20 Century

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Slouching Towards Utopia?: The Economic History of the Twentieth Century

-XVI. Climbing Out of the Great Depression-

J. Bradford DeLong
University of California at Berkeley and NBER

February 1997

The New Deal

Before the 1930s it was unheard of for a presidential candidate to appear at the national political convention of an American party. Candidates were supposed to remain at their homes, tending to their private affairs, until informed (a week or so after the convention) by party officials that they had been chosen. They were supposed to emulate the Roman politician Cincinnatus, who mythically remained on his small farm ploughing his crops until told that he had been elected commander-in-chief of the Roman army and dictator of Rome.

When the Democratic Party convention in Chicago nominated Franklin Delano Roosevelt, then governor of New York, as its presidential candidate in July 1932, Roosevelt broke tradition. He flew to Chicago--in part, historian Frank Leuchtenburg says, to disprove whispers that a polio victim with paralyzed legs was too frail to undertake a full-scale American presidential campaign--and spoke to the convention, saying:

I have started out on the tasks that like ahead by breaking the absurd tradition that the candidate should remain in professed ignorance of what has happened.... You have nominated me... I know it... I am here to thank you for the honor.... [I]n so doing I broke traditions. Let it be from now on the task of our Party to break foolish traditions.... I pledge you, I pledge myself to a new deal for the American people...

What was Roosevelt's "New Deal"?

First, it was a unique moment in American political history. Usually American politics is the politics of gridlock. James Madison and company constructed the American political system so that it would be broken by design: maneuvering programs and policies through several layers of committees, two legislative houses, past the president, and into execution is very complex, and overwhelming procedural obstacles can be erected by determined opponents at almost every step along the path. Legislative majorities for one party or the other in either house of the legislature are almost always small. American is governed by increments, from the center. Between 1900 and 1950 there were times when one party had a solid majority in the House, but its majority in the Senate then was small.

The elections of the 1930s were different. Roosevelt won 59 percent of the vote in 1932--an eighteen percentage-point margin over Herbert Hoover. Congress swung heavily Democratic in both houses. The 1930s would see Democratic political dominance in the congress to an extent never before seen since the Civil War. For the first and only time, the president and his party had unshakable working majorities in both houses of the legislature.

The figure shows the majoriity or minority status--as a percentage of the total number of seats in the body--of the Democrats in all the congressional elections from 1900 to 1950

 

But the new majority in congress had no idea what it was to do. It was looking for direction from the newly-elected president: whatever Roosevelt sent down, the congress would probably pass.

Roosevelt had no idea what he was to do, either. But he did have a conviction that he could do something important. So was born the strategy of the New Deal: try everything you can think of to cure the depression; drop and abandon the things that do not seem to be working; push the things that do seem to be working. And the important thing was action to change how America worked for two reasons. First because action would raise hopes, and as Roosevelt said in his inaugural address:

Let me assert my firm belief that the only thing we have to fear is fear itself--nameless, unreasoning, unjustified terror.

Second because the old way of doing things was clearly broken:

We are stricken by no plague of locusts. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated.... The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.

There was even a hint in Roosevelt's inaugural address that he would have limited patience with a congress that failed to follow his not-yet-constructed program for fighting the Great Depression. If so:

I shall not evade the clear course of duty that will then confront me. I shall ask the Congress for the one remaining instrument to meet the crisis--broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.

The day after his inauguration President Roosevelt exceeded his statutory powers by forbidding the export of gold and declared a bank holiday--a nationwide banking shutdown to freeze the then-ongoing banking crisis. Within four days the House and Senate had convened and--the House unanimously--passed Roosevelt's banking reform bill, arranging for the reopening of solvent banks, the reorganization of other banks, and giving Roosevelt complete control over gold movements.

The second bill Roosevelt submitted to congress--also passed immediately--was an "economy" bill, cutting federal spending and bringing the budget closer to balance. The third submission was a request for an end to Prohibition--for the repeal of the consitutional amendment banning alcohol. On March 29 Roosevelt called on congress to regulate financial markets to prevent fraud and overspeculation like that the U.S. had seen in the stock market crash.

On March 30 congress established Roosevelt's civilian conservation corps. On April 19 Roosevelt took the United States off of the gold standard. On May 12 congress passed Roosevelt's Agricultural Adjustment Act, promising federal aid to farmers nationwide and low-interest federal credit so farmers could refinance their mortgages. (In June congress was to extend low-interest federal credit to distressed homeowners as well.) On May 18 Roosevelt signed the bill creating the Tennessee Valley Authority, the first large government-owned utility corporation in the United States.

Also on May 18, President Roosevelt submitted to congress the center-piece of his first hundred days: the National Industrial Recovery Act, or NIRA.

