Lecture 9 FDRs New Deal and the Great Depression

be such a time….”2 In that address, he lamented where the country had been taken as a result of FDR’s New Deal.What “groundless hopes,” or “luxurious errors” surround our understanding o

Lecture 9: FDR’s New Deal and the Great Depression

Politics and the Law: Perverse Incentives and Unintended Consequences

As you evaluate what takes place in the news media particularly regarding those things

touching philosophy and politics I would advise you to maintain a healthy dose of skepticism before being persuaded

It is human nature to want to solve problems When we see problems out in society as a whole, many pursue political action to try to solve those problems and the end result of such political action is the expansion of law and a resulting reduction in individual liberty Most everything comes at a cost including attempted political solutions

First, they may not actually solve the problem and waste a lot of resources in the process that could have been put to better uses

Second, even if they provided some measure of solution to the problem at hand, they might also cause perverse incentives and unintended side effects that impose societal costs which

overwhelm whatever societal benefits might have been achieved

The economic costs of the implementation of such political “solutions” usually fall

predominately on business which makes it more difficult for them to succeed and, in turn, may negatively impact our economic prosperity It is not enough to just have good political/social intentions–we must be concerned about the actual net societal results that come from trying to solve every problem, and right every wrong, through the force of law

Herbert Spencer complained in 1884 about the political apathy in his native England, and this was at a time when there were no such competing diversions as television, video games, the internet, etc Said he:

“‘Surely,’ rejoins some one, ‘facility in reading opens the way to political knowledge.’ Doubtless; but will the way be followed? Table-talk proves that nine out of ten people read what amuses them or interests them rather than what instructs them; and that the last thing they read is something which tells them disagreeable truths or dispels groundless hopes That popular education results in an extensive reading of publications which foster pleasant illusions rather than those which insist on hard realities, is beyond

question.”1

In other words, Spencer observed that even though people read lots of things, they were not willing to read the right things—things that would instruct and teach hard truths and realities Instead, they were only willing to read things that would just entertain and tend to create

groundless political hopes and pleasant illusions

J Reuben Clark, Jr., once observed: “there always comes a time when unpleasant truths must be retold, even though the retelling disturbs the ease and quiet of a luxurious error Today seems to

1 Herbert Spencer, The Man versus the State, p 52.

be such a time….”2 In that address, he lamented where the country had been taken as a result of FDR’s New Deal.

What “groundless hopes,” or “luxurious errors” surround our understanding of FDR’s New Deal policies and the effects they had on the Great Depression? What “disagreeable truths,”

“unpleasant truths” or “hard realities” should we consider and understand about that chapter of American history?

Specifically, I would ask you how Franklin Delano Roosevelt was presented to you in school regarding how his New Deal policies affected the Great Depression If you were taught as I was taught, you were led to believe that FDR saved us from the Great Depression

Recently, I read some books that take serious issue with that conclusion and argue just the opposite–that the reason that particular economic depression was so long and so deep compared

to prior national economic depressions, was because of the extremely negative impact his variouspolitical policies, regulatory policies, tax policies, and his personal, and very publicly expressed, revulsion for business, had on the country’s business and economic climate and the economic opportunities available to our citizens As I hope you will be able to see from this discussion, his policies discouraged risk-taking, scared new investment out of the market place, and

practically guaranteed that the depression would truly become “Great” compared to all previous economic depressions

If the personal model you have constructed about how the world works includes a strong belief that FDR’s invasive micro-management of the free market saved us from the Great Depression and effectively improved the health of our economy, and consider that issue to be firmly settled

in your mind, I doubt you will be willing to read or listen to the rest of this lecture For people tend to become very invested in the various models they create in their minds and tend to be more willing to ignore or explain away inconvenient facts that tend to call into question the accuracy of their models, than to consider the need to adjust their models to better comport with reality

In my introductory lecture I introduced J Reuben Clark, Jr., as an honest seeker of truth In his

1898 university commencement address at the University of Utah, he said that he and his fellow students had been “taught those two great lessons first, to seek truth for the love of it, and

second, and equally important, to recognize truth when found.”3

As a humble seeker of truth, Clark recognized the possibility that he might not yet have fully discovered it In a quick memorandum he prepared at the request of Judge Salmon O Levinson

on American foreign policy, Clark said: “I reserve the right to change any and all views therein expressed, after more mature reflection.”4 He emphasized that statement by putting it into italics

In other words, he always kept an open mind sensitive to the possibility that he might be wrong

2 Some Elements of Postwar American Life (1945), Yarn 5, p.541.

3 J Reuben Clark, J Reuben Clark Selected Papers On Americanism and National Affairs, the fifth of a

multivolume set on the life and work of J Reuben Clark, Jr., edited by David H Yarn, Jr., (Brigham Young

University, 1987), p.12.

