Man Jailed for Charging 35 Cents but Market Skyrockets 15%

Posted by Bryan Taylor in Economic Data, General News, Government with no response yet

Under the Affordable Care Act, you must have health insurance, or pay a fine.  But what if you were arrested or jailed if you did not comply with the healthcare reform law?  The website for the Affordable Care Act is now up and running again so Americans can enroll for health insurance. Obama has had problems making the Affordable Care Act a reality during the past few weeks. Millions of Americans have found out that their health care has been cancelled, despite promises to the contrary, because their plans didn’t meet the standards of the Affordable Care Act, and millions more have seen large jumps in their annual premiums.  Other Americans could not sign up due to past website performance of an approximate 10% downtime so now the government is hoping the website will work and reverse their fortunes.

The problem is that given the increase in health care costs that will occur, many people will not be able to afford health care insurance and will face the prospect of paying fines for non-compliance.  The whole process reminds me of what happened during the Roosevelt Administration and its ill-fated attempt to impose price controls on the economy during the 1930s.

FINES FOR COMPETITION

After Roosevelt became President in 1933, he introduced the New Deal to bring the country out of the Great Depression. Manufacturing production was collapsing, trade was falling, people didn’t know where their next meal was coming from and unemployment lines were growing.   As the chart below shows, unemployment had risen from around 1% in 1929 to 25% by 1933.

After Roosevelt was sworn in, there was a period of two entire weeks in which the stock market and every bank in the United States were CLOSED!  From March 3 through March 14, 1933 banks were forced to observe a national “Holiday” because numerous consumers were pulling their money from financial institutions. When the stock market finally reopened, the market soared 15% the first day, and doubled in a few months as the intraday graph of the Dow Jones Industrial Average below shows.

Some people within Roosevelt’s “brain trust” felt the problem was too much competition, which was driving prices down through “destructive competition.”  Lower prices helped consumers, but hurt producers. Roosevelt’s solution was the National Industrial Recovery Act (NIRA) whose goal was to eliminate “cut-throat competition”, create codes of “fair practices” and set prices for each industry.  The National Recovery Administration (NRA) was set up to introduce codes of “fair competition”, which would set minimum wages, maximum weekly hours and minimum prices for goods.   The NRA negotiated specific sets of codes with leaders of the nation’s major industries, negotiating price floors for goods and wages, and making agreements on maintaining employment and production.

With any new legislation comes a new set of government rules, and the NRA created the inevitable regulatory nightmare. Raymond Clapper reported that between 4,000 and 5,000 business practices were prohibited by some 3,000 NRA orders that ran to over 10 million pages.  Businesses that supported Roosevelt’s plan showed their support by putting up an NRA poster, which showed a blue eagle and the words “We Do Our Part” in their windows. If you watch an old movie, such as Gold Diggers of 1933, you can even see an NRA eagle that Busby Berkeley had his dancers form in the musical as a sign of Hollywood’s support for the NRA.

BLACK MARKETS

As with any set of government regulations, you have to have enforcement. Black markets resulted from the NRA’s regulations and in some garment districts, enforcement police were used to make sure the rules were followed.  Just as the Volstead Act was passed to enforce Prohibition, each state passed laws that administered the thousands of regulations created by the NRA. The New Jersey State Recovery Act was passed by that state’s legislature to make sure businessmen complied, regardless of whether they knew all the details or not.

The biggest supporters of the price controls were big businesses which, as always, were better able to apply the regulations than small firms, and which could use the price controls to increase their profits and keep smaller, more efficient firms from competing against them.  In the cleaners and dyers business in New Jersey, the industry set a “fair competition” price of 40 cents for pressing a suit. Before the Crash, tailors could charge 50 cents; now they were forced to charge 40 cents.

Jacob Meged was a tailor of Polish descent who had a tailor shop at 138 Griffiths Street in Jersey City. He had a wife and four children and he needed money to feed his family.  Other tailors were charging 40 cents, but he wanted to get more business, so he put a sign in his shop window advertising that he would press suits for 35 cents. After all, this was America where you were accustomed to being free to charge what you want.  Beating the competition and being entrepreneurial was the American way, and he would be happy to press suits for 35 cents.  Unfortunately, Jacob didn’t get more business and instead, he was arrested.

