Annual EBHS Conference, 39th Annual Economic and Business History Society Conference

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“Why Did the Roosevelt Administration Think Cartels and High Wages would Promote Recovery from the Great Depression?”
Jason Taylor, Bernard C. Beaudreau

Last modified: 2014-05-19

Abstract


It seems that whenever the authors have discussed the National Industrial Recovery Act of 1933, whether at academic conferences or in the classroom, some audience members ask some version of the question embedded in the title above.  After all economic theory suggests that cartels reduce output and lower economic welfare—quite the opposite of a policy designed to promote recovery.  Furthermore, in the presence of unemployment, which was unprecedentedly high during the Great Depression, 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 short, the two major policies of the NIRA fly strongly in the face of orthodox economic theory today.  As the authors have heard countless times, “Didn’t Roosevelt and his advisors understand this?” We are confident that other economists discussing the NIRA have likewise been face with such questions. A standard quick response is that the Administration thought that cartels would prevent “ruinous competition” and believed that higher wages would increase aggregate demand.  In the authors’ experiences, such an answer has still left very puzzled and dissatisfied looks upon the questioners’ faces. Furthermore, this short answer is woefully inadequate in terms of the complex arguments (whether they were in fact right or wrong) that were behind the legislation. This paper hopes to provide a more satisfactory understanding of what motivated the policy that was at the heart of the New Deal—the NIRA.