Fireside Chat 6: On Government and Capitalism (September 30, 1934)

Franklin Delano Roosevelt

Three months have passed since I talked with you shortly after the adjournment of the Congress. Tonight I continue that report, though, because of the shortness of time, I must defer a number of subjects to a later date.

Recently the most notable public questions that have concerned us all have had to do with industry and labor and with respect to these, certain developments have taken place which I consider of importance. I am happy to report that after years of uncertainty, culminating in the collapse of the spring of 1933, we are bringing order out of the old chaos with a greater certainty of the employment of labor at a reasonable wage and of more business at a fair profit. These governmental and industrial developments hold promise of new achievements for the nation.

Men may differ as to the particular form of governmental activity with respect to industry and business, but nearly all are agreed that private enterprise in times such as these cannot be left without assistance and without reasonable safeguards lest it destroy not only itself but also our processes of civilization. The underlying necessity for such activity is indeed as strong now as it was years ago when Elihu Root said the following very significant words:

“Instead of the give and take of free individual contract, the tremendous power of organization has combined great aggregations of capital in enormous industrial establishments working through vast agencies of commerce and employing great masses of men in movements of production and transportation and trade, so great in the mass that each individual concerned in them is quite helpless by himself. The relations between the employer and the employed, between the owners of aggregated capital and the units of organized labor, between the small producer, the small trader, the consumer, and the great transporting and manufacturing and distributing agencies, all present new questions for the solution of which the old reliance upon the free action of individual wills appear quite inadequate. And in many directions, the intervention of that organized control which we call government seems necessary to produce the same result of justice and right conduct which obtained through the attrition of individuals before the new conditions arose.”

It was in this spirit thus described by Secretary Root that we approached our task of reviving private enterprise in March, 1933. Our first problem was, of course, the banking situation because, as you know, the banks had collapsed. Some banks could not be saved but the great majority of them, either through their own resources or with government aid, have been restored to complete public confidence. This has given safety to millions of depositors in these banks. Closely following this great constructive effort we have, through various Federal agencies, saved debtors and creditors alike in many other fields of enterprise, such as loans on farm mortgages and home mortgages; loans to the railroads and insurance companies and, finally, help for home owners and industry itself.

In all of these efforts the government has come to the assistance of business and with the full expectation that the money used to assist these enterprises will eventually be repaid. I believe it will be.

The second step we have taken in the restoration of normal business enterprise has been to clean up thoroughly unwholesome conditions in the field of investment. In this we have had assistance from many bankers and businessmen, most of whom recognize the past evils in the banking system, in the sale of securities, in the deliberate encouragement of stock gambling, in the sale of unsound mortgages and in many other ways in which the public lost billions of dollars. They saw that without changes in the policies and methods of investment there could be no recovery of public confidence in the security of savings. The country now enjoys the safety of bank savings under the new banking laws, the careful checking of new securities under the Securities Act and the curtailment of rank stock speculation through the Securities Exchange Act. I sincerely hope that as a result people will be discouraged in unhappy efforts to get rich quick by speculating in securities. The average person almost always loses. Only a very small minority of the people of this country believe in gambling as a substitute for the old philosophy of Benjamin Franklin that the way to wealth is through work.

In meeting the problems of industrial recovery the chief agency of the government has been the National Recovery Administration. Under its guidance, trades and industries covering over ninety percent of all industrial employees have adopted codes of fair competition, which have been approved by the President. Under these codes, in the industries covered, child labor has been eliminated. The work day and the work week have been shortened. Minimum wages have been established and other wages adjusted toward a rising standard of living. The emergency purpose of the N. R. A. was to put men to work and since its creation more than four million persons have been re-employed, in great part through the cooperation of American business brought about under the codes.

Benefits of the Industrial Recovery Program have come, not only to labor in the form of new jobs, in relief from over-work and in relief from under-pay, but also to the owners and managers of industry because, together with a great increase in the payrolls, there has come a substantial rise in the total of industrial profits – a rise from a deficit figure in the first quarter of 1933 to a level of sustained profits within one year from the inauguration of N. R. A.

