Economics and The Public Welfare

Chapter 70

The Severe Depression, 1937-1938, and the Mild Rally, 1938-1939

The winter of 1937-1938 was a period of gloom and apprehension both for the country and for the Administration and the Administration’s supporters in Washington. Efforts were made by close advisers of the President to persuade him to moderate his bitterness toward American business and finance.

Secretary of Treasury Makes Conservative Speech, November, 1957. The Secretary of the Treasury was permitted to make an address before the New York Academy of Political Science on November 11, 1937, in which he promised a determined move toward a balanced budget and stated that deficit spending was no longer needed. He said that the trust funds of the Treasury could be expected to take public debt out of private hands, and argued that it would be unwise to reduce the public debt in private hands too fast, indicating that a billion dollars to 1300 million dollars a year would be enough! 1 The distinguished audience made it very plain that it did not take the Secretary of the Treasury very seriously.

Thomas Lamont and John L. Lewis Visit President. Mr. Augustus Berle, one of the original Brain Trust, arranged an interview with the President for the strangely assorted pair, Mr. Thomas Lamont, of J. P. Morgan and Company, and Mr. John L. Lewis, of the C.I.O. Mr. Lewis was really concerned about the depression because he wanted work for the members of his unions. Unemployment rose from 12% in 1937 to 18.8% in 1938. Interesting stories as to what took place at this interview were current for a time, but it has not been possible to confirm any of them. The impression was that the President did not listen very much, and if policies were in any way modified by the conference, there was no objective evidence of it.

President Repudiates Secretary of Treasury, April, 1938. The speech of the Secretary of the Treasury, made in late 1937, was repudiated by the Administration when it was announced in the middle of April, 1938, that the Federal Reserve action in raising reserve requirements would be partially rescinded, that the sterilization fund of the Treasury was to be abandoned, and that further pump-priming expenditures were to be employed. A balanced budget and, above all, public debt reduction were thrown out of the window. On April 16, 1938, reserve requirements were lowered from 200% to 175% of the minimum requirements. At approximately the same time the sterilization fund was put into active use, as the Treasury turned over gold certificates to the Federal Reserve banks and received deposit credits with the Federal Reserve banks in exchange.

Repudiates Agreement with Democratic Leaders. The Democratic leaders of the House and Senate advised the President that he should content himself with getting appropriation bills passed by the Congress, abandon, for the time at least, the effort to get the wage and hour bill adopted by the Congress, and let the Congress and the people rest. The President agreed to this programme. But the next day, April 26, without consulting them again, the President made it known that he would demand the passage of the wage and hour bill in the current session. This was revealed at a press conference, after the President had called Chairman John J. O’Connor, of the Rules Committee, to the White House, to discuss the situation. The Democratic leaders were angry. The Rules Committee for a time refused to yield. On April 29, the House Rules Committee by a vote of 8 to 6, voted to bury the bill in Committee for the remainder of the session.2

The Wage and Hour Act—Last New Deal Law. The President, however, forced through the wage and hour act and signed it on June 25, 1938. This was the last important New Deal legislation before the war. It was a very dangerous piece of legislation, and, coming on top of all the other measures which had made complications for business, it had very ominous possibilities. It provided that hours should be limited to 44 hours a week for the first year, 42 hours a week for the second year, and 40 hours a week after two years. Work in excess of those hours should be paid for at not less than 1 1/2 times the regular wage rate. Minimum wages were set at 25¢ an hour for the first year, 30¢ an hour for the following six years, and 40¢ after seven years. Provisions were made for industry committees to speed up the application of the increases in minimum wages.

It was thought by many that, in the first year, the provision would not affect many industries outside the South, though the framers of the law apparently forgot about Puerto Rico, and very grave disturbances came in that island, where capital is scarce and population dense. Immense unemployment resulted there through the sheer inability of important industries to pay the 25¢ an hour. Wages are high when men are scarce and capital and natural resources abundant, and wages are low when men are abundant and capital and resources are scarce. In Puerto Rico population increases without restraint, and constantly presses on subsistence. Puerto Rico is a verification of Malthus’s Law.

The coming of the war, with its immense increase in wages, made these minima relatively harmless, even in the South. The provisions regarding hours, however, as we shall later see, tied our hands very badly when it came to fighting a war.

The trough of stock market prices was reached in March, 1938, and the trough of business depression, as measured by the Federal Reserve index of industrial production, was reached in May. There came a substantial rally in the index of industrial production (1923-1925 = 100) from 76 in May of 1938 to 105 in December of that year, followed by a drop to 92 in April and May of 1939, with a rally to 103 in August, just before the outbreak of the war. Unemployment averaged over 9,000,000, or 16.7% of the working force, for 1939. The Dow-Jones industrial averages in the stock market, which had dropped to a low of 97.46 on March 31, of 1938, rose to 158.90 on November 10 of that year, the rise being accentuated in the latter part of the year by improving Republican prospects in the autumn Congressional elections and by the sweeping Republican gains in the election.

• 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.