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How the New Deal Was Dealt, Part I

By       Message Doug Rogers     Permalink
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opednews.com Headlined to H3 9/20/08

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The comparisons are starting to thicken between our current economic predicament and what the country faced in the 1930's. Though it is too soon to know whether we will face the same kind of hardships that our grandparents' generation endured, it is difficult to avoid a comparison between the crash of 29 and the meltdown of 08.

In the 1920's the business sector had firm control of the reigns of government and collusion between Wall Street and the Fed expanded the money supply and promoted easy credit creating the illusion of an unprecedented expansion in the American economy. They were calling it a "new era" of capitalism where the old rules no longer applied. But that boom led to an inevitable bust, industrial output fell by half and a quarter of the nation's workforce sat idle (this without the comfort of a safety net).

Today we see the exact same predilection of unrestrained markets to defy the laws of gravity, circumvent rules and standard operating procedures for the purpose of amassing the largest personal fortunes possible. And we are witnessing the evaporation of this new new era before our very eyes.

All of the current remedies being applied to the crisis assume that the problem is essentially psychological; that if we can just get people to stop thinking the system is on the verge of collapse then we will be able to go back to business as usual. But unfortunately all of these prescriptions are premised on sweeping the problem under the rug of our massive federal debt. This is just another form of monetary expansion- they are just creating more money to cover the bad debts of the finance sector. They are essentially repeating the initial mistakes of the mortgage industry- offering easy credit so that nobody has to worry today about not being able to pay tomorrow. So it is all but inevitable that we will at some point face a real world reckoning for this monetary bubble, the powers that be are just hoping to allay it until after the election, even if it costs us our economy.

If we have indeed been down this road before then we should have a clear record of appropriate responses. Not everything in the New Deal was effective and the situation of the government today is different in key aspects. For one thing Roosevelt and the New Dealers did not understand the role that monetary policy played in causing the Depression and therefore did not have a coherent strategy for using the Fed as a tool, aside from consolidating power into the central governor. But of course monetary policy is a prophylactic and not likely to bring about any immediate relief to a contracted economy.

The tool they did come to rely on, via the growing influence of John Maynard Keynes, was fiscal policy. In fits and starts they began to see that large expenditures on public works could boost the economic activity that the private sector was unable to provide. The revolutionary tenet of Keynesianism was that in an economic downturn deficit spending was not only acceptable but was in fact beneficial.

In spite of the ascendancy of monetarism and its attendant revisionism, the basic premise of Keynes is accurate. World War II clearly demonstrated that enough government expenditure will bring an industrial economy back to full capacity. The irony is that conservative, monetary-oriented governments, who have continuously railed against deficit spending, are the ones who have run up the biggest deficits in American history. And they have turned fiscal policy on its head- instead of increasing deficits during recession and reducing them during expansion, they have run these deficits during prosperous times so that there is little room to maneuver in bad.

While this brings us full circle to the story of our present crisis it also highlights a new problem- there will be no fiscal option to fall back on to alleviate the symptoms of an economic contraction as there was in the 30's. Some believe this has been a deliberate strategy of conservatives to disable the liberal arsenal, but if so it will likely have backfired, because it will only have increased the hardship on the country and will further discredit Republicanism, another aspect the present will have in common with the Depression. The New Deal was fought on two fronts: recovery and reform. The record on recovery was spotty. After four years of steadily improving conditions the markets crashed again in 1937. This was due, as stated, to a poor understanding of monetary policy and a tepid commitment to public works spending. But the reform efforts of the New Deal are the much more relevant story. Indeed one reason that the captains of finance are working so desperately today to stave off a full collapse, is because of the lesson they learned from the Depression- that a full-blown financial crisis is the only time they lose control of the reigns of power and democratic oversight has an opening. My question in writing this piece is- will we be in a position to exert this democratic control if the situation demands it?

A couple of years into the Roosevelt administration a split had developed between two different philosophical approaches. On the one hand Roosevelt's initial group of academic advisors, known as the Brains Trust, were of the opinion that big concentrations of economic and industrial power were not a problem so long as the government was vested with the authority to manage and oversee their activities.

On the other side, the thinking that coalesced around Supreme Court Justice Louis Brandeis and Felix Frankfurter, the head of the Harvard Law School, and their prote'ge's, was that bigness itself was the problem and they sought to break up malignant and recalcitrant power structures.

The bigness boys offered up the National Industrial Recovery Act. This was a nod to economic central planning, which in 1933 did not yet have the weight of decades of failure under the Soviet system. It created an industrial code for each segment of the economy, i.e. shoe-making, coal-mining, retail, so that a government bureaucrat would be in charge of setting prices, wages, production rates for each of these industries.

