Rexford G. Tugwell sat in a marble-clad lobby in Rome, Italy. It was October 1934. A Columbia University economist who had become a key policy adviser to President Franklin Roosevelt and an architect of New Deal programs, he was waiting to meet with Benito Mussolini, the Italian Prime Minister and Fascist Party leader. Tugwell had been following Italy’s economic policy experiments with keen interest. He saw in Italian fascism an economic policy model with some attractive features. In his diary two nights earlier, Tugwell had written that Mussolini’s regime was “doing many of the things which seem to me necessary” and was “the cleanest, neatnest [sic], most efficiently operating piece of social machinery I’ve ever seen.
It makes me envious.”1 Tugwell was not alone in wanting to rationalize the social and economic systems of the United States. Before 1935 many Progressives could and did admire aspects of fascism’s economic system, despite their distaste for its repression of civil liberties. American expres-sions of admiration for Mussolini’s economic policies declined after his invasion of Abyssinia in 1935 and finally stopped when he allied with Hitler the following year.
FRANklIN ROOSEvElT AND THE COMMAND-ECONOMy MODEl
Franklin Delano Roosevelt assumed the American presidency on a rainy afternoon in March 1933, during the depths of the Great Depression. In his first inaugural address he declared that the federal government must
1 Rexford G. Tugwell, The Diary of Rexford G. Tugwell: The New Deal, 1932–1935, ed.
Michael vincent Namorato (New york: Greenwood Press, 1992), pp. 138–9 (entry dates:
20 and 22 October 1934).
treat the depression “as we would treat the emergency of war.” He was not speaking abstractly. Roosevelt was proposing to revive the Wilson admin-istration’s command-economy measures from the First World War.2 Under Wilson’s measures of 1917–18 the federal government had imposed non-market command and control measures on industry. A cluster of new fed-eral bureaus (the War Industries Board, the U.S. Food Administration, the U.S. Fuel Administration, and their many subsidiaries) enlisted business firms and labor unions into an effort to restrict competition and plan out-put through industrial cartels. Tugwell advised Roosevelt to revive such efforts in new forms.
Similar ideas were being tried elsewhere in the world. In Italy, led by Mussolini from 1922 to 1943, the system of cartelization and planning by
“corporatives” – government-business-labor boards with government the controlling partner – was known as corporativism or fascism.3 “Fascism”
has since become an emotionally charged term, associated less with eco-nomic policy than with rampant militarism and civil repression. F. A.
Hayek would argue in The Road to Serfdom (see Chapter 6) that there is a connection between the two aspects: centralized planning measures will lead any government trying to make them work down a slippery slope to political repression.
As an economic policy system, fascism is a nationalistic form of socialism with a veneer of private ownership. In Hitler’s Germany, the ruling party that imposed fascist economic policies called itself the National Socialist German Workers Party, or Nazi Party for short. Fascism retains nomi-nal private ownership of business but puts government in close control of major investment and production decisions. Mussolini’s and Hitler’s par-ties appealed to a different constituency from Marxian socialist parpar-ties, but state control of the economy was the common prescription. Hayek in 1933 noted the similarity of Hitler’s version to other versions of socialism: “The collectivist and antiindividualist character of German National Socialism is not much modified by the fact that it is not a proletarian but a middle class socialism, and that it is, in consequence, inclined to favour the small artisan
2 Wolfgang Schivelbusch, Three New Deals: Reflections on Roosevelt’s America, Mussolini’s Italy, and Hitler’s Germany, 1933–1939 (New york: Picador, 2006), pp. 40–1, quotes other militaristic declarations in Roosevelt’s speech and notes that “when the leaders of the New Deal talked about the experience of war, they were referring to World War I.”
3 For recent discussions of the parallels between Mussolini’s and Roosevelt’s economic pol-icies see Schivelbusch, Three New Deals, and Jonah Goldberg, Liberal Fascism (New york:
Doubleday, 2007).
and shop keeper and to set the limit up to which it recognizes private prop-erty somewhat higher than does communism.”4
FRANklIN DElANO ROOSEvElT (FDR) AND THE NRA Two pieces of legislation in 1933 spearheaded Roosevelt’s New Deal ini-tiative: the National Industrial Recovery Act (NIRA) and the Agricultural Adjustment Act (AAA). The goals were recovery and reform. The means were extensions of federal government control over the economy. Behind the acts lay the theory that sheltering American businesses from destruc-tive competition would help return them to profitability, and thereby return the economy to prosperity. The National Recovery Administration (NRA) established by the NIRA organized industries into federally supervised Code Authorities, government-sponsored cartels for arranging collusion among the participating firms. The Code Authorities decided and enforced prices, production quotas, employment, and distribution methods.
