 Good afternoon, ladies and gentlemen. Welcome to the beginning of the end. This is session 6 of 10. So we're on the downhill slope from this time forward. We economists are often accused correctly of being Philistines. And so to take a little bit of the edge off of that ever so valid accusation, I want to begin this session with a poetry reading. That is, oddly enough, relevant to this session's topic, The New Deal. This is actually a portion of a poem describing, as it were, The New Deal, a dollar for the services, a true producer renders, and a dollar for experiments of governmental spenders, a dollar for the earners and the savers and the thrifty, and a dollar for the wasters. It's a case of 50-50. We owe that to one, Burton Braley, who has a whole book full of such poems. And that one struck me especially once upon a time. It's one of many indications we have that The New Deal was not as wildly popular as some historians seem to suggest when they tell the story of the Roosevelt administration. And Roosevelt became during the 30s and 40s and remains to the present time, I'd say the most popular of all American presidents. It may be a little neck and neck with Abraham Lincoln, but I suspect that if we were to take some kind of a poll, we'd find that Franklin Roosevelt is the most popular American president. And a lot of observations could be made about that curious fact, but the one I want to make right now is that in reality a lot of people hated him at the time, and it wasn't just rich and callous reactionaries. Sometimes when the historians do recognize that people opposed Roosevelt and The New Deal, they are quick to represent the opponents as Republican vested interests of throwbacks to the age of laissez-faire, which were hard enough to find by 1933 indeed, Republican or otherwise. But a great many ordinary people hated Roosevelt or at least disliked him enough to vote against him in elections. So even though he won reelection three times, some of those elections were not wildly lopsided, and even in the ones he won most easily, tens of millions of people voted against him. So it wasn't just a few rich capitalists who disliked him and his policies, a lot of people did. But nonetheless he certainly perfected an apparatus for vote buying that succeeded better than any other such apparatus ever employed in American national politics, and in the circumstances it worked like a charm to keep him in office until the grim reaper relieved us of the great man. Let's take a look at the conditions that allowed Roosevelt to gain office and the New Deal policies to be implemented. So the depression began probably about midway through 1929, if we look at the real economy as opposed to the financial markets, which didn't really crash until the stock market crashed in October. But many of the time series measuring the level of real economic activity reached their peaks about the middle of 1929. The economy was already beginning to decline, and then the stock market crash brought everybody's attention to the decline and contributed to further decline along with many other contributors. But the real gross national product ultimately fell by approximately 30 percent between 1929 and 1933 when it hit bottom and then began to bounce back some. During that slide real investment spending declined by almost 90 percent, and in fact there was so little investment spending that it was far from enough to make up for the depreciation of existing capital. So in fact during those years the capital stock of the country was wasting away because wear and tear was not being compensated. Prices fell a great deal for four years straight, and the gross national product deflator, which is a very broad gaged price index, went down by 22 percent, wholesale prices went down by about 30 percent, consumer prices a little less. So there was deflation at the same time there was depression, and unfortunately many people have attributed causal significance to that association ever since and have come to fear deflation as such, although it wasn't the deflation as such that was the problem at the time, it was the depression. The most important index of the depression for most people was the level of unemployment that was reached. I have here a graph of the unemployment rate measured as a proportion of the civilian labor force. You can see that prior to 1930 the only time that unemployment rate had moved above 10 percent starting from 1890 onward was during the depression of the mid 1890s, and then it got up into the range of 12 to 14 percent for three or four years in the mid 1890s. But normally the economy had an unemployment rate that bounced around in the neighborhood of 5 percent, and we always expect a dynamic economy to have some unemployment because there are always adjustments being made in economic life. Some businesses are closing or going broke and their workers have to find new places of employment which they don't do immediately for perfectly good economic reasons. They sometimes like to spend more time searching for the best opportunity before they accept employment. So there's always a certain amount of so-called frictional unemployment, and it's because some industries may be declining relative to others, even declining in absolute terms there's a shedding of labor that then has to relocate to other employment opportunities. Structural changes that were going on in a growing economy also contributed to some unemployment. So 5 percent is approximately what we would view as about a normal level of unemployment in this economy. But we see now that very quickly in the early 1930s the unemployment rose to heights never reached before, not even approached before. And even though after 1933 the unemployment rate did fall a great deal for several years until 1937, even in 1937 it's barely dipped below 10 percent in what seemed to be a prosperous year. In fact, many people in 1937 were talking as if, well, the depression is about over. We've been growing rapidly for four years now and unemployment has fallen and real production has risen and we're just about out of this, but still unemployment was almost 10 percent. And then it popped back up again in the so-called depression within a depression that began in 1937 and on an annual basis was worst in 1938. And that wiped out much of the progress that people thought had occurred. It was a very deep depression by most standard measures. The investment spending almost collapsed completely for a year or a year and a half. The stock market fell drastically and it was a very big depression. If it weren't embedded in this gigantic long great depression it would be viewed as the third worst business slump in our history. But most people don't even know it happened because I guess it's a little like getting pneumonia when you're fighting leukemia or something. You've got bigger troubles going on and who's going to pay a lot of attention to this other one. But finally in the early 1940s we see the unemployment rate drop and fall to almost disappear during the war and that of course people misinterpreted too by presuming that the government's spending for war purposes had in a Keynesian type fashion been responsible for economic recovery and that this was a bona fide recovery like the ones that take place in civilian circumstances. But it was very different because of the war conditions and I'll talk about them in a later talk. But the point of this graph that I hope clear enough is that this was an extraordinary time and it lasted a long time. I mean we look at this and there's a whole century of experience displayed there. So it doesn't look very long but if say you were a young person that grew up and started looking for work in the early 1930s it must have seemed like forever that it was hard to find a decent job. In fact a lot of young people never had a proper job for the whole decade because there were so many workers looking for jobs that employers had their pick. They could be very choosy and there were all kinds of anecdotes that went around about say a gas station needs somebody to pump gas so it puts up a sign health wanted and a hundred guys show up standing in line to interview for the job and the gas station owner comes out and says alright everybody's not a college graduate you can drop out of