Crisis and Command: A History of Executive Power from George Washington to George W. Bush (37 page)

Roosevelt's revolution radically shifted the balance of power among the three branches of government as well as between the nation and the states. Under the New Deal, Congress delegated to the executive branch the discretion to make the many decisions necessary to regulate the economy. Congress did not have the time, organization, or expertise to make the minute decisions required. The New Deal did not just produce a federal government of broad power -- it gave birth to a President whose influence over domestic affairs would begin to match his role in foreign affairs. When the Supreme Court stood in the way of the new administrative state, Roosevelt launched a campaign to increase the membership of the Court to change the meaning of the Constitution. When political parties challenged the New Deal, Roosevelt concentrated power in the executive branch, which undermined their ability to channel benefits to their members. The New Deal produced a Presidency that was more institutionally independent of Congress and more politically free of the parties than ever before.
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The Great Depression spawned foreign threats, too. Economic instability in Europe set the conditions for the rise of fascism first in Italy, then in Germany and Japan. Roosevelt realized early that American interests would be best served by supporting the democracies against the Axis powers, but he was confronted by a nation wary of another foreign war and a Congress determined to impose strict neutrality. FDR used every last inch of presidential power to bring the nation into the war on the side of the Allies, including secretly coordinating military activities with Britain, hoping to force an incident with Germany in the North Atlantic, and pressuring Japan until it lashed out in the Pacific. FDR's steady leadership in the face of stiff congressional resistance stands as one the greatest examples of presidential leadership in the last century, one that redounded to the benefit of the United States and the free world.

THE NEW DEAL AND THE COURTS

FDR ENTERED OFFICE in the midst of the worst economic contraction in American history. Between the summer of 1929 and the spring of 1933, nominal gross national product dropped by 50 percent. Prices for all goods fell by about a third; income from agriculture collapsed from $6 billion to $2 billion; industrial production declined by 37 percent; and business investment plummeted from $24 billion to $3 billion. About one-quarter of the workforce, 13 million Americans, remained consistently unemployed, and the unemployment rate would remain above 15 percent for the rest of the decade. More than 5,000 banks failed, with a loss of $7 billion in deposits. From the time of the crash in October 1929 to its low in July 1932, the Dow Jones Industrial Average fell more than 75 percent.
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It was not a problem caused by famine or drought, dwindling natural resources, or crippled production; crops spoiled and livestock were destroyed because market prices were too low.

Americans were losing faith in their political institutions to solve the crisis. Though the causes of the Depression were complex, some, Roosevelt included, blamed "economic royalists," financiers and speculators, and the rich. Economists and historians have argued ever since over the causes of the Depression. Little evidence seems to support the claim that the stock market crash triggered the Depression -- stock markets have sharply declined since then, most recently in 1987, with no underlying change in economic growth.

In their classic
Monetary History of the United States
, Milton Friedman and Anna Schwartz argued that a normal recession deepened into the Great Depression because the Federal Reserve mistakenly responded to the banking panic by restricting the money supply. A deflation in prices followed, which led to a steep drop in economic activity. Ben Bernanke, the current Chairman of the Federal Reserve, elaborated on this theme by arguing that the Fed's deflationary banking policies tightened the credit available to businesses and households, further suppressing economic activity.
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Others argue that the Great Depression must be understood within the context of the international economy, which witnessed bank failures and recession in Germany and France, defaults on World War I loan and reparation payments, abandonment of the gold standard, and the dumping of agricultural products on world markets.

Our understanding of the causes of the Great Depression has improved, thanks to the scholarship of the last 40 years, but even to this day there is no clear consensus. To the Americans who lived through it, the collapse of the economy was bewildering, confusing, and without historical precedent. The Hoover administration's policies did not help, and might have made matters even worse. As historians have realized, Hoover did not adopt the aloof, hands-off attitude claimed by his political opponents. During his administration, Congress doubled public works spending, and the federal budget deficit rose to $2.7 billion, at that time the largest in American peacetime history. He pressed business executives to maintain employment and wages, and experimented with policies, such as the Reconstruction Finance Corporation's emergency loans to businesses, which would set important examples for the New Dealers.
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But Hoover's initiatives were mere stopgaps that were swamped by other policy mistakes. Though he had initially asked for tariff reductions, Hoover signed the notorious Smoot-Hawley Act, which raised rates and killed international trade flows. Following the conventional economic wisdom of the day, Hoover sought to balance the budget with tax increases at a time when the economy needed fiscal stimulus. As Milton Friedman and Allan Meltzer have separately argued, the Federal Reserve pursued a deflationary strategy, cutting off the economy's oxygen, when increases in the money supply were called for.
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Some of Hoover's failure rests on his vision of the Presidency. He refused the role of the President as legislative leader, resisted the expansion of the federal agencies, and opposed national welfare legislation -- all on constitutional grounds.
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FDR's vision of the office could not have created a sharper contrast. FDR led the nation through a frenzy of experimentation in policies and government structure without parallel in American history. There appeared to be no overall philosophy behind the New Deal, which comes as little surprise, given the confusion that prevailed at the time over the causes of the Depression.

Without any true understanding of the reasons for the collapse, the New Dealers tried anything and everything. Thinking that overproduction was the culprit, some recommended the cartelization of industries to reduce supply and increase prices. Others who blamed underconsumption advocated public jobs programs and welfare relief. Some believed that the budget deficit was the problem, and urged an increase in taxes and cuts in spending. Some thought international trade was a cause, and advocated both more flexibility in trade negotiations and the dumping of excess agricultural production overseas. Pragmatic and political (he had been a professional politician for most of his life), and unsure about the true causes of the Depression, Roosevelt flittered from idea to idea. Some had the effect of canceling each other out -- public works projects sponsored by the National Recovery Administration had to buy raw materials at prices inflated by controls imposed by the Department of Agriculture.

