Development Through Wage-Led Growth
 
By
Henry C.K. Liu
 
Part I:    Stagnant Worker Income Leads to Overcapacity
Part II:  Gold Keeps Rising as Other Commodities Fall
Part III: Labor Markets de-linked from the Gold Market
Part IV: Central Banks and Gold
Part V:  Central Banks and Gold Liquidity
Part VI: The London Gold Market
Part VII: Weak Political Response to Ineffective Financial Regulation
Part VIII: Gold and Fiat Currencies


Part IX: International Gold Agreements - Historical Political Context
 
This article appeared in AToL on April 1, 2011

  
In anticipation of a victorious ending of WWII against the Axis Powers of Germany, Italy and Japan, representatives of 45 allied countries attended a policy conference called by the US as the leading power, at the summer mountain resort town of Bretton Woods, New Hampshire in northeast United States in July 1944. The purpose was to attempt to create new supranational financial institutions that would help moderate, if not eliminate, the geo-economic causes of war and to forge a new post-war framework for international monetary cooperation to support international trade and finance.
 
The traditional geo-economic causes of war, identified as militant international competition based on aggressive economic nationalism in a global quest for imperialistic empires to exploit distant colonies with less developed economies, were expected to be eliminated after WWII through new supranational economic institutions to regulate free trade in peace. International trade was regarded as an effective economic means to avoid war.
 
The Bretton Woods international monetary regime established in 1945 was based on a fixed exchange rate of national currencies pegged to a gold-backed dollar at $35 per troy ounce of gold. Mainstream economic theory at the time did not consider free cross-border flow of funds necessary or desirable for promoting trade or economic development. Foreign exchange rates were to be intermediated only through transaction between central banks of trade participating nations. No private foreign exchange markets were permitted or existed.
 
Twenty-six year later, in 1971, the Bretton Woods monetary regime was abandoned by President Richard Nixon when the US suspended the dollar’s peg to gold. This was done because US fiscal deficits from overseas spending were causing massive and unsustainable drain in US gold holdings.
 
On the geo-political side, prospects of future full-scale wars were expected by conference attendees to be greatly reduced through non-violent conflict resolution within a new supranational political institution called the United Nations, based on the principles of democracy, self-determination of peoples and universal human rights for individuals.
 
Creation of IMF and World Bank at Bretton Woods
 
The outcome of the 1944 Bretton Woods Conference was the creation of an International Monetary Fund (IMF) to facilitate a new post-war international monetary system to sustain financial security with regard to balance of payments among nations participating in international trade.
 
An International Bank for Reconstruction and Development (IBRD) was also created to help war-torn Europe in post-war reconstruction.  To promoted world trade against the historical pre-war context of Mercantilist protectionism, participating nations of the Bretton Woods Conference reached a decision to meet further regularly to develop new supranational institutions to promote and regulate international free trade.
 
Creation of GATT and WTO
 
In October 1947, twenty-three countries followed up with a six-months-long conference in Geneva, Switzerland, to reach a multilateral General Agreement on Tariffs and Trade (GATT) designed to facilitate and regulate international trade liberalization.  GATT is a multilateral framework for regulating international trade among some 150 participating countries that had agreed to implement the idea of forming an International Trade Organization (ITO) based on GATT. A draft charter for the ITO was produced based on which the US, the world strongest economy as a result of being the only economy not damaged by war in the previous decade, initiated negotiations with 22 other countries that led to commitments to reduce and regulate some 45,000 tariff rates.
 
Procedurally, GATT was framed within existing provisions of US law as incorporated in the Reciprocal Trade Agreement Act (RTAA) that had been passed by Congress and signed into law by President Franklin D. Roosevelt in 1934. Thus GATT did not require further approval by Congress.
 
By the RTAA of 1934, Congress gave the President special power to negotiate bilateral and multilateral reciprocal trade agreements with other countries. This power enabled President Franklin D Roosevelt to liberalize US trade policy by reaching bilateral and multilateral trade agreements with other trading nations around the globe. RTAA is widely credited by economists and historians as the legal cornerstone for ushering in the subsequent post-WWII era of liberal trade policy that would evolve eventually into the current globalized neo-liberal global trade regime that emerged after the end of the Cold War.
 
Tariffs vs Federal Income Tax
 
Historically, foreign trade had not been a critically important part of the US economy until 1913, an eventful year during which the Federal Reserve System was created and a federal income tax was instituted. Still, foreign trade remained a peripheral sector in the US economy until after WWII when the US economy began to dominate the war-torn world economy by default. Historically, US tariffs had been set at high levels to provide revenue for the federal government before the introduction of a federal income tax.

