B005HFI0X2 EBOK (33 page)

Yea, though we walk through the valley of depression

We anticipate no recovery for those who are with us

Thy politicians and diplomats frighten us

Thou preparest a reduction of our salary in the presence of our enemies

Our expenses runneth over

Surely poverty and unemployment will follow us

And we will dwell in mortgaged homes forever
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In the winter of 1931–1932, several marches took place in Washington, including more than a thousand national hunger marchers and another group of fifteen thousand led by Father James Cox. Democrats and progressive Republicans called for direct federal relief programs or greatly expanded public-works spending, only to meet Hoover’s opposition.

In the spring of 1932, when veterans of World War I called the “Bonus Army” marched on Washington to demand the payment of promised bonuses immediately instead of in 1945 or to their families upon their deaths, Hoover ordered the US Army under General Douglas MacArthur to destroy their camp near the Capitol. Although stories that soldiers had butchered infants and children were false, the nation was shocked by the use of bayonets and tear gas against the unemployed in the nation’s capital. In his memoirs, Hoover wrote: “As abundantly proved later on, the march was in considerable part organized and promoted by the Communists and included a large number of hoodlums and ex-convicts determined to raise a public disturbance.”
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THE NEW DEAL COALITION

By 1932, the American people were ready for a “new deal.” The New Deal was not primarily a movement of the Left. It was an alliance of several groups—international bankers and international businesses, workers in the industrial core, farmers, and local champions of economic development in the southern and western periphery.
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(A fifth interest group, the consumer movement, was vocal but not politically significant until the end of the New Deal era in the 1960s and 1970s.)

Each of these groups that coalesced in support of Franklin Roosevelt’s Democratic Party during the Depression had its own reason to oppose the Lincoln-to-Hoover Republican coalition that dominated the federal government between the Civil War and the Depression. The international bankers and multinational businessmen wanted the United States to move away from protectionism toward free trade. The industrial workers wanted to share more of the profits of American industry, by means of higher wages, benefits, and shorter hours. The farmers wanted to rig agricultural markets to reduce volatility and increase their incomes.

The local economic elites in the South and West, resenting the treatment of their states as resource colonies by northeastern bankers and absentee capitalists, wanted the federal government, acting as state capitalist, to guide credit and manufacturing industries to their parts of the country. Among the members of this faction were a number of powerful Texans who surrounded Roosevelt. His vice president, John Nance Garner, known as “Cactus Jack,” was a conservative who turned against him and was dropped from the vice presidential spot on the ticket in 1940 in favor of the more liberal Henry Wallace. Garner famously described the vice presidency as not “worth a pitcher of warm spit.” Roosevelt worked closely with Sam Rayburn, an East Texas populist who served as majority leader in the House from 1937 to 1941 and as the longest-serving Speaker of the House in history, 1941 to 1961, with interruptions during brief periods of Republican control in 1947–1949 and 1953–1955. Roosevelt and Rayburn promoted the career of a dynamic young Texan politician named Lyndon Johnson.

The most powerful Texan of all during the New Deal years was Jesse Jones. A rich banker, Jones had helped to make Houston a leading port city, investing in some of the city’s first skyscrapers. Having turned down Woodrow Wilson’s offer to be secretary of commerce, Jones agreed to direct the American Red Cross during World War I. From 1933 to 1945, he ran the Reconstruction Finance Corporation and, from 1940 to 1945, served as commerce secretary. Because of his position at the center of New Deal state capitalism, he was given the title “The Emperor Jones,” a reference to a play by Eugene O’Neill. Under Jones, the RFC, originally created during the Hoover years to recapitalize banks, funded both New Deal agencies such as the Works Progress Adminstration (WPA; renamed the Works Projects Administration in 1939) and industrial-mobilization projects during World War II.

