Historic Events for Students: The Great Depression. Editor: Richard C Hanes & Sharon M Hanes. Volume 1. Detroit: Gale, 2002.
In his first inaugural address on March 4, 1933, President Franklin D. Roosevelt (served 1933-1945) denounced the “rulers of the exchange of mankind’s goods,” the “unscrupulous money changers,” for failing to preserve the prosperity of the nation. As a result of the Great Depression, the boom years of the 1920s now became commonly viewed as the result of greedy excess. The business elites, whose aims focused on unregulated financial markets, had neglected the greater economic good, serving only to precipitate the economic collapse. But the moneychangers, Roosevelt went on to proclaim, had “fled from their high seats in the temple of civilization.” No longer esteemed as the oracles of economic faith, the economic depression attested to the failure of the old economic order.
The possibility of piecemeal improvements of the old economic structure was rejected. The language in Roosevelt’s first inaugural address clearly alluded to a mandate for sweeping reform. In fact nothing short of a new economic order would suffice. In 1932 campaign speeches, Roosevelt called for a new role of government to assist business in the development of a new economic system. Defenders of the old economic structure, Roosevelt declared in his first inaugural address, had tried, but failed in their efforts to maintain an outdated economic tradition.
Many early supporters of Roosevelt’s agenda as president, called New Dealers, believed it was archaic to think of the modern corporation as purely an independent actor in the nation’s economic system. Just as the national government relies on corporations for economic prosperity, so do corporations rely on the national government for fair regulation of markets, for political stability and sometimes for subsidies of capital (money) and land. Corporations are equally dependent on an adequate supply of labor and good relations with workers. Thus to the New Dealers what was needed to transform American industrial relations was a new public philosophy. This philosophy would recognize the interdependence of large forces in the U.S. economy affected by government, labor, and industry. Large corporations should be viewed in terms of holding a public trust, then the role of government, it was envisioned, would be to coordinate these competing forces and guide the long-term interests of industry.
On a practical level, this meant that industrial relations should be organized in such a manner that the various economic interests would be represented by some associations such as committees that could both advance the interests of and discipline its members, with the help of government, along lines of a greater collective good. This philosophy came to be known as “corporatism.” Though many different varieties of it have developed in the twentieth century, such as in post-war Japan and Western Europe, it was not entirely clear what form it would take in America during the 1930s.
Following his inauguration in March 1933, President Roosevelt and his advisors moved quickly in devising a grand strategy of national economic planning. In June Congress passed the National Industrial Recovery Act. The National Recovery Administration (NRA), created by the act, soon tackled the task of developing hundreds of business codes that would attempt to control prices of goods and workers’ wages in numerous industries.
To accomplish this massive effort, scores of committees were created composed of business leaders and labor and consumer representatives, each group seeking to develop for codes for a particular industry. The sheer size of the effort, however, made the process unwieldy. In addition the voluntary nature of industry actually adopting the codes proved a major weakness. Numerous problems in use of the codes quickly developed. Just as Congress was engaged in heated debates over what to do about the NRA system, the U.S. Supreme Court issued a ruling in May 1935 that held the NIRA was unconstitutional. A major attempt at national economic planning ended abruptly. The New Deal would quickly chart a wholly different course from 1935 onward.
Problems with Early Economic Theories
Initially, the new administration did not have a detailed program for reform. It was guided by a set of general principles shaped by the failure of the nation’s economic system and the old intellectual framework that had supported it. Many New Dealers rejected as “outworn” certain basic elements of classical economics developed in the late nineteenth century, which had guided both business thinking and national economic policy. For example one belief was that pure, uninhibited competition in the marketplace was sufficient to channel individual greed for profit into beneficial paths for the market as a whole. This fundamental principle of laissez-faire economics, according to early New Deal theorists, was clearly a fallacy. What happens in the case of massive over-production and under-consumption? What happens when manufacturers in a given industry begin losing profits because consumers cannot afford to buy, as was widely perceived to be a root cause of the Depression? The old solutions no longer seemed to work.
According to the old, competitive laissez-faire model, manufacturers ought to become more competitive with each other. They should reduce the cost of production and ultimately the price for the consumer. Some manufacturers will lose out and fail in the process. In the end, however, the invisible hand of the market would adjust production and consumption in an economically efficient equilibrium.
Clearly several problems existed with this theory as economists in the early 1930s began to point out. First, nobody really knew how long it would take for a market to reestablish equilibrium under such circumstances. For all anybody knew, it could take years. Second, costly price wars clearly hurt many businesses and the resulting wage cuts limited the ability of consumers to buy the products produced by the firms. Such price wars, it seemed, could go on indefinitely. A third observation was that certain choices were now available to large scale manufacturers that might be highly beneficial to the individual company but ultimately counterproductive to the economy as a whole. If, for example, the output of a manufacturer was so great that its share of the market became large enough to influence the industry price, then it would essentially operate as a monopoly (a company or group of companies who control the supply of a product) and push smaller firms out of the market. Many large corporations in the 1930s, such as those in automobiles, steel, and consumer electronics, were so large that they did, in fact, control the market.
Laissez-faire theories of perfect competition did not appear to fit the facts of industry relations in the 1930s. Rather, it seemed to only apply to conditions where manufacturers were small enough that no one firm controlled the market. But in the case of vast concentrations of production that now characterized the American economy in the 1930s, many markets were no longer competitive. To treat the economy as if it were made up of firms in perfectly equal competition would ignore this fundamental reality. The damaging result to firms competing in imperfect markets came to be recognized as the result of “destructive competition.”
Rise of Corporate Influence
There was also a more basic philosophical barrier that hindered legal reform of the economic system, which could be found in the traditional view of the corporation as an independent entity free from either the government or the economy. The antitrust tradition of the Progressives—those who believe in using the powers of government to solve social and economic problems—in the early part of the century began to question this concept. Corporations had grown larger and more dominant both over the lives of workers and over the economic destiny of the nation.
Evidence of the end result of this process was published in 1932 in a study titled The Modern Corporation and Private Property. The book was by two Columbia University economists, Adolph Berle and Gardiner Means, who would soon become influential advisors in the Roosevelt administration. The book itself had a far-reaching impact in the new administration. Berle and Means demonstrated in statistical and economic terms that modern enterprise was made up of greater and greater concentrations of economic power.
Creating a Cooperative Movement
It was certain that the new economic order Roosevelt envisioned would rely on “a great cooperative movement throughout all of industry,” as Roosevelt himself stated on May 17, 1933 in a recommendation to Congress, rather than simply a variation of the U.S. economic structure of the past. If a few manufacturers in various industries could control that industry’s market, as in fact was the case, then the best interests of the economy would be served by promoting regulation of the industry by itself. This would be through agreements assuring fair competition within a particular industry. This strategy would become the core of the new industrial program. As if to illustrate his willingness to abandon the old approach to fair trade regulation, Roosevelt rejected too much reliance on the old antitrust (opposing large combinations of business that act to restrict competition) laws designed to combat monopolistic price-fixing. While necessary to safeguard against the most flagrantly improper business practices, the antitrust laws, designed to split up monopolies into smaller firms, were seen as clumsy if not obsolete tools to correct market abuses. Instead, divisions of economic interests would be formally incorporated into cooperative associations of industries that would agree on their own fair practices based on general guidelines provided by the federal government. The agency responsible for instituting this new form of industrial organization, the National Recovery Administration (NRA), was established under the administrative organ of the executive branch and would become the centerpiece of Roosevelt’s recovery program.
This new economic program was not, however, entirely new. In fact the War Industries Board (WIB) had developed a similar scheme during World War I (1914-1918). Many New Dealers looked to that experience as an appropriate model. The WIB was a very flexible board of voluntary committees made up of representatives from industry. Based upon a philosophy of industrial self-government, it agreed upon production and prices grounded in a shared commitment to winning the war. Voluntarism alone did not always assure compliance, however, and occasionally the government did use coercive power primarily by threatening to divert future government contracts to other companies or appealing to public pressure to force adherence to agreed direction. But on the whole, noncompliance was rare and the pressure of public opinion and sense of duty among industrial leaders was enough to insure that the board functioned effectively.
The conditions that were necessary to inspire industrial cooperation with the government during the time of the WIB, however, were not entirely the same as the conditions that existed during the 1930s. The desire for cooperation under the WIB during the war was driven by national security concerns and was widely understood to be a short-term emergency measure. The New Dealers were convinced that the Great Depression posed an equally dangerous threat to the national welfare. Any recovery program would have to be presented as a national emergency akin to war. Unlike the temporary WIB, however, they envisioned the creation of a permanent corporatist economic system.
Roosevelt was initially cautious about introducing a legislative proposal, presumably because of the sweeping scale of the reforms being contemplated. Legislative drafting began early in the new administration. Roosevelt appointed “brain trust” member Raymond Moley to gather and consider various proposals. Moley, in turn, appointed several advisors, including Hugh Johnson, a former WIB official; Donald Richberg, a labor lawyer; and Rexford Tugwell, an economist from Columbia University. At the same time, the President encouraged Senator Robert Wagner of New York to work on his own draft.
