UNIVERSITY OF MELBOURNE

THESIS FOR THE MASTER OF ARTS

by

JOSEPH BELBRUNO

SUBMITTED TO THE DEPARTMENT OF HISTORY

on 5

SUPERVISOR:

SEPTEMBER, 1986

DR. STUART MACINTYRE

THE SOCIETY OF CAPITAL:

AN INTERPRETATION OF THE NEW DEAL 1932-40

TABLE OF CONTENTS
Page No.

ACKNOWLEDGEMENTS
INTRODUCTION

CHAPTER 1

BEFORE THE DELUGE - BIRTH OF THE SOCIETY OF CAPITAL

APPENDIX

37

STATE-FORM, CRISIS AND CYCLE

CHAPTER 2

56

MONETARY AND FISCAL POLICIES OF THE NKW DEAL

CHAPTER 3

84

WORKERS AND CAPITAL IN THE NEW DEAL

CHAPTER 4

118

THE NEW DEAL AND THE NEW ASSET OF CAPITALIST INSTITUTIONS

CONCLUSION

138

BIBLIOGRAPHICAL ESSAY

143

ACKNOWLEDGEMENTS

Six years ago, I attended a series of lectures on 20th Century French

history.

It was the first time that I had studied political history, but soon I

realized that there was an uncanny predictability about that history.

The

failure of the Blum Government, in particular, appeared to have been

predetermined by the laws of institutional reality.
these

~laws'

as the categories of political economy.

Slowly, I began to identify

I owe that realization,

this thesis, and even my recent admission as a Ph.D. student to the Faculty of
Economics and Politics at Cambridge University, to the intellectual openness and
excellence of my teachers in the History Department of Melbourne University.
This thesis is dedicated partly to them - I only wish that they can be proud of
it.

Special thanks :nust go to my Supervisor, Dr. Stuart :iacint:rre,

3.

scholar whose practical intelligence helped greatly with the research and
..rri ting oi the thesis..

'D.anuscript.

Thanks :nust go also to 3ue Soltys 'llho cyped ::he

INTRODUCTION

"Epimenides did not practise divination about the future;

only about the obscurities of the past 1

With this statement Aristotle gives us a rare glimpse into the earliest
origins of historical thought.

The possibility of 'divining the past', which

must sound quaint to modern ears, was quite familiar to Greek authors.

Indeed,

they believed that Historis was the daughter of the blind prophet Teiresias almost as if to lay stress on the relation between present and future and its
dependence on the past.

Epimenides is said to have used his knowledge of the

past to purify the souls of his contemporaries and allow them to act freely in
future.

This essay also is an exercise in historical interpretation:

divination of the past.

of human beings;

it is a

The work of interpretation can only inform the actions

it cannot hope to determine them like any Philosophia Perennis.

But interpretation is vital to those who wish history to remain a crucible of

political action rather than to become a receptacle of sterile antiquities.
well known study by Theda Skocpol on the New

"'I

Deal,~

The

among others, shows that

it is possible even for a thesis of similar length to ours, wholly based on

published sources, to make original contributions to this topic.

Such studies

are all the more defensible when applied to those periods that have been
investigated in great detail and for which there is ample documentation.

1.

Aristotle, Rhetoric, I, 1418-21.

2.

"Political Response to Capitalist Crisis:

Nee-Marxist Theories of the State

and the Case of the New Deal", in Politics and Society, Vol. 10, No. 2
(1980), pp. 155-201.

- 2 -

The New Deal- that is, the period of Franklin D. Roosevelt's presidency
that runs from 1932 to 1940 - has received much attention from historians, and
theories have abounded as to its real significance.
understandable:

Their concern is

the New Deal was a pioneering political response, however

improvised and tentative, to the catastrophic economic crisis of the 1930s that
swept away the old capitalist order with its self-regulating market and negative
State.

For the first time in its history, the government of the United States

sought to regulate the capitalist economy, deploying for the purpose a vast
array of administrative agencies that transformed it into a powerful centralized
State.

The problem with nearly all existing accounts of the period is that they

run faithfully along the conceptual course set by capitalist relations of

production - a fact not confined to the more apologetic works that highlight the
'positive' reforms of the ,Roosevelt Revolution' , 3 but extending to those New
L~ft

accounts that accuse the New Dealers of not going far

enough.~

Historians have construed the social upheavals of the 1930s as manifestations

or

social progress rather than as outcomes of a new balance of forces in the class
struggle.

The

~lew

Deal as a. deliberate, conscious program of

capita~: .:;t

reform;

Roosevelt as the democratic-progressive leader of enlightened public opinion,

'the Keynesian Revolution' as the final victory of public interest over private
greed - these are only some of the myths disseminated by students of the period.
Chief culprits are those prosopographical interpretations that see the New Deal,
and history tout court, as the result of decisions taken by powerful
individuals.S

Next come those studies - including a great part of labour

3.

Cf. M. Einaudi, The Roosevelt Revolution, London, Constable, 1959.

4.

For instance, G. Kolka, Main Currents in American History, New York, Harper,
1976.

5.

First among them is A. Schlesinger Jnr.'s The Age of Roosevelt, Boston,

Houghton Mifflin, 1959, 3 vols.

- 3 -

history - that see the New Deal as an attempt to develop political institutions
adapted to the needs of an industrial civilization.6

On all sides, the central role of the working class in the dynamic of
capitalist development has been overlooked because historians have studied the
working class in the role assigned to it by capital, as labour-power.

When

capitalists purchase labour-power, they imagine that they are buying just
another commodity or exchange-value, whereas in fact they are buying the source
of exchange-value, the living human activity of workers.

Here is the

ineluctable antagonism that characterizes the wage relation (the purchase of

labour-power), despite all capitalist attempts to present it as a 'just
exchange' - as if the dead, objectified labour embodied in commodities could be
exchanged with living labour!

Once human labour is reified as labour-power,

industrial capitalism, which is a set of definite social relations of

production, is reduced to the technical-neutral progress of 'industrialization',
of 'the forces of production' - as if the latter were not the expression of the
former, as i the capitalist machine did rrot contain the command of the
capitalist!

It is to avoid these pitfalls that we have adopted a Marxist method

of historical interpretation in which individuals are merely the carriers of

social relations and alienated labour is the subjective essence of capital.

If

capital is alienated labour, then the latter must be logically and historically

6.

Latest among these is B.D. Karl's The Uneasy State, Chicago, Uni. of Chicago
Press, 1983.

- 4 -

prior to the former; only from this perspective is it possible to write the

workers~ history of capitalism.?

The collapse of the Keynesian economic order in the 1970s has reminded
us of the historical limitations of the mixed economy created forty years
earlier.

Conservative economists of all creeds have pilloried the New Deal to

exorcise the demons of the Depression, to denigrate the interventionist welfare

state and pour scorn on it as the prototype of the inflationary regime, and to
hail thus the advent of 'free-market conservatism'.

This conservative offensive

affords another justification for a fresh interpretation of the New Deal because
it calls for a reappraisal of the relationship between state and economy.

The

line that connects the wage relation to the State-form may be long, but it is
solid and continuous; tracing it is crucial to the confutation of theories that
separate artificially

~the

State' from 'civil society' or

~the

economy'.

This

separation, shared by such Marxist theories of the State as instrumentalism and

functionalism, finds its real source in the commodification of labour which
makes the economy appear as an apolitical and ahistorical 'base' on which is
founded a political and ideological 'superstructure'.

Instrumentalism

privileges 'superstructural' interpersonal relations between private capitalist

and state officials, from politicians to civil servants, to explain the procapitalist behaviour of state institutions.

But, as the name itself suggests,

this theory tends to treat the state apparatus as a mere 'instrument', an 'empty

7.

The full outline of our theoretical-practical position as applied to the New

Deal is in A. Negri et al., Operai eState, Milano, Feltrinelli, 1972.

Of

more general scope are the two classic works of the Italian School, M.
Tronti~s

Operai e

Capi~ale,

Torino, Einaudi, 1971, and R. Panzieri's Lotte

Operaie nello Sviluppo Capitalistico, Torino, Einaudi, 1973.

- 5 -

vessel' that may be filled with pro-capitalist or pro-worker contents, depending

on the personnel engaged.

According to it, then, there is no intimate, organic,

or 'functional' link between the economic base and the political superstructure.
This is where functionalism steps in to stress precisely the existence of such a
link.

Yet, because functionalists accept uncritically the commodification of

labour, they still postulate an economic base from which the political
superstructure is 'relatively autonomous'. 8

Even Skocpol's pluralist

eclecticism, with its insistence on the 'pecularity' of U.S. history and the New
Deal, is founded on this historically false distinction.

These theories thrive on the banal dichotomy between the rationality of

capitalist production and the irrational anarchy of distribution; their
proponents forget that distribution, just like the State-form, is a direct
result of the mode of production because the embryonic political relation - the
wage relation - is located in the factory, in the sphere of production, not in
that of circulation, in 'society' at large.

That is why we prefer to use the

phrase 'State-fonn' to indicate the historic trans-formations of :apitalist

state institutions, their impact on 'society', as imposed by the wage relation
springing from within the 'factory'.

Thus, we avoid from the outset the

rationalist trap in which are caught all those who hypostatize 'the State' and
'civil society' or 'the economy' as abstract concepts

deducible~

priori.

Too

many Marxists have written philosophical treatises on 'the .State' without

bothering to study its historical, economic, political, and legal aspects.

Had

they done so, they would have found that the historical tendency o capital is
to subordinate all social relations to the wage relation, to expand the factory

8.

For a succinct summary of both theories, seeR. Blackburn, Ideology in

Social Science, Glasgow, Fontana, 1972, pp. 238-62.

- 6 -

until it encompasses the whole of society.

Consequently, the freedom of the

market and its attendant bourgeois civil rights begin to vanish in the thick fog
of state economic regulation.

Aware of the internal necessity of this

capitalist development, Marx jeered its bourgeois opponents:

It is very characteristic that the enthusiastic apologists of

the factory system have nothing more damning to urge against
a general organization of labour in society than that it would
turn the whole of society into a factory. 9

At that precise point in time when a ;factory society' is constituted, the

phrase ;capitalist
the

society~

society~

can be understood only in the objective genitive of

capital.

The organization of our study reflects both its aims and this historical
logic of capitalist development.
discover why the

~ew

The aims of the thesis are, therefore, to

Deal happened, to establish how it came into being, and :o

categorize its institutional forms.

Each chapter in our study seeks to answer

one of these questions and to confute the existing theories.

A proper interpretation of the New Deal must identify first the

circumstances that evoked it, the specific problem that it was meant to solve.
This problem presents itself to us in dramatic guise as the catastrophic crisis
of the 1930s that swept away the old capitalist order - the Great Depression.
The specific mechanism of the crisis will need to be laid bare before we attempt
to interpret the New Deal.

9.

Hence our first chapter will trace briefly the

Capital, Vol. 1, London, Pelican, 1976, p. 477.

- 7 -

trajectory of capital in the United States seen as the unfolding of the wage
relation from its political origins to the emergence of a new State-form wi
the New Deal.

t: h

In our remaining three chapters we will seek to discover how

particular State-form acquired institutional shape in the United States.

Chapter Two begins the treatment of the New Deal as a State-form, identifying
money as the medium for the political homologation of capitalist command over
the working class and society as a whole, and providing historical illustrations
from the fiscal and monetary reforms of the New Deal.

But the survival of

capitalist society depended not so much on these measures - essential though

they were - as on the transformation of the wage relation with its concomitant
changes in industrial relations and income policy.

This subject will form

the

content of Chapter Three - the heart of our study - where we assess the role

of

American industrial workers in shaping the political and economic institutions

of the New Deal.

Not surprisingly for a study that is intended to overturn

the

conventional historiography of the New Deal, we have left the description of

institutional reforms till last, almost as if to expose their symptomatic,

as

opposed to aetiological, character.

As is explained in the Bibliography, this thesis draws on published

primary and secondary sources; its novelty therefore lies not in the discovery
of new material - though it is based firmly on the literature - but in an
interpretation of its subject that casts new light on the New Deal.
aim has been to describe these novel insights.

My primary

Had I written this thesis two

years ago, it would have been full of erudite f oo tno tes.

27, I can claim modestly to be an erudite person.

Already at the age

o i.

But as my ideas have fallen

into place, I have decided that erudition should be left to those without ideas
-

the rest are too busy communicating their discoveries.

Too many people

footnote everything, only to show that they have understood nothing!

Nowadays

- 8 -

references are easily within the reach of people who dare but to push the button
of a computer.

I have opted for brevity and concision:

readers should be able.

to read everything in the text, without endless footnotes to explain what they
have just read.

This is not to say the writer should not try to direct readers

toward a certain interpretative paradigm:

Select Bibliography.

I have relegated this task to the

CHAPTER 1

BEFORE THE DELUGE - BIRTH OF THE SOCIETY OF CAPITAL

In the final part of the first volume of Capital, after he has uncovered
the "secret' of the birth of capital - "so-called primitive accumulation" - Marx
shows with examples from the modern theory of colonization that capitalists are
necessarily aware of this secret:

In Western Europe, the homeland of political economy, the

process of primitive accumulation has more or less been
accomplished.

Here the capitalist regime has

directly

subordinated to itself the whole of the nation's production.

[ .... ]

To this ready-made world of capital, the political

economist applies the notions of law and of property inherited

from a pre-capitalist world ...

It is otherwise in the colonies.

There the capitalist regime

constantly comes up against the obstacle presented by the

producer who, as owner of his own conditions of labour,
employs that labour to enrich himself instead of the
capitalist.

[ .... This situation compels the political

economist] 'to make a clean breast of it', and to proclaim

aloud the antagonism between the two modes of production.

To

this end he demonstrates that the development of the social

productivity of labour, co-operation, division of labour,
application of machinery on a large scale, and so on, are
impossible without the expropriation of the workers and the
corresponding

tr~nsformation

of their means of production into

capital.

10 -

In the interest of the so-called wealth of the

nation, he seeks for artificial means to ensure the poverty of

the people.l

The immunity of North America from any previous mode of production serves to
illustrate with poignant clarity the political origins of capitalism and the
historical priority of alienated labour to capital.
without a proletariat. 2

There is no capitalism

The power of the capitalist to form a proletariat and

to enforce on it the despotism of the factory must come initially from outside
the factory, from society or the State.

North American capitalists invoked the

help of the State to force workers to sell their labour-power by setting

artificially high prices for land.

The fact that this State played only a

'negative' role in society, limiting itself to enforcing the rights of private

property, did not mean that it was a

~powerless'

State.

As soon as workers

enter the factory, they become part of capital, its real productive power.

At

first, capitalists adopted those labour processes that were used before their
advent with traditional tools and antiquated sources of energy and power.

With

such a fonnal subsumption of labour, production could be increased either by

employing more workers or by forcing them to work longer hours - that is, by the
absolute extraction of surplus value.

Thus, the living activity of workers is alienated from them and

objectified in commodities.

Money is the effect and the measure of this

objectification; through the money wage, capitalists regulate the amount of

1.

K. Marx, Capital, London, Pelican, 1976, Vol. 1, pp. 931-2.

2.

As pointed out in a footnote to the Introduction, our theoretical position

is stated more fully. in Tronti and Panzieri.

- 11 -

dead, objectified labour, or exchange-values, that go to workers in exchange for

their living ability to produce exchange-values.

Hence, capitalism is the

systematic theft of labour-time, the rule of dead over living labour, mediated
by the wage.

The wage relation therefore is the expression of a basic

antagonism between workers and capital.

Although the capitalist exploits the

sociality of human labour by herding workers in factories and transforming

thereby their normal labour process into one of capitalist valorization, the
money wage performs a metabolic function by allowing the abstraction of this
social labour so that it appears as a multitude of 'private labours'. 3

Once

they are in a factory, however, workers begin to realize their power as the
producers of social wealth.

It is from within the factory that workers begin to

re-compose their work socially and to take control over the labour process by
withholding labour-power and renouncing the wage relation.

This process of

political re-composition of the labour force as a working class threatens

capitalist accumulation because it breaks down the command of employers in the
factory.

For accumulation to continue, capitalists must re-assert their command

in the factory over the labour process by changing the latter so as to increase
the ratio of surplus value to variable capital (wages), also known as the rate
of exploitation.

The intensification of labour-power obtained with the new

labour process ensures that its reproduction occupies a smaller portion of the
working day so that the remaining values can be used to accumulate capital.4
This relative extraction of surplus value exploits fully the mediating potential
of the wage.5

3.

Therefore, relative surplus value is the characteristic

Perhaps the best discussion in English is in D. Elson et al., Value,

London, CSB Books, 1979.

4.

The locus classicus for this is K. Marx, op.cit., Vol. 1, Part 4.

5.

The first Marxist treatment of this neglected topic is in A. Negri, Marx

Oltre Marx, Milano, Feltrinelli, 1979, Ch. 7.

- 12 -

capitalist form of accumulation because, at any stage of capitalist production,

accumulation represents the control by dead labour over as great a part of
living labour as possible and relative surplus value, or the real subsumption of
labour in the labour process, permits the creation of a greater industrial
reserve army of labour- both relatively and absolutely.

In practice, both

methods of surplus-value extraction - absolute and relative - are adopted by

capital at any one time because both increase surplus value independently.
Nevertheless, there is a real historical distinction between the two that took
definite shape in the U.S. from around 1870.

Between 1870 and 1920, American industry underwent a momentous

transformation- so momentous that some have called it 'the second industrial
revolution~.

Prior to this period, nearly all production was carried on in

small shops or at home, manufacturing was seasonal and rural, and a tiny
proletariat was paid in kind as well as wages.

Even as late as 1870, despite

extraordinary increments in industrial production, a majority of the labour

force were employed in farming.

It was after this date that the capitalist

attempt to increase the rate of exploitation began to meet with the resistance
of craft workers keen to preserve their status and interests.

The traditional

labour process did not allow the intensification of labour necessary for greater
exploitation because the special skills of craft workers gave them control over
the pace and character of production.

Moreover, the expansion of factories and

the integration of formerly distinct labour processes was made very difficult by
the existence of separate craft unions for each process.

Finally, there was the

ability of craft workers to prevent the lengthening of the working day. 6

6.

The point hardly needs to be emphasized, see especially A. Chandler Jnr.,

The Visible Hand, Cambridge, Harvard U.P.) 1977, and R. Edwards et al.,
Segmented Work, Divided Workers, Cambridge, C.U.P., 1982.

- 13 -

The attempt to wrest control over the labour process from workers by
lowering their living standards and degrading their working conditions led to a
series of industrial upheavals that forced a change on the traditional forms of
production.

After the unprecedented worker revolts of the nationwide railroad

strike of 1877, the giant shutdown for the eight-hour day in 1886, and the
redoubtable strikes of the 1890s at Homestead Steel and Pullman,

u.s.

employers

quickened the pace of industrial change to regain control in the factories over
skilled workers.

It is estimated that, on a three-year average, the frequency

of strikes tripled between 1881 and 1893.

The capitalist response - though an

indirect one, imposed by the pressure of workers' antagonism - was the Great
Depression of the 1890s with the ensuing deflation and high rate of
unemployment.

The heightened class struggles of the last decades of the

nineteenth century caused much concern among capitalists for the growing
militancy and autonomy of craft unions.7

Two related and combined responses

were to increase the size of the reserve army of labour, through greater
migration from overseas and from country to city, and to reduce the level of
skill required in the labour process.

From 1900 to 1920, the U.S. population

rose from 76 to 106 million; a great part of the increase was from immigration,
with a peak of 1,285,000 entries reached in 1907.

Industry was transfoDmed

rapidly through the development of more efficient machinery and equipment, the
use of higher quality raw materials, and the intensified application of energy,
especially coal and oil.

7.

The assembly-line was introduced in car manufacturing,

See, passim, the works by P.S. Foner, History of the Labor Movement in the

u.s.,

New York, International Publishers, 1964, (5 vols) and E. Levinson,

Labor on the March, New York, Harper, 1938.

By far the most intelligent

treatment of these issues is in G. Bock et al., La Formazione dell' Operaio

Massa negli USA, 1898-1922, Milano, Feltrinelli, 1979.

- 14 -

while continuous-flow production gave an enormous boost to the oil industry.

The combination of these two techniques of production led to the creation of
mass-production industries that employed unorganized and unskilled workers.
They were part of the hideous drive system whose main features included the
reorganization of work through mechanization and job restructuring, a rapid
growth of plant size, and the expansion of the role of foremen supervising work
on the shop-floor.

Taylorism and Fordism are the best known expressions for the

intensification of the labour process and the rationalization of production that

took place in this period.8

The new methods of production were a capitalist reply to the growing

strength of skilled workers organized along craft union lines in the American
Federation of Labour (AFL).

The response of the AFL to mass-production was to

close ranks around craft unions, leaving thereby a great (and rapidly rising)
number of industrial workers in mass-production industries unorganized for the
simple reason that their jobs did not fit the old artisanal categories.

To be

sure, wherever the AFL swelled its ranks, capital followed and opposed it with
the establishment of various employers' federations, all under the umbrella of
the National Association of Manufacturers.9

Between 1904 and 1911, however,

only 85,000 new members joined the Federation - a fact that attests to its
inherent inability to organize unskilled industrial workers.

Instead of

restructuring the AFL, member unions were too keen to maintain their jealously

8.

The immigration data are in R. Hofstadter, The Age of Reform, New York,
Vintage, 1955, pp. 176-7.

For reviews of the labour process see H.

Braverman, Labor and Monopoly Capitalism, New York, Monthly Review Press,
1974; and the review by T. Elger in Capital and Class, No. 7, Spring 1979,
pp, 58-99.

9.

See Foner, op.cit., vol. 2.

- 15 -

guarded autonomy despite the fact that it did not allow for industrial unionism.
It is in this sense, however narrow, that one can speak of an entente between
big business and AFL to prevent the formation of industrial unions. 10

Of

course, employers left little undone to protect their new dispensation.

they lose control in the factory, capitalists do not hesitate to turn
and its civil rights against workers.
against workers:

When

~society'

Company unionism was their major weapon

the company provided funds for running the union and co-opted

officials in elections.

The strategy was facilitated by the construction of

industrial towns with housing and services provided to workers by the companies
themselves.

Scab labour (especially blacks from the South), detectives acting

as spies and agents provocateurs, intimidation and victimization of workers,

lock-outs - these were some of the more frequent tactics used to erase every
velleity of

workers~

autonomy.

In larger towns resort was made also to smear

campaigns in the local press to mobilize the local middle class against striking
workers, followed by the formation of civil liberties leagues and the engagement
of strike-breaking detectives or the deputization of local vigilantes.

When

none of these measures succeeded, there were always the law and the courts,
capably backed by the police and the National Guard.
remedies were the

~yellow-dog

Two of the favourite legal

contract' and the labor injunction.

legally distinct, these were used in combination:

Although

the companies put up signs on

factory premises restraining their employees from joining independent unions; in

case of strike, the company obtained court injunctions to prevent all
disruptions against business. 1 1

10.

Cf. Levinson, op.cit.

11.

For a brief account of the employers' tactics, D. Milton, The Politics of

u.s.

Labor, New York, Monthly Review Press, 1982.

A discussion of the law

is in W.B. Gould, A Primer on American Labor Law, Cambridge, MIT Press,

1982.

- 16 -

The paradoxical result of the immediate process of production in a

regime of relative surplus value is that the price of commodities falls and
nominal wages rise. 1 2

This happens because the greater productivity of

industries with a high ratio of constant to variable capital - known as the

organic composition of capital - permits a relative reduction both in the number
of workers employed for each unit of constant capital and in the price of
commodities, resulting in higher profitability.

The antagonism of workers in

the factory compels capitalists to intensify labour-power through the

expenditure of constant capital in new plants and machinery.

This, in turn,

forces many of them either out of business or into mergers because they cannot
afford the higher expenditures on constant capital and wages.

On the one hand

capitalists compete against one another by trying to increase productivity and

minimize their wage bill, which is done by altering the ratio of constant to
variable capital in favour of the former.

This means that different capitals

extract different rates of surplus value from workers.

On the other hand, it is

the very fact of competition that equalizes capitalist profits across the
various branches of production until an average rate of profit is formed.
Capitalists expect to gain from the anticipated capital for production the same
or pro rata the same profit as every other capital of commensurate magnitude,
whatever the branch of production.

Hence, the very existence of profit is

potentially constitutive of a class of capitalists; it unifies their interests

politically against the working class.

Once again, money is the vehicle that

homogenizes exploitation across all branches of production.

12.

In the form of

This curious dealectic and all its implications are explained brilliantly
by K. Marx, op.cit., Appendix to Vol. 1, pp. 949-1060.

- 17 -

monetary profit, capital finally presents itself as social capital.l3

It is

at this point that the function of money runs the risk of becoming autonomous
from the sphere of production.

Because of its ability to even out different

rates of exploitation, money soon comes to be endowed in the eyes of capitalists

with the ability to expand its own reproduction - hence the phrase 'fructiferous
capital'.

This tendency is a threat to capitalism as a whole because it makes

capitalists oblivious of the real foundations of the function of money in the

despotism of the factory, where dead labour rules over living labour.

Those

observers who have seen finance capital, in its form of social capital, as a
stabilizing force, as the herald of a new 'organized or monopoly capitalism',
err just as much as those who see in it the anarchy of the market, the selfish
greed of money dealers. 14

Only the crisis, which is also a financial crisis,

can wake capital from its imaginative flight and lead it from its feast in the
stock exchange back to the dreary reality of the factory.

The emergence of the joint-stock company - otherwise known as corporate

capital - as a direct result of capitalist concentration and centralization
marked a historic turn in the history of capitalism.

13.

As Marx put it:

The classic exposition is in Marx, op. cit., Vol. 3.

Our views on the role

of money are derived from K. Marx, Grundrisse, London, Pelican, 1973;

s.

De

Brunhoff, Marx On Money, New York, Urizen, 1976; and L. Berti, Moneta,
Crisi, e Stato Capitalistico, Milano, Feltrinelli, 1978.
14.

Among the former, R. Hilferding, Finance Capital, London, Routledge and

Kegan Paul, 1985; among the latter, E. Mandel, Marxist Economic Theory,
London, Merlin, 1966.

A clear exposition of Marx's views on 'fructiferous

capital' is contained in vol. 3 of Capital, op.cit., Ch. 21.

1~

Capital, which is inherently based on a social mode of production

and presupposes a social concentration of means of production and
labour-power, now receives the form of social capital ... in
contrast to private capital, and its enterprises appear as social
enterprises as opposed to private ones.

This is the abolition of

capital as private property within the confines of the capitalist

mode of production.15

Thus the extraction of relative surplus value facilitates the concentration and
centralization of capital - which explains why the new mass production of the
1870s and 1880s in the United States resulted in a great number of mergers and
trusts. 16

Indeed, the second industrial revolution transformed the face of

American society in countless ways.

The amount of production grew remarkably.

Gross national product in 1919 was six times larger than in 1870 ($146 billion
against $23 billion)* representing an average annual rate of growth of 3.75%,
with per capita output tripled.

Hand in hand with the surge of capital

accumulation went the concentration and centralization of capital.

The new

productive techniques and the expanding markets made it increasingly difficult

for smaller companies to survive.
monopolies.