4 Some elements of an American Foreign Policy (1925), Yarn 4, pp.349-50.

concerning the various models he had constructed in his own mind to explain how the world works and may, from time to time, have to change his position on something or, in other words, adjust his models That is a great mental frame of reference that we all would be wise to adopt if

we are to accurately be described as honest seekers of truth

As we begin our discussion of the New Deal, I would like to share a couple of other quotes from

J Reuben Clark that are applicable The first quote occurred near the end of FDR’s first hundreddays in office as President where there had been a flurry Congressional activity passing lots of his New Deal programs Clark said:

“But we must not forget that some men are still selfish, that they still love power and dominion, that they still use all the means necessary to secure their ends Tyranny has been so long away from us, that our ears do not detect his tread, our eyes do not

recognize his face and then he comes in so many guises What our fathers knew of him instinctively, we do not now know even by inspection We must not sleep, lest we shall bebound before we waken And while we watch and examine to spy out him who comes to rob us of our heritage, let us remember no tyrant is so hard to discern, none is so hard to unmask, as he who comes in the garb of a hypocritical interest in the welfare of the common people.”5

After FDR’s death and the end of WWII, Clark similarly observed:

“Tyranny has never come to live with any people with a placard on his breast bearing his name He always comes in deep disguise, sometimes proclaiming an endowment of freedom; sometimes promising to help the unfortunate and downtrodden, not by creating something for those who do not have, but by robbing those who have But Tyranny is always a wolf in sheep’s clothing, and he always ends by devouring the whole flock, saving none So it is today.”6

How the Law Affects the Success or Failure of Business

If the law becomes too intrusive, it will discourage business risk taking and negatively affect the economy Business risks will only voluntarily be undertaken, and the economy allowed to grow, when the prospects for financial gain exceed the perceived risks of loss in the minds of those with ideas

Most businesses fail because their costs of operation exceed their revenues over time While it isvery easy to see taxes as a cost of doing business, many seem to ignore the fact that legal

regulations also impose artificial costs on business that must be covered like every other cost of doing business, if a company is to survive

Recently I scanned the table of contents of a forthcoming book to be published by the Utah State Bar that is designed to help entrepreneurs comply with all the various federal and state laws that will apply to them The very distinct impression I got was that if a budding entrepreneur were to

read that table of contents and see all the legal mine fields that lay ahead of him before he took

5 Enemies of Liberty, Baccalaureate speech delivered June 4, 1933, University of Idaho, Southern Branch, Pocatello,

Idaho; Clarkana Papers, Box 211, Harold B Lee Library, Brigham Young University.

6 Inroads Upon the Constitution by the Roman Law (1946), Yarn 5, pp.143-44.

the plunge into business, he would probably decide not to go forward with his new idea for a

business; rather than produce a job for himself and perhaps others down the road, he would probably consider the potential legal risks and hassles to be too daunting and beg somebody else for a job That is not the way to produce a growing and vibrant economy that expands the economic opportunities for everybody Rather, it would tend to inhibit and impair an economy and make good jobs relatively scarce

Our relative prosperity and opportunities are not accidental a key determinant is freedom and a legal system that supports it If we are not careful, we can “kill the goose that laid the golden egg,” or in other words, we can destroy what has been our amazingly prosperous economy We can inadvertently kill it by regulating it and taxing it to death, be it under the name of rights, social justice, fairness, equality, equity, or any other euphemism one could use to get people to buy into that destructive proposition

Rather than the Great Depression being a failure of capitalism, many believe it was a “failure of government”7 as will be explained shortly

Again, this conclusion goes entirely against what I was taught in school which was that FDR’s government policies saved us from the Great Depression But when you see the various policies

of FDR’s New Deal, try to imagine yourself in the shoes of business people and ask yourself if you would have been inclined to borrow money and/or risk your capital in a new business

venture, or to expand an existing one, if you personally faced the various New Deal policies discussed below Most likely, just like the many business people of that day, you probably wouldhave taken your money off of the table, headed for your tornado cellar, and waited for the

political tornado of the New Deal to blow over and for calmer and sunnier political skies to rise

in Washington D.C before venturing out to again be willing to take risks with your capital or with borrowed funds

How Did the Federal Government Deal with the Various Economic Depressions Before the Great Depression?

