Economics and The Public Welfare

Chapter 48

The National Industrial Recovery Act

Certain Trade Associations Enthusiastic at First. Adam Smith remarked long ago that there was rarely a meeting of businessmen without some conspiracy against the public. In its origin the National Industrial Recovery Act may have been such a conspiracy. Businessmen wanted to restrict competition. Businessmen and their trade associations wanted to get rid of the Sherman Law. They wanted to restrict production (euphemistically called “adjusting supply to demand”) so that they could raise prices and fix prices by concerted action. Whether the idea originated with trade associations or whether it originated with certain of the New Dealers is not certain, but it is certain that the New Dealers responded enthusiastically to the idea and there was enthusiasm for the idea in certain business circles.

The business circles most enthusiastic about the idea were those most eager to preserve the high tariffs. They wanted a controlled market all to themselves, and the linkage of the two ideas of high protective tariffs and controlled markets made a strong appeal. They could not see that “adjusting supply to demand,” at the lowest state of demand of our greatest depression, would have precluded general industrial revival. It was beyond the imagination of a particular group of businessmen in a particular trade, who looked only at the supply-and-demand situation in their own trade, to see how greatly the demand for their product would increase if only other industries could expand.

But Enthusiasm Wanes When Labor Leaders Enter Picture. The enthusiasm of the businessmen, however, was dampened sharply when a new factor entered the picture. Labor leaders were quick to see their opportunity. To the proposal for restricted production and minimum prices, they added the proposal of the thirty-hour week for labor and minimum wages, and in the final form of the bill the demands of the labor leaders met more generous recognition than did the demands of the businessmen for monopoly.

Hull Goes to London Without Tariff Powers. The progress of the move toward what later became our NRA raised increasing doubts as to the policy of international coöperation to be worked out in the scheduled London International Economic Conference, and, above all, put increasing obstacles in the way of Secretary Hull’s request for a reciprocal tariff act which would give him tariff powers when he went to London to negotiate. He finally went to London without these powers.

NRA Imposes Import Restrictions to Protect Artificial Prices—Exemptions from Anti-Trust Act. The passage of the National Industrial Recovery Act was not completed until after the London Conference assembled on June 12. The National Industrial Recovery Act was introduced on May 17, 1933, and was signed by the President on June 16, 1933. As Hull went to London to urge the reduction of tariffs throughout the world, the Congress in the National Industrial Recovery Act authorized additional restrictions on imports. Among the purposes of the Act was definitely the raising of the prices of manufactured commodities in the United States. The Act further gave exemptions from the Anti-Trust laws of the United States to combinations in restraint of trade under codes drawn in conformity with the Act.

Monopolistic Codes—Prices, Wages, and Hours. Even before the passage of the Act, General Hugh Johnson, who was to have charge of the administration of the Act, had conferred with leaders in various industries urging them to have codes prepared for immediate submission. With the passage of the Act there came a frantic code movement. Industries of all kinds were called upon to prepare codes. These codes were concerned with shorter hours, with minimum wages, with increased employment, and with price fixing, usually disguised as prohibitions of sales “below costs.” It was obvious that an immense increase in industrial costs was in prospect.

“Purchasing Power” Means Payrolls. A naïve economic theory was developed as the guiding principle of NRA. The object of the administration of NRA was to “increase purchasing power.” Purchasing power meant payrolls. The point was to keep payrolls advancing faster than the production of goods. If this could be done, steady progress could be maintained, according to this theory.

Obviously payrolls of industrial labor constitute only a part of the purchasing power of the country. Obviously, too, if payrolls were increased only at the expense of profits and the income of shareholders, there was no increase in aggregate purchasing power.1 More fundamental still was the complete ignoring of the mainspring in industrial decisions, namely, the prospects of profits or losses. Under a system of free enterprise this is absolutely basic. When businessmen see prospects of growing profits, they expand their activities. They borrow more capital. They hire more labor. When profits are cut and when losses emerge, they contract their operations. This is fundamental in the theory of business cycles. It is the sound theory. It is the explicit major premise of Wesley Mitchell’s great book on Business Cycles, published in 1913. The idea that the purchasing power of labor is the mainspring of business activity seems to be incredibly naïve.

“Purchasing Power” vs. Profits as Dynamo. We were to see in August of 1933 a dramatic testing of the validity of these two contrasting theories, with the complete demolition (insofar as facts can demolish a theory) of the theory that increasing purchasing power of labor at the expense of business profits can make increasing business activity.

The obvious disharmony between internal regimentation of the NRA and AAA type on the one hand, and a liberal foreign trade policy based on low tariffs and sound currencies with fixed exchange rates on the other, could not fail to be evident. And the disharmony between exchange stabilization agreements and a policy of price raising based on depreciating currency was obviously great. The President’s enthusiasm for the London Conference rapidly diminished.

• 1This point will be discussed at length in Chap. 34.