the line as if that were necessary to do the job but he could set all kinds of extraordinary conditions and still hire somebody. Amazing things happened. Thousands of American engineers unable to find employment in engineering went to the Soviet Union to work in Stalin's industrialization program building factories in Russia. Amazing. Some lines of work in some industries some places it wasn't 15 or 20 or 25% unemployment it was 50 or 75% unemployment depending on the specialty. While real production fell by 30% construction fell by almost 80% so if you were a worker with a construction skill whether it's architect, engineer or carpenter, plumber whatever unemployment rates were extraordinary. There just was hardly any construction going on in the early 1930s. So you had to look for some other kind of work or move to some unusual place and people resorted to all of these measures to try to cope. They did various inventive and desperate things. My family had a whole collection of family lore about how my father managed to survive during the 1930s and for a while he chopped wood and he would chop a quart of wood and if you know how much that is it's quite a large stack of chopped wood. For a dollar he'd get paid for chopping a quart of wood. On one occasion he and my mother and my older brother I wasn't born then but they moved to Arizona and lived in a tent and picked cotton somewhere in the outskirts of Phoenix because they wanted cotton pickers out there and that was something they knew about and went out to find work. So people did extraordinary things and of course many people who weren't as willing or as able to do extraordinary things were happy to go on the government dole when government doles came along and were made available to them. Those were still times when many Americans thought that was wrong to go on the dole period. My family was like that. That was just a shameful thing so they didn't but even people who had felt that way before after years and years and years of hardship began to say well okay I'll go on the government dole. I don't see very many good alternatives so these conditions were calculated as it were to grind down people's moral sensibilities to make them more desperate and more willing to turn to government measures that they otherwise would have objected to if not on practical or political grounds on moral grounds. In many cases this decade had a profound effect on the character of the American people for the worse, much for the worse. Well after this initial slide went on for four years running and things reached such abysmal depths a great many people had grown quite desperate for some way to stop it and improve the situation and to understand the New Deal we really have to understand that sense of desperation that existed by the time Franklin Roosevelt took office because it was that atmosphere in which all of these New Deal proposals were put forward and enacted into law and put into practice. These things were not thrust upon people and in fact one of the remarkable attributes of those conditions in 1933 was that the scope of the interest groups and types of people clamoring for government aid was very very wide. It wasn't for example like the Depression of the 90s where unemployed people and farmers tried to press for government assistance especially. Now we've got everybody from rich capitalists down through middle class homeowners and farmers who own land down to unemployed people at the other end of the scale. Everybody is now clamoring for some kind of aid from the only place they see as capable of providing it, government. Many of them had become convinced by 1933 that the market system just had broken down. They looked at it and said it doesn't work anymore. Don't tell me old Adam Smith stuff. Look around you. The machine is busted. The only way out is through government assistance. Yes, yes, I know that's not the American way but this is a different situation. So they said okay, what can government do for us? What kind of help can it provide? Now when we think about the New Deal, it's hard to hold in our hand without it slipping away because it's not a coherent thing. It's not a program or a plan that all hangs together logically. In fact, very often it seems to be a whole collection of programs that war with one another because one kind of New Deal program has an effect on variable X to move it upward at the same time that another New Deal program has an effect on variable X to move it downward. So it looks as if this is just a hodgepodge of things that don't make any sense. Now I think we need to recognize that ideologically it doesn't make any sense that it's a mass of expedience. The only common denominator here is it's all something being done by government and in many cases not all but many federal government. Many of them things that had never been done before at least at the federal level of government, if at any level. So we get every kind of political view coming into play here with the possible exception of classical liberalism, I suppose. They didn't have a lot of input into the New Deal. But classical liberals were hard to find in 1933 and even people that you might think is not just classical liberal but paragons of classical liberalism. People like some of the professors at the University of Chicago, you know, Frank Knight, Simons, Weiner, you go back and you look at some of the measures that were being proposed and tried in 1933 and you'll find these guys signing their names to support them. So classical liberalism really didn't have many people manning the barricades at the time. Some of them came back to life later on and regretted, I think, their having lost the faith in the pit of the depression. But we have people of all sorts of views and schemes. If you just look at Roosevelt's brain trusters, for example, you've got on the one hand Rexford Tugwell, who's a near communist, I guess you could say. He certainly believed in socialism. He was one of the many naive Americans who had taken the ritual journey to the Soviet Union and had come back quite enthusiastic about what he had seen. So we well know how they were toured around and kept out of sight of the reality. But at all events, he believed in planning and nationalization of industry, of central direction by the government. He wanted the government to even take over land ownership so that would have central planning of agriculture. That's enough to give a misesi and a real headache. But there's Tugwell on the one hand, and then there's Hugh Johnson, who's a cartelizer, a big business flak. On the other, he certainly doesn't want to eliminate private property in the formal sense at least, although he certainly wants a little fascistic organization for the assistance of his government keepers. There's Mollie, Raymond Mollie. Mollie doesn't know anything. He's specialized in criminology, but he's kind of a middle-of-the-road new dealer who's willing to try anything, but not anything real radical. So these guys are all over the place. And if you look beyond the brain trust to all the people who are involved in making proposals or implementing proposals, they range from people who have monetary crank schemes like George Warren, the Cornell professor who thought if we raised the price of gold, we'd raise the price of everything. Yep, so facto, just like that. His statistical work had proven it to leftover populists who wanted the government to print paper money and give it to farmers, to big businessmen like Gerard Swope, the head of General Electric Corporation who wanted to cartelize all of industry and let businessmen run the cartels, to do-gooders who wanted the government to come on board and set minimally decent conditions for women and children working in industry. And it just goes on and on. Labor Unionists, they're all part of the New Deal. And they obviously are very strange bedfellows, ideologically or practically. But they're all in there. And so we need to bear that in mind. Otherwise we'll never understand how this thing came into being or how it worked. The second thing I think that is helpful is to recognize the extent to which New Deal programs just brought back to life the programs that had been used during World War I by the Wilson administration. Now in some ways you can see immediately