Markets and Governments in Economic History

The Microeconomics of the National Industrial Recovery Act

Jason E. Taylor

• Publisher: University of Chicago Press
• Year: 2019
• ISBN:
  9780226603445
• Topic: Negocios y empresa
• Subtopic: Negocios en general

The National Industrial Recovery Act (NIRA) was enacted by Congress in June of 1933 to assist the nation's recovery during the Great Depression. Its passage ushered in a unique experiment in US economic history: under the NIRA, the federal government explicitly supported, and in some cases enforced, alliances within industries. Antitrust laws were suspended, and companies were required to agree upon industry-level "codes of fair competition" that regulated wages and hours and could implement anti-competitive provisions such as those fixing prices, establishing production quotas, and imposing restrictions on new productive capacity.
            The NIRA is generally viewed as a monolithic program, its dramatic and sweeping effects best measurable through a macroeconomic lens. In this pioneering book, however, Jason E. Taylor examines the act instead using microeconomic tools, probing the uneven implementation of the act's codes and the radical heterogeneity of its impact across industries and time. Deconstructing the Monolith employs a mixture of archival and empirical research to enrich our understanding of how the program affected the behavior and well-being of workers and firms during the two years NIRA existed as well as in the period immediately following its demise.
 

1

Introduction

On November 8, 1934, a hearing was held by the National Recovery Administration (NRA) in which multiple affidavits were presented against the Liberty Baking Company of Washington, DC. The main charge against the bakery’s proprietor, Pete Theodor, was that he was selling loaves of bread for five cents each.1 “If this man is allowed to continue his unfair practices, he will cause a disruption of the bread market in the city of Washington . . . his competitors are daily losing business to him and are on the verge of dropping their prices in order to meet his.” So said Harry T. Kelly of the baking industry’s regional code authority in Washington. At the end of the hearing, Theodor agreed to raise his price to six cents in line with the baking code.

Over the next three days, the NRA sent various undercover buyers to Liberty Baking to determine whether the firm was complying. Theodor must have been suspicious of one of these agents because he charged him the proper six cents, but the agent covertly remained on the premises and caught Theodor selling bread to another customer at the illegal price of five cents. As punishment for selling bread at a price below the one agreed upon in the industry, a November 12 telegram was sent to Liberty Baking stating that the bakery could no longer display the NRA’s Blue Eagle compliance emblem—an emblem whose presence (or absence) President Franklin Roosevelt and members of his administration asked consumers to consider when deciding where to make purchases. The company was ordered to return all its Blue Eagle paraphernalia to the local postmaster. On November 19, Assistant Postmaster W. M. Mooney reported to the NRA Compliance Division that Liberty Baking continued to display the Blue Eagle. The case was then referred to the program’s Litigation Division, where fines and imprisonment could be imposed if the company was found guilty in the courts. However, by the time this layer of the NRA bureaucracy began its investigation in mid-December, Theodor had sold the bakery; hence, the case was dropped.

On December 11, 1933, Bernard Levine, proprietor of Home Food Market in Port Huron, Michigan, fired Joseph DeLawrence. The next day, DeLawrence filed a complaint against Levine alleging violation of the NRA’s Wholesale Food and Grocery Code.2 According to the code, employees in cities the size of Port Huron were entitled to a minimum pay of $13 per week. Levine actually paid DeLawrence $2 more than this minimum, but the code also stipulated that managers were entitled to at least $27.50 per week. In his complaint, DeLawrence noted that he was head of the meat department and hence entitled to executive pay. Levine told NRA investigators that DeLawrence never had any managerial duties and was simply a regular employee. Furthermore, Levine noted that when he approached DeLawrence about this accusation, DeLawrence said that if Levine would just give him his old job back, he would drop the complaint. Levine told the NRA that he was unwilling to succumb to this blackmail and said that he would not rehire DeLawrence because he would be a detriment to Levine’s business—which was why DeLawrence had been fired in the first place. Another of Levine’s employees, Irving Freeman, filed an affidavit to the NRA in support of Levine’s contention that DeLawrence did not perform any managerial duties and was simply employed as a butcher and clerk at the meat counter. After several months of uncertainty, on July 13, 1934, the NRA ended the case in Levine’s favor.

