Why Did the Roosevelt Administration Think Cartels, Higher Wages, and Shorter Workweeks Would Promote Recovery from the Great Depression?

• Author: Beaudreau, Bernard C.
• Position: Essay

When the National Industrial Recovery Act (NIRA) of 1933 is discussed, whether at academic conferences or in the classroom, an audience member seems invariably to ask some version of the question embedded in the title of this article. After all, in the presence of the massive unemployment of the early 1930s, a policy of increasing wage rates would be expected to drive a deeper wedge between the quantities of labor being demanded by firms and supplied by households. In addition, shorter workweeks would seem to put increased burdens on workers who were likely already supplying less labor than they viewed as their optimal amount. Finally, economic theory suggests that industry-wide cartels reduce output and economic welfare--which is quite the opposite of a policy designed to promote recovery.

In short, the three major policies of the NIRA fly in the face of orthodox economic reasoning. We often hear the question "Didn't Roosevelt and his advisors understand this?" In fact, all three of these seemingly puzzling policies--collusion (industrial planning), high wages, and shorter hours--were employed in various degrees prior to 1933 for economic reasons, and each had underpinnings that were widely espoused in the interwar era. Thus, the ideas embedded in the NIRA were not as new and radical as is often assumed, hi addition to discussing the economic thinking behind these three aspects of the NIRA, this paper outlines die precursors to the NIRA as well as the evolution of the economic thinking on these issues leading up to the law's passage on June 16, 1933. In so doing, we hope to provide a thoughtful answer to the question that is often asked with respect to the motivations behind the NIRA.

Rationale for Raising Wage Rates in the Face of Depression

Anthony Patrick O'Brien (1989) and Jason Taylor and George Selgin (1999) have previously documented the intellectual rise of the "high-wage doctrine" in the two decades prior to the Great Depression. This doctrine advocated the payment of high wage rates as a means of bringing economic prosperity. Specifically, it was believed that when a worker's pay rises, he or she will have more money to purchase goods and services, and this additional demand will entice firms to hire more workers. The labor-demand curve was viewed during this time as effectively upward sloping--higher wage rates, if imposed at an aggregate level, would prompt firms to wish to hire more workers.

It is important to note that this doctrine gained credence during a time of rising productivity owing to technological change. Orthodox theory suggests that rising productivity leads to rising wage rates; however, there were concerns in the 1920s that wage rates were not rising quickly enough for consumption to keep pace with rising production. Such concerns have been expressed in other eras of technological change, including today--see, for example, Fleck, Glaser, and Sprague 2011 and Ravikumar and Shao 2016, which show that manufacturing wages in industrialized countries in the 1990s and 2000s lagged behind productivity growth. These "underconsumptionist" views of insufficient purchasing power in the hands of consumers to buy the rising level of output can be traced back to as far as Barthelemy de Laffemas at the turn of the seventeenth century, although they gained considerable steam with the writings of Robert Owen ([1820] 1970) and Thomas Malthus (1827). Owen and Malthus believed that stagnation and depression were the result of workers not having enough money to buy the increased output that advances in the steam engine had enabled. Karl Marx and Friedrich Engels ([1848] 2002) made a similar argument based in large measure on falling wages and rising profits--or the rate of surplus value. John A. Hobson (1909) sparked a resurgence in this literature in the early twentieth century when he argued for policies of income redistribution to overcome the problem of underconsumptionism. (1)

In his book The Way Forward (1932), Robert Brookings, the founder of the Brookings Institution, offers a nice example of underconsumptionist/high-wage doctrine thinking as it stood just prior to the passage of the NIRA: "We have now the anomaly ... of a vast production of goods which cannot be distributed although there are millions of people needing them, and in some cases suffering acutely because of their lack. [We require] some modification in our system of compensation providing a more equitable distribution and so increasing the consuming power of the workers" (2).

