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The Revolution of 1935Tags Taxes and SpendingU.S. EconomyU.S. HistoryFiscal Theory
This article is excerpted from Gregory Bresiger’s large monograph, The Revolution of 1935: The Secret History of Social Security, published in the Mises Institute series Essays in Political Economy.
A second American revolution occurred almost 70 years ago. On August 14, 1935, after very little public or congressional debate, President Franklin Delano Roosevelt signed the Social Security Act into law on. Many of his allies were disappointed because they wanted more than the act provided; FDR assured them much more was coming.1
He said, on signing the bill into law, that Social Security "represents a cornerstone in a structure which is being built but is by no means complete."2 In the midst of the Great Depression, and with most of his New Deal initiatives failing to restore the economy, FDR hoped that the federal government, through programs such as Social Security, would temper and control the business cycle. Social Security, FDR said, would "flatten out the peaks and valleys of deflation and inflation."3
Social Security was representative of national planning schemes, some of which had been tested during World War I and regained popularity with intellectuals after the crash of 1929. Many intellectuals believed the government could wage war on poverty and, by using the techniques of wartime planning so popular with progressives during World War I, manage the business cycle.4
Social Security was a Keynesian device meant to ensure that buying power would remain strong in times of high unemployment. By Keynesian, I mean a kind of thinking pre-dated John Maynard Keynes by centuries but that he would popularize with his writings in the 1920s and 1930s. Keynes had rediscovered it in his reading of the philosopher Bernard Mandeville,5 whose “Fable of the Bees” was considered an example of how deficit spending could restart an economy.6
This philosophy held that, by using fiscal and monetary policies, a government could inject inflation into a weak economy and thereby work miracles. Keynes, for all his brilliance, was merely another member of this inflationist school that dated back centuries.7 And although Keynes seemed to have little direct influence when he met with FDR, he did influence many of the president’s key economic advisers.8 The latter, in turn, helped change FDR’s economic thinking, so Keynes’s thought became influential in the 1930s. One of the founding fathers of Social Security has said that the contribution of Keynes was not appreciated,9 but Keynes’s philosophy helped justify a massive welfare state.
Myriad additional programs followed over the years because of the initial triumph of the Social Security Act. One of FDR’s newspaper friends called the act “a monumental achievement,”10 even as he complained that the benefit amounts were “miserably inadequate.”11
This one new program helped bring about a fundamental change in American culture and government: The federal government that pushed ahead with Social Security took on many new powers and radically changed our economy.12
Most important of all, Social Security transformed American culture in ways the authors of the original Social Security Act may not have expected: The foundational social insurance13 program, among other things, discouraged savings, expanded the state’s reach into the family, and redistributed income in ways no one imagined (quite often from the working poor and the lower middle class to the upper middle class--the latter tend to have more political clout as exercised through organizations such as the AARP). It also created a huge unprecedented peacetime bureaucracy, a bureaucracy that frequently—and quietly—pushed for more expansion of the program under the guise of serving the people. Many of the leaders of the program became quietly political, despite their ostensibly apolitical civil service status.14
The program had another profound effect on American culture: It created the institution of mass retirement. Social Security, along with other modern welfare state programs, encouraged the concept of golden years in which individuals would stop working. Some of the best and wisest people in our society would vegetate; they would do fewer things, write fewer letters, and, most important, work less. Some physicians call this “the theory of disengagement.”15
The program was designed to foster senior inactivity by a clause that would allow recipients to earn only what one Social Security advocate called “pin money.”16 To make more than pin money would mean a penalty to anyone receiving Social Security. This idea was added to the original bill by the labor unions, which until the 1930s had been highly suspicious of welfare state measures such as social insurance.17 FDR and his allies readily agreed to the penalty notion, given that they had little expectation that the economy would fully recover; they believed work had to be rationed.
Social Security advocates convinced tens of millions of Americans that their golden years meant withdrawing from the most challenging part of their lives. This would free up millions of jobs, an important consideration in the midst of the Great Depression. That’s because FDR’s recovery policies, which included Social Security as a counter-cyclical device, did not restore a prosperous economy,18 as an FDR historian conceded: “The America over which Roosevelt presided in 1940 was in its eleventh year of depression. No decline in American history had been so deep, so lasting, so far reaching.”19
FDR, credited as the first major American politician to support a social security system, actually campaigned in 1932 in favor of limited government. He bitterly criticized Herbert Hoover’s huge deficits and attempts to bolster failing businesses with federal help, some of which mirrored the ideas of the New Deal.20 Still, on the campaign trail, FDR promised to roll back, not expand, the size of the federal government: “For three long years I have been going up and down this country preaching that government—federal government, state and local—costs too much. I shall not stop that preaching.”21 The Democratic Party platform of 1932 called for a balanced budget, sound money, and a 25-percent reduction in federal spending.