One way to look at the historical relationship between tariffs and income tax is that US citizens have been asked to pay for foreign free trade since 1913.
 
To raise revenue to fund the Civil War, a temporary federal income tax had been introduced in the North with the Revenue Act of 1861. It was a flat tax of 3% on annual income above $800. The following year, this act was replaced with a graduated (progressive) tax ranging from 3% to 5% on income above $600 in the Revenue Act of 1862, which specified a termination of federal income taxation in 1866.
 
The Socialist Labor Party advocated a graduated income tax in 1887. The Populist Party “demanded a graduated income tax” in its 1892 platform. The liberal wing of the Democratic Party, led by Progressive leader William Jennings Bryan, having advocated an income tax provision in the Revenue Act of 1894, and again proposed a federal income tax in the platform in his 1908 presidential campaign against Republican William Howard Taft, a candidate hand-picked by out-going President Theodore Roosevelt. Bryan lost the Electoral College 321 to 162, his worst defeat yet in his three campaigns for the presidency, and did not carry any of the states in the industrial Northeast.
 
The provisions of the Revenue Act of 1894, also known as the Wilson-Gorman Tariff Act of 1894, required that, for a five-year period, any “gains, profits and incomes” in excess of $4,000 would be taxed at 2%. In compliance with the Act, the New York-based Farmers’ Loan & Trust Company announced to its shareholders that it would not only pay the tax, but also provide to the collector of internal revenue in the Department of the Treasury the names of all shareholders who were liable for being taxed for income under the Act.
 
Charles Pollock, a Massachusetts resident who owned only ten shares of stock in the Farmers’ Loan & Trust Company sued the company to enjoin the company from paying the income tax. Pollock lost in the lower courts but finally appealed to the United States Supreme Court, which agreed to hear the case.
 
Since Article I, Section 9 of the Constitution gave the States the power to impose direct taxation, the federal government could impose direct taxes as well, but only if those taxes were apportioned among the states in proportion to their representation in Congress. In this case the Court examined a national income tax passed by Congress in 1894.
 
Pollock vs the Farmers’ Loan & Trust Company was decided by the Supreme Court together with Hyde v. Continental Trust Company of the City of New York. The question was whether the federal income tax was a direct tax in violation of the Constitution (Article I, Section 9). The Court rule in the affirmative, that the Wilson-Gorman Tariff Act of 1894 did violate the Constitution since it imposed taxes on personal income derived from real estate investments and personal property such as stocks and bonds; which was a direct taxation scheme that had to be apportioned properly among the States as required by the Constitution.
 
The Court handed down its decision on April 8, 1895, with Chief Justice Melville Fuller delivering the majority opinion of the Court, ruling in favor of Pollock, declaring as unconstitutional certain taxes levied by the Wilson-Gorman Acts, such as those imposed on income from property. The Court treated the tax on income from property as a direct tax. Under the provisions of the US Constitution at that time, such direct taxes were required to be imposed in proportion to the size of each State’s population. The tax in question had not been so apportioned and, therefore, was constitutionally invalid. The decision was negated eight years later by the adoption of the Sixteenth Amendment in 1913.
 
The Revenue Act of 1894 (Wilson-Gorman Tariff Act - ch. 349, §73, 28 Stat. 570, August 27, 1894) reduced the tariff rates slightly from the rates set in the 1890 McKinley tariff, and in exchange imposed a 2% income tax to make up for the loss of federal revenue. Supported by the Democrats, this attempt at tariff reform was important because it imposed the first peacetime federal income tax (2% on income over $4,000 or $88,100 in 2010 dollars, which meant only fewer than 10% of households would be required to pay any income tax). The purpose of the federal income tax was to make up for revenue that would be lost to the Federal government by tariff reductions.
 
By coincidence, $4,000 would be the exemption for married couples when the Revenue Act of 1913 was signed into law by President Woodrow Wilson in October, as a result of the February 25, 1913 ratification of the Sixteenth Amendment to the US Constitution.
 
The Revenue Act of 1913, introduced by President Wilson and passed by the House, lowered tariff rates significantly as promised in the Democratic election platform, dropping the import tariff to zero on iron ore, coal, lumber and wool, which angered US producers. Protectionists in the Senate added more than 600 amendments to the bill that nullified most of the tariff reforms and raised tariff rates back again. The “Sugar Trust” in particular pushed for higher tariff rates on sugar that favored producers at the expense of US consumers.
 
