid of that kind of behavior.
A lot of reporting requirements went in so that the making of better deals that is, again,
One of the standard ways that businessmen compete, you know, I give you better financing terms
or I give you quicker delivery or I give you more additional services or maintenance or
whatever it is that I have as part of our agreement, if my competitors don't know how
I'm sweetening the deal, then they can't so readily meet my terms and get those customers
back from me or prevent them from ever switching to begin with.
So many of these codes required businessmen to report all kinds of details about the business they were doing and thereby reveal, make public to everybody in the industry what the transactions were and prevent sweet deals from being made without the knowledge of other members of the industry.
and it just went on and on and on. In some cases they put restrictions on how much time plants could be operated
so that, you know, if my business happens to be so good that I'm just running two shifts a day,
well, maybe if I were restricted and could only run one shift a day, then I wouldn't be able to serve as many customers
There's no end to the number of ways that have kind of a plausible rationale about them and yet if you approach them by asking what is the effect of this provision on competition, you find in every instance the effect is to diminish the vitality of competition.
And so we got all of these codes that you can think of as cartel agreements, not necessarily classic type cartel agreements of dividing a market by area or fixing a price, but serving the same purpose.
That was similar to what the fascists had done in Italy under Mussolini.
And at the time, Mussolini's economic policies had many adherents in the United States.
And if you go back and read the periodicals of the early 30s,
May be astonished to find businessmen and journalists and politicians all writing so favorably about Mussolini and the great job he was doing with the Italian economy and suggesting that that's what we need in more ways than one.
We not only need to organize industry the way Mussolini has done in Italy by getting labor and government and business together and that kind of cooperation.
Cooperation sounds like a good idea, right?
Of course, if they had looked into how the Italian system worked, they would have found
that the cooperation was all people doing what the government told them to do, that
these fascist organizations were all frauds, and in fact, the government dictated the rules
from top to bottom, but nonetheless, many people at the time thought not only that business
and Business Government, cooperation sounded like a good idea, I mean, diminished conflict, right, have a more harmonious world, but they also like the idea of having a dictator.
It may be the only time in American history where people openly espoused dictatorship.
They looked around and said, look, our politicians just do nothing.
Here we are, we're floundering in this terrible situation. They can't seem to act.
We've got too much gridlock. We need a dictator, somebody who can really take charge and get something done, like Mussolini.
So this was the climate of the early 30s that gave rise to the NIRA.
Now, of course, no sooner had they created these monstrosities than many people discovered that they didn't deliver what they had expected them to deliver.
The benefits were not forthcoming.
Labor unions had signed up for the NIRA because it had provisions that required every code to provide for collective bargaining.
and that's what they've been trying to get the government to support for a long long time so great this is wonderful we'll be able to organize like gangbusters now because people will have to recognize our unions and bargain collectively with us but it didn't work out very well and in a lot of cases businessmen still wouldn't recognize and bargained with unionists when they came forward and in addition
It was clear that the whole set up was being created and administered by business people and the unionists were just tokens in this apparatus and no one was paying much real attention to them.
Even the businessmen, once they got their code authorities in operation, began to resent them because the government, which they thought was just going to endow them with this wonderful authority
and then step aside and let them wield it as they thought best, didn't step aside.
Bureaucrats kept showing up over and over, wanting to see reports, wanting to talk to
them about this and that, wanting to see what they were doing, and this kind of chronic
meddling by government officials was new to them. They never had to tolerate that before
except briefly during World War I. So they began to think, well, that isn't what we
This isn't working out.
And furthermore, many of them discovered that the very purpose of these schemes, the reflation,
wasn't working out either.
If you go back and look at what happened to prices after 1933, there's a little bounce
up in 1934, maybe 6 or 7 percent increase in prices, and that's it.
Price index is hardly budged for the rest of the decade.
So these people who had just had their prices fall by 20, 30, 40 percent depending on the
industry, wanting to go back to where they were and they're not even getting close to
prices they used to charge for their goods. So they're saying, this isn't delivering
the goods, this is not what we thought we had accomplished and yet we have to put up
with all this meddling by government officials and lawyers and people asking us to send in
and reports every week or every month.
So a lot of people became badly disillusioned by the National Recovery Scheme.
It had provisions in there besides authorizing labor unionization, provisions for minimum
wages and for setting working conditions at decent levels, and that turned out to have
have considerable effect, particularly in some industries and places.
If you were to look, for example, at wages, let's take the wage level out here and look
The frequency with which that wage rate is paid up here.