The administration would not be able to control the tempo of recovery proposals for long. On April 6, 1933, an impatient Senate passed a bill introduced by Senator Hugo Black of Alabama. The bill would ban from interstate commerce all goods produced in factories that employed workers for more than six hours a day or more than five days a week. Senator Black’s “Thirty hour” Bill professed to reduce unemployment and appealed broadly to organized labor. But the bill made no provision for establishing minimum wages or maximum hours, partly because the American Federation of Labor (AFL) labor union organization was hostile to minimum wage legislation. Black believed that a shorter work-week would reduce the supply of labor and thereby push wages up. Roosevelt, however, was not convinced that this would actually help wages rise. He believed that the program his administration was developing would ultimately prove more flexible. But the introduction of the Black Bill created a problem of political urgency for the administration that ultimately forced Roosevelt’s hand. Organized labor was hinting at a general strike if the Black Bill did not pass. A veto was therefore out of the question if it passed Congress. Instead, Roosevelt was able to use his influence in the U.S. House of Representatives to postpone action on the bill until he could introduce his own legislation. When Roosevelt did finally introduce the National Industrial Recovery Act on May 17,1933, it effectively scuttled further consideration of the Black Bill.
On May 17 Roosevelt introduced the National Industrial Recovery Act (NIRA) to Congress. The House, firmly controlled by Democrats, approved the bill within nine days, while the Senate took a little longer. In a foreshadowing of the eventual fate of the NIRA, a number of Senators questioned the bill’s constitutionality on the grounds that it gave too much power to the president. The U.S. Constitution gave such authority over business to Congress, not the Executive Branch of government. Concern also existed that the NIRA would blur the lines of interstate commerce and as a result infringe upon states’ rights. Under the U.S. Constitution the federal government only has power to regulate interstate commerce, meaning economic trade crossing state lines. States are responsible to regulate all other businesses.
Senator Borah of Idaho also argued that the bill would foster control by large business. When it came time to draft and administer codes of fair trade competition, the larger companies, Borah argued, would surely dominate the process. The protection against such abuse did not appear to be included in the legislation. How, Borah asked, could the President oversee so many codes for every industry? Senator Wagner attempted to persuade Borah that the safeguards to protect small business and labor were in the bill and that the proposed legislation did not nullify the antitrust laws. But Borah, an avid antitruster, insisted that the Senate add an amendment prohibiting company combinations from restraining trade, fixing prices, or any other type of practice that may have results like a monopoly. Borah’s amendment was in fact so sweeping that it would have undermined cooperation among industries needed to agree upon minimum wages or prices and would undermine the very purpose of the NIRA. Fortunately, the merge committee to reconcile the House and Senate versions eventually convinced him to water down his amendment to include only language prohibiting monopolistic practices.
The greatest opposition to the bill came from conservatives, who opposed the minimum wage provision and the right of collective bargaining guaranteed to labor. But conservatives could not exert enough pressure to stop the bill. It had been designed to satisfy nearly everybody else—labor, public works advocates, trustbusters, and economic planners. The AFL as well as the Chamber of Commerce and the National Association of Manufacturers supported it. Labor liked it because it guaranteed collective bargaining, and business liked it because it permitted price-fixing. It was, in short, a measure that had something for everyone. The momentum for its passage simply could not be restrained. On June 9 the Senate passed the measure by a vote of 58 to 24 and on June 16, 1933, Roosevelt signed the NIRA into law.
There were three titles, or main parts, to the NIRA: Title I outlining the general framework of industrial self-regulation; Title II establishing an emergency Public Works Administration (PWA) to construct highways, dams, federal buildings, naval construction, and other projects; and, Title III providing for taxes to help finance the PWA.
The substance of economic reform, however, lay in the ten sections of Title I.
- Section 1 was a broad description of policy, which was, in fact, a common feature of legislation passed by Congress during the period. The section defined the intent of the NIRA, which was to promote cooperative agreements in industry, eliminate unfair trade practices, increase workers’ purchasing power, and reduce unemployment while expanding production.
- Section 2 gave considerable authority to the president to create administrative agencies, appoint employees without regard to civil service laws, and delegate power to his appointees. This expanded power was not indefinite but imposed a time limit of two years on the act.
- Section 3 gave the president authority to approve codes for various trades and industries. He could add or delete parts of proposed codes or even establish entirely new codes.
- Section 4 granted the President authority to assist businesses in entering into voluntary agreements.
- Section 5 exempted all businesses operating under an approved code from the antitrust laws.
- Section 6 gave the president authority to determine whether a particular organization as truly representative of a particular trade or industry it claimed to represent.
- Section 7 was the most controversial part of the NIRA. It established basic labor standards, and minimum wage provisions. Under Section 7(a), a phrase would become famous in its own right—employees were given the right to organize and bargain collectively.
- Section 8 excluded agriculture from the reach of the NIRA. It also guaranteed that none of the codes could conflict with the Agricultural Adjustment Act, another New Deal law designed to financially assist farmers.
- Section 9 gave the president authority to regulate the shipment of petroleum across state lines.
- Section 10 authorized the president to re-write any of the codes at any time during the life of the NIRA.
- To administer the NIRA, the act provided for the creation of the National Recovery Administration (NRA), an administrative agency directly under the authority of the President.
Selling the NIRA
Initially business welcomed the NIRA, but underlying the positive reception of the act was a wait and see attitude. Success of the NRA would ultimately depend on how it was administered. Therefore it remained to be seen how much influence a particular group would have on the code drafting process.
Despite the heavy bureaucratic oversight and enforcement of the codes, the actual spirit of the NRA, like its predecessor the WIB, was very much voluntary. Coercion did not feature prominently in the scheme. It was therefore imperative that public support and enthusiasm be behind it. To do this, the administration launched a major campaign nothing short of a national crusade.
Roosevelt appointed General Hugh Johnson, who had designed and administered the selective service system during World War I, to head the agency. Johnson was a tough, action-oriented military man, whose occasional flair for colorful language only contributed to a sense of wartime crisis that he seemed to enjoy promoting. Johnson had also been an administrator for the Bureau of Purchase and Supply during the war and had served as a member of the WIB. Because of his unique experience, Johnson was in many ways the perfect man for the job. In other respects, however, he was not. For example, Johnson was not the most politically effective negotiator, often appearing to browbeat industry representatives into quickly drafting a code. This political insensitivity, as well as a quick temper, tended to make him very unpopular.
Johnson proceeded to launch the greatest out-pouring of patriotic fervor since the war. From the radio and the press the General exhorted everyone to do his part. Johnson demanded that individual firms pledge themselves to eliminate child labor, pay a minimum wage of twelve or thirteen dollars a week for 40 hours work, and work together to set floors for minimum prices. Those businesses that complied with the NRA could display a Blue Eagle emblem, a symbol designed by Johnson that became the national symbol of the NRA. The sign would indicate their willingness to participate in the recovery program. The legend under the symbol of the Blue Eagle, “We Do Our Part,” summarized the sentiment of national emergency. Blue Eagles began to appear in store and factory windows across America as part of a great patriotic drive to defeat the depression.
The Codes of the NIRA
By the summer of 1933 the NRA was drafting codes by the dozen. Before July only the cotton textile industry had created codes. As the campaign gained strength, codes for the shipbuilding and the wool textile industries soon followed. Then came steel, petroleum, and lumber. Throughout the summer, Johnson flew across the country on an army plane in order to convince major industries to adopt the Blue Eagle. Late in August, the automobile industry joined with the noted exception of Ford Motor Company. On September 18th, the coal industry, the last of the major industries, accepted the Blue Eagle. Many more months of code writing for smaller industries lay ahead but in the end, some 546 industrial codes and 185 supplemental codes were written and approved.
The administrative challenge of the NRA was enormous. The codes themselves eventually filled 18 volumes, including 685 amendments and modifications, 11,000 administrative orders interpreting the provisions of individual codes, 139 administrative orders bearing upon the procedures of the NRA, and some 70 executive orders signed by the president. This activity created a complex body of administrative law and an even greater body of administrative interpretations and decisions. Despite this enormous bureaucratic growth, the structure of the NRA was fundamentally decentralized in a key respect. The industries recognized under the various codes became self-governing. As a means of implementing the codes, the NRA approved 585 code authorities under which there were several thousand regional and divisional subordinate agencies. Most of the approved code agencies were also granted the authority to levy fines. Not surprisingly, the staff of the NRA grew as administrative activities of the code authorities expanded. In August 1933 the staff numbered nearly four hundred. By February 1935 it had risen to a high of 4,500 in Washington and the various field agencies. The scope of the authority of the NRA was staggering. It covered industries in many fields ranging from banking and insurance to transportation to public health. As Roosevelt anticipated, it was possibly the most far-reaching legislation ever passed by Congress.
Drafting the codes was essentially a process of negotiation. Government officials and business representatives hammered out agreements based on general principles of industrial organization. There was, however, a disadvantage for the government. Most government representatives were not as familiar with the industry as business representatives and no real policy guidelines existed to follow. Policy assumptions involved in drafting the codes very much came down to the individual deputy administrators involved in the code writing process. Personal desires and the manner in which issues were presented and negotiated naturally varied for each deputy administrator. The code authorities would formally adopt the codes through a voting process among the members. Members would also vote on enforcement issues when a company might not be properly complying with the codes. The members would decide how to respond to the situation.
Political pressure in certain industries, such as potential labor strife, could also be a factor in the sense of urgency in drafting codes. As a result the codes varied considerably from one industry to the next, however, business usually had the upper hand. Given the information at their disposal, experience, and political clout, it was almost inevitable that business would dominate the code writing process. Moreover many deputy administrators were themselves almost entirely drawn from the ranks of business. Most of Johnson’s immediate subordinates came from either industry or the military and shared his views and background.