The Sixteenth Amendment, brief in words, states: “The Congress shall have power to lay and collect taxes on income, from whatever sources derived, without apportionment among the several States, and without regard to any census or remuneration.”
 
It  negates the Court’s ruling on Pollock vs the Farmers’ Loan & Trust Company, which declared  the income tax in the Wilson-Gorman Acts unconstitutional because it was a direct tax that required apportionment among the states.
 
The Sixteenth Amendment, ratified on February 25, 1913, preceded by only three months the Seventeenth Amendment ratified on May 31, 1913, which established direct election of US Senators by direct popular vote. The Seventeenth Amendment superseded Article I, § 3, Clauses 1 and 2 of the Constitution, under which Senators were elected indirectly by elected officials in state legislatures. It also altered the procedure for filling vacancies in the Senate, to be consistent with the method of election. It also preceded the Nineteenth Amendment, rectified on August 26, 1920, which gave women the right to vote.
 
The Sixteenth Amendment exempted income taxes from the constitutional requirements with regard to direct taxes, after income taxes on rents, dividends, and interest were ruled by the Supreme Court to be direct taxes in Pollock v. Farmers' Loan & Trust Co. (1895) that must be apportioned among the states. 
 
A regime of central banking was also adopted with the establishment of the Federal Reserve System when Congress passed the 1913 Federal Reserve Act (ch. 6, 38 Stat. 251, enacted December 23, 1913)
 
Blaming Smoot-Hawley Wrongly for the Great Depression
 
In response to dismal economic conditions in the Great Depression following the stock market crash of 1929, Congress escalated its long-standing trade protectionist policies, culminating in the Smoot-Hawley Act of 1930, which was a basket of various increased tariffs to protect many fragile industries in the US economy in a severe depression, that was signed into law on June 17, 1930 by President Herbert Hoover. Two years later, Hoover, a conservative Republican, lost the1932 presidential election to Franklin D. Roosevelt, liberal Democrat governor of New York.
 
Until the current financial crisis that started in mid 2007, it had been conventional neo-liberal wisdom to blame the Smoot-Hawley Act as having deepened the Great Depression. Yet Smooth-Hawley was signed into law only on June 17, 1930, almost a year after the stock market crash on October 24, 1929. It is not possible for an event to trigger retrospectively other events that have taken place before it.
 
Further, imports during 1929 were only 4.2% of the US GNP (Gross National Product) and exports only 5.0%, with the US enjoying a trade surplus equaling to 0.8% of its GNP. Two-way total foreign trade amounted to only 9.2% of GNP. Before 1991, the US used GNP as its primary measure of total economic activity. After that, it began to use Gross Domestic Product (GDP).
 
Gross National Product (GNP) contrasts with Gross Domestic Product (GDP) in that while GNP measures the output generated by a country’s enterprises - whether physically located domestically or abroad, GDP measures the total output produced within a country’s borders - whether produced by that country’s own firms or not. Since globalization, many developing economies that sought development through exporting economies have become statistical boom towns while in reality are trapped in poverty by exporting low-wage production financed by foreign capital.
 
Even with a US trade deficit of $647 billion in 2010 that amounted to 2.9% of its GDP of $14.87 trillion, US GNP of $15.2 trillion was still greater than US GDP by $330 billion.  For 2006, when the trade deficit was at $840 billion, the US GNP was $13.8 trillion, still larger than US GDP of $13.6 by $200 billion.
 
In 2006, some 6 months before the current financial crisis first exploded in July 2007, US import was 18% of GDP and export was 13%, with a trade deficit amounting to 5% of GDP. Foreign trade still amounted to only 31% of US GDP.
 
In 2006, China’s import was 31% of GDP and export was 39% of GDP, yielding a trade surplus of 8% of GDP. Foreign trade accounted for 70% of Chinese GDP. China imported a larger percentage of its GDP than the US did in 2006. Foreign trade was twice as important to the Chinese economy as it was to the US economy in 2006. China has since adopted a plan to reduce the percentage of GDP devoted to foreign trade by trying to stimulate growth in the domestic sector faster than that in the export sector.
 
