THE NEW DEAL AND ITS CRITICS

An Evolutionary Force

The New Deal was one of the most powerful economic forces of the twentieth century, incubating economic philosophies and techniques of financial management that dominated American business life from 1945 to 1980. It expressed a shift from infrastructure manufacturing to consumer production; it ushered in large-scale federal oversight of the economy; it forced the development of bureaucratic procedures in business administration; it revolutionized public finance; it pioneered a mixed economy; it erected the welfare state. A combination of businessmen, economists, politicians, and labor leaders managed these transformations, synthesizing often-disparate approaches to the economy. They were often opposed by other businessmen and politicians far more unified in their economic outlook. For all their criticism, however, they could not derail the New Deal. It represented an evolutionary step in modern capitalism that avoided the political dangers attending contemporary alternatives, such as fascist corporatism and Soviet collectivism.

The System of '96

The New Deal's immediate predecessor as a national economic philosophy—and the source of most of the objections to the New Deal-—was what businessmen and politicians called "the system of '96." Originally articulated during the presidential election of 1896 by Republican Party leader Mark Hanna, the system of'96 was derived from the philosophy of a nineteenth-century British thinker, Herbert Spencer. Spencer's "social Darwinism" argued that life is an incessant struggle for survival, pitting individuals against each other. The economy reflects this struggle, with wealth and power going to those individuals born "fit"—cunning, disciplined, intelligent enough to prevail in the fight. Such fit individuals were rare, but society progressed by recognizing them and orienting the bulk of resources toward them, as they were best capable of enlightened use of such resources. Partisans of the system of '96 sometimes argued for a laissez-faire economy—a French term meaning an economy that regulated its own conduct, without interference from government and politicians. What the system of '96 meant by laissez-faire, however, was not divorcing government and economy but using government to advance the fortunes of those the economy had selected as fit. The businessmen of the time enjoyed generous tax benefits, high protective tariffs, and grants of land and natural resources. By 1900, 1 percent of the nation's population controlled 88 percent of the nation's wealth. Adherents of the system of '96 felt this was to the good: in Mark Hanna's famous formulation, businessmen and the wealthy would exploit natural resources, and the benefits of their skill would "trickle down" to the less capable. Society would advance by rewarding those most fit: responsible businessmen who had proved themselves in the competition of life.

Progressives

Businessmen were opposed in 1896 by economists and politicians who would later come to be known as progressives. Progressives laid much of the foundation of the New Deal. They attacked both the philosophy and the practice of the system of '96. Sociologist Lester Frank Ward and economist Richard T. Ely repudiated social Darwinism, noting that it was human cooperation—-not competition—that allowed civilization to raise itself above the law of the jungle. Economist Thorstein Veblen rejected the notion that businessmen advanced social progress. To him, the opposite was true. Those who advanced society were inventors and engineers who developed new technologies and exploited new resources for the benefit of all. Businessmen and middlemen interposed themselves between the engineer and the public, exploiting invention for personal gain. The only talent businessmen evidence, to Veblen, is the ability to exploit the genius of engineers and inventors, to hoard resources for themselves. Veblen argued that inevitably capitalism became monopolistic. (In his day the Standard Oil Company controlled nearly all the nation's oil production and distribution.) Once a businessman held a monopoly on a particular resource, he would raise its price, violating the law of the market and making expensive and exclusive what in the hands of the engineer was a cheap, usable commodity. The solution to this problem was to abolish the power of the businessman and have engineers and scientists develop natural resources directly for the public good. Another critic of monopoly and the system of '96 was jurist Louis Brandeis. His 1914 book Other Peoples Money—And How The Bankers Use It also attacked businessmen Brandeis felt were hoarding resources that belonged to the public. Brandeis argued that government should act to break up monopolies and keep business small and localized—where it could be more responsive to public needs. He also favored using the political power of big government to counterbalance the economic power of big business.