Nevertheless business did have to make concessions and in a few industries, such as textiles where unions were strong, business representatives were not able to dominate the drafting process. Overall, however, the wage and hour provisions were full of exceptions not originally contemplated by the legislation and labor representation on the code authorities was also limited wherever possible. In fact only 51 code authorities, less than 10 percent, contained labor representatives, moreover only 10 had consumer representatives. Business leaders in several industries succeeded in including a number of provisions designed to establish business cartels. A cartel is a combination of businesses formed to regulate prices and production in some industry.
The NRA and the Rubber Tire Industry
In the 1920s and 1930s, the rubber tire industry saw tremendous change, which resulted from changes in the sale of rubber tires to the public. The emergence of mass distributors intensified competition and erratic materials prices within the industry led to terrible price wars. In 1928 the rubber tire manufacturing industry employed over 83,000 workers, and by 1932 that number had fallen by half. Nearly everyone in the industry welcomed the National Recovery Administration (NRA), hoping that it would prevent fluctuating rubber prices and bring order to industry.
By 1920 the rubber tire market was dominated by the “Big Four” tire rubber firms: Goodyear, B.F. Goodrich, U.S. Rubber, and Firestone. These companies produced tires that were sold to automobile manufacturers as “original equipment.” There were also a number of smaller and medium size firms that dealt with the “replacement” market, selling to individuals and bus and taxi companies. The smaller firms served local markets and generally sold at the lowest possible price while the “Big Four,” aimed for the highest prices.
Throughout the 1920s, however, the industry structure began to change. Rubber costs were unstable, and toward the end of the decade automobile sales declined, which affected the Big Four. As a result the larger firms began moving into the replacement market and began producing cheaper lines of tires. Some of the smaller firms shifted to producing specialty tires, but most could not compete. In 1923 there were 166 tire manufacturing firms and by 1933 there were only 35.
Unlike other prominent industries, such as automobile or cotton textile manufacturers that negotiated primarily over labor issues when drafting NRA codes, the rubber tire industry fought almost exclusively over distribution practices. At first the code looked promising; tire manufacturers unanimously agreed not to sell tires below cost. There was little agreement, however, on the matter of production controls. Three of the Big Four favored a production and sales quota plan. Firestone was the maverick and instead proposed a flexible plan where prices would be set according to the size of the company. The smallest firms would be able to charge the lowest price. Goodrich, Goodyear, and U.S. Rubber remained supporters of production quotas. Five of the smaller companies represented on the industry’s eight-member Code Committee favored the Firestone plan. It was this plan that was approved in the final draft of October 1933. This decision was met with an uproar as many considered the plan to be blatant price-fixing. When the NRA finally approved a code at the end of October, the Firestone plan was conspicuously absent as was the production quota plan. The NRA administrators hoped that several months might bring a consensus on controlling the stability of prices. The stalemates never dissolved and the adopted code was completely ineffective.
It took five months of bitter negotiations before a code was approved in May 1934. Immediately afterwards accusations of noncompliance began flying. The tire industry condition was recognized as dire and if ever a situation required the declaration of an emergency, the tire industry was it. The emergency provisions classified tires into four price levels based on their quality of manufacture. A flexible price system was used but not between companies like the earlier Firestone plan but between products. This code was, critics objected, price-fixing and soon proved a failure.
Next manufacturers pushed for a long-term cost control plan. The industry presented a cost report to the NRA in June 1934 based on the current cost of raw materials. The NRA, however, refused to consider the plan because it would raise prices for the consumer. It would only accept the plan if it changed the value of raw materials. Neither side would budge. The last resort of the industry was to petition the NRA to modify its emergency price provisions by raising the minimum prices. The NRA agreed but the eventual changes, effective on August 27, 1934, were still too low and too late to help the industry. Thereafter tire manufacturers so widely ignored the NRA that by September’s end, the NRA had given up on the tire industry. The NRA tire manufacturing and retail codes were not only a major failure but also likely contributed to even greater industry strife and price wars.
A major feature of the NRA was controlling prices of goods. Most of the codes, approximately four hundred, prohibited sales of goods below cost of production. In practice, many businesses did not always follow the plain meaning of this term and tended to substitute “price” for “cost.” This allowed them to set minimum prices sufficiently high for all of their members to make a profit. A few codes, such as in lumber, cleaning and dyeing, and coal, actually contained language that allowed for direct price-fixing. These industries had traditionally engaged in price wars that threatened the existence of smaller firms within the industry.
Deputy administrators pursued several strategies for controlling prices set by the codes. One path was through what were known as price-filing plans. These were placed into 444 codes and called for the filing of current and future prices, required the identification of sellers, and prohibited deviation from filed prices without notifying the code authority. Penalties could be meted out to those who failed to comply. “Waiting periods” were established before a filed price became effective.
Other methods to control minimum prices were placed in codes. Some attempted to place into their codes existing geographical relationships so as to preserve existing avenues for distributing goods. Others tried to regulate bidding practices for winning new orders. Generally, the approach to standardize costs and sales practices in the codes presented an incredibly diverse collection of restrictions on economic competition.
Over 60 industries approached the control of prices by controlling production. Limitations were set on machine use or plant hours, production quotas, and even, in four codes, provisions for limitations on inventory control. These all restricted the productive capacity of industries. General Johnson tried to discourage production controls but admitted there were cases where they might be useful such as in natural resource industries like oil or timber.
Provisions were also set up for enforcing the codes. This provided the punishment approach for not falling into line. The amount of requirements differed from code to code and business was often reluctant to punish its own members. Many code authorities preferred instead to use their power to make exemptions for industries not willing to comply with the codes and interpret the code language in a favorable light for those industries. While every code authority did include government members appointed by the NRA, usually they were part-time, unpaid, and given little or no power to vote. When NRA administrators did not have duties elsewhere and were able to attend code authority meetings, their presence was usually negligible. The drift of the code authorities toward favoring the larger more economically powerful companies or groups of companies gradually became apparent. In practical terms, the larger and securely established trade associations (businesses having a common interest in a particular industry) controlled the process. Though some allowance was made for legally required labor clauses, what began to emerge was a system of business cartels.
Conflict over the NIRA
Critics of the NRA argued the codes were being misused. To substantiate this claim, they pointed to the gradual rise in prices for many goods and services. But Johnson was not concerned about rising prices. Since prices had collapsed as a result of the Great Depression and the new costs imposed on industry by the codes for wage increases and work hour reductions made price raises inevitable in many cases. In fact prices needed to rise according to Johnson and the NRA staff. Otherwise numerous shaky businesses trying to recover from the Depression would be driven into bankruptcy. What did alarm Johnson and the NRA staff was that prices of goods were rising faster than wages paid to workers. According to the overall NRA recovery plan, wages would rise with prices. The increased income would give more purchasing power to consumers. What was essential to the program was balance between price changes and wage changes. If business cartels increased prices beyond those justified by the new costs of production, then the usefulness of any increase in wages would be negated. By January 1934 growing evidence was suggesting that this is exactly what was happening. Business self-restraint was failing and many businesses were cooperating to produce cartels. Suspiciously large price increases in certain commodities (goods) were eating away at any benefit of increased wages. Thus the drive to create increase purchasing power of the public was working in reverse. The public was quickly becoming disenchanted with an economic recovery program that brought higher prices instead of better jobs.
In October Johnson decided it was time to counterattack. He started a “Buy Now” program in an attempt to encourage a consumer buying spree. This, it was thought, would stimulate enough spending to offset a drop in business confidence. With business confidence restored, there would be proof that the NRA was working and that businesses should follow the codes and cooperate with the code authorities. General Johnson envisioned the campaign to be a reenactment of the Liberty Bond drive he had undertaken during World War I. He soon discovered, however, that the same level of moral enthusiasm was not present. The campaign proved a dismal failure because consumers had very little to spend as the public grew exasperated with the Blue Eagle. If there were fears about the failure of the recovery program before, there was little doubt by the end of October.
By the fall of 1934 it had become clear that noncompliance with the codes was widespread. The temptation to violate the provisions of the codes was just too great. The competitive advantages over rivals who followed the codes were enormous. Wage slashing and “chiseling,” the dumping of goods on the market at below the code cost, became common. Once it became evident that certain businesses in a given industry were violating the codes, economic self-interest reasserted itself. Even those businesses committed to the NRA were ultimately compelled to violate the codes in order to compete with those businesses that had no qualms about ignoring the NRA. A few non-complying businesses in an industry could force the rest to abandon the codes in a vicious circle. Gradually the traditional competitiveness found its way back into the economic system.
During this period code-abiding businesses demanded that the NRA take steps to curb violations. By late 1933 the NRA put greater emphasis on compliance and created an independent Compliance Division, a National Compliance Board, and regional compliance offices in every state. The credibility of the NRA was at stake and a new emphasis on punishing violators ran through the agency. But if voluntary cooperation proved difficult, the problems posed by enforcing compliance would prove insurmountable. The codes were often very detailed and overly ambitious in many cases. Sometimes they included the smallest details of sales transactions in less organized industries like the service industry. Therefore violations were often difficult to detect. Businesses monitoring compliance in the industry was one thing, but the extent of highly detailed management that would have been required for government to oversee business compliance with the codes was never contemplated.