We have had several “depressions”8 in our history but they usually lasted only a few years beforethings turned around and economic growth resumed.9 In contrast to the Great Depression where the federal government tried to micro-manage our way through it, our prior depressions were relatively short-lived in duration because the federal government tried to get out of the way of the free market allowing it to make its necessary corrections without interference through

7 Economics Nobel Laureate Milton Friedman, Imprimis, Volume 35, Number 7, July 2006, p.5, (monthly periodical published by Hillsdale College); Jim Powell, FDR’s Folly–How Roosevelt and His New Deal Prolonged the Great

Depression (New York: Three Rivers Press (2003), pp.205 & 267.

8 Apparently economic downturns were traditionally called “depressions” until after the Great Depression of the 1930s Since then we have used the word “recession” to call such downturns since nothing after the Great

Depression has ever approached its depth and length “Depressions” occurred in 1819, 1839-1843, 1873-1879,

1895-1897, and 1920-1921 Hans F Sennholz, “Cyclical Unemployment,” The Freeman: Ideas on Liberty, Vol.36,

No.4, April 1986 published by the Foundation for Economic Education (http://www.fee.org).

9 Powell, pp.268-269; The World Book Encyclopedia (1986), Vol 8 (G), p.340b.

regulation and taxation.10

Before the Great Depression, companies were able to adjust to declining economic conditions bylaying off some of their workforce While it is true that this caused great hardships on those thrown out of work, it had the benefit of keeping the company healthy and able to survive the downturn and be in a position to increase its workforce when the economy began to recover To use a naval analogy, before the Great Depression, the prime objective was to save the ship (i.e businesses and the economy) at the sacrifice of some of the sailors (i.e workers), knowing that ifthe ship sunk all would be lost rather than just those few that had to be sacrificed to save the ship And a sunk ship would be permanently lost to all potential future usage and benefit

How was Herbert Hoover’s Approach to the Depression Different from Other Presidents in Dealing with Their Economic Depressions?

But before talking about FDR, let us begin with Herbert Hoover After the shock of the October

1929 stock market crash, on November 21st, President Hoover called the most prominent

businessmen of the nation to White House for consultations Amity Shlaes observed:

“After hearing their views, Hoover did something radical He noted that ‘liquidation’ ([or in other words,]layoffs) had accompanied all previous American recessions and that the federal government had allowed those liquidations to take place This time ‘his everyinstinct’ told him things must be different; wages must stay in place Otherwise values would be ‘stepped down’; industry must help to ‘cushion down’ the situation At the worst, businesses in trouble might reduce hours to share jobs But the general push must

be to keep high wages and keep up employment

wanted to be good citizens, they had to keep their pledge to Hoover and sustain

employment and wages The president was, essentially, requiring that companies take thehit in profits instead of employment

“ This was different from 1921, when companies had been able to cover their losses by cutting wages But there was also, of course, an effect on employers Their wage costs forced down the value of company shares, aggravating the downturn that Hoover had vowed to fight

“ Albert Wiggin of the Chase bank argued that Hoover had his logic about wages

backward ‘It is not true that high wages make for prosperity,’ Wiggin would protest at one point ‘Instead, prosperity makes high wages.’”11

10 Powell, pp.268-269; Paul Johnson, Modern Times: The World from the Twenties to the Nineties, (New York:

Harper & Row (1983)), p.216.

11 Amity Shlaes, The Forgotten Man–A New History of the Great Depression (New York, HarperCollins Publishers

(2007)), pp.92-94.

So, to return to my prior analogy, Hoover’s plan was to try to save every sailor as the first

priority rather than having that first priority be to save the ship (i.e business) FDR later pursuedthe same policy but in a faster and more complete way

We call the depression that happened in the 1930s the “Great Depression” because it lasted so long and was so deep It started in 1929 and didn’t end until about 1942 when we entered WWII

in full force.12

Jim Powell observed:

“From 1934 to 1940, the median annual unemployment rate was 17.2 percent.13 At no point during the 1930s did unemployment go below 14 percent Even in 1941, amidst themilitary buildup for World War II, 9.9 percent of American workers were unemployed Living standards remained depressed until after the war.”14

Things didn’t really get better until future presidents stopped the anti-business rhetoric, lowered taxes, cut back on government regulation of business and moved us back towards the free marketmodel In addition to the foregoing, we had the good fortune of being isolated by two gigantic oceans from the war zones which largely destroyed the industrial capacities of our economic rivals but left ours intact to quickly re-convert to the production of consumer products after the war

What Caused Me to Look at Things Differently about FDR’s Effect on the Great

Depression?

