Chapter 3
Post–World War I Developments
Through the 1920s, however, power continued to be concentrated in fewer hands as corporations issued shares with multiple classes of voting rights, while other shares were sold with no votes at all, salable in the post–World War I economic boom of the 1920s. More and more ordinary people, those wage earners we discussed above, were looking to the stock market to save the new money they were earning. The law did not, however, guarantee good information or fair terms.
The first three decades of the 20th century saw economic output surge with electrification, mass production and motorized farm machinery. Due to the rapid growth in productivity there was excess production capacity and the work week was reduced. The dramatic rise in productivity of major industries in the U.S. and the effects of productivity on output, wages and the work week are discussed by Spurgeon Bell in his book Productivity, Wages, and National Income (1940).
The Stock Market Crashes
And then, the stock market crashed on October 23, 1929. Share prices dropped 89 percent, and the country slowly moved into the Great Depression as confidence was shaken and banks failed at an increasing rate. Reflections on its cause prompted calls for reform. Controls on the issuing and trading of securities were virtually nonexistent, allowing for a variety of frauds and other schemes. Further, the unreported concentration of controlling stock interests led to various abuses of power.
At the beginning of the 1930s, more than 15 million Americans, one-quarter of all wage-earners, were unemployed. President Herbert Hoover did not do much to alleviate the crisis: Patience and self-reliance, he argued, were all Americans needed to get them through this “passing incident in our national lives.” But in 1932, Americans elected a new president, Franklin Delano Roosevelt, who promised “a New Deal for the American people.” This New Deal would use the power of the federal government to try and stop the economy’s downward spiral.
The Great Depression and FDR’s New Deal
With another determined Roosevelt (note that distinguished name offers another nod to the Dutch) in office, bold action was again taken. FDR had formed a group of academic advisers, known as his Brains Trust, comprised of three Columbia University professors: Raymond Moley, Rexford Guy Tugwell, and Adolph A. Berle, Jr, author with Gardiner C. Means in 1932 of The Modern Corporation and Private Property, a landmark book whose ideas still resonate. Basil (“Doc”) O’Connor, Samuel I. Rosenman, and Hugh Johnson joined shortly thereafter. These men helped FDR develop an economic plan which became the backbone of the New Deal, aimed at providing relief for the unemployed and poor, recovery of the economy back to normal levels, and reform of the financial system to prevent a repeat depression.
Safety Net for Banks Created
The new president acted swiftly to, he said, “wage a war against the emergency” just as though “we were in fact invaded by a foreign foe.” First, he shored up the nation’s banks.
In all, 9,000 banks failed during the decade of the 1930s. It is estimated that 4,000 banks failed during 1933 alone. By then, depositors saw $140 billion disappear through bank failures.
The last wave of bank runs continued through the winter of 1932 and into 1933. Almost immediately after taking office in early March, Roosevelt declared a national “bank holiday,” during which all banks would be closed until they were determined to be solvent through federal inspection. In combination with the bank holiday, Roosevelt called on Congress to come up with new banking legislation to further aid the ailing financial institutions of America. In June of that year, FDR signed into law the Banking Act of 1933, often referred to as the Glass-Stea-gall Act after its two Congressional sponsors, ending the banking panic.
The Banking Act established the Federal Deposit Insurance Corporation (FDIC) and extended federal oversight to all commercial banks for the first time. It also separated commercial and investment banking. At the time, overzealous commercial bank involvement in the stock market was considered the main culprit behind the crash. Banks were seen to have invested depositor money in the stock market and encouraged their depositors to invest in the same companies. When the market fell, the compound impact made the banks an easy target to blame.
The FDIC protected depositors by insuring commercial bank deposits of $2,500 (later $5,000) with a pool of money collected from the banks. The FDIC did not insure investment products such as stocks, bonds, mutual funds or annuities. No federal law mandated FDIC insurance for banks, though some states required their banks to be federally insured.
Further reforms followed rapidly. In his first 100 days in office, Roosevelt and Congress passed fifteen major laws, including the Agricultural Adjustment Act, the Home Owners’ Loan Act, the Tennessee Valley Authority Act and the National Industrial Recovery Act, that fundamentally reshaped many aspects of the American economy. This decisive action also did much to restore Americans’ confidence, as Roosevelt had declared in his inaugural address, “the only thing we have to fear is fear itself.”
