Take it From the 1938 Election Results: Ben Bernanke Knows Nothing About the Depression

SUMMARY:

• Ben Bernanke's conclusion that the New Deal worked, and, thus justifies bold action on the part of central banks and government during a crisis, is wrong. 
• Last week's article showed the best economic performance of the Depression era came immediately after the NRA was declared unconstitutional. 
• This week's discussion will show New Deal labor policies helped to spark massive labor unrest and a spectacular collapse of the economy, eight years after the stock market crashed.
• The so-called 'Depression within the Depression,' from August 1937 through March 1938, led to a more violent economic contraction than the one which followed the October 1929 stock market crash. 
• The best evidence of the New Deal's spectacular failure to end the Depression is the 1938 election. 
• After nearly 6-years of New Deal policies, New Deal parties lost nearly as many seats (85) as the Republicans had in 1932 (100). 

DISCUSSION:
In last week's article, Ben Bernanke's conclusion that FDR's 'bold experiments' worked to end the Depression was discussed.  It was shown the strongest economic performance of the Depression era came in the immediate wake of the New Deal's signature policy initiative - the National Industrial Recovery Act (NRA) - being declared unconstitutional in the Schecter Poultry case.  Far from helping the economy recover, the New Deal clearly played a role in holding the economy back!  This week's article will review another aspect of Ben Bernanke's incorrect conclusion on the efficacy of the New Deal bringing the Depression to an end.  Specifically, the labor unrest spawned by New Deal policies that brought economic activity to a grinding halt. 

FIGURE 1

In July 1935 the New Deal's signature labor legislation, the Wagner Act, passed, see Figure 1.  Like many laws today, its real impact would not be known until the law was implemented.  On its face, the law did not seem especially radical, particularly by today's standards.  It gave labor the right to organize and form unions.  The criticism of FDR's depression era labor policies is not a criticism of the labor movement itself.  Instead, the criticism is based on the fact the government's labor policy of the mid-1930s was not to serve as a dispassionate, objective moderator of disputes between labor and management, but to actively intercede on the behalf of labor in these disputes. 

The National Labor Relations Board (NLRB), which was created by the Wagner Act, would take labor disputes from the courts of law and place them in an inherently political environment where labor could be expected to - and did - dominate.  In a time, marked by massive unemployment - which, by definition, meant labor prices were too high - a politically emboldened organized labor movement would unhinge itself from the economic realities of the day and embark on the largest campaigns of strikes and labor unrest in the country's history. 

The General Motors Sit-Down Strike is a particularly telling example of the labor strife that plagued the economy at this time.  Even though the economy was still in the midst of the Depression, GM was still in business, still manufacturing cars and still employing tens of thousands of workers.  At the time, GM did not have a unionized workforce.  The United Auto Workers (UAW) was of course eager to organize GM workers.  UAW leadership soon discovered the Achilles heel of the entire GM production organization and would use this knowledge in their attempt to unionize GM. 

The UAW realized all GM production relied on the output of a tiny number of factories.  These factories built the dies used to stamp the body panels of all the different cars and trucks made by GM.  Union leadership then organized a sit-down strike at Fisher Body Plant #1 in Flint, Michigan. (1) Body Plan #1 contained one of the two sets of these critical dies.  If the Flint plant shut down, then nearly all other GM plants would be forced to shutdown or curtail output as well. 

In a sit-down strike, workers physically occupy company property.  In the case of the GM sit-down strike this was of course Fisher Body Plant #1.  By physically occupying the factory, the owners of the factory are unable to use their private property.  A sit-down strike is little different than returning to your home, finding another family living there, who then, not only refuses to move, but prevents you from living there as well.  A strike of this type has no legal standing whatsoever.  For many people of the Depression era, the only thing more outrageous then the sit-down strike itself was the reaction of the government, both state and Federal. 

A court order instructed the workers to be removed from the factory.  Michigan Governor Frank Murphy simply ignored the court's instruction and, instead, directed the National Guard to protect the workers occupying the factory!  FDR then refused to intervene in the strike.  Of course, politicians like Murphy and FDR looked at the strike through a purely political lens.  The number of workers was far greater than the number of factory owners.  Murphy, FDR and all the politicians who followed in their wake thought little about the long-term implications from the rule of law being undermined, and a privileged political constituency being free to flout the law when it suited them. 

However, business owners all over the country looked at the strike and began to adjust their actions accordingly.  After recovering from the shock of the government refusing to enforce its own laws, businesses all over the country pulled their collective heels in even further.  Why pour capital back into plant and equipment when at a moment's notice these things could essentially be confiscated by a politically protected mob running riot.  

In what came to be called the 'depression within the Depression,' the economy suffered a spectacularly violent collapse between August 1937 and March 1938.  In August 1937, stock prices hit 190 but fell to 97 by March 1938, a decline of 49%.  The Index of Industrial Production - baseline of 100 for 1923-1925 - fell from 115 to 76 in the same period, a decline of 34%.  While the overall declines of these indices from the September 1929 peak were greater, the August 1937 crash remains the most violent contraction in the economic history of the United States. (2)

Fittingly, FDR would pay a heavy political price for the spectacular collapse of the economy during the period 1937-1938, a collapse his policies did much to engender.  People all over the country were shocked by the brazen lawlessness the labor unrest of the time was rife with.  Even if people didn't associate the unrest as a consequence of FDR's overall labor policy, (the Wagner Act and NLRB), people couldn't understand FDR's refusal to enforce the law.  By the November 1938 elections, FDR had been in office for almost six years.  The majorities he enjoyed in Congress from 1933 - 1937 were some of the larges majorities on record.  Outside of the temporary defeats at the hands of the Supreme Court regarding aspects of the National Industrial Recovery Act (NRA), FDR was more or less able to do as he pleased with the economy. 

The simple, immutable fact historians who credit FDR for ending the Great Depression ignore is, at the time of the 1938 elections, the economy was nearly as bad as it was after the stock market crashed nine years earlier.  Moreover, the economy had failed to respond to six years of New Deal medicine.  While these observations are completely lost on historians and Ben Bernanke, they were front and center to the voters in 1938.  In 1938, after six years of FDR, the Democrats and other pro-New Deal parties lost nearly as many House seats (85) as the Republicans had in 1932 (100).  See the table below and note that only Republican and Democrat party affiliations are shown.

Ben Bernanke is supposed to be an expert on the Great Depression.  Don't be fooled by his Harvard and MIT degrees - both of which are in economics - he doesn't know the first thing about it.

Peter Schmidt
Sugar Land, TX
January 31, 2021

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ENDNOTES:
1.  The site of Fisher Body Plan #1 is now a pharmacy. 

2.  Benjamin Anderson, Economics and the Public Welfare, Liberty Press, Indianapolis, 1979, p. 430