Now it should not be expected that even employed labor and capital would be completely satisfied with present conditions. Employed workers have not by any means all enjoyed a return to the earnings of prosperous times; although millions of hitherto under- privileged workers are today far better paid than ever before. Also, billions of dollars of invested capital have today a greater security of present and future earning power than before. This is because of the establishment of fair, competitive standards and because of relief from unfair competition in wage cutting which depresses markets and destroys purchasing power. But it is an undeniable fact that the restoration of other billions of sound investments to a reasonable earning power could not be brought about in one year. There is no magic formula, no economic panacea, which could simply revive over-night the heavy industries and the trades dependent upon them.

Nevertheless the gains of trade and industry, as a whole, have been substantial. In these gains and in the policies of the Administration there are assurances that hearten all forward-looking men and women with the confidence that we are definitely rebuilding our political and economic system on the lines laid down by the New Deal – lines which as I have so often made clear, are in complete accord with the underlying principles of orderly popular government which Americans have demanded since the white man first came to these shores. We count, in the future as in the past, on the driving power of individual initiative and the incentive of fair private profit, strengthened with the acceptance of those obligations to the public interest which rest upon us all. We have the right to expect that this driving power will be given patriotically and whole-heartedly to our nation.

We have passed through the formative period of code making in the National Recovery Administration and have effected a reorganization of the N. R. A. suited to the needs of the next phase, which is, in turn, a period of preparation for legislation which will determine its permanent form.

In this recent reorganization we have recognized three distinct functions. First, the legislative or policy making function. Second, the administrative function of code making and revision and, third, the judicial function, which includes enforcement, consumer complaints and the settlement of disputes between employers and employees and between one employer and another.

We are now prepared to move into this second phase, on the basis of our experience in the first phase under the able and energetic leadership of General Johnson.

We shall watch carefully the working of this new machinery for the second phase of N. R. A., modifying it where it needs modification and finally making recommendations to the Congress, in order that the functions of N. R. A. which have proved their worth may be made a part of the permanent machinery of government.

Let me call your attention to the fact that the National Industrial Recovery Act gave businessmen the opportunity they had sought for years to improve business conditions through what has been called self-government in industry. If the codes which have been written have been too complicated, if they have gone too far in such matters as price fixing and limitation of production, let it be remembered that so far as possible, consistent with the immediate public interest of this past year and the vital necessity of improving labor conditions, the representatives of trade and industry were permitted to write their ideas into the codes. It is now time to review these actions as a whole to determine through deliberative means in the light of experience, from the standpoint of the good of the industries themselves, as well as the general public interest, whether the methods and policies adopted in the emergency have been best calculated to promote industrial recovery and a permanent improvement of business and labor conditions. There may be a serious question as to the wisdom of many of those devices to control production, or to prevent destructive price cutting which many business organizations have insisted were necessary, or whether their effect may have been to prevent that volume of production which would make possible lower prices and increased employment. Another question arises as to whether in fixing minimum wages on the basis of an hourly or weekly wage we have reached into the heart of the problem which is to provide such annual earnings for the lowest paid worker as will meet his minimum needs. We also question the wisdom of extending code requirements suited to the great industrial centers and to large employers, to the great number of small employers in the smaller communities.

During the last twelve months our industrial recovery has been to some extent retarded by strikes, including a few of major importance. I would not minimize the inevitable losses to employers and employees and to the general public through such conflicts. But I would point out that the extent and severity of labor disputes during this period has been far less than in any previous, comparable period.

When the businessmen of the country were demanding the right to organize themselves adequately to promote their legitimate interests; when the farmers were demanding legislation which would give them opportunities and incentives to organize themselves for a common advance, it was natural that the workers should seek and obtain a statutory declaration of their constitutional right to organize themselves for collective bargaining as embodied in Section 7 (a) of the National Industrial Recovery Act.

Machinery set up by the Federal government has provided some new methods of adjustment. Both employers and employees mast share the blame of not using them as fully as they should. The employer who turns away from impartial agencies of peace, who denies freedom of organization to his employees, or fails to make every reasonable effort at a peaceful solution of their differences, is not fully supporting the recovery effort of his government. The workers who turn away from these same impartial agencies and decline to use their good offices to gain their ends are likewise not fully cooperating with their government.

It is time that we made a clean-cut effort to bring about that united action of management and labor, which is one of the high purposes of the Recovery Act. We have passed through more than a year of education. Step by step we have created all the government agencies necessary to insure, as a general rule, industrial peace, with justice for all those willing to use these agencies whenever their voluntary bargaining fails to produce a necessary agreement.