The American System

Progressives like Brandeis were successful in breaking up the largest monopolies, such as Standard Oil, and in developing the beginnings of government regulation of business, via legislation such as the Pure Food and Drug Act (1906), the Clayton Anti-trust Act (1914), and the establishment of the Federal Reserve banking system (1913). World War I, however, returned the economy to the system of'96. Government put itself at the service of big business: federal funds underwrote factory modernization, created a merchant marine that was turned over to private hands after the war, insured American investment abroad, and suspended antitrust laws for American firms operating overseas. The system of '96 became what Secretary of Commerce Herbert Hoover called "the American System"—a businessman's government that would unleash the power of capitalism for the benefit of all. It fell 24 October 1929. Hoover and partisans of the American System believed it would right itself; they balanced their budgets and waited for market forces to return prosperity. But the market was locked in a disastrous deflationary spiral. Eventually political necessity dictated that Hoover act. When he did, it was in keeping with the philosophy of the American System: he advised business leaders in the hope they would act on his advice. Less than a month after the stock-market crash, he met with leading businessmen including Henry Ford, Pierre du Pont, and Julius Rosenwald to convince them, for humanitarian reasons, to maintain their workforce. He held similar conferences throughout the Depression, seeking voluntary compliance with his economic recovery program. The conferences failed, despite the efforts of businessmen such as Ford to comply. Workers were laid off; factories shut down; strikes erupted. Hoover tried more-assertive actions: incremental increases to public works projects; the creation of a Federal Farm Board to try to raise agricultural prices; the construction of a Home Loan banking system to cover home mortgages. The Reconstruction Finance Corporation, his most original innovation, made government loans to responsible businessmen and insisted that outlays be recoupable. Direct relief to the general public was out of the question, although Hoover did increase loans to state governments for relief. Hoover felt the public would only squander the money, that it would lead to a breakdown in the "sense of responsiblity of individual generosity," just as he felt public works expenditures would dry up capital for investment—axiomatic positions for the economically orthodox. Hoover, more or less, hewed to the straight and narrow; recovery, however, did not come.

The Brain Trust

Roosevelt proved far more flexible than Hoover in his philosophical approaches to the economic emergency. Roosevelt assembled a team of economists, scholars, and businessmen to help him sift through the various approaches to resolving the Depression. The nucleus of this socalled Brain Trust were three Columbia University professors: Raymond Moley, a progressive who believed in government regulation of business; Rexford Guy Tugwell, an economist and expert on agriculture; and Adolf A. Berle, a thirty-eight-year-old corporate lawyer (and registered Republican). Supplementing the work of these three was input from other figures soon to take places in the New Deal bureaucracy: former cavalry officer and businessman Hugh Johnson, agricultural businessman Henry Wallace, industrialist William H. Woodin, Chicago lawyer Harold L. Ickes, social worker Frances Perkins, Arizona politician Lewis Douglas, social worker Harry Hopkins, and corporation lawyer Jerome Frank.

Planning

The New Deal also relied on support from leading investment firms, commercial banks, and industries that in many cases would contribute to the leadership of the Democratic Party for the next forty years: Dillion, Read; Brown Brothers Harriman; Goldman, Sachs; Lehman Brothers; the Bank of America; First National Bank of Chicago; Chase National Bank; Standard Oil of New Jersey; General Electric; IBM; Filene's; Mead Paper; Reynolds Tobacco; American Tobacco; and Coca-Cola. What these banks and companies had in common with the Brain Trust was the belief that capitalism had evolved from its entrepreneurial and manufacturing base to a bureaucratic and consumerist mode. They felt the marketplace needed to be regulated and planned; that international trade should be on a tariff-free basis; that the wages of workers should be sufficient to drive nascent consumer industries. Often these businessmen were from ethnic backgrounds, and in the WASP-dominated market of the 1920s they were consistently slighted—especially on Wall Street. The New Deal was their vehicle of revenge and ascendancy; they succeeded, for example, in using it to split up the Anglophile, Republican powerhouse bank of J. P. Morgan and Company. But they were also aware of the damage an unregulated, uncontrolled market could wreak on business—-the Rockefeller interests, for example, suffered from ruthless price competition and an oil glut during the decade—-and pressed for price supports and the creation of business cartels. Uncontrolled overproduction had shattered investor confidence in 1929, and unregulated market pressure continued to freeze the movement of capital. The unregulated market of the 1920s led businessmen to seize gains in production for capital, rather than labor, and that seizure ultimately led to overproduction. The Brain Trust and the businesses that supported the Democratic Party felt the time had come for a planned, organized economy.