A few well-publicized prosecutions might have delayed the breakdown in compliance, but the most frequent violators were small businesses on the verge of bankruptcy. Attempts to penalize these businesses, which usually had nothing to lose, would only bring worse publicity for the program. Many within the agency now began to fear that the NRA was embarking down a dangerous path toward regulating industries. Compliance with the codes could only be assured by a much larger bureaucracy, and business would never be sympathetic to a development such as this. The NRA was stuck in a quandary. Without more enforcement, it would lose the support of those willing to comply, with more enforcement, opposition to the NRA would only increase.
Although both consumers and labor were increasingly vocal in their objections to the NRA, the majority of the complaints actually came from the increasing disharmony within industry. The inevitable conflicts between manufacturers and distributors, large firms versus smaller firms and chain stores versus independents could no longer be resolved in the marketplace. Resolving conflicts would have to come through political negotiations and the decisions of code authorities. Frequently businesses were put in the position of judging their competitors. The losers of NRA decisions were quick to conclude that their rivals were simply making a business maneuver by using the code and that the code authorities were discriminating to put them out of business. Inevitably the Roosevelt administration would be caught in the middle of such confrontation.
The old antitrusters in Congress, such as Senator Borah, were now convinced that the NRA was creating monopolies everywhere. Other departments within the administration became critical as well. The Department of Labor voiced concern about the accuracy of statistical reporting turned over to the code authorities. The Department of Agriculture was anxious about rising industrial prices. The Federal Trade Commission thought the objectives of the NRA were a complete corruption of the purpose of government regulated competition. Secretary of the Interior Harold Ickes was almost continually in disagreement with General Johnson. The General thought that Ickes was slow to get the PWA off the ground. Ickes accused the NRA of promoting monopoly as evidenced by the fact that he was receiving identical secret bids on public works contracts in terms of the dollar amounts proposed. Such marked similarities strongly suggested the companies were overly cooperating and essentially forming a cartel to corner the new government projects among themselves. Johnson and Ickes would spar at meetings of the Special Industrial Recovery Board, an interdepartmental agency designed to coordinate the activities of the NRA with the rest of the economic recovery program. The board had other critics sitting on it as well. Johnson would usually get an earful from Secretary of Agriculture Henry Wallace and assistant Secretary of Agriculture Rexford Tugwell about the futility of price controls unless they were accompanied by government regulation. Johnson vehemently disagreed, arguing that the price controls in the codes did much to limit destructive price wars. He was also aware that opposition by key players in the Department of Agriculture was actually part of a broader political break between the Department of Agriculture and the administrator of the Agricultural Adjustment Administration George Peek who generally supported the NRA. Partly due to his awareness of competing views within the Department of Agriculture, Johnson increasingly ignored the board, refused to provide it much information, and finally asked Roosevelt to abolish it. In December 1933 Roosevelt agreed with Johnson and the board’s functions were transferred to a coordinating agency, the National Recovery Council. The council was unlikely to give Johnson much difficulty.
Through 1933 attempts to reorient the focus of the NRA had been thwarted by conflict within the agency that was now growing. The increasingly vocal presence of the Consumer Advisory Board and the Research and Planning Division within the NRA was gaining notice by Congress. These sections were primarily staffed with economists and sociologists who had little faith in industrial self-government. Johnson generally ignored their policy proposals but they were assertively challenging existing policy. After much pressure in December 1933 he agreed to schedule public hearings on the so-called “price question” in January.
The complaints centered around areas where there was suspiciously too much similarity in price bids for government contracts and unjustified price increases, mostly in lumber, textiles, printing, steel, cement, coal and scientific instruments. In all only 34 codes were questioned. Days later Johnson would state publicly that the people complaining were mostly “chiselers,” and knew very little about industry. Nevertheless Johnson did concede to use labor and consumer advisors for the government representatives on each code authority. This policy, however, strongly opposed by industrial leaders, was never really implemented.
The biggest problem, critics charged, was that small firms were at a disadvantage because they could not challenge larger firms by lowering prices. In many industries, large firms had advantages that smaller firms did not. These included access to credit, advertising, research funds, control of patents, and managerial talent. The only advantage many small firms had was that they could offer lower prices, either by cutting wages or relocating, to undercut the larger firm’s brands. It was therefore to the advantage of larger firms to make sure that prices and wages could not be used to undercut them. The majority of codes seemed like efforts to eliminate any special advantages that made it possible for smaller firms to cut prices. There were exceptions, which Johnson pointed out, in retail, cotton textiles, and coal where reduction of competition did possibly maintain higher labor standards. Overall, however, it seemed to many that the codes were an effort to force small companies out of business. Small business protested that it was unable to pay the same wages and charge the same prices as the larger firms. Also many small businesses could not continually afford legal and accounting fees to work through the code authority directives and reports. To an administration dedicated to helping the “little man,” such complaints were politically devastating. On January 18, 1934, Senators Borah and Senator Gerald Nye of Wisconsin opened a Senate debate on the NRA. They charged the agency with breeding monopoly.
Fixing the NIRA
Roosevelt moved quickly to please these current champions of small business in the Senate. The President issued an executive order creating a formal way that small businessmen could appeal directly to the Federal Trade Commission if they were dissatisfied with the NRA’s decision in a case. On March 7, 1934, Roosevelt issued another executive order creating a National Recovery Review Board that would investigate the effect of codes on small business and recommend any changes. Johnson had considered the idea for such a board much earlier. Johnson had actually recommended that the great criminal defense attorney Clarence Darrow chair it. Darrow agreed, but instead of reporting to Johnson as Johnson had instructed him, Darrow decided he would report directly to the president. It was perhaps an indication that Darrow intended for the commission to make his findings public.
However much the general’s tough-minded persistence had induced him to dismiss critics in the past, it was becoming clear the NRA was reaching a crossroads. Johnson would have to face the two significant policy choices with which he was confronted. The first was how to eliminate or reduce price and production controls. The second was how to develop more responsible code authorities through closer supervision. Johnson wavered on what to do. He recognized that there were price increases that gave some firms, mostly smaller ones, an advantage. But price increases allowed average producers some profits and this was needed, in theory, if employment was to increase. Johnson also defended the NRA for its successes—wages had risen, child labor had been abolished, bankruptcies were down, and the right to join a union was being protected. There were enough successes, Johnson pointed out, to merit reform of the NRA rather than dismantling it.
As for eliminating price controls, one useful innovation came out of the January hearings. It was called the “emergency minimum price” concept. The approach was designed to simplify administration and get around complex accounting systems. Under this procedure, a code authority could determine when destructive price-cutting was so severe that it threatened an “emergency” for the industry. The code authority could then determine the industry’s “lowest reasonable cost” and submit this figure to the NRA administrator. If approval was given, the administrator would then declare an emergency and it would become an unfair practice to sell below what was found to be the “lowest reasonable cost.” The problem, as Johnson soon discovered, occurred when the NRA Administrator had to evaluate the basis for determining the “lowest reasonable cost” and make a determination. This was not always easy given the complexity of a company’s operations and the nuances of their bookkeeping in determining their overhead costs of doing business and outstanding debts as well as closely guarded details of various sales contracts.
In developing greater supervision over abuse by code authorities, the NRA began to shift in the direction of greater government control. At the end of January 1934, code authorities were stripped of much power and were prohibited from modifying code provisions, exempting members, and engaging in enforcement. These functions were taken over by state compliance officers, while code authorities were to stick to investigation, education, and arbitration. In March the Bureau of Labor Statistics took over the duty of collecting data directly from the code authorities.
Johnson reasserted his power to review, suspend, or veto code provisions. Policy in the NRA was definitely changing, although gradually. As for the idea of “industrial self-government,” it was the beginning of the end.
By executive order on June 30, 1934, President Roosevelt created two new organizations to assist the NRA: the Industrial Emergency Committee and the National Planning Board. The Industrial Emergency Committee was to coordinate government relief and employment programs under the NRA. Donald Richberg was named as its director. Other committee members were Secretary of Labor Francis Perkins, Secretary of the Interior Harold Ickes, Harry Hopkins, and NRA Administrator Hugh Johnson. The committee was established as part of the National Emergency Council, which Roosevelt had established a year earlier. It was an attempt to put the Committee in charge of the NRA and assert more control over General Johnson. The Committee was short-lived, however, in October the president merged the Industrial Emergency Committee into a new National Emergency Council headed by Donald Richberg.
The National Planning Board enjoyed a longer lifespan. Title II of the National Industrial Recovery Act established the National Planning Board under the Public Works Administration. An earlier model for the board existed in the War Industries Board during World War I and in some of the ideas of Herbert Hoover while he was Secretary of Commerce. The Planning Board became the first experiment in peacetime national planning. The National Planning Board changed names several times: National Planning Board (1933-1934), National Resources Board (1932-1935), National Resources Committee (1935-1939), and the National Resources Planning Board (1939-1943). But its personnel remained remarkably continuous. Over the course of the board’s existence, planning committees were set up to study a broad range of social and economic projects. Committees studied land use planning, mineral policy, transportation, energy, and the impact of science and technology. Regional planning agencies were also established in the Pacific Northwest and New England. Many of the studies remained unique for the remainder of the twentieth century.