Trusts were formed that quickly turned into

By 1900 monopoly ruled American industry: - a mere 1% of all

corporations controlled about 30% of manufacturing output, while the top 300
trusts owned about 37% of all U.S. corporate stocks and bonds; of 72 markets
investigated by Moody in 1904, trusts controlled 60% of the market in 55 cases

Figures adjusted in 1860 prices

15.

Marx, op.cit., vol. 3, p. 567.

16.

See generally J. Moody, The Truth About the Trusts, New York, MPC, 1904.

- 19 -

and up to 80% in 25 of them.

In 1929 the top 200 corporations controlled 50% of

all stocks and bonds and owned 20% of national wealth.l7

Behind these developments were three basic needs of

u.s.

capital that

had arisen from the growing antagonism of workers in mass industries.

One was

to relate more organically the process of financial centralization of capital to

that of its industrial concentration for the purposes of cash flow and
investments.

Another was to rationalize the composition of the labour force so

as to eliminate the middle classes engaged in unproductive labour and increase

thereby the mass of surplus value for accumulation.

The third need was to

establish a monopolistic industrial structure through the functional use of

~high

wages' that would eliminate small competitors unable to afford them.

Of

course, the satisfaction of these needs depended on the existence of a strong

working class that would be able to enforce a regime of

~high

wages' and,

thence, to facilitate the elimination of 'unproductive labour' and further the

accumulation of capital.

But this is exactly the opposite of what happened in

the 1920s - what was supposed to be the decade of 'welfare capitalism'.

As it

turned out, these overall needs of U.S. social capital were in contradiction
with the equally crucial need to reduce the wage level of industrial workers.
This task proved impossible while the dollar was pegged on the gold standard,
that is, while the market functioned autonomously, according to its own
laws. 18

17.

All these data are in R.L. Ransom, Coping with Capitalism, Englewood
Cliffs, Prentice-Hall, 1981, pp. 71-2.

18.

For this entire dynamic of events see A. Negri's essay on Keynes in Operai
e Stato, op.cit.

The decline of the "old middle class" in this period is

certified by C.W. Mills in White Collar, London, Q.U.P., 1956.

- 20 -

By contrast, the American federal government was based still on liberal

premises - although it had been engaged already in several acts of imperialistic
expansion (for example, against Spain in the war of 1898).

The budgets of some

of the new corporations seemed to exceed that of the government.

This fact

alone served to mobilize American farmers and white-collar workers whose entire
lives and social status grew ever more dependent on the burgeoning power of
corporate capital.

Progressivism, the great political movement that swept the

States from the 1890s, started mainly as a campaign against monopolies, asking
the government to intervene to break them up into more modest units.
Paradoxically, this request seemed to invoke a stronger government bureaucracy,
seen by many Progressives as a symptom of the malaise.

Even so, the government

did intervene and in 1898 Congress passed the Sherman Antitrust Act.

But,

although drafted in stern terms, the Act proved very difficult to enforce, given
the weakness of the administration and the

courts~

sympathy for the trusts.

Indeed, the growth of the trusts had been greatly facilitated by the Supreme
Court in the 1870s and 1880s through the use of the due process clause of the
Fifth and Fourteenth Amendments to protect 'corporate individualism' - that is,
the enforcement of corporate rights as if they belonged to natural persons.
Progressives turned to Theodore Roosevelt's 'New Nationalism' as an enthusiastic
call for the regulation of private enterprise.

Yet Roosevelt's two presidential

terms saw the highest rate of capitalist concentration in U.S. history.

Even

the Sherman Act was used by the courts as a legal device to destroy or curb
unions until in 1914 Woodrow Wilson signed the Clayton Act to stop this
judicial abuse.

The Act was intended also as a renewed attack on monopolies.

Whenever the federal government was called to intervene on some aspect of social
and economic life that had become politically troublesome- such as, for
instance, trusts and the railways

Congress preferred to erect separate

administrative commissions directly responsible to itself rather than allow the

- 21 -

power of the Presidency to expand.

The problem with the commissions, however,

was that their powers and budgets were limited, while their regulatory
activities, detached from overall political needs, were too static and rigid to
be effective.

Moreover, by virtue of their frequent contacts with interested

parties, the commissions tended to respond so readily to their needs as to

provoke frequent accusations of favouritism and corruption.

During the First World War the State intervened massively in the
economy.

Wilson was forced to abandon his "New Freedom" program for one of

price-setting, wage regulation and adjustments of production.

The relaxation of

trust controls and the suspension of the Sherman Act, as part of the enforced
rationalization imposed by the War Industries Board, gave many firms the chance
to merge into big conglomerates.

The reform of banking and trade laws and the

triumph of federal intervention over state legislatures gave big business a form
of government commensurate with its industrial needs with respect to the
regulation of the labour force and of inter-capitalist rivalries.

Excess

productive capacity in the aftermath of the War provided a unique opportunity

for big business to consolidate its hold over the economy.

But business was too

wary of political control over its affairs to allow the war-time state apparatus
to continue and it mounted a successful campaign to force Congress to dismantle
it.19

19.

On

the U.S. State machinery before the New Deal the literature is very

limited and not very intelligent.

See, generally, M. Fainsod et al.,

Government and the American Economy, New York, Norton and Co., 1959.

On

the commissions, G. Kolko, The Triumph of Conservatism, New York, Free

Press, 1963.
op.cit.

On

popular attitudes in this eventful age, R. Hofstadter,

- 22 -

But the huge concentration of U.S. capital, visible especially in the

new mass-production industries such as coal and steel mining and automobile
construction, had unleashed an explosive force on the industrial front.

In

1919 industrial workers, spurred by the consciousness of their productive

strength and the reduction in their living standards occasioned by the
inflationary financing of the War, broke the peace deal and gave rise to an
unprecedented wave of strikes throughout the States with the aim of organizing
industrial unions.

Already, during the war, workers had used the scarcity of

labour-power to increase their real wages:

the number of strikes nearly tripled

- 1,593 in 1915 and 4,450 in 1917 with an annual total of about 1.5 million
workers on strike.

But when in 1919 the government ended its war-time price

controls and the cost of living rose by 30%, more than 4.5 million workers
downed tools in 3,360 strikes - about 20% of the working population in a single
year.

Most epochal of all were the struggles in steel and coal mining.

And it

was here that the craft unionism of the AFL proved most treacherous and impotent
as employers turned one craft union against another, using the skilled workers
as strike-breaking pawns against mass workers who still lacked adequate
industrial organizations.20

Once the fight against the giant of mass

industries, U.S. Steel, was lost, the political horizon of industrial unionism
was pushed back many years.

u.s.

The scale and intensity of the struggles coerced

capital into one of its deepest recessions, induced partly by its excess

capacity in the aftermath of the War.

The rate of unemployment shot to an

incredible 11.9% while wages collapsed with the steep deflation.

20.

The working

The figures on strikes are in R. Edwards et al., op.cit., pp. 159-60.

Post-war developments are described aptly in J. Brecher, Strike!
South End Press, 1972, and D. Brody, Steelworkers in America,
Harper, 1969.

New York,

New York,

- 23 -

class was routed:

its discomfiture at home and the defeat of Wilson's plans in

Paris paved the way to 'the roaring twenties' .2 1

During the 1920s, the decade of welfare capitalism, the American economy
witnessed the most impressive growth of its history.
grew from $79 billion in 1923 to $97 billion in 1929.

Gross national product

Output rose 30% in

manufacturing and a staggering 100% in electric light and power.

Wholesale

commodity prices fell by about 5% while average hourly earnings rose 8%.

With

prices remaining steady throughout the decade, wages rising slowly, and greater
production of consumption goods, wage workers saw a good improvement in their
living standards.

Profitability increased by 62% and the top 5% of income

earners expanded their portion of income from 22.9% to 26.1%.

The number of

takeovers surged from about 250 to 1,200, confirming the trend of capitalist
centralization in times of rapid accumulation.

Total consumer outlay grew by

23%, from 62 to 76.4 billion dollars and gross capital formation by 22%, from 17
to 20.7 billion dollars.22

Amidst this phenomenal growth of capitalist fortunes, the working class

was virtually annihilated as a political entity.

The anti-worker techniques of

company unionism described above were used extensively after the big defeat of
the working class in 1919-21:

the new Fordist productive techniques were

intensified as the membership of the AFL dropped from 5 million in 1920 to 3.5
million in 1924 where it remained for the decade.

The number of workers on

strike declined steadily from 757,000 in 1923 to 289,000 in 1929, a drop of 62%.

21.

On the 1920-22 recession, see G. Soule, Prosperity Decade, New York,

Rinehart, 1947, Cbs. 5 & 9.

22.

Ibid., pp. 320-1.

24 -

The conditions of many workers actually deteriorated.

Although overall

employment grew by 8-11%, technological innovations and local recessions cut

jobs in manufacturing, coal mining, railroads and agriculture.
electricity absorbed most of the new jobs.

Services and

Even in the boom years of 1928 and

1929 the unemployment rate was 4.2% and 3.2%, respectively.

Despite a 43%

increase in labour productivity from 1919 because of better machinery and

industrial organization, wages advanced only 21%.

More alarming were the wage

differentials between North and South and between unionized and non-unionized
workers.

In cotton-textiles, for instance, hourly rates averaged 30 cents in

the South and 47 cents in the North; wages in unionized sectors averaged one
dollar an hour, but they were only 50 cents in non-unionized sectors.

Some

depressed industries like coal paid extremely low wages. 23

Apart from these imbalances in the national distribution of income,

there are only two or three series that might be linked to the Great Crash of
October 1929.

The rate of gross fixed capital formation, which had sky-rocketed

from $77 billion in 1922 to nearly $160 billion in 1926, plummeted from its 1926
high to $120 billion by the end of 1929 and then to the incredible low of $37
billion in 1932.24

The fall of investment in the capital goods industries

increased unemployment and the level of income, spreading quickly to the

consumption goods industries:

housing construction decreased by 37% and

consumption of durable goods by 5% between 1926 and 1929 (between 1920 and 1926

23.

R. Edwards et al., op.cit., pp. 162-4.

The story of U.S. workers in the

1920s has been told exhaustively by I. Bernstein, The Lean Years, New York,

Da Capo, 1960, q.v. for the data, Chs. 8 and 9.

24.

For these data see M. Aglietta, A Theory of Capitalist Regulation, London,

New Left Books, 1979, pp. 95 and 105.

- 25 -

they had increased 215% and 66%, respectively).

The wave of intense speculation

that started in these years and that culminated in the debacle of October 1929
was due in part to the increasing difficulties of realization that capital was
encountering.

Indeed, the corporate security issues, which had grown at

intervals of $500 million per annum between 1923 and 1926, jumped by $2 billion
in 1927 and by a further $2 billion in 1929 to a total of $10 billion; the
prices of industrial stock, which had increased by only 47 points between 1923
and 1927 (60 to 107), suddenly jumped 64 points to 1929 (107 to 171) as more
companies took capital away from productive investments to lucrative sharemarket speculation.

More than one billion shares were traded in 1929.

The

burgeoning "gambling" craze and the slight restriction of currency in

circulation raised interest rates from around 5% to 6% in New York City.25

The collapse of the stock market in October 1929 signalled the beginning
of a downward spiral of deflation that lasted four years until the biggest
economy on earth lay in a state of prostration.
billion.

In 1933 it had fallen to $55.6 billion.

In 1929 the GNP was $103

In the intervening period,

unemployment increased from 3.1% to 24% of the working population equivalent to

14 million workers.

Pay-rolls tumbled down to 39 from their 1929 high of 110.

Similarly, the physical volume of industrial production fell from 110 in 1929 to
58.

Wholesale prices for non-farm products fell 25 points, from 93.3 to 68.3.

The fall for all commodities, including farm products, was of 30 points, from
95.3 to 65.9.*

In the general euphoria of the New Era, many ignored or

disregarded some of the more evident danger signs such as the business slumps in
1924 and 1927 and the elevated number of bank failures.

For all indices, 1925100.

25.

For data see Soule, op.cit., p. 322.

Nearly seven thousand

- 26 -

(6,987) banks became insolvent in 1921-30.

A fifth of these (1,181) were

members of the Federal Reserve System, with deposits of $875 million.

member banks numbered 5,806 with deposits of $1.7 billion.
$300 million re-opened.
affected.

The non-

Only 806 banks with

Small banks in depressed rural areas were worst

After the Crash, the number of bank failures and suspensions soared.

In 1928 there had been 491; but in 1929 the number rose to 642 and in 1930 it
was a staggering 1,345 with many large city banks joining the death list.
nadir was reached in 1931:
billion.

The

2,298 banks failed with deposits totalling $1.7

In 1932 suspensions were 1,456 with deposits of $700 million.

When

England abandoned the gold standard in September 1931, the United States lost
$700 million in gold in six weeks. 2 6

It is impossible here even to recall, let alone summarize, the immense

misery and suffering that the Depression brought on millions of human beings.
Perhaps one set of figures above all others can help illustrate the depth of
despair reached by the American people:

for in these four years society was not

even reproducing; the national birth rate, already low at 25.0 per thousand
population in the 1920s, fell to an average of 19.2 for the 1930s.2 7

A month after the Crash, President Hoover summoned some business leaders
to the White House to persuade them to maintain current wage levels so as to

26.

Data on economy and bank crisis are from W. Mitchell, Depression Decade,
New York, Rinehart, 1947, Appendix and pp. 127-8, respectively.

27.

D.A. Shannon, Between the Wars, Boston, Houghton Mifflin, 1979, p. 140.
the effects of the Depression, J. Garraty, Unemployment in History, New
York, Harper, 1978,' Chs. 9 and 10, and Bernstein, op. cit.

On

- 27 -

avoid a fall in consumption. 28

An agreement was reached, fortified by the

AFL"s undertaking to renounce wage claims, but it began to break down

the

in

spring of 1930 under the weight of fixed capital depreciation and plum.me t i.ng
commodity prices.

The final blow was delivered in August 1931 when

u.s.

cut its workers' wages by 10-15%; most of the other industrial giants
suit.

Hoover's policy had failed.

Congress and in industrial circles.

Steel

followed

Several alternative proposals circul.a. ted in

One of them, promoted by the President of

General Electric, Gerald Swope, and the U.S. Chamber of Commerce, envisaged a
form of "industrial self-government" whereby corporations in an industry

were to

divide the market among themselves, refrain from undercutting one another- s
prices, and maintain wage levels.
rationalization of the economy.

The plan involved a full-scale

Its implementation required co-operation

from

the federal government, especially for the suspension of anti-trust legislation

and the imposition of uniform industrial standards.

But Hoover fretted for

individual liberties, preferring them to the corporate state.

By the

same

token, he rejected many proposals to expand the powers and functions of f e.deral
government.

He vetoed initiatives on welfare provision sponsored by eminent

senators like Democrat Robert F. Wagner and Republican dissidents Robert

Follette Jr. and George Norris.

~.

La

Instead, he organized a President's

Organization on Unemployment Relief (POUR) which was to engage in public

relations campaigns to encourage private donations to existing charities.
Organization turned out to be very ineffective.

When a Senate Committee

The
found

that POUR officials did not know the total of relief needed in the country,
Congress cut its funds.

28.

Regardless, Hoover remained entrenched in his

For this section on Hoover see generally Shannon, op.cit., Ch. 6,

and

Hofstadter, The American Political Tradition, New York, Vintage, 1973,

Ch. 11.

R.

28 -

opposition to relief programs except those of private initiative and to any

governmental interference with private enterprise for fear that the work ethic
of the American might be undermined.

The most infamous example and indictment

of Hoover's pusillanimous leadership was his treatment of the 'Bonus

Expeditionary Army', a group of war veterans who demanded payment of a bonus
promised them after the War.

Having marched on Washington, they set up a

'Hooverville' on the Anacostia Flats.

Fearful of riots, Hoover ordered General

Douglas MacArthur to clear out the marchers.

The latter went about his task in

a most ignominious manner, charging the helpless veterans with cavalry and
infantry equipped with bayonets.

One area in which Hoover, somewhat hypocritically, was keen to provide

government aid was in helping business to finance its debts.

He sponsored the

establishment of the Reconstruction Finance Corporation (RFC) with an original

capital of $500 million and authorized to borrow three times its capitalization.
The RFC lent money to help business in key sectors of the economy survive.
Banks and credit institutions, railroads, and insurance companies received top
priority.

The RFC's partiality to business and its virtual unconcern for the

urban poor and farmers caused resentment and widespread suspicion of corruption
that was substantiated in a few cases.

Even industrial states like Pennsylvania

received less loan funds than some banks, a fact that enraged progressive
Congressmen.

Perhaps the only joy that progressives derived from Hoover's presidency
was his consent to the Norris-La Guardia Anti-Injunction Act of March 1932,
restricting the power of federal courts to issue labor injunctions.

This

effectively put an end to the 'yellow dog' contract and augured well for the
reform of industry.

But it was too little to stop the groundswell of

dissatisfaction with the Republican Administration.

- 29 -

In assessing the theoretical direction of Hoover's economic policies it

is quite incorrect to try to locate it in individual economic decisions.29
The fact that Hoover's Administration stuck to the neo-classical tenets
contained in Say's Law does not say much about the content of particular
economic measures.

For instance, fiscal policy is not contradictory to Say's

Law, given that the latter postulates the ability of supply to meet increased
demand.

Hoover did believe in the need for governmental intervention in the

economy, as is shown by his sympathy for public works, the RFC, failure to
oppose the Norris-La Guardia
rationalization.

Act, and by his life-long belief in economic

Yet, within the framework of Say's Law, he was concerned more

about the 'appropriateness,. of government intervention in an economy where the

bulk of investment decisions were taken by private entrepreneurs.

In this

context, he believed that the government should do no more than co-ordinate

private efforts.
could play an

The State was merely another element in the economy, one that

'indicative~

role from a position of leadership, one that could

inspire business confidence; but it was also one that had clear limits beyond
which it could not legitimately go.

Hoover was not a crusader for laissez-faire capital ism.

As he wrote in 1933:

The 18th century thesis of laissez-faire passed in the United

States half a century ago.

The visible proof of it was the

enactment of the Sherman Act for the regulation of all business,

the transportation and public utility regulation, the Federal

29.

We agree here with M. Bleaney, The Rise and Fall of Keynesian Economics,
London, Macmillan, 1985, pp. 32-7 and H. Stein, The Fiscal Revolution in
America, Chicago,

C~icago

u.s.,

1969, Ch. 1.

- 30 -

Reserve System, the Eighteenth Amendment, the establishment of

the Farm Loan Banks, the Reconstruction Finance Corporation.
All are but part of the items marking the total abandonment of
that social thesis.30

Hence,

Hoover~s

disastrous decision to raise taxes and to deflate the economy at

the end of 1931 was intended to balance the budget against the fall in
government revenue. He feared that failure to do so would exacerbate the heavy
outflow of gold that occurred once Britain went off the gold standard in
September 1931, and that thereafter
irreparably.

busines~

confidence would be undermined

Hoover hoped to maintain government credit and the stability of

the currency so as to avoid financial loss and bank failures because the
political institutions of the time did not allow his Administration to undertake
a new form of economic policy. Even the Norris-La Guardia Act, for example, was
a futile exercise in this sense because it lacked the administrative machinery
to implement its clauses.

Only the political upheavals of the thirties could

change this situation - and we are about to see the social agencies and the
political institutions that effected the change.

The 1920s remained, however,

in the Age of Marshall - a time when a growing awareness of the new needs of
capitalist society had not found yet appropriate capitalist institutions.3 1

Of the many explanations that have been advanced to account for the
Great Depression, perhaps the most widely accepted is underconsumption,

30.

Stein, op.cit., pp. 7-8.

31.

For the mixture of humanism and laissez-faire in the Marshallian era see
J.M. Keynes' essay on Marshall in his Essays in Biography; also Tronti,
op.cit., pp. 269-74.

- 31 -

according to which economic crises occur whenever capitalists force wages too
low for workers to consume the commodities on sale.

A somewhat different

version says that, as capitalist profits increase, opportunities for investment

decline through the simple operation of the law of diminishing returns; the
result is a 'secular stagnation' that will last until new epoch-making
technological discoveries are made that can absorb the surplus capital.32
Another related explanation is that of 'overaccumulation' according to which
excessive accumulation of capital is achieved by a higher ratio of constant to
variable capital, or higher organic composition of capital, which leads in turn
to the fall of the rate of profit and disinvestment.

The problem with the first explanation is that it flies directly into
the face of the logic of capital:

it so happens that capitalists incessantly

must force workers to produce more than they can consume.

The consumption

deficiency of workers, then, cannot cause the capitalist crisis.

The fact that

the physical amount of fixed capital per worker increases does not mean that its
value must increase - for it may well decrease and, indeed, this is precisely
the task of fixed capital in the sector of capital goods production.
dismiss thus the

'overaccumulation~

thesis.

We may

Capitalists simply do not know what

'too much accumulation' means; there will be always new areas of investment so
long as there is living labour to exploit.

We have already a clue as to one

possible source of crisis - the dearth of exploitable living labour.

There can

be little doubt, however, that labour-power was plentiful and cheap throughout

32.

For a review of these theories, M. Bleaney, Underconsumption Theories,

London, Lawrence and Wishart, 1976, esp. Chs. 10 and 11.

Generally on the

Marxist theory of crises, E.O. Wright, Class, Crisis and the State, London,
Verso, 1979, Ch. 3.

- 32 -

the 1920s.

But let us pause on the 'cheapness' of labour-power.

We have seen

that the working class had been disembodied politically by capital in the 1920s
and that the use of fixed capital to transform the labour process helped it
achieve this goal.

In fact, fixed capital mediates between the political

composition of workers at the point of production, between control over the

labour process in the factory, on the one hand, and that of capital in different
branches of production with different organic compositions and their respective
claims to the total mass of surplus value transformed into profits, on the other
hand.

Crises are generally cyclical, occurring in waves that last as long as

the average life-span of fixed capital.

They are crises of realization because

all commodities produced cannot be sold, acting as mechanisms of capitalist

reproduction because they result in the depreciation of existing fixed capital
that provokes a new bout of investment at a higher level leading to greater
accumulation as the deflationary crisis cuts wages and the new fixed capital
increases the rate of exploitation.

Normally, a strong working class ensures

that the devaluation of fixed capital occurs through the employment of new
machinery, that is, through investment in new fixed capital.

But when, as in

1929, the working class is absent from the workplace, devaluation can take place
only through deflation.

The cheapness of labour-power meant that the industries

with lowest organic composition, employing more labour-power per unit of

investment, were realizing good profits without having to improve their fixed
capital.

The inevitable imbalance in profitability between capitalist

industries with different compositions led to massive overproduction that

threatened profits overall.

Formerly stable markets could be destroyed

overnight as new firms entered them easily.

The whole mediating role of fixed

capital was mortally endangered by these developments.

The level of investment

in the capital goods industries dropped while the crisis spread to consumption
good industries.

Gross fixed capital formation experienced a catastrophic fall.

33 -

The wave of financial speculation that preceded the collapse of 1929 was
the clearest sign of the crisis of realization that forced capitalists to
withdraw money capital from investments and seek better returns in the stock
market.

The very existence of exchange value separates the production of

commodities from their consumption.

Money facilitates this process and allows

the proportional distribution of surplus value- that is, of political command

over workers - to capital.
production

fails~

Once the mediation of fixed capital in the sphere of

so does that of money in the sphere of circulation because the

organic composition of capital no longer ensures a certain distribution of

profits.

The result is a spiral of speculation caused by the illusion of the

self-incrementation of money as 'fructiferous capital'!

The inevitable

financial collapse comes when the growing pile of paper money fails to find real
productive equivalents in terms of command over labour-power and other
commodities.

The ensuing deflation serves to wipe out smaller capitalists while

bigger ones resume their investments on new fixed capital, paying relatively
higher wages for higher productivity.

But the resumption of investments can

take place only where the working class is sufficiently strong to impose a
certain wage level throughout individual branches of industry and the entire
economy because the relatively high wage level cannot be afforded by smaller
capitalists whose fixed capital is devalued quickly.

In the United States,

instead, the working class had been driven out of the factory in the 1920s and
capital found it impossible now to start a new cycle of accumulation.
resulted in further deflation as prices and wages collapsed.

Deflation

The breakdown of

price and wage structures endangered also the function of money as the measure
of value, as the embodiment of capitalist command in society.

For there is no

real relation between money and value outside of a political one.

The decline

of the factory in the 1930s as the ultimate political battleground of capitalist

society gave rise to

vi~lent

disputes among capitalists themselves, especially

- 34 -

between debtors and creditors, about the. significance of money as a material

referent of political power.

Industrial capitalists who found it harder to

repay loans while their fixed capital was devalued ran to the State for help
against parasitical financiers.

We saw earlier that in the New Era fixed capital ceased to play its
mediating role between surplus value and variable capital.

It was the excessive

devaluation of fixed capital that brought capitalist society to its knees.

But

we have not discovered yet the reasons why what seemed to be a normal recession
turned into a micidial crisis both for capitalism and for society as a whole.
The growing extraction of surplus value requires ever increasing sums of fixed
capital relative to variable capital.

(Again, we must point out that, although

the physical mass of fixed capital increases, its value need not increase; on
the contrary, the purpose of higher expenditure on fixed capital is to raise the
rate of exploitation and thereby to lower the cost of fixed capital itself.)
But the attempt by capital to transform the labour process into a process of
valourization means that the expenditure on fixed capital must come slowly to
encompass even areas of social reproduction like communication, transport,
education, and health, as well as the production of means of production.
Investments in fixed capital have the double function of absorbing idle capital
and of liberating large amounts of surplus value for capitalists.

As Marx put

it, it is possible to stave off crises by transforming "a great part of capital
into fixed capital that does not serve as agency of direct production" because
''such undertakings, in which the ratio of constant capital to variable is so
enormous, do not necessarily enter into the equalization of the general rate of
profit".

This result modifies dramatically the function of monetary profit to

which we alluded above because the astronomic rise in the organic composition of
capital causes a 'jump'in the structure of capital:

thus, the very emergence

1~

35 -

of joint-stock companies as products of the general rate of profit creates such

a centralization of the 'credit system' that the general rate of profit itself
disappears and only particular monopolistic rates remain.33

The problem is,

however, that investments in fixed capital have very slow turnovers; hence,
capitalists are forced "to shift the burden ... on to the shoulders of the
State".

The State is needed also because "the greater the scale on which fixed

capital develops ... the more does the continuity of the

p~oduction

process

.... become an externally compelling condition for the mode of production

founded on capital". 3 4

This external compulsion requires a State-form that is

able to plan the development of capitalism, not in any rational sense, but in a
politically decisive manner.

Precisely this State-form was missing in the Great

Depression; nor is it possible to imagine how it could have existed without the
capitalist experience of such a redoubtable crisis.

The Great Depression

provides us with clear evidence that by the 1930s a society of capital had come
into existence, one in which the extraction of relative surplus value as the
specifically capitalist mode of accumulation had engulfed the basic reproductive
functions of society by transforming them into fixed capital and subordinated
most social relations to its own expanded reproduction.

33.

This point was seen first by G. Pietranera, see his Capitalismo ed

Economia, Torino, Einaudi, 1965; it was taken up by R. Panzieri, op.cit.,
p. 73; and adopted for modern purposes by D. Harvey, The Limits to Capital,
Oxford, Blackwell, 1982, pp. 222-9.