Reform

Perhaps the greatest innovation of the New Deal was to compartmentalize the problems of the Depression and deal with them on a case-by-case basis, rather than trying to resolve them through use of one sweeping philosophy, as had Hoover. Often this led to programs that contradicted one another, and often it made it difficult to define the New Deal's aims and purposes. Roosevelt sometimes seemed at sea, deploying several different economic programs because he was unable to choose among them. Consistently, however, he tried to reform corporate capitalism without abandoning it wholesale, as had Soviet Russia, or without shifting it into an authoritarian mode, as had Nazi Germany, This was no easy task, as partisans of the American System saw any deviation from their fundamental philosophy as fraught with error; for them, anything less than economic orthodoxy was revolutionary. "There are some principles that cannot be compromised," Herbert Hoover told the 1936 Republican National Convention. "Either we shall have a society based on ordered liberty and the initiative of the individual, or we shall have a planned society that means dictation [sic] no matter what you call it or who does it. There is no halfway ground." Such critics alternated between accusing the New Deal of being communistic and accusing it of being fascistic. The New Deal was vulnerable to attacks from the orthodox precisely because it lacked such ideological consistency. On the whole, however, its ad hoc programs effectively met the needs of the emergency, and by the end of the decade the New Deal had coalesced into a more coherent program.

Cartels and Regulation

To correct what they saw as a lack of economic regulation and federal oversight, from 1933 to 1935 the New Dealers inaugurated a series of reforms of the banking and financial industries. The reforms were designed to systematize investing and banking, prevent fraud, and assure investor confidence. The New Dealers hoped these reforms would spark an investment rally, and there was a small rally, but financial regulation was not enough to reassure the market. Competition was far too fierce; returns on investment far too slim. Accordingly, the government developed the National Recovery Administration (NRA), an agency built upon the model of industrial planning pioneered during World War I. The NRA represented in many ways a break with the Brandeis style of progressivism. It permitted business, in essence, to divide markets and form large productive cartels, thwarting competition, ending surpluses, and assuring returns on investments. To prevent the types of monopolistic abuses that had troubled Brandeis and Veblen, the NRA had the power to establish prices, allocate resources, and set wages. After seemingly endless haggling with the industries, the NRA established more than five hundred codes of business conduct.

Problems

Other New Deal agencies, such as the Tennessee Valley Authority (TVA) and the Rural Electrification Administration (REA) helped the NRA by establishing government-run industries to set codes and to gauge whether the productive costs reported by business were accurate or not. The TVA and REA were thus fundamentally programs that might have been envisioned by Veblen: one where engineers determined the fairest and most efficient cost for a resource and civil servants forced businessmen to hewr to this standard. The TVA and REA, however, were concerned primarily with the production of electricity; for most industries, the government had no guide to the fair cost of manufacturing (and hence fair price to consumers) save that provided by industry itself. There were other problems. Small businessmen complained they were being "coded out" of competition. Many repudiated the program and announced a return to "free enterprise." Price increases granted for hardship cases in one industry were then demanded by other industries. The codes discouraged the entry of newer and mo reaggressive firms into the marketplace. The codes raised prices and reduced the broader money supply. Provisions for enforcing the code were lax, and many NRA administrators refused to use them, believing they would not survive a court challenge. They were right. On 27 May 1935 the Supreme Court found the NRA unconstitutional, arguing that Roosevelt had exceeded his authority in establishing the codes. For the most part everyone, including Roosevelt, was glad to see the NRA go. It had established important precedents: a forty-hour workweek, a minimum wage, the abolition of child labor, and the beginnings of a systematized textile and oil industry. But it had not sparked a significant recovery.

Wages

The most important provision of the NRA was its codes regarding wages and rules concerning labor. Believing that a primary cause of the Depression was the low wages of workers, the New Dealers sought to raise wages, limit hours, and improve working conditions. The New Dealers believed that high wages would be used to purchase consumer goods, sparking increased production by industry, and setting the economy on the road to recovery. It was, in a sense, the exact opposite of the "trickle-down" philosophy of the system of '96—a kind of "trickle-up" theory. As Roosevelt explained it when he signed the National Industrial Recovery Act (the congressional measure that brought the NRA into being):

The law I have just signed was passed to put people back to work—to let them buy more of the products of farms and factories and start our business going at a living rate again.

In my inaugural I laid down the simple proposition that nobody is going to starve in this country. It seems to me to be equally plain that no business which depends for existence on paying less than a living wage to its workers has any right to continue in this country.…

Throughout industry, the change from starvation wages and starvation employment to living wages and sustained employment can, in large part, be made by an industrial covenant to which all employers shall subscribe. It is greatly to their interest to do this because decent living standards widely spread among our 125 million people eventually means the opening up to industry of the richest market the world has ever seen.…

I am fully aware that wage increases will eventually raise costs. But I ask that management give first consideration to the improvement of operating figures and to the greatly increased sales to be expected from the rising purchasing power of the public. This is sound economics and good business. The aim of this whole effort is to restore our rich domestic market by raising its vast consuming capacity.