Regulation of Securities and Securities Markets Takes Root
Congress passed the Securities Act of 1933, which required public corporations to register their stock sales and to make regular financial disclosures to shareholders, and later the Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) to regulate commerce in stocks, bonds, and other securities; to regulate exchanges, brokers, and over-the-counter markets; and to monitor the required financial disclosures.
The Investment Advisors Act of 1940 required delegation of investment responsibilities only to an adviser registered under the act or to a bank or an insurance company. There remained, however, a gap: creating a mechanism to regulate management of those pools of commingled funds known as mutual funds. Thus, after several years of study, Congress passed the Investment Company Act of 1940, which saw the first mandated use of disinterested directors to protect investors against conflicts of interest inherent in the intertwined structures of investment companies and their managers.
Safety Net Extended to Citizens as Social Security is Born
The Social Security Act was enacted on August 14, 1933 as an attempt to limit what were seen as dangers of the modern American life, including old age, poverty, unemployment, and the burdens of widows and fatherless children. The Act provided benefits to retirees and the unemployed, and a lump-sum benefit at death. Payments to current retirees are financed by a payroll tax on current workers’ wages, half directly as a payroll tax and half paid by the employer. The act also gave money to states to provide assistance to aged individuals (Title I), for unemployment insurance (Title III), Aid to Families with Dependent Children (Title IV), Maternal and Child Welfare (Title V), public health services (Title VI), and the blind (Title X).
President Roosevelt’s early efforts had begun to restore Americans’ confidence, but they had not ended the Depression. In the spring of 1935, he launched a second, more aggressive set of federal programs, sometimes called the Second New Deal. The Works Progress Administration provided jobs for unemployed people and built new public works like bridges, post offices, schools, highways and parks.
The 1935 Public Utility Holding Company Act did away with holding companies more than twice removed from the utilities whose stocks they held, to end the use of holding companies to obscure the control of public utility companies. The National Labor Relations Act, passed in 1935 and also known as the Wagner Act, gave workers the right to form unions and bargain collectively for higher wages and fairer treatment.
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, was founded in 1938 to support the policy goal of expanding home ownership by developing and supporting the secondary market for residential mortgages. This had the effect of allowing lenders to sell mortgage loans to FNMA and reinvest the proceeds into more lending. It also improved access to credit by smoothing regional differences in loan capacity of local savings and loan associations.
Frustration Sets in as Unemployment Persists
Still, the Depression dragged on. Workers grew more militant: In December 1936, for example, the United Auto Workers started a sit-down strike at a GM plant in Flint, Michigan that lasted for 44 days and spread to some 150,000 autoworkers in thirty-five cities. By 1937, some 8 million workers had joined unions and were loudly demanding their rights.
The economic performance of the 1930s showed a rapid upward trend. The country’s real gross domestic product had fallen from $865 billion in 1929 to $635 billion in 1933 and rebounded to $1 trillion by 1940. But the percentage of jobless Americans remained high. In 1930, unemployment was at 8.7 percent, and climbed to 24 percent in 1932 before declining to 15 percent by 1940. Jim Powell, author of FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression, asks, “There was expansion, but how come you still had average unemployment of 17 percent from 1933 to 1940?”
By the end of the 1930s, the New Deal had faded. The loss of the Democratic majority in 1938 and growing Congressional opposition made it difficult for President Roosevelt to introduce new programs. FDR’s great experiments, then, didn’t quite end the Great Depression. Only mobilization for a world war would bring an end to the most devastating economic crisis in United States history.
Government and Business Mobilize for World War II
Not exactly invoking neutrality in his decision to assist the Allied powers, President Roosevelt noted, “Even a neutral cannot be asked to close his mind or his conscience.” When Japanese bombers attacked Pearl Harbor in December 1941, the United States joined in the war in earnest.
Despite warnings of war, the United States wasn’t completely prepared. Many of the country’s machine and tool industries had disappeared during the depression, the military was woefully under-supplied, and many soldiers found themselves drilling with toy guns and wooden tanks. The Depression, however, provided good preparation for wartime life: Americans had learned to scrimp and persevere.
Americans rose to the occasion. When FDR called for the production of 50,000 planes in a year, it was thought ridiculous. By 1944, the country was producing 96,000 a year. Technology blossomed. When metals became scarce, plastics were developed to take their place. Copper was taken out of pennies and replaced with steel; nickel was removed from nickels. Gasoline and tires were rationed, as were coffee, sugar, canned goods, butter, and shoes.