I have always puzzled over why the Great Depression lasted so long we had abundant natural resources, factories, machinery, and people who wanted to work I was always taught that FDR saved us from the Great Depression, through all of the government agencies he created and laws

he passed and I simply believed what I was told by my teachers

But a few years ago I saw some book titles that grabbed my attention: The Roosevelt Myth by John T Flynn, and FDR’s Folly–How Roosevelt and His New Deal Prolonged the Great

Depression by Jim Powell I bought them and finally discovered what the legal policies of

FDR’s New Deal consisted of and could see the answers to my prior question which I will summarize momentarily

Before getting into the details, consider two supporting statements by two Nobel prize-winning economists in the forward to Powell’s book:

Milton Friedman: “Admirers of FDR credit his New Deal with restoring the American economy after the disastrous contraction of 1929-1933 Truth to tell–as Powell

demonstrates without a shadow of doubt–the New Deal hampered recovery from the

12 The World Book Encyclopedia (1986), Vol 8 (G), p.340d.

13 Richard K Vedder and Lowell E Gallaway, Out of Work: Unemployment and Government in Twentieth-Century

America (New York: New York University Press, 1997), p.129.

14 Powell, p.vii.

contraction, prolonged and added to unemployment, and set the stage for ever more intrusive and costly government Powell’s analysis is thoroughly documented, relying upon an impressive variety of popular and academic literature, both contemporary and historical.”

James M Buchanan: “The material laid out in this book desperately needs to be available

to a much wider audience than the ranks of professional economists and economic historians, if policy confusion similar to the New Deal is to be avoided in the future.”

Presidents Wilson’s Contributions to the Great Depression

Before we discuss what FDR did, let us stay true to chronology and briefly consider some other things that happened on Woodrow Wilson’s watch The Federal Reserve (Fed) was created in

1914 under Woodrow Wilson “primarily to act as a ‘lender of last resort’ from which private banks could borrow money in times of crisis.”15 Before this time the commercial bank

clearinghouses performed this function.16

Great Britain had gone off the gold standard during World War I in order to print more money to pay its various war expenses This caused inflation and after the war, it wanted to get back onto the gold standard at its original rate In order to do this it had to have help from other countries

to support its currency Interest rates in America were higher than in England so money and goldwere flowing out of England and over to America In July of 1927, Montagu Norman, the head

of the Bank of England, asked Benjamin Strong, the governor of the Federal Reserve Bank of New York, to help In response, Strong cut the discount rate, at which the Fed would lend money

to member Federal Reserve banks, from 4 percent to 3 percent In addition he directly supportedthe English currency by sending gold to the Bank of England to buy 12 million British pounds This caused the American stock market to rise significantly for at least two reasons First, it made bonds less attractive relative to stocks, and second, lowering the discount rate effectively expanded the money supply and spurred lending; much of the resulting easy money was invested

in the stock market causing prices to rise.17

By the way, do you see any similarities to what is happening today with the Federal Reserve’s discount rate currently being zero? What has happened to the stock market?—it has recovered all of its staggering losses from 2007 forward and has even rocketed past its prior high set in

2007 by more than a thousand points The Fed is currently creating new money to the tune of

about $85 billion per month in lending money to the government to support its voracious

spending habits As old bonds are being retired and replaced by new bond issues, most of those

new bonds are not being bought by private investors with their pre-existing funds, but rather, are

being bought by the Fed with new money it made out of thin air Much of those freed-up privatefunds are then finding their way into the stock market thus propping up stock prices

15 Ivan Pongracic, Jr., “The Great Depression According to Milton Friedman,” The Freeman: Ideas on Liberty,

September 2007, Vol 57, No 7, published by the Foundation for Economic Education (See http://www.fee.org)

16 Pongracic, Id.

17 Powell, pp.28-29.

Now lets get back to our story about the conditions preceding the stock market crash of 1929