US Foreign trade being less than 10% of its GNP in 1929 was cited by monetarist Milton Friedman as evidence for the reason he dismissed the alleged critical role of Smoot-Hawley played on the other 90% of the US economy that was not related to foreign trade. Instead, Friedman pointed to the critical role played by the failure of Federal Reserve monetary policy to provide needed liquidity to a stagnant market, as the main cause of the depression. For seven decades, Friedman’s assertion was held as valid by mainstream economics until 2008, when the Greenspan Fed’s repeated administration of monetary easing at the first sign of any economic slowdown over an 18- year period merely built toward an accumulative crisis that exploded in mid-2007. 
 
Since then, while the first Fed quantitative easing (QE1) of $1.7 trillion that ended in March 2010 arguably prevented a total meltdown of the financial markets, QE2 in the amount of $600 billion administered through June 2011 so far has failed to jump start any recovery from a serious impaired economy. There are still talks of more quantitative easing being needed even after a total of $2.1 trillion had been committed.
 
The Fed has kept the bench-mark interest rate near zero since December 2008 against an inflation rate of above 2%, going on 30 months, which is too long a time for negative interest rates for any economy to sustain without commensurate inflationary penalty down the road. In addition, the Fed’s balance sheet has ballooned to a record of $2.8 trillion, with no visible strategy on an orderly exit from the market and unwinding of toxic assets held that would not cause serious market turmoil. 
 
Even then, Friedman’s assertion was only a myth that was at best half right – only on the monetary part. Friedman failed to acknowledge the role low wages played in the growth of the debt bubble in the Roaring Twenties and the long-term unemployment caused by the bubble’s burst that put the world economy in a spiral of  supply/demand imbalance. The depression was then prolonged by intractable demand deficiency resulting from prolonged high unemployment and declining wages.
 
It was ironic that Friedman did not learn from his teacher Jacob Viner who, as the leading faculty member in the Economics Department at the University of Chicago, identified “unbalanced deflation”, in which both asset prices and wages declined while nominal debt levels remain constant, as the prime cause of the Great Depression. Without lessons of history on the danger of deficient wages being  acknowledged, the same chain of events seven decades later was allowed to again cause the current depression that started in 2008.
 
On the economics of nuclear war-making, Viner spoke at the Conference on Atomic Energy Control in 1945, saying “that the atomic bomb was the cheapest way yet devised of killing human beings” and that the destructive characteristics of nuclear bombs “will be peacemaking in effect”. For this testimony, Viner is sometimes viewed as the founder of nuclear deterrence later developed into the Cold War doctrine of Mutual Massive Assured Destruction (MAD) as a stabilizing deterent of nuclear war by Herman Khan in his book: On Thermal Nuclear War. (Please see my January 31, 2003 AToL article: War and the military-industrial complex)
 
In reality, Smoot-Hawley’s high protectionist tariffs actually prevented wages from declining further through cross-border wage arbitrage during the 1930s Great Depression, which seven decades later became a main cause of demand deficiency that caused the current economic crisis that first manifested itself as a financial crisis in 2007. Unlike during the age of industrial imperialism when mercantilist trade raised domestic wages in the imperialist economies such as Britain’s and Germany’s before WWI, global international trade in the neo-liberal era in the 21st century acts to depress wages in all economies through cross–border wage arbitrage to create a downward spiral of wages worldwide, in a race to the bottom on consumer demand that needs to be compensated through massive consumer debt in the form of subprime mortgages that were supported only by rising home prices rather than rising wages. 
 
Fed Quantitative Easing Delivered Newly Created Money to Wrong Recipients
 
In the 1930s, companies had to close their doors and lay off workers because their employed workers did not have enough money to buy the products they produced for the companies that employed them. The resultant high unemployment rate from lay-offs of workers shrank consumer demand further to cause more companies to close and to layoff still more workers to depress demand further in a downward spiral. This chain of events seem to be repeating itself seven decades later in an economy gravely impaired by the current global financial crisis that began in the US in 2007. This is  because management has not learned from history that taking money from wages to increase return on capital is a self-defeating dead end in a market economy.
 
Furthermore, in the current financial crisis, the solution adopted by the Federal Reserve and the Treasury is to create money ex nihilo (out of nothing) to buy toxic debt from insolvent financial institutions, and lending these walking-dead financial institutions newly created money that the tax-paying public would have to pay back with future taxes, merely to create an illusion of profit for these financially distressed institutions, while management continues to lay off more workers.
 