See also, for a fuller treatment of

the matter, P. Boccara, Etudes sur le Capitalisme Monopoliste d'Etat,

Paris, Editions Sociales, 1973, pp. 19-68 and pp. 291-310.
34.

Marx cited in D. Harvey, op.cit., pp. 223-4.

- 36 -

The crucial problem for a State-form adequate to the real subsumption of

labour is to re-establish the all-important link between capital and its
'subjective essence', alienated living labour.

Thus, in a regime of relative

extraction of surplus value, it is essential for capital in its form of social

capital to preserve the homogeneous composition of the working class, something
that can be achieved only by allowing workers to organize
point of production.

p~litically

at the

When the crisis hits, the old fixed capital quickly

depreciates and markets are cleared.

All is ready for a new round of

accumulation with a higher rate of exploitation, that is, with a new politicoeconomic asset between workers and capital.

But the ensuing depression can be

too deep if there is no working class to set a limit to it.

A certain

homogeneity of working-class composition can be obtained through sheer authority

even in a regime of absolute extraction of surplus value (as in Italy and
Germany under fascist dictatorship).

But here the very different form of

political command adopted by capital makes such homogeneity superfluous, while

it necessarily interferes with the objective of capitalist accumulation, which
is served best by relative surplus-value extraction.35

How to use the

composition of the working class as the motor of capitalist development:

this

was the momentous political task that the Roosevelt Administration inherited in
1933.

35.

This brilliant insight belongs to A. Sohn-Rethel, Okonomie und

Klassenstruktur des., Deutschen Faschismus, Frankfurt, 19 73.

APPENDIX

STATE-FORM, CRISIS, AND CYCLE

The history of U.S. capitalism up to the 1930s has helped us understand

how the antagonism between workers and capital, expressed socially in the wage
relation, leads from the subterranean life of the factory up to the empyrean of
the capitalist State-form.

The exploration of this bourgeois political paradise

is essential to our study because it is impossible fully to appreciate the

significance of the political reforms carried out in the New Deal without
comparing them with the old institutional order that they were meant to
supplant.

But the specific form taken by the capitalist state machinery is a

political response to certain social and class antagonisms as the bourgeosie

perceives them;

this response is not intended to resolve these antagonisms, but

to perpetuate the existing order.

It is important, therefore, for us to study

the self-understanding of the bourgeoisie leading up to the New Deal, to see

exactly how bourgeois science proposed to meet the foonidable challenge of an
increasingly pugnacious working class between 1890 and the Depression.

This is

why we have concentrated exclusively on European rather than American

theoreticians:

quite apart from their greater historical experience with strong

absolutist States, the Europeans displayed a quality of systematic rational

reflection that the Americans never achieved.

Although it is still one-sided,

the thought of a Weber or a Keynes is much more valuable than the scattered
pragmatic journalism of people like Walter Lippmann or Thorstein Veblen.

It

should be borne also in mind that Weber, Keynes and Schumpeter all visited the
United States and embodied their experiences there in their theoretical
frameworks.

Indeed, when they began to consider executive reorganization in

1936, it was to Europe and its theoreticians that the American administrators
turned:

they even

travel!~d

to Europe to discover its political and

- 38 -

administrative secrets.

But the solutions adopted in the United States were

peculiar to that country and especially to the fact that it had become already

society of capital.

The emergence of the capitalist mode of production in England between

the sixteenth and the eighteenth century depended on the creation of a

~free'

labour-force expropriated and separated from its means of production.

The

labour-force was 'free' in two senses, both quite foreign to declining

feudalism:

the workers were not legally attached to their tools or to the

owners of the tools, and consequently they were free to alienate or sell their
labour-power to any employer.

The latter, of course, stood to the former as

legal subjects, as owners of private property.

Thus, the theoreticians of the

English Civil War assumed the alienation of labour and the existence of a legal
subject.

In their attempts to justify the new social order, the jusnaturalists

posited the existence of a pre-social or pre-political legal subject bestowed

with certain natural rights.
the pre-social nature of these
their validation.

A palpable contradiction arose, thererore, between

~rights~

and the necessarily social character of

It was necessary for the jusnaturalists to presuppose a

social contract by means of which each individual bourgeois could have its
rights validated as a citizen.

Writing in a time of unprecedented civil unrest,

the consistent Hobbes had advocated the total alienation of the individual self
to the sovereign who would ensure social peace.

Locke, instead, having

witnessed the growth of political stability after the Restoration, could propose
the creation of a representative State with the purely negative function of
protecting .. life, liberty and estate".

So confident was Locke in the

compactness of the bourgeoisie that he could even entrust it with a power of

resistance against tyrannical or unconstitutional government.

- 39 -

There were, after all, real reasons for this confidence.

The expansion

of commodity production and of the market had permitted the homogenization of

rationality and its tangibility in money.

Even power could be rationalized

through the representation of public opinion in a balanced parliamentary system

operating with a strict separation of legislative, executive, and judicial
power.

Indeed, opinion could be 'public' also in the sense that it did not

promote any private or sectional interests but merely aided the protection of
private interests generally by assuring them of the impartiality of the State.
Hence, the self-understanding of the English and American Revolutions was based
precisely on the postulate of a good state of nature, pre-social and prepolitical, giving rise to a civil society embodying natural rights and operating
according to the laws of the market which the state was to protect against
external interference.

The philosophical underpinnings of the French Revolution were different.

Though sharing many of the assumptions of the English jusnaturalists, Rousseau
advocated the total alienation of the self not, as in Hobbes, to create a third
party as an external compulsion, but rather to transform the selfish and corrupt
bourgeois into the virtuous and altruistic citizen.

For Rousseau, public

opinion was to be established contractually as the radical reconstitution of a

degenerate civil society.

The task was to be achieved by the general will'.

under a total constitutional order that embraced society itself.

But the

formation of the "general will" or the State, depended on the pre-formed

enlightenment of the parties to the social contract.

Rousseau was forced,

therefore, to oscillate continually between educational and religious refonn, on

the one hand, and forceful action by the State, on the other, to uplift civil
society.

- 40 -

What neither jusnaturalism nor contractualism explained was how it was

possible for a society of private owners and producers to reproduce itself:
was left to classical political economy to proffer some answers.

it

Whereas

previous theories of civil society had relied on the statal protection of

natural

rights~

the political economists concentrated on the public welfare

created by the self-interest of equal and free participants to the market.

Given a certain homogeneity of consumer choices, ensured by their monetary
quantification, the supply and demand of commodities would reach an equilibrium
where their price would be fixed, determining thereby the distribution of wealth
according to the factors of production and the social allocation of resources.
It was assumed throughout that all production was for consumption; indeed, Say's
Law decreed that supply would create its own demand!

But the market mechanism,

supposed to be made self-regulating by these elements, could not guarantee the

truth of these propositions until after the commodities were sold.

hence, the

political economists had to equate artificially the enlightened self-interest of

the producer with the needs of society.
3entham had dislodged Locke.

Utilitarianism could now reign supreme;

The automatism of the market transformed

~ven

public opinion from a classist tool for the rationalization of power (the public
sphere of property owners) into the very embodiment of Reason.

With the State

confined to a negative role, the public sphere could be emancipated from

economic problems and become exclusively the forum for dispassionate and
disinterested debates over political, religious and moral issues.

The repeal of

the Corn Laws and the extension of free trade to the markets of the world,
together with the introduction of the gold standard that sanctioned the existing
global division of labour, finally enthroned the ideology of bourgeois public
opinion as the supreme social power.

If 'ideology' is taken to mean a pattern

of classist ideas that directs the overall operation of a political system, this
was the only period in the history of capital when a bourgeois ideology can be
said to have existed.

- 41 -

By separating the individual capital from a particular branch of

production, money permitted that bourgeois rationalization of power and
scientization of politics on which the autonomy of the market was based.

The

problem arose, however, of how this rationality of power was to be ensured.

For

the State, the embodiment of rational power, was to preserve the autonomy of the
market by ensuring the adequate electoral representation of the various
interests in society so that no particular interest arose to disrupt the
economic equilibrium.

But this task was clearly antithetical to the necessary

imbalance of economic interests competing in the markets.

How could a State

that represented unequal interests see to it that they would be protected

equally?

Nor could this problem be solved by a system of constitutional ;checks

and balances':

the very scientization of politics tended to bureaucratize the

political process and to reduce individual autonomy as a result; the

rationalization of power merely constricted the freedom of the market because
the latter could not be given as a condition of the former.
to this antithesis emerged in the nineteenth century:

Two major solutions

one, underwritten by the

two great liberal philosophers, J.S. Mill and Alexis de Tocqueville, limited the
sphere of State activities to the negative enforcement of private rights and
civil liberties in the light of public opinion; the other, expounded by G.W.F.
Hegel, duly recognized the misery of civil society, the antagonism of bourgeois
interests, and sought to reconcile (Versohnen) them at the level of, and
through, the State.

Neither of these theories could resolve the contradiction

between State and civil society because they did not confront the antagonism of
private interests; but the mere fact that they dealt with the problem showed
that even bourgeois thought perceived a central dysfunction in the liberal
regime.

'

- 42 -

Already, then, at the height of its autonomous operation, the doubts of

bourgeois society were gnawing at its material and ideological underpinnings.
Three were the major problems:

At the level of the individual legal subjects, the claim to subjective

rights was inconsistent with their social, objective validation.

Socially, the

increasing division of labour and interdependence of individual producers made

the existence of a 'state of nature' where wealth was 'originally

accumulated~

according to natural endowments ever more remote and implausible.

At the level of civil society, the reproduction of the market, its selfregulation, was inconsistent with the autonomy of the producers.

Economically,

the expansion of the market and the increased production of social wealth had
paradoxically brought about the immiseration of a whole social class and the
obvious squandering of material resources.

Finally, at the State level, the representation of selfish interests was

in clear contradiction with the desired neutrality of the State.

Politically,

the endogenous growth of powerful economic interests within the market and of
classist political organizations within civil society had elicited the political
intervention of the State and engendered the need for a bureaucratic apparatus
to regulate social conflict.

As we saw in the previous chapter, the Great Depression was the first
catastrophic symptom of the existence of a society

capital; it served to put

in sharp relief the complete inadequacy of capitalist institutions that were

still geared to the era of competitive capitalism.

Despite the backwardness of

I*

- 43 -

u.s.

state institutions, important changes had occurred in Europe.

Starting in

the second half of the ninetheenth century, European parliaments and States
began to adjust to the growing political needs of the capitalist economy with a
flurry of legislative activity.

Not only did the pace and volume of legislation

increase rapidly (thanks to some provident changes to legislative techniques

such as the introduction of the 'guillotine' to shorten debates on bills and
prevent the 'filibuster'); but also statute law assumed a generic social rather
than specific private character, interfering increasingly with customary and
judge-made law.

European States developed also large bureaucracies run

according to rational-scientific principles by a hierarchy of civil servants,

while parliamentary constitutions like England saw a growing concentration of
power in the hands of executive cabinets led by prime ministers with the backing
of strong national parties.

The parties themselves were creatures of the

spreading monopolization of capital as well as a response to the emergence of

working-class institutions like trade unions and social democratic parties.

These can be seen as attempts to liberate the state machinery from the
shackles of liberalism with its defunct institutions and allow it to intervene
in the capitalist market mechanism to ensure the reproduction of society.

One

of the major obstacles to the expansion of state functions, namely, the

existence of a 'public sphere' of independent bourgeoises and a white-collar
middle class was being eliminated by the growth of monopolies and the
disappearance of ;unproductive labour; as a result of the spread of the wage
relation to all areas of social life.

As yet, however, there was no precise

awareness of the tasks of the new State-form and of how it should fulfil them.
Not until the great international explosion of working-class revolutions in
1919-20 did the most brilliant bourgeois theoreticians reflect on the immediate
needs of capitalism.

Weber~

Keynes and Schumpeter posed themselves the specific

- 44 -

goal of saving capitalism from its imminent diremption; but each of them dealt
with a different aspect of this goal - Weber with how the new State-form could

master politically the antagonism of the working class and make it the motor of
its growth, Keynes with how the crisis could be avoided through state control
over the monetary medium, and Schumpeter with the possiblity of a capitalist use
of the crisis and the trade cycle.

For Weber, the real ruler in the modern State was bureaucracy, the
public power of the administration to ensure the reproduction of society in its
vital functions:

Sociologically speaking, the modern state is an 'enterprise'

(Betrieb) just like a factory:
peculiarity.

This exactly is its historical

Here as there the authority relations have the

same roots ....

This all-important economic fact:

the

'separation' of the worker from the material means of

production

is the common basis of the modern state

and of the private capitalist economy

The 'progress'

toward the bureaucratic state .... is nowadays very closely

related to the modern capitalist development. 1

The fate of Zivilisation, then, is the "disenchantment" of the world that comes
with the "separation" of the worker from the object of work.

It is the enforced

alienation of the Arbeit (labour) that has transformed human reality into a
wholly reified, calculable, cybernetic "iron cage".

Those socialists and

- 45 -

workers who clamour for the socialization of the means of production are
oblivious of this destiny:

The progressive elimination of private capitalism is

theoretically quite thinkable ..

But assuming it succeeds:

what would be its practical significance?

the iron cage of modern industrial work?

The shattering of
No!

Rather it would

mean that the management of nationalized or in some way

'socialized' enterprises would also become bureaucratic.2

But Weber was never fooled by the apparent objectivity of purposive rationality
or by its embodiment in the bureaucratic machinery; "an inanimate machine is
mind objectified",3 its technical operation is the product of political
decisions.

Hence, while bureaucracy allows only the servile and innocuous

obeisance of "officialdom'" (Beamtetum), politics is the "will to power .. (Wille

zur Macht):

'To be above parties' - in truth, to remain outside the realm

of the struggle for power- is the offical's role, while this
struggle for personal power, and the resulting personal
responsibility, is the lifeblood of the politician as well as
of the entrepreneur .. 4

2.

Cited in K. Lowith, Max Weber and Karl Marx, London, Allen & Unwin, 1982,
p. 53.

3.

Ibid. , p. 1402.

4.

Ibid., p. 1404.

- 46 -

In a nation of antagonistic classes, decisions cannot be taken rationally or

automatically.

The outbreak of World War I, with its grave domestic crisis, had

exposed the inadequacy of the Imperial Obrigkeitsstaat (authoritarian State),

its pitiful distance from the political will of the nation and its inability to
muster the energies and resources of the Reich, all due to the dichotomy of
bureaucratic government and a parliament of guild-like parties.

These factors

combined had led to the "negative politics" of the Reichstag in both external
and internal affairs - such was the execrable "will to impotence" (Wille
Ohnmacht) of the German political class.

With the prospect of a political

crisis awaiting Germany at the end of the War, Weber threw the entire weight of
his analytical acumen on devising a new form of the State to counter the rising
level of working-class composition and struggle.

Against the fearsome

proletarian avalanche, against the blind fury of the masses", a powerful asset
of the State would be essential; democracy would have to be transformed.

From the viewpoint of the national interest, the political

utility of solidly organized interest groups rests on the same
basis.

Completely irrational, from the same viewpoint, is the

unorganized 'mass' - the democracy of the streets.

It is

strongest in countries with either a powerless or a

politically discredited parliament, that means, above all, in
countries without rationally organized parties.

In Germany

.... organizations such as the trade unions, but also the

Social Democratic party, constitute a very important counterbalance against the direct and irrational mob rule typical of
purely plebiscitary peoples.s

5.

Ibid., p. 1460.

- 47 -

This is the programme of Parlamentarisierung, a programme that includes the full

integration of the organizations of the working class in the institutions of
capitalist political domination.

If capital must continue to rule, then it must

be able to anticipate and assail the level of political composition of the

working class dictated by the struggle over the labour process.

Capital must

use the Arbeit of the labour force as the motor of its own development.

To

integrate and master the explosive force of the working class -

This and nothing else is the political meaning of

~social

democracy' in an age which, inevitably, will still remain

capitalist for a long time.6

It is the antagonistic cohesion of the working class that forces capital out of
its archaic form of private capital into the new one of organized capital:
capital must present itself now as social capital, and the State as a
Sozialstaat.

The Parlamentarisierung is "organized domination".

Gone are the

days of "negative politics"; the new Parliament will engage in "positive

politics to co-ordinate and direct the crisis-ridden capitalist economy.

The

law will intervene decisively to regulate and command vital social processes,
and the intervention will be guided by political, not bureaucratic, dictates.
There will be parliamentary control of the bureaucracy; but above all, there
will be parliamentary selection of leaders, who will be accountable to
Parliament through the party structure.
Beruf (calling) of the leaders.

Weber ... s "new parties" will e-ducate the

By concentrating political power in the hands

of the executive, the new parliamentary structure will pro-duce the leitender
Geist (the charismatic leader).

6.

Ibid., p. 1391.

But this is the end of the ... bourgeois', of the

- 48 -

public sphere, of enlightened public opinion, of the old constitutional

~

separation of powers.

There is a tone of pathos in Weber's voice as he delivers

the Munich lecture, Politik als Beruf:

(I]t has to be clearly realized that the plebiscitarian

leadership of parties entails the 'soullessness' of the
following, their intellectual proletarianization one might
say.

In order to be a useful apparatus, a machine in the

American sense - undisturbed by the vanity of notables or

pretentious to independent views - the following of such a
leader must obey him blindly. 7

No-one understood the meaning of Social Democracy better than Weber.

For even at the heart of the Bernstein Debate over whether socialism would be
achieved through revolution, as the Communists prescribed, or through peaceful
evolution, as the Socialists proposed, both sides shared the conviction that the
development of the forces of production by capitalism would come increasingly
into conflict with its social relations of production.

All Marxist

theoreticians of the time were agreed that the contradictions of capitalism, its
'exploitation', lay not in the act of production mediated by the wage relation,
but in the distribution of commodities.

Hilferding's attack on

Bohm-Bawerk~s

critique of Marx, aimed at proving that the latter had not failed to

transfo~

values into prices in Volume 3 of Capital, was meant to establish the

possibility of a 'correct, distribution of the fruits of social labour through

7.

H.H. Gerth & c.w. Mills, From Max Weber:

Routledge & Kegan Paul, 1970, p. 113.

Essays in Sociology, London,

- 49 -

the price mechanism. 8

Similarly, the notion of finance capital as a product

of the monopolistic practices of capitalists, to which Lenin subscribed, was

intended to show that imperialism arose in the sphere of circulation and not in
that of production.

Lenin~s

own championing of Taylorist scientific management

as a harbinger of socialist rationality and abundance together with the rational

division of labour along "democractic centralist" lines within the Bolshevik
Party identified by Weber as "the iron cage" followed this reasoning.

Lukacs,

Luxemburg and Gramsci - centred their thoughts precisely on the opposition to

the commodification of labour brought about by the capitalist transformation of
the labour process.

After reviewing Weber's theory of bureaucratization, Lukacs

took up his notion of disenchantment.

By separating workers from their labour,

capitalism operates a split between subject and object that becomes evident in
the act of cognition, in the antinomies of burgeois thought; it encourages
contemplative attitude.9
this process.

Nevertheless, Lukacs denies the inevitability of

The real culprit, instead, is the modern labour process imposed

by the development of capitalism because "the specialization of skills leads to

the destruction of every image of the whole".lO

Lukacs~ philosophy,

therefore, must be seen as a politically ineffectual, romantic longing for the

old artisanal skills labour of craft workers and as a condemnation of the new
'massified' methods of production.

Rosa Luxemburg's critique of the Russian

Revolution falls wholly within this logic, condemning the "democratic

centralism" of the Bolsheviks as a reflection of the capitalist "division of

8.

In P. Sweezy (ed.), Karl Marx and the Close of His System, London, Merlin,

1975, pp. 121 ff.

9.

History and Class Consciousness, London, Merlin, 1971, pp. 103

10.

Ibid., p. 103.

- 50 -

labourH in the factory and as an unjustifiable interference with the spontaneit!

displayed by workers in the Massenatreik.ll

Only Grrunsci had a critical understanding of the

labour process.

transfo~ation

of the

In his genial notes on ,.Americanism and Fordism", Gramsci saw

the new phase of capitalism as involving a closer, more organic relationship

between finance capital and industrial production, the slow atrophy of middle
classes engaged in 'unproductive

labour~,

and the functional use of 'high wages'

by monopolies, all meant to counter the tendential fall of the rate of profit.

The Italian Communist had no illusions about artisanal labour:

A forced selection will take place ineluctably, a part of the

old working class will be eliminated pitilessly from the
world ... 12

But the new indusrial methods of Taylorism and Fordism would not eliminate the
old antagonism:

[Capitalists] have understood that

~tame gorilla~

is a phrase,

that the worker remains 'unfortunately' a human being .... 13

The 'rationalization' of production dictated by the new labour process would

require a reorganization of the entire productive apparatus and of collective

11.

R. Luxemburg, Rosa Luxemburg Speaks, New York, Pathfinder, 1970, pp. 153-

218.
12.

A. Gramsci, Note Sul Machiavelli, Roma, Editori Riuniti, 1975, p. 459.

13.

Ibid., p. 467.

- 51 needs that could be left in the hands of private capital but has to be
controlled by the State.

This, in turn, would necessitate an intervention in

the credit system:

If the State proposed to impose an economic direction for

which the production of savings from a 'function' of a
parasitic class became a function of the productive organism,
these hypothetical developments would be progressive, they
could come within a vast plan of integral rationalization .... 14

Failure to take such action "would weigh on labour in a much more crushing
manner".

For Gramsci, then, "labour" ends up being very similar to the

ubiquitous Arbeit of this period, and the sole fault of finance capital is to be
unconnected to the "productive organism".

It was left to Keynes to spell out the precise terms of state economic
policy for the new exigencies of capitalism in crisis.

Lenin was certainly right.

There is no subtler, no surer

means of overturning the existing basis of society than to

debauch the currency.15

If 'money is the link between the present and the future', the crisis had shown
that the political autonomy of this link, on which depended the self-regulation

14.

Ibid., P 472.

15.

J.M. Keynes, The Economic Consequences of the Peace, London, Macmillan,

1971, pp. 148-9.

- 52 -

of the market, had been broken for capitalism.

The institutional conditions

for neo-classical general equilibrium, on which rested Say's Law, no longer

obtained. 16

For it could happen that increases in demand would not be met by

higher capitalist investment if the marginal productivity (the

'profitability~)

of capital did not seem favourable to capitalists so as to justify their parting

with their savings.

It could well be, then, that in a critical situation

investments would not equal savings.

Formerly, equilibrium had been achieved

through a fall in the marginal productivity of labour (wages) by increasing

unemployment.

But the emergence of the working class in the twentieth century

had shown that money wages had a certain 'stickiness', even when real living
standards were preserved.

The massive presence of the working class in the

development of capitalism persuaded Keynes to formulate the notion of effective

demand".

The link between present and future, the political role of money, had

to be re-established forcibly by the State.

Effective demand is not, therefore,

a simple matter of monetary flows because it concerns the antagonism of the wage
relation evinced by falling profits and

~sticky'

wages.

There is no

misunderstanding Keynes on this point.

At the Peace Conference of Versailles, Keynes had diagnosed the demise

of the gold standard as a final arbiter of capitalist claims and warned against
its return because the deflationary measures that some countries, especially
Germany, would be forced to take to adjust their balance of payments would fuel
the revolutionary fire of the proletariat and lead to civil war.

This outcome

could be avoided only if the gold standard were abandoned in favour of

international co-operation in the setting up of a world fund to provide cheap
finance for investments.

16.

The abolition of the gold standard would allow each

Of course, the reference is to Keynes' General Theory.

- 53 -

capitalist class time to settle accounts with its own national working class
instead of keeping to the structures of gold.

Keynes' opposition to England's

return to gold in 1925 is explained thus.

The notion of "effective demand" was eminently political because it made

economic equilibrium hinge on maintaining a certain level of investments that
could be sustained by the State alone.

Only through the massive intervention of

the State to fix investments and eliminate the influence of parasitic rentiers
could effective demand be raised to maintain equilibrium with full employment.
The crucial category was to be '"national economic growth", and not "profit".
Hence, the State appeared in a novel guise as the expression of a capitalist
will to power, or better, will to survive.

There is in this sense - and beyond

a marked Cantabrian ethical moralism - a tone of despair in the future on

Keynes ... part, founded on deep-seated irrationalism:
all dead."

"In the long run, we are

The pessimistic prognostications of "secular stagnation'", which

sought a solution to the falling marginal efficiency of capital through the

discovery of new technical conditions of production, reveal that Keynes had
nothing positive to say about the trade cycle.

The Weberian shift from worth to purpose was not limited to the social
sciences but extended to science overall and to technology.

For once,

therefore, science and technology had lost their epistemological neutrality and
become aspects of social practice.

So far as it is 'scientific', science is

also rational; but its ultimate status of social practice requires a sujective
motor to it that, for Weber, is the calling (Beruf) of charisma.

If the State

must be run like a factory, the charismatic leader must become a captain of
industry.

Keynes' pessimism had sought to replace the uncharismatic behaviour

of the rentier with the

mas~ive

economic intervention of the State to avoid the

- 54 -

deleterious effects of the crisis.

Schumpeter, instead, re-introduced the

category of interest as reward for delayed consumption on the part of the

innovative entrepreneur.

Just as the concept of effective demand had upset the

Marshallian self-understanding of the bourgeois economy, so did Schumpeter's

championing of the entrepreneur as the expression of scientific and
technological practices overturn the Marshallian treatment of those as exogenous
factors in microeconomic analysis.

The hopeful neo-classical horizon of full

employment had failed to understand the specific nature of the cycle, concealing
the political uses of economic crises.

As Schumpeter himself put it:

"Analyzing business cycles means neither more nor less than

analyzing the economic process of the capitalist era.

Most

of us discover this truth which at once reveals the nature

of the task and also its formidable dimensions.

Cycles are

not, like tonsils, separable things that might be treated by

themselves, but are, like the beat of the heart, of the
essence of the organism that displays them." 17

Cycles are no longer thought to be accidental 'conjunctures' that may or may not
occur; rather, they are structural elements essential to the reproduction of the
capitalist system, the system of "creative destruction".

The massive

destruction of fixed capital caused by crises allows the dominating spirit of

inventive entrepreneurs to improve and expand the productive powers of industry
so as to accumulate wealth.

The crisis violently pushes aside weaker

capitalists and reduces the recalcitrant spirit of the working class, it

punishes the timid and rewards the adventurer by throwing the old order into

17.

J. Schumpeter, Business Cycles, New York, McGraw Hill, 1939, p. vii.

- 55 -

confusion;

it pushes the economy out of its "circular flow" by opening up new

outlets for investment.

These are the political uses of the crisis.

There is a

striking similarity here between Schumpeter's enterprising captains of industry

and Weber's charismatic leaders:

both force the stagnant, sclerotic,

bureaucratic asset of the old society to make a leap to a new dynamic system, to
more powerful forms of political command for the promotion of capitalist
production.

Thus Schumpeter relinquished the worn-out tenets of liberal

economics without borrowing the fatalistic pessimism of the Keynesians; in their

place, he put the awareness of the necessity of the cycle and the need for its
political use.

Yet Schumpeter understood the cycle from the topsy-turvy

perspective of bourgeois interests which distorts reality and mystifies it at

the same time: - the theory of entrepreneurial innovation (which he himself
called a 'psychological' theory) glorifies the individual capitalist without
comprehending the deeper truth that cycles are functions of social capital, not
of individual capitals, and that, therefore, they need to be explained at the
level of classes, not of individuals.

