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The Sources of New Deal Regime Uncertainty

[Excerpted from “Regime Uncertainty,” The Independent Review 1 (4), Spring 1997.]


Despite the encroachments of taxation, regulation, and other government action at all levels that had been occurring for half a century or more (Hughes 1991, pp. 92–135; Higgs 1987, pp. 77–167; Keller 1990), as late as 1932 businesspeople in general and investors in particular remained — certainly in retrospect — relatively free of major threats to the prevailing regime of private-property rights. Then, during the next two presidential terms, the Roosevelt administration proposed and Congress enacted an unparalleled outpouring of laws that significantly attenuated private-property rights (Leuchtenburg 1963; Badger 1989).

State legislatures followed suit with their “little New Deals” (Leuchtenburg 1963, pp. 188–198; Badger 1989, pp. 283–284) and relentless tax increases (Brownlee 1996, pp. 83 & 85). As financial economist Benjamin Anderson ([1949] 1979), an astute contemporary observer, remarked, “The impact of these multitudinous measures — industrial, agricultural, financial, monetary, and other — upon a bewildered industrial and financial community was extraordinarily heavy” (p. 357).

Anderson was hardly the only contemporary economist convinced that the New Deal measures caused the Great Duration. Schumpeter, one of the world’s leading authorities on business cycles, wrote in the first edition of his Capitalism, Socialism and Democracy, published in 1942,

The subnormal recovery to 1935, the subnormal prosperity to 1937 and the slump after that are easily accounted for by the difficulties incident to the adaptation to a new fiscal policy, new labor legislation and a general change in the attitude of government to private enterprise all of which can … be distinguished from the working of the productive apparatus as such. … So extensive and rapid a change of the social scene naturally affects productive performance for a time, and so much the most ardent New Dealer must and also can admit. I for one do not see how it would otherwise be possible to account for the fact that this country which had the best chance of recovering quickly was precisely the one to experience the most unsatisfactory recovery. ([1942] 1962, pp. 64–65; emphasis in original)

Schumpeter had elaborated on this interpretation three years earlier in his treatise, Business Cycles (1939, pp. 1037–1050), insisting that “the individual measures obviously tended to reinforce each other” (p. 1045) in their discouraging effect on investors.

Taken together, the many menacing New Deal measures, especially those from 1935 onward, gave businesspeople and investors good reason to fear that the market economy might not survive in anything like its traditional form and that even more drastic developments — perhaps even some kind of collectivist dictatorship — could not be ruled out entirely (Roose 1954, pp. 65–69). As Schumpeter (1939) remarked of businessmen in the late 1930s,

They are not only, but they feel threatened. They realize that they are on trial before judges who have the verdict in their pocket beforehand, that an increasing part of public opinion is impervious to their point of view, and that any particular indictment will, if successfully met, at once be replaced by another. (P. 1046)

One of the chief ironies of the Roosevelt administration’s policies is that “for the most part the New Deal relied on private investment to stimulate recovery yet its rhetoric precluded the private confidence to invest” (Badger 1989, p. 116). Early in his presidency, Roosevelt took seriously “the risk of worsening the economic depression by undermining business confidence and investment,” but by 1935 he “had gained confidence in the prospects for economic recovery and was less worried about a business backlash” (Brownlee 1996, pp. 71–72).

Under political pressure from radical challengers such as Huey Long, Francis Townsend, Father Charles Coughlin, and others, FDR had begun to voice heightened hostility to investors as early as 1934 (Leuchtenburg 1963, pp. 95–117). In 1935 Roosevelt “lost patience with corporation leaders, and younger New Dealers came to the fore who shared his reluctance to make concessions to conservative business opinion. … The men around Roosevelt were now highly sceptical of the ability of business to act in the national interest” (Badger 1989, p. 96). Ignoring the opposition of business groups such as the US Chamber of Commerce and the National Association of Manufacturers, in 1935 FDR supported the Social Security Act, the National Labor Relations Act, the Banking Act, and the Public Utilities Holding Company Act as well as a host of other laws, including soak-the-rich taxes, opposed by most business groups.

Accepting his party’s nomination for the presidency in 1936, Roosevelt railed against the “economic royalists” allegedly seeking a “new industrial dictatorship” (quoted in Leuchtenburg 1963, pp. 183–184). Privately he opined that “businessmen as a class were stupid, that newspapers were just as bad; nothing would win more votes than to have the press and the business community aligned against him” (Leuchtenburg 1963, p. 183).