You'd find a distribution of wages in any industry, and let's say we look at people who work in the lumber industry in the south.
That was a big southern industry in those days, and we'd find a distribution that looks like that.
Most of the workers have relatively low wages, and then as we go out, we find a few have higher wage levels.
In fact, that is the general shape of the wage distribution for almost any kind of work we can think of.
Well, what happened was that when they put these NRA minimum wages into effect, they were set at levels like 25 cents an hour.
Well, if we take southern lumber workers, we'd find that 25 cents is right here.
So any wage lower than that can no longer be legally paid under this scheme.
Well, here are all these workers who used to work at some wage less than 25 cents an hour.
and employers now simply discover that they're not worth hiring anymore so they
lay them off they fire them and a great many southern workers and workers in
other low-wage regions and low-wage industries and occupations found
themselves suddenly out of work because of the NRA minimum wage and for that
For that reason, the NRA came to be known among many blacks as the Negro Removal Administration and correctly known for that because blacks tended to work in relatively low-wage occupations and low-wage industries
and so they were disproportionately affected by that provision.
At the same time, in agriculture, provisions for administering agricultural benefits were
structured in such a way that landowners received payments, even when landowners operated their
farms with tenant labor.
So the landowners got rid of anybody who might have a competing claim to receive farm benefits
from the federal government and the result was that a lot of tenants were dismissed and
replaced by wage workers and then the farm owner raked in the benefits that were coming
from the federal government.
So once again the effect of that in the south was that a lot of black farm tenants found
themselves dismissed or asked to change their status and become wage workers and many of
them were just let go.
In addition, many of the farmers were able to use their agricultural benefits to buy
machinery and then replace labor with machinery so that they didn't need as much labor as
before. They operated with more capital and less labor and that again set blacks on the
road. Blacks had always been avid supporters of the Republican Party all the way from emancipation
to 1932, but they began to switch strangely enough, and there's an irony here, because
from what I've been telling you, you'd think they'd see that the government was the cause
of their immediate woes, at least in part. But in fact, what was happening at the same
time is that the federal government was establishing work relief and dole programs for which blacks
were eligible and so being put in this dire circumstance by the federal government and
then turning around and getting some pittance of relief from the WPA or from some other
federal dole agency, they concluded that the federal government had saved them.
From that time forward, blacks in this country became strong supporters of the Democratic
Party, and until in the last 50 years it's more like a 90% level of support for Democrats
among the black population. And that all happened by virtue of the New Deal programs. A great
many programs had something to do with finance. The laws were changed, first of all, to go
go off the gold standard. Roosevelt did that by executive order. The second day he was
in office, he declared a bank holiday, nationwide bank holiday. By that time, the states themselves
had closed most of the banks in the country, which meant banks just weren't allowed to
do any business. You couldn't go withdraw money or get a check cleared or anything.
They were shut down and they were shut down totally for a week after which the banks began
to reopen with federal approval after federal banking inspectors had gone around and looked
at their books and declared some of them safe enough to reopen.
But it took many, many months for all of them to, well, most of them to come back into operation.
Some of them were never reopened.
They were simply closed permanently because the inspectors declared them unfit to be operated again at all.
And when Roosevelt declared the bank holiday, he also put restrictions on international dealings in gold.
And quickly thereafter, he nationalized the gold and required everybody to surrender their gold,
except those people who used gold for industrial purposes or jewelry or for collector's items.
But if you had either gold coins, which were still circulating quite widely in those days,
or gold certificates, paper money which was directly redeemable for a fixed amount of gold,
you had to surrender all of those forms of money to the Federal Reserve System.
System, and you would be given what? Federal Reserve notes. What else? So what did the
Federal Reserve note promise to pay you? Lawful money. Still does. What's that? More Federal
Reserve notes. So that's where we made that switch in 1933. And having gone off gold,
The New Dealers then undertook to pursue George Warren's cockamamie scheme, which is to try
to get reflation by raising the price of gold.
Government began to use the Reconstruction Finance Corporation to bid up the price, the
The dollar price of gold, starting in the spring of 1933, and it edged it up a little
bit every week, every week. The Reconstruction Finance guys would come in and talk to Roosevelt.