Congress adjourned on June 16, 1933, one hundred days after Roosevelt had called it into special sesson. Congress had committed the country to a strong "corporatist" program of joint government-industry planning, collusive regulation, and cooperation; put the entire farm sector on the federal dole indefinitely; promised to build and operate utilities; undertaken huge amounts of public works spending; established meaningful federal regulation over the financial markets; and provided insurance for small depositors' bank deposits. Congress had passed all fifteen bills submitted by Roosevelt.

A A

 The Legislation of Roosevelt's First Hundred Days
(from Atack and Pasell)

 Date  Legislation  Acronym  Effect
March 9 Emergency Banking Relief Act   Authorized the "bank holiday"; gave the Reconstruction Finance Corporation authority to invest in banks, and gave the Federal Reserve authority to lend to non-member banks and to businesses; gave the executive broad powers over transactions in gold, silver, or foreign exchange.
March 31 Civilian Conservations Corps Reforestation Relief Act  CCC Authorized the employment of 250,000 males for reforestaton, road construction, national parks, flood control, and soil erosion control.
May 12 Federal Emergency Relief Act  FER Appropriated $500 million for relief; half given directly to the states, the rest on a $1 federal for each $3 given in state relief.
May 12 Agricultural Adjustment Act  AA Established "parity prices"--returning
       
       
       
       
       
       
       
       

But what did it all add up to? The NIRA broke the back of expectations of future deflation. The creation of deposit insurance and the reform of the banking system made savers willing to trust their money to the banks again, and began the reexpansion of the money supply. Corporatism and farm subsidies spread the pain of the Great Depression to some extent. These three policy moves kept things from getting worse, and probably made things somewhat better.

But the rest of Roosevelt's "hundred days"? It is not clear whether the balance sheet of the rest of the hundred days is positive or negative. The "economy" bill that cut spending and relief did harm. Much of financial market regulation (save deposit insurance) was simply irrelevant to the Great Depression. Farm subsidies set the American government on a path that would prove expensive and counterproductive for the next sixty years.

More important, perhaps, people relatively soon decided that they did not like the combination of "corporatist" government-business cooperation and business collusion embodied in the NRA. Consumers complained that the NRA raised prices. Workers complained that it gave them insufficient voice. Businessmen complained that the government was telling them what to do. Progressives complained that the NRA created monopoly. Spenders worried that collusion among businesses raised prices, reduced production, and increased unemployment. A committee to study the NRA headed by progressive lawyer Clarence Darrow denounced the NRA for promoting monopoly, urged a return to free competition, and then for good measure denounced competition as "savage and wolfish" and called for socialism: government nationalization of industry.

In May 1935 the Supreme Court unanimously declared the NIRA and its implementing agency, the NRA, unconstitutional. Roosevelt's experiment with "corporatism"--which crusty Democrats like Senator Carter Glass denounced as "the utterly dangerous effort of the federal government at Washington to transplant Hitlerism to every corner of this nation" was over. It was not success.

By the end of 1933 Roosevelt had shifted his attention to monetary matters: recovery was to be promoted by raising the prices of commodities in dollars, and the prices of commodities in dollars were to be raised by devaluing the dollar in terms of gold. By the end of January 1934 Roosevelt fixed the value of the dollar at 1/35 of a (troy) ounce of gold, fifty-nine percent of its pre-1933 gold-standard parity. But the full-fledged policy of monetary inflation and mammoth fiscal deficits that might have pulled the country out of the Great Depression quickly--that did pull Germany under Hitler out of the Great Depression quickly--was not tried. 1934 was a better economic year than 1933, 1935 was better than 1934, and 1936 was better than 1935, but not by much.

The slide in which each year was worse than the one before had been ended by the Depression. Some ground had been regained. But happy days were not here again.

Roosevelt Tries Again

Therefore Roosevelt kept trying different things. If business-labor-government "corporatism" did not work, perhaps a safety net would. The most enduring and powerful accomplishment of the New Deal was to be the Social Security Act, which provided federal cash assistance for widows, orphans, children without fathers in the home, and the disabled; and which also set up a near-universal system of federally-funded old-age pensions. If pushing up the price of gold did not work, perhaps strengthening the union movement would: another enduring accomplishment of the New Deal was the Wagner Act, that set down a new set of rules for labor-management conflict, strengthened the union movement, and meant that the wave of unionization in the United States in the 1930s survived for half a century (rather than being rolled back within half a generation, as had happened to previous expansions of the union movement in the United States. Massive public works an dpublic employment programs restored some self-esteem and transferred some money to households without private-sector jobs--but at the probable price of some delay in recovery, as firms and workers saw higher taxes.