John T. Flynn, a leading contemporary critic of the NRA, described the system as follows:
The NRA provided that in America each industry should be organized into a federally supervised trade association. It was not called a corporative [as in Mussolini’s Italy]. It was called a Code Authority. But it was essentially the same thing. These code authorities could regulate production, quanti-ties, qualiquanti-ties, prices, distribution methods, etc., under the supervision of the NRA. This was fascism. The anti-trust laws forbade such organizations.
Roosevelt had denounced Hoover for not enforcing these laws sufficiently.
Now he suspended them and compelled men to combine.5
Flynn here meant fascism in the economic-policy sense, not in the sense of militarism or repression. As he put the distinction: “In those days fascism was not defined as anti-Semitism. It was a word used to describe the polit-ical system of Mussolini.”6 As the quoted passage hints, Flynn at least ini-tially was a Progressive who supported the antitrust laws. He had supported FDR in the 1932 election.
4 Hayek, “Nazi-Socialism” [1933] in The Road to Serfdom: Text and Documents, the Definitive Edition (Chicago: University of Chicago Press, 2007), p. 247. On Mussolini as a Marxist-leninist turned nationalistic socialist, see Joshua Muravchik, Heaven on Earth: The Rise and Fall of Socialism (San Francisco: Encounter Books, 2002), ch. 6.
5 John T. Flynn, The Roosevelt Myth (New york: Devin-Adair, 1948), p. 43.
6 Ibid., pp. 78–9.
The NRA Code Authorities drafted some 550 industry codes covering about 80 percent of nonagricultural industry. They outlawed more than 1,000
“unfair” competitive practices. As a contemporary Brookings Institution study noted, the NRA’s planning effort was not fully comprehensive in that the program was designed “to operate within a profit economy.” Because the industry codes were drafted by a variety of industry Code Authorities, they
“introduced no coordinated adjustment of relative prices.”7
THE THEORy BEHIND THE NRA
Rexford Tugwell first proposed the outlines of the NRA in The Industrial Discipline and the Governmental Arts (1932), a book that he published just before joining the administration.8 A contemporary British reviewer sum-marized the author’s recommendations:
He proposes that all of the concerns within an industry be formed into an “association.” These cartellised industries, then, are to be largely governing, but subjected to specific control by some powerful national agency, or Board. Representatives of the industries themselves, and of the labourers employed therein, are to participate, with public officials, in this control. This democratic dictatorship is to allocate capital funds, supervise working conditions, and, when necessary, fix wages and prices.
That Dr. Tugwell’s plan is in close harmony with President Roosevelt’s policy is evident by a consideration of the Industrial Control (National Recovery) Act, which became law in the United States on June 16, 1933. But as to whether or not the ultimate philosophy of the Administration is in accord with Dr. Tugwell’s neo-socialism, only time can tell.9
His biographer reports that, as a member of the “Brain Trust” advising candidate Roosevelt, Tugwell
was assigned the task of working on agricultural recovery and industrial cooperation. For the latter, he proposed the last chapter of his Industrial Discipline as a solution to the industrial problems in the United States. . . . After Roosevelt’s nomination was secured, Tugwell presented . . . a memoran-dum calling for the creation of a National Economic Council.
7 Charles l. Dearing, Paul T. Homan, lewis l. lorwin, and leverett S. lyon, The ABC of the NRA (Washington, DC: Brookings Institution, 1934), p. 38.
8 Rexford G. Tugwell, The Industrial Discipline and the Governmental Arts (New york:
Columbia University Press, 1932).
9 William S. Hopkins, Review of The Industrial Discipline and the Governmental Arts by Rexford G. Tugwell, The Economic Journal 43 (September 1933), pp. 501–2. Tugwell’s sketch of a central-planning U.S. Industrial Integration Board and its subsidiary industry integration associations appears in Tugwell, Industrial Discipline, pp. 212–16.