Collective Bargaining

The New Dealers tried to raise wages through Title 7(a) of the National Industrial Recovery Act. Title 7(a) gave labor unions the legal right to bargain collectively, and the Roosevelt administration usually backed labor in its disputes with management. When the NRA was struck down by the Supreme Court, Congress passed the Wagner Act, which continued the right to bargain collectively, authorized the Fair Labor Standards Act, which continued the forty-hour work-week and prohibited child labor, and established the National Labor Relations Board to mediate industrial disputes. When labor unions added the clout of the sit-down strike to government assistance, they secured for themselves living wages and purchasing power.

Other Measures

The Roosevelt administration buttressed increased wages by more equitably distributing wealth in America. Welfare-state programs such as Social Security and unemployment compensation were, in effect, transfers in wealth from employers to employees, although programs such as these were not nearly as radical in the United States as they were in Europe, and many of the benefits of such transfers were offset by indirect taxes. Devaluation of the dollar in 1934 and reform of the Federal Reserve System increased the money supply and eased credit. Finally, the New Dealers shifted the tax burden to the wealthiest Americans, increasing the purchasing power of average citizens. While Roosevelt opponents, such as Louisiana politician Huey Long, suggested a confiscatory 100 percent tax on millionaires, Roosevelt settled for steep inheritance and luxury taxes. The Revenue Acts of 1937 clamped down on tax loop-holes for businesses and levied a new tax on undistributed corporate profits. Afraid of war profiteering during World War II, the Roosevelt administration restructured the tax code in 1942 to provide for a 91 percent tax on the highest incomes—a progressive system that, although modified, remained in place until 1964. The increased power of labor unions, welfare programs, and progressive taxation combined to increase vastly the spending power of average Americans, but the effects of such policies would not really be apparent until after World War II.

Deficit Financing

The most radical economic feature of the New Deal took the longest to arrive. In 1929 the federal government operated with a budget surplus of $734 million. By 1932 the government operated with a deficit of $2.7 billion, due to increased outlays and a nearly 50 percent decline in tax receipts. During the 1932 election Roosevelt had promised to balance the budget after the election, a position he shared with his opponent. It was a bipartisan article of economic faith that governments, like households and businesses, had to operate in the black. Originally the New Deal was committed to this end. In May 1933, for example, the Roosevelt administration disbursed $500 million in unemployment relief—precisely the amount the government had saved by cutting federal salaries and reducing payments to veterans with the passage of the Economy Act. In 1936 Congress had to override a Roosevelt veto to pass a veterans' bonus. Like Hoover before him, FDR feared it would badly destabilize the federal budget. Consistently the New Dealers distinguished between "general" outlays—those federal expenditures that predated the Depression—and "emergency" outlays that would be eliminated with recovery. In 1932 very few economists believed that persistent government deficits would lead to anything but calamity. Nearly all economists felt that if government borrowed the savings of the public for its operations, banks and businesses would be "crowded out"—unable to draw on public savings for industrial improvements and expansion. The New Dealers believed that if they kept the deficit down, restructured American finance, and cartelized industry, banks and private loaners would feel confident enough in the economy that they would resume investments. Yet the Roosevelt administration was so economically heterodox, and the international situation so unstable, that large-scale investment failed to take place.

Public Works

The New Dealers thus took the next logical step: they themselves borrowed money from the public to invest in direct relief, public works, and infrastructure development. The New Dealers hoped that projects such as the Public Works Administration, the Works Progress Administration, the Civil Works Administration, the Tennessee Valley Authority, the Civilian Conservation Corps, and the National Youth Administration would hire enough of the unemployed to build bridges, schools, and highways that it would "prime the pump" of broad consumer spending, leading to increased demand for consumer products and setting manufacturing on the road to recovery. Once the economy had recovered, tax revenues from prosperity would enable the government to repay its debts. Such was the New Deal theory behind deficit spending. By 1936 Roosevelt was spending $4.8 billion, an unprecedented sum during a time when total gross national product was about $100 billion. Yet, on the face of it, the expenditures did prime the pump of private sector recovery. Consumer spending grew from $46 billion in 1933 to $67 billion in 1937. Business investment rose from a low of __BODY__.9 billion in 1932 to $11 billion in 1937. Gross national product returned to the levels it held in 1929; unemployment was reduced to 7.7 million. Thus, in 1937, the New Dealers attempted to balance the budget, cutting back its work programs. The action sent the whole economy south, and Roosevelt scrambled to resume deficit spending. The Depression was back.