Throughout all the experimentation and expansion of government, the one thing that did not change was the focus on the Presidency. FDR became the father of the modern Presidency by moving the chief executive to the center of the American political universe. FDR drafted the executive's wartime powers into peacetime service, but without calling for any formal change in the Constitution. In his First Inaugural Address, he declared that "our Constitution is so simple and practical that it is possible always to meet extraordinary needs by changes in emphasis and arrangement without loss of essential form." What FDR wanted was access to the constitutional powers granted to the President during time of emergency. He promised to seek from Congress "broad executive power to wage a war against the emergency, as great as the power that would be given me if we were in fact invaded by a foreign foe."
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FDR's expansion of the powers of the Presidency, both political and constitutional, would grow from this basic theme -- the economy and society would henceforth be regulated in ways that were once considered suitable only for war.

The nation got a taste of what FDR meant when, on his second day in office, he issued the second emergency proclamation in American history. During the period between FDR's election and his inauguration, a massive run on banks had forced many to close their doors or stop lending. Invoking the Trading with the Enemy Act, FDR imposed a national banking holiday and prohibited all gold transactions.
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Roosevelt's use of the Act was questionable, to say the least. Congress had passed the Act in 1917 to give the President broad economic powers during wartime or national emergency, but not to regulate the domestic economy in the absence of a foreign threat. Without the statute, FDR was left to act under an unspecified presidential emergency power. At the end of the banking moratorium, Congress convened in special session and passed the Emergency Banking Act, which gave the federal government powers to control gold and currency transactions, to own stock in banks, and to regulate the reopening of the banks. Because the Roosevelt administration had only finished drafting the legislation the night before, a rolled-up newspaper substituted as a prop for an actual copy of the bill's text, and the House spent only 30 minutes discussing the legislation.

Roosevelt set a precedent for his successors by rushing a torrent of legislation through Congress in his first 100 days. The National Industrial Recovery Act (NIRA), the Agricultural Adjustment Act (AAA), the Banking Act, the Emergency Railroad Transportation Act (ERTA), and the Home Owners Loan Act (HOLA) all granted FDR extraordinary economic powers to fight the Depression. Their enactment witnessed the breakdown of the sharp distinction between the executive and legislative branches. The executive branch took the primary responsibility for drafting bills, Congress passed them quickly with a minimum of deliberation (sometimes sight unseen), and the laws themselves delegated broad authority to the President or the administrative agencies.
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Through the agencies, the executive branch would impose an unprecedented level of centralized planning over the peacetime economy. The AAA, for example, gave the executive the power to dictate which crops were to be planted. Under the NIRA, agencies enacted industry-wide codes of conduct, usually drafted by the industries themselves, to govern production and employment. New Dealers sought to address falling prices for commodities by setting higher prices, reducing competition, and limiting production.
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Little attention was given to constitutional problems with the legislation, which threatened to exceed the Supreme Court's limitations on federal power. Laws like the NIRA or the AAA pressed the Constitution's grant of authority to Congress to make laws "to regulate Commerce... among the several States." Other laws, such as the new public employment and unemployment relief programs, raised constitutional issues about the national government's taxing and spending authority, but again these were only problems of federalism, not of presidential power. They mirrored the steps that the national government had taken to mobilize the economy for military production while reducing domestic consumption -- many of the early programs of the New Deal were modeled on World War I efforts. As William Leuchtenberg has observed, war became a metaphor for the calamity brought on by the Depression, and FDR and his advisers turned to the wartime experience for solutions. "Almost every New Deal act or agency derived, to some extent, from the experience of World War I."
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FDR's legislative whirlwind set in motion a series of events that culminated in confrontation with the Supreme Court. Even though the President would suffer politically and constitutionally, he would eventually prevail. The roots of the conflict stretched back to the Progressive Era, when the Justices had held that the Interstate Commerce Clause did not allow regulation of manufacturing or agriculture within a state. Under the theory of dual federalism, the Court had blocked antitrust enforcement against a sugar-refining monopoly in 1895 because the refining itself did not cross interstate lines.
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In 1918, it had held unconstitutional a federal law that prohibited the interstate transportation of goods made with child labor. Even though the federal ban applied only when the product moved across state lines, the Court held that "the production of articles, intended for interstate commerce, is a matter of local regulation."
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When Congress attacked child labor again with a 10 percent excise tax, the Court blocked that, too, on the ground that Congress could not use a tax to achieve a prohibited end.
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The Court matched its limits on federal authority to regulate the economy with similar restrictions on the states. Where Congress could only exercise the powers carefully enumerated in Article I, states enjoyed a general "police power" over all conduct within their borders. The courts, however, read the Fourteenth Amendment -- which forbids states from depriving individuals of life, liberty, or property without due process -- to block a great deal of state business regulation. In
Lochner v. New York
(1905), the Court struck down a state law that prohibited bakers from working more than 60 hours a week or 10 hours per day. According to the majority, the Constitution protected the bakers' individual right to contract to work as much as they liked.
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The state could not adopt economic legislation to redistribute income within the industry (the law favored established bakeries at the expense of immigrant bakers), or infringe the rights of free labor. In dissent, Justice Oliver Wendell Holmes famously accused the majority of following its preferences rather than the law. "A Constitution is not intended to embody a particular economic theory, whether of paternalism ... or of laissez faire," Holmes memorably wrote. "The Fourteenth Amendment does not enact Mr. Herbert Spencer's
Social Statics.
" From the time of
Lochner
to the New Deal, the Court invalidated 184 state laws governing working hours and wages, organized labor, commodity prices, and entry into business.
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