Economics and The Public Welfare

Chapter 66

The Business Rally of 1935-1937 and the Major Crisis of 1937

The Federal Reserve Index of Industrial Production (old series 1923-1925 = 100) rose from approximately 60 in March, 1933, to 100 in July of 1933; then with the coming of the NRA and the processing taxes dropped to 72 in November of 1933. Partly under the impetus of the President’s spending programme, it rose to 86 in May of 1934, dropping again, however, to 71 in September of 1934. There came a moderate rally to 90 at the beginning of 1935, and then a sagging in the spring to about 86 again.

These were all very subnormal figures, taking into account the growth which we ought to have had following 1923-1925. Unemployment ran very high, standing well above ten millions at all points down to the summer of 1935.

Congress Gives Roosevelt Blank Check for $4,800,000,000, April, 1935. President Roosevelt tried his spending magic again. He demanded and received from Congress a blank check of $4,880,000,000 as a work relief measure. There were some formal but largely ineffective limitations on the possible uses of the funds. One limitation that was absolutely definite was a provision that no part of the money should be spent for munitions, war ships, and so on. The President signed the bill on April 8, 1935.

What should he do with the money?

Out of Which Roosevelt Allocates $13,600,000,000! Later, soon after he had retired from office, Comptroller General McCarl said privately that out of the $4,880,000,000, President Roosevelt promptly made allocations totaling $13,600,000,000. All of these allocations, of course, came to the Comptroller General’s office, as it was his duty, under the law of the land, to pass upon the legality of all expenditures. The Comptroller said that he went to President Roosevelt and told him that any one of the items in this vast $13,600,000,000 was apparently legal, but that the total was too great. The total could be only $4,880,000,000. Did the President wish to revise the list, or did the President wish the Comptroller General to approve the items in the order in which they had come to him up to the total of $4,880,000,000? Mr. McCarl said that the President felt that he, McCarl, was most unreasonable. He added, however, that this was not the point on which he and the President had definitely split. That came when he was obliged to inform the President that his proposal to plant a wide belt of trees, stretching from the Canadian Border to the Mexican Border, would not be legal under the terms of the agricultural appropriation act.

Comptroller General McCarl on Guard—Business Curve Sags. Until his retirement from office Comptroller McCarl was a thorn in the side of President Roosevelt. He was absolutely independent. The law had made him independent. He was inflexible in the performance of his duties and the law had prescribed his duties. After his retirement the President was very slow in appointing his successor.

The legislation giving President Roosevelt this blank check was passed by the House of Representatives in late January. It was debated in the Senate and finally became a law April 8. The business curve continued to sag while this legislation was in process, and after its passage.

The Supreme Court Declares NRA Unconstitutional. American business was working under fearful handicaps, as we have seen in preceding chapters. NRA, in particular, was a nightmare, with the constant shifting of rulings by bureaucrats—rulings that were supposed to have the force of law, under a general grant of power by the Congress in the National Industrial Recovery Act. There was no legal certainty anywhere. The businessman, contemplating any move, had to consult his lawyers before he could safely give instructions to his engineers, his production manager, or his sales manager.

On May 27, 1935, came the sweeping, unanimous decision of the United States Supreme Court outlawing NRA, in the famous Schechter case. Questions of the demarcation of interstate commerce and intrastate commerce were involved in this case, but the central point in the court’s decision, as emphasized in the concurring opinion by Justice Cardozo, joined by Justice Stone, was the denunciation of Section 3 of the National Industrial Recovery Act dealing with code making and the fixing of hours and wages as “delegation running riot.” Whatever powers Congress might have, the Congress could not delegate its powers without qualifications and restrictions and without clear definition of Congressional policy, and yet in the National Industrial Recovery Act it had done just this. The Act was unconstitutional, null and void. The bureaucrats had no power under the Act. NRA was finished.

Supreme Court Gives People and Congress Time to React. This Supreme Court decision is a great landmark in our history. If the Court had been as cowardly as the Congress, we should have lost our constitutional liberties. The Court could not, of course, indefinitely save them for us, but it could and did give time for the people to take second thought, and for the Congress to reassert its independence. By the time the Court was finally reconstituted through the retirement of old judges and new appointments by President Roosevelt, the Congress was already in revolt on many points, and the public was backing it up. Today we look to the Congress, rather than to the Supreme Court, for the defense of the Constitution.