Antitrust policy? The breaking-up of utility monopolies? A more progressive income tax? Finally, a hesitant embrace of deficit spending not just as an unavoidable temporary evil but as a positive good? All were tried. In the end they probably did little to cure the Great Depression in the United States. But they did turn the U.S. into a modest European-style social democracy.

And as the decade came to an end Roosevelt's concerns shifted to the forthcoming war in Europe and to the Japanese invasion of China. Dr. New Deal was replaced by Dr. Win the War.

Winners and Losers from the Depression:

Workers who kept their jobs, even with reduced hours, and financiers whose money was invested in bonds prospered during the Depression. Their nominal incomes in dollars dropped, but prices dropped even more: the baskets of goods they could buy increased. Farmers, workers who lost their jobs, and entrepreneurs who had bet their money on continued prosperity were the big losers of the Depression. Production was a third less than normal and the distribution of income had shifted toward those who kept steady employment or who had invested their financial wealth conservatively. As a result, at the nadir the standard of living of losers taken all together was perhaps half of what it had been in 1929.

No large-scale social insurance programs compensated the losers from the Depression during Hoover's term. In contrast to Europe, the United States had no effective system of unemployment insurance to cushion job loss. The Federal government's only significant action before the New Deal was the Veterans' Bonus-granted over Hoover's objection. State governments, with limited abilities to tax, could not come close to finding the resources to significantly cushion the decline in living standards of the unemployed.

Recovery in the U.S. began with the inauguration of Roosevelt. The two initial planks of the New Deal were the abandonment of the gold standard with the concomitant attempt to force the dollar price of gold and other commodities up, and the National Industrial Recovery Act (later declared unconstitutional) with its explicit aim of keeping competition from pushing wages and prices down. These two broke the expectation of further deflation. The end of deflation caused a mini industrial boom. Thereafter output slowly increased and unemployment slowly decreased throughout the New Deal.

While the shift in expectations brought about by the announcement of the New Deal deserves credit for breaking the downward slide, it may be the case--such arguments are still controversial--that the New Deal hindered the recovery as well. New Deal spending was by and large not deficit spending: each dollar Harry Hopkins funneled into relief was matched by a dollar removed from private-sector pockets by taxation, causing little if any rise in aggregate demand. The alliance of the New Deal with organized labor may have led to policies biased toward maintaining the real incomes of those still employed, perhaps at the expense of the unemployed in the late 1930's.

Could "It" Have Happened Here?

In June 1932 the "Bonus Expeditionary Force" converged on Washington. The American Expeditionary Force [A.E.F.] of 1917-1918 was made up those American soldiers who had been sent to France in the latter stage of World War I and who had made up the margin of victory for the allies. The B.E.F. of 1932 was a group of some 20,000 massed war veterans who traveled to and demonstrated in Washington to try to convince congress to pay them at once bonuses for World War I that congress had voted to pay in 1945. The B.E.F. marchers camped in "Hoovervilles" and shantytowns by the Anacostia River and in unused government buildings on Pennsylvania Avenue. The congress rejected the B.E.F. petition, but many of the marchers remained in Washington.

Hoover panicked. He ordered the chief of the District of Columbia police to clear the veterans out of the buildings along Pennsylvania Avenue. First the police and then the army--commanded by Douglas MacArthur, armed with tanks, cavalry sabers, tear gas, and bayonets--cleared Pennsylvania Avenue, crossed the Anacostia River, and burned the shantytowns.

As historian Frank Leuchtenburg puts it: "That night, Washington was lit by the burning camps of Anacostia Flats."

Hoover's view of the situation was that:

...the march was in considerable part organized and promoted by the Communists and included a large number of hoodlums and ex-convicts determined to raise a public disturbance. They were frequently addressed by Democratic Congressmen seeking to inflame them against me for my opposition to the bonus legislation. They were given financial support by some of the publishers of the sensationalist press....

When it was evident that no legislation... would be passed... [many] availed themselves of...aid [to return home], leaving behind about 5,000 mixed hoodlums, ex-convicts, Communists, and a minority of veterans in Washington... fewer than a third of them had ever served in the armies, and... [45 percent] were ex-convicts and Communists.

Translation: the remaining B.E.F. members were not "real veterans."

Some old buildings on Pennsylvania Avenue had been occupied by about 50 marchers. These buildings stood in the way of construction work going on as an aid to employment in Washington. On July 28th the Treasury... requested these marchers to move to other quarters.

Translation: Hoover is saying that he, Herbert Hoover, had nothing to do with the eviction--that it was the doing of Treasury Secretary Andrew Mellon.