J. Raymon Tiffany, Special Assistant Attorney General in charge of enforcing NRA codes in New Jersey took responsibility for prosecuting the tailor. When Jacob Meged was read the charges, he told Judge Kinkead that he was only vaguely aware of the existence of a code, but he pled guilty to the charge that he had violated the New Jersey State Recovery Act.  Mr. Tiffany asked the court to impose a sentence stiff enough to warn other code violators that the law had teeth in it.

UNSUITABLE JAIL SENTENCE

On Friday, April 20, 1934, Judge Robert V. Kinkead sentenced Jacob Meged to 30 days in the county jail, and he was ordered to pay a $100 fine.   At 40 cents a suit, Meged would have to press 250 suits to cover his fine.  That would be $100 he couldn’t use to feed his family, and in addition to this, he would lose a month’s earnings.

As The New York Times put it, “He believed that the codes were designed to help the ‘little fellow’ and could not believe that by charging 35 cents instead of 40 cents to press a suit would put him behind bars. In court yesterday he stood as if in a trance when sentence was pronounced.  He hoped that it was a joke.”

It was no joke. Jacob Meged spent the weekend in jail, where he played checkers with fellow inmates.  His case quickly became a cause célèbre, and although there is no record of it, over the weekend, political pressure was likely brought to bear upon Judge Kinkead to reverse the sentence. On Monday, Jacob Meged was called back before Judge Kinkead who remitted the fine and suspended sentence. Meged’s attorney explained that Meged had been ignorant of the meaning of the NRA, and now that the purpose of the NRA had been explained to him, he was anxious to comply.

Judge Kinkead -who had no problem feeding his family, spoke to Meged like a father berating a little child. “I am glad you have come into court in a spirit of repentance…. The idea was to teach you a lesson. It never was the intention of this court that you pay the fine or be sent to prison. But there must be some way of impressing people who break the law that you did and it is necessary to demonstrate to people that the NRA State Act will be rigidly enforced.”

The jocular judge even promised to be one of Meged’s customers if he raised his price to 40 cents for pressing a suit, though it is not known if Judge Kinkead ever followed up on his promise.  Jacob Meged had an easy choice – shut up, do as you are told, comply, and you will be able to feed your family.  Don’t comply and you could lose everything.  So Jacob Meged did what he had to do.  He went back to his shop. He took down the poster advertising his willingness to press a suit for 35 cents and replaced it with an NRA poster with the blue eagle on it.  The photo of Jacob Meged at his shop, obviously staged, was published in newspapers with the caption: “The NRA is OK.” Jacob Meged also wired General Hugh Johnson, the head of the NRA, and let him know that he was “heartily in favor of it.”   Meged was free from jail, but not free in spirit.  He had to choose between his conscience and his family, and he chose his family.

Although Jacob Meged’s incarceration was the most egregious result of the NRA, there were many other examples of the agency keeping people from competing freely in the market. As a result, in early 1935, the NRA announced that it would stop setting prices.  The main supporters of the price controls had been the businessmen who ran the industries. According to Time Magazine, of the 2,000 businessmen that worked with the NRA, 90% opposed the chairman of the NRA’s decision to stop setting prices. Why compete with more agile, smaller firms when you can use the government to set up a cartel to protect you?

FREED BUT NOT FREE

On May 27, 1935, in the court case of Schecter Poultry Corp. v. United States, the Supreme Court, in a unanimous decision, held that the mandatory codes section of the NRA was unconstitutional because it attempted to regulate commerce that was not interstate in character. They found that the codes represented an unacceptable delegation of power from the legislature to the executive. The Court held that the codes violated the United States Constitution’s separation of powers as an impermissible delegation of legislative power to the executive branch. The Court also held that the NIRA provisions were in excess of congressional power under the commerce clause.

After the Supreme Court invalidated the NRA, Jacob Meged was free to speak his mind and indeed he did.  When asked what he thought of the court’s ruling, he retorted . . .  “[the] NRA never was any good and is no good now.”  Nevertheless, the entire ordeal clearly took its toll on Jacob Meged.  He became ill in 1938, went into the hospital on February 21, 1939 where he died at the young age of 54, only five years after initial arrest.

Reviewing this misadventure of Joseph Meged, it makes you wonder about the unintended consequences of government interference in the marketplace.  Who and when will be the next Joseph Meged? The government has proven it is able to enforce its writ regardless of the consequences, but I certainly hope that this time, the government will leave the Joseph Megeds of the world alone.

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