Hamilton’s Protectionist Policy Saved the Young US from British Imperialism
 
While liberal economic theory after WWII mistakenly asserted that intensified protectionist trade policies had worsened the Great Depression, the adherents of this theory, in their eagerness to promote global trade liberalization in the 1990s, have chosen to ignore the historical fact that the US economy in the new nation’s early decades had benefited greatly from the protectionist trade policies of Alexander Hamilton against British trade imperialism for most of its history until the two World Wars in the 20th century made the US the leading economical power to benefit from low tariffs and open trade worldwide.
 
As evident in Britain and the US during the Great Depression, international trade liberation historically did not benefit equally all in the domestic population of the trading nations, or even benefit equally all sectors in the domestic economy of trading nations. International trade certainly failed to benefit equally all trading nations in the global trade regime in the pre-WWII decades. These flaws of distributional inequalities in a global trade liberation regime continue to be swept under the intellectual rug today within the WTO. (Please see my March 14. 2008 AToL article – The Shape of US Populism – Part II: Long Term Effects of the Civil War)
 
Income Mal-distribution Effects of the RTAA of 1934
 
The Reciprocal Trade Agreement Act (RTAA) of 1934 marked a sharp policy departure from the earlier era of Hamiltonian selective trade protectionism in the United States. Since RTAA, tariffs on imported foreign products declined from an average of 46% in 1934 to 12% by 1962. Reciprocally, US exports also enjoyed equivalent tariffs reduction in foreign markets. And since during this period, the US exported more than it imported, reciprocal international tariff reduction was beneficial to the US economy as a whole by producing a positive balance of payments, even if it was distributionally not evenly beneficial to all sectors of the economy or all segments of population.
 
Liberalized trade actually exacerbated income and wealth disparity both within each trading nation and among trading nations. This trend has continued and strengthened to the present time. The misdistribution of benefits and burdens of free trade, both domestic and international, is the main reason why anti-trade sentiments have risen sharply everywhere in recent decades.
 
Before the RTAA became law in 1934, any change in tariff for particular imports would require Congress to unilaterally choose a tariff rate for a particular industries different than the median preferred tariff, according to each industry’s need for protection against superior foreign competition, taking a target foreign country’s tariff rate as fixed, and depending on the influence of special interest on Congress. Congressional action of tariffs would depend on its partisan composition.
 
Historically, since the Civil War, a Congress controlled by Republicans who represented new growing industries would prefer higher tariffs to protect their industrial constituents that were not yet strong enough to export or to withstand strong foreign competition. On the other hands, a Congress controlled by Democrats would prefer lower tariffs to expand profitable agricultural produce export between the Southern plantations and industrialized Britain. Thus, the matter of tariffs became a major issue of partisan contention in US domestic politics. This issue has continued to the present time. Individual members of Congress were, and still are, under intense pressure from industry lobbyists to raise tariffs to protect US industries from the negative effects of superior foreign imports, and on the other side, from farm lobbyists to lower tariffs to increase agricultural export.
 
The RTAA of 1934 freed both the President and the Congress from the trend of political pressure on selective tariff increases by linking US tariff reduction reciprocally with her trading partners. Reciprocity in general tariff reduction shifts the fight between exporter and importers to a fight on selectivity.  Secondly, it also allowed Congress to approve changes in tariffs with a simple majority, as opposed to the previous requisite two-thirds super majority required by earlier trade treaties. Lastly, the President gained the authority to negotiate the terms of trade bilaterally which the Congress could only accept or reject, but not modify.
 
These three developments in the formulation process on trade policy shaped the political trajectory towards automatic enactment of more liberal US trade policies without full consensus of all citizens, allowing special interest influence to dominate tariff policy formulation. Trade then began to structurally benefit special sectors in the economy and special segments in the population with strong legislative lobbies, often at the expense of those industries and segments of the population not as strongly represented in the political process.
 
Reciprocity was an important tenet of the bilateral trade agreements brokered under the RTAA of 1934 because it gave Congress a more open one-way door to lower tariffs. As more foreign trading countries entered into bilateral tariff reduction deals with the United States, US exporters had more incentive and resources to lobby Congress for even lower tariffs for many industries that had grown strong to seek  more open markets overseas.
 
Changing Domestic Politics on Protectionist Tariffs
 
After the Civil War ended in 1865, Democrats representing the agricultural South were generally the party of trade liberalization, while Republicans representing the industrial and financial North, were generally for higher protectionist tariffs. This pattern was clear in congressional votes on tariffs from 1860 until 1930. Southern Democrats were the congressional minority in the Northeast Republican majority of Congresses after the Civil War, until the election of Franklin D Roosevelt, a liberal Democrat from New York, the financial center of the nation. During their brief stints in the majority, Democrats passed several tariff reduction bills. Examples include the Wilson-Gorman Act of 1894 and the Underwood Tariff Act of 1913.
 