Whereupon more than 1,000 of the disturbers marched from camps outside of the city armed with clubs and made an organized attack upon the police. In the melee Police Commissioner Glassford failed to organize his men. Several were surrounded... and beaten up; two policemen... fired to protect their lives and killed two marchers....

In the midst of this riot the District Commissioners... asked military assistance to restore order.... General Douglas MacArthur was directed to take charge. General Eisenhower (then Colonel) was second in command. Without firing a shot or injuring a single person, they cleaned up the situation.

Translation: Hoover is saying "if I'm going down for this, I'm going to do my best to take Eisenhower with me."

Certain of my directives to the Secretary of War, however, were not carried out. Those directions limited action to seeing to it that the disturbing factions returned to their camps outside the business district. I did not wish them driven from their camps, as I proposed that the next day we would surround the camps and determine more accurately the number of Communists and ex-convicts among the marchers. Our military officers, however, having them on the move, pushed them outside the District of Columbia....

Translation: Hoover is saying "MacArthur, not me, fired the camps and dispersed the B.E.F. with tear gas."

Hoover's version is frightening: if Hoover is correct, then commander of the army MacArthur disobeyed orders given by his civilian superiors and used military force against American citizens exercising their constitutional right to petition for the redress of grievances. Hoover and MacArthur both agreed that the B.E.F. was "a mob... animated by the essence of revolution," and MacArthur at least believed that if there had been any further delay in disbursing the marchers "the institutions of our government would have been very severely threatened."

A version that puts less trust in Hoover's views is even more frightening: Hoover thought that in the Great Depression a large class of American citizens--B.E.F. marchers, communists, ex-convicts, "inflammatory" Democratic congressmen, the "sensationalist" press--had become Enemies of the People in Hoover's mind.

Hoover's search for anti-American enemies conspiring against him was not limited to impoverished ex-veterans. It included the legislative barons of the Democratic Party (who ); the legislative barons of the Republican Party (who ); and the powers-that-be on Wall Street, who had, Hoover believed, turned into "bears" conducting "bear raids" on the market to push prices down, line their own pockets further, and deepen the Great Depression. Early in 1932 Hoover summoned Wall Street's powers-that-be to account: either they were to stop their "bear raids" on the market and restore stock prices, or he would encourage the Senate to go on an investigative witch-hunt.

We were still--even with the burning of the B.E.F. shantytowns--light-years away from Hitler's suppression of the German Social Democratic Party, or Pinochet's soccer-stadium massacres of Chilean leftists and supposed leftists after his coup. There were additional signs of proto-fascism in the Depression-era U.S.: Huey Long, the anti-semitic radio priest Charles Coughlin, Gerald L.K. Smith. But we were still far from Mussolini's murders of socialist legislators like Mateotti, or from French Premier Daladier's resignation from the Prime Ministership out of fear of the French fascist mobs in the Paris streets outside.

But would the United States have stayed as far from a breakdown of democracy in the absence of Roosevelt's New Deal? What would four years of continued deep depression with no visible signs of recovery have brought?

The Social Welfare State and the Great Levelling:

The usefulness of market systems as social allocation and control mechanisms--as instruments to guide economic activity in ways that promote the general welfare--depends on the distribution of income. Markets carry out their implicitly assigned tasks with ruthless efficiency. The key to managing systems of markets is to determine what instructions the market is being implicitly given, and how to alter those instructions.

Systems of markets can indeed promote the general welfare under certain conditions. These required conditions are that property rights be well-defined, and that spillovers be small--thus market systems will be good at activities like allocating labor or finding and exploiting minerals (where property rights in land are set), and will be bad at activities like directing the proper amount of resources to research (for one firm can receive powerful benefits from another's research) and controlling pollution (for no one polluter benefits directly and immediately from his own pollution reduction).

There is another required condition: that the general welfare be defined in a way that weights the material well-being and utility of each individual in an appropriate manner that depends on his or her wealth. A clarifying assumption is that each doubling of material consumption adds an equal amount to individual utility. This captures the fact that the first dollar of income is more valuable than the second, the second more valuable than the third, and so on. Under this clarifying assumption theoretical economists' formulas and theorems take on a particularly simple form: the market maximizes the general welfare if one's definition of the general welfare weights the material well-being and utility of each individual by the market value of his or her wealth. If I am ten times as wealthy as you are, then the market arrives at the distribution of production and consumption by transfering resources from making goods that you desire and consume to making goods that I desire and consume as long as each transfer that increases my material well-being by one unit decreases yours by ten units or less.

With unequal distribution a market economy will generate extraordinarily cruel outcomes. If my wealth consists entirely of my ability to work with my hands in someone else's field, and if the rains do not come so that my ability to work with my hands has no productive market value, then the market will starve me to death. The market system produces and allocates goods to individuals in a way that maximizes its definition of general welfare, a definition that gives my material well-being, utility, and indeed my survival a weight of zero if that is the market's valuation of my initial wealth-my ability to work.