Unlike Weber and Keynes, he re-proposed

the old entrepreneurial figure as the subject of economic action without

noticing the capitalist need for institutional renewal.

Nevertheless, the

greatness of Schumpeter in economics lies in having seen the possibility of a

capitalist use of the business cycle.

CHAPTER 2

MONETARY AND FISCAL POLICIES OF THE NEW DEAL

Prologue:

The coming of the society of capital, the elevation of capitalist

industry to a point where the reproduction of society itself was dependent on
the reproduction of capital, required a new politico-economic asset of
capitalist institutions if the survival of capitalism was to be ensured.

Two

crucial areas had to be guarded in particular from the perspective of social as

against private capital - money and labour.

Only the emergence of a strong

state with capable institutions could ensure an adequate response to the gravity
of the crisis.

For this was not just anoher cyclical slump; here the very future of
capitalism was in danger.

It is probable that

Roosevelt~s

San Francisco address

of 1932 owes its fame to the pessimistic conception:

Our industrial plant is built .... " said Roosevelt.

"Our last

frontier has long since been reached, and there is practically

no more free land

Hence the need for political control of private enterprise had grown greater
than ever:

1.

This and the following quotations from

Roosevelt~s

Inaugural Address are in

S. Rosenman (ed.), The Public Papers and Addresses of Franklin D. Roosevelt,

New York, Random House, 1938-SO, vol. 2, pp. 11-S.

- 57 -

I feel that we are coming to a view .... that private economic

power is ... a public trust as well.

I hold that continued

enjoyment of that power by any individual or group must depend

upon the fulfillment of that trust.

But the constitutional, legal, and political machinery available to the

new Administration did not allow it to effect the necessary reforms.

It became

clear from the outset that a revolution in government was needed:

Our greatest primary task is to put people to work.

In every

dark hour of our national life, a leadership of frankness and

vigour has met with that understanding and support of the
people themselves which is essential to victory ....
We do not disturb the future of essential democracy.

The

people of the United States have not failed

In the event that the national emergency is still critical
.... I shall ask the Congress for the one remaining instrument
to meet the crisis - broad Executive power to wage a war
against the emergency, as broad as the power that would be
given to me if we were in fact invaded by a foreign foe
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 ...

Roosevelt was speaking from a position of strength.

The elections of

the previous year had seen him victorious by seven million votes over Hoover,
reversing the latter's victory by six million over Smith in 1928.

The gigantic

swing was due to the massiv~ working-class vote that allowed Roosevelt to

- )8 -

capture 32 of the 37 major towns.2

With that kind of political mandate, which

included a crushing Democratic majority in Congress,* the President had

considerable political space in which to manoeuvre.
infusion of new blood in Washington.
quickly formed:

~A

The time was ripe for an

Brain Trust; of ;New Dealers' was

a motley band of lawyers, economists, bankers, engineers, and

administrators marched to Washington and set camp.

The new Administration

needed them to run the many governmental agencies, boards and authorities that
were to be erected in the next few years to measure and control the performance
of the economy.

Many waited breathlessly to see if the crisis would transform the United
States into another Russia or Germany and Franklin D. Roosevelt into another
Huey P. Long.

Would the reins of commodity production, however checked by

government, remain in the hands of capitalists, or would it be overridden by a

corporate State on the fascist model?

In Marxist terms, would the regime of

capitalist accumulation in the United States be one of relative or of absolute

extraction of surplus value?

All ears listened intently as Roosevelt delivered

his acceptance speech on 4 March, 1933:

This Nation asks for action, and action now ....

and act quickly ...

We must act,

We must move as a trained and loyal army

willing to sacrifice for the good of a common discipline,

because without such discipline no progess is made, no

Senate: 59 Dem. and 36 Rep.; H. of R.: 313 Dem. and 117 Rep.

2.

See J.M. Allswang, The New Deal and American Politics, New York, Wiley,

1978, Ch. 3.

- 59 -

leadership becomes effective.

It may be that an unprecedented

demand and need for undelayed action may call for temporary
departure from that normal balance of public procedure.

*****

We begin our treatment of the New Deal with an analysis of its monetary
and fiscal policies not merely because they form an essential part of all
economic policy, but also because they illustrate best the logic of state

,,,
II'

intervention in the capitalist economy.

As we have seen, money is the

embodiment of value in the sphere of circulation; it is the essential element in

the formation of social capital.

By removing value from its immediate

extraction in the labour process, money constitutes capital as a transcendent

social entity separate from its private uses.

This independent existence of

money capital - what amounts to the

of capital - can pose a threat to

~idealism'

capitalism whenever capitalists themselves forget its real origins in the

exploitation of living labour.

The growing independence of money capital from

its real origins in the exploitation of living labour threatened capitalism

itself.

Therefore, the enforcement of the law of value required political

control over the monetary medium to ensure that it gave a truer indication of
real capital formation and accumulation.

Not surprisingly money was selected

both as the quickest channel for state intervention in the economy and as the
most powerful form of state authority over society.
much:

Roosevelt understood as

- 60 -

Now, in a nutshell, the first portion of this, down to the

first line, might be called philosophical.

In other words,

it merely goes into the general theory that the issuance of

money or currency or any medium of exchange is solely a
Government prerogative and always has been [our emphasis]
since the days of Babylon or the time they used sea shells
or coral beads in the South Sea Islands.

In theory, coral

beads are a perfectly good medium of. exchange, perfectly

good money as such, provided there is control over them.
It becomes a question of contro1. 3

The President's obvious exaggeration was clearly intended to impress in the mind
of listeners the necessity of prompt political action to resolve the crisis.
Only political authority over the monetary medium could extend the capitalist
present into an otherwise uncertain future.

By the time Roosevelt took charge of the Presidency on 4 March 1933, the
financial system of the United States was on the verge of total collapse:

an

unprecedented number of bank failures, deposit withdrawals, and the drain of

gold reserves had forced many state governors to declare bank holidays.

Hence,

in the first days of March, the financial system of the greatest capitalist
economy was paralyzed. 4

Only immediate and drastic action by the federal

government could have saved private banking.

Invoking war-time powers under the

Trading with the Enemy Act, Roosevelt declared a national bank holiday and the

3.

Quoted in H. Stein, op.cit., p. 42.

4.

See H.W. Arndt, The Economic Lessons of the Nineteen Thirties, London,
Oxford U.P., 1944.

\)

- 61 -

suspension of the gold standard.

Although many Congressional leaders called for

the nationalization of banks, the newly-elected President chose to seek the

collaboration of the money-changers who might have fled from their high seats in
the temple, but had quickly found the back door to the Treasury.

After calling

a special session of Congress on 9 March, Roosevelt obtained passage of the

Emergency Banking Act, 1933, in record time.

The Act authorized the bank

holiday and the lending by the Federal Reserve to member banks without
limitation on the character of the security accepted.

From the following day

those banks whose solvency and liquidity could be guaranteed. by the government
were re-opened.

Within a week, about 75% of member banks had been re-opened

without restrictions; a month later the number had risen to 90%; withdrawals had
lj

stopped and $1.25 billion in currency had flowed into banks by the end of
March. 5

,,
By 1933 many debts that had been contracted three or four years earlier
had become unbearably onerous because of the rapid decline in price 1evels. 6
A succesGful economic policy presupposed the re-establishment of the old price
level through reflation which, in turn, required the suspension of the gold
standard at home and the strict supervision of gold exchanges.
Banking Act achieved all this and went further in outlawing

The Emergency

~gold

clauses' in

contracts and enjoining all possessors of gold to turn it in to the Treasury.

Congress was certainly equal to the task.

In Title III of the Agricultural

Adjustment Act (the Thomas Amendment), signed on 12 May, Congress authorized the

5.

W. Mitchell, op.cit., pp. 127-33.

6.

For what follows below, see L. V. Chandler, American Monetary Policy,

1928-41, New York, Harper, 1971, Ch. 17.

- 62 -

FRB to acquire up to $3 billion in government securities to the Treasury; it

empowered the Secretary of the Treasury, under presidential direction, to

issue~

$3 billion in 'greenbacks' and to fix the gold value of the dollar by

proclamation at a level not exceeding a 50% reduction.

An investment fund of

$2 billion was to be set up with the funds obtained from the devaluation.
Moreove~,

the silver value of the dollar was to be fixed; silver could be

accepted at no more than 50 cents an ounce in payment of debts by other

governments, though the total accepted could not exceed $200 million; and
unlimited coinage of silver and gold could be made at fixed ratios to establish
bimetallism both at home and internationally.
unprecedented measures.
~greenbacks',

mournfully:

These were sweeping and

Upon hearing about the grant of power to print

Budget Director Lewis Douglas is said to have announced

"This is the end of Western civilization".

worried that much.

But he need not have

Although he had not regretted the 'greenback' printing

powers, Roosevelt wanted a managed money economy and not some reckless
;greenbackism'.
balanced budget.

Indeed, throughout the New Deal, he remained committed to a

State expenditure was to create only temporary deficits which

would be paid later by higher tax revenues.

There was nothing contradictory or

sinister, then, in Roosevelt's insistent support of the Economy Act of March

1933, trimming administrative costs, or in his opposition to the payment of the
bonus to war veterans.

Roosevelt's fiscal policy was far from loose or

expansionist; he never believed in "recovery expenditure", but spent only when

political need dictated. 7

7.

Cf. Stein, op.cit., Ctr.l2.

- 63 -

Yet, in the summer of 19-33, political need dictated a change in the

world economic order.

The London Conference, held in June, was to decide the

fate of international exchange.8

It had become clear to many members of the

Administration and Congress that the budget deficit could not be incurred with
the dollar so overvalued on the gold standard without a serious outflow of gold
that might lower prices still further and spread financial panic.

Although the

United States could withstand the gold outflow easily in terms of gold reserves
(which had been growing fantastically during the twenties), a drain of gold
would have lowered domestic prices and threatened the fragile economic recovery.
Since March, the dollar had fallen spectacularly in exchange markets, driving
domestic commodity prices up and creating new purchasing power.

Tied to this

reflation was the added protection enjoyed by U.S. industry through the SmootHawley tariffs of 1932 and those introduced by the Agricultural Adjustment
Administration and the National Recovery Administration.

Roosevelt hoped that

by the time the Conference was held, the dollar would fall so much that the
foreign delegations might be forced to agree on international action to raise
price levels in exchange for monetary stabilization and lower tariffs.

The

American President was quite conscious of the importance of a positive agreement

for global economic stability and peace against the nationalistic drive of the

Axis powers; he himself linked the fates of the London Economic Conference and
the Geneva Disarmament Conference on 16 May, a day before Hitler launched his
foreign policy in the Reichstag.

But in the face of European unwillingness to

shoulder the cost of reflation, Roosevelt warned his delegates not to enter into
any monetary or tariff agreement that might jeopardize domestic recovery.

8.

A fuller treatment of this important episode is in A. Schlesinger Jnr.,

The Age of Roosevelt, New York, Houghton Mifflin, 1959, (3 vola.), vol. 2,
Ch. 13.

- 64 -

Eventually, on 3 July, he sent the famous 'bombshell' message to the Conference

which was interpreted by the other powers as a declaration of economic warfare:

I would regard it as a catastrophe amounting to a world tragedy

if the great Conference of Nations, called to bring about a

more real and permanent financial stability and a greater
prosperity to the masses of all Nations, should, in advance of
any serious effort to consider these broader problems, allow
itself to be diverted by the proposal of a purely artificial
and temporary experiment affecting the monetary exchange of a
few Nations only ...

According to Roosevelt, the mere return of the dollar to the gold standard
showed "a singular lack of proportion and a failure to remember the larger
purposes for which the Economic Conference was called".
e tis hes of so- called international bankers.

He denounced the "old

They were being replaced

by efforts to plan national currencies with the objective of

giving to those currencies a continuing purchasing power which
does not vary greatly in terms of the commodities and need of
modern civilization.

Let me be frank in saying that the United

States seeks the kind of a dollar which a generation hence will

have the same purchasing and debt-paying power as the dollar
value we hope to attain in the near future.

That objective

means more to the good of other nations than a fixed ratio for
a month or two in terms of the pound or franc.9

9.

The Public Papers

of FDR, vol. II, pp. 264-5.

- 65 -

The decision of the Roosevelt Administration to abandon the gold

standard and international financial stability in favour of economic

national~sm

in order to settle the internal balance of class forces was tantamount to a

declaration of trade war.

After the middle of 1933, the U.S. financial system

experienced an avalanche of in-flowing gold as European capitalists sought the

protection of a strong dollar.

The Gold Reserve Act of 1934, passed by Congress

on 30 January, gave Roosevelt power to fix the new price of gold, which became
$35 per ounce, up 69.33% from its old official level of $20.67.

The decision to

buy gold, announced by Roosevelt in October, was dictated by the new slump of
the economy and prices in mid-summer.

It is impossible to assess the ultimate

effectiveness of these measures; but there can be no doubt that the fantastic
increase of U.S. gold .reserves from $4 billion in 1933 to nearly $14 billion in
1937 must have created a lot of liquidity, as is attested by the large excess
reserves of banks and the low interest rates.

Certainly, banks were able to

make large increases in their loans and investments.

Overseas, however, the

flight of gold reserves occasioned by U.S. purchases caused the gold-bloc

countries to deflate until, confronted with domestic political problems and the
resultant speculation against their currencies, they were forced to capitulate:
Belgium left gold early in 1935 and France late in 1936.10

These initial measures opened the road to inflation, they made possible
''the liberation of fiscal policy" that allowed the State to mortgage the future
through the credit system in order to preserve the present. 11

Now the

Roosevelt Administration could turn to settling the internal balance of class

forces.

The revolutionary fiscal and monetary measures it took until 1937 must

10.

See L.V. Chandler, op.cit., Chs. 18 and 19.

11.

Cf. Stein, op.cit., .. Ch. 2.

- 66 -

be seen in the broad context of a thorough overhaul of the distribution of

surplus profits among capitalists elicited by the necessity to re-establish tne
link between wages, understood as 'purchasing power', and investment in fixed
capital, geared to the savings-investment process.

The devaluation of fixed

capital during the crisis had provoked an abysmal deflation and caused serious
distortions in the distribution of productive assets.

A huge program of

reflation was needed to raise wages and valorize fixed capital.

The first step

in this process was the rehabilitation of financial intermediaries such as

banks, building and loan associations, mortgage companies, and joint-stock land
companies - all of which provided loans for entrepreneurs to valorize their
fixed capital directly and for workers to maintain their purchasing power, or

I'll
I'

wages, so as to valorize it indirectly.

Merely postponing payment dates or

reducing interest rates was not sufficient because, in the absence of government
aid, debt re-adjustment could only hurt creditors and increase the financial
chaos. 1 2

The aid was divided into three major categories:

loans to and preferred

stock in financial institutions (mainly banks), loans to urban homes, and loans
to farmers.

Most of the assistance to banks was in the form of preferred stock

purchases ($1,018 million) as against direct loans ($678 million).

This

financing technique was meant to increase government control over banks in view
of the creation of deposit insurance.

The Administration felt also that banks

would benefit indirectly from the greatly swollen money supply.

A huge

proportion of funds ($875 million by 1938) went to liquidators of closed banks

to benefit depositors directly, to aid the orderly and better realization of

12.

This analysis is in Aglietta, op.cit., pp. 228-38.

op.cit., pp. 262-3.u

Also, L.V. Chandler,

- 67 -

bank assets, and to relieve pressure on their prices.

The other major

recipients of aid were home mortgages ($2,903 million) and farm mortgages
($2,867 million); these loans were intended to finance private debts and to
increase directly the purchasing power of urban workers and farmers.

Very

little aid went to business firms, almost as if to stress the government's

intention to minimize the role of the stock exchange as a centre of finance
capital vis-a-vis the banks; firms were forced to draw from banks for their
financial needs rather than issue share capital.

The encouraging results of executive action in March did not mark the
end

of

the emergency.

First, the financial system had to be rehabilitated by

reducing the burden of individual debtors made unbearable by the severe

deflation of the past three years.
to be rekindled.

Second, the savings-investment process had

A spate of new institutions were formed to finance debt-ridden

industries, sometimes at a loss.

The Reconstruction Finance Corporation,

founded in 1932 by Hoover, was enlarged in resources and scope to feed funds to
banks by subscribing to preferred stock or other equity claims against them; the
Federal Farm Mortgage Corporation helped farmers in trouble; the Home Owners'
Loan Corporation re-financed home mortgages.

Between themselves, these

corporations distributed close to $9 billion by the end of 1935, a sum beyond

the ken of previous Administrations.l3

The necessary price that finance capitalists had to pay for their rescue
came in the shape of the two Banking Acts, 1933 and 1935, the two Securities
Acts, 1933 and 1934, and the Public Utility Holding Company Act, 1935.14

13.

See L.V. Chandler, op.cit., pp. 263-9.

14.

A full account is

i~J.Seligman,

The Transformation of Wall Street, Boston,

Houghton Mifflin, 1982, pp. 1-241.

- 68 -

These statutes sprang out of the investigations held by the Senate Committee on
Banking and Currency, starting in September 1931 under the direction of Senatar
Carter Glass, into the causes of the depression and the role of the Federal
Reserve System.

The Senate inquiry acquired teeth early in 1933 when Ferdinand

Pecora, special attorney for the committee, subjected top bankers like
J.P. Morgan and Charles M. Mitchell to a thorough grilling.

A series of grave

legal abuses was uncovered, ranging from speculative investment techniques to

tax evasion and avoidance.

The great resonance of committee hearings

intensified public outrage against Wall Street until it reached fever pitch on
the eve of Roosevelt's Inauguration.

The new Administration was prodded into

action.

,tt

The Banking Act of 1933, approved on 16 June, separated the savings and
commercial business of banks, prohibiting their joint pursuit and requiring
Federal Reserve banks to keep themselves informed on the credit extensions of
their member banks.

Bank holding companies were regulated to check their

members and to prevent the shifting of assets from one to another in a

combination, which made auditing difficult.

Moreover, chain or branch banking

for national banks was encouraged as a stabilizing force.

The most successful

innovation in the Act was the Federal Deposit Insurance Corporation which, under
its permanent scheme, was to insure deposits 100% up to $10,000, 75% between
$10,000 and $50,000, and 50% beyond $50,000.

All member banks had to be insured

while state banks had to become members within two years to be insured.

The

capital stock of the FDIC was subscribed by the Treasury, by Federal Reserve
banks, and by participating banks.

The FDIC was to be the receiver of failed

banks, which would be liquidated, while new stockholders were found or else the
business of the failed bank would be turned to a larger bank willing to take it.
With the FDIC, bank failures became a thing of the past.

Finally, the Act

- 69 -

increased the authority of the Federal Reserve Board and extended the Federal
Reserve System. No reserve bank could negotiate with
consent and participation of the FRB.

foreign banks without

~he

Member banks could no longer pay interest

on demand deposits and the FRB could set the interest rate on time deposits.
The FRB was empowered to remove officers of member banks who offended against
regulations or sound banking practice.

In view of the many failures due to

inadequacy of capital, the minimum capitalization requirements of national banks

was doubled to $50,000.

Between 1933 and 1935, the Roosevelt Administration prepared a plan to

centralize further the FRB's authority over banking.

But when the Banking bill

was introduced in February 1935, big bankers and other finance capitalists
finally rallied their forces against its proposals.

Although the bill, drawn

under the guidance of none other than FRB chairperson Marriner S. Eccles, easily
went through the House, it was stopped in the Senate until it was signed,
heavily curtailed, on 23 August.

The move underlined the more immediately

political role of inconvertible money, its new status as

'credit~

or 'legal

tender' that had to be placed under the tight control of a central bank
responsible to the State.

Already, the Securities and Exchange Act of 1934 had

given the FRB authority to impose margin requirements for loans on securities
(again, a measure apt to strengthen banks against stock exchanges).

The Banking

Act of 1935 clarified and extended the role of the Federal Reserve System.

The

old FRB was replaced by a Board of Governors with seven governors appointed by
the President with the advice and consent of the Senate.

The Board was

empowered to prescribe different interest rates on different time and savings

deposits, to set reserve requirements and discount rates, and to order member
banks to hand over government securities.
surveillance over

presid~nts

It was given also powers of

and vice-presidents of member banks.

The Federal

70 -

Open-Market Committee was re-organized and its powers were enhanced:

the old

membership of twelve representatives from Reserve banks was changed so that

seven of them made space for the seven governors of the Board, while power over
open-market operations was transferred to the new Committee.
included many concessions to finance capital.

But the Act

The generous deposit insurance

scheme of the 1933 Act was dropped for a $5,000 insurance limit on any one
account - a concession to the larger banks whose higher deposits were not
equally protected, occasioning a loss of business to smaller banks.
independence of the

~Fed~

The

was preserved by making government securities

available for purchase only in the open market and not directly from the
Treasury.

The spectacular growth of Postal Savings was curbed in favour of

private banks by fixing their maximum interest rates to the level paid on
savings by the member bank nearest to a post office.

National banks were

allowed to end double liability by giving newspaper notice.

Most important, the

original proposals contained in the bill for one central bank, for a monetary
authority, for a policy declaration, and for new qualifications for board
members, were all dropped.15

Virtually the same fate awaited the Securities Act, 1933, and the
Securities Exchange Act, 1934. 1 6

As enacted, the 1933 Securities Act granted

only modest regulatory powers to the Federal Trade Commission.

Schedule A

provided for the disclosure of information in the registration statement filed

with the FTC and in prospectuses available to investors before an issuer offered
securities to the public.

This was certainly sufficient to discourage fraud.

Securities issuers could expect to wait twenty days for the FTC to study the

15.

On the Banking Acts, see generally W. Mitchell, op.cit., pp. 163-71.

16.

Again, the mandatory'reference is Seligman, op. cit.

- 71 -

contents of a filed registration statement.

The Commission could bar public

sale of the securities if it could show incomplete or inaccurate information.

Company directors, executives, accountants, engineers, and appraisers as well as
underwriters (investment bankers) co?ld be held civilly liable for falsehood or
omissions in the statement.

But the Act was a far cry from the original bill.

In particular, the FTC had no power to comment on the quality of securities

issues, or to direct capital to productive channels in industries that needed
it.

It had no authority to enforce state blue sky laws on securities traded

interstate.

What is more, the Act exempted interstate and bank securities,

buildings and loan associations, and securities issuances for less than
$100,000.

The dilution of the Securities bill can be ascribed only to the

weakness and uncertainty of Congress, certainly not to any pressure from Wall
Street, which was still recovering from the shock of the Pecora hearings.

The

mildness of the 1933 Act, however, gave Wall Street time to catch its breath and
to prepare against future attacks.

One of the aspects of finance capital with which the new Administration
had not dealt yet was the regulation of the securities industry and of the stock
exchanges.

An initial bill was introduced in Congress in February 1934.

The

bill, drafted by Senator Fletcher and Representative Rayburn, contained drastic

reforms of the securities market.

Among other things, the bill required each

securities exchange to register with the FTC, which could approve or reject its
rules and regulations;

it proscribed nine specific types of market manipulation

(e.g. wash-out sales, short-sellings, insider trading); it forbade brokers from

lending above a narrow margin, authorizing the FTC to regulate them from time to
time.

These provisions reflected the New Dealers' belief that "the two real

causes of trouble in the stock market are speculation with borrowed money ...
and lack of adequate

pub~~city'',

as well as their doubts about the political

- 72 -

independence of the FRB from Wall Street that would permit it to settle margins
adequately - thence, the reliance on the FTC.
the 'financial

community~

But perhaps the biggest blow tQ

projected in the bill was its attempt to abolish floor

traders, or in other words, to separate brokers and dealers.

This meant

effectively that money changers could not be investors and vice versa!

One can

easily imagine how these proposals pronged the money changers into action:
Congressmen were incessantly lobbied, newspapers were approached and often
bribed to oppose the bill, state legislatures were called in support, people
were employed to write thousands of letters and telegrams to all those involved
with the bill, a slur campaign was started against the proponents of the bill
and Roosevelt himself.

Against what Rayburn called "the most vicious and

persistent lobby that any of us have ever known in Washington", the bill was
defeated in Congress.
4 May, 1934.

Only after extensive revision was the bill passed on

The act required the registration of the stock exchanges, but it

vested a new Securities and Exchange Commission, rather than the FTC, with power
to approve their rules.

The new Commission had been endorsed by the opponents

of the bill against the New Dealers' wishes because they feared the power of the
FTC.

Despite its fortuitous origins, however, the SEC turned out in practice to

be a very useful and thorough watchdog of the money market, mainly because of
its expert and courageous membership.

The Commission was to be made up of five

members appointed by the President and was to have jurisdiction over both the
Securities Act, 1933, and the Securities Exchange Act of 1934.

The 1934 Act

itself was a big disappointment if one excepts the creation of the SEC itself.
Still, there was reason for some optimism; as Pecora put it to Roosevelt,
"It will be a good or bad law depending upon the men who administer it." 17
In hindsight, it was a good law.

17.

Ibid., p. 100.

- 73 -

One of the major causes of the Great Crash still needed to be

neutralized by administrative regulation - the public utility holding
company. 18

The regulation was preceded by long investigations on the

companies.

The proponents of legislation wished to reduce drastically the

concentration of public utility industries (mainly electricity and gas), to

dismember the huge, intricate, and powerful network of holding companies, and to
raise the standards of corporate finance and management.

Despite the intense

controversy instigated by the companies against its passage, the Public Utility
Holding Company Act of 1935 granted the Securities and Exchange Commission more
sweeping powers than most regulatory agencies and had extraordinary breadth in
that it applied to all electric and gas companies.

The Act required all

companies to register with the SEC by 1 December, 1935.

Section 11, containing

the 'death sentence' provisions, directed the Commission to order the physical
integration and corporate simplification of public utility systems and gave it
control over all aspects of company finance and management.

An

~anti

pyramiding' clause prohibited operating companies from having above them more
than two tiers of holding companies.

But the holding companies frustrated the

operation of the Act through legal action in the courts; it was March 1938
before the Supreme Court approved the constitutionality of the Act with regard
to registration, and it waited until 1946 before upholding the other provisions.
Nevertheless, the fear of imminent state intervention forced many companies to
put their houses in order.

A strong incentive for the self-regulation of utility companies came

from the establishment of public-owned power agencies, the most famous of which

18.

M. Fainsod et al., op.cit., Ch. 12.

- 74 -

was the Tennesee Valley Authority (TVA). 19

The TVA was meant to play a

regulatory role with regard to private companies especially with regard to high
rates, low utilization, and limited availability of electricity.
threat of public competition served to reduce rates.

The mere

Moreover, the very

existence of the TVA encouraged the public ownership of distributive facilities

by selling surplus power to states, countries, municipalities and other
organizations distributing power to constituents.

This tended to create a

strong vested interest in support of public ownership, putting added pressure on

the private companies.

One other important aspect of the TVA was its effect in

terms of accounting and managerial practices because the shareholders of public

companies could check the standards set by the Authority.

Hence, the TVA

provided an important experiment in 'indicative planning' that was to receive

widespread application in later decades.

