I. ECONOMICS OF THE TWENTIES

1. FROM DEBTOR NATION TO CREDITOR NATION

In 1914 Americans owed $3 billion abroad. In 1919 foreign governments owed the US $10 billion, and foreign citizens owed the US $3 billion. World War was the moment in history when the US went from being a debtor nation to being a creditor nation.

2. GNP (Tindall and Shi, America: A Narrative History, p. 1074-1075).

1920 $88.9 billion
1921 $74 billion
1922 $74 billion
1929 $104 billion

3. ANNUAL PER CAPITA EARNINGS (WAGES) IN MANUFACTURING

1921 $1,171
1928 $1,408

4. PER CAPITA INCOME (Tindall and Shi, America: A Narrative History, p. 1075).

1922 $672
1929 $857

5. HIGH PROTECTIVE TARIFFS

One factor that contributed to the Great Depression of the Thirties was high protective tariffs and trade wars between the industrialized nations. In March of 1921, in the last days of the Wilson administration, the Republicans passed a new high tariff. Wilson vetoed it. In May Congress passed this Emergency tariff again, and the new republican president, Warren Harding, signed it. It placed duties on foreign agricultural products.

In September 1922 the Republicans passed a new tariff, the Fordney-McCumber tariff. it established the highest tariffs, up to that time, in American history. Sugar, textiles, iron, rails, hardware, chemicals and dyes from abroad faced tariffs as high as 60 to 400%. But this high tariff on the goods of other countries sparked a trade war. Europe retaliated with trade barriers against our goods. This hurt foreign trade and exports.

Further, as industrial workers in the North turned to the Democratic Party, Northern strength within the Democratic Party increased and Southern influence weakened. The Northern wing of the Democratic Party supported high protective tariffs as job protection. Therefore the traditional opposition of the Democratic Party to tariffs was weakened.

In June 1930 President Herbert Hoover signed the Hawley-Smoot tariff. It raised tariffs on virtually everything to the highest levies in history. The American Bankers Assoc. and industries with foreign markets warned it would damage export trade, but Hoover brushed them aside. Within two years 25 countries retaliated with tariffs against American goods, and foreign trade plunged (Morison, Commager and Leuchtenburg, Growth of the American Republic, Vol. II, p. 426).
 

6. VERY UNEVEN DISTRIBUTION OF WEALTH

During most of the Twenties, from 1922 to 1929, much of the nation enjoyed prosperity and a boom. But it was very unevenly distributed. The middle class was doing well. But agriculture, plagued by overproduction and shrinking overseas markets, was depressed. In 1921 some 4 million workers were unemployed. At no point in the Twenties did unemployment fall below 1.5 million workers.

Historians Henry Steele Commager and William Leuchtenberg point out that 5% of the population had 1/3rd of the national income. In 1929 the 27,000 wealthiest families earned the same amount as 11 million families below the poverty level of $1,500. (Garraty, The American Nation, p. 709). Twenty-five million families (25 million), or 87% of the American people, had incomes of less than $2,500. Another million families, or less than 3%, had incomes over $5,000. (Morison, Commager, Leucntenberg, p. 447). But that small handful might have millions. At this point in our history there was in fact a ruling class of wealthy people, like the Morgans, DuPonts, Mellons, Rockefellers.

7. OVER-PRODUCTION

Another contributing factor to the Depression was over-production. In the industrial sector, this was an unforeseen consequence of the electrification of industry. This in turn brought about a vast increase in productivity.

In 1914 thirty (30%) percent of American industry was electrified. By 1929 some 70% of American industry was electrified. (Morison, Commager, Leuchtenburg, p. 424).

Between 1919 and 1929, as a national average, productivity increased 64% (Green, World of the Worker, p. 108). In the two preceding decades the increase had been 12%. For some individual firms the increase was even more than 64%.At Ford, productivity increased 255%. Factory productivity (Divine, Breen, Fredrickson and William, America, Past And Present, p. 748) in particular increased 43%, and the wages of factory workers increased 11%

This increase of productivity of 64% meant that basically, with the same number of workers, industry could produce twice as much. The same number of workers were producing twice as much in 1929 as they had in 1919.

Dividends to stockholders rose 100% in the Twenties. On average workers received a real gain of 26% in their wages. (Green). For factory wokers, in particular, the increase was 11% (Divine, Breen, Fredrickson and William, America, Past And Present, p. 748).
 