There should be at least a full and fair trial given to these means of ending industrial warfare; and in such an effort we should be able to secure for employers and employees and consumers the benefits that all derive from the continuous, peaceful operation of our essential enterprises.

Accordingly, I propose to confer within the coming month with small groups of those truly representative of large employers of labor and of large groups of organized labor, in order to seek their cooperation in establishing what I may describe as a specific trial period of industrial peace.

From those willing to join in establishing this hoped-for period of peace, I shall seek assurances of the making and maintenance of agreements, which can be mutually relied upon, under which wages, hours and working conditions may be determined and any later adjustments shall be made either by agreement or, in case of disagreement, through the mediation or arbitration of state or federal agencies. I shall not ask either employers or employees permanently to lay aside the weapons common to industrial war. But I shall ask both groups to give a fair trial to peaceful methods of adjusting their conflicts of opinion and interest, and to experiment for a reasonable time with measures suitable to civilize our industrial civilization.

Closely allied to the N. R. A. is the program of Public Works provided for in the same Act and designed to put more men back to work, both directly on the public works themselves, and indirectly in the industries supplying the materials for these public works. To those who say that our expenditures for Public Works and other means for recovery are a waste that we cannot afford, I answer that no country, however rich, can afford the waste of its human resources. Demoralization caused by vast unemployment is our greatest extravagance. Morally, it is the greatest menace to our social order. Some people try to tell me that we must make up our minds that for the future we shall permanently have millions of unemployed just as other countries have had them for over a decade. What may be necessary for those countries is not my responsibility to determine. But as for this country, I stand or fall by my refusal to accept as a necessary condition of our future a permanent army of unemployed. On the contrary, we must make it a national principle that we will not tolerate a large army of unemployed and that we will arrange our national economy to end our present unemployment as soon as we can and then to take wise measures against its return. I do not want to think that it is the destiny of any American to remain permanently on relief rolls.

Those, fortunately few in number, who are frightened by boldness and cowed by the necessity for making decisions, complain that all we have done is unnecessary and subject to great risks. Now that these people are coming out of their storm cellars, they forget that there ever was a storm. They point to England. They would have you believe that England has made progress out of her depression by a do-nothing policy, by letting nature take her course. England has her peculiarities and we have ours but I do not believe any intelligent observer can accuse England of undue orthodoxy in the present emergency.

Did England let nature take her course? No. Did England hold to the gold standard when her reserves were threatened? No. Has England gone back to the gold standard today? No. Did England hesitate to call in ten billion dollars of her war bonds bearing 5 percent interest, to issue new bonds therefore bearing only 3 1/2 percent interest, thereby saving the British Treasury one hundred and fifty million dollars a year in interest alone? No. And let it be recorded that the British bankers helped. Is it not a fact that ever since the year 1909, Great Britain in many ways has advanced further along lines of social security than the United States? Is it not a fact that relations between capital and labor on the basis of collective bargaining are much further advanced in Great Britain than in the United States? It is perhaps not strange that the conservative British press has told us with pardonable irony that much of our New Deal program is only an attempt to catch up with English reforms that go back ten years or more.

Nearly all Americans are sensible and calm people. We do not get greatly excited nor is our peace of mind disturbed, whether we be businessmen or workers or farmers, by awesome pronouncements concerning the unconstitutionality of some of our measures of recovery and relief and reform. We are not frightened by reactionary lawyers or political editors. All of these cries have been heard before. More than twenty years ago, when Theodore Roosevelt and Woodrow Wilson were attempting to correct abuses in our national life, the great Chief Justice White said:

“There is great danger it seems to me to arise from the constant habit which prevails where anything is opposed or objected to, of referring without rhyme or reason to the Constitution as a means of preventing its accomplishment, thus creating the general impression that the Constitution is but a barrier to progress instead of being the broad highway through which alone true progress may be enjoyed.”