For this reason, it is key to look at the distribution of wealth to assess the performance of any economy as an engine for producing human material well being. A natural way to evaluate the social and political order--a way embraced by conservative economists like James Buchanan as well as by liberals like John Stuart Mill--is to use Bentham's criterion: each individual counts for one and only for one so that the material well being and utility of each weighs the same in the balance.

The market seeks to maximize utility weighting each individual by his or her initial wealth, and will do the best that it can to accomplish this task. If the initial distribution of wealth is relatively equal, then the market's equilibrium will be close to the best that could be attained from Bentham's perspective: the allocation will be such that no one's material well-being can be raised without lowering someone else's material well-being by a greater amount. If the initial distribution is grossly unequal, then there will be plenty of rearrangements of goods that would raise some people's utility by more than they would lower others'. But those whose utility would be raised are the poor who do not weigh as heavily in the market's calculation, and those whose utility would be lowered are the rich whose preferences and desires weigh heavily indeed. The more unequal is the wealth distribution, the further will the economy as a mechanism for generating material well-being fall short of what could be attained, at least according to Bentham's perspective.

Levelling has not been the rule since the founding of the United States. There was an increase in inequality before the Civil War that turned what foreign observers saw as the remarkably egalitarian economy of the colonial era into an economy that from 1850 to 1929 had steep gradations of wealth not too different from those experienced in nineteenth century Europe or seen in the third world today. The lack of an egalitarian distribution of wealth in the United States at the turn of the twentieth century is somewhat surprising. The United States possessed many advantages: "abundant land, alleged equality of opportunity, democratic institutions... a nineteenth-century reputation as an ideal 'poor man's country'." Yet these were not enough to keep the distribution of income in the nineteenth century as equal as it had been in the eighteenth.

Growing inequality--not absolute immiserization of the working class, but a growing (relative) gap between the income and wealth of rich and poor even as industrialization raised living standards of all classes--was a natural result of the form industrialization took in nineteenth century America. Rapid accumulation of capital did tend to crowd unskilled labor out of its place in the workforce, and did tend to force unskilled laborers to reduce their relative wages in order to maintain or win back their jobs. In the nineteenth century skilled and educated workers could not easily be replaced by machines; capital could more easily substitute for unskilled workers. In addition, the opportunities of industrialization increased the share of total product that was paid as rent and profits. As farm productivity increased, the agricultural sector shrank, releasing additional supplies of relatively unskilled workers to the urban and industrial job markets. And tthe waves of mid- and late-nineteenth century immigration included many non English speakers, who found it very difficult to acquire skills or to use the skills that they had.

The distribution of income and wealth in the slaveholding south had always been extraordinarily unequal: how could it be otherwise when one-third of the population are held as chattels? But the distribution of income and wealth in the south did not become much more equal after the Civil War. Blacks remained extraordinarily impoverished relative to whites. And even southern whites were poor relative to northern city dwellers or midwestern farmers. In a sense, the relative impoverishment of the south was to be expected given the economic and political choices southerners made. The pre Civil War south had seen its wealthy accumulate not physical capital but slaves. The acquisition of a machine raises society's total wealth and productive power available per worker. The acquisition of a slave does not: it does not raise productivity, but merely gives the slaveholder an all but unlimited right to exploit the labor of the slave. The Civil War did not impoverish the south: it merely transferred "ownership" of ex-slaves' capacities to labor from masters to the ex-slaves themselves. It did reveal how impoverished the slaveholding south had become.

Choices made after the Civil War did not help. Mechanization did not come rapidly to southern agriculture. Southern governments did not believe in a good system of public education-particularly not for black Americans. This lack of a skilled, literate, and educated workforce meant that for most of a century northern manufacturers would not risk moving their operations to the south. The south would not begin to close the relative income gap separating it from the rest of the United States until the period after the First World War

World War I saw a sharp but short-lived compression of the income distribution. Wages became much more equal in the space of a few short years. But this compression was quickly undone in the 1920's, which saw "...very unbalanced technological progress, with productivity advancing faster in automobiles...consumer appliances, petrochemicals, and electric utilities" then elsewhere in the economy. These sectors were skill-intensive sectors. Relative skilled workers, both white collar and blue collar, once again captured the lion's share of the increased incomes made possible by technological change. The property income share also rose somewhat in the 1920's. It is uncertain whether relatively poor and unskilled blue collar workers experienced any rise in their wages adjusted for in_ation between 1920 and 1929.

