Just as Henry Ford was a better constitutional scholar than FDR ...
Published in The Tennessean, Sunday, April 15, 2012
and Forbes with archives.
by Richard J. Grant
Richard J. Grant is a Professor of Finance and Economics at Lipscomb Universityand a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.
E-mail messages received at: rjg@richardjgrant.com
Follow on Twitter: @RichardJGrant1
Copyright © Richard J Grant 2012
and Forbes with archives.
by Richard J. Grant
Those who watched episodes of the Little Rascals from the early 1930s might remember
the distinctive eagle in a white square that appeared in the end credits. This
Blue Eagle was the symbol of the National Industrial Recovery Act (NRA), which
became law at the beginning of the New Deal in 1933.
Display of the
Blue Eagle showed compliance with the NRA. It called on each industry’s leaders
to meet together to write “codes of fair competition” that would result in
uniformly higher prices and be binding on all producers in their industry,
whether they signed on or not. With the NRA, labor unions had greater power to
organize and restrict the supply of labor in order to push up wages without
necessarily increasing productivity.
The administration
of Franklin D. Roosevelt, much like its ideological descendants in the Obama
administration, believed that the sluggishness of recovery from recession was
due to a lack of consumer demand. The imagined solution was to replace
competition with “fair competition” so that businesses could charge higher
prices without fear of being undercut and could thereby afford to pay higher
wages. Higher-paid workers were expected to consume more.
In a break with
previous American history, the price cutter became the enemy. Threatened with
fines and imprisonment, innovators and small businesses found it illegal to
compete on price. Many small businesses failed, and many resisters were jailed.
But, as Burton Folsom writes in his book, New Deal or Raw Deal?, not all
men who refused to sign the code could be easily intimidated. “In the auto
industry, Henry Ford refused to sign the NRA code and jack up his car prices,
as his competitors were doing.” General Motors, Chrysler, and the smaller
independents had “eagerly signed Blue Eagle codes,” which regulated their
production, wages, prices, and the hours of work. Ford denounced the law as
un-American and unconstitutional.
President Roosevelt and Hugh Johnson, his NRA czar, tried to
pressure Ford into signing the code by shutting Ford out of any government
contracts. They rejected Ford's lower bids. Roosevelt justified paying more for
government cars and trucks because Ford had not “gone along with the general
[NRA] agreement.”
They didn't dare put Ford in jail, but many other smaller
businessmen, who were given hope and strength by Ford's example, were fined and
imprisoned. Another source of strength was a clear perception of economic
reality around them, a clarity not shared by the Roosevelt administration.
Companies constrained by the NRA price-fixing requirements saw their business
steadily decrease.
Ayn Rand did not need to predict the future to formulate her
fictional “Anti-Dog-Eat-Dog Act.” She lived through 1930s America. She knew
from experience that “fair competition” meant the destruction of competition
and industrial progress.
But it was not her philosopher-physicist John Galt who brought
down the NRA: it was the Schechter brothers, who sold kosher chickens in
Brooklyn. When the NRA prosecutors came for them, they hired a good legal team
and took it all the way to the Supreme Court. During the proceedings, the
absurdity of the regulations showed them clearly to be unconstitutional.
Roosevelt decried this limitation of the Constitution's Commerce
Clause, through which Congress can regulate interstate commerce. But Roosevelt
had to accept that, as any real constitutional scholar knows, the Supreme Court
has the power and the duty to strike down unconstitutional legislation.
Richard J. Grant is a Professor of Finance and Economics at Lipscomb Universityand a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.
E-mail messages received at: rjg@richardjgrant.com
Follow on Twitter: @RichardJGrant1
Copyright © Richard J Grant 2012