This piece is a continuation of “People’s Republic of China: Socialist, or Capitalist?”. Read it first! In the US, government intervention in business and economics has become progressively more pronounced, especially in the 20th and 21st centuries. One of the most significant government interventions in US history was the New Deal, implemented by Franklin Roosevelt after the Great Depression. Prior to the New Deal, the US government experimented with nationalization of private industry, primarily in railroads. The government’s most famous form of intervention pre-New Deal was in Anti-Trust. The government broke up railroad companies, the Chicago beef trusts, and most famously of all, Rockefeller’s Standard Oil Company. Trusts, by the way, is another word for cartels; cartels are leaders of competing companies who get together and fix prices and wages so as to halt competition and remove pricing power from both consumers and labor. Much more on that also in Upton Sinclair’s, The Jungle. A whole list of anti-trust lawsuits were brought against monopolies by the federal government after the Sherman Act was passed in 1890, and the Clayton Act in 1914.
“We have here the problem of bigness…Industrial power should be decentralized. It should be scattered into many hands so that the fortunes of the people will not be dependent on the whim or caprice, the political prejudices, the emotional stability of a few self-appointed men…That is the philosophy and the command of the Sherman Act. It is founded on a theory of hostility to the concentration in private hands of power so great that only a government of the people should have it.” [Dissenting opinion of Justice Douglas in United States v. Columbia Steel Co.]
Not all Anti-Trust cases brought against companies succeeded as shown above in United States vs. Columbia Steel. With that said, Justice Douglas’ dissenting opinion is fascinating. He stresses the importance of decentralization. Why? Because no central authority, whether it be government, or otherwise, is a good thing. Justice Douglas points us to the flaw in capitalism that plagues us even today, and that is the concentration of wealth and power. He’s telling us, quite simply, that capitalism in the hands of a few businessmen is just as bad, if not worse, as a government in the hands of socialists.
Cartelization & NIRA
Decades after the the Sherman Anti-Trust law was passed, America seemed to swing the other way on taming corporate power. In the process of fighting through and emerging from the Great Depression (of which no other country had it worse at the time, other than Germany), American business had become fragile. There was a consensus among government that it needed protecting. According to the National Industrial Recovery Act, government thought that American business needed protection from capitalism itself. The emergence of Industrial powers in Europe, Russia (National Economic Policy i.e. temporary state capitalism, was working) and China, gave credence to the thought that government needed to assist industries it considered vital to national interests. It was nationalism’s effect on economics that drove this, and it was also a strong socialist/communist movement in the US in the 30’s that powered it.
A great piece by Seymour Martin in the Hoover Digest, titled, “How FDR Saved Capitalism”, talks about the politics behind the New Deal. The 1930’s were one of the few times in history when the two-party system in the United States was under considerable. The threat came from Socialism. Socialist, and even Communist, parties were winning seats in state and local election across the country, especially in Minnesota, Wisconsin, and New York. Upton Sinclair, the author of the book, The Jungle, ran for the governorship of California on a Socialist platform. In Minnesota in 1932, the Farmer-Labor Party won the governorship and five house seats. The Communist Party endorsed President Roosevelt in 1936. It placed a candidate in elections, as part of an electoral coalition, to get Democrats elected. That’s right, Roosevelt had and accepted the support of the Communist party to take votes away from Republicans. With that said, the Hoover Digest article claims that by appeasing the socialist movement, and its followers, Roosevelt prevented them from gaining any foothold at the federal level, and thereby saved capitalism in the long-run. With that said, the New Deal Coalition did, and continues to have, an impact on economics and business, to this very day.
As part of the New Deal, and a mandate to prevent another Great Depression at all cost, Franklin Roosevelt proposed, and the congress passed, the National Industrial Recovery Act. The act is one of the lesser known components of the New Deal, but important to understand in the context of American Socialism. The act basically contradicted the Sherman Anti-Trust Law. It encouraged companies to get together and negotiate out competition from the market. This meant companies could fix prices. This was illegal under the Sherman Anti-Trust Law. In Adam Smith’s, The Wealth of Nations, also known as the capitalist manifesto, he warned that collusion amongst competitors was to be discouraged by laws enacted by the government. It is a grave threat to capitalism when producers can get together to fix quantity and price of supply. Despite, the most successful experiment in capitalism, the United States of America, passed a law in direct contrast to it. It should not go without mention that Franklin Roosevelt was the only president in United States history to serve more than 2 terms in office. His entire presidency was a period of great crisis for the United States, and the world. During crises, we find the abundant evidence of power grab. Whether it be the rise of the military industrial complex or the proliferation of government bureaucracy, crises create gaps often filled by the strong-men of government.