However, subsequent Republican majorities always managed to undo the unilateral tariff reductions pushed through by the Democrats. By the time of the Great Depression in the 1930s, tariffs were at historic highs as a result of years of Republican control of Congress and the White House. Members of Congress commonly entered into informal quid pro quo agreements where they voted for other members’ preferred tariffs in order to secure support for their own tariff positions. Political representatives of the people voted in narrow parochial interests of their own districts, seldom taking into account their actions’ aggregate national toll on other US consumers, domestic industries or exporters outside their own districts.
 
FDR’s Fight against Legislative Log-rolling
 
This practice is referred to in political nomenclature as log-rolling, which describes a common practice in Congress in which legislators agree to trade votes on bills of little interest for votes on bills that were much more important to their political survival, Logrolling is especially common when the legislators are relatively free of control by their national party leaders and are trying to secure votes for bills that will concentrate sizable benefits on their own home districts while spreading most of the costs out over taxpayers in the rest of the country. Local projects such as Federal-funded dams, bridges, highways, housing projects, VA hospitals, job-training centers, military bases and the like, or high protective tariffs to help local industries,  are often pushed through by log-rolling.
 
President Franklin D Roosevelt and key members of his administration, including key policy-makers in his Brain Trust, were intent on stopping this practice of log-rolling that systematically produced bills that worked against the national interest.
 
Defectors in the FDR Camp
 
Though Democrats voted for trade liberalization far more often than Republicans, they did not vote as a solid block. Democrats from industrial states who were uncomfortable with reducing protectionist tariffs during the Depression included Democratic Representative Henry Rainey from Illinois, a key industrial state, and some members of Roosevelt’s own administration with close ties to industries and finance.
 
Among other Democrats who supported high protectionist tariffs was Rexford Tugwell, an agro-economist who became a lead member of Roosevelt’s first “Brain Trust”. He was among a group of Columbia University scholars who helped develop policy recommendations leading up to Roosevelt’s successful 1932 election as president. Tugwell subsequently served in FDR’s administration for four years and was one of the chief intellectual contributors to the New Deal. Later in his life, he also served as the director of the New York City Planning Commission and Governor of Puerto Rico. Tugwell is an advocate of central economic planning that contributed to the long-range success of the US economy.
 
Another supporter of high protectionist tariffs was Raymond Moley, a leading New Dealer who became a bitter opponent of the New Deal later in his political career. Moley supported FDR in his first campaign in 1932 for the White House, and recruited fellow Columbia professors to form the first “Brain Trust” to advise Roosevelt to shape an alternative economic destiny for the nation during the presidential campaign in 1932.
 
Despite loud ridicule from editorial writers and political cartoonists, the “Brain Trust” went on to Washington with its members becoming powerful figures in Roosevelt’s New Deal, with Moley writing important speeches for the president and contributed memorable phrases such as “The Forgotten Men” and “The only thing we have to fear is fear itself”. He coined the term “New Deal” for the equalitarian policies of the FDR administration, and declared that capitalism “was saved in eight days” by FDR’s early actions as President.
 
However, in mid-1933 Moley began to break with Roosevelt, and although he continued to write speeches for the president until 1936, he became increasingly critical of Roosevelt’s liberal policies, eventually becoming a conservative Republican. He wrote a column for Newsweek magazine from 1937 to 1968 promoting no-holds-barred free market capitalism.
 
Later, Moley wrote for the nation’s leading conservative periodical National Review founded by William F Buckley in 1955. In these roles, he became one of the best known critics of liberalism in general and the New Deal in particular. Moley’s book: After Seven Years (New York: 1939), was one of the first in-depth attacks on the New Deal, and remains one of the harshest ever. Moley was awarded the Presidential Medal of Freedom by Republican President Richard Nixon on April 22, 1970.
 
Another supporter of high protectionist tariffs in the FDR administration was Adolf A. Berle. An academic child prodigy, Berle entered Harvard College at age 14 in 1909, earning a bachelor’s degree by 1913 and a master's in 1914. He then enrolled in Harvard Law School and became the youngest graduate in the school’s history in 1916, at age 21. Upon graduation, Berle joined the military in the intelligent service in June 1916, a full year before the US entered WWI on Aril 6, 1917.
 