The New Deal was a social revolution as well as an economic revolution. Just as it united the “outs” of economic policy, so it empowered ambitious Americans from ethnic groups or regions who were despised and marginalized by the elite white Anglo-Saxon Protestants (WASPs) of the Northeast and Midwest. By discrediting the old WASP oligarchy, the Depression made possible a more meritocratic society, even if racial integration had to wait until the civil rights revolution a generation later. Jewish Americans including Benjamin Cohen, Jerome Frank, and David Lilienthal, Irish Americans like FDR’s political fixer Tommy “the Cork” Corcoran and Joseph Kennedy, the father of the future president, businessmen from the future Sun Belt like George and Herman Brown of Texas—whose Brown and Root construction firm became Halliburton—the Italian American banker A. P. Giannini and the Mormon banker Marriner Eccles: all these outsiders broke into citadels of power from which people with their backgrounds had been excluded.

A diverse and discontented crowd was waiting in the wings of American politics. The failure of Herbert Hoover would give them their chance onstage.

A DISCIPLINED ATTACK UPON OUR COMMON PROBLEMS

In 1930, the Democrats captured the House. In 1932, they captured the Senate and the presidency.

“With this pledge taken,” Franklin Roosevelt vowed in his first inaugural address on March 4, 1933, “I assume unhesitatingly the leadership of this great army of our people dedicated to a disciplined attack upon our common problems.”
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On becoming president, Roosevelt broke with the policy of Hoover in a number of areas and took bold measures which, in the view of many historians, ended the downward spiral of deflation and set the US economy on the road to recovery.

In April 1933, Roosevelt invoked emergency powers to ban the private holding of gold and remove the United States from the gold standard. Immediately after his inauguration, on March 6, Roosevelt shut down the national banking system by proclaiming a federal bank holiday (earlier some states had declared similar holidays). On March 9, Congress passed the Emergency Banking Act, which allowed the Federal Reserve in effect to insure bank deposits. In his first fireside chat by radio on March 12, Roosevelt explained the system to the American people. When the banks opened again the next day, depositors who had been hoarding cash stood in line to return it. In the next two weeks, half of the hoarded cash in the country was deposited in the banks.
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The temporary insurance of bank deposits became permanent with the Glass-Steagall Act of 1933, which also reorganized the Federal Reserve, separated commercial and investment banking, and created deposit insurance by establishing the Federal Deposit Insurance Corporation (FDIC). An old Jeffersonian panacea favored by southern and western politicians that enabled small one-unit banks to hold smaller capital reserves, deposit-insurance schemes at the state level had failed, both before the Civil War and in the early twentieth century, with every recent effort collapsing in the 1920s.
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Roosevelt thought that deposit insurance was a crackpot idea. So did Senator Carter Glass, who lent his name to the Glass-Steagall Act and who preferred liberalized interstate branch banking along with higher reserve requirements and the government as lender of last resort. The provision for deposit insurance was not introduced until late in the bill’s evolution, on April 4, 1933, at the insistence of Glass’s counterpart in the House, Representative Henry B. Steagall of Alabama. In spite of Roosevelt’s misgivings, deposit insurance eliminated bank panics.

The inclusion of deposit insurance made it necessary to separate commercial banks, which would be insured by the government, from investment banks, which would not be. Brandeis and his allies had long supported the separation of commercial and investment banking, on the basis of their hostility to investment bankers like the late J. P. Morgan Sr. The Rockefeller interests supported the measure, which happened to cripple their rival, the House of Morgan, by forcing J. P. Morgan and Company to turn itself into two entities—a commercial bank that kept the name of J. P. Morgan and Co. and an investment bank, Morgan Stanley. The Democrats also exploited popular anger at bankers to pass the Securities Exchange Act of 1934.

Abandoning his campaign pledge to balance the budget, Roosevelt engaged in deficit spending. In the introduction to the first volume of his presidential papers, FDR wrote: “To balance our budget in 1933 or 1934 or 1935 would have been a crime against the American people. To do so we should have had to make a capital levy that would have been confiscatory, or we would have had to set our face against human suffering with callous indifference.”
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Deficit spending continued until 1937, when Roosevelt and Congress repeated Hoover’s mistake by prematurely trying to balance the budget, throwing the country back into recession.

While Hoover as president had vetoed federal relief programs, Roosevelt as governor of New York had presided over the first state relief program funded by bonds, the New York Temporary Emergency Relief Administration (TERA). Its head, the social worker Harry Hopkins, went on to lead the Federal Emergency Relief Administration (FERA) that was created in the spring of 1933. Roosevelt’s fiscal policy, though on a much larger scale than under Hoover, was still far short of what was needed. But taken together, his policies arrested and reversed the death spiral of the economy.