NIRA did not last long. It was deemed unconstitutional by the Supreme Court in a decision known as Schechter Poultry Corp. vs. United States. Schechter Poultry Corp refused to give in to the NYC Chicken Cartel that had socialized the chicken business in NYC under NIRA. The regulations and codes put in place by the cartel meant the consumer’s right to choose a chicken at the butcher was taken away. The Schechter Brothers had built a business serving the Jewish community in NYC with kosher meat, but the business code implemented by the chicken cartel meant that chickens could not be slaughtered and sold by “grade”, This meant that all chickens were the same, and the chicken that you were served was the chicken you simply had to accept. The idea was to prevent consumer demand from influencing prices on one chicken versus another. The following from Forbes summarizes the issue, and explains how the kosher butchery was made illegal by the codes implemented with NIRA as pre-text:
“Their specialized company and unique clientele were the type of aberrant business that the NYC chicken cartel was ill equipped to deal with. Under the “Code of Fair Competition for the Live Poultry Industry” for NYC, the Schechter brothers’ business model was basically illegal. In order to prevent “destructive price cutting” the code prohibited “killing on the basis of grade.” In other words, customers did not have the right to “make any selection of particular birds.” As silly as it sounds, the code required the butcher to reach into the chicken coop and grab the first chicken that touched his hand, any specific selection was prohibited. If a customer wanted to buy a half coop, the butcher could only break the coop in half. Because kosher rules require that unhealthy birds be discarded, the code essentially made kosher butchery illegal.” (From Forbes)
Notice above the line stating that consumers did not have the right to make a selection of a specific bird. Sounds very Soviet-esque to me. It is the forced commoditization of consumer demand; this concept reduces the market to one choice, thereby eliminating competition, and making price stability. Forced commoditization is not compatible with capitalism; it is no wonder that NIRA did not last long. With that said, other New Deal programs did last. After NIRA, Franklin Roosevelt turned his focus toward the farming, agriculture, and dairy industries. The cartels of the dairy and raisin industries made possible by the New Deal still affect the way business is done in dairy and raisin farming. Competition in those industries from non-cartel businesses, is nil. Those industries have been commoditized. What is left of those industries is two-fold,
- State sponsored monopolies,
- Taxpayer subsidized cash cows for the business heads of those monopolies.
You might ask, why should we care about competition in dairy and raisin farming? America’s economy is no longer dependent on farming, dairy or otherwise.The modern economy, and Gross Domestic Product ( a measure of economic output) is dominated by industrial, service, and technology companies. Farming accounted for 1% of US GDP in 2015.
That point is well-taken; but I argue that clandestine legislation passed because “no one cares” is exactly the thing we should be concerned with.
AMAA stands for Agricultural Marketing Agreement Act. It was NIRA, for dairy farmers. Here’s a brief history on it from the a Dairy Farmers news site:
In 1937, Congress passed the Agricultural Marketing Agreement Act (AMAA) which established the Federal Milk Marketing Orders (FMMO) that created equal pay for farmers through pooling within the orders to create a uniform price for milk regardless as to how the milk was used. The provision in 7 U.S.C. Section 608 (c) 18 of the 1937 AMAA mandated that the Secretary of Agriculture consider regional production costs in the raw milk pricing formula. FMMOs still exist as a result of the 1937 AMAA but the “cost of production” part has been ignored and scorned for the last 37 years.
Notice the writer of the above excerpt is upset; he argues the AMAA failed to take into consideration cost of production, and how it varies by region. The effect is therefore to make dairy farming impossible in certain parts of the country, where cost of production is higher. Dairy farming is quite an entrenched business in the state of Nevada. A dairy farmer named Hain Hettinga from Arizona came to realize that when he was put out of business by the federal government. Hain Hettinga produced and bottled milk on his Arizona dairy farm. As a small dairy farmer, he decided to integrate vertically as a way to compete with large dairy farmers, such as Dean Foods. By integrating vertically the production and bottling of milk, he took advantage of a loophole in the AAMA that meant he did not have to pay into a tax established by the AAMA to equalize costs for all producers. Not long after, the likes of Dean Foods and other Nevada dairy farmers, complained to their Senator, Harry Reid. Senator Harry Reid took action to help his dairy farming constituency. He wrote up a new Milk Act, one that closed the so-called “producer-handler” loophole. EXCEPT, he kept it open for you guessed it, Nevada dairy farmers. As Forbes puts it,
“Lobbying money and campaign cash flowed. In the end, Hettinga was outmatched. Without even a committee hearing, the new milk bill was brought up by Reid to a nearly empty Senate chamber and passed by “unanimous consent,” which is Senate-speak for rubber-stamping backroom deals. The bill closed the Hettinga “loophole” but, ironically, or perhaps expectedly, opened up the exact same loophole for Reid’s Nevada producers.”
This type of government intervention sets a precedent, and in this case, continues a precedent started with the New Deal. It’s not a surprise that after the Harry Reid’s milk bill was passed, Sun-Maid, the largest raisin producer in the world, came out in praise of it. The RAC (Raisin Administrative Committee) is the raisin industry equivalent of the AMAA, and it too was created during the New Deal era. Sun-Maid said that industry participants should be allowed to…
“collectively decide whether to regulate their respective industries. It benefits the entire raisin industry, including petitioners, by avoiding price volatility.”
Dean Foods and other “Big Dairy” farmers in Nevada, built large facilities after Harry Reid’s Milk Act was passed. They now have pricing power, exactly what Hein Hettinga from Arizona had, and they are scaling it massively. In addition, they have scaled massively the “producer-handler” business model, the business model that Hein Hettinga discovered, before big dairy stole it, with the help of the US Senator from Nevada. I’ll finish this on an interesting note; it was Hein Hettinga’s innovation that started this whole saga; he triggered a sequence of actions that ended up in laws being changed at the federal level. This is the power of small business innovation. It’s unfortunate that the innovators have to be sacrificed, but that is what socialism ultimately does.