The Great Depression, World War II, and the immediate post-World War II period saw a substantial levelling of the income distribution. The figure below plots the wages of three groups--skilled urban workers, skilled manufacturing workers, and professors--relative to the wages of unskilled laborers from 1907 to the early 1970's. The figure shows a reduction of at least half in wage differentials. Skilled urban workers earned ninety percent more than unskilled workers before the Great Depression; they earned some sixty percent more after World War II. Skilled manufacturing workers earned close to double what unskilled workers earned before the Great Depression; they earned only forty percent more after World War II. And professors' incomes before the Great Depression were (aside from the years immediately after World War I) four times those of unskilled workers before the Great Depression; they were only twice those of unskilled workers in 1960. Similar patterns can be found in the share of income going to property rather than to labor: it, too, dropped by a third-from thirty percent to twenty percent of total national product-between the 1920's and the 1950's.

Williamson and Lindert guess that about half of the reduction in wage inequality was due to a shift in the character of technological progress after 1929. Before 1929, productivity growth had been concentrated in manufacturing industry and other sectors that required a relatively skilled workforce. As the economy's structure shifted toward these sectors where productivity was growing most rapidly, demand for and returns to skills and capital rose and demand for unskilled labor fell. After 1929, productivity growth was much more balanced: productivity in agriculture and in service sector jobs that relied on unskilled labor more than skilled labor also grew rapidly. The other half of the levelling comes from demographic factors: fewer children and more education per child both shifts the distribution of skills within the population-making more skilled and fewer unskilled workers-and diminishes the supply of unskilled workers.

The Twentieth Century Levelling of the Income Distribution: Wage Levels as a Multiple of Unskilled Worker Wages


The levelling of the wage distribution was also encouraged by the growth in the number of jobs that were relatively low-skilled yet also paid high wages. English engineers had always noticed that American manufacturing industries made simpler and rougher goods, used less skilled labor, and seemed to incorporate much more of the knowledge needed to run the process of production into machines and organizations, leaving much less in skilled workers' brains and hands. Some of this was simply economizing on the relevant margin-skilled workers were exceedingly scarce in America throughout the nineteenth century, and it seemed worthwhile to follow production strategies that used skilled workers as little as possible. Some of this was finding new and more productive ways of doing things.

Mass production carried this "American system" to its extreme. As Henry Ford's engineer Max Wollering said: "Mr. Ford...realized...that in order to create great quantities of production, your interchangeability must be fine and unique in order to accomplish the rapid assembly of units. There can't be much hand work or fitting if you are to accomplish great things." Every time a skilled worker is needed to file or adjust an already-made part before it is added to the car under construction, time is wasted. At Ford in 1913 at most 26 percent of workers were classified as "skilled or skilled operators"--a substantially lower proportion for a substantially wider job class when compared to the 70% that Daimler employed who were "skilled workers." And Ford could build Fords with a productivity more than ten times that with which Daimler could build Mercedes cars.

Pre-Depression unions are usually counted as failures. Yet the "union threat" appears to have played a major role in starting the $5 day at Ford, and in setting the pattern for a system of labor relations that would dominate blue-collar assembly lines in the United States for half a century: we will pay you very high wages for unskilled, if difficult and alienating, work, and in return you will not disrupt production or smash the machines: even the likes of Herbert Hoover would, after the $5 day, say that of course firms should share their profits from mass production with their workers. This system was worthwhile for employers because it economized on expensive skilled labor. This system was worthwhile for employees because it paid them high wages. And this system was a significant contributing factor to the mid-twentieth century levelling of the American income distribution.

The restriction of immigration after 1920 also diminished the supply of unskilled, newly-arrived workers competing for low-level urban jobs. This made the distribution of income and wealth within America more equal. Note, however, that many who would have been Americans had the open-door immigration policies of the nineteenth century continued were excluded from the country. For the most part such excluded potential immigrants were far poorer than they would have been had they been allowed to come to America.

In addition to the levelling created by the drawing together of wage levels and the reduction in the share of income going to property, the distribution of income was also made more equal by the actions of the government. The New Deal of President Franklin Roosevelt saw the beginnings of a transfer system-Social Security, Supplemental Security Income, and Aid to Families with Dependent Chidren-to provide income to those who could not, for reasons of age, health, disability, or within-household demands on their time-earn money in the labor market.

The American welfare state was never seen as an income levelling tool in its own right, but only as a "safety net" to provide security against potential disasters: impoverishment in old age, disability, desertion by a husband, and so forth. The New Deal established a "social insurance" rather than a "welfare" state in that the point of the programs was as much to let the employed and relatively well off sleep easier at night by "insuring" them against porential disasters as to help raise the standard of living of the poor. The social insurance state did contribute to the levelling of the income distribution, although this was never its primary purpose. In addition, taxation became progressive. Those in higher income brackets were expected to, and until the 1980's by and large did, contribute a larger proportion of their incomes to the government in taxes than those in lower income brackets.

