How FDR Promoted Price-Gouging

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During
the Great Depression of the 1930s, Americans desperately needed
bargains. But President Franklin Delano Roosevelt signed laws that
forced businesses to charge above-market prices for everything.
He made discounting a crime!

FDR did this
even though antitrust laws provided penalties for private individuals
who acted in restraint of trade and charged above-market prices.
These laws were passed by “progressives” – his ideological
brethren.

First came
FDR’s National Industrial Recovery Act, considered the flagship
of the New Deal. FDR signed that in June 1933, climaxing his heroic
Hundred Days of legislative mania. Back then, the economic situation
was considered so urgent that members of Congress didn’t have
time to seriously debate FDR’s proposals. The members probably
didn’t have time to read the bills, either, before the voting
began. Possibly, the Hundred Days began the American tradition of
having members of Congress vote on bills they haven’t read.
In any case, The National Industrial Recovery Act authorized the
president to establish cartels via executive orders. He established
some 500 cartels, and one of the things they did was fix prices
above market levels.

The Agricultural
Adjustment Act (1933), another triumph of the Hundred Days, aimed
to raise prices of agricultural commodities above market levels,
in an effort to raise farm incomes. Apparently the authors of the
Agricultural Adjustment Act weren’t particularly concerned
about the three-quarters of the U.S. population who weren’t
farmers and had to pay more for food.

The Robinson-Patman
Act, amending the Clayton Antitrust Act in 1936, aimed to protect
small grocery stores from price competition offered by A&P,
King Kullen (“World’s Greatest Price Wrecker”), and
other chain stores. Because they bought goods in large volume, they
obtained quantity discounts and passed savings to consumers. Less
efficient small stores wanted to maintain high prices. Accordingly,
the Grocery Manufacturers Association lobbied for and did much of
the work drafting Robinson-Patman. Often referred to as the Anti-Chain-Store
Act, it benefited wholesalers as well as small retailers, because
wholesalers didn’t want chain stores buying directly from manufacturers.
The bottom line was that the law made it illegal for big stores
to cut prices. If private stores had conspired among themselves
to maintain high prices, they would have invited prosecution under
the antitrust laws.

The Miller-Tydings
Retail Price Maintenance Act (August 17, 1937) was a related effort
to protect small businesses from competition with larger, more efficient
firms. Small business lobbyists had successfully persuaded most
state legislatures to enact “fair trade” laws which authorized
price fixing, but the Supreme Court struck these down as violating
the Sherman Antitrust Act. Congress passed, and FDR signed, Miller-Tydings
which amended the Sherman Act to let manufacturers fix above-market
retail prices of branded merchandise and thereby stop chain stores
from offering consumers great discount prices. Apparently consumers
counted for nothing during the New Deal.

On June 23,
1938, FDR signed into law the Civil Aeronautics Act which established
the Civil Aeronautics Authority – this later became the Civil
Aeronautics Board. It enforced a cartel, protecting existing airlines
from new competition. Without a CAB certificate of “public
convenience and necessity,” an airline couldn’t fly an
interstate route. The CAB made clear its intent to suppress competition
when it declared, “In the absence of particular circumstances
presenting an affirmative reason for a new carrier, there appears
to be no inherent desirability of increasing the present number
of carriers merely for the purpose of numerically enlarging the
industry.” During the next 40 years, until airlines were deregulated
in 1978, the CAB didn’t issue a license for a single new interstate
airline.

The
CAB also had the power to fix prices and determine which airlines
flew to which cities. “All passenger, cargo, and mail rates,”
explained economist Sam Peltzman, “while initially set by the
airlines, required approval by the CAB.” It maintained high
fares. Non-scheduled carriers, initially exempted from CAB regulation,
operated without published schedules and provided flights to whatever
destinations were under-served, and they offered lower fares. The
CAB-regulated airlines responded with lower-priced coach service,
but they lobbied the CAB to gain jurisdiction over the “non-scheds,”
and it denied more and more applications to provide nonsked service,
until that source of competition was virtually eliminated.

In
addition to outlawing discounting, FDR indirectly forced prices
above market levels by signing the National Labor Relations Act
(1935). When it was upheld by the Supreme Court two years later,
labor union monopolies developed in mass production industries.
In 1937 – a depression year, remember – average labor
costs surged 11 percent. Naturally, this put strong upward pressure
on the prices of things made with union labor, until the labor cost
surge helped trigger a recession that undermined demand.

FDR did what
private businesses cannot do by themselves, namely use the law to
enforce above-market prices. As long as businesses are free to enter
any market, somebody who charges above-market prices is likely to
attract competitors who will drive prices down. Competitors could
be start-up businesses or established businesses entering a new
market, and such competitors could come from within the country
or overseas. The most famous private “monopoly,” John
D. Rockefeller’s Standard Oil, lost market share despite having
cut the price of its principal product 90 percent, because it wasn’t
backed by the force of government. Perhaps the most intriguing question
is why “progressives” continue to view FDR as savior,
giving him a free pass as a price-gouger.

March
31, 2009

Jim
Powell, a Senior Fellow at the Cato Institute, is the author of
Wilson's
War, How Woodrow Wilson's Great Blunder Led To Hitler, Lenin, Stalin
And World War II
(2005), FDR's
Folly, How Roosevelt and His New Deal Prolonged the Great Depression

(2003), and The
Triumph of Liberty, A 2,000-Year History Told Through The Lives
Of Freedom's Greatest Champions
(2000).

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