Sunday, April 15, 2012

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

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

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Copyright © Richard J Grant 2012