By 1928 a number of Federal Reserve officials became concerned about the rampant stock market speculation In response they turned off the liquidity tap by raising the discount rate to 5 percent In August of 1929, following Strong’s death, it was further raised to 6 percent This discouraged lending, constricted the money supply, and exerted deflationary pressures

throughout the economy—including the stock market.18

Milton Friedman, who won the Nobel Prize in economics for his book The Monetary History of the United States, 1867-1960, said that the Fed’s action caused the money supply to shrink by

about a third which was the main cause of the depression.19 Mismanagement of the money supply obviously is a failure of government, not business.20 Ivan Progracic said:

“In 2002 Ben Bernanke [now (in 2013) the Fed Chairman] , made this startling

admission in a speech given in honor of Friedman’s 90th birthday: ‘I would like to say to Milton [Friedman] : Regarding the Great Depression, you’re right We [the Fed] did it We’re very sorry.’”21

In 1929 there were about 25,000 banks in the United States By mid-1933 that number had dropped to about 15,000 People’s savings were wiped out so their natural response was to save and cut back on their spending causing the economy to falter The Gross Domestic Product (GDP) was 29 percent lower in 1933 than in 1929 And the unemployment rate hit its historic high of 25 percent in 1933.22

“Friedman and Schwartz argued that all this was due to the Fed’s failure to carry out its assigned role as the lender of last resort Rather than providing liquidity through loans, the Fed just watched as banks dropped like flies, seemingly oblivious to the [reducing] effect this would have

on the money supply The Fed could have offset the decrease created by bank failures by

engaging in bond purchases, but it did not As Milton and Rose Friedman wrote in Free to Choose:

“‘The [Federal Reserve] System could have provided a far better solution by engaging in large-scale open market purchases of government bonds That would have provided banks with additional cash to meet the demands of their depositors That would have ended–or at least sharply reduced–the stream of bank failures and have prevented the

21 Pongracic, Id Apparently taking his cues from that conclusion, Bernake did some extraordinary things in early

2008 in response to the fear of a pending recession While the stock markets were closed on Martin Luther King’s holiday, foreign stock markets around the world dropped around 5% on that single day After an emergency session

by the Fed, and with the obvious intent of heading off a similar drop in our stock markets, just before their opening the next day, it dropped the federal discount rate by 3/4 of a percentage point About a month later, it dropped the discount rate down to only 2% in response to more negative economic news Later in the financial crisis, the Fed eventually lowered the discount rate all the way down to 0% and has kept it there at least to the end of 2013

22 Pongracic, Id.

public’s attempted conversion of deposits into currency from reducing the quantity of money ’”23

Actual cash became so scarce that many communities, including Cedar City, created their own money substitutes to facilitate commerce For example, J David Leigh who had a store in CedarCity, had metal tokens made in various increments from five cents to a dollar that could be redeemed in purchases at his store These were used in the our area as equivalents of real

nickels, dimes, etc and helped facilitate the continuance of business in our area rather than having to resort to wholesale bartering as our only means of transacting sales and purchases

Pongracic asked:

“The obvious question is: Why didn’t the Fed act? We don’t know for sure, but Friedmanand Schwartz proposed several possible explanations: 1) the Fed officials did not fully understand the disastrous consequences of letting so many banks go under ; 2) Fed officials may have been acting out of their own self-interest since many of them were affiliated with large Northeastern banks Bank failures, at least in the early stages, ‘were concentrated among smaller banks and since the most influential figures in the system were big-city bankers who deplored the existence of smaller banks, their disappearance may have been viewed with complacency’; 3) The inactivity may have been caused by political infighting between the Federal Reserve Board in Washington D.C., and regional Fed banks, in particular the New York district bank, which was the most important part ofthe system at that time.”24

Pongracic continued:

“ Friedman and Schwartz claimed that the depression would not have been a Great Depression if there had been no Federal Reserve in the first place: ‘[I]f the pre-1914 banking system rather than the Federal Reserve System had been in existence in 1929, the money stock almost certainly would not have undergone a decline comparable to the one that occurred.’”25

Lawrence H White further explains:

“Friedman understood that the Fed, having nationalized the roles of the clearinghouse associations [CHAs], particularly the lender-of-last-resort role, did less to mitigate the panic than the CHAs had done in earlier panics like 1907 and 1893 In that sense, the economy would have been better off if the Fed had not been created.”26

The mismanagement of the money supply by the Fed was the first government failure which pushed us into the depression But that depression became “Great” because of an accumulation

of many other sequential government failures as explained below While what the Fed did was

23 Pongracic, Id.

24 Pongracic, Id.

25 Pongracic, Id.

26 Pongracic, Id.

not done for the sake of promoting social justice, the things that follow were.