In Blanks, Louisiana, the proprietor of the A. N. Smith Lumber Company freely admitted that he was in violation of the NRA lumber code’s minimum wage provisions. W. L. Evans of the NRA lumber code authority visited the company on May 11, 1934, and said that Smith was very “determined in his attitude toward code compliance and assures me that nothing except a court order will change him.”3 In a letter dated May 26, 1934, Smith defended his wage payments by saying that his employees freely agreed to work at the level of compensation he paid. NRA deputy administrator J. C. Wickliffe noted this was not a reasonable defense. A hearing was held in New Orleans on June 7, and the NRA ruled Smith Lumber in violation of the lumber code, and hence the company was ordered to cease displaying the Blue Eagle—an emblem that Smith had never displayed in any case given his antipathy toward the program. The file was forwarded to the Litigation Division for prosecution. On April 20, 1935, however, the NRA’s lawyers decided not to pursue the case further.

These three cases provide a window into a bold experiment—the National Industrial Recovery Act (NIRA)—that eliminated normal antitrust at the height of the Great Depression. The program attempted to reorganize labor and product markets around codes that were written by industries themselves (though subject to government approval) and hence had the potential to lead to collusive outcomes throughout the manufacturing sector. Getting the competing interests within each industry to agree on the rules embedded in each industry code was difficult. Getting firm owners to then abide by the codes presented further challenges. Still, the NIRA was met, at least initially, with great enthusiasm by businesses and consumers. As a result, compliance with the codes was surprisingly high. But as the cases above suggest, the NRA codes were not always able to accomplish what their framers had hoped. Over time, defections from the codes became increasingly rampant. An examination of the NIRA can lend insight not only into the historical issue of whether the program helped or hindered recovery from the Great Depression but also into contemporary issues such as how the administrative state operates inside the federal system as well as into labor or cartel theory. Existing research about the NIRA has often painted the program in overly broad (macroeconomic) brushstrokes. The goal of this book is to break the program down into its components—in terms of both what it did and when it did it—and thus better understand the impact the program had on firms and consumers during the 1930s.

The NIRA Monolith?

The NIRA is generally viewed as a monolithic negative supply shock that lasted for nearly two years between 1933 and 1935. Macroeconomists, in particular, have pointed toward the NIRA’s promotion of collusion and its imposition of minimum hourly wage rates as clear obstacles to recovery from the Great Depression. After all, cartels reduce output, and, coupled with exogenous wage increases, this was likely to have exacerbated the unemployment situation. Although there is some validity to the view of the NIRA as an obstacle to recovery, this assessment of the NIRA monolith is also a gross oversimplification.

The NIRA was a multifaceted program that affected different industries very differently. Importantly, it also had very diverse temporal effects across the 710 days of its existence. Without understanding this heterogeneity, scholars cannot fully assess the NIRA’s role in the Great Depression. Rather than painting the legislation as a one-size-fits-all shackle, I disaggregate the NIRA into its components—collusion, wage increases, work sharing, and recognition of collective bargaining—to better evaluate the impact of each. And because the NIRA’s economic impact varied over time, the legislation is also separated into four key periods: the code formulation period, the President’s Reemployment Agreement, the effective cartel era, and the postcompliance crisis era. Additionally, this book documents the wide industry-level variation of the NIRA’s impact. In some industries, the program looked very much like the caricature that many economists now paint, with harmful collusive outcomes being achieved and workers being priced out of the market by dramatic wage spikes. But in many other industries, the NIRA codes brought little or no collusion and only minimal changes to wages and hours.

The NIRA can provide important insights into economic theory, and the legislation has been employed to this end by many scholars. However, these insights can only be properly gleaned if researchers carefully isolate the impact of each facet of the NIRA. Additionally, scholars must understand which specific windows of time to examine within the NIRA period to correctly garner such insights. To illustrate this point, consider two industries, yarn production and cement, both of which were covered by an NIRA “code of fair competition.”

The yarn industry employed forty-one thousand people in the summer of 1933—more than it had employed at the start of the Depression in 1929, which was certainly not the norm. The average workweek in the industry was forty-five hours, and the average hourly wage rate was around 36 cents.4 The yarn code was passed on August 26, 1933, ten weeks after the NIRA was implemented. This code was a scant two pages long, and it specified a forty-hour maximum workweek and a 32.5-cent minimum wage for the industry. The code—as was the case of every approved NIRA code—also forbade the employment of children under age sixteen and required firms in the yarn production industry to recognize the rights of employees to bargain collectively. Aside from these provisions, the code did nothing else to regulate the activity of yarn producers.