Another key policy decision that gave hope to small businesses and others was the creation of an advisory council on May 21, 1935, to coordinate the various advisory boards within the NRA. It was anticipated that internal disputes within individual industries could be settled more peacefully. A new Policy Group was also created, which was made up of a single administrator and three deputy administrators, one each for trade practices, labor provisions, and code authority administration. Leverett S. Lyon of the Brookings Institution, a former critic of the price production policies of the NRA, was appointed to head the Trade Practices Division. Lyon’s recommendations furnished the NRA’s most controversial declaration of policy. In a famous office memorandum of June 7, 1934, which came to be known as “Memorandum 228,” a new approach to price policy was outlined, essentially recognizing that the goal of the NRA was to create a free market. Code provisions, therefore, should strengthen, rather than limit, competition. Strict safeguards were to be provided against price fixing, and price cutting would be considered unfair practice where it imperiled small business, labor standards, or tended to promote a monopoly. Lastly the fixing of minimum prices was to take place only in emergencies after full study by NRA economists.
Memorandum 228 was hailed as an abandonment of all price-fixing. This perception brought an immediate wave of resistance from the business community who liked the ability to fix prices whenever they wanted. Johnson was forced to make a public statement to stifle the clamor. When he spoke he announced the new policy would not affect already approved codes. It would neither create changes nor be applied to codes near completion at the time the memo was issued. As a result of the confusion, the NRA found it difficult to take any action at all. The great policy shift, like so many other attempts at reform within the agency, amounted to little more than organizational change. Critics now attacked the agency for the inconsistency between its policy and practice. Matters were made worse by the release of the Darrow Board reports that found exactly what it had been looking for: the NRA promoted monopoly and discriminated against small business. In reaction an Industrial Appeals Board was established to handle small business complaints. It, however, dealt only with individual complaints of misconduct, not general reform of the program.
Organized labor felt especially out of the picture by the summer of 1934. Johnson was not highly receptive to union representation and generally refused to get involved in labor disputes created by section 7(a). As time went on small businesses and antitrusters continued to claim the NRA assisted big business to the detriment of the “little man.” Even leaders of large industry were increasingly disillusioned by shifting policy changes and the seeming lack of stability within the agency. Frustration and disappointment was now so great that Johnson could not keep a lid on bickering within the organization. As pressured mounted, he had become increasingly emotional and would occasionally explode in an angry tirade and also took refuge in alcohol. It became clear to Roosevelt that Johnson would have to go, and on August 21, 1934, the President summoned Johnson to the White House to discuss having him chair a commission to study recovery programs of several European nations. Johnson refused and immediately submitted his resignation.
The National Industrial Recovery Board
Instead of one-man rule, the President would now try using an administrative board to run the NRA. On September 27 Roosevelt announced the appointment of a five-man National Industrial Recovery Board under the chairmanship of S. Clay Williams, former chief executive of R. J. Reynolds Tobacco Company. Sidney Hillman of the Amalgamated Clothing Workers would represent labor. Two economics professors, Leon C. Marshall and Walton Hamilton, and a former Division administrator, Arthur D. Whiteside, would also serve on the Board. Policy, however, would be at the direction of Donald Richberg who would manage and formulate the broad policy of all recovery agencies from the Industrial Emergency Committee. The press praised the new reorganization as a victory for the liberal economic men who advocated maintaining the price controls and protection from the antitrust laws while introducing policies that strengthened competition.
Free markets were not feasible under such dire economic conditions, although it was believed that stronger institutions and controls could be created to accomplish the same ends that a free market would achieve. Planners, as well as business, continued to be hopeful of a fair, recovering economy. In the end, however, the board only proved effective in balancing opposing interests, and it was never able to take effective action. Advocates of change scored minor gains, but the complexity of the problems and potential political fall-out from moving too far in one direction prevented any significant revision in the program. Many industrial leaders still supported the idea of industrial self-government in a corporatist state, but only to the point at which concessions had to be made to labor. In the end, the Board’s only real accomplishment was that it more skillfully presided over stalemates between parties.
Renewing the NIRA
By January 1935, the timeframe set for the NRA by Congress was reaching its end. Congress was beginning to discuss whether to extend the agency. But it was increasingly apparent that divisions within the NRA were well established along rigid battle lines. Official policy had strayed from the original provisions of the business codes, agency officials were exhausted, and the future of the program was uncertain. There was little inclination to take action since Congress would decide the very existence of the program in a short period of time, with new hearings scheduled for January 1935. Once again economists within the NRA argued that price and production controls were economically harmful. The majority of business, however, made it clear that they opposed Memorandum 228 and that industry still needed price protection. Some way had to be found to stop destructive price wars and establish a minimum “price floor” below which prices could not fall. The hearing was followed by two other major hearings in early 1935, but little was gained in changes of policy. Lines of conflict within the agency went unchanged. Officials were left feeling that they were doing little more than biding their time until the program would be ended.
With few friends for the agency as it shuffled toward the end of its two-year authorization by Congress, critics began to look toward a potential replacement. Nobody supported an extension of the agency in its original form but the diversity of proposals were broad reflecting the different perceptions of the NRA’s success or failure. Business was generally unhappy about its perceived lack of control, while labor believed business had too much control. There was little agreement regarding an alternative. Some industry leaders proposed adopting purely voluntary codes, while a few in Labor were advocating continuing wage and hours standards but eliminating the price controls.
Roosevelt’s task was to arrive at a compromise between conflicting groups if the NRA was to be renewed. Donald Richberg advised the President that this could be done if sharper distinctions were drawn between restraining destructive competition and promoting monopoly. Roosevelt realized antitrust laws had to be revived, and in a message to Congress on February 20, 1935, the President recommended a two-year extension of the NRA in a revised form. The new program would keep the labor provisions but limit price and production controls only to those industries who needed to protect small business, conserve natural resources, or prevent monopolies. The address was not as well-received as hoped, and considerable resistance to renewal was gathering in the Senate as the Senate Finance Committee was preparing to begin an investigation.
The Senate hearings were devastating. Much publicity was given to the NRA’s enemies who insisted the agency was dominated by big business. There was conflicting evidence on the different effects of the code system in different industries. In the end the Senate approved a much watered-down measure. The NRA would only be extended a year, applying only to businesses engaged in interstate commerce and barring all price-fixing. Existing codes had to comply with the new provisions within 30 days.
The President’s hopes lay in the House of Representatives where he had much greater support. The House Ways and Means Committee recommended a two-year extension. By the end of May, however, it became clear the Senate would not agree to such an extension. In fact it looked as if a deadlock between the two chambers would block any resolution at all. The Ways and Means Committee pressed forward and scheduled a vote in the House for May 28, 1935, but the vote was never to be cast. A day before the House vote was scheduled, the Supreme Court handed down a decision that held the NRA and the entire system of codes unconstitutional. The case that brought the NRA to its knees involved an attempt by the NRA to prosecute several violations of the “Live Poultry Code.” The press would facetiously refer to it as the “Sick Chicken Case.”
The U.S. Supreme Court Strikes Down the NIRA
ALA Schecter Poultry Corporation and its affiliate Schecter Live Poultry Market operated wholesale slaughterhouse markets in Brooklyn. They would purchase live poultry in New York and Philadelphia, slaughtered the poultry according to Jewish law, and sold the poultry within the state of New York. In June 1934 the Justice Department began investigating a number of alleged violations of the NRA live poultry code. Enough evidence was gathered to obtain indictments against the corporation and its affiliate, as well as the four Schecter brothers who operated them. The Schecters were indicted for conspiracy to violate the codes and 18 specific violations of the code. They were accused of filing false reports, violating the hours-and-wage provision, ignoring the health inspection requirements in the code, and selling “unfit chickens.” In October the Schecter brothers were found guilty in district court of all 19 counts. The brothers appealed and in April 1935 the Circuit Court upheld the conviction on 17 counts. Two counts charging violation of the maximum hours and minimum wage provisions were ruled to be beyond the regulatory powers of Congress and therefore unconstitutional. Having faced criticism in the past that the NRA was afraid to face a judicial test, the administration decided to make Schecter a test case. The case was argued before the United States Supreme Court on May 2 and 3 and decided on May 27, 1935, a relatively short time later.
The Schecter Brothers claimed that the provisions in the code under section 3 of the NRA were an unconstitutional delegation of legislative power by Congress. The government responded by arguing that the national crisis justified extraordinary measures. Writing for a unanimous majority, Chief Justice Charles Evans Hughes rejected the government’s argument. Extraordinary conditions, he stated, do not create or enlarge constitutional power. The adoption of codes by industries and their administration by the president were acts of legislative not executive authority. Only Congress had the authority to legislate matters effecting commerce. This authority could not be delegated to another branch of government. But Congress, Hughes held, only has the authority to regulate interstate commerce. It cannot regulate commerce exclusively within a state. Because the Schechter Brothers were not involved in interstate commerce—they sold poultry only within the state of New York—their business was outside the range of congressional commerce power. In fact all the NRA codes exercised this power beyond the scope and authority of Congress. On the basis of these conclusions, the Court reversed the conviction of the Schechter Corporation. The code provisions of the NRA were found unconstitutional and the National Industrial Recovery Act was invalidated.
