Economics and The Public Welfare

Chapter 50

The Strong Business Rally, March to July, 1933—Turns Downward With NRA

With the reopening of the banks in the middle of March, 1933, there came an extraordinary rally in American business. The worst had happened. Production had dropped to unprecedentedly low levels. Banks which had reopened were believed to be sound. The people were putting their money back into the banks. Inventories had fallen to absurdly low levels, and this was especially true of goods on merchants’ shelves. Hand-to-mouth buying on a great scale had prevailed. Great department stores in New York City had been ordering sheets and towels in lots of half-a-dozen. The panic was over, and something like normal orderly buying on the part of retailers began, which meant a vast increase in the volume of buying.

Expansion of plant and equipment was hardly in order at the moment, because there was so much unused plant and equipment, but ordinary maintenance of plant and equipment meant a great increase in buying as compared with that which had prevailed. A powerful upward movement began. The Federal Reserve Index of Production 1 was just under 60 in March of 1933 and ran up to 100 by July of 1933.

The explanation of this rally was, first of all, the inevitable upswing from extreme panic and depression. It started, as the weekly indices of production show, immediately with the reopening of the banks.

Speculative excitement following the introduction of the Thomas Amendment on April 20, with its provisions authorizing currency debasement, 3 billions of greenbacks, 3 billions of purchases of Government securities by the Federal Reserve banks, and even bimetallism, though reflecting itself chiefly in the speculative markets, also tended to intensify the upward movement in business. Money magic was a new thing in America, and it had its influence for a little while.

New York Times Weekly Index of Business Activity (Seasonally adjusted)
March 11	64.0
March 18	63.7
March 25	66.8
April 1	68.0
April 8	69.1
April 15	69.8
April 22	71.1
April 29	73.7
May 6	74.7
May 13	76.3
May 20	77.9
May 27	79.5
June 3	82.9
June 10	84.4
June 17	87.0
June 24	89.1
July 1	92.5
July 8	93.1
July 15	93.4

It must be observed, however, that there is nothing in the foregoing figures of the weekly index of business activity that can be easily identified as showing the influence of this “inflation” factor.

In the latter phases of this upswing a new factor appeared. It came with the passage of the National Industrial Recovery Act on June 17, and in some cases even before the passage of this Act. Businessmen suddenly realized that with the application of the NRA codes, and with the application of the processing taxes which the Agricultural Adjustment Act provided, there would come a great increase in the costs of production.

They speeded up production to get as much done as possible before these increased costs began to operate. This undoubtedly brought the production curve to a higher point than it would otherwise have reached so soon.

NRA and the processing taxes came in July and August, and the production curve turned sharply downward, the Federal Reserve index dropping from 100 in July to 72 in November of 1933.

We had then the first of two dramatic and conclusive tests of the theory that raising wage rates and shortening hours to increase factory employment and factory payrolls, and to increase the buying power of factory labor, would increase business activity. The second test was to come in 1937-1938, to be discussed below.

From March, 1933, to July, 1933, there was an increase in factory employment of 23%, and an increase of factory payrolls of 35%. NRA came. Hours were shortened. Wages were raised arbitrarily. With what result? There was, between July and December of 1933, a further increase in factory employment of 3%, and a further increase in factory payrolls of 6%. NRA made this addition to the buying power of factory labor. Did this increase production and business activity? The answer is startlingly clear. From July, 1933, to December, 1933, industrial production dropped 25%.

The rise in activity from March to July of 1933 meant a sharp decline of 26% in labor costs per unit of output. Overhead cost was there anyway. Hiring additional laborers and adding to payrolls did not mean that the cost per unit of output was correspondingly increased, because overhead was spread thinner. It was still profitable to put on additional laborers. But with the arbitrary imposition of shorter hours and higher rates, the situation was radically reversed between July and December. The combination of the drop in industrial production and increased payrolls meant a 54% increase in labor cost per unit of output between July, 1933, and December, 1933. See page 336.

In August and September of 1933 the combined effect of the NRA increases in costs and of the processing taxes upon the situation was a very dramatic one, and a very discouraging one, as a banker, talking with his customers, could see it at that time. Here are some cases. One large industrial organization, producing consumer goods, had had a 300% increase in its volume between March and July. Its profits were large, and it absorbed without any difficulty the increased costs of NRA and the processing taxes, both of which affected it, and went on with a large volume of activity. At the opposite end was a large organization, producing capital goods and equipment, which had been running a deficit of 3 million dollars a year. It was not affected by the processing taxes, but was affected by NRA rules as to wages and hours. This industry had its 3-million-dollar deficit increased to a 6-million-dollar deficit. In between were a great many cases of businesses which reported that, for the first time in two or three years, they had had profits between March and July of 1933, but that, with the coming of NRA and, in some cases, the processing taxes, they found these profits largely wiped out or turned into deficits,

