By late 1934, there was clear evidence of a box-office recovery led by the neighborhood theatres and apparently responsive to the new production trends that elevated Shirley Temple to the pinnacle of box-office championship from 1934 to 1938. The complex ideological phenomenon that Temple represented indicated a change in public sensibility as well as industry strategy, but the films in which she appeared were, as Graham Greene pointed out in 1937, hardly devoid of sexual sophistication, any more than were Astaire-Rogers musicals or screwball comedies. Rather, these genres contained the culmination of Joy's policy of encoding the representation of sexuality in such a way that a pre-existent knowledge was required to gain access to it. Having conceded the limitations of its boundaries, in the second half of the decade producers and audiences alike could explore the possibilities as well as the constraints of the Code as a convention of representation - much as they had done before, but with much less public hindrance.
The establishment of the PCA did not abate the process of negotiation over what constituted satisfactory material for films. Writers and producers commonly left material that they knew would be cut in scripts sent to the PCA, often in hopes of negotiating something else through, and frequently shots or sequences that the PCA initially objected to survived into in the final film. In 1935, disputes over the representation of crime resurfaced with the attempt by several studios to circumvent the prohibition on gangster films in the G-Men cycle, until British censors objected to the trend. The Code's provisions on crime were modified on a number of occasions during the later 1930s. On the whole, however, these questions of Code enforcement were relatively minor: the studios had acquiesced in the PCA machinery and, with occasional displays of resistance, acquiesced in its decisions. More importantly, public opinion had, with few and inconsequential exceptions, recovered from its moral panic and accepted the Association's or the Legion's account of the industry's rescue from the abyss in 1934.
Despite the tone with which Breen did business, his insistence that the PCA was "regarded by producers, directors, and their staffs, as participants in the processes of production" was perfectly accurate. Beyond the shared assumption that the PCA functioned as an aid, not a hindrance, to production, there were two underlying considerations that governed its working operation. "Compensating moral values," as understood by Breen, ensured not only that "No picture shall be produced which will lower the moral standards of those who see it," but also that a calculus of retribution or coincidence would invariably be deployed to punish the guilty or declare sympathetic characters innocent. But if plots had to be morally unambiguous in their development, dialogue and conclusion, the site of textual ambiguity shifted from narrative to the representation of incident, in a manner that required the audience to construct an event that may or may not have taken place. In matters of sex in particular, Joy's policy of encoding the representation of sexuality in such a way that a pre-existent knowledge was required to gain access to it came to preside over Hollywood's representation. The public, argued Harold J. Salemson, "learned to supply from its own imagination the specific acts of so-called misconduct which the Production Code has made unmentionable." As screenwriter Elliott Paul pithily observed, "A scene should give full play to the vices of the audience, and still have a technical out" (Paul and Quintanilla, 1942, pp. 63-4).
The difficulties the Association faced over film content in the late 1930s were largely the results of its success. As his dealings with the studios became more assertive after 1934, Breen's correspondence made fewer distinctions between a decision under the Code, advice regarding the likely actions of state or foreign censors, and the implementation of "industry policy" in response to pressure groups, foreign governments and corporate interests. Industry policy was, like self-regulation, designed to prevent the movies becoming a subject of controversy or giving offense to powerful interests, but events such as MGM's decision in 1936 to not to produce a film version of Sinclair Lewis's It Can't Happen Here, and Catholic protest over Blockade, set in the Spanish Civil War, led to accusations from liberals within the industry and outside that "self-regulation ... has degenerated into political censorship." Throughout the 1930s, German and Italian censorship had been particularly concerned with controlling imports, and for much of the decade Hollywood's studios appeased the restrictive demands of foreign governments to preserve access to their markets. But the escalating European crisis eventually provoked a change in Hollywood's behavior, as the spread of Nazism progressively closed markets to American movies. Political censorship was also practiced in the United States in the 1930s, most often when a number of state or local boards banned Soviet films. Newsreels were generally exempted from state censorship, but they practiced a firm degree of self-regulation, avoiding the coverage of crime as well as political controversy. In 1941, isolationists complained that Hollywood was actively promoting American entry into the war.
The PCA case that received most public attention in the late 1930s, however, was as trivial as most publicized instances of moral censorship: the inclusion of the usually prohibited word "damn" in Clark Gable's last line in Gone with the Wind, whose producer, David O. Selznick, was one of those arguing that the industry should abandon the "insane and inane and outmoded" Code. Hays, on the other hand, maintained in 1938 that the industry could afford "the soft impeachment" that it provided nothing more than "escapist" entertainment, since that was "the commodity for which the public pays at the box-office. Propaganda disguised as entertainment would be neither honest salesmanship nor honest showmanship." At the same time, however, he had initiated an investigation into the jurisdiction of the PCA, largely as a result of the anti-trust suit filed against the major companies by the Department of Justice in July 1938. Implicating the PCA in the majors' restrictive practices, the suit alleged that they used the Code to exercise a practical censorship over the entire industry, restricting the production of pictures treating controversial subjects and hindering the development of innovative approaches to drama or narrative by companies that might use innovation as a way of challenging the majors' monopoly power. For the first time, the censorship of the movies – as opposed to movie content – was in danger of becoming the issue. In 1939 the PCA's jurisdiction was restricted so that there was a clear distinction between its administration of the Code and its other advisory functions. One effect of this was to acquiesce in the use of politically more controversial content as a way of demonstrating that the "freedom of the screen" was not hampered by the operations of the PCA. Although PCA officials continued to voice concern over whether such subjects as Confessions of a Nazi Spy constituted appropriate screen entertainment, they were much more circumspect in expressing their opinions.
Under Breen, the PCA was one of the most powerful influences on Hollywood production for more than twenty years, and although his personal control over the PCA's standards has often been exaggerated, the Classical Hollywood of the studio system would have been unrecognizable without the determining market censorship the PCA exercised. Hays, a Presbyterian Church elder who neither smoked nor drank, was often caricatured as "a Babbitt in Babylon," but in his organization of industry self-regulation, and his protection of the industry from the application of the anti-trust laws, he did more than any other individual to preserve Hollywood for oligopoly capital.