The decision produced both dread and relief. While some businesses praised the decision as a necessary check on presidential power, others feared tremendous uncertainty as to the potential for industrial chaos now that the codes were suddenly dead. At the White House the President conferred with his advisors for over two hours and, in the end, all accepted the conclusion that the codes were now unenforceable. Ironically the Supreme Court’s decision gave the appearance of bringing America’s great experiment with corporatism to an abrupt and untimely end. In actuality, the NRA had long been disinherited of its popularity and support. Congress had become increasingly hesitant about renewing the program and the agency’s chances of survival had grown slim. Frozen in deadlock, the numerous and contradictory policies of the NRA had effectively brought the agency to a standstill. Even though several advisors suggested ways around the Schecter decision, Roosevelt decided against an effort to restore the NRA. Privately the president breathed a sigh of relief as the agency had created the most perplexing administrative problems imaginable.
The Antitrust Acts
Antitrust laws are designed to curb the growth of monopolies and monopoly practices. A monopoly is where a company or group of companies, called a cartel, that have total control over the production and price of a certain good, or commodity. Antitrust laws were based on belief that the public could be protected from the power of business monopolies by breaking up complex monopolistic companies into smaller companies. The federal government through its constitutional power to regulate interstate commerce (trade that crosses state boundaries) could best accomplish this. The Sherman Anti-Trust Act of 1890 was the first of three laws passed during the so-called “Progressive” era that sought grater government regulation of economic activity. The two other acts were the Clayton Act and the Federal Trade Commission Act, both passed in 1914. The Sherman Act provided that every business contract, business combination in the form of a trust or otherwise, or conspiracy to restrain trade was illegal. Penalties included a $5,000 fine, a year in prison, or both. The Anti-Trust Division of the Department of Justice administers the act. Much of the teeth of the Sherman Act, however, were removed by a Supreme Court decision, United States v. E.C. Knight Company (1895). The ruling severely limited the definition of what was considered an act of trade. Thereafter government attorneys made few attempts to enforce the law and only 18 lawsuits were brought between 1890 and 1900. Some of these were designed to restrain labor unions rather than industries.
The Democratic administration of Woodrow Wilson (served 1913-1921) brought a renewed vigor to expand government regulation of business and a revival of interest in strengthening the Sherman Act. Both the Clayton Act and the Federal Trade Commission Act were proposed to Congress by the Wilson administration. The Clayton Act, a supplement to the Sherman Act, specifically excluded organized labor from the provisions of the Sherman Act. Among other things the Clayton Act prohibited corporations from purchasing the stocks and bonds of other corporations for the purpose of eliminating competition. It also provided that individual corporate officers could be held personally liable for violating the antitrust laws. The Federal Trade Commission Act established the Federal Trade Commission (FTC). The FTC was authorized to prevent persons, partnerships, or corporations from using unfair methods of competition. The FTC was also given power to gather information, require corporations to file annual or special reports concerning their business practices, investigate trade conditions, and reorganize businesses convicted of violating the antitrust laws.
A Working Relationship Is Formed
After World War I, there developed in the United States a growing acceptance of cooperation between business and government to achieve social and economic stability. The experience of the War Industries Board (WIB) had shown, however briefly, that this cooperation could be successful under certain conditions. Governments in Western Europe were also embracing the social philosophy of “corporatism.” Corporatism envisioned an economic system in which business, labor, and agriculture could be organized and guided by government to pursue the common good. In America corporatists sketched a picture of society in which industry was organized by trade associations that could formulate plans for achieving stability and progress. The chief proponent of this cooperative scheme in America was, ironically, Herbert Hoover (served 1929-1933). Hoover had been head of the wartime Food Administration and Secretary of Commerce during the Harding and Coolidge administrations. Bernard Baruch, chair of the WIB and a wealthy Wall Street financier during the 1920s, also advanced a corporatist model for American industry. Both men favored a voluntary corporatist system of “associations.” In an “Associative State,” as the term became known, business would subordinate their immediate interests to the long-term welfare of the nation. In turn laws that hindered cooperation, such as the antitrust laws, would be abandoned.
As Secretary of Commerce from 1921 to 1928, Herbert Hoover did much to establish relations between industry and the government. Throughout the period he was a zealous advocate of voluntary association to solve the problems of a modern industrial nation. By the mid-1920s an array of trade associations and professional societies had taken shape and were working with the Department of Commerce. Hoover had transformed the Department of Commerce from a collection of small technical bureaus into a unified and expanding agency with a genuine spirit to guide development and serve business groups. The dream of such an economic order was symbolized by the new Department of Commerce building approved for construction in 1926. This new “temple of commerce” would be the largest building in Washington apart from the Capitol.
After the Stock Market Crash
Tragically, the events that followed the stock market crash ultimately proved too unmanageable for a voluntary system. “Associationalism” came to be viewed as a mere front behind which businesses earnestly pursued monopolies in obscurity. The leaders of the new industrial order were less cooperative than Hoover had hoped. They were unable to solve the social problems wrought by the depression or to stop the great economic decline. Demands were made for more effective coordination between business and government. Hoover was confronted with establishing programs and agencies he had never contemplated. The way had to be paved for greater government involvement in industry. The government’s use of antitrust prosecution, however, was increasingly viewed as an obstacle to more extensive business-government cooperation. Attacks on the antitrust laws intensified from groups as diverse as the American Bar Association and the American Mining Congress. A system of antitrust exemptions, it was proposed, could be replaced by greater cooperation between business and government developed according to a national plan. In fact many “national plans” began appearing in 1931 and 1932. They called for a revival of the WIB system of World War I, the creation of trade associations or syndicates that represented various interests in industry. A national board could coordinate these associations.
In October 1931 a long series of Senate hearings considered a variety of planning schemes. Disagreement existed about the degree of autonomy (freedom) businesses would have. A general consensus, however, emerged for a system that offered more power for labor and consumer groups and a central planning and regulatory structure run by experts. A general concurrence developed for a “superorganization” of industry that would be strong enough to both contain and guide the range of interests in a far-reaching business commonwealth.
Various proposals appeared. Former chairman of the WIB and economic advisor to President Woodrow Wilson (served 1923-1929) at the Paris Peace Conference, Bernard Baruch, proposed the creation of a Peace Industries Board modeled on the industrial cooperation of the WIB. Others offered similar proposals that were variations on the same theme. Henry Harriman, the chairman of the Chamber of Commerce Committee on Continuity of Business and Employment, released a report in October 1932. The report called for coordination of trade associations. The coordinating agency would be a “national economic council” chosen by leaders of various interest groups. The plan that eventually would become the blueprint for the National Recovery Administration, however, came from General Electric’s president Gerard Swope. Long revered as an “industrial statesman,” Swope proposed a system that would operate through trade associations made up of major industries empowered to regulate production, prices, and trade practices. Labor would benefit from unemployment insurance administered by committees in each industry. Coordination would come through a supervisory agency that would act in the public interest. Critics of the plan charged that it would be an administrative horror. Swope, however, argued that administrative matters would be problematic in the beginning, but eventually an efficient system of cooperation would develop.
From the onset of the Roosevelt administration, Swope was recruited to serve as chairman of the new Business Advisory Council, which would eventually supply expertise for the NRA. The National Industrial Recovery Act was essentially the end result of these schemes, particularly the Swope plan. Roosevelt relied heavily on the “corporate liberals” to guide the NRA.
National Views of Business and Government
The federal government and U.S. business leaders brought very different desires for applying the NRA to economic recovery. The NRA was inspired by a utopian (socially perfect) vision of a new economic order involving close working relations between government and business. This dream, however, collapsed as economic self-interest undermined the lofty ideal of a business commonwealth. The corporatist framework of the NRA was intended to provide not only recovery but also the foundation of a new cooperative relationship between business and government. It unintentionally, however, created more industrial strife. The demand that business recognize labor as an equal partner in the industrial system led to much conflict. The decline in enthusiasm for the NRA created a crisis of compliance in the agency. Also contrary to the intentions of the framers of the NIRA, the codes became a vehicle for business creating cartels. This was a very much unintended, if widespread, consequence. Despite attempts to distinguish legitimate from illegitimate cartels, cartels flourished under the NRA. In actuality such theoretical distinctions proved meaningless. Johnson believed the development of cartels could have its advantages, so long as the abuses, such as price-fixing and squeezing out other firms, could be eliminated, and in the end this proved an impossibility.
Many believed the NRA was a poorly administered agency and that Johnson was a poor choice for administrator. He was continually unable to assess the agency’s resources and abilities. To his credit, he was a visionary, believing that the NRA would usher in a new, cooperative stage of capitalism, but he underestimated how much government supervision of the codes would be necessary. Johnson also frustrated many of his subordinates by his apparent unfamiliarity of the problems of assessing cost—a key component in the NRA’s attempt to promote fair competition. Critics charged there was no easy, objective way to determine costs over an entire industry, and Johnson naively dismissed this concern by pointing out that anybody could hire an accountant to figure it out. But all the blame could not be directed toward Johnson. Given the enormity of the endeavor, it is difficult to imagine anyone succeeding as NRA administrator. The failure of the NRA was ultimately due to the impossibility of the task. Attempts to bring prices in line with costs and to establish fair competition assumed that it was possible to arrive at a political agreement as to what these costs and provisions should be. The sheer variety of industries, types of products produced, accounting practices used, and channels of distribution, as well as variation in the practicality and authority of code authorities, combined to form insurmountable administrative difficulties. A more modest program, confined to only a few key industries, might have fared better. But Johnson rejected this plan and the viability of such an approach is purely speculative.