Well, what do you want the price of gold to be this week? You can't imagine anything
more arbitrary than that. The President of the United States is saying now what the price
of gold should be this week, and gradually he set it higher and higher and higher. And
Under the law that Congress had passed in the spring of 1933, he was allowed to raise
the price by 60 percent. So when he finally got the price up to $35, that was a 59 percent
increase in the dollar price of gold, which in the old days had been $20.67. He said,
okay, that's it. That's where we stop. And the government did, in fact, hold the price
The price of gold at $35 an ounce from 1934 until the early 1970s, when it finally gave up, fixing the dollar price of gold. Yes, sir?
I think this understood something. I thought it was illegal to own gold if it rose above the industry.
Only monetary gold.
Do you purchase gold bullion?
No, you could purchase gold for use in industry, or you could maintain gold jewelry, or you could have collector's pieces.
So you can buy gold for 35 cents, 35 dollars an ounce to make into jewelry.
Yes, that's right, yeah. So it wasn't a forbidden substance, but monetary gold was forbidden, not only the use of monetary gold,
Gold, but even the possession of monetary gold. So if you had a big collection of, you
know, gold eagles that you'd put in your piggy bank over the years, that was unlawful
to hold on to, you know, 50 of those, say. They'd probably let you keep a few in a collection.
I don't know what the exact limit would have been. I do know they allowed some collector's
Mr. Redleaf, you have gold again in 73, monetary gold.
I had a friend who tried to get me involved in speculating on gold in the early 70s, and I said nah, I don't know anything, I'd lose my shirt, and of course if I'd done it I would have got rich within a few years, but well there's just another one of those times I didn't get rich, okay, but in addition to going off gold, again this is part of the reflation program, right, well we already
No, it didn't work. They raised the price of gold 59 percent, but prices in general came up about 6 or 7 percent for the rest of the decade.
So George Warren was decisively refuted and had to go back to Cornell and wallow in his price data some more, but they didn't give up on reflation.
and in 1935 the banking laws were amended significantly so that authority was centralized in Washington, D.C. in the Federal Reserve Board
whereas before the individual banks had had much more autonomy in setting their policies and the New York City Fed had been the leader and most important
is important but still only one of twelve. There really was no formally centralized monetary policy making prior to 1935 except to the extent that Benjamin Strong at the New York Fed or somebody else could persuade the other banks to act in a coordinated way and sometimes they did or sometimes the New York Bank was so decisive that it could really affect the course of events
and its own actions, but only after 1935 did we have something that qualifies as a central bank equivalent to those of say the Western European countries.
That didn't do any good either. Obviously nothing the Fed did in the whole decade of the Great Depression can be said to have helped in any way.
The monetarists, of course, blame the entire debacle on the Federal Reserve system because they say it simply stood by and did not act decisively enough to prevent that 30% reduction in money stock between 1929 and 1933.
It did not intervene actively enough to prevent that series of banking panics, which gave rise to ultimately more than 9,000 bankruptcies of commercial banks, and therefore it's to blame.
It created such a terrible situation that it took the rest of the decade to get out of it.
Well, that's an argument, but I think that's far from a complete story of why the depression was as deep as it was and how it might have been prevented or how recovery might have been brought about more quickly.
Neoclassical economists have come, even the people who are semi-Keynesian, have come to be very naive monitors about the whole experience of the Great Depression.
The Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit
I would claim that they could not have if other things had happened in the same way, if, for example, the New Deal had adopted the same policies, no amount of money creation would have led businessmen and investors to resume the investment at old levels, when they were afraid that they were going to be wiped out in the next few years.
The amount of money creation would have led businessmen and investors to resume the investment at old levels when they were afraid that they were going to be wiped out or even have their property confiscated by the federal government.
We've seen any number of countries in the world have rapid rates of money growth and they don't have prosperity.
All they have is inflation.
and I think the neoclassical economists have simply overlooked the context of the 1930s
and put way too much emphasis on both the initial collapse of money.
I think it did contribute to the financial debacle of those years
and much too much emphasis on the ability of monetary acceleration
to have brought the economy out of the conditions prevailing in 1933. But needless to say, that's
an endlessly debated topic in macroeconomics, even now, after all this time.