Selling Capitalism

The New Deal's critics seized on the recession of 1937-1938 with glee, and in 1938 the New Deal was defeated at the polls, the end of a long period of political ostracism for partisans of the American System. Hoover's relative inactivity during the early Depression had discredited much of the prestige that businessmen and orthodox economic thinkers had in the mind of the public. The 1934 Pecora and Nye committee investigations of big business focused public blame for the Depression on orthodox economic thinkers and Republican businesses, such as J. P. Morgan and Company. These businessmen responded by mounting an unprecedented media campaign designed to rehabilitate the system of '96 and defeat the New Deal. By the middle of the decade such businessmen were preoccupied with rebuilding favorable public opinion toward their own version of capitalism. The National Association of Manufacturers (NAM) was determined to use the most modern advertising techniques to sell the idea that capitalism was good 'just as continuously as the people are told that Ivory Soap floats or that children cry for Castoria," The NAM posted forty-five thousand billboards with messages such as "What Is Good For Industry Is Good For You" and distributed free, procapitalist radio advertisements. On the other hand, the American Bankers Association seriously threatened a "boycott" if the federal government refused to balance its budget.

The Liberty League, In 1934 the New Deal's economic opponents, including Morgan; R. R. M. Carpenter, vice president of Du Pont; Alfred Sloan and William Knudsen of General Motors; J. Howard Pew of Sun Oil; and Sewell Avery of Montgomery Ward combined to form and finance the American Liberty League. Its one-hundred-man executive committee comprised seventy presidents or directors of leading corporations or investment firms. Many of Roosevelt's political enemies in the Democratic Party, including John J. Raskob, Jouett Shouse, and Al Smith, also joined. The Liberty League was one of the New Deal's most vitriolic opponents, challenging each economic innovation from the stand-point of the orthodox. To the Liberty League, the NRA smacked of Italian corporatism, and they predicted the New Deal would turn fascistic. They argued equally adamantly that the public works programs and Social Security were communistic. Most important, however, they objected to deficit financing, labor unions, and the redistribution of wealth. Each objection was based on the philosophical core of orthodoxy: redistribution of wealth put money in the hands of people incapable of using it properly; labor unions coddled workers and increased laziness; deficit financing borrowed extravagantly for economic programs whose returns were limited.

Defeat

Critics feared at times that the New Deal was the authoritarian mechanism whereby the American voters traded their freedom for economic security. The presidential election of 1936 did nothing to diminish their fears. The Liberty Leaguers backed the Republican candidate, Gov. Alfred Landon of Kansas, in part because he expressed their sentiments to the American people. The Liberty League sent the public more than five million pamphlets and leaflets explaining their position. The public sent Landon and the Liberty League packing, in the worst political defeat in modern American history. Only after the New Deal stumbled in 1937 and Southern Democrats, concerned with Roosevelt's support for black civil rights, made common cause with Republicans would there be a political rehabilitation for conservatives. Even then, the public—and the business community-—never embraced economic orthodoxy. By 1938 many Liberty Leaguers and partisans of economic orthodoxy, who were, for the most part, economic nationalists in favor of high tariffs and an almost mercantilist attitude toward trade, embraced isolationism and opposed American entry into the World War II. What political influence they recovered disappeared with Pearl Harbor. The system of'96 was dead.

Keynesian Economics

World War II and the Cold War validated many New Deal economic theories, at least from the perspective of the majority of the nation's business leaders and politicians. Deficit spending received a theoretical boost with the publication of British economist John Maynard Keynes's Genera! Theory of Employment, Interest, and Money (1936). Keynes's argument was that deficit spending could be used to temper the effects of the business cycle. Countercyclical spending could indeed prevent catastrophic depression—but the spending had to be great enough to make a difference. The New Deal's tens of billions, it turned out, were too little; World War IFs $240 billion was what was required to spark the private sector economic recovery. High wages due to powerful labor unions and a progressive income tax sustained that recovery. Businessmen not only prospered within the regulative supervision of the government, but they extended its mechanisms to international trade at the Bretton Woods conference in 1944 and through the Marshall Plan and tariff agreements after that. After 1945 politicians from both parties and economists of almost every persuasion unified around a consumer economy and multinational Keynesian economics. The economic transition years were behind; the great age of American prosperity ahead.