Importantly the NRA had never been designed to function as a regulatory agency, since it was conceived as an experiment in corporatism. The very structure of the code authorities made it extremely difficult to detect abuses, let alone regulate them. As various business interests refused to accept the sacrifices the NRA demanded of them, administrators relied less and less on industries to regulate themselves. The agency moved toward a more regulatory posture, and the responsibilities of the code authorities were pared down, while the authority of the central administration grew. Business watched this development with a distrustful eye, and in time, business elites would come to loathe Roosevelt and the New Deal as a radical threat to their interests. Through time the NRA functioned less and less as a vehicle for big business to form cartels to control prices and wages. Big business had been willing to come under the Blue Eagle, to give the program a chance, especially since it would relax the antitrust laws. The NRA experience, however, demonstrated that any attempt to formalize a cooperative relationship between business and government would fail because of fundamental conflicts between business elites and New Dealers. There were many corporate liberals like Bernard Baruch and Gerard Swope who envisioned a new type of industrial state, but these men were ultimately the exception and not the rule. In general, business attitudes were in opposition to the proposed changes. Much hostility toward the New Deal derived from a strong belief in a laissez-faire capitalist system whose roots lay in the nineteenth century. The belief that only a free market could maximize economic growth and that government intervention only obstructed this process was too strong a faith in the 1930s to be undermined, even by an event as devastating as the Great Depression.
The end of the NRA in May 1935 marked a significant shift in the political direction of the New Deal. Ambitious designs to restructure American industrial relations and society through cooperative schemes between business and government were shown to be fundamentally flawed. It proved impossible for a central coordinating agency to administer such a comprehensive national plan with so many contradictory aims and interests. Separate agencies and boards would instead pursue these various objectives. Their sole function was to pursue reform on a piecemeal basis for a particular interest. The grandiose ideal of redirecting American society through central economic planning was reduced to a more limited but more realistic approach. The NRA experiment had with little doubt proven a failure, perhaps the greatest failure of the New Deal. But the shattering of the agency scattered many of its functions across a broad range of newly created boards and committees.
Some of the functions of the NRA were quickly recreated by executive order after the Schechter decision. On June 7 the president established the National Resources Committee, and the Labor Relations Board was reestablished by executive order a week later. Several divisions and their employees were transferred to the Department of Commerce on June 15 and the Consumer Division was transferred to the Department of Labor on June 30. For the rest of the summer Roosevelt forced Congress to remain in session through a hot Washington July and August. On July 5 Congress passed the National Labor Relations Act, which made the board a permanent agency. Roosevelt further extended the power of the board through a later executive order.
At the end of August Congress passed the Public Utility Holding Company Act and a Bituminous Coal Stabilization Act. Both were plainly the result of disillusion with the NRA’s attempts to coordinate each industry. The Public Utilities Holding Company Act gave the Federal Power Commission authority to regulate interstate shipments of electrical power. It also gave the same authority to the Federal Trade Commission over natural gas shipments. The act also eliminated some holding companies (companies whose sole function is the ownership of other companies). All utility companies also had to register with the Security Trade Commission, which could supervise their financial transactions. The Guffey-Snyder Bituminous Coal Stabilization Act was the immediate outcome of the demise of the NRA. Both the United Mineworkers and northern mine operators wanted more rigid controls on production, prices, and wages in order to loosen competition from western and southern mines. The Guffey Act went well beyond the NRA’s code provisions for the industry. A Bituminous Coal Labor Board was revived to oversee administration of the act. Instead of a central agency, however, the jurisdictional authority of the act was divided into districts that would determine prices for each region. The U.S. Supreme Court struck down parts of the Guffey-Snyder Act in 1936 but other parts were reenacted in 1937.
After 1935 Roosevelt abandoned attempts at working closely with business, which represented a major shift in the administration. The NRA had shown, above all else, that voluntary cooperative arrangements between government and business did not work. The New Deal became more aggressively anti-business and pro-labor after 1935. Business could not be expected to act beyond its own self-interest. Nowhere had this been more apparent than the refusal of most industries to recognize labor’s collective bargaining rights or abide by the wage and hour provisions set out in the NRA codes. These would never be recognized, the administration concluded, without the coercive power of government. The National Labor Relations Act, or Wagner Act, guaranteed labor rights that had been essentially ignored under the NRA codes. Majority rule within unions was ensured, the right of collective bargaining was secured, and the act specified unfair labor practices. The Wagner Act thus enacted industrial relations procedures that the administration had attempted to impose through the NRA but in a more sweeping manner.
On a broader scale, the philosophy of central planning had been permanently disgraced. Certainly some still dreamed of a business commonwealth and the idea of national planning was not totally erased. But the concept of cooperative self-regulation was dead. The demise of the NRA also signified the end of a decade-long attempt by industry to repeal the antitrust laws. Attacks on monopolistic business practices would now find renewed support through old-fashioned trust-busting. Increasingly New Dealers came to recognize the function of government in industrial relations not so much as one of coordinating and planning, but more as a regulator, or “broker,” of opposing interests. In hindsight, one can discern in this development the emergence of the modern American state.
Adolph Augustus Berle (1895-1971)
Adolph Berle was one of the original “brain trust” advisors of Franklin Roosevelt during the 1932 presidential campaign and has been acknowledged as one of the most brilliant of the New Dealers. Born the son of a Congregational minister, Berle came from an intellectually gifted family and was pushed to succeed academically at an early age. This did not seem to be difficult for Adolph who was a child prodigy. He graduated from Harvard at the age of 18 and from Harvard Law School at 21. During World War I he did intelligence work for the army Signal Corps. Also during the war a request by the South Puerto Rico Sugar Company in the Dominican Republic went to the army. They needed legal help in disentangling a confusing web of land-holding laws that inhibited sugar production, considered an “essential” commodity in time of war. The army sent Berle to Puerto Rico as the United States occupied the Dominican Republic. This became a turning point in Berle’s life. He witnessed firsthand the effects of American imperialism (extending rule over a foreign nation) and it introduced him to the sugar trade as well as the Caribbean and Latin America, a region for which he developed a life-long passion. When Berle left the Dominican Republic in 1918, he was a firm believer in self-determination of colonial peoples. Berle was next sent to Europe and at the age of 23 he became the U.S. advisor to Russia at the Paris Peace Conference.
Upon returning to the United States, Berle practiced corporate law for a brief time in New York before becoming a professor at Columbia Law School. Together with the economist Gardiner Means, he published one of the most influential books of the next two decades. The Modern Corporation and Private Property (1932), documented a trend toward greater concentrations of corporate power, increasingly separated from stockholder or public control. The book eventually became somewhat of an ideological blueprint for the NRA. Berle’s views on corporate power, and the means necessary to regulate it through planning and corporate control, put him in conflict with many established old-line Progressives. These included Felix Frankfurter and Louis Brandeis who continued to advocate an antitrust approach.
After the 1932 presidential election Berle served only for a brief period in the Roosevelt administration in the Reconstruction Finance Corporation. In 1934 he had returned to New York to work with Mayor Fiorello LaGuardia where he was instrumental in saving the city from bankruptcy. While in New York he remained one of Roosevelt’s closest advisors through frequent meetings and letters. In 1938 Roosevelt asked Berle to become assistant Secretary of State. Berle remained assistant Secretary of State until 1944 before becoming Ambassador to Brazil for two years. A generation later, he would again develop policy with Latin America when he served as chairman of President Kennedy’s Latin American task force in 1961. The task force originated the Alliance for Progress. During the 1960s Berle became increasingly disenchanted with the New Left’s criticism of American society, and he had a growing realization that a middle ground in politics and economics would not overcome the political extremes in American society. His final work was an analysis of political power based on his long experience in government.
Hugh S. Johnson (1882-1942)
Hugh Samuel Johnson was born in Ft. Scott, Kansas, on August 5, 1982, but was raised in the Cherokee Strip of Oklahoma. He graduated from Northwest Teachers College before attending the U.S. Military Academy at West Point. Johnson quickly rose from second lieutenant to brigadier general in 1918 after receiving a law degree at the University of California in 1916. During World War I Johnson served as chief of the Bureau of Purchase and Supply for the War Industries Board. He retired from the military in 1919 to become vice-president and general counsel to the Moline Plow Company, and by 1925 he was chairman of the board. Because of his extraordinary business and administrative experience, Hugh Johnson was Roosevelt’s choice to head the National Recovery Administration.
Johnson’s political skills were not as highly developed as his business skills. He was never as tactful or diplomatic as politics often required, having been used to giving orders in the army or as a corporate executive. He never quite came to grips with the necessity of unifying fragile coalitions within a public agency, and as a result he quickly alienated many people. This situation was not helped by Johnson’s increasing anger toward business for refusing to cooperate with the NRA, especially to pledge to maintain the wages and hours standards.
Throughout the summer of 1933 Johnson traveled across the country in an army plane to persuade businesses to join the NRA. By September Johnson had brought nearly every major industry on board, including the automobile industry with the noted exception of Ford. He had reached the height of his popularity. While extremely able at completing the code writing campaigns, Johnson quickly became the symbol of controversy as the NRA began to be assaulted. Southern Democrats in Congress attacked the NRA for the bureaucratic power it represented. Progressive Republicans saw it as a vehicle for monopoly. Labor attacked the NRA for failing to enforce section 7(a). Economists argued that the production controls actually slowed down the economy and inhibited recovery. Once the National Recovery Review Board, headed by famed lawyer Clarence Darrow, accused the NRA of exploiting labor and small business, public discontent with the NRA hardened. This criticism combined with Johnson’s political insensitivity and drinking problem made him expendable. Johnson was urged to resign and left the NRA on October 15, 1934. He went to New York where he worked briefly as an administrator for the WPA but then left the New Deal altogether. Johnson became a newspaper columnist and, by the late 1930s, his relationship with Roosevelt and the New Deal had further deteriorated. He attacked the dictatorial ambitions of Roosevelt and spent the last years of his life viewing the New Deal as anti-business.