NRA and Business Indices* (Percentage increases or decreases)
	Preceding establishment of NRA (March to July, 1933)	Following establishment of NRA (July to December, 1933)
Industrial Production (a) (adjusted)	+69	- 25
Factory Employment (a) (adjusted)	+23	+ 3
Factory Payrolls (a)	+ 35	+ 6
Wholesale Prices (b)	+15	+ 3
Cost of Living (d)	+5	+ 3
Food	+16	—
Clothing	+ 4	+ 21
Stocks of Manufactured Goods (c)	+7	+ 6
Labor Costs per Unit of Output	-26	+ 54
Department Store Sales (a) (adjusted)	+ 23	-1
Department Store Stocks (a) (adjusted)	+11	+ 8

(a) Federal Reserve Board, 1923-25 base.

(b) U. S. Bureau of Labor Statistics.

(c) U. S. Department of Commerce.

(d) National Industrial Conference Board.

* This table is taken from “The First Phase of the National Industrial Recovery Act, 1933,” by Arthur Robert Burns, Political Science Quarterly, June, 1934. In cases where later figures have appeared to replace preliminary figures, revision has been made. The cost of living figures published by the National Industrial Conference Board have been used in the above table. The figures for “labor costs per unit of output” are estimates by Professor Burns.

NRA Anti-revival Measure. NRA was not a revival measure. It was an antirevival measure. The theory that shortening hours and raising wages would increase business activity was conclusively exploded in this six-month period of actual test.

Through the whole of the NRA period industrial production did not rise as high as it had been in July of 1933, before NRA came in. Following the disappearance of NRA, after the Supreme Court decision in May, 1935, there came the first real recovery. We passed the July, 1933, peak in the autumn of 1935, and then, with rapidly growing volume of production and with decreasing unemployment, had approximately two years of growing business activity—though at the best, in 1937, we had 6,372,000, or 12% of the total labor force, unemployed.

Fearful Burden of Reports Placed on Business—Shifting Rulings Replace Settled Law. One of the most appalling things about NRA was the sudden multiplication of new rules with which businesses must comply, rules not resting on settled law but on arbitrary decisions of administrative bodies, subject to change almost without notice. The business community was suddenly called upon to rush to Washington to participate in the making of codes, codes which represented bargains among different elements of the industries, bargains with labor, and bargains with an extraordinarily incapable set of Government officials and employees, many of whom were extremely radical, and few of whom knew anything about business.

The business community was suddenly called upon to prepare replies to a great mass of questionnaires, which often called for information that could not readily be obtained from the books of the businesses as ordinarily kept, and which involved immense labor on the part of the accounting offices and gravely burdened the attention of the chiefs of business, as categories had to be interpreted and the laws and the rules had to be interpreted.

All this was complicated for the financial community by the new laws and regulations connected with the Banking Act of 1933 and the new security legislation. The definition of “affiliates” under the Banking Act of 1933 was such as to impose upon financial institutions, and especially upon the banks and the security affiliates of the banks, responsibility for reporting on the financial affairs of a great many institutions that they did not in fact control and to whose detailed figures they had no legal access. One fine veteran, a very upright man, faced this problem, labored with it for several days and finally threw up his hands in despair. He died that night. Many men turned suddenly old under the heavy pressure.

Lawyers Replace Engineers and Salesmen. It is not easy to keep a powerful business move going when the head of the business must give more time to his lawyers than he can give to his engineers or to his salesmen. Under NRA, especially in the early stages, the main time and the main energies of the business leaders went into conferences with their lawyers.

NRA Hardest on Small Businesses. Hard as NRA was on the great businesses of the country, it was harder still on the small businesses and on businesses in smaller places. Businesses with limited working capital simply could not stand the sudden increase in costs. Fortunately the enforcement of NRA was lax where small businesses in small places were involved.2

But over the country there was a great mortality in small businesses, and this was particularly true in regions where capital was scarce and labor relatively abundant. An effort was made under NRA to meet unequal conditions in different parts of the country by allowing differentials as between regions, but these differentials did not begin to meet the problem.

And on the South. NRA created a great deal of unemployment in the South. Despite the differentials, the greatest percentage increase in wages, the greatest shortening of hours, and the greatest percentage increase in labor costs under NRA were in the South. In the lumber trade, for example, very little increase was made in Western wages, while a very great increase was made in Southern wages, even though they remained well below those of the West. This illustration, by the way, strikingly reveals how absurd the contention is that cost of production in a given industry is wholly a question of wage rates. In the case of lumber, far more depends upon the quality of the stumpage, its accessibility to transportation, the degree of mechanization in the methods of getting out the timber, the quality of labor, and a wide variety of other factors. An interesting book by Charles Frederick Roos, who was formerly Director of Research of the NRA 3 gives significant figures in connection with this point 4 and says: “In view of these data, it is not surprising that lumber business was diverted from the South to the Pacific Northwest.”