FDR gave no indication he was committed to a massive expansion of the federal government. Later, FDR said that circumstances had changed. His supporters would argue that the Great Depression, and the popularity of the more radical social insurance proposals such as those advocated by Huey Long, Upton Sinclair, and Frances Townsend,22 had led him to support this “moderate” program called Social Security.
Yet even before he took office, FDR was quietly committed to a social insurance program23 as part of a program of countercyclical measures he believed would cure the problems of the business cycle. These initiatives were failures if one measures by unemployment numbers and traditional economic indices.24 They did not restore prosperity, as advisers told FDR six years into the New Deal.25
Social Security was a key part of FDR’s economic thinking. It was a revolution that shifted the responsibility for income maintenance from the private to the public sector, from the family to the state, and from voluntary organizations to public bureaucracies. And it was a revolution carried out by elite groups of welfare workers, Social Democrats, and others who believed European democratic socialism could be imported to the United States step by step.26 They believed in a “new liberalism” that was at odds with America’s traditional Jeffersonian philosophy.
Almost everyone, FDR critics and admirers alike, agree that Social Security was a watershed event in our history. It was indeed a “monumental achievement,” even if it seemed modest at the time. But FDR said of the legislation that, if it were the only bill passed in the 1935-36 congressional session, Congress would have accomplished much.27 Social Security was so important to those—such as FDR—who scorned the individualist tradition because it was the centerpiece of a revolution that meant “big government, modern government” was here to stay.28
When Social Security survived--and, in its earlier years, it was unknown whether it would, and it required all the political, judicial, and legislative skills FDR and his allies could summon—Americans implicitly accepted the most essential part of a new social policy. Washington, not individuals, not state or local governments, would now have great power over individual citizens’ retirement planning, unemployment insurance, and welfare payments. When FDR signed the Social Security Act, the United States, for the first time in her history, would have “a significant, permanent social welfare bureaucracy.”29
- 1. Although the Social Security system initially covered a relatively small part of the workforce, FDR assured his allies it would expand: “I see no reason why everybody in the United States should not be covered,” FDR privately told Francis Perkins. “Cradle to the grave--from the cradle to the grave they ought to be in a social insurance system.” See Arthur Schlesinger, Jr.’s The Coming of the New Deal, p. 308 (Houghton Mifflin Company, Boston, 1959).
- 2. See Policymaking for Social Security, by Martha Derthick, p. 5 (Villard Books, New York, 1991).
- 3. The Public Papers and Addresses of Franklin D. Roosevelt, Samuel Rosenman, ed., Vol. IV, pp. 324-325 (Random House, New York).
- 4. Some socialists said FDR was moving toward central planning and economic nationalism. Said Stuart Chase: “National planning and economic nationalism must go together or not all. President Roosevelt has accepted the general philosophy of planning.” He added that the nation could confidently move toward autarchy. Also see George Soule’s comments in Walter Lippmann’s The Good Society, p. 91 (Grosset & Dunlap, New York, 1936): “It is nonsense to say that there is any physical impossibility of doing for peace purposes the sort of thing we did for war purposes.”
- 5. The General Theory of Employment, Interest, and Money, Vol. VII, from The Collected Writings of John Maynard Keynes, p. 378 (St. Martin’s Press, Royal Economic Society, London).
- 6. Ibid.
- 7. For more on this, see Ludwig von Mises, Human Action, , p. 466 (FEE, Irvington-on Hudson, N.Y.,1966),.4th rev. ed., in which he discusses the inflationist view of history: “A very popular doctrine maintains that progressive lowering of the monetary unit’s purchasing power has played a decisive role in historical evolution.” See The Keynesian Episode: A Reassessment, by W.H. Hutt, pp. 269-70 (Liberty Press, Indianapolis, 1979).
- 8. See The Keynesian Episode: A Reassessment, by W.H. Hutt, pp. 269-70 (Liberty Press, Indianapolis, 1979).
- 9. Madam Secretary: Frances Perkins, by George Martin, p. 346 (Houghton Mifflin, Boston, 1976).
- 10. Half Way with Roosevelt, by Ernest K. Lindley, p. 218 (Viking Press, New York, 1937).