Dramatic Effect of Decision on Business and Markets. The effect of the NRA decision upon the business and financial community was extraordinarily great. The effect in the stock market was almost immediate. A great rally in stocks began which carried them by the autumn to levels unreached since early 1931, and which carried them by 1937 to levels that had not been reached since 1930.

The effect on business, as shown by the Federal Reserve Index of Industrial Production (base 1923-1925), follows the stock market rise with a lag of two or three months. By August of 1935 a strong move was under way which pulled the index up to 104 in December, a new high since 1930. There was a moderate dip in early 1936, then the curve moved up with vigor to above 120, and it remained above 115 until after the stock market break in August of 1937.

Business felt itself free again after the Supreme Court decision and a great many activities, which business had lacked the courage to undertake while NRA was in force, were undertaken. Production of durable goods in particular showed its first sustained upward move after the Supreme Court decision. Capital expenditures began to be made, and the gap between the production of durable and nondurable goods in the Federal Reserve curves,1 which was very wide at the time of the Supreme Court decision, practically disappeared in the third quarter of 1937.

Effect of Soldiers’ Bonus and Blank Check. The spending policy of the Government had been quite ineffective in turning a great depression into a sustained rally when applied at the end of 1933. But when a natural rally came following the Supreme Court decision, the Government spending accentuated it. The payment of the soldiers’ bonus in the Hoover Administration 2 in the spring of 1931 had perhaps made a minor upward ripple in the trend of the business curve, which was then strongly downward. The soldiers’ bonus payment in June, 1936, when the trend was already strongly upward, made a real difference in accentuating the trend.

The soldiers’ bonus payments in the Hoover Administration were made in the spring of 1931. The cash payments of the soldiers’ bonus in the Roosevelt Administration were concentrated heavily in June of 1936. Total “adjusted service certificate fund” expenditures for the fiscal year, 1936, were $1,773,000,000, and most of this came in June, 1936. Additional payments, however, under the Adjusted Compensation Act of 1936, were made in June of 1937. Of this, $56,000,000 was in cash, $500,158,000 consisted of bonds paid into the United States Life Insurance Fund.3 Doubtless too, once the business move was on, the Government expenditures for relief and recovery accelerated it. President Roosevelt’s blank check of $4,880,000,000 was not without effect—after the Supreme Court decision on NRA.

1935-1937 Rally Far Below Normal Expectation. We had a strong rally, but at no point in the rally did we approach the normal expectations which the growth of the country would ordinarily have justified, and at no point did we reach anything approximating full employment. The best year was 1937, when the annual average figure for unemployment dropped to 634 millions. There remained altogether too many Governmental interferences with business. Governmental financial policy continued to undermine long-run confidence. The course of taxation, described in preceding chapters, continued to paralyze a great deal of venture capital, the undistributed profits tax cut capital expenditures heavily, as did the securities legislation, and unsatisfactory conditions in the outside world and in our foreign trade relations and our trade policy continued to retard recovery.

Secretary Hull was making a valiant, steady effort to reduce trade barriers throughout the world, but the adverse forces, both foreign and domestic, with which he had to contend were very strong.

Election of 1936. Political developments in the United States in 1936 and 1937 were not of a sort that tended to increase business and financial confidence. The Republican Party, in its convention in 1936, had a reactionary and excessively timid Resolutions Committee which the Republican nominee for the Presidency had not been able to control. Old ghosts walked, and certain reactionary Republican leaders, who had been retired from public office, made themselves very powerful in this platform committee. Governor Landon’s personal representative on the committee, William Allen White, fought hard for four days to get a sound platform. In the course of this fight four requests which he made on one day, in Governor Landon’s name, were turned down. The plank on money failed to call for a return to the gold standard. The plank on the tariff was reactionary in the extreme, although containing one passage which had been inserted in deference to the wishes of Governor Landon, to the effect that the Republican Party would adjust tariffs with a view to increasing foreign trade—the economic meaning of which was that it would lower protective tariffs. Governor Landon sent a telegram to the Convention, before his nomination, commenting on the platform, in which he expressed his own belief in gold, and in which he told the delegates that they should not nominate him if they disapproved of his position. It was a courageous and statesmanlike telegram.

In the campaign which followed the Republican candidate made a number of very effective speeches, but he made one unfortunate speech at Minneapolis, dealing with the tariff, which was interpreted by the country as taking an ultra-high protective tariff view, and which alienated a great body of conservative Democrats who would otherwise have supported him, including the powerful and influential Baltimore Sun. Subsequently, in a speech at Albuquerque late in the campaign, he corrected this unfortunate Minneapolis speech, and placed the emphasis upon the particular part of the Republican tariff plank above referred to, namely, that the tariff should be adjusted with a view to increasing foreign trade. The Minneapolis speech attracted wide attention. The Albuquerque speech attracted little attention. Whatever chance the Republicans had had to win in 1936 was destroyed at Minneapolis.