Henry Ford's policy of paying workers $5 a day--more than twice the going wage at the time--first instituted in 1914 (and raised to $6 in 1919), played a large role in popularizing underconsumptionism theory and the high-wage doctrine. Having revolutionized automobile manufacturing at his Highland Park plant, where worker productivity soared (Beaudreau 1996), Ford claimed that his company's "sales depend in a measure upon the wages we pay. If we can distribute high wages, then that money is going to be spent and it will serve to make ... workers in other lines more prosperous and their prosperity will be reflected in our sales" (1922, 124). In 1926, Ford attributed his company's success to the high-wage policy it had begun twelve years earlier--"we increased the buying power of our own people, and they increased the buying power of other people and so on" (9). Furthermore, Ford claimed that economic downturns were caused by wage cuts and could be abated by wage increases: "An unemployed man is an out of work customer.... Business depression is caused by weakened purchasing power----The cure of business depression is through purchasing power, and the source of purchasing power is wages" (1926, 152-53).

At the start of the Great Depression in the fall of 1929, Ford doubled-down on his high-wage policy and rhetoric. He expressed the "need of increasing the purchasing power of our principle customers--the American people.... Wages must not come down, they must not even stay at their present level; they must go up" (quoted in New York Times 1929). In fact, Ford raised his company's minimum wage from $6 to $7 a day in November 1929 in an attempt to offset the potential decline in demand in view of the stock-market crash. It is not clear whether Ford actually believed that his own high-wage payments ultimately boosted demand for his cars or so publically cheered for high wages under the belief that demand for his cars was a function of wages paid by all firms and thus that it was important to convince other business owners likewise to keep their wage rates high. The idea that Ford's wage increases could have large general equilibrium impacts that affected demand for his cars seems highly implausible.

Ford's statements and actions in favor of high wages gained many followers among economists, policy makers, and other industrialists. In their book Business without a Buyer (1928), William Trufant Foster and Waddill Catchings, two of the most prominent underconsumptionists of the 1920s, noted that "Mr. Ford has helped [employers] see that it is bad business to destroy customers by reducing purchasing power.... The best wages that have up to date ever been paid are not nearly as high as they ought to be" (175). Even Irving Fisher noted in 1930, at the start of the Great Depression, that "Henry Ford was substantially right when he suggested the need ... of 'increasing the purchasing power of our principle customers--the American people'" (25).

Boston merchant Edward A. Filene was another influential advocate of raising wage rates to fight underconsumption in the 1920s and 1930s. He wrote that low wages "manifestly cut down that widespread and sustained buying power of the masses.... The business man of the future must fill the pockets of the workers and consumers before he can fill his pockets" (1924, 201). Furthermore, writing in the American Economic Review, Filene claimed that high wages were a boon not just to the worker but also to the employer--"I refer to Henry Ford. He has become the richest man in the world" due to the payment of high wages (1923, 411).

Murray Rothbard shows that Herbert Hoover's actions during his time as secretary of commerce under Presidents Warren G. Harding and Calvin Coolidge were consistently aligned with the claims made by those promoting higher hourly wage rates and that these actions continued when Hoover became president (1963, 178). In November 1929, a month after the stock-market crash, President Hoover held a conference with twenty-three industrial business leaders--Henry Ford, Alfred Sloan, Myron Taylor, Julius Rosenwald, and Pierre Du Pont, among others--in which he asked them to maintain the prosperity level of wages as a means of helping maintain economic prosperity. Jonathan Rose (2010) shows that this conference affected behavior in that these business leaders' companies maintained high nominal wage rates until October 1931 despite the economy's deep slip into depression and a falling price level (which sharply increased real wage rates).

Rose notes that the wage-maintaining behavior of 1929-31 was not normal--in prior downturns, such as the one in 1921, wage rates were cut far more quickly. James Grant (2014) and Gary Pecquet and Clifford Thies (2016) contend that the government's laissez-faire policy of allowing markets to adjust in the early 1920s--that is, of allowing nominal wage rates to fall in the face of falling prices and high unemployment--was a key factor in why the economy recovered quickly from that downturn. Richard Vedder and Lowell Gallaway (1993) note, however, that the policy lesson Hoover and some industrialists took from the recession of 1921 was that the sharp declines in wage rates and prices that year caused the downturn to be more severe, not less. Indeed, John Maynard Keynes said in December 1923 that "the more troublesome the times, the worse does a laissez-faire system work"...