8. FAILURE OF PURCHASING POWER

But this increase in wages did not keep up with the avalanche of goods being turned out. Workers and consumers lacked the money, the purchasing power, to buy all these goods that were being produced. Industry was overproducing goods, relative to wages or purchasing power and the ability of the people to purchase or consume those goods.
 
 

9. STOCK MARKET SPECULATION

Meanwhile people with money were trying their luck on the stock market. And others were buying "on margin." This meant that they put 10% down, on the cost of stock, and borrowed the other 90% from a broker. But if the stock lost value, you still owed the broker the other 90%. When the stock market crashed some people were wiped out because they still owed money on worthless stocks.

By 1927 housing construction began to slip. Building construction came to a halt. Consumer spending began to fall. Inventories at factories and warehouses began to rise.

10. DISASTER IN AGRICULTURE

Meanwhile the price of farm commodities was falling disastrously.

Between 1920 and 1932 the price of
corn fell from 61 cents a bushel to 32 cents.

Cotton fell from 16 cents/lb to 6 cents.

Wheat fell from $1.82 a bushel to 38 cents.

Between 1920 and 1932 farm income fell from $15.5 billion to 5.5 billion. (Morison, Commager, Leuchtenburg, p. 471-472).
 
 

11. STOCK MARKET CRASH

The stock market crashed on October 29, 1929, and the Great Depression set in. In the off-year Congressional elections of 1930 the Democrats captured control of both houses of Congress. Resigned to the likelihood of defeat, the Republicans nominated Herbert Hoover for a second term. The Democrats nominated Franklin Delano Roosevelt, former governor of New York.
 

II. THE GREAT DEPRESSION

1. BANK FAILURES

As the Depression set in, banks and businesses failed.

YEAR # OF BANK FAILURES (IN EACH YEAR)

1929     659
1930     1,352
1931     1,456
1932     2,294
1933     5,190

2. ECONOMIC HARDSHIP

Factories and businesses laid off and fired workers, and slashed the wages of those who remained. In 1931 Ford closed a plant in Detroit. Some 75,000 people were thrown out of work (Garraty, The American Nation, p. 713). In 1930, nationwide, 6 million people were unemployed. By 1933 it had climbed to 13 million (Divine, Breen, Fredrickson and Williams, p. 752). In a country of 120 million people, some 40 million people were either unemployed workers or members of families in which the main breadwinner was out of work. The unemployment rate rose from 3 percent in 1929 to 25 percent in 1933 (Boyer, Clark et al.,Enduring Vision, p. 809).

50% in Cleveland
60% in Akron
80% in Toledo.

In 1932 the auto industry was operating at 20% of capacity. Between 1929 and 1932 foreign trade fell from $9 billion to $3 billion. This was the worst collapse of the world economy in history.

People could not pay their rent, the mortgages on their homes, or on their farms. Renters were evicted, banks foreclosed on homes, and on farms. More than 2 million people were homeless, wandering the country looking for food and shelter. They huddled in squatter camps called Hoovervilles. They attacked trains carrying coal and food. And they rummages through garbage heaps and alleys trying to find a few scraps to stay alive. No one could believe that this could be happening in America.

The business of America was supposed to be business. But somehow it seemed that the god of business had failed. Maybe it had been a false god, after all.
 
 

3. REJECTION OF LAISSEZ-FAIRE

Many Americans came to the conclusion that laissez-faire didn't work. We had tried it, especially in the Twenties. And it gave us the worst depression in human history. Most Americans concluded it was time to try something else, something new. That something new was the New Deal, which took a capitalist foundation or base, and constructed or superimposed a welfare state on top of it. We call this hybrid WELFARE CAPITALISM, as in a system designed to promote the general welfare or the greater public good. It is a new form or type of capitalism. Not the traditional laissez-faire capitalism, but welfare capitalism. Welfare capitalism means a capitalist economy with a welfare state attached. By welfare state we mean a society, or government, that more closely regulates free enterprise and also undertakes measures to protect the general welfare. Basically this means that you don't let people starve. Government assumes a responsibility to provide a safety net and a minimum standard of living for the people. Some people see this as socialism, and you will have to judge that for yourselves. If it is socialism, it is a very mild form of socialism, and certainly does not compare to the socialism of Europe or the welfare democracies of Denmark, Sweden and Norway. In any case, the New Deal marks a turning point in American history. The American people rejected laissez-faire in favor of stronger experimentation and regulation.
 