Donald R. Richberg (1881-1960)
Donald Randall Richberg was born on July 1881, in Knoxville, Tennessee, to John Richberg, later a prosperous attorney in Chicago, and Eloise Randall, who would become a physician. Donald Richberg graduated from the University of Chicago in 1901 and Harvard Law School in 1904. Upon graduating Donald joined the family firm of Richberg and Richberg in Chicago. Seeing the city government corruption in the city firsthand, the young attorney supported the municipal reforms urged by the progressive movement. Consequently he endorsed Theodore Roosevelt and the “Bull Moose” campaign of 1912 representing a break of the progressive wing of the Republican Party from the main party. This led to his appointment to a position in the Progressive Party in 1913 and 1914. But when the Progressive Party backed Charles Evans Hughes for President in 1916, Richberg turned to the Democrats and campaigned for Woodrow Wilson. During the 1920s, Richberg served as special counsel for the city of Chicago and continued in private practice of law. He was instrumental in drafting the Railway Labor Act of 1926 and continued to stay active in party politics. He supported Democratic candidate Al Smith in 1928 and worked with Senator George Norris of Nebraska in forming the National Progressive League that endorsed Franklin Roosevelt in 1932.
Richberg wrote speeches for Roosevelt during the 1932 campaign and then went to work for General Hugh Johnson as a deputy administrator of the NRA. Johnson quickly appointed him chief counsel where Richberg served until Johnson was forced to resign in 1934. Roosevelt then appointed Richberg to a five-member board that would administer the NRA. Richberg strongly believed in the potential for industrial cooperation and the establishment of a business commonwealth based on government cooperation with industry. He believed that this industrial framework should be self-regulatory and felt uneasy about too much government regulatory authority. When the Supreme Court struck down the NRA, Richberg returned to private practice in Chicago. Although he remained a steadfast supporter of Roosevelt, Richberg viewed the New Deal’s leftward drift with increasing alarm after 1935. He felt that labor exerted too much control over the administration and by the time Harry Truman (served 1945-1953) took office, was convinced the country was on the road to becoming a welfare state. A man who was renowned for his ironic sense of humor, Richberg eventually became a celebrated figure among conservatives by the 1950s.
Gerard Swope (1872-1957)
Gerard Swope was born in St. Louis, Missouri, on December 1, 1872. He attended the Massachusetts Institute of Technology from which he graduated in 1895 with a degree in electrical engineering. He then went to work for the Western Electric Company, where he rose quickly up the corporate ladder. He became general sales manager of the New York office in 1908 and then vice-president of the company in 1913. In 1919 he was elected president of the company and three years later, chairman of the board.
Swope was an early architect of business and government cooperation. A so-called “corporate liberal,” he saw the benefits of a corporatist or business association with government form of industrial order. As the first president of the National Electrical Manufacturers Association, Swope strongly supported business self-regulation. He quickly rose to become a prominent spokesman for the business community during the 1920s. But he was very different than many of his conservative colleagues. He worked for years in Greenwich House in New York and was sympathetic to the needs of the poor and unemployed. He was also a close associate of Herbert Hoover in the Department of Commerce and worked hard to encourage trade associations as a means of stabilizing the industrial economy.
Once the Great Depression hit, Swope urged the federal government to adopt a plan of industrial self-regulation through trade associations, codes of fair competition, long-term economic planning, and a suspension of the antitrust laws. His proposal was, in short, the blueprint for the National Industrial Recovery Act. During the New Deal, Swope became the most influential business policy advisor in the country. He was appointed to be the first Chairman of the Business Advisory Council in the Department of Commerce and Chairman of the Coal Arbitration Board in 1933. He later became a member of the National Labor Board, the Committee on Economic Security, and the Advisory Council on Social Security. Swope eventually concluded that the NRA should be scrapped and turned over to the Chamber of Commerce, but he always remained an active and effective business participant in the New Deal.
The Rising Influence of Corporations in America
In their 1932 book The Modern Corporation and Private Property, Adolf Berle, Jr., and Gardiner Means proposed that the modern corporation’s economic power was such that it could compete on equal terms with the state and its political power. The growing power and influence of corporations through the 1920s into the 1930s had a profound impact on the ordinary lives of Americans. No longer a nation of predominately small shopkeepers or farmers, most people worked for a large corporation of some kind and nearly all purchased goods produced by them. Given such influence, it was argued that large corporations should function in greater measure for the common good. This argument took new strength with the economic decline during the Great Depression. Much of the public lost confidence in business leaders during the early years of the Depression and Roosevelt sought to restore that faith. The following statements demonstrates the faith many in business had for the rise of large corporations in the United States (from Berle and Means, 1932, pp. 1-2, 357).
Corporations have ceased to be merely legal devices through which the private business transactions of individuals may be carried on. Though still much used for this purpose, the corporate form has acquired a larger significance. The corporation has, in fact, become both a method of property tenure and a means of organizing economic life. Grown to tremendous proportions, there may be said t have evolved a “corporate system”—as there was once a feudal system—which has attracted to itself a combination of attributes and powers, and has attained a degree of prominence entitling it to be dealt with as a major social institution.
We are examining this institution probably before it has attained its zenith. Spectacular as its rise has been, every indication seems to be that the system will move forward to proportions which would stagger imagination today …
In its new aspect the corporation is a means whereby the wealth of innumerable individuals has been concentrated into huge aggregates and whereby control over this wealth has been surrendered to a unified direction. The power attendant upon such concentration has brought forth princes of industry, whose position in the community is yet to be defined.
The rise of the modern corporation has brought a concentration of economic power which can compete on equal terms with the modern state—economic power versus political power, each strong in its own field. The state seeks in some aspects to regulate the corporation, while the corporation, steadily becoming more powerful, makes every effort to avoid such regulation. Where its own interests are concerned, it even attempts to dominate the states. The future may see the economic organism, now typified by the corporation, not only on an equal plane with the state, but possibly even superseding it as the dominate form of social organization. The law of corporations, accordingly, might well be considered as a potential constitutional law for the new economic state, while business practice is increasingly assuming the aspect of economic statesmanship.
The President Charts a New Course for Business
To provide quick economic relief to the nation, President Roosevelt was poised in his first hundred days of office to take bold actions never attempted before by the U.S. government. On May 17, 1933, the president addressed Congress and argued strongly for a new approach in business, by proposing the creation of industry agreements. Rejecting a strong reliance on antitrust (opposing large combinations of business that act to restrict competition) laws he envisioned cooperative associations of industries that establish their own fair practices with general guidance from the federal government. To accomplish this change in direction Roosevelt proposed passage of the National Industrial Recovery Act (NIRA) (reprinted in Franklin Roosevelt’s The Public Papers and Addresses of Franklin D. Roosevelt, Volume Two, 1933, pp. 202-204).
Before the Special Session of the Congress adjourns, I recommend two further steps in our national campaign to put people to work. My first request is that the Congress provide for the machinery necessary for a great cooperative movement throughout all industry in order to obtain wide reemployment, to shorten the working week, to pay a decent wage for the shorter week and to prevent unfair competition and disastrous overproduction.
Employers cannot do this singly or even in organized groups, because such action increases costs and thus permits cut-throat underselling by selfish competitors unwilling to join in such a public-spirited endeavor. One of the great restrictions upon such cooperative efforts up to this time has been our anti-trust laws. They were properly designed as the means to cure the great evils of monopolistic price fixing. They should certainly be retained as a permanent assurance that the old evils of unfair competition shall never return. But the public interest will be served if, with the authority and under the guidance of Government, private industries are permitted to make agreements and codes insuring fair competition …
The other proposal gives the Executive full power to start a large program of direct employment. A careful survey convinces me that approximately $3,300,000,000 can be invested in useful and necessary public construction, and at the same time put the largest possible number of people to work.
Provision should be made to permit States, counties, and municipalities to undertake useful public works …
Finally, I stress the fact that all of these proposals are based on the gravity of the emergency and that therefore it is urgently necessary immediately to initiate a reemployment campaign if we are to avoid further hardships, to sustain business improvement and to pass on to better things.
For this reason I urge prompt action on this legislation.
Suggested Research Topics
- Imagine trying to convince business leaders of a particular industry, labor representatives, and consumers to sit in the same room to develop strict price and wage control codes. What would be the most likely perspectives of each category of person?
- Volunteerism by businesses was a key ingredient of the National Recovery Administration codes. List and describe the various factors that would influence a business to voluntarily comply with the codes. Next list and describe the various factors that would influence a business to not comply with the codes.
- The U.S. Supreme Court ruled that the National Industrial Recovery Act was unconstitutional. Research the reasons the Court gave in justifying their ruling.
- If you were a consumer in the United States in 1934, what would be your reaction to seeing a Blue Eagle sign in a store’s window? Would you more likely purchase goods from that store rather than one who did not have a Blue Eagle sign?