that that's what you would expect because, look, after Wilson left office, the Republicans have had control of the bureaucracy and sometimes the Congress too until the New Deal starts. So now all of these Democrats who've been living in the wilderness for 12 years are suddenly back, you know, they've left their haunts nowadays, you know, when this happens, guys bail out of the Brookings Institution and go back into the federal bureaucracy. Well, Brookings had just got started back in those days so they couldn't warehouse as many Democrats out of office. But they found places out there and waited their turn. And now their turn has come again. And they've come back wanting to do the same kinds of things they used to do. So it's natural that they would want to reinvent the war finance corporation and reinvent the food administration and reinvent the war industry's board and all the rest of it. But the other thing that is important and affected far more people is that many people had come away from World War I with the idea, which I suggested this morning, was planted there by Bernard Baruch and his friends that World War I had been an example of very successful government economic management. So they readily swallowed a kind of analogy which was that World War I was a great national emergency and we dealt with it with programs of this sort. We're now in a terrible economic depression which is a national emergency so we know how to deal with national emergencies. We've dealt with them before. Let's do it the same way we did last time. Of course, the analogy was totally far-fetched. The sense in which World War I had constituted a national emergency was totally different from the sense in which the Great Depression constituted a national emergency. So it was a very faulty logic but nonetheless it was one that had a kind of gut-level appeal. And when people thought about proposals, they were sometimes easily led to accept those proposals on grounds no stronger than that. The third element that many of these proposals and programs shared was that they sought to raise prices. As I said, there had been a lot of deflation somewhere depending on the price you looked at between 20 and 30 percent or even more. Farm prices fell by more than 50 percent on average. So people looked around and of course if you were selling good or service X and its price had fallen, you thought to yourself, I'd be a lot better off if I could get a higher price for what I sell. The problem is prices are too low. Well yeah, for every individual that could be viewed as a problem. But of course it's completely different if all prices have fallen and your problem won't necessarily be solved of course if all prices are raised. But people viewed this matter piecemeal. Farmers said we need to get farm prices up. Of course if prices they paid for labor and materials and equipment and everything else went up accordingly, they wouldn't be any better off. But they didn't think of it that way. What we're doing is trying to raise farm prices. Manufacturers are trying to raise the price of cars or refrigerators or whatever they had to sell. And so people looked at this as a question of price raising. The term was reflation at the time. They were seeking reflation. And many of the New Deal programs aimed to achieve reflation in many cases, bizarrely, by supply restrictions. And again if you think in terms of partial analysis, if you think in terms of one industry at a time or one commodity at a time, well yes, restricting supply, other things being equal will cause a higher price to prevail in the market. But if we have an anti-depression policy that consists of restricting supply across the board, that's simply ensuring that the whole economy's real output falls even farther. That's what the depression really consists of is low levels of producing real goods and services. So this was a kind of policy guaranteed to fail when implemented on a wide scale. But that's how it was implemented. And particularly when it worked through the War Industries Board, which affected most of the manufacturing sector of the economy, it was responsible for drastically slowing the economy's recovery after 1933. We've seen it did recover some, but without the National Recovery Administration would have recovered much quicker. But people were trying to raise prices. One other attribute that we see of the events of that period is that they gave rise to a great deal of centralization of government activity, functions that had been performed before at some level of government, such as relief of the unemployed and the destitute, that had been overwhelmingly done by local governments in this country for centuries. Towns, counties made efforts to relieve people who were impoverished. Every county had what used to be known as the poor house, where you could house people who were destitute. Cities during business slums would set up soup lines where at least you could go get something to eat at the expense of the city if you were out of work and didn't have any food. But during the New Deal, welfare and relief came to be much more centralized at the federal level. The federal government had never undertaken to provide those kinds of benefits to people before at all. It hadn't even been willing to subsidize states and local governments doing so. But beginning in 1932, when Hoover was still in office, the federal government did begin to make loans. It turned out they were actually gifts because subsequently the loans were forgiven. The states, so that the states would have the funds to pay for more provision of relief to unemployed and destitute people. So in many, many ways, the government became more centralized as a result of the way the New Deal policies were constructed. I'll come back in a minute to this final aspect, having to do with the distinction between the early and the later New Deal. Now, there's so many things that happened, I can barely even list them, much less say anything intelligent about them in a few minutes here. But I just want to touch on some of the high points and make a few comments that I hope are worthwhile. As I said, the farmers were suffering disproportionately. And in fact, in some places so much so that they were becoming violent. Farmers were having their farms repossessed when they were unable to make payments on their mortgages. So the mortgage holders, as the lending agreements provided for, were taking the security when they weren't receiving the interest that was due. Well, okay, you might say the farmers had agreed to this. This was a term of the contract they had entered into. But that's a hard thing to stomach, particularly if this is a farm that you've lived on your whole life. Maybe your parents lived there. Maybe you were born there. This is not just a farm. It's not just a piece of security for a loan. It's, on the one hand, your livelihood. And on the other, maybe it's a lot more than that. So a lot of these farmers took offense to having insurance companies or bankers come around with the sheriff and tell them you've got to get out of here. This is not your land anymore. It's not your farmhouse. And particularly out in the Midwest, some of them became violent. And when the sheriff came around or when the bankers came around to tell them they were going to be put off of their property, they threatened to shoot these people. And in some cases, they resorted to going after them, beating them up or menacing them in some way. And of course the authorities weren't going to tolerate that, but in some cases they did tolerate it because they didn't want to start killing local citizens in these circumstances. And eventually 25 states in the years 1932-34 passed stay laws on mortgage obligations. And that allowed people who were in a position to be foreclosed on to have more time to repay. And in some cases actually changed the terms of what they owed. This was a classic case of what you might call interference with the obligation of contract to use the words of the United States Constitution. And in fact, it was precisely this sort of thing. Actually, this event applicable to farm mortgages that had caused the trouble, that led the framers of the Constitution to put that language in there to begin with. Because it was not the first time that this