Wednesday, July 7, 2010

The National Recovery Act of 1933

Ever heard of the National Industrial Recovery Act (NIRA). Actually, it was later changed to NRA, although that point is mute. This was an act passed in 1933 by an American Congress that allowed "American Industrialists to collaborate to set the prices of their products, and even the wages and hours that went into making them."

That's according to Burton Folsom, Jr. in his book "New Deal or Raw Deal." A very good book overall about the Great Depression. It provides a great overall history that is often overlooked in other history books, and in the classroom.

The NRA allowed "leaders in all industries, from steel and coal to shoulder pads and dog food," to sit together over lunch and write "'Codes of fair competition' that would be binding on all producers in their industry. Laborers were often allowed to organize, and antitrust laws were suspended."
So it allowed the President to regulate industry (power Hitler and Stalin and Mussolini also sought and obtained) and to create public works programs such as the Civilian Conservation Corps which was a group of young men who were hired by the government to do meaningless jobs just so the government had a reason to pay them.

Although, we must note here, every dollar spend to make a bridge, or to plant a tree, or other such project, is a dollar that is not spent into the market, and ultimately one less worker that can be hired. Ultimately, the NRA lead to more unemployment, not less.

Does that sound like a fair and Constitutional law to you. Well, it was actually overturned by the Supreme Court as Unconstitutional, but it was a gallant attempt by the FDR administration to thwart the Constitution in the name of Progressivism and control the markets.

Yep, the free market was overthrown for a while with this law. Industries could not only set prices, but they could also determine how many hours to be worked by workers. And also raise wages. In total, there were 540 such codes written.

Some businesses did not participate, but whether it did or not it would be bound by the rules set forth by other businesses in the industry.

So nothing like forcing one business to do what it does not want to do. If the business that didn't want to comply does not comply, he could be fined and sent to jail. And FDR used this to send many of his enemies to jail. Yes, this happened in America. Many men were jailed for failing to comply with the government totolitarian demands. It would be like living in Iran, Syria or North Korea today.

Henry Ford was one of the few industrialists who refused to sign the agreement and was not jailed. He said he did not want to punish his customers with higher prices. Although he was strongly urged to "join the party." Ford rightly denounced the law as "un-American and unconstitutional."

The totolitarian FDR wanted complete control of the markets, and tried to pressure Ford. But he would not give. He never gave in, although FDR refused to give Ford any government contracts. Burton notes that since there was a large increase in government business back then, that was a lot of business Ford lost. But Ford stood firm on his principle.

It kind of reminds me of the Obama Health care package that thwarts the Constitution and will ultimately force people to get health care or... what? Go to jail? Go to prison? Pay a hefty fine? All this just to be an American?

Burton notes that Adam Smith in 1776 warned against this type of price fixing system and what would occur if it eventually happened: "People of the same trade seldom meet together, even for merriment and diversion, but the contrivance to raise prices," Smith wrote. "But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary."

This Act actually falsely raised wages while productivity and competition were down. FDR did whatever he could to set higher wages. He wanted higher wages to give people who were working more purchasing power so they would buy more goods and services. FDR actually believed this would help end the Great Depression.

Any business who joined the NRA placed a sticker in their window that showed the Blue Eagle. Actually, this is how the Philadelphia Eagles obtained their name. Plus the announcement was written: "NRA Member: We do our part." That meant: we do our part to help end the depression. Ironically, they were really making the depression worse.

Burton notes the person who is in favor of competition, the capitalist, the conservative, was evil because he contributed to the booming 1920s which ultimately resulted in loss of confidence in the market that resulted in banks collapsing.

Actually, it was Acts like this that prolonged the Great Depression, because it made it so businesses could not afford to hire new workers. In fact, as Burton writes, "Their faith in the NRA was not based on the laws of economics, on knowledge of supply and demand, or on human nature. Likewise, even progressive economists John Maynard Keynes said this would not work.

Smaller companies were not able to complete with bigger companies, and closed up shop. This resulted in even more unemployment. The people who lost out most were not so much the companies at all, but the consumers.

If other industries had worked together to set high prices, many products would be priced out of the market. If in 1980 computer companies had set the price at $1,000, few would have been sold, and the innovation that eventually led to the Internet would have been stymied. People would have to work harder to learn, and that would have led to even fewer innovations, such as no GPSs and iPods and other great inventions. We never would have seen the Internet bubble.

The reverse of the NRA, capitalism, leads to innovation, as we saw in the 1920s when many new innovations were made in the U.S. market, and later in the 1980s. Competition is needed to set prices and to for cheaper products to appear on the market.
In fact, the case that brought the NRA before the Supreme Court claimed The Schechter brothers, who sol chickens, sold them at wages below what the code permitted, and he also allowed consumers to choose their own chickens rather than demanding the customer pick chickens at random from a pile.

This case, Burton writes, was so "astonishing to the justices of the Supreme Court that Joseph Heller (the lawyer representing the Fed) had to clarify it repeatedly. Under the NRA code, he explained, 'the customer is not permitted to select the ones (chickens) he wants. He must put his hand in the coop when he buys from the slaughterhouse and take the first chicken that comes to hand. He has to take that.' According to the transcript of the trial, that response produced a rarity -- open laughter in the Supreme Court chamber." Later, one justice said, "Well, suppose, however, that all the chickens have gone over to one end of the coop?". That produced more laughter, before the court ruled the Act to be ridiculous.

While the Act was set to expire in June of 1935, the Supreme Court ruled it Unconstitutional on May 27, 1935. On September 5, 1935, the Blue Eagle was abolished and prevented from ever being used again.

FDR was frustrated that he lost control of the market, and claimed it would have worked if it weren't for "selfish" industries getting carried away.

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