Let me say just a little bit about the labor reforms. The NIRA was declared unconstitutional
in 1935 on the grounds that Congress had delegated unconstitutional authority to the President
by just letting him approve or even create these codes of fair competition. And so that
That came to an end. I don't think too many people were sorry to see it go, although I've
run into a few other historians who think they have a lot of evidence that some businessmen
continued. Butler Schaefer, for example, in his book argues that in fact a lot of business
people would like to have had NRA continue or be recreated in some constitutionally acceptable
in a political way, but my reading is the same as I think most historians, which is that people had had enough of N.I.R.A. by 1935, even the people who had liked it to begin with had stopped liking it in most cases, but what happened is as soon as it was declared unconstitutional is that some of the parts that had a lot of political support were reenacted in other ways, the most important of those reenactments
was the labor provisions, the old Section 7A that authorized collective bargaining was
blown up hugely into the National Labor Relations Act of 1935, often called the Wagner Act,
and from that time on, that law is still in effect as amended, 1935, the right to bargain
and a whole list of so-called unfair labor practices identified, which meant that it was unlawful for employers to take various actions they had routinely taken in the past to discourage the formation or operation of unions in their workplaces.
So, after 1935, for example, an employer could not even circulate information to workers.
Let's say a union came in and tried to organize his workforce.
He might have in the past circulated a flyer saying, look, if you adopt a union here, the
consequences are going to be the following.
I'm going to lay off 10% of you, or I'm going to change the way I forgive you for coming in late, or any number of things could have been told to the workers, but that kind of information was outlawed.
Company unions were outlawed. Of course, the unionists had always hated company unions because they sometimes preempted them.
In fact, many workers liked company unions. That's why they joined them and stayed with
them. They were more cooperative. They weren't organizations with built-in hostility to the
employer. And these new unions, particularly the CIO unions that flourished after 1935
under this legislation, were more than hostile to employers. They sometimes looked as if
they were trying to wreck the industries they organized and they were full of communists and that's not just a turn of phrase they were full of actual card-carrying communists and indeed the CIO even the leaders who were not communists liked having these communists along with them because they worked harder they were more ideologically inspired to get out there and really take risks and put in a lot of hours
and Organized Workers and so the CIO unions, whether it's rubber workers or
automobile workers or steel workers, all these big industrial unions that
organized not along occupational lines but everybody in a given plant or even a
given company or a given industry would belong to the same union. They were
We're full of communists who hated the capitalist system and we're viewing this unionization
as just a means to the destruction of that system and its replacement with socialism.
So that was not something calculated to bring about industrial peace and in fact in 1937
all hell broke loose in labor relations in this country.
There were not only big strikes in many of these industries, like the rubber industry
and the automobile industry, where CIO unions were attempting to organize, but for the first
time the unions began to stage so-called sit-down strikes.
This was really quite an extraordinary thing because a sit-down strike is not at all what
it seems to be from the language.
It's not a strike.
It's a takeover of somebody else's property. These men would come into a plant, not work,
but not leave, and not let anybody else come in or work there. So they just literally took
control of the property, and you might think, well, why didn't the owner call the police
and have them eject these people? Well, you're the police in Detroit, and Ford calls up and
I've got 12,000 guys sitting here in the plant and they won't leave. What are you going to do?
There are too goddamn many of them. You can't send the police and eject 12,000 guys who are determined to stay there
and willing to use violence against you if you try to throw them out.
So these unions and their sit-down strikes and the refusal of state governors and city mayors to do what would have been required to bring this action to an end meant that employers just had no choice but in some cases to capitulate, to recognize these unions and to enter into collective bargaining agreements with them.
and again think back this is now part and parcel of what's called the second New
Deal period 1935 on the Crown Jewels being the National Labor Relations Act
and the Social Security Act this is the New Deal's turn to the left it's then now
starting to repudiate the cartelizers and the big businessmen that it had had
had embraced in 1933, if reluctantly. It's not only repudiating them, but it's making them the fall guys.
And Roosevelt and his lieutenants are starting to attack them on every occasion, publicly, as economic royalists,
People who are wrecking the economy by their selfishness and their refusal to do the right thing like recognize CIO unions
and accusing them of industrial sabotage, saying, why aren't they making investments?
They're trying to sabotage my administration. That's what they're trying to do.
Well, you know, this is like the saboteur accusing the victim of sabotaging him because these businessmen were scared to death.
You know, this isn't some nut on a street corner. It's the President of the United States talking this way.
They'd never encountered anything like that before. Nothing like that had ever happened before.
They hadn't imagined anything like that happening.
Big businessmen, wealthy people had always been movers and shakers.
Now there's some guy in the position of highest power in the government
who's threatening to take away their property and who's tolerating occupation of their factories.
What's going to happen next?
Well, put yourself in their position.
They not only are looking at this, but they're looking around the world.
Mussolini has taken over Italian economy, a dictator.
Hitler's running the economy. Germany. A bunch of the smaller countries in Europe are gone fascist.