The cement industry employed around twelve thousand workers, which was a sharp decline from the thirty-four thousand workers in the industry in 1928. Furthermore, the industry’s production had fallen by 54 percent since 1928. Unlike the yarn industry, the cement industry had a trade association in place, the Cement Institute (created in 1929), which helped formulate the industry’s code of fair competition and represented the industry in the hearings in which the code was evaluated. The cement code was passed on November 27, 1933—more than five months after the NIRA took effect. This code was twenty-four pages long and, in stark contrast to the yarn code, contained a plethora of detailed wage and trade practice provisions. An employee’s workweek could not average more than thirty-six hours over a half-year period, and could never exceed forty-two hours in any one week. Minimum hourly wage rates varied throughout twelve specific geographic districts, with a high of 40 cents and a low of 30 cents. The code also set up a seven-member code authority to help ensure its smooth execution, and all firms in the industry had to regularly submit data on wages, hours, and production to this body. The code included a detailed plan for “the equitable allocation of available business” among firms. The code required firms to submit to the code authority, in advance of any action, plans for increases in their productive capacity, and these increases could be disallowed if it was determined that this would increase “the problem of over-production and over-capacity” in the area. The code forbade firms from selling below cost, and it required firms to file with the code authority any price changes five days in advance—and the code authority would make this information available so that other firms could choose to match the price cut (thus limiting the rationale for the price cut in the first place). The code even forbade, among several other specific attempts at non-price competition, the providing of banquets or lavish entertainment for purchasers of cement.

In light of the contents of these two codes, one of these industries looks a lot like a cartel and the other does not. Indeed, Chicu, Vickers, and Ziebarth (2013) “cement the case” that collusion occurred under the NIRA by examining establishment-level data from the cement industry in the 1930s. But which type of code was more common—the type that resembled the yarn industry or the type that resembled the cement industry? Although these two industries offer extremely different examples of codes with respect to their content, they are not strong outliers; many codes were similar in complexity (or lack thereof). This book demonstrates that industries with longer, more complex codes were more likely than industries with simple codes to have achieved collusive outcomes.

But even in the case of the cement industry, it is important to note that the cartel-oriented code was not put into place until the end of November 1933—if one employs monthly data in a test for cartelization, the date of each industry code’s implementation should also be considered. Some industries were not covered by codes until 1934, or even early 1935—just a few months before the NIRA was ruled unconstitutional. The bowling and billiard equipment industry was the subject of the 557th, and final, code passed on March 30, 1935. Since the NIRA was ruled unconstitutional on May 27, 1935, this code was in effect for only about eight weeks. The 277th and 278th code—that is, the median ones in terms of timing of code passage—were approved on February 10, 1934. Thus, to paint the NIRA as a two-year cartel program is to use an overly broad brushstroke. Furthermore, to employ the NIRA to gain insight into cartel theory, this heterogeneity of the timing of code passage must be accounted for. The use of macroeconomic, rather than industry-level, data could be particularly problematic given the heterogeneous effects of the NIRA on different industries.

Another important factor to consider with respect to potential collusive effects under the NIRA is that a widespread “compliance crisis” hit the program in the spring of 1934. Cartel theory suggests that collusion is difficult to maintain absent an effective enforcement mechanism. After all, cartels are a classic example of a prisoner’s dilemma scenario; even though collusion is collectively optimal, each individual firm’s best strategy is to defect. The NIRA set up what appeared, on its face, to be a formidable enforcement mechanism. The law specified that violations of the codes could be punished with fines and imprisonment for up to six months. Additionally, the Blue Eagle emblem was created in late July 1933 to serve as a symbol of compliance with the law—NRA violators would lose the right to display the emblem in their storefronts, advertisements, or directly on their products. This loss could be harmful, because President Roosevelt strongly encouraged Americans—especially the nation’s housewives since they generally directed the family spending—to buy products only from Blue Eagle firms and essentially boycott those that were not in compliance with the NIRA.

The Blue Eagle was viewed as a powerful economic symbol, particularly in the late summer and early fall of 1933. Firms employed substantial resources to promote their compliance with the NIRA via the Blue Eagle, suggesting that the emblem did indeed carry significant economic weight. Furthermore, firms viewed the NIRA’s Compliance Division, with its authority to prosecute violators and impose fines and jail time, as a formidable adversary that one would not wish to cross. As a result, firms viewed compliance with the NRA codes as being not only in the industry’s collective best interest but in their individual best interest as well. Thus, compliance was initially very high.

