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Wednesday, April 1, 2009

The NRA: How Price-Fixing Perpetuated the Great Depression

During the Great Depression of the 1930s the first thing to be sacrificed was free markets. Industrialists, farmers, laborers, and many more came to Washington for handouts, regulations, or price controls.

Some observers seem to think employers are less willing than employees to seek federal help, so the actual case is revealing. The National Industrial Recovery Act (soon shortened to NRA) became law under President Franklin Roosevelt in 1933 and dramatically altered America’s traditional free-market system. Under the NRA, a majority of firms in any industry had government approval backed by force to determine how much a factory could expand, what wages had to be paid, the number of hours to be worked, and the prices of products. Whether or not a businessman helped write the code for his industry, he was bound by the terms and subject to a fine or jail term if he violated them.

Evil Price-Cutting

Why were Roosevelt and certain New Dealers so eager for higher wages and prices without an increase in productivity and with less competition? They believed that if people earned more, they could buy more, and that would stimulate recovery from the Great Depression. In this high-wage theory the efficient, innovative, and price-cutting businessman was evil because he was believed to contribute to lower wages and therefore diminishing purchasing power. He was a violator of “fair competition.” His gain was not just the loss of his competitors but of the whole country. By encouraging codes of “fair competition,” the NRA was giving all existing businesses a chance to make profits, to pay high wages, and to survive the price-cutter.

Many businessmen liked the idea of raising their prices and sending to jail any competitor who wanted to charge lower prices. But such a move discouraged inventors and entrepreneurs from experimenting with ways to make products cheaper and better. The NRA in effect carved up markets among existing producers, fixed prices and wages, and assumed all industry was stagnant and unchanging. In automobiles, however, Henry Ford had experimented with assembly-line production and had cut the price of American cars from about $3,000 to $300. Under the NRA he was not allowed to innovate further. So Ford refused to sign the code and jack up his car prices, as his competitors at General Motors and Chrysler were doing. “I do not think that this country is ready to be treated like Russia for awhile,” Ford wrote in his notebook. “There is a lot of that pioneer spirit here yet.”

Ford was told his company would receive no government contracts until he signed—and with the large increase in government agencies during the 1930s, that meant a huge loss of business. For example, the government rejected a Ford agency bid on 500 trucks for the Civilian Conservation Corps that was $169,000 below the next best offer. “We have got to eliminate the purchase of Ford cars [by the government because the company has not] gone along with the general [NRA] agreement,” Roosevelt said at a press conference.

Ford’s assertion of freedom and independence gave hope to those who wanted to return to competition.

When Hugh Johnson, the head of the NRA, was asked what would happen to those “who won’t go along with the new code,” he threatened, “They’ll get a sock in the nose.” Although Johnson refrained from applying his fist to Ford’s nose, he did use the arm of the law to jail many men who refused to jeopardize their businesses by complying with NRA codes. In York, Pennsylvania, for example, Fred Perkins, who produced storage batteries to help light farms, went to jail for paying his employees less than what had been written into the NRA code by the storage-battery businessmen. Perkins’s employees were outraged that their boss was in jail, and they met with him to receive instructions on how to continue the business in his absence. As J.B. Jones, one of Perkins’s employees, said, “We asked him for work and he gave it to us at a time when we were in distress. The wages he was paying were fair.”

A more dramatic jailing was that of 49-year-old Jacob Maged of Jersey City, New Jersey. Maged had been pressing pants for 22 years, and his low prices and quality work had kept him competitive with larger tailor shops in the better parts of town. The NRA Cleaners and Dyers Code demanded that he charge 40 cents to press a suit. Maged, despite repeated warnings, insisted on charging his customers only 35 cents. “You can’t tell me how to run my business,” he insisted.

Not only was Maged thrown in jail, he was also slapped with a $100 fine. “We think that this is the only way to enforce the NRA,” said Abraham Traube, a director of the NRA code authority for the Cleaners and Dyers Board of Trade. “If we did the same thing in New York City we would soon get the whole industry in line.” Many editorialists, however, sided with Maged. “It didn’t matter,” the Washington Post said, “if Maged had to charge less than the bright and shiny tailor shop up the street if he wanted to continue to exist. The law said he couldn’t.” “For a parallel,” the New York Herald Tribune said, “it is necessary to go to the Fascist or Communist states of Europe.”

Embarrassing Questions

No merchants wanted to pay fines or go to jail, but the more than 500 NRA codes often imposed such quirky regulations that it was hard for many to comply. Finally, in 1935, the Schechter brothers, who sold kosher chickens in Brooklyn, took their case to the Supreme Court to challenge the constitutionality of the NRA. Justice George Sutherland asked so many embarrassing questions about the NRA chicken code that the audience actually broke into laughter at some of the exchanges. By a 9-0 vote the NRA was found unconstitutional.

The defeat of the NRA was a cause for celebration. “The Constitution has been re-established,” rejoiced Senator William Borah of Idaho. “Impulsively adopted . . . ,” journalist Frank Kent said, “it [the NRA] was fastened on the people by the most blatant ballyhoo ever promoted by a Government, and it ends in a horrible mess.” President Roosevelt disagreed and said the Supreme Court was taking the country backward with a “horse and buggy” interpretation of the clause in the Constitution that gives Congress the power to regulate commerce. Roosevelt’s desire to continue his experiments in central planning and government intervention would keep the Great Depression going for many years more. When we freed up the American economy after World War II, however, we encouraged competition, innovation, and the creation of new jobs. The Great Depression was over at last.

  • Burton Folsom, Jr. is a professor of history at Hillsdale College and author (with his wife, Anita) of FDR Goes to WarHe is a member of the FEE Faculty Network