After Roosevelt’s inauguration, Tugwell was “actively involved in the drafting and eventual passage of the Agricultural Adjustment Act and the National Industrial Recovery Act.”10
Tugwell believed that the Great Depression had been caused by industrial overproduction that had clogged markets, driven by myopic profit-seeking and abetted by the absence of any top-down oversight of the economy to prevent such problems. Here is how Tugwell in his diary recalled explaining the cause of the Depression to the other members of the Brain Trust:
I said that our troubles were made by businessmen and could only be cor-rected by disciplining business. Businessmen had been able to take advantage of an unusual situation, arising out of the advance in productivity during the war. Costs had fallen. But prices had not. Nor had wages risen. Therefore what consumers had to buy with had become disproportionate to the goods being produced. Some of them could not be sold. This caused unemploy-ment. The unemployed, of course, reduced their buying to a minimum. And thus a spiral of decline set in.11
And here is how Tugwell, from the vantage point of 1948, summarized the same view of the 1929 bust in an academic article:
It is one of the unalterable conditions for the successful continuation of large-scale industry that purchasing power among consumers must be sufficient to carry off the volume produced. In order to maintain purchasing power in volume, consumers’ incomes and the total of prices attached to goods and services for sale must be roughly equal. They cannot be equal unless prices come down as costs come down; otherwise, the increasing profits go into more factories and increased production. In the long run warehouses fill with goods for which there is no demand. This is a very short and, because short, inaccurate account of the basic trouble in 1929. It leaves out, for instance, the effect of the vast pools of sterile savings, and also those which financed the wild speculation after 1927. But it does emphasize the fact that, by 1929, pro-ductive power had far outrun purchasing power. The farmers had first been priced out of the market; then other consumers had followed; and all the time vast increases in plant were being made.12
Tugwell here suggested that competition among business firms, which can normally be counted on to reduce prices in line with reduced costs, and to bid wages up in line with increased worker productivity, was effectively absent. The overproduction (or underconsumption) doctrine he expressed,
10 Namorato, Diary, pp. 5–6. “Industrial cooperation” here means cartelization or corporativism.
11 Rexford G. Tugwell, Diary, pp. 290–1.
12 R. G. Tugwell, “The New Deal in Retrospect,” Western Political Quarterly 1 (December 1948), p. 376.
complete with its indictment of businessmen, was reflected in a remarkable passage of Roosevelt’s first inaugural address in which the new president declared:
Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because the rulers of the exchange of man-kind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.13
Tugwell’s and Roosevelt’s prescription: take decision-making out of busi-nessmen’s hands and give it to government-sponsored cartels that would plan reductions in supply under the guidance of the NRA and AAA.
UNDERCONSUMPTION AND J. A. HOBSON
In his revised diary Tugwell noted that he did not owe the undercon-sumption theory of depressions to John Maynard keynes, but “had been influenced by J. A. Hobson more than any one other individual.”14 Hobson, a British socialist influenced both by Marxism and by the institutionalist economist Thorstein veblen, had developed his theory of depressions in The Physiology of Industry (coauthored with A. F. Mummery, 1889), The Problem of the Unemployed (1896), his best-known work Imperialism (1902), and The Industrial System (1909).15 Hobson took the Marxian con-cept of “surplus value” – the employer paying the worker less than the value of his product and pocketing the difference – and put it to use in construct-ing a business cycle theory.
Friedrich Engels had sketched a similar idea in an 1844 article:
Modernization and industrial concentration tend to lead to higher
13 Franklin Delano Roosevelt, “First Inaugural Address” in Great Speeches, ed. John Grafton (Mineola, Ny: Dover, 1999), p. 30. Tugwell’s fellow Brain Truster Raymond Moley was principal author of the address; see Davis W. Houck and Mihaela Nocasian, “FDR’s First Inaugural Address: Text, Context, and Reception,” Rhetoric and Public Affairs 5 (Winter 2002), pp. 649–78.
14 Ibid., p. 291. The influence of Hobson’s theory on Tugwell has been noted by Malcolm Rutheford, “American Institutionalism and Its British Connections,” European Journal of the History of Economic Thought 14 (June 2007), pp. 291–323. Rutheford also remarks that Thorstein veblen had earlier “made many references to Hobson’s underconsumptionist ideas in his treatment of business depressions.”
15 For a book-length treatment of Hobson’s ideas see John Allett, New Liberalism: The Political Economy of J. A. Hobson (Toronto: University of Toronto Press, 1981). Hobson entitled his autobiography Confessions of an Economic Heretic (london: George Allen and Unwin, 1938).
productivity and higher profits but lower wages. Underpaid workers can-not afford to buy the increased supply of goods for sale. By implication, capitalists do not spend enough out of their profits to take up the slack. The overproduction causes a depression: In Engels’s vivid phrase, “the people starve from sheer abundance.”16 Note that the prices of goods, for some rea-son, do not adjust to clear the market.
David Hamilton summarized Hobson’s theory as follows:
The unearned surplus results in a maldistribution of income. The maldistri-bution of income means excess saving. Excess saving leads to overinvestment.
Overinvestment, the product of excess saving, means inadequate [consumer]
purchasing power. This leads to economic breakdowns.17
Hobson viewed imperialism as a capitalist economy’s way of exporting its excess saving and selling its overproduced goods, at least for a while.18 Restating his theory in 1933, Hobson drew the same implication for eco-nomic policy that Tugwell did:
[A] consciously planned economic system . . . would show no natural or nor-mal tendency to the cyclical fluctuations which carry so much waste owing to the stoppage of large quantities of capital and labour.19
In elaborating his own better-known variation on the underconsump-tion theme, keynes credited Hobson with “see[ing] the truth obscurely and imperfectly.”20 We will discuss keynes’s and earlier underconsumption the-ories in the next chapter.