Whatever the merits of particular elements of the Roosevelt program, the result was dramatic: the decline of the American economy reversed around the time of Roosevelt’s “Hundred Days” of decisive activity. What followed between 1933 and 1937 was the most rapid peacetime growth in American history. Although his program fell short of what was needed to eliminate lingering unemployment, Roosevelt was far more successful than Hoover.

THE BLUE EAGLE

When Roosevelt was elected, there were a number of competing alternatives for a recovery program: massive public-works spending; wage-and-hours laws to increase purchasing power; increasing output through relaxation of antitrust laws; loans to industry or guarantees against losses; and even antitrust measures (some argued that monopoly had caused the Depression). Roosevelt was spurred to action when the Senate passed the Thirty-Hour Bill of Senator Hugo Black of Alabama, a law that sought to promote work sharing by mandating a thirty-hour workweek. Roosevelt thought that the Black bill was too radical, but rather than oppose it directly he preferred to sideline it by setting forth his own recovery plan.

What became the National Industrial Recovery Act (NIRA) was cobbled together from the efforts of two groups: one led by General Hugh Johnson, a veteran of the WIB, and supported by brain trust member Raymond Moley, budget director Lewis Douglas, and Donald Richberg. The other team included New York senator Robert Wagner, labor secretary Frances Perkins, undersecretary of commerce John Dickinson, and Jerome Frank.
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The NIRA drew on several alternatives to please several constituencies. It provided antitrust relief to industries, fostered minimum wages and hours to be determined by trade associations and labor representatives, and included a modest public works program in the form of the Public Works Administration (PWA).

Much nonsense has been written by conservative and libertarian critics of the New Deal about the alleged origins of the NIRA in Italian Fascism. When FDR pushed General Hugh Johnson, its first head, out of the leadership of the National Recovery Administration, the erratic general invoked the “shining name” of Benito Mussolini.
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Roosevelt, who despised Hitler, described the Italian dictator at one point as “that admirable Italian gentleman.” Mussolini’s invasion of Ethiopia and alliance with Nazi Germany embarrassed a number of people, including the composer and songwriter Cole Porter, who changed the lyrics to his song “You’re the Top!” to leave out the line “You’re the top! You’re Mussolini!”
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Among Mussolini’s earlier admirers was Winston Churchill, who praised “Fascismo’s triumphant struggle against the bestial appetites and passions of Leninism.”
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In his book
Liberalism
, published in 1927 after Mussolini had seized power in Italy, one of the heroes of modern libertarian critics of Roosevelt and the New Deal, Ludwig von Mises, wrote: “It cannot be denied that [Italian] Fascism and similar movements aimed at the establishment of dictatorships are full of the best intentions and that their intervention has for the moment saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history.”
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None of this is relevant, because the actual origins of the NIRA lay in the Wilson administration, not the Mussolini regime. The NIRA revived the WIB of World War I under a new name. The trade associations that were supposed to write industry-wide codes under government supervision were a version of the commodity sections and war-service committees of the WIB. The denial of the Blue Eagle emblem to uncooperative firms was merely a revival of the technique of shaming companies into compliance that had been used by the WIB during World War I. Hugh Johnson was the former deputy of Bernard Baruch at the WIB.

Roosevelt declared in his inaugural address: “It is high time to admit with courage that we are in the midst of an emergency at least equal to that of war.” He invoked World War I associationalism as the model for recovery on April 7, 1932, when he called “for plans like those of 1917 that build from the bottom up not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”
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Like the Reconstruction Finance Corporation (RFC), a reincarnation of the War Finance Corporation of World War I, and the Home Ownership Loan Corporation, the major programs of the New Deal were inspired by wartime agencies. Jesse Jones, whom Roosevelt appointed to head the RFC, was a veteran of the WIB, as was George Nelson Peek, who directed the agricultural equivalent of the NIRA, the Agricultural Adjustment Administration (AAA). The Securities and Exchange Commission (SEC) was based on the Capital Issues Committee during World War I.