situation had arisen, and the debtors had prevailed on state governments to help them out, to give them more time or to scale down what they owed. And had brought forth some plausible argument. They came forward and they said, look, I borrowed this money, sure enough, but when I borrowed it, you know, the money was worth a lot less than it is now. So these banks are asking me to repay a hundred dollars that's a lot more real purchasing power than I borrowed from them, or that I promised to repay, so that's not right. And it's often in these changes, in these situations where the price level is fluctuated violently, that we see these kinds of conflicts between borrowers and lenders. Because that's precisely what gets deranged. They also have an inter-temporal dimension. They're all premised on somebody's forecast of what the price level will be in the future when certain money obligations are due. And if people miss forecasts and make mistakes, they get themselves in deep economic trouble. And that's what the farmers had done who tended to be debtors and found themselves with real repayment obligations much greater than they had expected they would have. Even without that, they would have been having enough trouble. Things were difficult as it was, but that made their situation much worse. So these states did pass mortgage moratoria, and they were challenged on constitutional grounds and taken to the US Supreme Court, which actually ruled that the states could do that. It was one of those less-than-crystal clear decisions, but the upshot of it was that the US Supreme Court did not strike down the Minnesota moratorium law, which was the one under challenge and therefore all the others that were like it at the time. Businessmen were losing money hand over fist in most cases, in 1931, 1932, 1933, net corporate profits were negative every year. Didn't mean every single business in America lost money, of course, but it meant that if you take all the losses, they're bigger than all the gains. So there had never been anything like that before. There had never been a time when net earnings of business were negative three years running. So businessmen, everybody from general electric and general motors down to mom and pop were very apprehensive about their ability to remain in business, and of course the failure rate of businesses skyrocketed in those years, and many people did, in fact, go broke and lose their investments. So businessmen were in all sorts of ways clamoring for some kind of bailout, and eventually that pressure coalesced in large part in support of the National Industrial Recovery Act passed in the spring of 1933, administered by the National Recovery Administration, in RA, which authorized businessmen to get together and form so-called codes of fair competition. Now, if you apply Higgs' rule of political rhetoric to this term, by simply reversing it in order to find its actual meaning, what you find, of course, is that these were all intended to suppress competition, and they did that in endless variety of ways. Each industry had a different kind of regulations that concocted, and even though, supposedly, workers and the public were involved along with businessmen in writing these codes, they were written almost exclusively by the bigger business owners in each industry. Eventually some 750 of them were written and approved by the government, and it didn't do any good to have principles because if you didn't get together in your industry and write one, the government would impose one on you. So the New Deal lawyers would sit down, and if you and the nuts and bolts industry hadn't produced a code of fair competition, they would write one and impose it on you that was legally binding. So, of course, all businessmen decided it was better to try to design this thing ourselves than to have these young Harvard grads in Washington D.C. do it and force it on us. So that's what people did, and they, in some cases, suppress competition by imposing standardization on products because, of course, one of the ways that people compete is by differentiating their products. My products design differently or performs differently from yours. It's a better one. Well, I mean, I'll compete your product. If we're going to cut competition, we've got to get rid of that kind of behavior. A lot of reporting requirements went in so that the making of better deals that is, again, one of the standard ways that businessmen compete. You know, I give you better financing terms or I give you quicker delivery or I give you more additional services or maintenance or whatever it is that I have as part of our agreement. If my competitors don't know how I'm sweetening the deal, then they can't so readily meet my terms and get those customers back from me or prevent them from ever switching to begin with. So many of these codes required businessmen to report all kinds of details about the business they were doing and thereby reveal, make public to everybody in the industry what the transactions were and prevent sweet deals from being made without the knowledge of other members of the industry. And it just went on and on and on. In some cases they put restrictions on how much time plants could be operated so that, you know, if my business happens to be so good that I'm just running two shifts a day, well, maybe if I were restricted and could only run one shift a day, then I wouldn't be able to serve as many customers and some of them would end up at your place instead. There's no end to the number of ways that have kind of a plausible rationale about them and yet if you approach them by asking what is the effect of this provision on competition, you find in every instance the effect is to diminish the vitality of competition. And so we've got all of these codes that you can think of as cartel agreements, not necessarily classic type cartel agreements of dividing a market by area or fixing a price but serving the same purpose. That was similar to what the fascists had done in Italy under Mussolini. And at the time, Mussolini's economic policies had many adherents in the United States. And if you go back and read the periodicals of the early 30s, you may be astonished to find businessmen and journalists and politicians all writing so favorably about Mussolini and the great job he was doing with the Italian economy and suggesting that that's what we need in more ways than one. We not only need to organize industry the way Mussolini has done in Italy by getting labor and government and business together and that kind of cooperation. Cooperation sounds like a good idea, right? First, if they had looked into how the Italian system worked they would have found that the cooperation was all people doing what the government told them to do. These fascist organizations were all frauds and in fact the government dictated the rules from top to bottom. But nonetheless, many people at the time thought not only the business government cooperation sounded like a good idea. I mean the diminished conflict, right? Have a more harmonious world. But they also liked the idea of having a dictator. It may be the only time in American history where people openly espoused dictatorship. They looked around and said, look, our politicians just do nothing. Here we are, we're floundering in this terrible situation. They can't seem to act. We've got too much gridlock. We need a dictator, somebody who can really take charge and get something done, like Mussolini. So this was the climate of the early 30s that gave rise to the NRA. Now of course, no sooner had they created these monstrosities than many people discovered that they didn't deliver what they had expected them to deliver. The benefits were not forthcoming. Labor unions had signed up for the NRA because it had provisions that required every code to provide for collective bargaining. And that's what they'd been trying to get the government to support for a long, long time. So great, this is wonderful. We'll be able to organize like gangbusters now because people will have to recognize our unions and bargain collectively with us. But it didn't work out very well. In a lot of cases, businessmen still wouldn't recognize and bargain with unionists when they came forward. And in addition, it was clear that the whole setup was being