In our efforts for recovery we have avoided on the one hand the theory that business should and must be taken over into an all-embracing Government. We have avoided on the other hand the equally untenable theory that it is an interference with liberty to offer reasonable help when private enterprise is in need of help. The course we have followed fits the American practice of Government – a practice of taking action step by step, of regulating only to meet concrete needs – a practice of courageous recognition of change. I believe with Abraham Lincoln, that “The legitimate object of Government is to do for a community of people whatever they need to have done but cannot do at all or cannot do so well for themselves in their separate and individual capacities.”

I still believe in ideals. I am not for a return to that definition of Liberty under which for many years a free people were being gradually regimented into the service of the privileged few. I prefer and I am sure you prefer that broader definition of Liberty under which we are moving forward to greater freedom, to greater security for the average man than he has ever known before in the history of America.

RELATED:

FDR saved capitalism in eight days – Slate Magazine

I once again had the chance to speak with the legendary Don Coxe, Chairman of Coxe Advisors LLP, which collaborates with and advises BMO Global Asset Management—a $105 billion arm of the $540 billion BMO Financial Group.

It was an incredibly powerful interview, covering topics from his 20th anniversary and final edition of “Basic Points”, entitled, “The Final Problem”.

These topics included: the sustained delivery of “financial heroin” into global markets, the “rigged” environment of government growth, and the utility of gold as a weapon during dark financial times.

Starting out with, Don spoke to the growing symptoms which one could interpret as the death of capitalism, in saying, “When you’ve got a situation of governments that are running monstrous deficits, are able to borrow at zero…the basic bloodstream mechanisms of capitalism are seriously at risk.” He further added, “The basic system is being rigged in favor of expanding [the] size of government. If you expand the size of government at a time when the economy is not growing, what that means is, that the socialist forces are gaining strength. There’s something that’s got to happen to change that.”

Don recounted a fascinating story from his father’s service during WW II and it’s relevance to today’s financial environment. He said, “[My father] was cited for doing more battlefield anesthetics than any other Canadian doctor during WW II… he said the skill was…you had to decide who needed heroin [which was the only thing that worked for those desperately wounded and screaming in pain], rather than morphine…So you put them on heroin knowing it was a high-risk thing…and the other thing that was the skill, was knowing when enough healing had been done that you took them off the heroin and put them on morphine.”

“If you kept them on the heroin too long, they would not be able to go back and be risk-taking soldiers[and their lives would be destroyed].”

In connecting his father’s story to today’s financial environment, Don said, “I was on a platform with David Dodge, shortly after he ceased to be governor of the Bank of Canada, we were speaking to an audience in Denver. He was talking about the necessity to get off the zero interest rates very fast, because of the long-term damage [it] could do. So when I got up to speak, I told the story about my father and said, ‘Zero interest rates are financial heroin.’ [Dodge's] head just jerked, and he turned and said to me, ‘That is a wonderful analogy!’”

“My fear,” Don continued, “is that year after year…we’re going to have a whole situation where everybody has become used to these zero interest rates, and what happens when you try to restore normal interest rates? Will the economy have been so undermined…that it wont be able to deliver and function, when you’re actually pricing money the way you’ll eventually have too, which is in relation to risk?”

Concluding with his thoughts on gold, Don said,“There’s no [historical] precedent for this…When what lies ahead of you is ‘no-mans land’…you probably want to go in with a gun. If we’re going into economic no-mans land, what you say is, ‘What’s the only asset out there which for as long as we have recorded history has been used as a medium for buying goods and services, and investments? That’s gold.”

“No matter how this story turns out, I don’t believe it can turn out in a way that is going to be disadvantageous to those that have gold…[in fact] The next time people make serious money on gold, it will come a midst a major kind of shock.”

Once again, this was a powerful interview with one of the legendary investors of our time, and it is required listening for serious investors and market students.

To listen to the interview, left click the following link and/or right click and “save target as” or “save link as” to to your desktop:

>>Interview with Don Coxe (MP3)

What can we expect in coming years? If our estimates and assumptions are correct, 2013 is likely to be a more extreme version of 2010-2012, with a bigger positive private sector impulse that is offset by a bigger negative public sector impulse but still leaves growth around trend. But we expect the net impulse to turn positive in subsequent years, assuming that 2013 marks the peak rate of fiscal contraction. By 2014-2015, the decline in the ex ante private sector balance should be contributing around 11⁄2 percentage points to the overall growth impulse, but we currently assume that fiscal policy will subtract only 1⁄2- 1 percentage point, for a net impulse of 1⁄2-1 point. This ought to be a recipe for clearly above-trend growth.