Berle’s first assignment as an intelligence officer was to assist in increasing sugar production in the Dominican Republic by working out property and contractual conflicts among rural landowners. Immediately after World War I, Berle became a member of the US Delegation to the Paris Peace Conference, advocating for smaller nations' rights of self-determination. In 1919, Berle moved to New York City and founded a prominent law known as Berle, Berle and Brunner.
 
In 1927, Berle became a professor of corporate law at Columbia Law School in 1927 and remained on the faculty until retiring in 1964. He is best known among economists and corporate law specialists for his groundbreaking work in corporate governance. His book, The Modern Corporation and Private Property, which he co-authored with economist Gardiner Means, remains the most quoted text in corporate governance studies today.
 
Gardiner Means followed the institutionalist tradition of economic which focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. Institutionalism’s original focus lay in Thorstein Veblen (1857-1929) instinct-oriented dichotomy between technology on the one side and the “ceremonial” sphere of society on the other.
 
In 1934, Means coined to the term “administered prices” to refer to prices set by firms in monopolistic positions. In The Corporate Revolution in America (1962) written with Berle, Means wrote:
“We now have single corporate enterprises employing hundreds of thousands of workers, having hundreds of thousands of stockholders, using billions of dollars' worth of the instruments of production, serving millions of customers, and controlled by a single management group. These are great collectives of enterprise, and a system composed of them might well be called ‘collective capitalism’.”
Means argued that where an economy is fueled by big firms it is the interests of management, not the public, that govern society. It should be pointed out the “collective” is not the same as “socialized”.  Collective enterprises work only to benenfit member of the collective, not society as large.
 
Berle and Means showed that the means of production in the US economy by the 1960s were highly concentrated in the hands of the largest 200 corporations, and that within the large corporations, managers controlled firms despite shareholders’ formal ownership.
Berle theorized that economic concentration meant that the effects of competitive price theory were largely mythical. This fact remains operative today.
 
Some voice began to advocate trust busting, the breaking up of the concentrations of firms into smaller entities in order to restore competitive forces in the market, as had been carried out by Progressive President Theodore Roosevelt, who inherited the presidency as the vice president of Republican President McKinley after the latter’s assassination in 1901.
 
Theodore Roosevelt was the first president since the rise of big corporations to assert the principle of government supremacy over private business, and the first Republican president since Lincoln to assert strong executive leadership over the other two branches of the government.
 
Roosevelt’s trust busting crusade under the antitrust Sherman Act of 1890 against railroad barons James J. Hill and Edward H. Harriman and the House of Morgan to break up the monopoly of rail lines in the Northeast, and against John D. Rockefeller’s Standard Oil Trust, and against James B. Duke’s tobacco trust, received enthusiastic public support and favorable rulings by the Supreme Court. But the economic effect was disappointing since the dissolved trusts simply reorganized into small companies with non-compete “community of interest” agreements to stay out of the legal reach of the Sherman Act, which at any rate, was gradually watered down by an increasingly conservative Supreme Court.
 
Berle in 1934 believed that trust busting would be economically regressive. Instead, he argued for government regulation over business and became identified with the school of business statesmanship, which advocated that corporate leadership accept (and theorized that they had to a great extent already accepted) that they must fulfill responsibilities toward society in addition to their traditional responsibilities toward shareholders interests, giving birth to the concept of good corporate citizenship.
 
Berle asserted that corporate law should reflect this new reality. Berle wrote in The Modern Corporation: “The law of corporations, accordingly, might well be considered as a potential constitutional law for the new economic state, while business practice is increasingly assuming the aspect of economic statesmanship.”
To Berle, the US was moving inevitably towards being a Corporate State, a socio-economic trend that requires the injection of the need for statesmanship into the mentality of corporate management to make the new Corporate State acceptable.
 
For the 1967 Revised Edition, Berle added a new Preface, updating the overviiew and bringing in new arguments and observations. He summed up the whole thrust of the book at the same time, making it a valuable adjunct to the text:
“Why have stockholders? What contribution do they make, entitling them to heirship of half the profits of the industrial system, receivable partly in the form of dividends, and partly in the form of increased market values resulting from undistributed corporate gains? Stockholders toil not, neither do they spin, to earn that reward. They are beneficiaries by position only. Justification for their inheritance must be sought outside classic economic reasoning.”
 