Tugwell learned about Hobson’s theory of depressions from his Columbia University colleague Wesley Clair Mitchell, who taught and wrote about business cycles. Mitchell’s own affinity for the theory can be seen in his framing of “the basic economic problem that now confronts mankind” as
“the problem of developing an economic organization that will enable the citizens of a modern state to buy from one another what modern industrial methods enable them to produce.”21
16 Muravchik, Heaven on Earth, p. 65.
17 David Hamilton, “Hobson with a keynesian Twist,” American Journal of Economics and Sociology, 13, no. 3. (April 1954), p. 274. Hamilton goes on to compare and contrast Hobson’s theory of depression to that of keynes.
18 lenin acknowledged Hobson’s influence on his own critique of imperialism in the preface to his book Imperialism: The Highest Stage of Capitalism [1917] (New york: International, 1939).
19 J. A. Hobson, “Underconsumption: An Exposition,” Economica (old series) 42 (November 1933) [with a “Reply” by E. F. M. Durbin], p. 409.
20 keynes, General Theory, p. 367.
21 Quoted by Tugwell, Diary, p. 342.
Tugwell saw his own diagnosis of the Depression as combining Hobson’s theory with complementary insights into “scientific management” and into the problems of agriculture.22 An effort to relieve the Depression by mit-igating what Hobson called “the maldistribution of income” may be seen in the efforts of NRA Code Authorities to raise wages at the expense of profits, hoping thereby to increase aggregate demand for goods (as well as to enlarge labor’s share of the pie).23 Tugwell worried that scientific manage-ment or Taylorism, discussed in more detail later in this chapter, enabled a massive increase in output and thereby increased the threat of overproduc-tion. Regarding the problems of American agriculture, Tugwell had written in 1924:
We are no longer convinced that it is necessary to depend altogether upon the clumsy mechanisms of unregulated price determination to reduce or spur consumption as production varies, especially when the effects on productive forces are so disastrous as we clearly see them to be in agriculture.24
Agriculture, as a single industry, can have overproduction in the sense of a crop so large that the price of produce falls to a point where farmers make losses in a given year. Tugwell thought that the same problem could trouble business in general.
ECONOMIC AND lEGAl PROBlEMS WITH THE NRA AND AAA The NRA had serious logical flaws as a remedy for depression. The act hoped to restore profits in each industry by restricting the industry’s output, thereby raising its output price and profit margin, as a monopolist would.
For any one industry, holding the output of the others constant, profits might indeed be increased by such restriction. But because the profits thus created were premised on restricting output, they could not be a stimulus to renewed investment or hiring. Output restriction implies that the use of plant and equipment in the industry, as well as employment, will be shrink-ing and not expandshrink-ing.
22 Ibid., p. 291
23 On wage-raising efforts by the NRA see the remarks of George Terborgh in Robert M.
Hutchins et al., “NRA Examined,” American Economic Review 25 (Supplement, Papers and Proceedings) (March 1935), p. 2.
24 Rexford Guy Tugwell, “The Problem of Agriculture,” Political Science Quarterly 39 (December 1924), p. 555. For Tugwell’s indictment of laissez faire in agriculture, see also R.
G. Tugwell, “Farm Relief and a Permanent Agriculture,” Annals of the American Academy of Political and Social Science 142 (March 1929), pp. 271–82.
Equally fatal, it was a fallacy of composition to think that the profit effect in one industry could generalize to all industries simultaneously.
The artificially high prices gained by one industry (e.g., steel) would raise costs and thereby reduce profits for other industries that use its product as an input (e.g., the automobile industry). When every industry restricts its own output, the logically necessarily result is a shrinkage of total out-put that makes the entire economy poorer, discourages investment and employment, and blocks recovery. Put another way, the monopoly restric-tion of one industry’s output can increase that industry’s share of narestric-tional income, but it cannot raise national income. Restricting all industries is self-defeating. Relative shares end up about the same, while the overall pie shrinks from every side. John Maynard keynes pithily identified the
The artificially high prices gained by one industry (e.g., steel) would raise costs and thereby reduce profits for other industries that use its product as an input (e.g., the automobile industry). When every industry restricts its own output, the logically necessarily result is a shrinkage of total out-put that makes the entire economy poorer, discourages investment and employment, and blocks recovery. Put another way, the monopoly restric-tion of one industry’s output can increase that industry’s share of narestric-tional income, but it cannot raise national income. Restricting all industries is self-defeating. Relative shares end up about the same, while the overall pie shrinks from every side. John Maynard keynes pithily identified the