More About Hoover’s Contribution to the Great Depression

Referring to Herbert Hoover, Pongracic observed:

“(1) In response to a sharp decrease in tax revenues in 1930 and 1931 (caused by a slowdown of economic activities), the federal government passed the largest peacetime tax increase in the history of the United States [raising the top marginal individual

income tax bracket from 25% to 63%], which clearly applied the brakes on any recovery that could have taken place; (2) the federal government also passed the Smoot-Hawley Tariff Act in 1930, substantially increasing tariffs and leading to retaliatory restrictions bytrading partners, which resulted in a considerable decrease in demand for U.S exports and a further slowdown in production (not to mention a loss of mutually advantageous division of labor); (3) the federal government also instituted all sorts of ‘public works’ programs, beginning under Herbert Hoover and increasing dramatically under FDR; the programs removed hundreds of thousands of people from the labor market and engaged them in economically wasteful activities, such as carving faces of dead presidents into thesides of a mountain, preventing or delaying necessary labor-market adjustments ”27

As economically damaging as Hoover’s policies were, FDR made things even worse by several times Even though Hoover was extremely interventionist compared to his predecessors, the level of FDR’s interventions were so much larger still that perhaps this is the reason that Hoover was called a “do nothing President.”

FDR’s “Brain Trust”

FDR picked academic intellectuals as his top advisors rather than successful business people They became known as the “Brain Trust.”28 But as we will see from the economic effects of the New Deal policies, the collective wisdom of a small number of “experts” is far less than the collective wisdom of the free market as a whole where the millions of daily votes by consumers give the necessary signals for the free market to naturally respond to prevailing economic

conditions

Political experts get easily blinded by their goals and hopes and tend to focus only on the direct and immediate results they hope and expect to achieve They tend to ignore the indirect and delayed consequences of their legal policies They tend to ignore the perverse incentives and unintended negative side effects they are creating by trying to use the force of law to solve problems and promote some sense of “social justice.”

The New Deal’s Micro-Management of Business

Law is designed to affect human behavior, but it is rarely the case that it affects human behavior

in just one way Usually it causes a multiplicity of human behavioral responses the sum total of

27 Pongracic, Id.

28 John T Flynn, The Roosevelt Myth, (San Francisco, Fox & Wilkes, (1998)), p.31.

which may, on net, be bad rather than good despite the motives and intents of the policy makers

to the contrary The Great Depression is a good example of these dynamics

Before FDR took office, he and his advisors were impressed by the attempts by Mussolini in Italy to create a planned economy.29 The intellectuals were so impressed with Mussolini that he

was being promoted for the Man of the Year by Time magazine.30

They believed that businessmen were too selfish and made business decisions that benefited onlythem but hurt everybody else They believed that businessmen had abused their freedoms and therefore, should have them taken away They further believed that altruistic experts through the exercise of political power could plan and run the economy on a more moral and effective basis than the free market could on its own And they were bold enough to put their theories to work

by passing a plethora of regulatory law.31

Since the Democrats controlled both houses of Congress, during his first term in office, FDR, playing captain of the ship, would issue orders and Congress would usually dutifully comply In

a prior lecture I discussed one big exception to that general rule dealing with FDR’s unsuccessfulproposal to pack the Supreme Court during his second term, but during his first term, he usually got what he wanted out of Congress Within the first 100 days in office, at FDR’s prompting the Democrats passed the National Industrial Recovery Act (NIRA) which created the National Recovery Administration (NRA) headed by General Hugh Johnson, also an admirer of

Mussolini.32 Back then, when people heard the acronym “NRA” they immediately thought of theNational Recovery Administration not the “National Rifle Association” like most people today would tend to think

The NRA would propose various codes to minutely regulate various industries and FDR would impose them on the country by executive order.33 In all, there were over 500 such codes

administered by the NRA ranging from the production of lightning rods to the manufacture of corsets and brassieres They covered more than 2 million employers and 22 million workers There were codes for the production of hair tonic, dog leashes, and even musical comedies.34

As I said, these Codes were implemented through Executive Orders and were applied in a

mandatory manner,35 but if a company voluntarily agreed in writing to comply with its applicableCode, it was entitled to display a newly created “Blue Eagle” insignia Critics derisively called it