created and administered by business people. And the unionists were just tokens in this apparatus and no one was paying much real attention to them. Even the businessmen, once they got their code authorities in operation, began to resent them because the government, which they thought was just going to endow them with this wonderful authority and then step aside and let them wield it and they thought best didn't step aside. Bureaucrats kept showing up over and over, wanting to see reports, wanting to talk to them about this and that, wanting to see what they were doing. And this kind of chronic meddling by government officials was new to them. They never had to tolerate that before except briefly during World War I. So they began to think, well that isn't what we were trying to do. This isn't working out. And furthermore, many of them discovered that the very purpose of these schemes, the reflation wasn't working out either. If you go back and look at what happened to prices after 1933, there's a little bounce up in 1934, maybe six or seven percent increase in prices. And that's it. Price indexes hardly budged for the rest of the decade. So these people who had just had their prices fall 20, 30, 40 percent, depending on the industry, wanting to go back to where they were, and they're not even getting close to prices they used to charge for their goods. So they're saying this isn't delivering the goods. This is not what we thought we'd accomplish. And yet we have to put up with all this meddling by government officials and lawyers and people asking us to send in reports every week or every month. So a lot of people became badly disillusioned by the national recovery scheme. It had provisions in there besides authorizing labor unionization, provisions for minimum wages and for setting working conditions at decent levels. And that turned out to have considerable effect, particularly in some industries and places. If you were to look, for example, at wages, now let's do that the other way around. Let's take the wage level out here and look at the frequency with which that wage rate is paid up here. Find a distribution of wages in any industry. And let's say we look at people who work in the lumber industry in the south. That was a big southern industry in those days and we'd find a distribution that looks like that. Most of the workers have relatively low wages and then as we go out, we find a few have higher wage levels. In fact, that is the general shape of the wage distribution for almost any kind of work we can think of. What happened was that when they put these NIRA minimum wages into effect, they were set at levels like 25 cents an hour. Well, if we take southern lumber workers, we'd find that 25 cents is right here. So any wage lower than that can no longer be legally paid under this scheme. Well, here are all these workers who used to work at some wage less than 25 cents an hour and employers now simply discover that they're not worth hiring anymore. So they lay them off, they fire them. And a great many southern workers and workers in other low wage regions and low wage industries and occupations found themselves suddenly out of work because of the NIRA minimum wage. And for that reason, the NIRA came to be known among many blacks as the Negro Removal Administration and correctly known for that because blacks tended to work in relatively low wage occupations and low wage industries and so they were disproportionately affected by that provision. At the same time, in agriculture, provisions for administering agricultural benefits were structured in such a way that landowners received payments, even when landowners operated their farms with tenant labor. So the landowners got rid of anybody who might have a competing claim to receive farm benefits from the federal government and the result was that a lot of tenants were dismissed and replaced by wage workers and then the farm owner raked in the benefits that were coming from the federal government. So once again, the effect of that in the south was that a lot of black farm tenants found themselves dismissed or asked to change their status and become wage workers and many of them were just let go. In addition, many of the farmers were able to use their agricultural benefits to buy machinery and then replace labor with machinery so that they didn't need as much labor as before. They operated with more capital and less labor and that again set blacks on the road. Blacks had always been avid supporters of the Republican Party all the way from Emancipation to 1932 but they began to switch strangely enough and there's an irony here because from what I've been telling you'd think they'd see that the government was the cause of their immediate woes at least in part. But in fact what was happening at the same time is that the federal government was establishing work relief and dole programs for which blacks were eligible and so being put in this dire circumstance by the federal government and then turning around and getting some pittance of relief from the WPA or from some other federal dole agency they concluded that the federal government had saved them. So from that time forward blacks in this country became strong supporters of the Democratic Party until in the last 50 years more like a 90% level of support for Democrats among the black population and that all happened by virtue of the new deal programs. A great many programs had something to do with finance. The laws were changed first of all to go off the gold standard Roosevelt did that by executive order the second day he was in office he declared a bank holiday nationwide bank holiday by that time the states themselves had closed most of the banks in the country which meant banks just weren't allowed to do any business you couldn't go withdraw money or get a check cleared or anything they were shut down and they were shut down totally for a week after which banks began to reopen with federal approval after federal banking inspectors had gone around and looked at their books and declared some of them safe enough to reopen but it took many many months for all of them to well most of them to come back into operation some of them were never reopened they were simply closed permanently because the inspectors declared them unfit to be operated again at all and when Roosevelt declared the bank holiday he also put restrictions on international dealings in gold and quickly thereafter he nationalized the goal and required everybody to surrender their gold except those people who used gold for industrial purposes or jewelry or for collector's items but if you had either gold coins which were still circulating quite widely in those days or gold certificates paper money which was directly redeemable for a fixed amount of gold you had to surrender all of those forms of money to the Federal Reserve system and you would be given what? Federal Reserve notes, what else? So what did the Federal Reserve note promise to pay you? Lawful money, still does. What's that? More Federal Reserve notes. So that's where we made that switch in 1933 and having gone off gold the new dealers then undertook to pursue George Warren's cockamamie scheme which is to try to get reflation by raising the price of gold the government began to use the Reconstruction Finance Corporation to bid up the price, the dollar price of gold starting in the spring of 1933 and it edged it up a little bit every week, every week the Reconstruction Finance guys would come in and talk to Roosevelt what do you want the price of gold to be this week? You can't imagine anything more arbitrary than that the President of the United States saying now what the price of gold should be this week and gradually he said it higher and higher and higher and under the law that Congress had passed in the spring of 1933 he was allowed to raise the price by 60% so when he finally got the price up to $35 that was a 59% increase in the dollar price of gold which in the old days had been $20.67 he said okay, that's it, that's where we stop and the government did in fact hold the price of gold at $35 an ounce from 1934 until the early 1970s when it finally gave up fixing the dollar price of gold yes sir? I think this was something something it was illegal to have the gold what was it about