The First New Deal Was a Scheme to turn the U.S. Economy into One Massive, Government-Run System of Cartels; the NIRA Was an Economy-Wide Minimum Wage and Maximum Hour Program

In The Roosevelt Myth, John T. Flynn devotes his sixth chapter to "The Dance of the Crackpots," which describes many of the quite literally crackpot ideas that were widely discussed in Washington during the early 1930s. Unfortunately, FDR adopted one of these crackpot ideas as the primary basis of his economic policy. The central idea was based on an interpretation of the Depression that had cause and effect exactly backward. The main cause of the Depression, FDR and his advisers believed, was low prices. The Depression did not cause low prices and wages, then contended; low prices and wages caused the Depression. Therefore, the "obvious solution" to the Depression was government-mandated price and wage increases (to ostensibly increase "purchasing power"), which is what the National Industrial Recovery Act (NIRA) and the Agricultural Adjustment Act attempted to do. The former act sought to cartelize virtually every industry in America under the auspices of the federal government (while suspending the antitrust laws); the latter act sought to do the same for agriculture.

The First New Deal was essentially a scheme to turn the U.S. economy into one massive, government-run system of industrial and agricultural cartels. At a time when underemployment or unemployment of resources, including labor resources, was of tragic proportions, the focus of the government was to restrict output and employment even further with supply-reducing cartel schemes and limitations on hours worked.

The scheme was always destined to fail, of course, because of several major confusions. First, if wages are forced up by government fiat, the effect is to reduce the demand for labor, which creates more unemployment.

It is well-known that the minimum wage law causes unemployment, especially among lower-skilled workers. But at least the minimum wage law primarily applies only to entry-level employees and is therefore limited in the amount of harm it can do. The NIRA was an economy-wide minimum wage (and maximum hour) program that rendered the job-destroying effect of the minimum wage law universal.

Second, higher prices caused by a government-run cartel scheme may increase the incomes of some sellers, but only by reducing the incomes of buyers by an equivalent amount. On net, the economy is not "stimulated." The NIRA was the public policy equivalent of a Rube Goldberg machine.

--Thomas J. DiLorenzo, "Franklin Delano Roosevelt's New Deal: From Economic Fascism to Pork-Barrel Politics," in Reassessing the Presidency: The Rise of the Executive State and the Decline of Freedom, ed. John V. Denson (Auburn, AL: Ludwig von Mises Institute, 2001), 430-431.