Meanwhile, the fiscal policies of the New Deal were coming under
increasing attack from business.20

As the role of government in the NRA

increased, business began to fear tne possible power of government to interfere

in its affairs by seeking, if necessary, an alliance with labour.

In fact, as

the reform of industrial relations and the regulation of the labour force
proceeded, business grew more alarmed at the ominous fresh militancy of workers.
Soon, the collective wrath of the various employers' organizations, from the
Chamber of Commerce and National Association of Manufacturers, both representing
small business, to the Business Advisory Council, representing the big
corporations, was aimed at the destruction of the New Deal reform program:

the

Social Security legislation, the renewal of NRA, the holding company bill, the

19.

Ibid., pp. 361-6.

20.

But see the account .in Stein, op.cit., pp. 74-6.

- 75 -

Wagner labor relations bill, the thirty-hour bill, Title II of the Banking Act,
the government's taking over the role of trade associations, the broadening

o~

powers of the AAA, the improvement of the Securities Act - all these were
sturdily opposed and combatted by business with greater vehemence as the
elections of 1936 approached.

As it happened, in the summer of 1935, after many

of the Administration's reforms had been nullified by judicial decisions of the

Supreme Court, Roosevelt had to decide on an overall plan to achieve recovery
that would win his Administration enough popular allegiance to carry it through
the elections of the following November.

The New Deal saw the development of a full-scale welfare state through a
spate of legislation and of executive action providing for the regulation of the
labour force with relief payments and public works.
expenditure was twofold:

The purpose of welfare

first, to raise the wage level by increase purchasing

power and, second, to prevent the political polarization of the unemployed

proletariat. 2 1

Immediately upon taking office, Roosevelt established the

Civilian Conservation Corps (CCC) with $300 million to provide work camps for
many thousand youths from families on relief.

In May 1933 the Federal Emergency

Relief Act (FERA) made available $500 million for grants-in-aid to states.

The

following month, the Public Works Administration (PWA) was set up under Part II
of the National Recovery Act and endowed with $3.3 billion to stimulate direct
and indirect employment.

21.

The program covered three types of projects undertaken

Cf. B. Rauch ... s famous thesis on "the Second New Deal" of 1935 in The
History of the New Deal 1933-8, New York, Capricorn, 1963,
for what follows.

~,

Ch. 5,

- 76 -

severally by federal agencies, state or local bodies, and railroads or loan

financing.

But Roosevelt's preference for direct relief persuaded him to

pla~e

Harold Ickes, a well-known opponent of public expenditure, at the head of the

program, with the result that it got off to a very slow start.

Consequently,

Roosevelt hurried to form the Civil Works Administration (CWA) in November,

after the economic downturn beginning in July.
to the CWA from the PWA.

About $400 million were diverted

Early in 1934, a further $550 million was appropriated

to finance the program through the winter. The CWA employed over four million
workers at its peak, but soon it ran out of funds and was suspended in April
1934.

The Emergency Relief Appropriation Act of 1935 appropriated $4.8 billion

to provide relief for one and a half million 'unemployables' and 'useful work'
for three and a half million 'employables'.

A new agency, the Works Progress

Administration was erected for the latter purpose.

Its major expenditures were

allocated to highways, roads and streets, to professional and service projects,

and to public buildings.

The WPA bore the heaviest burden for job relief

throughout the Depression, paying normal hourly rates for lesser hours.
Obviously, the purpose was to preserve .the 'availability' of the unemployed for
work and to inure them to the work ethic. 22

The Social Security Act of 1935 is one of the most important pieces of
legislation in the entire New Deal

22.

becau~e

it set the pattern for social

For a Marxist analysis of New Deal welfare policies seeS. De Brunhoff, The
State, Capital and Economic Policy, London, Pluto Press, 1978, Ch. 2, and
F. Fox Piven and R.A. Cloward, Regulating the Poor, New York, Vintage,
1971, Ch. 3.

- 77 -

security schemes that were to become ubiquitous in the Western world.23

Its

novelty lay in the original provision for a scheme of social insurance as

against relief assistance.

Though ostensibly intended to free its participants

from the arbitrariness of charity and relief, the real purposes of the Act were
political and financial.

The major form of assistance under the Act, old age

assistance, was provided already in 28 states just prior to its passage, but the
various programs were either inoperative or inadequate.

When Dr. Francis

Townsend founded a movement to pay $200 once off to all people over 60, the
extraordinary success of the Townsend Plan stung Roosevelt into action.

As

finally enacted, the SSA provided for federal co-operation in state plans for
public assistance to the aged, the blind and dependent children, extending also
to various health and welfare services.
aged.

There were two types of support for the

One consisted of a system of matched grants to finance state plans and

came into operation immediately.

'I~"

The other was a national scheme for compulsory

old age insurance that was to begin annuity payments in 1942; benefits were tied
to contributions and protection was made a matter of right.

The 1935 Act

covered nearly two-thirds of the privately employed population.

Initially,

employers and employees alike paid taxes of 1% on all wages under $3,000 a year.
The Act included also a system of compensation for temporary unemployment based
on contributions.

The scheme proved its fiscal worth very soon:

in 1936,

receipts from contributions totalled $391 million and expenditures $95 million;
in 1937, receipts were $1.5 billion and expenditures only $142 million.

It did

not take long for the social security scheme set up by the 1935 Act to be
supplemented by private pension schemes established by insurance companies.

The

capitalist liking for these funds is explained by the fact that they are current

23.

Apart from Rauch and Fox Piven and Cloward, seeM. Fainsod et al.,
op.cit., pp. 774-89 ..

~j
''I

- 78 -

expenditures for firms that have all the attributes of an ideal form of savings
for long-term financial investments.

They provided contractual savings that

centralized the pooling of monetary resources away from stock exchanges.

Of

course, the very fact that these pension schemes are 'private' serves to
perpetuate a certain proletarian insecurity when insurance companies go
bankrupt. 24

In 1936, Congress finally paid the 'bonus' to veterans against

Roosevelt's veto:

$1,673 million were disbursed in 1936 and $564 million in

1937, lifting overall consumption.

Two other significant fiscal measures were adopted by the Administration

in this period. 25

The first, the Revenue Act of 1935, raised the top tax rate

on individual incomes from 50% to 75%, it set higher tax rates on large
corporations together with a federal tax on inheritances on top of the existing
federal tax on estates, and it made some other changes.

The amount of revenue

to be collected was estimated at around $250 million, which suggests that the
measure was not intended chiefly as a revenue-raising tax.

The second Act of

1936 proposed to eliminate the then existing tax on corporate profits and impose
only a tax on profits not distributed to shareholders at a rate to be
commensurate with the proportion of undistributed profits.

This was certainly a

revenue-raising tax and it evinced the growing sophistication of the

Administration in matters of public finance.

Apart from removing the 'iniquity'

of taxing distributed profits twice, the new tax was to encourage the payment of
big firms that could finance themselves over those that had to resort to the
capital markets.

Once again, financial intermediaries were favoured against

stock exchanges; but the Wealth Tax of 1936 must be seen mainly as an attempt to
reduce the budget deficit.

24.

Cf. Aglietta, op.cit., pp. 231-5 and De Brunhoff, op.cit., pp. 16-9.

25.

On these, see Stein, op.cit., pp. 81-6.

- 79 -

Nearly all of the economic measures that we have reviewed above were
grounded on underconsumptionist reasoning.

But in our exegesis of the period,J

underconsumptionism was a correct response to the crisis to the extent that it

sought to re-establish the link between fixed capital expenditure, consumption
and accumulation.

The fiscal and monetary policies of the New Deal, however,

served also an all-important political purpose.

This explains why most of the

welfare reforms were adopted after the collapse of the NRA under the weight of
bourgeois pressure between 1934 and 1935.

The failure of the NRA meant that

Roosevelt had to consolidate popular forces behind the New Deal against the
evident inability and unwillingness of business to settle its own affairs and
achieve industrial recovery.

Roosevelt was inspired, if not forced, to take the

road of reform in 1935 by the tremendous groundswell of popular resentment

against state institutions that occurred in this period.26

In particular, the

reforms were to prevent the rising political unification of the unemployed

against private property.
expressly 'soak the

rich~

The wealth taxes of 1935, for instance, were called

by Roosevelt to counter the 'Share the Wealth'

movement that had gathered behind the Louisiana Governor and Senator Huey P.
Long, for it is estimated that at one time the
nicknamed) could count on six million votes.

~Kingfish'

(as Long was

Similarly, the Social Security Act

was to neutralize the popular ferment behind the Townsend Plan; and the relief
program (the WPA) effectively halted the rapid advance of left-wing groups of
unemployed and dozed the spreading popularity of Father Coughlin, the 'radio
priest'.

The political perspicacity of the President was rewarded in 1936:

first, because the followers of Long, Father Coughlin, and Townsend joined
forces to form the Union Party and, second, because they were defeated

26.

The political aims behind Roosevelt's reforms are discussed in Fox Piven
and Cloward,

op.cit~,

pp. 84-94.

- 80 -

decisively in the elections held in November.

Roosevelt himself acknowleged as

much to reporters:

I am fighting Communism, Huey Longism, Coughlinism, Townsendism.

I want to save our system, the capitalist system; to save it
is to give some heed to world thought today.

I want to equalize

the distribution of wealth.27

After the great triumph of Roosevelt and the New Deal in the elections
of 1936, the WPA rolls were reduced almost immediately, and they continued to
decline thereafter except for a brief spell with the recession of 1938.

Also in

1938, Congress acceded to the request of business to abrogate the wealth taxes
of 1935, overriding the President's objections.

Once the political crisis was

over and the economy began to recover in 1937 and then again late the following
year, Roosevelt and Congress lost their sympathy for programs of direct relief
and welfare that tended to emancipate workers from the wage relation. 28

The fact that these programs had to be enacted and implemented against
strenuous opposition from business says a lot about their political importance
to the Roosevelt Administration.

At first, U.S. businessmen seemed to accept

Roosevelt's early reassurances about balancing the budget.

But they reacted

with alarm when the President voted nearly $4.8 billion for the WPA in 1935
while the budget deficit was already $3.5 billion.

Their main fear was

inflation fuelled by deficits, and it was inflamed whenever fiscal expenditure

was tied to welfare programs or to the regulation of business.

27.

Quoted ibid, p. 89.

28.

Cf. Fox Piven and Cloward, op.cit., pp. 111-7.

Yet businessmen

- 81 -

were far from united on these matters.

For instance, in May 1935, the Chamber

of Commerce meeting in Washington carried some strongly-worded resolutions

attacking the New Deal.

The speakers at the meeting were particularly vehement

against projects like the public utilities bill, the banking bill, the
continuation of NRA, and the Social Security program.

On the same day, however,

Roosevelt met the Business Advisory Council, which consisted of some of the
leading

u.s.

businessmen, and a statement was released by the BAC supporting the

welfare program and the extension of the NRA, although it opposed other pending
legislation.

The outcome of the meeting amounted to an endorsement of the New

Deal by big business.29

The tax program of 1935 and 1936, more than any other measure, won the
enmity of business toward the New Deal.

Even the slimmest chance of getting a

majority of businessmen to approve of Roosevelt's fiscal policies was removed by

the taxes which confirmed the fear of business that bigger budget deficits
brought inevitably with them the bane of higher taxes.

The concerted opposition

of business to the New Deal in 1935 and especially in 1936 - an opposition that
grew more strident as recovery progressed - was one of the major reasons behind
Roosevelt's decision to balance the budget for fiscal 1937.

At this point in

time, therefore, just before the recession of 1937, both the Administration and
business championed the balanced budget and sound finance as an implicit
good. 30

Altogether these measures amounted to a revolution in fiscal policy.

But too many myths have surrounded the attitude of Roosevelt about fiscal

29.

See Stein, op.cit., PP 79-81.

30.

Ibid., pp. 87-90.

- 82 -

policy; chief among them is that of his 'Keynesian' leanings.

The historical

evidence suggests instead that the promoter of the Economy Act of 1933 and the
vetoer of the bonus bill in 1936 was a firm believer in 'sound finance'.3l
Roosevelt did believe in a balanced budget and saw most of the New Deal programs
as a 'stop-gap' until industrial recovery was achieved.
to this belief:

There were three parts

first, that the budget would be balanced once full recovery was

made; second, that the Administration should expect to balance the budget
Nsoon"; third, that both expenditures and deficit should decline as recovery
progressed.

Indeed, while the GNP was below its level in 1929, the federal

government had increased its expenditures- from $4 billion in 1933 to $8.7

billion three years later.

But once the level of 1929 was reached in 1937,

federal expenditures dropped to $7.4 billion and the annual deficit to $358
million from a peak of $3.6 billion the previous year.

While Roosevelt cut

spending sharply for fear of inflation, the government was collecting $2 billion
in taxes to balance its budget.

Thus, instead of priming the pump, Roosevelt

was taking water out of the spout!

This deflation, together with the co-

ordinated decisions of the Reserve Board to raise reserve requirements in 1936

and early 1937, provoked almost immediately a very sharp recession that turned
out to be the most severe in U.S. history:

industrial production declined by

33% and durable goods production by 50%; national income fell 13% and payrolls
35%; manufacturing employment lost 23%.32

The dramatic downturn convinced Roosevelt that the spending program had
to be resumed:33

it was clear in his view that the government's tax claim

31.

Cf. Stein, op.cit, pp. 43-7.

32.

For these data and for what follows, see K.D. Roose, The Economics of
Recession and Revival, New York, Anchor, 1969, Ch. 15

33.

For what follows, Stein, op.cit., PP 109-14.

- 83 -

upon the future national income had to be invoked as a basis for deficit
borrowing to provide purchasing power that would keep the economy going.
"Spending for its own sake", oblivious of budget deficits, was born.
expenditure for fiscal 1938 returned to $8.6 billion.

The

Moreover, this time

round, Roosevelt agreed to spend $1.5 billion for public works and housing as an
"indirect" means of stimulating consumption by intervening "directly" in
production, reversing thus his old preference for direct relief.

It must be

stressed, however, that Roosevelt took these decisions neither on his own nor
willingly; at all times he was persuaded and guided by a growing body of
economic opinion ranging from academics to his closest advisers to a radical
Congress in an election year.
budget plans.

By 1938 even business agreed with Roosevelt .. s

Utw,

The argtiment of businessmen and financiers was that spending by

itself could not achieve a lasting recovery without policies to encourage

''tl
. d
l.lj

i>fil

private investment.

Thus, the major concern of capital was over the future

~~:

...
extraction and distribution of surplus value, but there were few disagreements
about the new inflationary regime, there were no frantic cries of alarm about
the possibility of inflation arising from deficit spending or dire warnings
about the collapse of government credit.
suited capitalists.

Obviously, the new inflationary regime

Their major concern was no longer the existence of fiscal

policy but rather its direction.

This represented an epochal change in he

climate of bourgeois opinion and capitalist strategy from the frenzied fiscal
and monetary conservatism of the 1920s.

In the next chapter, we will attempt to

discover the reasons for the final success of the inflationary regime in the New
Deal.

CHAPTER 3

WORKERS AND CAPITAL IN THE NEW DEAL

The monetary and fiscal measures adopted by the Roosevelt Administration

immediately upon taking power had certainly saved capitalist industry from
complete collapse.

By re-asserting political power through the monetary medium,

Roosevelt had proved that the workings of the capitalist system were not at all
automatic, but that they depended on a certain level of political control over
the 'metabolism' of the economy.

Despite the apparent success of these

measures, Roosevelt was convinced that full recovery could not be achieved
without setting in motion the industrial machinery of the country, without
restoring its profitability.

Here, again, private enterprise would have to be

either substituted or encouraged by state initiative, that is, by political

control.

As we have seen, the first alternative was not open to the democratic

Roosevelt; but the second was necessary and was undertaken by legislation.

The

philosophy behind the emerging legislation, the National Industrial Recovery

Act, was underconsumptionist.

The economy had failed because wages had not kept

pace with increases in productivity; lack of purchasing power had caused profits
and investments to fall; the ensuing overproduction had led to cut-throat
competition destructive to profits.
these problems.

Any legislative remedy had to deal with all

The question was what would be the solution and how would it be

implemented.

Three major responses which had been taking shape in the early years of
the Depression, competed for support in 1933: 1

1.

the anti-trusters, backed by

Perhaps the best summary of these is in E.W. Hawley, The New Deal and the
Problem of Monopoly,'"Princeton, P.U.P., 1966, Ch. 2.

- 85 -

small business, argued that monopolies had squeezed the economy with their high
profits and that they should be curbed to achieve recovery; the 'planners',

backed by big business, claimed that overproduction was the evil and that its
remedy lay in abolishing the anti-trust laws and allowing industrial selfregulation and trade associations to weed out destructive competition and to
encourage national economic planning; a strand of left-wing 'planners' insisted,
however, that the planning should be undertaken by the state, not by industry
itself.

These three suggested solutions were obviously divergent, especially

the first as against the last two.

It was clear that any legislative solution

to the problem of industrial recovery would have to side with either the antitrusters or the planners.

Roosevelt was determined to obtain the support of big

business and labour as a pre-requisite for the success of state industrial

regulation:

given that both sides were set on planning, he had little choice in

the matter. Still, dissensions were bound to arise over two crucial points in
the legislation:

would business or government regulate industry and what was to

be labour's reward for supporting the legislation?

The first question was not

very problematic; all that business required was that any government regulatory
agency gave industry the chance to work out its own codes and that it ensured
their enforcement.

But business opposed vehemently the proposal that workers

should be given a say in the codes through the banning of company unionism,
revocation of anti-strike laws like injunctions and 'yellow-dog' contracts,
legalization of the closed shop, and collective bargaining.

Regardless, the

strength of underconsumptionist arguments, AFL President William Green's threat

of widespread strikes, not to mention the Administration's fear that labour
unrest would hurt its plans, tipped the scales against business.

It is

important to note that initially the Administration did not promote what became
Section 7 of the NIRA.

Rather, it was forced to put its weight behind it by the

strength of the feeling . among Democrats in Congress and by the surprising

(.~

- 86 -

resolve of the AFL, probably emboldened by the weakness of business induced by

the Depression.2

In its final form, the NIRA contained three titles whose combined effect
was to extend the peacetime governmental powers of control over industrial
organization beyond anything the country had known in its history.

Under

Title I, the President was empowered to form agencies such as the NRA, to
administer the Title, and to authorize equitable and representative codes that
did not promote monopolies.

No prescription was given for the contents of the

codes, except that they should comply with Section 7 on labour standards.
Ill

Section 1 promulgated a general declaration of policy - to promote co-operative

action, eliminate unfair practices, increase purchasing power, expand

production, reduce unemployment and conserve natural resources - without
specifying the method of achieving these ends.

The second section authorized

the President to form appropriate administrative agencies, to appoint officers

and employees without regard to civil-service laws, and to delegate any of his
powers under the Act.

Section 3 empowered the President to approve equitable

and representative codes that did not promote monopolistic practices to which he
could add or delete segments or impose entirely new codes.

The most important

provisions for the content of the codes were in Section 7.

This section

outlawed yellow dog contracts and guaranteed the right of employees to organize
and bargain collectively through representatives of their own choosing.
Section 4a allowed the President to enter into voluntary agreements to
accomplish the purposes of the law; Section 4b contained the controversial

2.

See B. Bellush, The Failure of the NRA, New York, Norton, 1975, Ch. 1, and
I. Bernstein, The New Deal Collective Bargaining Policy, Berkeley,
University of California Press, 1950, esp. pp. 29-31.

I if

- 87 -

licensing provision that granted the President a power of life or death over
business enterprises, attacked by many as an unprecedented extension of
presidential power.

Section 5 exempted the codes from antitrust law, and

Section 10 authorized the Chief Executive to remake any code at any time during
the life of the law.

The other important title, Title II, set up the Public

Works Administration which was to spend $3.3 billion either' directly or through
the Reconstruction Finance Corporation.

The President was obviously biased

toward Title I and saw the PWA as a temporary recovery measure.

Therefore, he

placed the mercurial and energetic General Johnson, who had already directed the
War Industries Board during World War I, at the head of the NRA and the
finically cautious Harry Ickes at the helm of the PWA.
had no consistent strategy of

~pump

Clearly, then, Roosevelt

priming' even as late as June 1933.

There

can be little doubt that the appointment of Ickes as helmsman of the PWA greatly
weakened the economic effectiveness of the NIRA.

All the same, Roosevelt

decided that if the economy was to be revived that had to be achieved through a
thorough reform of its industrial structure; the other measures were to serve
simply as means of political control while the Depression lasted.

General Johnson took up his job with characteristic vigour. 3

first breakthrough came in the textile industry.

The

This was a major industry,

employing about 314,000 workers in March 1933 - more than steel.

During the

1920s it had suffered from overcapacity with all its attendant evils, pricecutting, low profits, inhumane working conditions, and very low wages.
was drawn up to fix prices in the industry and reduce competition.

3.

Bellush, op.cit., Ch. 2.

The code

Johnson's

But the details of what follows can be traced also

in Schlesinger Jnr., The Coming of the New Deal, Boston, Houghton Mifflin,
1959.

- 88 -

acceptance of the price-fixing, granted under great pressure from industry,

worried labour representatives who complained through the Labour Advisory

Bo~rd.

Eventually, a concession was extracted on behalf of labour under the code

whereby the industry agreed to adhere to Section 7a and to abolish grave abuses
such as child labour, long hours and low wages.

When the President signed this

code of fair competition on 9 July 1933, few could see that it would be used by
the leaders of the textile industry to circumvent the guarantees in Section 7a
and to adopt a restrictionist policy of reduced production (e.g. production
machinery was not to operate for more than two shifts of a forty-hour work week)
that was to have deleterious consequences for employment and wages.

Yet, even

by that late date, no other major industry had proposed a code by which it would
be bound.

Fearing for the future of the NRA, Johnson uncovered a

~blanket code~

under which participating industries would pledge support for NRA standards
concerning minimum wages and hours, and other labour rights.

After obtaining

the approval of the President and a majority of Cabinet, Johnson launched a

thirty-day drive for the President's Re-employment Agreement from l August 1933
under the aggressive symbol of the Blue Eagle.

Within days, the nation was

engulfed in scenes of mass hysteria reminiscent of World War I.

The Blue Eagle

appeared on millions of posters, billboards, flags and movie screens; thousands

of

~four

minute speakers' harangued and exhorted the population from radio,

pulpits and lecterns.

The campaign culminated in a Nuremberg-style Blue Eagle

Parade held in New York, the largest in the history of that city.

The General

succeeded in forcing most of the biggest industries to sign codes outside the
blanket agreement within a month.

Employers preferred to sign codes rather than

the 'blanket code' because of the obvious advantages of the former, including
price-fixing and regulation of production

'J

- 89 -

The codes followed a standard pattern of development with Johnson

exerting the initial pressure, which never amounted to more than moral

suasi~n,

however pressing, because of the risk that the NIRA might be challenged in the
Courts for unconstitutionality. 4

Industrial applicants generally submitted

the code to a deputy administrator who then organized a conference with

representatives from the industry, the three obvious boards, the Legal, and the
Research and Planning Divisions.

Eventually, the code went to Johnson who

reviewed its impact on the economy and on the public interest before submitting
it to the President for signing.

The people who played the major role in the

code-making process were the deputy administrators who were drawn from the ranks
of business; like Johnson, they were unwilling to oppose business and seconded
most of its wishes.
none.

Labour representation on the code authorities was little or

Outside the code-making process lay three Advisory Boards that were

supposed to represent the major social interests in the NRA.

The Industrial

Advisory Board was selected by the Secretary of Commerce and represented by a

permanent staff employed by business concerns; its members assisted industrial
applicants in their negotiations with labour while they ignored the consumer
representatives, who lacked organized support.

The Labor Advisory Board was

appointed by the Secretary of Labor and consisted o labour leaders, a couple of

public-spirited citizens who championed the interests of unorganized workers,
and a permanent staff of labor specialists.

Of course, the effectiveness of the

Labor Board was limited by the general weakness of trade unions and by its much
inferior technical resources and research skills to those enjoyed by the
Industrial Board.
behest.

The Consumers' Advisory Board existed virtually at

It was supposed to protect the "public interest", but because it had no

organized support, it could not possibly absolve to its tasks.

4.

Johnson~s

The inevitable

On the mechanics of code drafting, see Hawley, op.cit., Ch. 3.

- 90 -

result was that the codes were written by the technicians from business and
industry loaned temporarily to the government.

The first twenty codes

established precedents for nearly all conceivable monopolistic practices.s

Given the domination of business in the NRA and the sympathetic approach of its
major administrators, it was inevitable that the main strategy of the NRA should
become 'industrial self-government' instead of government planning, as some had
wished.

Industrialists succeeded in shaping codes that established cartels,

eliminated competition, and avoided the provisions of Section 7a.

Some of the

provisions in the codes set minimum prices either directly, through outright
price-fixing, or indirectly, by prohibiting sales below cost determined with
uniform cost-accounting techniques.

Other provisions, supposed to facilitate

competition through the open exchange of price statistics, turned out to be an

expedient to identify 'chiselers' that were quickly neutralized with other
price-fixing rules, leading to a high degree of price uniformity.

A third set

restricted trade by reinforcing minimum price provisions with standardized

costs, by recommending sales practices and regulating non-price competition along geographic lines, for instance.

The high level at which prices were fixed

was demonstrated by some detailed price data collected by the Mail Order
Association.

Within six months of the start of the NRA, while farm prices

remained at little more than half their 1926 level, prices quoted for products
under open-price provisions were 11.2% higher than in 1926 and 21% higher than
in 1929.

Farmers and low-wage workers were the first to suffer and to complain.

There were also provisions that controlled prices indirectly by limiting

production.

Limitations on machine or plant hours, production quotas, inventory

controls, limitations on the construction of new capacity, bans on the opening

S.

A succinct description of the negative effects of the NRA is in Bellush,

op.cit., Ch. 3.

- 91 -

of closed plants, controls on the transfer of industrial machinery or plants to

other branches of production -these were some of the techniques adopted most~
frequently to enforce the devalourization of fixed capital.

Finally, some

provisions set up administrative and enforcement machinery to the guide of which

businessmen were entrusted generally.

Nowhere was the business bias of the NRA more evident than in the
administration of Section 7a.6

Right from the start, Johnson turned against

labour in his interpretation of the Section by opposing the majority principle

of representation, essential to the formation of closed shops, and by allowing
company unions so long as management did not infringe the NIRA through
interference and coercion.

Bowing to pressure from business, Johnson did not

appoint labour representatives to some of the boards until December 1933, and
even after that their contribution was all but insignificant.

Instead of

facilitating the role of labour to force the economic recovery in line with the
underconsumptionist philosophy behind Title I of the NIRA, the NRA codes
strengthened the hand of business against workers.

The first great defeat came

with the automobile industry code, which set the trend for all future codes.
Profiting from the AFL's weakness in the industry, the auto employers obtained
Johnson's and Richberg's approval of a 'merit clause' to select and retain
employees as a proper construction" of Section 7a.

The minimum-wage provisions

in the code affected few workers, while the variations in maximum hours allowed
in it gave employers flexibility to handle the labour force.

The auto code

inspired another twenty-nine by the end of August; President Harriman of the

Chamber of Commerce recommended its incorporation in all codes.

Only after the

Labor Advisory Board warned of disaster in industrial relation did Johnson, and

6.

Bellush, Ch. 4,

proy~des

the best short summary of these events.