in the spring? the only monetary gold do you purchase gold for William? no, you could purchase gold for use in industry or you could maintain gold jewelry or you could have collectors' pieces so you could buy it at $35 an ounce to make it into jewelry? yes, that's right so it wasn't a forbidden substance but monetary gold was forbidden not only the use of monetary gold but even the possession of monetary gold so if you had a big collection of gold eagles that you put in your piggy bank over the years that was unlawful to hold on to 50 of those say they'd probably let you keep a few in a collection I don't know what the exact limit would have been I do know they allowed some collectors' items to be retained they started letting people have gold again in 1973 monetary gold? I think it was 73 when the government changed the law and allowed people to deal in gold possess gold, monetary gold, any amount and back then people started buying Krugerans and foreign gold pieces that were still in existence mostly South African gold coins I had a friend who tried to get me involved in speculating on gold in the early 70s and I said, nah, I don't know anything I'd lose my shirt or if I'd done it I would have got rich within a few years well there's just another one of those times I didn't get rich but in addition to going off gold again this is part of the reflation program we already know it didn't work they raised the price of gold 59% but prices in general came up about 6% or 7% for the rest of the decade George Warren was decisively refuted and had to go back to Cornell and wallow in his price data some more but they didn't give up on reflation and in 1935 the banking laws were amended significantly so that authority was centralized in Washington DC and the Federal Reserve Board whereas before the individual banks had had much more autonomy in setting their policies and the New York City Fed had been the leader and most important but still there really was no formally centralized monetary policymaking prior to 1935 except to the extent that Benjamin Strong at the New York Fed or somebody else could persuade the other banks to act in a coordinated way and sometimes they did or sometimes the New York Bank was so decisive that it could really affect the course of events by its own actions but only after 1935 did we have something that qualifies as a central bank equivalent to those of say the western European countries that didn't do any good either obviously nothing the Fed did and the whole decade of the Great Depression can be said to have helped in any way and the monitors of course blamed the entire debacle on the Federal Reserve system because they say it simply stood by and did not act decisively enough to prevent that 30% reduction in money stock between 1929 and 1933 it did not intervene actively enough to prevent that series of banking panics which gave rise to ultimately more than 9,000 bankruptcies of commercial banks and therefore it's to blame it created such a terrible situation that it took the rest of the decade to get out of it well, that's an argument but I think that's far from a complete story of why the Depression was as deep as it was and how it might have been prevented or how recovery might have been brought about more quickly Neoclassical economists have come even the people who are semi-Keynesian have come to be very naive monitors about the whole experience of the Great Depression they just think everything turned on one variable it was all a matter of what the money stock was in the United States and I think that's a badly mistaken interpretation for example, suppose the Fed had been more active after 1933 instead of being quiescent and letting gold inflows gradually cause the money stock to increase suppose they had just did everything they could and made the money stock grow by 25% a year could they have then brought about full recovery by 1938 I would claim that they could not have if other things had happened in the same way if for example the New Deal had adopted the same policies no amount of money creation would have led businessmen and investors to resume the investment at old levels when they were afraid that they were going to be wiped out or even have their property confiscated by the federal government we've seen any number of countries in the world have rapid rates of money growth and they don't have prosperity all they have is inflation and I think the neoclassical economists have simply overlooked the context of the 1930s and put way too much emphasis on both the initial collapse of money I think it did contribute to the financial debacle of those years and much too much emphasis on the ability of monetary acceleration to have brought the economy out of the conditions prevailing in 1933 but needless to say that's an endlessly debated topic in macroeconomics even now after all this time let me say just a little bit about the labor reforms the NIRA was declared unconstitutional in 1935 on the grounds that Congress had delegated unconstitutional authority to the president by just letting him approve or even create these codes of fair competition and so that came to an end I don't think too many people were sorry to see it go although I've run into a few other historians who think they have a lot of evidence that some businessman continued Butler Schaefer for example in his book argues that in fact a lot of business people would like to have had NIRA continue or be recreated in some constitutionally acceptable way but my reading is the same as I think most historians that people had had enough of NIRA by 1935 even the people who had liked it to begin with had stopped liking it in most cases but what happened is as soon as it was declared unconstitutional is that some of the parts that had a lot of political support were reenacted in other ways the most important of those reenactments was the labor provisions Section 7A that authorized collective bargaining was blown up hugely into the National Labor Relations Act of 1935 often called the Wagner Act and from that time on that law still in effect as amended 1935 the right to bargain collectively was guaranteed by the federal government and a whole list of so-called unfair labor practices identified which meant that it was unlawful for employers to take various actions they had routinely taken in the past to discourage the formation or operation of unions in their workplaces so after 1935 for example an employer could not even circulate information to workers let's say a union came in and tried to organize his workforce he might have in the past circulated a flyer saying look if you adopt a union here the consequences are going to be the following I'm going to lay off 10% of you I'm going to change the way I forgive you for coming in late or any number of things could have been told to the workers that kind of information was outlawed company unions were outlawed of course the unionists had always hated company unions because they sometimes preempted them in fact many workers liked company unions that's why they joined them and stayed with them they were more cooperative they weren't organizations with built-in hostility to the employer these new unions particularly the CIO unions that flourished after 1935 under this legislation were more than hostile to employers they sometimes looked as if they were trying to wreck the industries they organized and they were full of communists and that's not just a turn of phrase they were full of actual card carrying communists and indeed the CIO even the leaders who were not communists liked having these communists along with them because they worked harder they were more ideologically inspired to get out there and really take risks and put in a lot of hours and organize workers and so the CIO unions whether it's rubber workers or automobile workers or steel workers all these big industrial unions that organized not along occupational lines but everybody in a given plant or even a given company or a given industry would belong to the same union they were full of communists who hated the capitalist system and were viewing this unionization as just a means to the destruction of that system and its replacement with socialism so that was not something calculated to bring about industrial peace and in fact