Governor Landon—a man of fine quality and high purposes—made a gallant fight, culminating in a speech that revealed great dignity and elevation of thought at Madison Square Garden in New York at the end of the campaign.

He probably faced hopeless odds in any case. President Roosevelt still had immense personal popularity and still had the confidence of the country. Suggestions that the President planned to undermine the Supreme Court were received with incredulity. The rising tide of business activity, moreover, was in his favor. And finally, the immense outpouring of Federal funds to farmers, to WPA workers, to college students, and to other elements of the population, constituted a “slush fund” so vast that more than one informed and judicious man, including Democratic members of the Senate from Northern States who had actively supported President Roosevelt both for the renomination and for election, privately characterized the election of 1936 as a “bought election.” One may recognize that many doubtful electoral votes were bought (as in Kansas itself), and still hesitate to endorse this view of a “bought election”—having in mind the warm support the President got in 1936 from a great many conservative people who certainly were not bought, who approved the President’s general purposes, even though questioning his methods, who refused to believe the accusation that he was contemplating an attack upon the Supreme Court, and who turned violently against him when, early in 1937, he did attack the Supreme Court.

The Wagner Act. The Wagner Act, passed July 5, 1935, did not immediately lead to great changes in labor relations. But following the election of 1936 there came an immense activity in unionization and in wage raising, with a great deal of labor disturbance—the conspicuous leader of the movement being the C.I.O. headed by John L. Lewis. Ugly developments came, centering especially around Detroit.

The Court Packing Fight. Early in 1937 the President made his demand on the Congress for a bill that would enable him to pack the Supreme Court with new appointees additional to the existing Judges. The country was shocked. Here was a naked bid for dictatorship by a President who felt that he already had the Congress in the hollow of his hand, and who wished to force this subservient Congress to put the courts in the same position, so that the will and purposes of one man, freed from the checks and balances of the Constitution, might dominate the making of the laws, the interpretation of the laws, and the execution of the laws.

The country was shocked and the country rallied to the defense of its institutions. Party antagonism disappeared in this great fight, and differences among radicals and liberals and conservatives did not prevent effective coöperation. The Republican Party, very weak in both houses of Congress, refrained from making the matter a party issue lest they should thereby make it possible for the Administration to make it a party issue. Instead, the Republicans gladly accepted Democratic leadership in the fight against the President’s proposal. The leader in the fight was the brilliant and able left-wing Democrat, Senator Burton K. Wheeler of Montana, who had given enthusiastic support to most of the President’s New Deal measures, but who was none the less aghast at the proposal to pack the Court and to subordinate the Judiciary to the Executive. There has probably never been a situation, short of war itself, in which so many men of diverse views, interests and opinions, turned with one purpose to the defense of the country.

The President sustained a sweeping defeat. The Court was saved. But the old Judges began to drop out, and in a comparatively short time after the President’s defeat he was able to reconstitute the Court by the lawful process of making new appointments, so that it would sustain a great deal of legislation which had previously been regarded as unconstitutional.

The Violent Stock Market Crash and Business Crisis, 1937. The stock market, which had reached a high of 195.59 4 in early 1937, weakened with the attack on the Supreme Court, and then, as the evidence grew that the attack would be beaten off, rallied to 190.38 on August 14. Then, out of a clear sky, there came a violent break in the stock market, which moved, almost without interruption, to a low of 97.46 on March 31, 1938. Following the stock market break, with a lag of about four weeks, as shown by the New York Times seasonally adjusted business index, there began a decisive downward move in industrial production. The Federal Reserve index shows a break from a level above 115 in August of 1937 to 76 in May of 1938.

The break in the stock market was one of the most violent in our whole history. The decline in the curve for industrial production, 1937-1938, was the most violent decline in an eight- or nine-month period that our history records. The break amounted to 34 1/2%. The break between the summer of 1920 and the low in the second quarter of 1921 was definitely more moderate, amounting to only 28%, and this was the most violent sudden break which our history had shown down to that time. The extreme down swing between the peak of 1929 and the low of 1932 in volume of business was greater, but at no stage of that decline was anything like so rapid a downward movement revealed.5

• 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.