29 Flynn, p.39; Powell, pp.76-77.

30 Powell, p.113; Time, January 1, 1934; http://www.time.com/time/special/moy/1933.html.

31 Flynn, pp.92-93, 106-107, 264-265, 381-382, & 395-396; Powell, pp.76-77, 114, & 116.

32 Flynn, p.39; Lawrence W Reed, Great Myths of the Great Depression, Mackinac Center for Public Policy, p.11.

33 Powell, p.122.

34 Flynn, p.40; Reed, p.11; Powell estimates the code totals to be about 550, p.121.

35 Shlaes, pp.217-218.

the “blue buzzard,”36 “Roosevelt buzzard,”37 and/or “soviet duck.”38

General Johnson orchestrated a massive public relations blitz to sell the program to the Americanpeople.39 He said that while America’s men won WWI in our fight against the Germans, it would

be America’s women who would win our war against the Great Depression by only allowing intotheir homes goods sold by those patriotically displaying the Blue Eagle Johnson warned: “May Almighty God have mercy on anyone who attempts to trifle with that bird.”40

Henry Ford refused to sign the Code that applied to his industry and embarrassed the governmentwhen bids were requested by the Civilian Conservation Corps (CCC) from the various car companies to buy a fleet of trucks Ford’s bid was much less than the other car companies whichhad signed on to their applicable Code The CCC accepted Ford’s low bid and in response, FDR signed an Executive Order prohibiting the federal government in the future from buying from those who refused to sign on to their applicable Code.41

Apparently the general public appreciated Ford’s refusal to submit to the government’s attempt

to micro-manage his company since his sales increased rather than decreased despite (1) General Johnson’s pleas for the public not to buy from anybody who did not display the Blue Eagle and (2) Ford’s loss of all government contracts for vehicles because of his refusal to sign onto the code.42

Consider a few examples of the minute level of regulatory micro-management and intrusiveness under the various NRA codes and the Agricultural Adjustment Act

The Code applicable to those who slaughtered chickens was so detailed as to prohibit the

customer from choosing the live chicken he wanted to buy and have slaughtered The butcher was required to randomly pick the first chicken he happened to grab from the pen and sell that one to the customer.43 What the government hoped to achieve by such a rule is hard to discern Perhaps the government wanted to do away with price differentiation based upon perceived differences in quality This is consistent with the later policy of the Office of Price

Administration that sought to do away with all quality differentiation.44

A N.J tailor named Jack Magid was jailed for 3 months for charging 35 cents instead of the code-mandated 40 cents to press a pair of trousers When his story was made public, wondering what type of country we had become, a storm of indignation swept through the nation In hopes

of trying to end this public relations nightmare for the NRA, the judge quickly summoned the tailor from his jail cell, remitted his sentence, and offered to give the offender the judge’s own pants to press.45

Flynn observed:

“The NRA was discovering it could not enforce its rules Black markets grew up Only the most violent police methods could procure enforcement In [the] garment industry the code authority employed enforcement police They roamed through the garment district like storm troopers They could enter a man’s factory, send him out, line up his employees, subject them to minute interrogation Flying squadrons of these private coat-and-suit police went through the district at night, battering down doors with axes looking for men who were committing the crime of sewing together a pair of pants at night But without these harsh methods many code authorities said there could be no compliance because the public was not back of it.”46

The price fixing associated with the codes hurt small businesses by destroying their ability to compete with big business through price-cutting competition.47 Similarly it hurt blacks who formerly were able to successfully compete for jobs by offering their services at lower hourly rates It is estimated that a half million blacks lost their jobs due to the NRA minimum wage laws.48 The experts probably didn’t expect or desire these results, but such is the nature of perverse incentives and unintended side effects associated with legal mandates that tend to get soeasily ignored by the so-called “experts.”

Lawrence Reed said: “Some economists have estimated that the NRA boosted the cost of doing business by an average of 40 percent not something a depressed economy needed for

recovery.”49

American farm production increased shortly after WWI in order to help feed a starving Europe whose fields were destroyed during the war But as reconstruction progressed over there and agricultural production went up, this foreign market for American farmers started drying up and creating a problem with over-production by our farmers This overproduction caused prices to drop radically, threatening the livelihoods of many American farmers.50 A bushel of wheat sold for $1 in 1929 but later only sold for only 30 cents in 1932.51