in 1937 all hell broke loose in labor relations in this country there were not only big strikes in many of these industries like the rubber industry and the automobile industry or CIO unions were attempting to organize but for the first time the unions began to stage so-called sit-down strikes this was really quite an extraordinary thing because a sit-down strike is not at all what it seems to be from the language it's not a strike it's a takeover of somebody else's property these men would come into a plant not work but not leave and not let anybody else come in or work there so they just literally took control of the property and you might think well why didn't the owner call the police and have them eject these people well, you're the police in Detroit and Ford calls up and says I got 12,000 guys sitting here in the plant and they won't leave what are you going to do? there are two goddamn many of them you can't send the police and eject 12,000 guys who are determined to stay there and willing to use violence against you if you try to throw them out so these unions and their sit-down strikes and the refusal of state governors and city mayors to do what would have been required to bring this action to an end meant that employers just had no choice in some cases to capitulate to recognize these unions and to enter into collective bargaining agreements with them and again, think back this is now part and parcel of what's called the second New Deal period 1935 on the crown jewels being the National Labor Relations Act and the Social Security Act this is the New Deal's turn to the left it's now starting to repudiate the cartilizers and the big businessmen that it had embraced in 1933 if reluctantly it's not only repudiating them but it's making them the fall guys and Roosevelt and his lieutenants are starting to attack them on every occasion publicly as economic royalists as people who are wrecking the economy by their selfishness and their refusal to do the right thing like recognize CIO unions and accusing them of industrial sabotage saying why aren't they making investments they're trying to sabotage my administration that's what they're trying to do well, this is like the saboteur accusing the victim of sabotaging him because these businessmen were scared to death this isn't some nut on the street corner it's the president of the United States talking this way it never encountered anything like that before nothing like that had ever happened before they hadn't imagined anything like that happening big businessmen, wealthy people had always been movers and shakers now there's some guy in the position of highest power in the government who's threatening to take away their property and who's tolerating occupation of their factories what's going to happen next? put yourself in their position they not only are looking at this but they're looking around the world Mussolini is taking over Italian economy a dictator, Hitler's running the economy Germany a bunch of the smaller countries in Europe are gone fascists it looks as if the whole civilized or what used to be the civilized world is going to hell and dictatorship why should we be different? especially when our own president is acting as if he wants to be dictator so they were frightened and long-term investment was almost non-existent the investment that took place between 1935 and 1940 was almost all investment inventories and investment in equipment with short life because it made no economic sense in view of the risks associated with appropriating future returns from long-term investment to put good money now into projects that wouldn't pay off fully for 20 or 25 years so new construction, new plants new infrastructure, no none of those long-term projects effectively, none were revived in the late 30s and that is one of the principal reasons why the whole economy never revived because if we look at the economy's normal operation it has never before or since been the case that it went 10 years without adding to the capital stock and that's exactly what it did in the 1930s net investment for the entire decade was negative so we didn't even make up for depreciation over a 10-year period normally the capital stock would have been growing by 2, 3, 4% a year and we would have ended up after a decade with a capital stock that was 20 or 30% greater than it had been at the beginning that's part and parcel of the growth process adding to our capital equipment to accommodate our roundabout production but it didn't happen in the 1930s because the New Deal scared the devil out of the investor class in the service of FDR selling himself and his policies to the voters in the face of a situation which is desperate enough for a lot of people even as late as 1936 still a lot of people hurting and by that time a number of complete net cases were challenging the president from the left Huey Long Father Coughlin Dr. Townsend people had crazy schemes for having the government give big sums of money to white or poor or old people and those schemes had great appeal to the masses and so Roosevelt looked around and said I've got to start sucking those voters away from these guys or I might lose the election and this demagoguery he resorted to so strongly from 1935 on until 1940 when he had to start sweet talking businessmen with them to cooperate with the war mobilization this demagoguery was responsible for prolonging I believe the depression and would have prolonged it even if the Fed had jacked up the money supply much quicker than it did I wrote an article making this argument and presenting some evidence that I've never seen anybody else present on the question called regime uncertainty and then the independent review in 1997 if you'd like to look at it and you may find it useful as a synopsis of the second new deal even if you don't like my argument about the regime uncertainty you can find it online onpower.org well let me quit now and take your questions or hear your comments I have a question about the unemployment data on the slide there I wanted to ask whether you thought that there might be certain kinds of unemployment which are actually quite significant that are not listed there for example an argument can be made that conscription shouldn't really be considered kind of employment because it's actually the government taking resources in which case that drastic recovery there in World War II wouldn't look so drastic if you'd be controlled with that wouldn't show up at all much later on in the 60s, 70s and 80s a lot of drug laws for example are putting non-violent offenders in jail and if I remember my macroeconomics can way back when correctly the government typically doesn't include people who are not looking for work and if people are being put in jail for non-violent crimes that's artificially suppressing the unemployment rate think of it as an unemployment program your points are very well taken these are standard unemployment data they are adjusted in one way at least which is that the data for the 1930s have been adjusted so that the persons on government work relief programs are no longer counted as unemployed in the standard Labor Department data series which is still used by many people those persons were regarded as unemployed and there were anywhere from 3 to 5 million of them during the new deal so they make a substantial difference in the rate of unemployment you'll see here it never gets above 22% if you were to throw in those people on the work relief programs it would be 25% unemployment and the argument was at the time and since that they weren't in regular employment this was emergency employment shouldn't be counted as equivalent to real jobs but I think it's a bad argument and they should be counted as employed even though they're employed differently they're not unemployed clearly just quickly what was the logic again why the tenants were being employed by wage workers what happened again with that well tenants depending on the kind of tenancy agreement they had might have a claim to some of these benefit payments going to farmers they were supposed to be paid to the farmers well is the guy who's renting a farm and operating it is he the farmer or is the owner the farmer well the owners of course wanted to collect the money and if they had a tenant there