But civil rights for Blacks had to wait until after World War II.

Left, Right, or Center?

The failure of "orthodox" economics to have anything constructive to say about the Great Depression paved the way for the advance of socialism, and the emergence of social democracy, during and after the Great Depression. The habits of mind that had supported laissez-faire capitalism--social Darwinism, the benefits of free competition, and the rest-seemed much less reasonable, and must less worthwhile during the Great Depression. A work ethic-a feeling that one should be ashamed not to be doing one's best and working one's hardest--was an important foundation stone for the pre-Depression order, yet such a feeling--that lack of a job was a sign of one's own lack of worth--was insane in the depths of the Depression.

As George Orwell put it:

the thing that horrified and amazed me was to find that many of [the unemployed] were ashamed of being unemployed. I was very ignorant, but not so ignorant as to imagine that when the loss of foreign markets pushes two million men out of work, those two million are any more to blame than the people who draw blanks in the Calcutta Sweep. But at that time...the middle classes were still talking about 'lazy idle loafers on the dole' and saying that 'these men could all find work if they wanted to'...

This, to Orwell, was all the proof he needed that the existing system was illegitimate. It raised people up to believe that they were failures if they failed to find work, and yet also created:

streets where nobody has a job, where getting a job seems about as probable as owning an aeroplane and much less probable than winning fifty pounds in the Football Pool.,,

Orwell's touchstone for judging a social system was a combination of honesty, decency, prosperity, and liberty, but with the accent on decency. The social and economic system had a moral obligation to treat these men-its most productive resource-well. It was not decent that they should be without work. And since the system did not live up to the obligations it had undertaken, it did not deserve to survive.

These sentiments were reinforced by the "orthodox" failure to come up with any plans for the alleviation of the Depression. It should be put more strongly: the "orthodox" belief that any plans set up for the alleviation of the Depression were counterproductive and would lead to more harm than good. In the 1930s, intellectuals and politicians turned this syllogism set out by Schumpeter and by his fellow believers such as Hayek, Mellon, and Robbins upside down. They had said that only if you accepted the necessity of Great Depressions could you have the benefits of capitalist development. Orwell and everyone left of center believed this--and concluded, instead, that we cannot afford the costs of capitalist, and must seek for some other kind of economic organization.

The relative stagnation and decline of average living standards during the Depression also sharpened conflicts over distribution. As long as the pie is growing and expected to keep on growing, the inequality of the slices may not matter as much as the fact that everyone's slice is getting larger. But when the engine of capitalist development appears stalled, the inegalitarian face of capitalism imposes costs unacceptable to a benevolent and decent society. For example, says Orwell, think of how modern civilization is built on the labor of the coal miner:

Practically everything we do, from eating an ice to crossing the Atlantic, and from baking a loaf to writing a novel, involves the use of coal....Here am I, sitting writing in front of my comfortable coal fire....It is only very rarely... that I connect his coal with that far-off labour in the mines.... Yet their lamp-lit world down there is as necessary to the daylight world above as the root is to the flower.... [I]t is brought home to you, at least while you are watching, that it is only because miners sweat their guts out that superior persons can remain superior. You and I and the editor of the Times Lit. Supp., and the Nancy Poets and the Archbishop of Canterbury and Comrade X, author of Marxism for Infants--all of us really owe the comparative decency of our lives to poor drudges underground, blackened to the eyes, with their throats full of coal dust, driving their shovels forward with arms and belly muscles of steel...

Hard work and inequality might be tolerated if, as the masters of capital had always said, they were necessary for the successful operation of the engine of capitalist development and would make everyone better off in the long run. But the Great Depression revealed that the guardians of economic orthodoxy had no more insight into the way the modern economy really did work than the Wizard of Oz. The Depression suggested that the costs of capitalist development--in terms of starvation, privation, and inequality--were far greater than had previously been thought. And the Depression made plausible once again the argument that the promise that inequality would generate growth was just a confidence game.

What was the alternative? one alternative was to believe that the Soviet Union promised a way out. A positive example of another, presumed to be better system. For example, Orwell's publisher Victor Gollancz, in the introduction Gollancz wrote to The Road to Wigan Pier, held that the Soviet Union had been a great boon because it had demonstrated that socialism was possible: "[T]he most frequent argument which socialists have to face is precisely this: 'I agree with you that Socialism would be wholly admirable if it would work-but it wouldn't'.... [This] objection was more frequently heard in 1919 than in 1927, in 1927 than at the end of the first Five Year Plan, and at the end of the first Five Year Plan than to-day-the reason being precisely that... the achievements of the Soviet Union are there to see."