Just before the election of 1936, in an address at Madison Square Garden, he fulminated against the magnates of “organized money … [who were] unanimous in their hate for me” and declared, “I welcome their hatred.” To uproarious applause, he threatened, “I should like to have it said of my second Administration that in it these forces met their master” (quoted in Leuchtenburg 1963, p. 184).

In 1935, 1936, and 1937 the Roosevelt administration requested tax legislation aimed at punishing the wealthy. The so-called Wealth Tax of 1935 (part of the Revenue Act) ultimately included a graduated corporate income tax, a tax on intercorporate dividends, increases of estate and gift taxes, and increases of surtaxes on incomes greater than $50,000 that ranged up to a top rate of 75 percent. In 1936 FDR sought to tax retained corporate earnings in lieu of all other corporate income taxes. Congress approved a graduated surtax on corporate earnings, based on the percentage of earnings retained, and increased the tax rate on intercorporate dividends. The overall effect was to raise corporate income taxes.

The 1937 tax act closed a variety of “loopholes,” including the use of personal holding companies to avoid taxes.1 These soak-the-rich efforts left little doubt that the president and his administration intended to push through Congress everything they could to extract wealth from the high-income earners responsible for making the bulk of the nation’s decisions about private investment. According to economic historian Elliot Brownlee (1985, p. 417), “the tax reform of 1935–37, more than any other aspect of the New Deal, … stimulated business hostility to Roosevelt. … Business opponents of New Deal tax reform charged that Roosevelt’s taxes, particularly the undistributed profits tax, had caused the recession [of 1937–38] by discouraging investment” (ibid.).

Although Congress reversed in 1938 and 1939 some of the tax provisions most offensive to investors, Roosevelt continued to rail against businessmen who, as he said in a 1938 speech, “will fight to the last ditch to retain such autocratic control over the industry and finances of the country as they now possess” (quoted in Brownlee 1996, p. 81). Although historians emphasize the president’s defeats with respect to taxation in the late 1930s, contemporary businessmen must have appreciated the reality of increased taxation: in fiscal 1940, with the depression still lingering, the federal government collected 57 percent more total revenue than it had in the prosperous year 1927 (US Bureau of the Census 1975, 1122, Series Y568).

Meanwhile other developments heightened the perceived threat to established private property rights. Early in 1937 FDR brought forth his plan to pack the Supreme Court. Although he failed to gain congressional support for this scheme, which many perceived as “a naked bid for dictatorship” (Anderson [1949] 1979, p. 430), the intimidated justices, weary of public contempt and worried that their constitutional power might be undercut, finally capitulated. Beginning in 1937 the court abandoned its employment of the doctrine of substantive due process under which, since the 1890s, it had struck down state- and federal-government interferences with private contracting.

Subsequently the court, increasingly composed of FDR’s appointees, upheld state minimum-wage laws, the Social Security Act, the National Labor Relations Act — indeed the entire panoply of New Deal regulatory measures — under an interpretation of the Interstate Commerce clause so sweeping that it embraced virtually all economic activity (Siegan 1980, pp. 184–204; Ely 1992, pp. 119–134). In the face of this “monumental change in the court’s attitude toward property rights and entrepreneurial liberty” (Ely 1992, p. 132), investors correctly perceived that the strongest bulwark against the government juggernaut had evaporated, exposing them to whatever legislative and executive incursions the political process might generate.

Simultaneously, wielding the new powers granted them by the National Labor Relations Act, labor unions carried out their most rapid surge of organizing. Membership rose from 3.8 million in 1935 to between 8.7 and 10.2 million (sources differ) in 1941 — the latter of the 1941 figures representing 28 percent of nonagricultural employment (US Bureau of the Census 1975, pp. 177–178). As union power increased, unions became a major force in the New Deal coalition, and Democratic politicians and officeholders across the country increasingly deferred to them.

In the starkest demonstration of their new power, unionists began sit-down strikes, occupying employers’ facilities and refusing either to work or to leave until their demands were met. President Roosevelt declined to use force to eject the sit-down strikers; likewise, many state and local officials would not enforce the law against this willful trespassing on private property. As historian William E. Leuchtenburg (1963) observed, “Property-minded citizens were scared by the seizure of factories, incensed when strikers interfered with the mails, vexed by the intimidation of nonunionists, and alarmed by flying squadrons of workers who marched, or threatened to march, from city to city” (p. 242).