- 92 -

then Roosevelt, announce that future codes would not contain 'interpretations'
of Section 7a.

But the damage was done:

the merit clause was not removed

w~n

the auto code was renewed.

These developments began to undermine the effectiveness of the NRA very

early in its operation.

Another source of trouble emerged slowly but soon

became the chief disruptive force: - disagreements over NRA policy within
business circles themselves. 7

The goals of the NRA had never been clear.

The

dissensions that had arisen from the start between 'planners' and 'antitrusters'
betrayed their different stance on behalf of big and small business,
respectively.

Once the initial clamour of the Blue Eagle drive was over, the

old problems of competition versus cartelization returned but this time in

political trappings provided by the NRA.

Apart from the complaints of farmers,

labour, and consumer groups, various business groups, especially small business,
unleashed a campaign of opposition to the anti-competitive, corporatist features
of the NRA.

As the effects of the abolition of anti-trust laws in the codes

became clear, many small businesses denounced the NRA as a form of 'bureaucratic
socialism' prone to 'labor domination' and political economic intervention in
favour of 'monopolistic combinations' that threatened to put small business out
of action.

The NRA was accused of being a cover-up for big business to

administer the extinction of small firms and competition.

Even some members of

big business, after the initial panic caused by the price slump of July 1933,
began to view the NRA as a dangerous precedent in government regulation of
business on the European corporatist model.

7.

For what follows, see Hawley, op.cit., Ch. 4.

- 93 -

Furthermore, the obvious

inabil~ty

of the NRA to pull the country out of

depression soon provoked widespread disillusionment.

Throughout 1934, until

~he

Supreme Court torpedoed the NIRA for unconstitutionality in May 1935, the NRA
became a welter of divisions, dissent, and confusion, with constant squabbling
and changes of personnel.

Small wonder, then, that Roosevelt decided against

reviving it after its annulment.

The President did pledge, however, that he

would proceed with some of the more beneficial aspects of the program.

One of the more beneficial aspects of the NRA had arisen as a result of
the strike wave in the summer of 1933 which involved at one stage 300,000
workers.8

Pursuing a recommendation of the Industrial and Labor Advisory

Boards that a tripartite National Labor Board (NLB) be created to stem the tide
of strikes that threatened recovery, Roosevelt

el~cted

members (three from

labour and three from business), with New York's Senator Wagner as public
representative.

The Board was to "consider, adjust, and settle differences and

controversies that may arise through differing interpretations of the

President's Re-employment Agreement" which prescribed the observation of
Section 7a.
enforcement.

Unfortunately, the NLB had no clear procedures or powers of

The most it could do was ask the NRA to withdraw the Blue Eagle,

its seal of approval, from a given employer.

Despite its obvious weakness and

the vagueness of the decree establishing it, Wagner and the other
representatives took the tasks of the Board very seriously.

The Board was soon

put to the test in a recognition dispute involving the hosiery mills in Reading,
Pennsylvania.

8.

On 10 August, the NLB laid down the 'Reading

Formula~

which

The 'causal' connection is undeniable, cf. C.L. Tomlins, The State and the
Unions, New York, Cambridge U.P., 1985, P 109, and PP 109-19 for a concise
narration and appraisal of events that follow.

- 94 -

amounted to a 'common law' interpretation of Section 7a.

The Board directed the

parties to hold elections where workers would vote by secret ballot for
representatives and those chosen by a majority would bargain collectively with
the employers on wages, hours, and conditions of work.
agree, the NLB would make a final adjudication.

If the parties could not

The compliance of the hosiery

employers with the directions of the NLB and the conclusion of the dispute
marked a major victory for the Board and for the '"Reading Formula".

In October

and November, the Board continued to score a number of brilliant successes; but,
given the constraints to which we have referred above, this situation could not
be expected to last for long.

Indeed, the imminent failure of the Board was to

show to the wide world, including industrial workers, just how dependent the
whole NRA experiment was on the self-interested support of business.

Once

again, after the initial panic of economic collapse in July had vanished,

u.s.

business, especially those businesses represented by the National Association of

Manufacturers, launched a violent campaign against the NLB on 1 November.
deadly setbacks ensued for the Board in December.

Two

When two employers defied the

NLB, the latter was forced to request the NRA to withdraw the Blue Eagle; but it
was clear that the NRA could not take that action if it did not wish to cause a
general business strike against the entire program.

Roosevelt's belated grant

of an Executive Order on 15 December ratifying the Board's decision could not

save it against a business strike:

whereas the NLB had settled 104 out of 155

disputes in its first three months, its success rate had fallen to 28 out of 86
cases from December 1933.

Another attempt by the President to revive the NLB

through Executive Order No. 6580 failed when Johnson and Richberg 'interpreted'
this Order in support of proportional representation.
were in open war.

Now the NRA and the NLB

Roosevelt intervened once again on the Board's behalf by

severing it from the NRA and making its findings final.

A new confrontation was

on the borizon betweenworkers and capital, while both sides were losing faith
in the recovery program.

- 95 -

The battle resumed in the auto ~ndustry in Detroit.9

tried unsuccessfully to organize auto workers in 1933.

The AFL had

In March 1934, the

organized plants in Detroit warned General Motors and Hudson that they would
strike unless recognition was granted, union activists reinstated and a 20% wage
increase granted.

Realizing its weakness in the face of the auto industry's

resolve, the AFL asked Roosevelt to intervene.

On 25 March the President

announced a settlement that hurt both the union and the NLB.

The settlement

provided for a tripartite Automobile Labor Board (ALB), with one labour, one
industry, and one neutral representative, separate from the NLB but still within
the NRA.

The ALB could hear and adjudicate charges of discrimination, but the

auto industry was awarded the all-important victory over the interpretation of
Section 7a.

Thus, the President himself had contradicted the NLB and supported

proportional representation.

The AFL had failed once again because of its basic

organizational faults and because of the complacent conservatism of its officals

who had desisted from launching a strike that would have paralyzed the auto
industry in its busy season and, with it, the rest of the economy.

Instead,

they allowed the auto industry to become the spearhead of a capitalist attack on
the working class, helped by the President and the NRA.

Roosevelt's apparent success with the ALB afforded him a chance to

defeat the next move in industrial relations by Senator Wagner and other
progressive Democrats.

Alarmed by the rising wave of strikes and labour unrest,

Wagner and other progressives, like Representative Connery, introduced a Labor

Disputes Bill to Congress. 10

Recognizing the failure of Section 7a, the

Wagner-Connery bill sought to eliminate employer interference with the funding

9.

Bellush, op.cit., pp. 104-6.

10.

Again, Tomlins, op.cit., pp. 119-27.

- 96 -

and running of unions, to enforce recognition of union representatives and

maintenance of agreements on wages, hours, and conditions of work.

The bill

provided also for a permanent national labour board to negotiate in industrial

disputes, to enforce its decisions, and to determine the proper union
representatives for collective bargaining.

It was Roosevelt himself, however,

who killed the bill in April by denying it his official endorsement.

The

President's action was dictated by the fact that business was united as one
against the bill and he was unwilling to confront it.

Yet, the need for action

became dramatically apparent in the weeks that followed.

Massive social

upheavals shook the country when workers in Toledo and Minneapolis struck. 11
It was evident that 1934 would witness a strike explosion of a scale and
significance comparable to that of 1919-20.

In May, suddenly confronted with

the threat of a strike in steel, Roosevelt decided to generalize the experience

of the Automobile Labor Board.

After convincing Green of the AFL to call for a

cancellation of the steel strike, he introduced Public Resolution No. 44 in

Congress through Congressional leaders on 15 June. 12

The measure was greeted

with dismay by progressive Congressmen of both parties because it retained all

the vices of the ALB without any improvements.

Wagner himself was forced to

reassure his progressive colleagues that a stronger measure would be presented

in the next session of Congress and to persuade them not to embarrass the
President.

On 29 June, an Executive Order abolished the NLB and erected in its

place a three-member National Labour Relations Board (NLRB) under the

jurisdiction of the Labor Department with the usual powers of negotiation,
adjudication, and regulation in industrial disputes.

Business was satisfied,

while the AFL regretted the missed opportunity of the Wagner-Cannery bill.

11.

See J. Brecher, op.cit., Ch. 5.

12.

Tomlins, op.cit.,

'pp.

127-32.

In

- 97 -

effect, the new NLRB was no improvement on previous experiments because it

failed to deal with the crucial isues of company unionism and proportional
representation.

Its real importance lay in the fact that the administration of

industrial disputes had been forced out of the

~industrial

self-government' of

the NRA by the scale, bitterness, and violence of working-class struggle early
in 1934.

Johnston and Richberg, the top administrators of the NRA, were aware
that the massive wave of strikes menaced the existence of their Administration,
once it became clear that it could not negotiate the codeswithout the
concurrence of workers.

It is not surprising, then, that Johnson especially,

and Richberg, to a lesser extent, should clash with workers over the next few
months.l3

Johnson went so far as to instigate vigilante violence against

Congressmen in San Francisco, provoking the famous General Strike in July.

Later, in September, he intervened again to inveigh against striking textile
workers engaged in a nationwide strike.

Each time, the General's

pronunciamentos acquired a starker proto-fascist tone until, after a

particularly vile and vicious tirade delivered at Carnegie Hall before a
cheering crowd of representatives from four hundred code authorities (another
proof of the pro-business composition of the NRA), Roosevelt gently forced him
to resign.

Johnson's removal was essential for the success of Roosevelt's new

industrial strategy contained in Public Resolution No. 44 which was applied

generally to the detriment of workers.

By the end of 1934, the NRA had been

left in tatters by the sheer imponence and disruption of workers' strikes; it

had become precisely what workers called i t - the "National Run-Around".

13.

Bellush, op.cit., .Ch. 5.