The economy for years has been characterized by below-trend growth and a private sector that remained in massive surplus (meaning excess savings). That’s been the essence of what we’ve seen, and Goldman believes that’s almost over.

In short, recovery cannot be left to the Fed, the European Central Bank, or the Bank of England. It requires the active involvement of fiscal policymakers. Our current situation requires not a lender of last resort, but a spender of  last resort, and that can only be governments.

Whether you exhaled or gasped over the presidential election’s result, there’s no denying what comes next: a deficit and budget slugfest that will play out against a vulnerable U.S. economic recovery and Europe’s own debt mop-up.

That means if you believe that the so-called fiscal cliff, in the shape of a planned $600 billion of federal spending cuts and higher taxes, threatens the growth-stock strategies favored during the election runup, it may be time for a little insurance.

Stock-market Armageddon portfolio? Not quite. Canned beans? You bet.

John Kenneth Galbraith on the Moral Justifications for Wealth and Inequality

The U.S. manufacturing sector has contracted, consumers are watching their wallets and lawmakers in the nation’s capital are twiddling their thumbs.

Not a recipe for a stronger economy.

The latest batch of economic data is expected to show the U.S. muddling along. Consumers are spending too much on necessities such as gas and big-ticket manufactured goods are no longer flying off the shelves. A modestly improved housing market is not expanding fast enough to offset downward pressures on the nation’s growth, either.

Economists expect those trends to persist to the end of the year. The hope in 2013 is that lackluster global growth will gain more of a shine and that Washington won’t fall off a so-called fiscal cliff by letting big tax increases and spending cuts take effect in January as scheduled.

“Once we get over that at the end of the year, we are clearly expecting some confidence to come back to consumers and

Going, going……

There appears to be an emerging consensus that the euro will survive, especially now that Mario Draghi has apparently grasped the nettle and persuaded his colleagues that the ECB is prepared to initiate unlimited purchases of national government bonds in order to underwrite their solvency.  Of course, as usual
with the ECB, there’s a sting in the tail, the sting being additional “conditionality” (for which one can read more fiscal austerity) as a quid pro quo.  It’s like dealing with Hannibal Lecter.

Greece is the implied fate of anybody who dares to flout the rules.   Maybe the country isn’t washed down with a Chianti and some fava beans, but it’s getting pretty close.  And whilst nobody wants to appear to be the triggerman who finally kills off Greek membership in the currency union, the country is increasingly being placed in an untenable position, which will almost certainly set it up for future failure.

The problem is that the currency union is only as strong as its weakest link. Lopping off the weakest part of the Eurozone is not akin to removing a cancerous lesion from an otherwise healthy body, but more like the puncturing of an important blood vessel, which could well destroy the patient. True, Greece has been historically ridden with corruption and tax evasion (a recent report from the organisation, “Global Financial Integrity” – suggests that the Greek economy lost US$261 billion to crime, corruption, and tax evasion from 2003-2011).

But the country has more recent made strenuous efforts to cut its deficit is by cutting public sector wages and pensions, a step that has exacerbated the size of its public deficits by decreasing incomes and employment. Were Greece to leave the Eurozone, it is almost certain that speculators would move to pick off another member country—Portugal, Italy, or Spain— all of which could face the same metaphoric fate as Hannibal Lecter’s victims. And so it goes.

Of course, the idea at this stage isn’t to rescue Greece. It is to provide an abject lesson to any other country which in the future considers flouting the country’s perverse rules. According to a recent report in the Guardian, the eurozone creditors are now saying the Greek government must tighten the universal neoliberal screws even further by imposing a six day work week and perhaps reducing wages as well, as a condition for the Greeks getting another “bailout.” Of course, unemployment and underemployment in Greece are rising rapidly, so it is hard to see how extending the work week for the already employed can be the kind of “tough love” that will create an increase in the total number of jobs or improve the economy. In the creditor’s eyes, however, that is unimportant; the real problem is Greece’s dysfunctional culture of work and profligacy.