In 1937 and 1938 Roosevelt’s attempt to reorganize the executive branch of government seemed to many of his opponents still another attempt on the part of a would-be dictator “to subvert democratic institutions” by “importing European totalitarianism into the United States” (Leuchtenburg 1963, pp. 277 & 279). As described by historian Charles Schilke (1985), “the capstone of the reorganization was to be the transformation of the advisory National Resources Board into a vigorous statutory National Resources Planning Board to engage in continuous central planning and program coordination” (p. 356). Not surprisingly, business leaders “argued that reorganization legislation would erode business confidence and impede recovery.”

After the House of Representatives defeated the president’s reorganization bill in 1938, FDR introduced a watered-down replacement in 1939, which gained quick enactment (Brinkley 1995, pp. 21–23). This law, “the last major New Deal measure before the Second World War,” nonetheless “represented a significant shift in power from Congress to the presidency,” and Roosevelt used it skillfully to create the Executive Office of the President and an Office of Emergency Management (Schilke 1985, p. 355), both of which proved instrumental in the president’s maneuvering to bring the United States into World War II (US Bureau of the Budget 1946, pp. 14–16, 22).

Further disturbing business confidence, the federal government in June 1938 created the Temporary National Economic Committee (TNEC). A product of the misguided idea that “monopolies” had brought about or sustained the depression (Roose 1954, pp. 142–143), the TNEC interrogated 552 witnesses between December 1, 1938, and March 11, 1941, and ultimately published a report of 43 volumes. The main accomplishments of the committee were to showcase the rudimentary Keynesian ideas of economists such as Alvin Hansen and Lauchlin Currie and to heighten business suspicions that the government intended to launch an antitrust jihad (May 1985, pp. 419–420).

At the time, critics of the TNEC investigation regarded it as “an important, if ominous, event” (Brinkley 1995, p. 123). Raymond Moley, a member of FDR’s brain trust who had become estranged from the New Deal, described the TNEC in 1940 as a “time bomb” — in the words of historian Alan Brinkley, “sputtering along misleadingly but certain to produce unwelcome, radical results” (Brinkley 1995, p. 123).

The fear seemed well justified, given the frenetic activities of Thurman Arnold, who took charge of the Antitrust Division of the Department of Justice in 1938. Despite having written a book mocking the antitrust laws, Arnold proceeded to lead an unprecedented attack on business concentration and trade practices, enormously expanding the number of prosecutions (Brinkley 1995, p. 111). In retrospect, one may be tempted to view this crusade as little more than an insignificant spasm of a bewildered administration seeking to shift the blame for the recession of 1937 to 1938. But contemporaries could not know, as we do, that the crusade would peter out in 1941 and 1942, when the managers of the wartime economy used their prerogatives to shield companies from antitrust actions on grounds of military necessity (Brinkley 1995, pp. 120–121).

In contemplating the state of mind of investors between 1935 and 1940, one ought to recall just how radically the government’s policies with respect to industrial structure and business practices had shifted. As late as 1935 the National Recovery Administration was still enforcing the comprehensive cartelization of all American industry. Just three years later an unprecedented hurricane of antitrust enforcement swept over business shores.

In a recent evaluation of the New Deal’s effects on the recovery, economic historian Gene Smiley (1994) notes that businesses “were further discouraged from investing by the new capital-market regulations generated by the Securities and Exchange Act, the government’s entry into the utility industry through the TVA, the continued tax increases (particularly the undistributed corporate profits tax) and rhetoric about the need to equalize incomes.” By these and a multitude of other policy changes, the Roosevelt administration “abruptly and dramatically altered the institutional framework within which private business decisions were made, not just once but several times” (p. 136), with the result that regime uncertainty was heightened and recovery substantially retarded. Fearon (1987) concurs that “shifts in government policy and the bitterness of the exchanges between business and Roosevelt were not likely to encourage an expansion in investment” (p. 210).

In these conclusions, economic historians only echo the observations of one of America’s leading investors, Lammot du Pont, in 1937,

Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don’t know. Is labor to be union or non-union? … Are we to have inflation or deflation, more government spending or less? … Are new restrictions to be placed on capital, new limits on profits? … It is impossible to even guess at the answers. (Quoted in Krooss 1970, p. 200)

This article is excerpted from “Regime Uncertainty,” The Independent Review, vol. 1 no. 4 (Spring 1997).

  • 1On the tax laws, see Witte (1985, pp. 100–108), Brownlee (1985, pp. 415–418), and Brownlee (1996, pp. 74–82).
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