It looks as if the whole civilized, or what used to be the civilized world, is going to hell in dictatorship.
Why should we be different? Especially when our own president is acting as if he wants to be dictator.
So they were frightened, and long-term investment was almost non-existent.
The investment that took place between 1935 and 1940 was almost all investment in inventories
and investment in equipment with short life.
Because it made no economic sense in view of the risks associated with appropriating future returns
Returns from Long-Term Investment to put good money now into projects that wouldn't pay
off fully for 20 or 25 years. So, new construction, new plants, new infrastructure, no. None of
those long-term projects, effectively none, were revived in the late 30s. And that's one
The principle reasons why the whole economy never revived, because if we look at the economy's normal operation, it has never before or since been the case that it went 10 years without adding to the capital stock, and that's exactly what it did in the 1930s.
Net investment for the entire decade was negative, so we didn't even make up for depreciation over a 10-year period.
Normally, the capital stock would have been growing by 2%, 3%, 4% a year, and we would have ended up after a decade with a capital stock that was 20% or 30% greater than it had been at the beginning.
It's part and parcel of the growth process, adding to our capital equipment to accommodate
our roundabout production, but it didn't happen in the 1930s because the New Deal scared
the devil out of the investor class in the service of FDR selling himself and his policies
to the voters in the face of a situation which is desperate enough for a lot of people, even
as late as 1936, still a lot of people hurting, and by that time a number of complete nut
cases were challenging the president from the left.
Huey Long, Father Coughlin, Dr. Townsend, people who had crazy schemes for having the
government give big sums of money to the unemployed or poor or old people, and those schemes had
great appeal to the masses. And so Roosevelt looked around and said, you know, I've got
to start sucking those voters away from these guys or I might lose the election.
And this demagoguery he resorted to so strongly from 1935 on until 1940 when he had to start
sweet-talking businessmen to get them to cooperate with the war mobilization, this demagoguery
was responsible for prolonging, I believe, the depression and would have prolonged it
even if the Fed had jacked up the money supply much quicker than it did.
I wrote an article making this argument and presenting some evidence that I've never seen
anybody else present on the question called Regime Uncertainty.
It's in the Independent Review in 1997, if you'd like to look at it, and you may find
it useful as just kind of a synopsis of the second New Deal.
I have a question actually about the unemployment data on the slide there. I wanted to ask whether you thought that there might be certain kinds of unemployment which are actually potentially quite significant that are not listed there.
For example, I mean, an argument can be made that conscription shouldn't really be considered a kind of employment because it's actually the government taking resources.
In which case, that drastic recovery there in World War II wouldn't look so drastic if you were told of that.
Wouldn't show up at all.
Much later on, in the 60s, 70s, 80s, a lot of drug laws, for example, are putting non-violent offenders in jail.
And if I remember my macroeconomics from way back when correctly, the government typically doesn't include people who are not looking for work.
And if people are being put in jail for nonviolent crimes, that's artificially suppressing the unemployment rate.
Think of it as an unemployment program.
You know, your points are very well taken. These are standard unemployment data. They
are adjusted in one way at least, which is that the data for the 1930s have been adjusted
so that the persons on government work relief programs are no longer counted as unemployed.
In the standard Labor Department data series, which is still used by many people, those
persons were regarded as unemployed and there were anywhere from 3 to 5 million of them
during the New Deal. So they make a substantial difference in the rate of unemployment. You'll
see here it never gets above 22 percent. If you were to throw in those people on the work
Work Relief Programs, it would be 25% unemployment, and the argument was at the time and since
that they weren't in regular employment, this was emergency employment, shouldn't be counted
as equivalent to real jobs, but I think it's a bad argument and they should be counted
as employed even though they're employed differently, they're not unemployed clearly.
Just quickly, what was the logic, again, why the tenants were being complained about wage workers, and what happened again with that?
How did sharecroppers fare during the Great Depression?
We talked about the National Labor Relations Act, the Wagner Act, and I think when you're talking about the growth in government,
We talked about the National Labor Relations Act, the Wagner Act, and I think when you're talking about the growth in government, you should also consider a look at the growth of government-sanctioned
When you look at the growth of government sanctioned unions for government workers, when did that all come into effect and how did that all work? Are you familiar with the history?
And of course, they didn't like that, or the people who wanted to organize unions among government workers didn't like that, and eventually they got the law changed, and it's had a big effect because virtually the only growth in unionized labor in recent decades has been government workers.
