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 ‘ownership 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 better—so 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 production—whether the farmers wanted to limit their production or not—by 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 simple—have 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 prices—Henry 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 NRA—the 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 technocrats—engineers, economists, technicians and other “experts”—could 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 everyone—not 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 owned—or 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 entailed—they 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 commodities—including processed food—and 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 concerned—impose an excess profits tax to confiscate any undistributed corporate profits and let the government put these funds to productive uses—punish 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 spending—which is the key to economic recovery—lies 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 maintained—in Bob Higgs’ words, uncertain about the continuation of the current “regime” of private property rights—they 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 diminished—though 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 system—and 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