Forces 500,000 Negroes Out of Work. Roos estimates that, by reason of the minimum wage provisions of the codes, about 500,000 Negro workers were on relief in 1934.5

Roos adds that a minimum wage definitely causes the displacement of the young, inexperienced worker and the old worker.6 He adds that the NRA favored the highly mechanized units of industry,7 that insuperable difficulties arose in fixing fair differentials, not only as between sections but also as between large and small places,8 that small firms survived, frequently, by disregarding the provisions of the code,9 and that, had the codes been rigorously enforced, employment at the expiration of the NRA might have been considerably less than it was.

NRA Struck Especially at Capital Goods Industries. He adds that rising wage rates and increasing prices delayed recovery, especially in residential building and replacement machinery,10 and, in general, it is his view that the NRA struck especially at the capital goods industries.11

AAA versus NRA. Under the Agricultural Adjustment Act, we had the remarkable spectacle in the summer of 1933 of a radical reversal of all previous practices in agriculture, with the farmers being paid by the Government to plow under their crops and to reduce production, and with a variety of measures for artificially raising agricultural prices.

Between the agricultural programme and the NRA programme there was an absurd inconsistency. The agricultural programme was designed to lift agricultural prices not merely absolutely, but also in relation to the price of manufactured goods. The agricultural programme was designed to give farm products the same purchasing power in relation to manufactured goods that they had in the base period 1909-1914. But NRA was designed to raise the price of manufactured goods.

There was in the spring and early summer of 1933 a radical rise in the price of agricultural goods, amounting to nearly 50%, with a sharp reaction after July. There was a sharp rise of other prices, smaller in percentage, but not followed by reaction in the latter half of the year. The general average of all prices declined from its high of the year by December. By December of 1933 the gap between agricultural prices and other prices was very nearly as great as it had been in early April. The effort of the Agricultural Adjustment Administration to achieve prewar parity was defeated in 1933 by NRA.

Nervous Speculative Markets. The AAA programme, moreover, added to the complications of business. New rules and new procedures were announced with great frequency, creating violent speculative disturbances and creating new business uncertainties.

The stock market and the speculative markets in commodities had violent upswings between March and July, and both had violent downswings in July. Speculation is a product of uncertainty, and the same uncertainties which made heavy speculative markets in July and August made inhibitions and confusion for business planning and for business activities. The autumn of 1933 was a pretty blue period for the business community, for the speculative markets, and for the economic planners in Washington who saw their plans go wrong.

• 1This point will be discussed at length in Chap. 34.
• 2I have not been able to find that this article was ever published. However, the reader will find much of it in two books by Veblen: Imperial Germany and the Industrial Revolution, New York, 1915; and The Nature of Peace and the Terms of Its Perpetuation, New York, 1917.
• 3See my book The Effects of the War on Money, Credit and Banking in France and the United States, published by the Carnegie Endowment for International Peace, Oxford University Press, New York, 1919. For London, see the interesting articles by Mr. J. M. Keynes in the British Economic Journal in late 1914.
• 4O. M. W. Sprague: “Crisis of 1914 in the United States,” American Economic Review, September, 1915; H. G. S. Noble: “The New York Stock Exchange in the Crisis of 1914,” Garden City, N. Y., Country Life Press, 1915. These two papers are classics of permanent value.
• 5The figures of all the State and National banks and trust companies appear only once a year in the Comptroller’s report as of approximately June 30. For dates other than June 30, it is necessary to make estimates. During the war period these estimates are made on the basis of variation in the National Bank figures.
• 6War Industries Board Price Bulletin No. 3, Government Control Over Prices, by Paul Willard Garrett, assisted by Isador Lubin and Stella Stewart, Washington, Government Printing Office, 1920, p. 550.
• 7Mr. Herbert Hoover, in particular, did a superb job in bringing the grain and milling interests into the service of the country. I shall later find occasion to criticize his policies as President, but I wish to pay high tribute to his work in feeding the Belgians before we entered the war, to his work in food control at home during the war, to his postwar work in feeding stricken countries, and to his work under President Truman along similar lines after World War II.
• 8See my “Value and Price Theory in Relation to Price-fixing and War Finance,” an address before the American Economic Association, printed in papers and proceedings, American Economic Review Supplement, March, 1918. Reprinted in the Economic Bulletin issued by the Capital Research Company of Los Angeles, Vol. II, No. 2, Dec. 6, 1940, and reprinted in the hearings of the Senate Committee on Banking and Currency on the Price Control Bill Dec. 16, 1941. See also my testimony of Dec. 16, 1941, before this Committee.
• 9“An Index Number of Production,” American Economic Association, Dec., 1920, published in Papers and Proceedings the following March.
• 10See Federal Reserve Charts on Bank Credit, Money Rates and Business, Feb., 1941, p. 32.
• 11See Federal Reserve Charts on Bank Credit, Money Rates and Business, Nov., 1941, p. 34.