Indiana

McNutt became chairman of the state party and led the Indiana delegation to the Democratic National Convention in 1932. Up until the last ballot, he and the delegation refused to support the nomination of Franklin D. Roosevelt for President. McNutt was dismissive and rude to Roosevelt when he came to personally ask for their support. Roosevelt never forgot the slight, and from then on in private he referred to McNutt as "that platinum blond S.O.B from Indiana."^[5]

The same year, Indiana's Democrats nominated McNutt for governor at the state convention. In the general campaign he focused his attacks on Republicans by blaming them for doing too little to resolve the problems of the Great Depression. His campaign created the first political club for supporters in the United States. Members could join for a small fee with the contributions going to the campaign. The idea became popular and is now employed in many campaigns nationwide. He won easily, swept along in that year's national Democratic landslide led by Franklin D. Roosevelt. The Democrats swept the Indiana General Assembly as well, taking 91 out of 100 house seats, and 43 of the 50 senate seats.^[6]

McNutt was a forceful and controversial governor. With an overwhelming Democratic majority in the legislature, he completely reorganized state government with the passage of the Executive Reorganization Act. The act effectively rolled back over fifty years of restrictions the legislation had placed on the governor in appointing officials, in having control over policy, giving him a measure of control over the more independent branches of the administration, and also granting new and expanded powers to the Lieutenant Governor of Indiana.^[7]

To remedy the state funding problem, he was able to have constitutional amendments passed that legalized a gross income tax. Previously almost all state revenue had come from property tax which fell disproportionately on farmers and rural citizens, while since the 1920s the majority of citizens were living in Indiana's cities. In the city, most people owned much less property, leading few city dwellers to pay any taxes at all. To provide another source of revenue, he advocated creating a state-issued franchise license, so that licensees would be the only business that could sell liquor in the state. The General Assembly approved and legalized beer and wine sales in the store in anticipation of the repeal of federal prohibition. The revenue increases had the desired effect and balanced the state budget and paid off the $3.4 million debt created during World War I. He left office with state possessing a $17 million surplus.^[8]

McNutt was very involved in joining the state to the new federal welfare programs. Legislation was passed to allow the state to participate in Social Security and worker's unemployment programs. Additionally, he was most active in pursuing federal jobs and created the administrative framework necessary for Indiana to participate in the Works Progress Administration programs. More than 75,000 Hoosiers were working in the government program before he left office. This created a massive patronage system that made McNutt one of the most powerful governors in the state's history.^[8]

McNutt earned the reputation of an old-style machine politician by using the reorganization of state government to oust his opponents, both Republican and Democratic, from state jobs and by forcing state employees to pay two percent of their salaries to the Indiana Democratic Party. The "Two Percent" club scandals would hinder McNutt's chances of obtaining a place on the 1940 and 1944 national tickets. The system for exclusive franchises for beer distribution were sold to his campaign contributors who in turn made large donations to him and the party. He also had the legislature postpone the 1933 municipal elections as a cost-saving measure, adding an extra year to the terms of local officials, a majority of whom were Democrats.^[8] McNutt took up the cause of getting John Dillinger paroled from the Michigan City State Penitentiary. He submitted a false record of Dillinger's criminal and prison activities and excluded two letters from law enforcers. Dillinger was granted clemency and later was named the first "Public Enemy Number One."^[9]

McNutt also took up the cause of welfare reform. The new welfare laws passed effectively made charitable giving by the government an entirely state level controlled operation. Previously, local governments had been in charge of identifying needs and carrying out relief. McNutt began his term with the support of several key labor groups, but soon lost that support. Although McNutt's administration curtailed the use of court injunctions to prevent labor picketing, McNutt did not hesitate to declare martial law in eleven coal-mining counties where major violence accompanied union efforts to organize the miners. In all, McNutt called out the Indiana National Guard three times in response to labor-related violence.^[10]

In the 1934 mid-term elections, Republicans gained seats in both houses of the General Assembly and narrowed the Democratic majority. They began an attempt to rein in McNutt's power by creating a merit system to limit McNutt's control of the current patronage system. Publicly, McNutt supported the legislation, but once enacted it had very little effect on the operation of the government as many parts were simply ignored. Over time though, the system was gradually implemented in some state bureaus.^[10]

Federal government

Indiana's constitution kept McNutt from seeking reelection as governor in 1936, and he launched a bid to be nominated to run for President on the Democratic ticket. He was considered the front-runner until Roosevelt announced he would seek a second term. McNutt was overwhelmingly defeated, but attempted to be nominated for Vice President. Roosevelt, however, still recalled McNutt's lack of support in his previous reelection bid and refused to accept him. Despite the rejection, McNutt campaigned strongly for Roosevelt's reelection as president. Roosevelt made him High Commissioner to the Philippines in 1937, a post that McNutt thought would help him in a presidential bid in 1940 and which Roosevelt, contemplating a third term for himself, thought would effectively sideline McNutt.^[11]

McNutt (left) being congratulated by President Manuel Quezon on his appointment as High Commissioner in 1937

With the Philippines largely self-governing, the post of high commissioner was mostly ceremonial. Nevertheless, McNutt managed to stir controversy by appearing fussy over details of protocol. He also questioned the wisdom of giving early independence to the islands as promised in the 1934 Tydings–McDuffie Act, believing that the small country could not defend itself. McNutt was also the target of criticism from Republicans, notably Representative Albert J. Engel of Michigan, for a proposal to construct a "summer palace" in the mountains near Baguio.^[12]

In a notable humanitarian act, McNutt, in cooperation with Commonwealth President Manuel L. Quezon, quietly side-stepped the U.S. Department of State in allowing the entry into the Philippines of 1,300 Jewish refugees fleeing fascist regimes in Europe. This was at a time when the refugees could not legally enter the United States itself in large numbers. McNutt's role was documented in the 2013 film Rescue in the Philippines: Refuge from the Holocaust.^[13]

Paul V. McNutt (left), High Commissioner to the Philippines, gestures at Secretary of War Harry H. Woodring during an official visit to Washington in 1938.

By 1938 the press speculated that McNutt would, despite opposition from Roosevelt supporters, "have to be reckoned with" for the 1940 Democratic nomination for president because of his military and American Legion service, gubernatorial record, and "astonishingly good looks."^[14] He left the Philippines in 1939 to become head of Roosevelt's new Federal Security Agency, an umbrella office that managed an array of New Deal programs that ranged from the Civilian Conservation Corps to Social Security. It also served as a cover agency from 1942 to 1944 for the War Research Service, a secret program to develop chemical and biological weapons. The FSA job gave McNutt high visibility, but his presidential hopes ended because Roosevelt decided to seek a third term. Although McNutt's name was floated as a possible vice-presidential running mate, Roosevelt apparently did not seriously consider the possibility, preferring the more liberal Secretary of Agriculture Henry A. Wallace. Coincidentally, Roosevelt's opponent in 1940 was McNutt's Indiana University classmate and Beta Theta Pi fraternity brother Wendell Willkie, now a Republican.