158

~~~

'

(,...[

ll

;t~l1I

~~

u
111

'
'

.:

'~~I

1111~~~~

- 98 -

In November 1934, the New Deal triumphed at the polls.

usual swing against the Administration, the Democratic
1932 showing.

par~y

Instead of the

improved on its

Having witnessed the massive wave of strikes in 1934, the new

progressive Democratic Congress was determined to change the entire complexion

of national labour relations and, with majorities of 45 in the Senate and 219 in
the House, it could claim to have a mandate for it.
introduced on 21 February, 1935 as S. 1958.14

Wagner's revised bill was

It replaced Section 7a with a

comprehensive statute that reflected the new legislative resolve.

A declaration

of policy in Section 1 stated that equality of bargaining was not attainable

unless employees were granted "the right to bargain collectively through
representatives of their own choosing".

It was the imbalance between the rate

Ill
'I

of wages and industrial expansion that had caused the depression.

strikes and other obstructions to commerce hadbeen provoked.

Worse,

The bill went on

to outlaw such unfair labour practices as company unionism and interference with
collective bargaining; it set up a National Labor Relations Board with power to
enforce its own decisions and sanctioned the majority principle in workers'
elections for union representation.

The opponents of the bill, represented by

the National Association of Manufacturers and the Chamber of Commerce, tried

everything to kill it, from lobbying and advertizing to 'spontaneous'
demonstrations and contrived protest-letter writing.

But the only obstacle to

the bill after a year or more of industrial strife and with the failure of NRA
all but evident was the backing of the President.

Originally, Roosevelt had

followed his NRA advisors in rejecting the bill, probably because he held out
some hopes for business support.

14.

But on 2 May 1935 the Chamber of Commerce

Bernstein, New Deal , op.cit., Ch. 7.

Also Tomlins, op.cit., pp. 132-

40, and J.A. Gross, The Making of the National Labor Relations Board,
Albany, State Uni '~Of New York Press, 1974.

- 99 -

finally broke with Roosevelt denouncing. both the Wagner bill and the New Deal as
a whole at the same time as the Business Advisory Council, representing big
business, expressed its overall support of the Administration.l5

Fortified by

the backing of the BAG and seeing the obvious unwillingness and perhaps even the
inability of business - demonstrated in the NRA experiment - to reform the
industrial production of the country, Roosevelt was compelled to turn elsewhere
for political support; the American working class was the obvious alternative.
Responding to Wagner's entreaties not to oppose his bill which had been passed
already in the Senate, the President finally yielded, needled by the thought
that he might be losing his initiative in Congress over the legislative program
of the New Deal now that the bill looked like passing easily in the House.

On

24 May he decided to endorse the Wagner bill, three days before the Supreme
Court delivered its decision in the Schechter Case declaring the NIRA
unconstitutional.
5

The bill was passed on 27 June and Roosevelt signed it on

July.

The Wagner Act was enacted consciously to replace the NIRA and became
quickly the keystone of the New Deal.

Its major provisionsl6 set up a

National Labor Relations Board (NLRB) as a permanent and independent agency

empowered to determine appropriate bargaining units and agents as well as to
restrain business from "unfair labor practices" such as discharging workers for
union membership or fostering employer-dominated company unions.

The

declaration of policy in Section 1 had the dual purpose of voicing an economic

philosophy and to protect the Act from constitutional challenges in the wake of
the Schechter Case.

The economic welfare of the country had been hurt by the

15.

H. Stein, op.cit., pp. 79-80.

16.

A copy of the

text~is

in Bernstein, op.cit., Appendix.

- 100 -

unequal distribution of income which was a product of the workers' inability to

bargain collectively against employers.

All this, and the strikes that it

provoked, jeopardized interstate commerce whose regulation fell within the

powers of Congress.

Section 2 contained definitions that extended the

application and validity of the Act in the light of U.S. common law.

The third

section established the NLRB as an independent body of three members appointed

by the President and confirmed by the Senate for five-year terms.

Sections 4

and 5 set forth the organization of the agency, while Section 6 granted it
authority to issue rules and regulations.
oq~anization

The rights of workers to self-

and to bargain collectively through representatives of their own

choosing were copied precisely from the NIRA and set out in Section 7.

Various

clauses in Section 8 banned certain "unfair labor practices" such as

interference with the rights guaranteed in Section 7, formation of company
unions, discrimination against workers engaged in collective bargaining, and
refusal to bargain in good faith. By virtue of Section 9(a), the all-important
principle of majority representation of workers became law at last.
Section 9(b) empowered the Board to determine the "appropriate units .. for
bargaining.

Section lO(a) gave the NLRB exclusive and ultimate authority to

prevent unfair labor practices.

The remaining sections dealt with aspects of

enforcement of the Act by the Board:

it had power to requisition necessary

information and to refer matters to district courts for enforcement.

Throughout the legislative history of the Wagner bill, the AFL had
backed its reforms almost implicitly.

But the bill did create some discomfort

to the AFL leadership because of the ominous implications of a few provisions in

the bill.17

17.

In fact, the AFL had hoped that the bill would empower the NLRB

."
Cf. Tomlins, op.cit., pp. 140-5.

- 101 -

merely with the function to ensure that basic trade union rights were observed
by employers while the actual task of organizing workers went to the Federation.
As it turned out, however, the bill went much further than this in assigning to
the NLRB the authority to oversee the conduct of elections, to decide on the
"appropriate units" of voting workers in various branches of industry, and to
scrutinize the conduct or internal organization of the new unions.

The presence

of these provisions in the bill and their eventual inclusion in the Act is quite
understandable within the overall functional aims of the New Deal.

If the

Depression had been caused by an unhealthy imbalance in the distribution of

income between capital and workers, and if this problem required the formation
of trade unions in the mass production industries, it stood to reason that the
potentially explosive force of these trade unions be modulated by a state
institution like the NLRB.

And this aim could be achieved only if the Board

were given power to integrate the new unions in the rejuvenated motor of
capitalist industry aimed at regulating the various phases of accumulation.l8
The timing of the Wagner Act - which, as we have seen, virtually was imposed on
Congress by the strike eruption of 1934 - was a further source of worry to the
AFL.

For, in 1935, the Federation was facing a growing internal challenge from

industrial unions that saw in the rising militance of industrial workers a

chance to expand their power and could not condone the repeated failures of the
Federation's half-hearted organizing drives in industries that were ill-suited
to craft unionism. 1 9

It was evident to the leaders of these unions that

theirs and other industries were ripe for organization:

indications of unrest and upheaval were present.

after all, all the

The industrial unions in the

18.

For a fuller Marxist interpretation, Aglietta, op.cit., pp. 190-8.

19.

See

w.

Galenson, The CIO Challenge to the AFL, Cambridge, Harvard U.P.,

1960, Ch. 1.

- 102 -

AFL consisted of the United Mine Workers, the Amalgamated Clothing Workers, and
the Industrial Ladies' Garments Workers' Union, led by John L. Lewis,
Hillman, and David Dubinsky, respectively.

Stephen~

These unions, backed by other minor

unions, went to the AFL convention of 1935 held in October in Atlantic City with
the intention to convince the Federation to carry out a massive organizing
campaign among industrial workers.

But the AFL hierarchy was against them; when

it came to the vote, the industrial unions could not summon more than 38% - good
but not sufficient.

So, on 10 November, 1935, the major industrial union

leaders met with seven others in the Washington headquarters of the UMW to found
the Committee for Industrial Organization.

Thereafter, the AFL tried every

tactic, legal and illegal, to force the Committee to dissolve.

But the CIO went

from strength to strength picking up many affiliates in 1936 and 1937.

Once

again, the usual perspective that sees the CIO as the founder of industrial
unionism must be reversed:

it was industrial workers, in fact, whose struggles

were responsible for the success of the CIO and the enforcement of the Wagner
Act, both of which had to be imposed on

u.s.

capitalists against their will.

To

these struggles we must turn now.

The Wagner bill had been passed and the NLRB was a reality.

But could

it enforce its decisions on its own against the combined might of U.S. capital?
In the light of historical experience with the NRA, the answer had to be
negative.

Employers simply had to be forced to respect the terms of the Act;

workers would have to win recognition for themselves.

From the beginning of

1936, a powerful wave of strikes arose that led to the unionization of the great
majority of industrial workers in the United States and to the recognition of
their unions by capital.20

20.

For what follows

Mifflin, 1970.

s7,~

First up were the workers in the big rubber

I. Bernstein, The Turbulent Years, Boston, Houghton

- 103 -

companies.

In January and February

193~,

workers at Firestone, Goodyear, and

Goodrich plants staged a rapid series of strikes using a new tactic - the sitdown strike.

The rest of the year saw 43 strikes with about 76,000 workers and

a loss of 477,000 working days of production- an all-time record for the

industry.

Although it did not recognize the union, Goodyear agreed to negotiate

grievances with union representatives.

The United Auto Workers copied the sit-

down technique and won partial bargaining rights after paralyzing a steel
company producing frames for Chrysler and Ford.
strike.

Next electrical workers went on

After a long battle that cost RCA half a million dollars, the United

Electrical Workers won recognition from RCA as sole bargaining agents.

But the

real giant in the industry, General Electric, remained to be conquered. In

February 1937, after a long series of negotiations backed by threats, General
Electric signed a national agreement with the Communist-led United Electrical
Workers to take effect one year later.

By the fall of 1936, the CIO was one of

the most powerful institutions in the United States.

The auto workers had

joined it in July; now it was the turn of electrical and rubber workers.

On the

West Coast, the International Longshoremen's Association organized a 90-day

strike against ship owners.

They were joined soon by East Coast seamen who

formed the National Maritime Union with Communist leaders and affiliated to the
CIO.

This was all very good news to Roosevelt for not only did it justify

he

existence of the NLRB, but also it provided a new powerful political ally in an
environment made very unfriendly by the rabid turn of the Supreme Court against
the New Deal in the spring of 1936. In the fall of that year, as the
Presidential elections approached, the Wagner Act was believed to have only a
few months of life left before the Court struck it down upon an application
backed by business.

Roosevelt knew then that the legislative program of the New

Deal and, thence, recovery itself depended on the support of organized labour.
Such support, however,

~auld

not come from the AFL because the rise of the CIO

- 104 -

was being facilitated by the decisions

~f

the NLRB. Therefore, as in 1935,

Roosevelt was forced to turn to the anti-business part of labour which in 1936
was represented by the CIO.
themselves:

The results of the November elections spoke for

it was an unqualified triumph for the New Dea1. 21

Roosevelt's

campaign for a 'people's government' and against corporate business was rewarded
with an electoral landslide.

The incumbent President received a great popular

vote of 27,751,000 and an electoral vote of 523 out of 531.

Democratic

majorities in both Houses increased so that in the next session of Congress

three-fourths of the Senators and nearly four-fifths of the Representatives
would be of the President's Party. There can be no doubt that Roosevelt's
victory in 1936, like the one in 1932, was won along class lines - though these
were obscured by his large majorities. The Roosevelt-CIO coalition, organized as
Labor's Non-Partisan League, mobilized and unified the working-class vote as
never before in

u.s.

history.

Angry crowds of workers cheered the Democratic

President throughout the country:

At the close of the campaign, at Madison Square Garden on

31 October, [Roosevelt] let out all the stops.

The forces of

'organized money', he told a roaring crowd, 'are unanimous in

their hate for me- and I welcome their hatred'.

'I should like

to have it said of my first Administration that in it the forces

of selfishness and of lust for power met their match .
should like to have it said -'
the crowd.

Another deafening roar from

'Wait a moment!' the President cried.

'I should

like to have it said of my second Administration that in it

these forces met their master!'

The Garden was pandemonium. 22

21.

See data in AllswaAg, op.cit.

22.

W.E. Leuchtenburg, F.D.R. and the New Deal, New York, Harper, 1963, p. 184.

- 105 -

Roosevelt's efforts must be

see~

as attempts to realign class forces in

the changing asset of capitalist institutions, and not as the usual banal
instance of popular democracy against business oligarchy.

Only such a

realignment could force individual capitalist firms to accept the new

institutionalization of industrial antagonism proposed by the Wagner Act.

But

there was never a single chance that Roosevelt might turn seriously against the
interests of organized capital in the name of his much-vaunted 'people's
government"'"!

The precise nature of the divergence between Roosevelt and business must
not be misunderstood; in particular, the amount of opposition to the NLRB by
both business and AFL must be viewed in context, first, because the CIO was not
very strong until the end of 1936 - and hence it could not enforce NLRB
decisions - and, second, because before the middle of 1937 - when the major CIO
unions obtained recognition from employers - the NLRB had lived in a state of
'suspended animation', settling very few disputes, while it waited for the
Supreme Court to decide its fate.

Clearly, then, the future effectiveness of

the Act, outside of an unfavourable Supreme Court verdict, depended on the

ability of the CIO to impose its bargaining power.

Better still, everything

depended on rank-and-file industrial workers who were to transform the face of

U.S. industry in 1937.

Two industries in particular, cars and steel, collapsed

in that year and were forced to grant the UAW and steelworkers nation-wide
recognition.23

With these two industrial giants broken, the last major

bulwark of resistance to unionism in the mass industries was destroyed.

Auto

workers at General Motors went on strike between December 1936 and February

23.

Cf. D. Milton, The Politics of U.S. labor, New York, Monthly Review Press,
19 8 2 , Ch 4

- 106 -

1937, bringing the company to its knees by cutting car production from 32,000 to
6,000 units and causing General Motors severe economic damage.

The CIO and

Roosevelt played only a mediating role in what has been called the most critical
labour conflict of the 1930s.

In the end, after a tough struggle that saw

workers adopt the sit-down strike while General Motors resorted to some of the
most repressive business tactics adopted in the twenties and early thirties,
General Motors was compelled to recognize the UAW as the sole bargaining agent
of auto workers.

Once again, however, workers were short-changed because their

major concern had been to abolish piece-work and the speed-up.

These matters

would be taken up in later struggles, but the reformist orientation of the UAWCIO was evident already in their unwillingness to pursue demands that went
beyond union recognition and touching on the vital questions of managerial
command in the factory: - these included shop-steward representation, piecework, speed-up, and duration of the work week.
Motors, Chrysler could not last long.
similar to that of General Motors.
earlier, on 2 March, when

u.s.

With the surrender of General

On 6 April 1937, it signed an agreement

But the real shock had come one month

Steel signed a contract with the Steel Workers'

Organizing Committee of its own volition!

Raving witnessed the great

determination of General Motors workers and fearing the possibility of a long,

protracted series of sit-down strikes in its own plants, U.S. Steel decided to
give up without a fight.

Although it did not agree to sole bargaining rights

for the SWOC, the company did undertake not to interfere with the process of
unionization and to deal with a majority union.

Thus, in the space of three

weeks, American industrial workers had set up the greatest trade union
organization in the history of the United States.
Motors and

u.s.

United States.

The surrender of General

Steel marked the end of an era of industrial relations in the

Soon the other mass-production industries followed suit.

The

third largest after cars and steel, the electrical industry, resisted a little

- 107 -

longer until General Electric recognized the United Electrical Workers in 1938
and Westinghouse was forced to sign by the Supreme Court in 1941.

By the end

August 1937, the CIO had a membership larger than that of the AFL.

of

At its

national conference in Atlantic City in October, the Congress claimed four

million members, 32 national and international chartered unions, and 600 local
federated or industrial unions, as well as 80 state and city labour councils.
Moreover, between 1937 and 1940 the membership of the CIO doubled from about 4.5
million to nearly 9 million.

The struggles of U.S. industrial workers in 1936 and 1937 changed

profoundly the industrial and political forms of capitalist accumulation and set
the pattern for an entire epoch of capitalist development not only in the United
States, but all over the world as well.

Let us review now in brief outline the

more significant features of the transformation of the wage relation brought

about by these struggles.

For the purpose, we will use two illustrations:

the

first, dealing with collective bargaining, is taken from the GM-UAW contract,
and the second, concerning wage practices, is derived from the U.s. Steel - SWOC
contract, both of 1937.
two isolated cases.

We should point out, however, that these are not just

On the contrary, their importance constitutes the principal

feature in our analysis precisely because it was the creation of the CIO that
enabled big business to regulate the wage relation of entire
industry.

~ectors

of

The recognition of trade unions as independent bargaining units in

mass industries

pe~itted

finally the organization of a determinant proportion

of workers in those industries for the purpose of setting unform wage and
conditions in the various industries across the States.

What the imponent

triumph of the CIO achieved was nothing less than the possibility for capital to
use the composition of the working class as a dynamic motor of capitalist
development by tying it

to

its own organic composition.

In other words, the

- 108 -

unionization of mass industries made possible the use of fixed capital as a tool
of relative surplus-value extraction without the risk of its violent periodic,
cyclical devalourization.

The expanded use of fixed capital as a means of

establishing monopolies and gaining access to surplus profits for certain

sectors of capital was crucial to its expanded reproduction after 1929.
not pure chance, then, that the GM-UAW and

u.s.

It is

Steel SWOC agreements contained

very similar provisions and that they spread in no time at all, not only
throughout the auto and steel industries, but also across U.S. industry as a
whole.

Their historic importance was not lost on the U.S. Supreme Court which,

after destroying the major reforms of the New Deal, drew the inevitable
conclusions from the surrender of General Motors and

u.s.

Steel to industrial

workers and, in April 1937, upheld the constitutionality of the Wagner Act.
There can be no doubt that the Court was merely ratifying the achievements of
the workers' struggles, aware of the new balance of power in industry.

After

all, General Motors and U.S. Steel had used every illegal means to defeat
industrial unionism and had failed; the Court could do no less than to give the

NLRB a chance to salvage industrial relations for legality.

Indeed, it went

even further; in a series of decisions over the next few years, the Court was to
confirm the authority of the Board to determine the content and the exercise of
its discretion.

Finally given a chance to operate unhampered by threats of

legal challenge, the Board quickly picked up its record:

in its first four and

a half years of operation, until December 1939, it heard over 25,000 cases
involving 5.75 million workers; it settled 2,000 strikes and averted 800; it
held 2,500 elections (1,700 by consent) with 1.2 million votes cast, issuing 887
certificates.24

Apart from this general, but cardinal point, there are two

other more concrete features of the transformation of the wage relation that

24.

See Tom! ins, op. cit.;' Ch. 5.

- 109 -

pertain to the contents of the contracts.

Again, although we have chosen to

concentrate on one aspect of each contract, both types of provisions are

contained in them.

The first of these aspects was the establishment of

grievance procedures and productivity agreements.

The principal and novel

feature of the GM-UAW contract to which the parties agreed on 12 March was the
elaborate grievance procedure it prescribed for all GM plants. 25
was to have a shop committee of five to nine members.

Each plant

Workers were to take

their grievances to the appropriate foreman and then, if not resolved, could be
refereed by stages involving the participation of the shop committee to a joint
review by the president of the UAW, the appropriate GM Vice-President, and other
optional representatives.

If all stages failed, the parties could agree to

refer the dispute to an impartial umpire or arbitrator.

GM insisted on the

inclusion of a clause barring work stoppage until the grievance procedure had
been exhausted and the approval of the UAW officers had been secured in order to
avoid waves of wild-cat strikes like the one it was experiencing early in 1937
because of

lo~

discipline among union members.

Once the union officialdom

established tight control over the membership in 1940, however, GM agreed to a

partial restoration of the UAW shop steward system.

In the same year, the GM

contract became the first among the large corporations bargaining with the CIO
to provide for a single permanent arbitrator; predictably, the practice was
adopted soon in many other large CIO contracts.

The productivity agreements were subtle and obscure aspects of wage

bargaining that went almost unnoticed in 1937, but grew quickly in importance

25.

s.

Fine, Sit-Down, Ann Arbor, Uni. of Michigan Press, 1969, Ch. 10.

Also, seeM. Derber and E. Young (eds.), Labor and the New Deal, New York,

Da capo, 1957, Ch. 9:

- 110 -

thereafter.

Many of the newly organized mass production firms, including GM,

operated on a bonus or point-incentive basis or measured day rate.

The UAW

sought to be allowed to participate in the setting of the rates or on the

standards for such setting; it asked for advance notice of rates and the right
of appeal through the grievance procedure.

GM granted readily the second

request, but stuck adamantly to denying the first on the ground that it
infringed "managerial prerogatives ...

Regardless, these negotiations

foreshadowed the future broadening of the concept of the wage until it came to
include productivity agreements and 'fringes' such as holiday pay, health and
vacation : ovisions.

Productivity agreements served to tie wages to the degree

of monopoly enjoyed by a given firm in its market.

The second main aspect relating to the contents of the new collective
agreements in mass industries was the mutation undergone by the function of the
wage. 26

The historic agreement between

u.s.

Steel and SWOC revealed the

strategy that big business would adopt to deal with the new political
composition of the working class:

wage increases would be compensated with

price increases to socialize the costs of production.

One the one hand, high

wages allowed the valourization of fixed capital made possible by the massive
unionization of industry; on the other hand, their combination with the
political control by the State over the monetary medium served to devalourize
fixed capital through both the inflationary pressure of higher prices and the
competitive one of higher productivity.

The

u.s.

Steel-SWOC contract was

accompanied by a wage increase of 10 cents per hour and a parallel price

increase.

The corporation could withstand raising the basic labour rate in the

North to 62.5 cents an hour because its current high volume of operations

26.

On this aspect, cf . :tU-1 ton, op. cit., p. 104.

- 111 -

recouped it the cost in higher prices.

Even Marriner S. Eccles, head of the

FRB, wrote to Roosevelt informing him that the price increase set by

u.s.

Steel

"has been greatly in excess of the rise that would be sufficient to compensate
for the wage advance".

The agreement marked the beginning of nee-capitalism:

by allowing the giant corporations to increase wages and to improve general work
conditions through nationwide collective agreements with powerful industrial
unions, the new inflationary regime provided a welcome escape route from the
usual downward spiral of deflation and depression.

But the socialization of the costs of production brought about by the

change in the function of the wage could not be achieved without the help of the
State, without its continual provision of public finance in the form of cheap
credit guaranteed through financial intermediaries controlled by a central bank
(the Federal Reserve), in that of sustained purchasing power for workers, and in
that of public expenditure to provide the conditions for monopolistic production
and the gradual devalourization of fixed capital.

We are in a position now to

explain the sharp recession of 1937 and the reaction of big business to it.

With the establishment of an inflationary regime after the industrial

upheavals of the first half of 1937, the way was cleared for a new cycle of
capitalist accumulation.

How, then, from this perspective, does one explain the

recession that struck the U.S. economy in August 1937 and persisted for most of
1938?

Here there is a constellation of facts that, far from confuting it, go in

support of our thesis.

For, encouraged by the 'prosperity' of early 1937,

Roosevelt proceeded to cut spending sharply for fear of inflation at the same
time as the government was collecting two billion dollars in taxes to balance
its budget.

This happened in a delicate period when the inflationary regime had

just been established and most businesses were worried about the political

- 112 -

direction of the New Deal and, in particular, about the ability of Rosevelt and
the NLRB to control industrial workers and the CIO.

Indeed, the first six

months of 1937 saw an inordinate wage explosion of about 15% above the 1929
level.

In such an unstable climate, Roosevelt was asking business to foot the

bill for financing new investments.

But this was in stark contradiction with

the basic tenets of the new inflationary regimel

The huge recession of August

1937 to June 1938 was nothing less than a protracted business strike against
Roosevelt's inability to grasp the new rules of the game, both on the fiscal and
on the political side.

By means of the recessions business was able to

stabilize wages (at 120, 1929 100) while holding prices and costs steady
throughout the period.

On top of this, the Federal Reserve intervened on excess

reserves, causing short-term government bonds to weaken and capital costs to

rise, bringing down the securities market (industrial stock averages fell by
over 50%

with a 35% drop in five months) on which business expectations often

are based. 2 7

The economic downturn gave business the chance to inflict a few

resounding defeats on the CIO; in steel, textiles, electrical industry, as in
many other areas, industrial workers suffered debilitating setbacks.

The object

of the exercise was not to reintroduce company unionism or to destroy the CIO as
a bargaining unit; rather, it was to break the antagonist political initiative
of this organization, which threatened to become unmanageable.

Now that the

conditions for a new industrial recovery had been laid - in 1939 the GNP
equalled that of 1929 - even Congress could move to dismantle some of the more
politically ostentatious parts of the New Deal:

relief appropriations were

slashed and the remains of the undistributed profits tax eliminated.

27.

See Mitchell, op.cit., Appendix, and L.V. Chandler, op.cit.,

Roosevelt

pp. 326-9.

- 113 -

himself immolated some unpopular experiments, like the Federal Theatre Project.
Yet, as late as January 1938, Roosevelt was holding talks with corporate leaders
about a possible return to the corporatism of the NRA:

he could see that the

tide had turned and that business negotiated from a position of strength given
the industrial recovery.

The President was heading clearly for fiscal expansion

and labour restraint.28

Timely support for labour restraint came from the AFL which had
bestirred itself from the stunned torpor of 1936-37.

Abandoning its archaic

resistance to industrial unionism and quintupling its budget for organizing

unions, the Federation set out in the spring of 1937 to regain lost ground:

it

set itself up as a respectable organization as against the 'un-American', proCommunist CIO; it demanded tests of loyalty from all local bodies; it revoked
the charters of CIO locals and expelled CIO officers from state federations and
city labour councils; finally, it persuaded employers to do business with its
more conservative unions.

The drive was very successful.

American capital,

which had used the craft unions to stifle industrial unionism for at least fifty
years, turned now to a revitalized AFL to stop the spread of the CIO.

After the

elections of 1938, the AFL encouraged conservative congressmen and corporate

leaders to attack the La Follette Committee and the personnel of the NLRB, which
it accused of being pro-CIO and pro-Communist.

Roosevelt succumbed to the

pressure and forced four members of the Board to resign. 29

28.

Milton, op.cit., Ch. 5; Rauch, op.cit, Ch. 14.

29.

Milton, op.cit., Ch. 6.

Also, J.A. Gross, The Reshaping of the NLRB,

Albany, State University of New York Press, 1981.

- 114 -

Roosevelt's prompt resumption of public expenditure in fiscal 1938 reestablished the terms of the new economic equilibrium.

The massive interventipn

of the State in the capitalist economy was needed to absorb huge amounts of
capital to create the conditions for the profitability of social capital and, in
particular, to ensure surplus profits for certain industrial monopolies.

The

public financing of fixed capital devalourization together with the ability of

giant corporations to increase wages and prices to valourize their fixed capital
investments were the two mainstays of the new inflationary regime.

Between the

final victory of the CIO in 1937 and Roosevelt's budgetary announcements in the
spring of 1938, a solid and lasting consensus was reached between the
Administration and big business on the new form of capitalist accumulation.

Yet there are those who argue that from 1937 onwards the

Ne~

Deal was

curtailed and eventually defeated by a conservative resistance that solidified

in Congress around 1939.

These are the same people who believe that the New

Deal was an ''unfinished democratic experiment", a rare example of enlightened

government.

These people ignore, because they cannot explain it, the fact that

some of the most dramatic, 'revolutionary' New Deal reforms were instituted
precisely in this period.

For it was in this period that the Supreme Court

ratified the NLRA and most other pieces of New Deal legislation without raising
a ripple of bourgeois anger, while Congress passed the Judicial Act and then the
Executive Reorganization Act.

These are only some of the reforms that we will

analyze more systematically in the next Chapter.

on those measures that concern the wage relation

For the moment, we will pause

- 115 -

Right from the start of its operation, the organized capitalist

opposition to the NLRB was a prelude to later legislative changes.30

Business~

had opposed the Wagner Act because it constituted an intolerable form of state
interference with industrial relations.

This attitude was reflected in the CIO

contracts of 1937 by the insistence of giant corporations on the avoidance of

disputes based on the parties' full adherence to the contracts.

This opened the

way for U.S. big business to prevent the NLRB from meddling with the content of
contracts and to ensure their legal enforcement.

Indeed, the NLRA was notable

for the degree of interference that it allowed the NLRB to have on the internal
affairs of unions.

The obvious aim of employers was to contain the political

growth of the CIO by subjecting it to the overall cyclical control or

tuning' of the State under the new inflationary regime.

~fine

This trend in

industrial relations was to be enshrined by a conservative Congress in the TaftHartley Act of 1946.

A measure linked directly to the changed function of the wage late in

the 1930s was the Fair Labor Standards Act (FLSA) passed in June 1938. 31
law applied to enterprises engaging or affecting interstate commerce.

The

The

object of the law was to impose a nationwide wage minimum of 40 cents an hour
and a maximum of 40 hours of work per week.

Although scheduled to come into

operation gradually, the FLSA caused almost immediately shut-downs especially in

the South where labour standards remained bad after they had been a major cause
of the Depression.

About 1% of workers affected by the law were stood down but

the hours of 1,500,000 were shortened and the wages of over 750,000 were raised,
inducing a rise in the employment rate and in purchasing power.

Child labour

30.

Cf. Tomlins, op.cit., Ch. 6, and Aglietta, op.cit, pp. 190-6.

31.

For what follows, see Rauch, op.cit., pp. 305-8.

- 116 -

was finally forbidden under the Act after a progressive struggle that had lasted
twenty years.

The law also abolished the worst abuses of sweatshops and

extended some benefits of the Wagner Act to unorganized workers as well. Of

course, the passage of the FLSA was strenuously resisted by Southern Congressmen
seeking to preserve the cheap labour market in the South.

Their efforts met

with a degree of success, at least until the Supreme Court approved the
constitutionality of the Act in February 1941.

They were much more successful,

however, in their attempts to stop more thoroughgoing reforms for the South
announced by Roosevelt in the 1938 Congressional campaign.

The proposed reforms

were based on the "Report on Economic Conditions in the South" published by a

homonymous Conference of Southern progressive intellectuals that was sponsored
by the Administration.

The Report was a penetrating and damning indictment of

some of the elements that we have identified already as causes of the

Depression.

Lowest wages in the country, extremely docile labour force, low

productivity occasioned by the bad health and malnutrition of workers, vast

amounts of child and female labour, and finally, low capital investment- these
were only some of the problems in the Southern economy identified by the
Conference in its Report.

Despite the general indolence of Congress and

Northern business in their support for

Roosevelt~s

plans to act on the Report,

it is fair to argue that the FLSA provided a satisfactory framework for future
action.

Roosevelt himself admitted, perhaps with an eye on the imminent war,

that the era of domestic reform was over.

1939 the

u.s.

In his Annual Message of 4 January,

President stated:

We have now passed the period of internal conflict in the

launching of our program of social reform.

Our full energies

- 117 -

may now be released to invigorate the processes of recovery

in order to preserve our reforms .. 32

The outbreak of World War II provided the Administration with a unique

chance to fortify the new inflationary regime thanks to the pressing
requirements of military expenses.

On all accounts, military expenditure is an

excellent way of devalourizing fixed capital through planned obsolescence and of

creating monopolies and surplus profits given the high organic composition of
capital in the armaments industry.

Prescinding from the objective logistic

needs occasioned by the European crisis, the fact remains that Congress, which
had planned to slash War Department appropriations in the Spring of 1940, had
voted over $17 billion.for defence by October of the same year!

Nor can it be

said that this was only a temporary emergency for military expenditures in the
United States continued at a very high level after the War.

The advent of a

permanent arms economy finally severed the link between use values and commodity
production and confirmed thereby the possibility of a politically-enforced form
of capitalist accumulation; in other words, the production of surplus value was
divorced from that of use values by means of sheer political coercion.
this a new State-form was needed:

we will turn to the study of its

institutional structures in our concluding Chapter.

32.

Public Papers

Q~

F.D.R., 1939, p. 7 (emphasis added).

But for

CBAPTEB. 4

THE NEW DEAL AND THE NEW ASSET OF CAPITALIST INSTITUTIONS

We look finally at some of the institutional changes that occurred

during the New Deal.

The fact that we have relegated these matters to our last

chapter will seem odd, for it is precisely in its institutional reforms that the
New Deal was most conspicuously

~revolutionary~,

and it is to them that most

accounts of the period turn first, if not exclusively.

To be sure, the social

and political reforms of the New Deal are essential to our understanding of its
overall significance; but their explanatory power is only secondary because they
are derived from the transformation of the wage relation that we have described
above.

The transformation of the wage relation occasioned by a combination of

economic depression and working-class insurgency in the 1930s obliterated the

autonomous operation of the law of value as a competitive basis for the
distribution of profits among capitalists.

The drastic intervention of the

capitalist State in the vital processes of social reproduction aimed at

replacing the 1.iberal-competitive regime of the self-regulating market with a
novel political-statal imposition of the law of value.

Through monetary and

fiscal policies, the State wrested control over the economy from individual
capitalists to achieve a twofold purpose:

to transform the entire reproduction

of society into a process of capitalist valourization by means of fixed capital

expenditure; to realize and distribute the greater mass of surplus value
produced thereby as surplus profits for monopolistic sectors of the economy.
But the reconstruction of an entire society to suit the needs of capitalist
production required a great deal of social planning because of the inconvertible
character of fixed capital investments and their slow turnover.

The problem

arose, therefore, of how the old authoritarian State could be substituted with
one that could plan the overall development of social capital while preserving

- 119 -

the autonomous moments of capitalist decision-making essential for the disparate

processes of competitive concentration and centralization of capital.

It must

be stressed that the new State-form was not to discard the wage relation and
profitability in favour of

~the

autonomy of the political'.

This was precisely

the evil represented by fascism and communism - the subordination of capitalist

enterprise tQ political imperatives.

Such interference was quite at odds with

the peculiar dynamic of capitalist accumulation based on the extraction of

relative surplus value.

Instead, the paramount aim of State intervention

remained the maximization and realization of surplus-value extraction; only the

mode of this extraction had to change on a social scale.

Indeed, throughout our

treatment it will be important to stress the practical and political necessity

of the new State-form as a functional response to the crisis and the
recomposition of the working class. 1

The breakdown of the market, symbolized dramatically by the collapse of

the gold standard, entailed the state monitoring of the antagonism between
workers and capital as embodied homogeneously in the monetary medium.

The

Depression had evinced the well-nigh complete inability of Congress and the
other government organs to deal effectively with the crisis.

In the past,

government expenses had been seen as a burden on the economy; any extension of
governmental functions had been thought to be a certain precursor of higher
taxes.

Therefore, the aim of government reform had been always to cut expenses

and trim the budget.

Instead, the New Deal witnessed an unprecedented degree of

state control over the economy.

1.

The new function of the State, which was to

On the necessity and character of the new State form see J. Agnoli, Die
Transformation der Demokratie, Berlin, Voltaire, 1967, and A. Negri, La
Forma Stato, Milano, F&ltrinelli, 1975.

120 -

provide the social framework for capitalist production, pushed economy out of
the reckoning.

So long as government did not affect the reproductive cycle of

capital, its expenditure could only detract from total surplus value; but now
that it was a crucial factor in reproduction, its expenses became simple
overheads.

Nor could efficiency be seen in terms of a reduction of executive

authority - quite the contrary.

Efficiency was seen now as the ability to plan

accurately the development of capital to avert the possibility of crises.2

For this purpose, state institutions needed to extend their reach into diverse
areas of social interaction:

on the one hand, the new articulation of

institutions enabled them to gather information on all aspects of economic life

to ensure the 'democratic' formulation of the State-plan; on the other hand,
this apparatus needed sufficient powers to enforce its prompt 'authoritarian'
execution.

Hence, the new State-form acquired the contradictory character of

'authoritarian democracy'.

But the simple democratic formulation of the State-plan could not

warrant the necessity for its authoritarian execution unless appropriate
functional principles of legitimation were found.

The State-plan had to be

assigned a global economic role to cover the entire social arena.

Specifically,

the link between state action and private profitability had to be dissolved in
favour of collective categories such as national economic growth and aggregate
demand.

Thus, despite its collapse under the old institutional guise of the

free market, the law of value had to be reinstated as the supreme guiding
principle of state action in the new inflationary regime.

2.

This regime was

For a re-statement of these points, in ideological dress, see B.D. Karl,