Things began to change, however, in late 1933 and early 1934, when violations of the codes went unpunished. Complying firms, as well as patriotic consumers, vehemently protested the lack of action from federal authorities against violators. As defections continued without government action, enthusiasm for the Blue Eagle began to wane—the emblem was no longer viewed as an effective signal of who was complying with the program. By March and April of 1934, firms realized that the NIRA Compliance Division had far more bark than bite—thus, the classic prisoner’s dilemma scenario returned and firms defected en masse from the codes. While some firms continued to comply, the achievement of cartel-oriented outcomes was less prominent after April 1934 than it had been in fall 1933 and winter 1934. The NRA tried to get industries back in step with its “mass compliance” drives in the fall of 1934, but the proverbial genie was already out of the bottle and compliance with the NIRA never returned to the level present in the last half of 1933.

When the NIRA was ruled unconstitutional in May 1935 via the Supreme Court’s Schechter decision, the Roosevelt administration asked firms to continue to voluntarily comply with the codes. The Robert Committee surveyed forty-four industries in the summer and fall of 1935 to gauge the extent to which the codes were still being followed. The committee found a surprisingly large degree of compliance—specifically, it concluded that more than half of firms in 75 percent of all industries reported that they continued to voluntarily follow the codes’ labor provisions. Still, there was a large industry-level variation in the degree of continued compliance—in some industries, massive “violations” had occurred. Additionally, just as the NIRA itself had heterogeneous effects on industries between 1933 and 1935, the removal of the program likewise had differential effects. Firms in industries such as cement and lumber, which had detailed and cartel-oriented codes, were far more affected by Schechter than firms in, say, the yarn industry, which were subject to very simple codes. In fact, I find that output rose faster in the two years after the NIRA in industries that had more complex codes than it did in industries whose codes were short and simple.

An Outline of the Book

The book proceeds as follows. Chapter 2 begins with the question of why policy makers thought a program of collusion, high wages, unionization, and reduced hours would promote recovery from the Great Depression. The views held by key architects of the NIRA are examined. To preview, many contemporary economists, including Roosevelt advisor Rexford Tugwell, felt that wages had not kept pace with the sharp productivity gains of the 1920s and this created the problem of “underconsumption.” Underconsumptionists such as Tugwell proposed economic planning—both by the government as well as within industries through closer coordination—and the imposition of higher real wages as the means to put the economy on a sustainable high-growth path. The NIRA’s reductions in the workweek were driven by a belief in the concept of work sharing—effectively spreading scarce work among more people by cutting each worker’s ration of hours. This idea was not novel to the NIRA—in fact, it was a major focus of President Herbert Hoover’s approach to the unemployment problem between 1930 and 1932. Hoover had also pushed for high wages as a means of boosting aggregate demand, consistent with the underconsumptionist doctrine, but whereas Hoover generally relied on moral suasion and voluntary compliance between 1929 and 1932, the NIRA would institute such policies into law. Chapter 2 also provides a time line of the NIRA’s formulation and evaluates how it was received by the business community.

Chapter 3 provides a detailed investigation of the first six weeks after the NIRA’s passage—what I call the code negotiation period. Industry representatives came together—generally in hotel conference centers in Washington DC, New York, Chicago, and other large cities—with the purpose of creating a code of fair competition for their specific industry. This process, which some industries began prior to June 16, in anticipation of the NIRA’s passage, was open to any firm owner in the industry. Once an industry was ready to submit its proposal to the National Recovery Administration, a formal hearing would be held in Washington, DC, and the code would be put into a fairly standardized format. The law said that codes could not “promote monopoly”; thus, during these hearings, an industry had to carefully defend why its proposed code provisions would promote fair competition rather than being a pure profit grab. The code ultimately had to be approved by the Roosevelt administration, which sought the advice of representatives from labor, consumers, and the NRA’s legal team. In some cases, these hearings took several days, and often recesses—which could last weeks or months—were called so that industry leaders could redraw provisions that the government deemed unacceptable. In other cases, the hearings lasted just a couple of hours. Still, code building and approval was a slow process. The first code, for the ...

Table of contents

• Cover
• Title Page
• Copyright Page
• Contents
• Preface
• 1  Introduction
• 2  The Underpinnings, Precursors, and Development of the NIRA
• 3  The NIRA Code Negotiation Process
• 4  The President’s Reemployment Agreement of August 1933
• 5  Codes of Fair Competition: Industrial Planning and Collusion under the NIRA
• 6  The NIRA Compliance Mechanism in Theory and Practice
• 7  The Economics of Compliance and Enforcement and the NRA Compliance Crisis
• 8  The Schechter Decision and the Lingering Effects of the NIRA
• 9  Conclusion
• Acknowledgments
• Notes
• References
• Index