 

THE ROOSEVELT PRESIDENCY

1. BANKING AND THE STOCK MARKET

When Roosevelt came into office the banks were in crisis. In February the governors of Michigan, Maryland, Kentucky and California closed the banks in their states. In March New York and Illinois closed their banks. When Roosevelt was inaugurated on March 4th, the banks had closed in 38 states (Divine, Breen, Fredrickson and Williams, America: Past and Present, p. 752).

1. Roosevelt declared a four-day national bank holiday. This suspended all transactions of the Federal Reserve and other banks. Gold and silver could only be withdrawn with a license from the Treasury. The immediate problem had been that there was a "run on the banks," where people rushed down to the bank to get their money fearing they might collapse. So they wanted to get their money before it was too late. Banks lend money, so that don't have all the money of all their depositors on hand at any one time.

Roosevelt called the new Congress into special session, and it met on March 9th.

2. Within 7 hours it passed the Emergency Banking Relief Act of 1933. Treasury officials inspected or audited the banks, and basically only those banks which were solvent were allowed to re-open, and insolvent banks would have their assets placed under a conservator appointed by the Comptroller of the Currency. Thus, if a bank re-opened, you knew it was solvent and you didn't need to worry. This helped to restore confidence in the banks, and in fact 9/10ths of the banks re-opened. (Tindall and Shi, America: A Narrative History, p. 1006).

3. The Glass Steagall Act, or Banking Act of June 16, 1933, created the Federal Deposit Insurance Corporation (FDIC), which insured bank deposits up to $5,000 per depositor. Previous to this, if the bank folded, and you had not withdrawn your money beforehand, you were just S.O.L. It also permitted branch banking, but forbade banks to own affiliates through which they used the savings of depositors to invest on the stock market and engage in speculation. This was meant to divorce savings or deposit banking from investment affilates. This was bitterly opposed by the American banker's Assoc.).

4. Later on, the Banking Act of 1935 increased the authority of the government over the banking system by empowering the Federal Reserve Board to regulate the discount rate, which is the interest rate for loans by the Federal Reserve to member banks.

5. In May 1933 Congress passed the Securities Act. It required full disclosure of the value of new stock to the Federal trade Commission. Previously companies had fraudulently misrepresented the value of their stock and "watered" it to inflate its true value. This Act was supplemented by the Securities Act of 1934. It created the Securities and Exchange Commission (SEC). This required the registration of all securities with the SEC rather than the FTC.

II. UNEMPLOYMENT AND ECONOMIC DISTRESS

As I described previously, more than 13 million people were unemployed. People were homeless, freezing, starving. To respond to the genuine plight of the people in this time of unprecedented emergency and hardship, the government turned to emergency relief and public works. Forty years too late, Jacob Coxey was vindicated.

In May 1933 Congress passed the Federal Emergency Relief Act, or FERA. The federal government assumed responsibility for relief, which is also called public assistance or welfare. Previously this had been the responsibility solely of the localities and the states. Since the Middle Ages in Christian Europe there has always been relief. But it was provided by the church, and since the colonial period in America by the local county.

In 1933, for the first time, the federal government assumed responsibility for it as well. By the winter of 1934 some 20 million people were receiving welfare (or the dole, as it was called). Initially FERA was given $500 million (Tindall and Shi, America: A Narrative History, p. 1109).

2. In March 1933 Congress approved the Civilian Conservation Corps. This provided jobs for males aged 18-25, usually from the cities, to work in reforestation, fire-prevention, the national parks and the construction of roads and dams. At its peak it employed 500,000 people. It paid $30 a month (Enduring Vision, p. 816, says $35). Of that amount, $22 was sent home to the parents. An individual could be in it for a year or so, and then someone else would get a turn. By the end of 1941 it had employed 2,750,000 people.
 

3. In June 1933 Congress approved the Public Works Administration (PWA). It was directed by Harold Ickes. This program provided construction and maintenance jobs at public expense. Initially it was part of the National Industrial Recovery Act (NIRA), which appropriated 3.3 billion (Boyer et. al., The Enduring Vision, p. 818). The PWA was responsible for 250,000 projects, including the construction of hospitals, bridges, and schools; clearing slums; and the rehabilitation of old army and navy posts. It built the Triborough Bridge in New York, the Lincoln Tunnel; 30th Street Station in Phila, and the Grand Coulee Dam on the Columbia River in Washington State (The Enduring Vision, p. 822); and the aircraft carriers Yorktown and Enterprise. At its height in 1938 it had 3,275,000 people on the payroll. By 1941 some 8 million people had worked on a PWA project at one time or another. In all, this program spent $4,240,000,000.