And now, the unions have declined so much in the past 50 years that of the private labor force, less than 10% is unionized, but of the government workers, I believe it's something in the neighborhood of 40%, that includes school teachers and of course they're the ones that cause the most trouble because they like to wait until school's about to start in the fall and then go on strike
Is there any book or article that treats that subject that you're aware of?
and some very good books that deal with public sector unionism as well as the unionism elsewhere
in the economy.
A couple of books written in the 1980s and they're easy to find, in fact many of the
Mises Institute reading lists list them, so if you don't find them there just look up
Morgan Reynolds on Google and they'll pop right up.
Yes sir.
When did the minimum wage legislation go into effect and are there many estimates of what the impact was on the unemployment rate?
The New Minimum Wage Law was passed in 1938, the so-called Fair Labor Standards Act, and it had more coverage, and more uniform coverage, and then that law has been amended a number of times over the years to increase the scope of coverage, and just about everybody was covered by a code of fair competition.
is covered nowadays and of course states have their own minimum wages and sometimes they set higher rates than the federal rate requires so so there's been change over time and there's some variation across space there have been many studies of the effect of the minimum wage it's a it's a cottage industry in the economics profession they they almost all find some kind of effect we would expect that is that they make unemployment
The Theory of Money and Credit
We can always argue about the magnitude of the effect because economic theory doesn't tell us what the magnitude will be.
Most of the time, it turns out, the magnitude that's estimated in these studies is not very big.
That is, when the minimum wage is raised, let's say, from $5 to $6, it's often just compensating for some price level changes that have taken place since the last change.
So it's not a real change at all, but you know for the moment it's a change and it has a relatively small effect, a few percentage points change in what the situation would otherwise be for the unemployment rate.
so it's it's not a big deal because in our economy relatively few people are
directly subject to that effect there aren't that many people in the free
market who would earn below the minimum wage that's set so so its effect is is
on relatively few people directly it affects more people indirectly because
Indeed, the reason the labor unions support it so actively is not because their members are going to be immediately affected by it, but because many unions have members producing goods which compete with goods produced by people who do earn around the minimum wage rate.
So this is a way of placing competitors at a disadvantage, competitors for the goods that their members help to produce.
So it's a kind of indirect protectionist scheme for higher wage workers more than anything else,
but it's one of those schemes that's easily sold to people as what it purports to be, a way to help the poor.
No matter how many times you explain it to people, they just refuse to accept the argument.
I've gone through this any number of times with people myself.
We've got a guy now in Louisiana in the legislature who's set out to raise the state minimum wage level.
And that's all we need in Louisiana, you know, is to reduce the number, you know, the handful of us who are still working and not on welfare down there.
and yet they're trying to do it and a friend of mine in Baton Rouge, a libertarian over there, he's made it a project to persuade this legislator of the error of his ways and so he's been prevailing upon me for articles to give to this legislator and I'm sure this is quite a futile endeavor but I've done what I could to help him out.
I just wanted to mention that having been a federal employee, a lot of that number is increased or is there because they have what's called a dental plan.
And if you join the union, you get this dental plan and most people, the only reason they even join the union is so they can get that so-called free dental plan.
I think if we looked at the overall level of pay, factoring in the benefit value as part of the pay packages, we'd find that government employees, especially at the federal level, are earning substantially above market rates.
The ones at the state and local level are not so far out of line in general, although some of them, depending on the work they're doing, are.
But there's always been a lot of variation in how much effect unions have in actually changing their wages.
Tons of studies have been done in neoclassical labor economics to try to make estimates of this.
They range all the way from nothing, you know, unions that are totally ineffective, to some unions, say, airline pilots unions, that have maybe even doubled the pay that these workers would be getting without the union.
What you want is to work in, if you want to make a union really count, then unionize a group of workers in an industry where there's a small amount of labor cost relative to the cost of other inputs, but that labor is very critical.
So if you're talking about airlines, there's all this huge capital cost associated with the airplanes and the equipment and the repair facilities and so forth.
And then the pilots that come on board, now they're critical.
You can't operate your business without pilots to fly the airplanes.
But how much of your total cost of operation is pilot expense?
Fairly small amounts.
So, that puts them in a position to really squeeze and still not be displaced. You can't
really displace them in the end. So, those people have been very successful and if you
try to unionize somebody like janitors, it has really no effect because they just get
fire instead of using a janitor the clean-up people use a mechanical mop or
something to clean up the building okay we'll call a halt for today
Thank you very much.