The federal government spent about $350 billion during World War II — or twice as much as it had spent in total since the formation of the United States. About 40 percent of that came from taxes; the rest came through government borrowing, much of that through the sale of bonds. Gross national product more than doubled between 1939 and 1945. Wages and corporate profits went up, as did prices.
Roosevelt and Business Create Formidable Alliance
In the early years of the war, Roosevelt consciously pursued a conversion program to shift industry to a wartime footing. Lingerie factories began making camouflage netting, baby carriages became field hospital food carts. Lipstick cases became bomb cases, beer cans went to hand grenades, adding machines to automatic pistols, and vacuum cleaners to gas mask parts.
Basically, Roosevelt made the decision that he had to mobilize the leaders of the mines, the factories, and the shops. He realized Congress could provide the money, but could not build the planes, design the tanks, or assemble the weapons. Without the cooperation of industry, massive production could not succeed, yet private business could not find all the capital required for the expansion of the plants nor take the risk that the end of the war would leave them with no orders and excess capacity.
Using the Reconstruction Finance Corporation, therefore, the federal government provided the funding needed to expand the factories, often leasing them to industry. The government also helped develop new sources of raw material supplies and created mass transportation to mobilize resources. It went into the business of producing synthetic rubber and aluminum, invested in other emerging industries, and helped stimulate new technologies.
Contrary to the stereotype of a wartime “command economy,” a robust entrepreneurial spirit prevailed. Roosevelt brought in dozens of top business executives as “dollar-a-year” men to help run the government commissions and reduce the sentiment that government was telling business what to do. He used government to create markets and to help business set up new plants and equipment. The war created new technologies, industries, and associated skills.
Solidarity Works Miracles
Perhaps because mobilization included the ideological argument that the war was being fought for the interests of common men and women, social solidarity extended far beyond the foxholes. Public opinion held that our valorous veterans should not return jobless, without opportunity and education. That led to the GI Bill, which helped lay the foundation for the remarkable post-war expansion that followed. The stereotype of FDR as a regulation-lover flies in the face of the national experience in the 1940s. Wartime planning was far more business oriented than was New Deal planning, and with considerably less class warfare.
Air Corps aces would visit the factories; the pilot would tell the workers that it wasn’t the pilots who were heroic, it was their planes. The war production posters emphasized that factories and GIs were one continuous front, a theme that Roosevelt also struck in his speeches. The people understood from the start that America’s dominant contribution to the war would be its production. Productivity soared: the Kaiser shipyards, for example, were able to get production time for Liberty Ships down from 365 days to 92, 62, and, finally, to one day.
Roosevelt resisted the idea of compulsory service, believing that the momentum of democracy would be sufficient. If the jobs were out there, he believed that people would put their mattresses on top of their cars and go where the jobs were. He envisioned highways filled with people on the move; going south, going west. In one fireside chat, he advised people to get maps, and the Hammond company in New York sold out their entire stock of 2,000 maps in a single morning. Though mobilization was chaotic, it worked.
Wartime Success Reaches Far Beyond Battlefields
Word War II produced remarkable social gains. Eleanor Roosevelt, in particular, was successful in arguing that a fully productive work force requires everyone’s talents, blacks and women alike; and if women are to work in the factories, their children require day care. She proved that absentee rates were high in the factories because worried women were going home to care for their children. She got restaurants to prepare hot meals, so women could bring home hot dinners. The productivity rates continued to soar as a result of these and other measures.
Government was viewed as a source of full employment, macroeconomic recovery, technological breakthrough, worker training, reindustrialization, and a good deal of incidental social progress. The alliance between large corporations and government had developed to the point where big business helped government develop and implement various certain economic and reconstruction programs.
The Committee for Economic Development, formed in 1942 by CEOs of our largest corporations to promote sustained economic progress, assisted with development and adoption of the Marshall Plan for post-war reconstruction as well as the Bretton Woods Agreement, an agreement among the world’s industrial nations to a global monetary system designed to improve economic stability by promoting global trade. That system hashed out during July 1944 by forty-four nations in Bretton Woods, New Hampshire, provided for a fixed rate of exchange between the currencies of the world and the U.S. dollar, and the U.S. dollar was linked to gold.