The position of stockholders' profit, said Berle,“can be founded only upon social grounds. There is... a value attached to individual life, individual development, individual solution of personal problems, individual choice of consumption and activity. Wealth unquestionably does add to an individual’s capacity and range in pursuit of happiness and self-development. There is certainly advantage to the community when men take care of themselves.
 
But that justification turns on the distribution as well as the existence of wealth. Its force exists only in direct ratio to the number of individuals who hold such wealth. Justification for the stockholder’s existence thus depends on increasing distribution within the American population. Ideally the stockholder’s position will be impregnable only when every American family has its fragment of that position and of the wealth by which the opportunity to develop individuality becomes fully actualized.”
 
Berle eloquently prepared the public for the ermergence of a benign corperate state in the US.
 
Trade Liberation and the Roosevelt Brain Trust
 
Berle was an original member of Franklin D Roosevelt’s “Brain Trust”, a group of expert advisers who developed policy recommendations. Berle’s foci ranged from economic recovery to diplomatic strategy during Roosevelt’s 1932 re-election campaign. Berle wrote Roosevelt’s Commonwealth Club Address on the need for government involvement in industrial and economic policy, delivered September 23, 1932 in San Francisco. In contrast to President Hoover’s “Rugged Individualism” campaign speech delivered on October 22, 1928, one year before the market crash of October 1929, Roosevelt in 1932 argued that the United States had entered a new era in which only through an active government could individual liberty and opportunity be protected from the abuses of industry and the unequal distribution of resources. In 2000, the speech was ranked as the second best presidential campaign speech of the 20th century by public address scholars.
 
The Roosevelt administration took advantage of a Democrat-controlled Congress and the Presidency in 1934 to push through the RTAA to reduce tariffs. In 1936 and again 1940, the Republican Party ran on a platform of repealing the tariff reductions secured under the RTAA but failed to unseat Roosevelt. But when the Republicans finally won back control of Congress in 1946, they did not act to raise tariffs. In the years since the enactment of the RTAA in 1934, the economies of Europe and East Asia had been decimated by the violence of World War II. This left a huge global production vacuum that was filled by American exporters whose goods were welcomed by the defeated countries with low tariffs to add to the cost of needed imports. On the other side, US industrial strength had been greatly enhance by war production and no longer needed protectionist tariffs to survive.
 
In the World War II years, the United States had its highest positive account balance in its history. Republican preferences for high tariffs started shifting as exporters from their home districts began to benefit from increased export in international trade. By the 1950s, there was no statistically significant difference between Republicans and Democrats on tariff policies. This change has endured to the present day.
 
Another key feature of the RTAA was the fact that if Congress wanted to repeal a tariff reduction, it would take a two-thirds supermajority. That means that the tariff would have to be especially onerous and the effect nation wide and that the Congress would have to be especially protectionist. Once enacted, tariff reductions tended to stick. As more US industries began to benefit from tariff reductions, they began to lobby Congress for even lower tariffs. Prior to RTAA, Congress was mostly lobbied by industries seeking to create or raise tariffs to protect their domestic market. This change also helped to lock in many of the gains in trade liberalization. In short, the political incentive to raise tariffs decreased across the board while the political incentive to lower tariffs increased. The only except was organized labor who saw jobs held their members increasingly moved overseas by cross-border arbitrage.  But organized labor has been in sharp decline since the decades of globalization which affect its political clout in domestic politics.
 
As reciprocal tariffs dropped off dramatically, global markets were also increasingly liberalized. World trade expanded at a rapid pace. The RTAA, though a law of the United States, provided the first widespread system of guidelines for US bilateral trade agreements. The United States and the European nations began avoiding beggar-thy-neighbor policies which supposedly pursued national trade objectives at the expense of other nations. Instead, countries started to accept the Ricardo notion of comparative advantage from trade cooperation.
 
The Ricardian theory of comparative advantage in trade asserts that two countries can both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods. Even if one country is more efficient in the production of all goods (absolute advantage), it can still gain by trading with a less-efficient country, as long as they have different relative efficiencies. Among the different relative efficiencies Ricardo implied but failed to specify is the profit opportunity of cross border wage arbitrage to bring global wages to the lowest possible levels.
 
Led by the United States, international trade and monetary cooperation flourished and free trade institutions came into existence to dismantle residual common sense resistance. All this worked smilingly for the strong economies and the financial elite in all economies until the financial crisis broke out in 2007 from the blow back from systemically induced low wages in all trading economies.

 March 23, 2011
 
Next: The Birth and Decline of Institutional Economics