Executive Reorganization and Reform in the New Deal, Cambridge, Harvard
U P , 19 6 3 , Ch. 4

- 121 -

characterized therefore by the widening chasm between the political enforcement

of the law of value and its ability to metabolize the disparate sources of
surplus value in the face of rising working-class antagonism.

The potential

danger of inflation was precisely that it could distort fatally the exchange and
realization of value so as to frustrate capitalist enterprise.
come four decades later.

But that would

For the moment, the law of value, as the sanction of

the equivalence of various kinds of reified labour, could render legitimate the
arrogation of socio-economic power by the State on the grounds that it ensured
the fair, rational and planned distribution of socialized surplus value, while
it preserved the function of money as the homogeneous medium of capitalist
command over society.3

The need to plan and co-ordinate capitalist economic development on a

social scale entailed certain radical changes to the traditional separation of
state powers - changes that were not merely functional, but that touched also
the form of political representation.

For the new State-form could not tolerate

any longer the political and technical constraints imposed on it by the

~enlightened

public opinion' of free-market capitalism.

State intervention in

the economy clashed necessarily with the old Rule of Law and its individualist
notions of private ownership and civil rights.

These could be affected

drastically now by the administrative action of the State; therefore, new

effective foDns of governmental power had to be found with which to supplant an
obsolete 'public opinion'.

3.

The public sphere had its popular basis in the

We lack, even at this stage, a satisfactory Marxist study on these crucial

issues.

For a first delineation see A. Negri, Forma Stato, op.cit., and the

essays in J. Holloway and

s.

Picciotto, The State and Capital, London,

Arnold, 1978, all by German authors.

- 122 -

existence of a middle class removed from the productive cycle of capital and
therefore free from the wage relation.

But once the wage relation spread to ali

spheres of production early in this century, the middle class was progressively
proletarianized until it could play no longer a valid role in the new Stateform.4

The transfonnation of the bourgeois middle class into a ~salariat'

condemned it to political disenfrachisement from the influence it enjoyed

through its elected parliamentary representatives in the form of a transfer of
political power away from the legislature and into the hands of the
executive.s

In fact, partly because of its lowered status, partly because of

the growing concentration of ownership in the economy and the media in the hands
of powerful corporations, the salariat became even more dependent on the
sprawling mass media- radio, newspapers, magazines and cinema- for its
opinions, and on organizations such as pressure groups and associations for
their atomized expression.

As a result, public opinion became increasingly

massified and homogeneous.

Historical experience showed that totalitarian

regimes could orchestrate public opinion through mass propaganda.

being independent and enlightened, modern public opinion was
gabble of helpless individuals.

th~

Far from

_hysterical

'"Public opinion, in its raw state, wrote H. L.

Mencken, "gushes out in the inunemorial form of the mob's fears.

It is piped to

central factories, and there it is flavoured and coloured, and put into
cans".6

Social factory indeed!

The mirage of 'public opinion' had to be

abandoned for the reality of the 'public interest' subordinated to the law of
value.

4.

Hence, the public interest was to be identified and determined with

Generally, cf. J. Habermas, Strukturwandel des Offentlichkeit, Neuwied,

Luchterhand, 1962.

u.s.,

see

c.w.

5.

For the

6.

Notes On Democracy,

Mills, White Collar, New York, Oxford, 1951, Ch. 1.

N~

York, A.A. Knopf, 1926, p. 192.

- 123 -

scientific devices such as public opinion polls and statistical surveys compiled
by administrative departments and deciphered by experts.

There was no longer

any public with which political decisions could be entrusted; rather, the
political system itself had to be made rationally safe for 'democracy'.

No less

a social critic than Walter Lippmann commented that "no reform, however
sensational, is truly radical, which does not consciously

provi~e

a way of

overcoming the subjectivism of human opinion based on the limitation of

individual experience".'

The alternative lay in the full "scientization" of

the public interest achieved by bureaucratic means. 8

Two obstacles stood in the way of the institutional reforms needed to

deal with the new balance of forces and economic forces unleashed by the
Depression: one was the old separation of powers and its matrix, the Rule of
Law; the other was dual federalism.

Such was the character and extent of the

reforms sought by the Roosevelt Administration that as early as 1935 they had
sparked what was soon to become one of the gravest constitutional crises in U.S.
history.

For in that year the Supreme Court dealt two severe blows to the

activist zeal of the Administration when it handed down its decisions in

Schechter V.

u.s.

and in Humphrey

v.

United States. 9

The first case

invalidated the NIRA on the grounds that it exceeded the power of the federal
government to regulate interstate trade and commerce and that it conferred on
the Chief Executive the authority to set up agencies with legislative and quasi-

7.

w.

8.

A post-mortem on this is in J. Habermas, Toward a Rational Society,

Lippmann, Public Opinion, New York, Free Press, 1922, p. 397.

London, Routledge and Kegan Paul, 1971, Ch. 5.

9.

295

u.s.

495 (1935)

an~

295 U.S. 602 (1935), respectively.

judicial powers.

124 -

We will examine this aspect more closely later.

The Humphrey

Case concerned a suit by Humphrey, a member of the Federal Trade Commission

reappointed to his post for seven years by President Hoover in 1931, upon his
removal from office by President Roosevelt late in 1933 for his divergent views
on public policy.

The Court held that the

President~s

decision was beyond power

(ultra vires) because, although the FTC was an administrative body, it had been
created by Congress to carry out legislative policies prescribed in the statute,
free from executive control.

Despite its clear unfavourable outcome for the

Administration, inspired perhaps by the

'political~

opposition of the Court to

the New Deal, the decision in Humphrey's Case seemed unwittingly to breach the
doctrine of separation of powers.

For in its zeal to save the doctrine, but

mindful of established governmental practices, the Court had brought down a

decision that in effect allowed Congress to confer all three types of powers on
an agency after placing it 'formally' in one of the three departments. 10
Doubtless, Roosevelt had this scheme in mind when he instituted a Committee on
Administrative Management early in 1936 to report a plan for the systematic
overhaul of the national administrative machine. 1 1

In its report, the

Committee attacked the system of Commissions that Congress had erected in

preference to the extension of presidential power.

According to the Committee,

the system was "a headless 'fourth branch' of the government, a haphazard
deposit of irresponsible agencies and un-coordinated powers".

The future looked

even more bleak:

10. Cf. E.S. Corwin, The President, Office and Power, New York, New York Uni.
Press, 1957, pp. 85-95.
11. Generally for the history and membership of the Committee as well as a
brilliant analysis of its Report, see B.D. Karl, op.cit.

- 125 -

Congress is always tempted to turn each regulatory function

over to a new independent commission.

This is not only

following the line of least resistance; it is also following a

50-year-old tradition.

The multiplication of these agencies

cannot fail to destruct the effective over-all management of

the Executive Branch of the Government almost in geometric
ratio to their number.

At the present rate we shall have 40

to 50 of them within a decade.

Every bit of executive and

administrative authority which they enjoy means a relative

weakening of the President, in whom, according to the
Constitution, 'the executive Power shall be vested'.
grow in number his stature is bound to diminish.

As they

He will no

longer be in reality the Executive but only one of many

executives, threading his way around obstacles which he has
no power to overcome.12

The report itself was the creation of three academics who wished to put an end
to the traditional piecemeal approach to government and who sought to establish
a science of planning.

In this context, and from the standpoint of practical

observation and experience, the visit to Europe of two leading members of the
Committee, Merriam and Brownlow, was decisive in shaping the final report.
While in Europe, the two had occasion to draw from ancient administrative
traditions, to meet with leaders such as Hitler, to read the work of politicians
and administrators like Leon Blum, and to converse with students of government

12.

Quotations can be found readily in the Report of the Committee with Studies
of Administrative Management in the Federal Government, U.S. Government
Printing Office,

1937~~

pp. i-iii, 1-53.

- 126 -

like Laski and Finer.

On their return to the States, Merriam and Brownlow were

convinced of the importance of their work and proposals in reforming a

government that otherwise might fall in totalitarian hands.

As they wrote in

the introduction to the report, '"If America fails, the hopes and dreams of
democracy all over the world go down".l3

The report itself and its recommendations were founded on an approach

that took "overall management" as its object and the Presidency as the source of
executive authority.

The major points undertaken by the report and embodied

later in the Executive Re-organization Bill of 1937 proposed five changes to the
executive structure:

1.

To deal with the greatly increased duties of executive

management falling upon the President, the White House
staff should be expanded.

2.

The managerial agencies of the Government, particularly

those dealing with the budget, efficiency research,
personnel and planning, should be greatly strengthened and
developed as arms of the Chief Executive.

3.

The merit system should be extended upward, outward and

downward to cover all non-policy-determining posts, and
the civil service system should be reorganized and
opportunites for a career system attractive to the best
talent of the Nation should be provided.

13.

See Karl, op.cit., pp,. 222-6.

- 127 -

4.

The whole Executive Branch of the Government should be

overhauled and the present 100 agencies reorganized under
a few large departments in which every executive activity
would find its place.

5.

The fiscal system should be extensively revised in the

light of the best governmental and private practice,
particularly with reference to financial records, audits,
and accountability of the executive to the Congress.

The major aim contained in the recommendations was obviously to strengthen the
bureaucratic efficiency of the executive and to ensure at the same time that it
remained subordinate to .political command.

Indeed, the Congressional

Commissions had drawn criticism because their regulation of business turned

quickly into a collusive partnership.

The Committee attempted to subject

regulatory administrative agencies to the politically-dictated imperatives of

public policy.

This was the other, less conspicuous and more industrial-

economic side of the

~public

interest~

filtered by the new agencies, ensuring a

sectoral protection of capitalist interests through the "written representation

or submission'" to the appropriate agency.

The exponential proliferation of administrative rules and regulations

consequent upon the expansion of regulatory agencies under the New Deal dwarfed
Congressional legislation itself and called forth the development of judicial
review of administrative action.

Here again the Supreme Court struck down New

Deal measures three times in 1935 because they involved unfettered delegations
of power.

It was in that fatal year that the time-honoured principles of

the

constitutional order of the United States - the Rule of Law, the Separation of
Powers, and Dual

Federalis~-

clashed decisively with the organic needs of the

- 128 -

economy.

For in that year the Court adopted all three principles to demolish

one by one all the major reforms of the New Deal.

As the ultimate tribunal forJ

judicial appeal, the Supreme Court stood as the guard of

enshrined in the Constitution.

u.s.

federalism

It was understandable, moreover, that a judicial

body of conservative men should have an atavistic attachment to certain archaic

interpretations of that document.

After 1890, the growing class antagonism and

the industrial transformations in both labour process and capital structure had
convinced many of the need to update legislation, and legislatures at federal
and state level had intervened to regulate key areas of economic activity.

But

bit by bit they saw their work be nullified by the Supreme Court. Decision after
decision, the Court kept social legislation at bay for nearly fifty years by
means of two devices:

a narrow and static reading of the "interstate commerce"

clause and the application of the "due process of law" requirement in the Fifth
and Fourteenth Amendments in a substantive sense..

Behind the "conservative

extremism" of the Court were the old values and ideologies of laissez faire to
which it held firmly. 14
however.

The situation began to change with the New Deal,

From 1932 to 1937, as the need for federal government intervention

became felt more intensely than ever before, pressure mounted on the Court from
all sides.

On 31 May, 1935, President Roosevelt gave a press conference during

which he criticized the decision in Schechter as a return to the days of "horseand-buggy" and drawing the attention of the nation to the inadequacy of Supreme
Court doctrines to resolve great national economic problems. 15

There followed

Roosevelt's landslide victory in 1936 showing very widespread popular support

for the New Deal.

Furthermore, some politically-minded judges could not fail to

be impressed by the extraordinary worsening of class antagonism and industrial

14.

Cf. M. Fainsod et al., op.cit., Ch. 4

15.

Public Papers of.F.D. Roosevelt, op.cit., vol. IV, PP 220-1.

- 129 -

strife in 1936 and early 1937.

The capitulation of General Motors and U.S.

Steel to industrial workers gave a clear signal to the Court that pillars of
conservatism were crumbling.

Finally, Roosevelt's announcement of his Court

reform plan on 5 February, 1937, must have altered decisively the balance of
opinion within the Court.

The Judiciary Reorganization Bill proposed to enable

the President to increase the number of judges in federal courts whenever

existing judges who reached 70 years of age did not retire.

Another proposal

allowed the Attorney-General to appeal immediately from lower federal courts to

the Supreme Court in cases involving the constitutionality of bills in order to
expedite important matters. 16

Although Congress was disposed favourably

toward the Bill at first, a conservative campaign mounted by the Republicans and
accusing Roosevelt of dictatorial designs soon gathered momentum and the Bill
looked certain to be defeated.

Detennined to see it pass, Roosevelt decided to

take the campaign for the Bill in his own hands and began to mobilize the
Democratic Party.

While the parties prepared for battle, the Supreme Court

finally surrendered.

In a remarkable series of reversals, the Court went so far

in its ratification of the New Deal as to become one of its major

proponents. 17

First came the marginal decision in West Coast Hotel Co. V.

Parrish18 where the Court upheld the right of New York State to regulate the
minimum wages of women and children.

In a famous sentence presaging future

events, Chief Justice Hughes said:

16.

On judicial reforms, see generally Rauch, op.cit., pp. 272-6, 279-83.

17.

This "constitutional revolution" is described very well in M. Einaudi,

op.cit., pp. 212-22, and E.S. Corwin, The Constitutional Revolution,
Westport, Greenwood, 1977.

18.

300

u.s.

379.

130 -

The community may direct its law-making power to correct the

abuse which springs from (employers'] selfish disregard of the
public interest.19

But a few days later, on 12 April, 1937, the Court shocked the country with its
validation of the Wagner Act in NLRB V. Jones and Laughlin Steel Corp.20

In a

similar case, the Court acknowledged openly one of the probable causes of its
reversal.

Recognizing the power of Congress to legislate on industrial

relations, the Court's judgement stated that collective bargaining was often "an
essential condition of industrial peace".21

Refusal to confer and negotiate has been one of the most

prolific causes of strife.

This is such an outstanding fact

in the history of labor disturbances that it is a proper

subject of judicial notice.

Next were three Social Security cases of historic importance in that they
established the federal power to tax and spend for the "general welfare".
Finally, the Fair Labor Standards Act was validated by the "New Court" in 1941
in U.S. V. Darby.22

The Act banned not only interstate commerce of

substandard goods, but also their production "intended for that commerce.

19.

~-,

2 0.

301

21.

Ibid., p. 42.

22.

312

pp. 399-400.

u.s.

u.s.

1.

100.

This

- 131 -

time, unlike previous occasions, Justice Stone could deliver the judgement for a
unanimous Court:

The power of Congress over interstate commerce

~is

complete in

itself, may be exercised to its utmost extent, and

acknowledges no limitations other than are prescribed in the
Constitution"'.23

It was the end of dual federalism and the beginning of a co-operative federalism
in which the federal government was bound to play the senior role. 24

Parallel

to these judicial developments in the socio-economic sphere were a number of

uncertain moves by the Court to guarantee individual civil rights - freedom of
speech, of action of religion, and of assembly, freedom of the press and right
to counsel.

Although the humanitarian motives of the Court should not be

discounted a priori, these moves must be seen partly in the context of the new
inflationary regime and its foundation on mass consumption.

Perhaps the best

example of this is provided by Roosevelt's revocation of the Amendment on

prohibition in 1933, aimed consciously at increasing consumption.

In the

society of capital, the freedom of consumption must be protected to a large

degree.

But this is only an apparent freedom because the mode of consumption is

set inevitably by-the producers of commodities.

23.

Ibid.

24.

Co-operative federalism is discussed in E.S. Corwin, ''The Passing of Dual

Federalism", Virginia Law Reform, (1980), Vol. 36, No. 1, esp. pp. 17-21.
On the later trajectory of the Court, M. Einaudi, op.cit., Ch. 6 and A.
Cox, The Warren CourtJ,, Cambridge, Harvard U.P., 1969.

- 132 -

According to the conception of co-operative federalism, the federal

government and the States form a functional entity in dealing with common
problems, acting as a single governmental mechanism.

Two forms of co-operation

in particular developed during the New Deal and soon outweighed all others
primarily through the use of legislative powers on both sides.

First, the

federal government brought its great powers over interstate commerce and
communications to the assistance of States whose internal legislation was
frustrated often by extraterritorial activities.

Second, the federal government

coaxed individual States into co-operation to achieve certain national

objectives by assigning pecuniary inducements to them.

The system of "grants-

in-aid" permitted the fusion of the financial might of the national government
with the greater coercive powers of the States.

The best and most successful

example of this type of co-operation was the Social Security Act of 1935.

The

Act brought the tax-spending power of the national government to he support of

the States that wished to co-operate on the various welfare provisions set out
in the Act.

Of course, co-operative federalism did not spell the end for

States; on the contrary, it provided them with opportunities to extend their

activities in areas where they could not have maintained operations on their
own.

What did happen, however, was that the power of the federal government

grew disproportionately under the new federalism in comparison with that of the
States.

These outcomes are not surprising in terms of our model of

'authoritarian democracy' for, on the one hand, the new role of the States
allowed the continuation of a seemingly democratic filtering of public opinion
with a local, autonomous and coercive implementation of measures that, on the
other hand, were determined by centralized decision-making institutions in
Washington.

IJ

- 133 -

The timely 'switch"' by the Supreme Court sealed the fate of the
Judiciary Reorganization Bill.

Regardless, save for the provision on the

appointment of new justices and judges, most of the procedural reforms

recommended by the President were adopted in the Judicial Procedure Reform Act
of 1937. 2 5

The Executive Reorganization Bill was caught also in the

constitutional uproar because it fuelled suspicion about Roosevelt's dictatorial

tendencies.

But two years later, on 8 September, 1939, the provisions of the

Bill were absorbed substantially in the system of government through Roosevelt's

Executive Order 8248.

In the same year, the President was granted power to

reorganize, not by executive order, but through submission to Congress of

reorganization plans, acting therefore as an agent of the legislature.

The

Executive Office of the President was erected; the Bureau of the Budget and the
National Resources Planning Board were transferred to the Executive Office.
Though forbidden to erect two new departments, the President created the Federal
Security Agency and the Public Works Agency to oversee welfare and public works
projected by the Planning Board.

As a result of the refusal by Congress to have

a single Civil Service Administrator instead of the Commission, Roosevelt named

one assistant to take charge of personnel and to liaise with the Civil Service
Commission.

These powers to reorganize expired in 1941 but were continued with

the War Powers Acts and then restored with the Reorganization Act of 1945.
Thereafter, reorganizations followed the pattern set in 1939. 26
administration was born thus, quietly.

But, the tremendous importance of these

events has not been lost on students of U.S. government:

25.

See Rauch, op.cit., pp. 293-4.

26.

See, generally,

Karl~vop.cit.,

Public

Ch. 5.

- 134 -

Buried in the last hectic days of the New Deal's efforts to

sustain its revolution, the report of the President's
committee was in some respects the Thermidor, the
institutionalization in American government of one of
Roosevelt's greatest contributions to American politics:

the

presidency as the movable weight in the balance of democratic

government, providing that rapidly adjustable point which
might seek to maintain equilibrium in a rapidly changing
world.27

Another significant change in the Presidency concerned its relations

with Congress.

Roosevelt regarded Congress as an extension of the Executive, as

an instrument that had to be brought closer to the needs of the nation as

identified and defined by the executive.
this end.

He adopted many techniques to achieve

The special session of Congress was used in propitious moments when

an enthusiastic Democratic majority could be trusted to pass entire legislative

programmes in a matter of days, as in "the hundred days".

He appeared

personally in Congress to deliver the more important messages for greater

dramatic effect.

Similarly, he stressed specific points of his legislative

proposals to focus the public gaze on them and force Congress to meet its
responsibilities.

The direct appeal to the peqple over the heads of

congressmen, the pork barrel, and secret negotiations with congressional leaders
were all part of Roosevelt's strategy to rally or bribe Capitol Hill. 28

27.

Ibid., pp. 258-9.

28.

Corwin discusses the relationship of Roosevelt with the Congress in The

President, op.cit., P.R 272-7.

Also, Einaudi, op.cit., PP 119-33.

- 135 -

The New Deal witnessed a significant rise in the number of legislative

measures initiated by the executive through the President and a precipitous
decline in those initiated by Congress.29

This fact alone sufficed to make a

closer relationship between the two heads of power very desirable, on top of the
existing amount of co-ordination between them.

What was missing in Congress was

a voting bloc of party representatives that could be coerced to observe the

policies endorsed by a political party. 30

The presence of such a bloc,

instead, would have allowed the immediate unity of legislative and executive
power displayed for instance by the British system of government.

For, despite

all the political transformations inspired by the New Deal, it was still true
that Congress remained a haphazard collection of individual representatives
unchecked by party discipline.

Roosevelt received a convincing, if dramatic,

demonstration of this in the constitutional crisis of 1937.

Against a

recalcitant Congress that would not pass the much-needed measures on the
judiciary, executive reorganization, and fair labour standards, Roosevelt had
had to resort to exploiting his double role of President and progressive leader
of the Democratic party in a
members of his party.

despera~~

attempt to 'purge' the conservative

It was obvious to Roosevelt that the political system

needed an organized opposition party that would at one and the same time absorb
political movements starting outside the constitutional framework and force
decisively the alignment of legislature and executive.

For this purpose, it was

essential to abolish the traditional neutrality of the national party leadership

29.

On the long-term decline of Congress as the initiator of legislation, see

L.H. Chamberlin, The President, Congress and Legislation, New York,
Columbia U.P., 1946.

30.

The problem is stated with due emphasis in Negri et al., Operai e Stato,
op.cit., pp. 131-2,

~din

Rauch, op.cit., pp. 317-25.

- 136 -

in the selection of candidates for primaries.

Hence, in 1938 the President

resolved to campaign openly in selected districts in support of liberal

Democrats standing for the Congressional elections.

The aim was to transform

the Democratic party into an exclusive organization of liberals.

The

spectacular emergence of the CIO on the political horizon showed the necessity
of an oppositional

~social-democratlc~

party within the New Deal.

Indeed, twice

before 1938 had Roosevelt intervened to neutralize potential parties in the

making - in 1935 against the welfare movement and in 1937-38 against the
projected labour party based on the CIO.

The strategic political use of this

move was stressed by Roosevelt himself in a "fireside chat" on 24 June, 1938:

An election cannot give a country a firm sense of direction if

it has two or more national parties which merely have
different names but are as alike in their principles and aims
as peas in the same pod.31

Roosevelt was alluding to the necessity of a solid political bloc in Congress

and the danger of shutting out of the political process proletarian movements
composed by the very structure of industry.

Clear proof of the link between big

industry and working-class political composition was the fact that the only
reliable voting bloc in Congress was formed by the Eastern Democrats.

Roosevelt

felt that the spread of industry to South and West together with that of the CIO
made a realignment of the party and political system along class lines feasible.
But his tour of the States befoe the elections of November 1938 was rather
unsuccessful.

The time was not ripe for this other ambitious Rooseveltian

project.

31.

Public Papers .. of F.D. Roosev.elt, op.cit., 1938, P 398.

- 137 -

The combined effect of these developments was to modernize the political

machinery of U.S. capitalism in the light of the economic and industrial
upheavals of the 1930s.

Our treatment has stressed the functional character of

the changes in the State-form to show their dependence on the transformation of

the wage relation.

Indeed, it could be said that the entire New Deal was an

exercise in institutional change if by wage relation we intend also the

institutional arrangements

the factory.

Be that as it may, there can be no

doubt that it was the working-class strike explosion of 1936-37 that gave the
final decisive push to the constitutional and political revolution of the late
1930s.

Once capitalist saw their traditional State-form collapse and be swept

aside by the Depression, it became clear to them that a new durable response to
the antagonism of the working-class was needed.

The capitalist crisis was

therefore the catalyst of political transformation; it provoked a novel

awareness of the social character of capitalist production and of the necessity
to adjust the political system accordingly.

With the New Deal, the capitalist

State was called finally to act as a collective capitalist against the imponent
emergence of the working-class

(}

CONCLUSION

Let us review now in summary fashion some of the advances on existing

historiography that we hope to have achieved in this thesis.

These can be

divided into methodological improvements and historiographical discoveries.

Of

course, the latter are partly a product of the former; but whereas only the
historiographical discoveries can be listed here with sufficient brevity, the
methodological points are too integral to the text to be severed from it.

First of all, as a result of our investigation of the historical

development of U.S. capitalism, we reached the conclusion that the Great
Depression of the 1930s was caused by a disproportion between wage levels and
fixed capital investments, and not by 'underconsumption' or 'overaccumulation'
or the vagaries of the stock market.

The antagonistic foundations of capitalism

determine its development through a regime of relative extraction of surplus

value.

But the expanded reproduction of capital under such a regime requires

the existence of a definite relation between constant capital and variable

capital.

Whenever the latter loses its composition with regard to the former,

the process of accumulation runs against an absolute limit in the size of the
labour force and the length of the working day.

Thereafter, greater

accumulation can be achieved only through the annihilation of the working class.
But this does not remove the basic barrier to expansion; on the contrary, by
breaking the political composition of the working class, the absolute extraction
of surplus value can start a downward spiral of capital depreciation and
depression as the vital link between constant and variable capital is dissolved.
This is exactly what happened in the United States during the 1920s.

The

ensuing depression could be overcome upon condition that this link between the
political composition of the working class and constant capital was reestablished.

It was not simply a matter of setting high wages for workers in

- 139 -

industries with a high organic composition of capital (that is, with a higher
proportion of constant to variable capital) and higher productivity generally in this sense, the New Deal achieved little; it was rather a matter of tying
wages to the various organic compositions of capital, of redefining the function
of the wage. This called for a new relationship between workers and capital.

In

particular, it became very clear to most representatives of capital that this

vital relationship could no longer be left to the automatic regulation of the
market but had to be regulated politically, by the State.

Thus, the State had

to transform itself from a simple mediator between various groups in civil

societ! to the crucial institution in the expanded reproduction of capitalist
society; it was to stand as the collective capitalist to the new

~society-as-

factory~.

Second, the identification of money as a political entity homogenizing

capitalist command over the whole society has allowed us to avoid the old
squabbles between instrumentalism and functionalism about the historical dynamic
of state intervention in the economy.
impression:

We must be careful not to form the wrong

despite what New Deal historiography would have us believe, the new

role assumed by the State in the thirties was not the result of a conscious
capitalist plan to reform the economic system - although, as we saw in the
Appendix to Chapter One, there were early forms of bourgeois awareness of the
inadequacy of the laissez-faire order and projects for future renewal of the
capitalist order with which even Marxist-socialist analyses converged.

Rather,

the New Deal was a slow and hesitant response to the dysfunctions of capitalist
society as signalled by the level of working-class antagonism - by its absence
in the twenties and early thirties, and by its tremendous surge from 1934.

Nor

was there any fundamental difference between the First and the Second Hundred

Days in terms of the political orientation of the Roosevelt Administration,

- 140 -

except that its policies became markedly responsive to workers' struggles.

If a

periodization of the New Deal is implausible, a categorization is necessary:

on

the one hand, there were policies of a fiscal and monetary nature that derived
their efficacy from money, that is, the specific embodiment of value; on the
other hand, there were measures apt to regulate the labour force as a political
entity, as a working class that could keep the mechanism of accumulation in
motion; finally, both these objectives gave rise to a third type of measure that
concerned the state institutional control of the economy.

The fiscal and monetary measures were aimed at centralizing state

control over the economy by affecting the money supply and the level of
investments.

The depression manifested itself immediately as a financial crisis

that weakened money as the social medium for the enforcement of the law of
value.

Hence, the crisis threatened the survival of capitalist society as a

whole.

By taking the dollar off the gold standard, Roosevelt ensured

politically the survival of the law of value, that is, the social validation of
capitalist command over wage labour.

Although it was intended as a temporary

move, Roosevelt was forced to make it permanent, first, to maintain prices and,
later, to accommodate the new inflationary regime.

More important, the

suspension of the gold standard and the establishment of a paper currency

allowed Roosevelt to fix the level of investments and employment without great
loss of value (in the form of gold outflows) to foreign capitals; it permitted
also the shunting of money capital to monopolies in key economic sectors as well
as the building of essential infrastructures for the cycle of capital
(transport, communication, education, and so on).

But all this could not suffice in the long run; the process of
accumulation had to be resumed by re-establishing the link between constant and

- 141 -

variable capital, on the one hand, and profitability, on the other.

Our third

discovery is that this essential reform, and many others as well, was not
adopted independently by the Roosevelt Administration but was imposed on capital
by an increasingly militant working class in the years 1934-37.

The early

attempt with the NIRA failed partly because it proved impossible for the State
alone to beat the resistance of individual capitalists, but partly also because
of the State's unwillingness to promote a potentially dangerous political
unification of the working class.

The result was that the major reforms in

labour law and industrial relations had to be forced on capital by the

groundswell of workers' unrest that hit the mass-production industries in the
mid-thirties.

The struggles served not only to force the hand of the

Administration to support the Wagner Act, but also to coerce the big employers
to deal with the new industrial unions.

Once union recognition and collective

agreements spread to most mass industries, capital was able to use the
organizational cohesion of industrial unions to impose wage differentials
commensurate with its own organic composition.

This, together with the

establishment of a national paper currency suspended from the gold standard,

gave rise to the new inflationary regime whereby wage increases were followed
quickly by commodity price rises.

Thus the political impact of the working

class could be absorbed as the driving force of capitalist accumulation without

significant losses, if any, in profitability.

These were the quite dramatic changes in the political and economic life
of American society in the thirties that were to set the pattern for the
development of the capitalist West for the next forty years.

This was what

would be called, retrospectively, 'the Keynesian revolution', that is, the

intervention of the State in the capitalist economy as regulator of aggregate
demand, investments, and ~ncomes.

It was nothing less than the culmination of

- 142 -

'the society of capital', of the awareness on the part of capitalists that

society could no longer be regulated by the market but by the collective
capitalist, the State.

Capital was no longer merely a part of civil society; it

was the model on which society itself had been designed.

Henceforth, capital

would exist as social capital and capitalist society as the society of capital.
The State, which had played a determinant role in the triumph of early
capitalism, was called again to guarantee its survival.

Our study has suggested

that it was from 1937 onwards that U.S. state institutions began to be
transformed as a response to the new wage relation and conditions of capitalist
accumulation.

In this sense, the history of the New Deal in the United States

continued until the early 1970s when it was unmade by the internationalization
of capital and the collapse of the Bretton Woods system.

But this eclat could

neither conceal nor belittle the importance of an entire epoch of class struggle
for the future transformation of the society of capital into that of communism.

BIBLIOGRAPHICAL ESSAY:

As I set out to prepare the Bibliography, I began to list the works

cited in the footnotes of the thesis.

Despite the fact that I had tried to

exercise restraint, I listed not less than sixty-five titles(!), already too
many to include in a Bibliography suited to the needs of a thesis like this one.
I

reached the obvious conclusion that a Bibliographical Essay was the only

intelligent alternative to an otherwise unwieldy and meaningless list of works.

Our aim here has been to inform the reader of the purpose and direction of our
research.

The general history of the period is covered adequately in W.E.

Leuchtenburg~s

Franklin D. Roosevelt and the New Deal, New York, Harper, 1963,

while the more biographical details of the protagonists are described

brilliantly in A.M. Schlesinger Jnr., The Age of Roosevelt, Boston, Houghton
Mifflin, 1959 (3 vols.).
remains B.
~963.

Rauch~s

But the most perceptive and intelligent history

The History of the New Deal, 1933-8, New York, Capricorn,

uur overall :heorecical approach

A. Negri et al., Operai

et al., La Formazione
Feltrinelli, 1979.

~as

iniormed by the brilliant essays in

Stato, Milano, Feltrinelli, 1972, and those in G. Bock

dell~

Operaio Massa negli USA, 1898-1922, Milano,

On state economic policies for the period we have benefited

from M. Aglietta, A Theory of Capitalist Regulation, London, New Left Books,

1979, and

s. De

Press, 1978.

Brunhoff, The State, Capital, and Economic Policy, London, Pluto

Various Neo-Marxist accounts of the New Deal are reviewed by T.

Skocpol in .. Political Response to Capitalist Crisis:

Nee-Marxist Theories of

the State and the Case of the New Deal', Politics and Society, Vol. 10, No. 2
(1980), pp. 155-201.

- 144 -

The international economic background is sk.etched in H.. W.. Arndt, The

Economic Lessons of the Nineteen Thirties, London, Oxford U. P. ,

194 4, while the

U.s. scene is covered by G. Soule, Prosperity Decade, New York.,

Rinehart, 1947,
The best account

and W. Mitchell, Depression Decade, New York, Rinehart, 1947.

of the 1937 Recession is in K.D. Roose, The Economics of Recession and Revival,
New York, Anchor, '196 9.

For the political background to the period see R.

Hofstadter""s two great books, The Age of Reform, New York, Vintage,
The American Political Tradition, New York, Vintage, 1973.

1955, and

Monetary and fiscal

policies in the New Deal are described conveniently in L .. V. Chandler, American

Monetary Policy, 1928-41, New York, Harper, 1971, and H. Stein,

The Fiscal

Revolution in America, Chicago, Uni. of Chicago Press, 1969.

Our own viewm on

money were derived from K. Marx, Grundrisse, London, Pelican,

19 7 3 ,

and S. De

Brunhoff, Marx on Money, New York, Urizen, 1976.

The history of the working class is told exhaustively in t..

Bernstein"' s

two famous books, The Lean Years, New York, Da Capo, 1960, and The Turbulent
Years, Boston, Houghton Mifflin, 1970.

See also the collection of essays

Derber and E. Young (eds.), Labor and the New Deal, New York,

in~.

Da Capo, 1957.

The conflict between the AFL and the CIO is narrated from the political angle in
E. Levinson, Labor on the March, New York, Harper, 1938 and from the industrial
angle in W. Galenson, The CIO Challenge to the AFL, Cambridge, Harvard U.P.,
1960.

The transformation of the labour process has been studied by H. Braverman

in his Labor and Monopoly Capital, New York, Monthly Review Press,

1974; but we

prefer the historical application in R. Edwards et al., Segmented Work, Divided

Workers, Cambridge, C.U.P., 1982

1{/

- 145 -

There is no good history of the NRA, but B. Bellush, The Failure of the
NRA, New York, Norton, 1975, and E.W. Hawley, The New Deal and the Problem of
Monopoly, Princeton, P.U.P., 1966, provide essential information and analyses.
The history of the NLRB, on the contrary, has been written exhaustively by J.A.
Gross with his two works, The Making of the National Labor Relations Board,
Albany, State Uni. of New York Press, 1974, and The Reshaping of the NLRB,
Albany, State Uni. of New York Press, 1981.

Typically, these histories are

\

written from a pluralistic perspective that is intellectually and politically

quite oppressive.

Students of this period will welcome, therefore, the recent

contribution by C.L. Tomlins, The State and the Unions, Cambridge, C.U.P., 1985,
where the history of industrial relations is seen in its aspect of
struggle~

~class

without any sacrifice of scholarliness.

On the Banking Acts, see L.V. Chandler op.cit.

The history of state

regulation of the securities industry has been written recently by J. Seligman,

The Transformation of Wall Street, Boston, Houghton Mifflin, 1982.

The

political effects of welfare measures are analysed by F. Fox Piven and R.A.
Cloward, Regulating the Poor, New York, Vintage, 1971.

Most other aspects of

regulation, from public utilities to farming, are summarized in M. Fainsod,

Government and the American Economy, New York, Norton and Co., 1959.

Finally, we come to the legal-institutional aspects.

The apologetic

account in M. Einaudi, The Roosevelt Revolution, London, Constance, 1959, should

be balanced with B.D. Karl~s more critical work, Executive Reorganization and
Reform in the New Deal, Cambridge, Harvard U.P., 1963.

Despite his liberal

orientation, E.S. Corwin's works on the contitutional history of the New Deal
are very valuable and perc~ptive; see above all,

The President, Office and

Power, New York, New York Uni. Press,l957, and The Constitutional Revolution,
Westport, Greenwood, 1977.

----_.ji~-