- 11. Ibid, p. 219.
- 12. Reviewing the achievements of FDR, Doris Kearns Goodwin writes: “No longer would government be viewed as merely a bystander and an occasional referee, intervening only in times of crisis. Instead, the government would assume responsibility for continued growth and fairness in the distribution of wealth.” No Ordinary Time; Franklin and Eleanor Roosevelt: The Home Front in World War II, p. 625 (Simon & Schuster, New York, 1994).
- 13. I will discuss this term in a later section.
- 14. The best example is one of the administrators of Social Security, Wilbur Cohen. With the Republicans back in power in 1953, the supposedly nonpartisan Cohen quietly “wrote speeches and supplied information” for the Democrats. Says a friendly biographer: “It was not the first time that the nonpartisan Social Security administration shaded into partisan politics.” See Mr. Social Security: The Life of Wilbur Cohen, by Edward Berkowitz, p. 41 (University Press of Kansas, Lawrence, 1995).
- 15. See Dare to Be 100, by Walter M. Bortz, III, p. 52 (Random House, New York, 1997).
- 16. Barbara Armstrong, executive director of the Committee on Economic Security (CES) which wrote the Social Security plan, said retirement would mean “that you’ve stopped working for pay.” See The History of Retirement: The Meaning and Functioning of an American Institution, 1885-1978, by William Graebner, p. 185 (Yale University Press, New Haven, Conn., 1980).
- 17. “The American antistatist tradition,” write a pair of historians, “produced a union movement which in principle, though often not in action, refused to look to the government to improve the position of the government.” See It Didn’t Happen Here: Why Socialism Failed in the United States, by Gary Marks and Seymour Martin Lipset, p. 31 (W.W. Norton & Company, New York, 2000).
- 18. By 1938, in the midst of a recession, it was clear to many of FDR’s advisers that the New Deal was failing. One of his political advisers, Vice President John Nance Garner, said, “I don’t think the Boss has any definite programs to meet the business. I don’t think much of the spending program. You can’t keep spending forever. Some day you have to meet the bills.” See Jim Farley’s Story: The Roosevelt Years, p. 138 (McGraw Hill, New York, 1948). Roosevelt also complained when Secretary of Commerce Dan Roper told him that the economy was slipping into recession. “Dan, you’ve got to stop issuing these Hooverish statements all the time.” Ibid., p. 101.
- 19. The historian is Doris Kearns Goodwin, and her implication was that FDR had failed to reverse the depression just as Hoover had. See No Ordinary Time, p. 42 (Simon & Schuster, New York, 1994).
- 20. See FDR, Architect of an Era, by Rexford Tugwell, p. 71 (Macmillan, New York, 1967).
- 21. The Roosevelt Myth, by John T. Flynn, p. 37 (Devon-Adair Company, New York, 1961).
- 22. Social Security: The First Half Century, Gerald Nash, ed., pp. 35-36 (University of New Mexico Press, Albuquerque, 1988).
- 23. Social Security in the United States, by Paul Douglas, p. 15 (McGraw Hill, New York, 1936).
- 24. In 1937, after five years of the New Deal, another recession began. Two historians have written, “The resulting downturn began in August 1937 and continued through the winter and spring of 1938. It was nothing short of catastrophic.” See FDR’s Fireside Chats, Russell D. Buhite and David W. Levy, eds., p. 111 (Penguin Books, New York, 1992).
- 25. FDR conceded to Farley that there were problems, but he blamed a conspiracy against him: “I know that the present situation is the result of a concerted effort by big business and concentrated wealth to drive the market down and just to create a situation unfavorable to me.” See Jim Farley’s Story, p. 101.
- 26. “The vast expansion of public assistance functions and expenditures beginning in the 1930s was superimposed upon a long tradition of disdain totally incongruous with the political and economic power assumed by the public welfare sector.” See The Professional Altruist: The Emergence of Social Work as a Career, 1880-1930, by Roy Lubove, p. 54 (Atheneum, New York, 1969).
- 27. See The New Deal: A Documentary History, William E. Leuchtenburg, p. 80 (Harper & Row, New York, 1968).
- 28. Frances Perkins said “modern government” was here to stay when she saw the 1944 GOP platform, which accepted many of FDR’s welfare-state initiatives. The Republicans were in the process of becoming “a me-too party.” See Frances Perkins: a Member of the Cabinet, by Bill Severin, p. 223 (Hawthorn Books, New York, 1976).
- 29. Goodwin, p. 625.