who might have a claim that would displace his then his way of dealing with it in many cases was to get rid of the tenant and replace him with a form of labor that didn't have a competing claim such as a wage worker or replace either one of them with a tractor they fared badly in general especially in the south because many of them were among those displaced by mechanization then or by landlord adjustments prompted by the benefit schemes so they didn't they did not do well we talked about the national labor relations at a red direct and I think when you're talking about the growth in government you should also consider a look at the growth of government sanctioned unions for government workers when did that all come into effect and how did that all work that didn't come along along until the post world war two era in fact as I recall it dates from around the 1960s sometime it used to be the case that government workers were routinely forbidden to strike and of course they didn't like that or the people who wanted to organize unions among government workers didn't like that and eventually they got the law changed and it's had a big effect because virtually the only growth in unionized labor in recent decades has been government workers and now the unions have declined so much in the past 50 years that of the private labor force less than 10% is unionized but of the government workers I believe it's something in the neighborhood of 40% that includes school teachers and of course they're the ones that cause the most trouble because they like to wait until schools about to start in the fall and then go on strike and put all the parents in a pinch when they think they're going to get really little brats and send them off to government holding tank so they can go to work or do something else with their time so people are easily exposed to extortion by these teachers' unions they're a big part of the problem Is there any protocol or anything that the truth says subject that you're aware of? Morgan Reynolds has written some very good books that deal with public sector unionism as well as the unionism elsewhere in the economy a couple of books written in the 1980s and they're easy to find in fact many of the Mises Institute reading lists them so if you don't find them there just look up Morgan Reynolds on Google and they'll pop right up Yes sir When did the minimum wage legislation go into effect and are there many estimates of what the impact was on the unemployment rate? Well it went into effect in many parts of the economy in 1933 as soon as those codes of fair competition went into effect and that was pretty much about the summer and fall of 1933 Now that didn't cover everybody for example agricultural workers who were not covered by a code of fair competition it was just industry domestic workers who were not covered and so forth and then new minimum wage law was passed in 1938 so-called Fair Labor Standards Act and it had more coverage and more uniform coverage and then that law has been amended a number of times over the years to increase the scope of coverage and just about everybody's covered nowadays and of course states have their own minimum wages and sometimes they set higher rates than the federal rate requires so there's been change over time and there's some variation across space there have been many studies of the effect of the minimum wage it's a cottage industry and the economics profession they almost all find some kind of effect we would expect that is that they make unemployment greater than it would be otherwise Occasionally there will be some furor as there was a few years ago and somebody pretends to have done a study that shows that effect didn't happen but those studies are always flawed in some way or another because we know from economic theory that if you really have other things equal you can't increase employment by forcing a higher wage on a labor market that's just not good economic logic we can always argue about the magnitude of the effect because economic theory doesn't tell us what the magnitude will be most of the time it turns out the magnitude that's estimated in these studies is not very big that is when the minimum wage is raised let's say from $5 to $6 it's often just compensating for some price level changes that have taken place since the last change so it's not a real change at all but for the moment it's a change and it has a relatively small effect a few percentage points change and what the situation would otherwise be for the unemployment rate so it's not a big deal because in our economy relatively few people are directly subject to that effect there aren't that many people in the free market who would earn below the minimum wage that's set so its effect is on relatively few people directly it affects more people indirectly because indeed the reason the labor unions support it so actively is not because their members are going to be immediately affected by it but because many unions have members producing goods which compete with goods produced by people who do own who do earn around the minimum wage rate so this is a way of placing competitors at a disadvantage competitors for the goods that their members help to produce so it's a kind of indirect protectionist scheme for higher wage workers more than anything else but it's one of those schemes that's easily sold to people as what it purports to be a way to help the poor no matter how many times you explain it to people they just refuse to accept the argument I've gone through this any number of times with people myself we've got a guy now in Louisiana in the legislature who's who's set out to raise a state minimum wage level and that's all we need in Louisiana reduce the number, the handful of us here are still working not on welfare down there and yet they're trying to do it and a friend of mine in Baton Rouge Libertarian over there he's made it a project to persuade this legislator of the error of his ways so he's been prevailing upon me for articles to give to this legislator I'm sure this is quite a futile endeavor but I've done what I could to help him out I just wanted to mention that having been a federal employee a lot of that number is increased or is there because they have what's called a dental plan and if you join the union you can get this done and most people the only reason they can join the union is so they can get that so-called freedom I think if we looked at the overall level of pay you know factoring in the benefit value that is part of the pay packages we'd find that government employees especially at the federal level are earning substantially above market rates the ones at the state and local level are not so far out of line in general although some of them depending on the work they're doing are but there's always been a lot of variation in how much effect unions have in their wages tons of studies have been done in neoclassical labor economics to try to make estimates of this they range all the way from nothing unions that are totally ineffective to some unions say airline pilots unions that have maybe even doubled the pay that these workers would be getting without the union what you want is to work in if you want to make a union really count then unionize a group of workers in an industry where there's a small amount of labor cost relative to the cost of other inputs but that labor is very critical so if you're talking about airlines there's always huge capital costs associated with the airplanes and the equipment and the repair facilities and so forth and then the pilots that come on board now they're critical you can't operate your business without pilots to fly the airplanes but how much of your total cost of operation is pilot expense fairly small amounts that puts them in a position to really squeeze and still not be displaced you can't really displace them in the end so those people have been very successful and if you try to unionize somebody like janitors it has really no effect because they just get fired instead of using a janitor the cleanup people use a mechanical mop or something to clean up the build at least as we think about unions the people that come to mind are at least upper income like the artist unions the administration unions the actors ok we'll call a halt for today