Whether or not you subscribe to Hayek's theory of prices being signals in the marketplace, the NRA was clearly a muddled and burdensome approach. Its aim was to foster co-operation between capital, labor and consumers, but capital easily dominated that triumvirate and many monopolies flourished under the NRA. It was unanimously rejected by the Supreme Court, which was a shock for the New Dealers because this included the three liberal justices, led by Brandeis, who was intolerant of any kind of concentration of power whether in government or business.

This aspect of New Deal reform, to challenge real power, is what is especially relevant to our current situation. The initiative came from the young Harvard lawyers, "Frankfurter's Hotdogs" as they were known. Tom Corcoran and Ben Cohen were the most pre-eminent and influential of these men. Always at the top of their class and impeccable in their dedication, they had both worked on Wall Street and understood its intricacies. They had a much greater respect for constitutional viability and their work was aimed at the clear abuses of the market system.

Their first success was in mandating transparency in stock transactions. This was followed by the act that created the Securities and Exchange Commission. It can't be over-emphasized the legal skill that was required to make these bills loop-hole proof while under pressure from Wall Street lobbyists to derail or water them down. Just because the onus for the Great Depression was clearly on the shoulders of uncontrolled markets doesn't mean that any of these reforms were automatic. Each one was a battle requiring supreme effort. That these laws and agencies remained effective for over seventy years speaks to the tremendous achievement of their authors.

It was one of the few times in modern political history when the smartest lawyers were working on the side of the public good and not for the corporations. How did this anomaly come to be? While the progressive movement was in ebb during the 1920's, an abiding center of liberal thought existed in the legal and judicial community. Its wellspring could only be described as idealism, residing in unique gifted individuals. Felix Frankfurter was collecting the best minds he could find and nurturing their commitment through legal efforts to establish worker rights and individual liberties.

When Roosevelt took the White House, Frankfurter was not only an important advisor, but also the main clearing house for placing qualified, dedicated individuals into influential positions in the new government. Ben Cohen, now a nearly forgotten name, was perhaps the most exemplary of these. Socially awkward, melancholy, he was a lawyer's lawyer with an unerring sense of his moral position and duty.

His greatest achievement and perhaps the biggest struggle against entrenched power of the era, was won with the Public Utilities Holding Company Act. The holding companies had replaced the trusts of the 19th Century and the utilities industry was unregulated. The scandals surrounding these corporations were very similar to the Enron scandal of the 21st Century. One company would gain control of another which in turn would buy out another until, ten deep, the initial investor of maybe $300,000 would be in control of billions of dollars in assets. They would then capriciously raise rates to finance their next acquisition. As these schemes came crashing down consumers and small investors were left holding the bag. A very familiar scenario indeed.

After initially being flat-footed in response to the New Deal, the finance industry was back at full strength and prepared to throw everything it had into the fight against the utilities bill. Roosevelt to his credit, personally insisted on a "death sentence" clause, that mandated that companies adhere to the new regulations or be forced out of business. This made the fight even hotter. After nearly being swamped in congress the law passed after the revelation of the subterfuge the holding companies were employing in prosecuting their fight. Elmer, the Western Union messenger, testified in congress about being paid to manufacture telegrams of outrage. That sealed its passage.

The act still had to be carefully shepherded through the court challenge, and Cohen successfully argued the case himself before the Supreme Court and in so doing ended the Court's rejection of New Deal policies. The Public Utilities Holding Company Act remained on the books for seventy years, protecting consumers and regulating utilities, until it was overturned in 2005 by the Republican sponsored energy bill.

This week in America we are seeing the socialization of the finance industry's bad debt under the rationalization that all of these institutions are "too big to fail". Their size is protecting them from suffering the consequences of their irresponsible actions. If this is the case, then clearly the examples of these New Deal reforms are cogent for the public's self-interest. It has become manifestly evident that large concentrations of economic power need to be broken up. This is the essence of the challenge we face.

Concentration of power is the backbone of corporate control of our society. The rationale for finally confronting this slippery eel is staring us right in the face. Separating commercial banking from investment banking is the first and easiest of these steps. Other applied actions against the corrosive power of corporations should follow. But every step is going to be a bitter contest and we will need every weapon we can bring to bear. Brilliant, dedicated, idealistic lawyers would be one vital component.

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Doug Rogers is a composer and playwright and for many years designed ladies' sweaters. He is now a student again at Empire State College in Buffalo NY.

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