4. In April 1935 another works program was added, called the Works Progress Administration. Its director was Harry Hopkins. It employed over 8,500,000 people between 1935 and 1943, and completed over 1 million projects. It spent $11 billion and constructed or improved 650,000 miles of road; built or repaired 124,000 bridges, 125,000 public buildings (such as schools, post offices), 8,192 parks and 853 airport landing fields.

In these public works programs the government was acting as the employer of last resort. If the private sector does not generate growth and create jobs, the people cannot simply be left to starve. Nothing feeds revolution like masses of hungry, desperate, unemployed people. That is what produced communism in Russia, and the Nazis in Germany.

In June 1933 Congress also passed the Home Owners Loan Act. It established a Home Owners Loan Corporation (HOLC) that provided loans to homeowners to allow them to refinance their mortgages. Eventually if refinanced one-fifth of the home mortgages in the country (TheEnduring Vision, p. 816). Many Americans would have lost their homes had it not been for HOLC.

III. BUSINESS AND INDUSTRY

FDR and his advisors also attempted to help business and industry with a controversial policy that ultimately was declared unconstitutional. This was the National Industrial Recovery Act of June 1933, (NIRA), which created a National Recovery Admin. (NRA). Fundamentally it did 6 things:

1. suspended the anti-trust laws

2. allowed trade associations to fix prices and restrict output (production)

3. industries would draw up agreements on prices and output,

4. and the government would enforce them.

5. If a business violated the pact by lowering prices or increasing production above its quota, the courts were supposed to issue injunctions.

6. in return for this relaxation of the anti-trust laws, businesses were supposed to accept unions and collective bargaining, as well as a forty hour work week (8 hour day) with time-and-a-half for overtime.

Roosevelt supported NIRA in part to head-off a more radical piece of legislation that had passed the Senate. It was called the Black bill, named after Senator Hugo Black of Alabama. It was also called the 30-Hours bill, because it would have established a 30 hour work week. FDR thought this was too radical, and pushed the House to adopt a 40 hour provision (as a moderate alternative).
 

NIRA would have "cartelized" the American economy, or formed it into cartels of producers, as Hitler did in Germany. This would have produced a concentration of power in the hands of a few firms. This would have been good for the big corporations. But it would have frozen small firms into their existing market share. Further, many companies reneged on their promise to accept unions and collective bargaining. In 1935 the Supreme Court declared NIRA unconstitutional.

In the case of Schecter Poultry Co. v. US, involving a poultry firm in New York, the Court said:

NIRA improperly delegated legislative or Congressional power to the executive.

Provisions of the poultry code were a regulation of intra-state commerce, not inter-state commerce, and the government had no jurisdiction.

Republican Chief Justice Charles Evans Hughes said the chicken had died in New York, so even though it had been carried across state lines it was intra-state commerce rather than inter-state. (Tindall and Shi, America: A Narrative History, p. 1121). It should be added that FDR was experimenting. He did NOT have a master plan. He was reaching, groping for anything that might work.

IV. AGRICULTURE

There are 4 major pieces of legislation and several minor ones dealing with agriculture.

1. The Agriculture Adjustment Act of May 1933 (AAA) was declared unconstitutional in 1936, because the Supreme Court said it didn't like the WAY it had been done. It was then replaced by a modified bill.

The first AAA placed a tax on the processors of specified agricultural products, such as the flour miller, the sugar refiner, the vegetable oil processor, meatpackers. The revenue generated from the tax on processors was used to pay farmers to reduce their output or production.

In other words if the problem with agriculture was overproduction, the government said to farmers "stop growing so damn much." We will pay you to stop growing. So in 1933 farmers plowed up their fields and slaughtered their animals to reduce the supply, and got money for it. This came to be called the Great Plow-Up."

However in January 1936, in the case of US v. Butler, the Supreme Court said this was unconstitutional. You could not single out one group of people, namely processors, and tax them, for the benefit of another class of people.

Furthermore, farm production was ruled to be intra-sate rather than inter-state, conveniently ignoring the precedent of the Swift case of 1905.

2. In Feb. 1939 FDR responded with the Soil Conservation and Domestic Allotment Act.

The government now proclaimed that its purpose was conservation and the prevention of soil erosion. The government would pay farmers not to grow "soil-eroding" crops, but asked them to take land out of production or plant clover instead.

The government would in a sense "lease" this land or acreage, which was taken out of production, from the farmer.