From today's standpoint, it is hard to imagine what the impressive achievements of the Soviet Union that Gollancz pointed to were. Industrial production under Stalin did not recover to its pre-World War I Czarist trend line (such statistical comparisons were, however, unavailable). Stalinist Russia after the collectivization of agriculture was not an exporter of food. Czarist Russia had been one of the major grain exporters of the world. There was the suppression of internal dissent, the secret police, the terror-famine of the collectivization of agriculture, and--starting in 1934--the purges on a scale that not even Ivan the Terrible could have imagined.

Arthur Koestler--still in the early 1940's a man of the left and not yet famous as the anti-Communist author of Darkness at Noon-was heartbroken at the influence over the left exercised by the Soviet Union. Its suppression of internal dissent, its execution of most of its own founders, and its repeated shifts in foreign policy had robbed it of moral authority. Who could believe a movement that thought that Nazism was to be encouraged (for the Nazis will not last long, and will be followed by socialists: in Lenin's phrase, "the worse, the better") up to 1934, supported "Popular Front" alliances of Communists with Social Democratic parties from 1935 to 1937, in 1938 began shooting non-Communist left-wing allies claiming that they were fascists, and switched back to openly pro-Nazi in 1939 with the Nazi-Soviet pact, and then switched again in mid-1941 with the German invasion of Russia?

Yet the myth of the Soviet Union retained an astonishing hold. To some degree, this was simply a projection onto the present of the belief that the French Revolution had been an exciting, levelling, and redeeming cataclysm, and so the same must be true of twentieth century revolutions. Consider through Orwell's eyes revolutionary Barcelona during the Spanish Civil War:

In outward appearance [Barcelona] was a town in which the wealthy classes had practically ceased to exist.... [E]veryone wore rough working class clothes.... All this was queer and moving. There was much in it that I did not understand, in some ways I did not even like it, but I recognized it immediately as a state of affairs worth fighting for.... There was no unemployment...you saw very few conspicuously destitute people, and no beggars.... Above all, there was a belief in the revolution and the future, a feeling of having suddenly emerged into an era of equality and freedom. Human beings were trying to behave as human beings and not as cogs in the capitalist machines. In the barbers' shops were anarchist notices...solemnly explaining that barbers were no longer slaves...

Leninist socialism rested on Marx's belief that a sustained and permanent increase (as opposed to a selective, partial, and temporary increase) in the average worker's standard of living was not possible under market capitalism, and required full-scale socialism: abolition of the market system, government seizure of the "commanding heights" of the economy, from each according to his ability, to each according to his means. Such a belief had looked plausible through the "hungry forties"--the 1840's--in England. It looked plausible once again in the 1930s. Trotsky, writing during the 1930's , believed that the Great Depression had finally demonstrated showed that Marx had been completely right, and the foundations of the market capitalist order were completely rotten:

[In the 1920s]... the bourgeoisie, frightened by its own crimes and by the October Revolution, took to the road of advertised social reforms.... [But] the economic contradiction between the proletariat and the bourgeoisie was aggravated... the rise in the standard of living of certain strata of toilers... hid the decrease of the proletariat's share in the national income....

In 1930 began an ominous growth of unemployment.... The illusion of the uninterupted 'progress' of all classes has vanished without a trace. The relative decline of the masses' standard of living has been superseded by an absolute decline.... The history of the capitalist world since the last war has irrefutably borne out the so-called "theory of increasing misery"...

With the coming of the Depression, it was not unreasonable to conclude that the old order was bankrupt. There appeared to be no serious possibilities for reorganizing the market economy. Democracy was also on the retreat: Britain and its dominions, Ireland, France, the United States, Switzerland, and Scandinavia were the only democracies on the eve of World War II.And so the choices seemed boiled down to Hitler or Stalin. In which case, how should we choose? Many--including thinkers and politicians who would play major roles in the 1940's in setting the foundations of the post-World War II liberal democratic industrial capitalist order, like George Orwell and Harry Dexter White (architect of Bretton Woods, and at the least an "agent of influence" for Whittaker Chambers' Soviet spy apparatus in the 1930s)--chose Stalin for at least a little while, doubting the survival (or the value) of the old order, and hating Hitler more.

It was only by luck that the end of laissez faire as a doctrine for guiding economic policy did not mean the complete end of the market economy. "Keynesianism" and the "mixed economy" that it supported emerged barely in the nick of time.

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20 Century

Created 2/10/1997
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Associate Professor of Economics Brad DeLong, 601 Evans
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