So the neoliberal policy solution for turning around the Greek economy is to improve the culture of work is to introduce a kind of debt peonage by taking the Greeks back to the 19th Century. Arbeit macht frei? And what happens when the six-day workweek and wage reductions do not work, as they inevitably won’t? What comes next? Charles Dickens knew the answer — improve the culture of work by relaxing child labour laws to reduce wages further and/or privatize the Aegean islands, Delphi, and the Acropolis. No problem.

Greece, to be sure, has its share of self-inflicted economic problems, but austerity economics is pushing Greece into a death spiral. Europe is cutting its nose to spite its face as it convert one Eurozone economy after another into a barter state. One already sees that with Spain as well. As the Toronto Globe and Mail’s Eric Reguly has noted, Madrid is being mauled by a double-dip recession, imminent bank bailout, yawning budget deficit and soaring jobless rate:

“But things are even worse than they appear because Spain’s capital flight has quietly gone from bad to dire. Fortunes are fleeing the country as the economy deteriorates and as investors and bank customers worry that Spanish banks will not survive the onslaught. They also fear that the country’ use of the euro is not guaranteed. If you believe the peseta is about to make an inglorious return, you do not want your precious euros sitting in Spanish deposit accounts.”

That’s our old friend, the bank run, which still remains unaddressed. The ECB’s proposed bond buying program may ultimately address the solvency issue because it remains the only currency-issuing institution that can act like the federal governments in Canada and the US. But its means of enforcement is perverse:  it is as if the US threatened Mississippi with expulsion if the state didn’t learn to “leave within its means”, to employ one of the German Chancellor’s favourite “Merkelisms”.

As Bill Mitchell has noted, the likes of Jens Weidmann might be threatening to resign as the BuBa head if the ECB continues to run its Securities Market Program (buying trouble government’s debt on the secondary markets) but he cannot deny the reality that the SMP and other ECB fiscal-type interventions has been the only reason why the euro hasn’t vaporised just yet. One wonders, however, what kind of salvation this presents for those countries which endure the ongoing rigors of austerity.

Do Nothing and think Nein

“Now, I say to you today my friends, even though we face the difficulties of today and tomorrow, I still have a dream. It is a dream deeply rooted in the American dream. I have a dream that one day this nation will rise up and live out the true meaning of its creed: – ‘We hold these truths to be self-evident, that all men are created equal.’” Martin Luther King Jr., August 28, 1963

“The suspicions that the system is rigged in favor of the largest banks and their elites, so they play by their own set of rules to the disfavor of the taxpayers who funded their bailout, are true.

It really happened. These suspicions are valid.”

Neil Barofsky, TARP Inspector General

The Fed is not the solution; the Fed is a creature of the biggest banks, and very much a part of the problem.

Once again we hear a lone voice of common sense, and reason for reform, in this case Sarah Bloom Raskin, speak out forcefully for reform.

You may recall ‘The Warning’ which featured Brooksley Born, who sounded the alarm about the growing dangers of the unregulated derivatives market during the Clinton Administration. And who was thwarted and bullied by team Greenspan-Summers-Geithner.

And you might remember how the Wall Street Banks used the NY Fed and the Treasury’s Tim Geithner to block the reforms proposed by the FDIC’s Sheila Bair.

I do not think that these men who block reform and serious change are evil. Rather, I think they are just dead wood, who know nothing more than the system of privilege that has elevated them, and rewarded them, and which they are loathe to see change.

But the times are getting difficult, and so it is time for a change, which is necessary for there to be a sustainable economic recovery.

And in the election of the President this year the people are being given a choice, as someone so aptly put it, between an ineffective and compromised gamekeeper and one of the worst and greediest of the poachers. Obama was marketed as an independent outsider, but he is not. They are both owned by the system, each in their own way.

And that means change is not going to come from the top. But it will come nonethless.

If this continues the capitalists will eventually destroy themselves, because none of them will want to be the first that calls a stop. And that will be a tragedy.

Baseline Scenario
Fed Governor Speaks Out For Stronger Rules
By Simon Johnson
July 28, 2012

The United States will push a global growth agenda at the two-day Group of 20 leaders’ summit in Mexico next week, the Obama administration said Friday.

“The overwhelming focus of this G-20 is going to be reflecting … the critical importance of global growth and global recovery, and the European piece is the most central piece at the moment,” according to Michael Froman, a senior White House adviser to President Barack Obama.   IT’S GROWTH, STUPID