The money to pay for this would come from direct Congressional appropriations rather than a processing tax.

3. In October 1933 Congress passed the Commodity Credit Corporation. It extended loans to farmers who grew cotton, and they could store it in government warehouses. The loan was an advance on the value of the cotton, which could be sold at a later date when the price improved. This was the Populist subtreasury once again. In time subsequent acts applied this principle to other commodities as well.

4. The Second Agricultural Adjustment Act of Feb. 1938, deleted the processors tax of the first AAA, and provided for a system of quotas to control production.

QUOTAS

Whenever the Dept. of Agriculture determined that a surplus of any export farm commodity threatens the price, the Secretary of Agriculture may fix a quota.

CROP REDUCTION AND ACREAGE ALLOTMENT

The farmers would then be asked to approve the quota by referendum, and each state, each county and each individual farmer in a county would be allotted a certain number of acres that he could plant in that crop, and no more.
 

"EVER-NORMAL GRANARY" or Commodity Loan

Excess crops would be stored under government auspices. The farmer would receive a loan from the government, and when the price rose he could sell the crop and repay the loan. This was the Populist subtreasury on a much larger scale. It bears repeating that the Populism of the 1890s was a forerunner and predecessor to the New Deal. Some of the oldest and deepest roots of the New Deal are to be found in Populism. It is important to understand the continuity between Populism and the New Deal, and in fact the trajectory of Populism, Progressivism and the New Deal. Almost fifty years after the Ocala Platform, the Populist subtreasury idea was finally enacted, and the Populists were vindicated. We might say that the Populists were fifty years ahead of their time.

This too was challenged in court, but by that time the Court had changed, and the Second Triple A was upheld.

5. In April 1933 Congress had passed the Bankhead Cotton Control Act. It set marketing quotas for cotton. Farmers who tried to sell more than their share of the quota would be stopped by a prohibitive tax.

6. The Kerr-Smith Tobacco Control Act of 1934 applied the same thing to tobacco. (Tindall and Shi, America: A Narrative History, p. 1111).

7. In March 1933 Roosevelt re-organized all farm credit agencies into a Farm Credit Administration.

8a, b). In May 1933 Congress passed the Emergency Farm Mortgage Act, and in June the Farm Credit Act Together they provided loans that permitted the refinancing of farm mortgages at lower interest rates. (Tindall and Shi, p. America: A Narrative History, 1107). The Farm Credit Act gave loans (federal money) to farmers to refinance the mortgages on their farms loans that private banks probably would not have given them.

9a. In June 1934 Congress passed the Federal Farm Bankruptcy Act. This gave farmers who had lost their land due to foreclosure a 6-year extension to repay their debts. The banks contested it, and the Supreme Court ruled the law unconstitutional.

9b. A Farm Mortgage Moratorium Act of May 1935 provided for a 3-year moratorium against the seizure of the land of indebted landowners (farmers) if they applied for a court order giving them protection from foreclosure.

10. In 1937 Congress passed the Farm Tenant Act. This would provide loans, repayable over 40 years, to sharecroppers, tenants and farm laborers who did not own any land. It would help them to buy land, livestock, supplies and equipment. Southern conservatives bitterly hated this bill because they felt it weakened their control over their dependent labor force, especially African-Americans.

11. IMPACT ON SOUTH

The agricultural programs of the New Deal had a profound effect in the South. Under the AAA, 53% of the cotton acreage was taken out of production. With loans from the government, farmers could now buy tractors and mechanical devices. White landowners began discharging their black sharecroppers and pushing them off the land. The mechanized cotton picker finally replaced the mule, plow and sharecropper. The mechanized picker could do the work of fifty sharecroppers. Southern agriculture began to shift from cheap and labor-intensive agriculture to mechanized, capital-intensive agriculture. As a result, in the 1930s, 425,000 blacks left the South. The Second Great Migration was underway. IN 1944 a mechanical cotton picker was developed. It was like a tractor with a vacuum that sucked up the cotton into a hopper. The machine could do the work of many sharecroppers. As farmers bought these machines, they no longer needed their sharecroppers, and fired them and evicted them from the land. For many blacks, this meant they were uprooted from the only way of life they had ever known. But the vicious system of sharecropping and debt peonage finally began to decline. As the mechanization of agriculture proceeded in the South, between 1940 and 1970, five million African Americans left the South (Nicholas Lemann, Promised Land, p. 6). The change in technology and economics led to a dramatic shift in demographics (population). [cause and effect]