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| THE NEW DEAL-- THE SOCIAL SECURITY ACT OF 1935 gggff |
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| THE NEW DEAL-- THE SOCIAL SECURITY ACT OF 1935 gggff |
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The Early Development of the American Welfare State, Leading to the Social Security Act of 1935 by Larry DeWitt
Social Security works because its speaks to a universal human need. All peoples throughout all of human history have faced the uncertainties brought on by unemployment, illness, disability, death and old age. Social Security is designed as a community response to these uncertainties. In the realm of economics, these inevitable facets of life are said to be threats to one's economic security. For the ancient Greeks economic security took the form of amphorae of olive oil. Olive oil was very nutritious and could be stored for relatively long periods. To provide for themselves in times of need the Greeks stockpiled olive oil and this was their form of economic security. In medieval Europe, the feudal system was the basis of economic security, with the feudal lord responsible for the economic survival of the serfs working on the estate. The feudal lord had economic security as long as there was a steady supply of serfs to work the estate, and the serfs had economic security only so long as they were fit enough to provide their labor. During the Middle Ages the idea of charity as a formal economic arrangement also appeared for the first time. Family members and relatives have always felt some degree of responsibility to one another, and to the extent that the family had resources to draw upon, this was often a source of economic security, especially for the aged or infirm. And land itself was an important form of economic security for those who owned it or who lived on farms. These then are the traditional sources of economic security: assets; labor; family; and charity. The Rise of Formal Systems of Economic Security As societies grew in economic and social complexity, and as isolated farms gave way to cities and villages, Europe witnessed the development of formal organizations of various types that sought to protect the economic security of their members. Probably the earliest of these organizations were guilds formed during the Middle Ages by merchants or craftsmen. Individuals who had a common trade or business banded together into mutual aid societies, or guilds. These guilds regulated production and employment and they also provided a range of benefits to their members including financial help in times of poverty or illness and contributions to help defray the expenses when a member died. Out of the tradition of the guilds emerged the friendly societies. These organizations began appearing in England in the 16th century. Again organized around a common trade or business, the friendly societies would evolve into what we now call fraternal organizations and were the forerunners of modern trade unions. In addition to the types of economic security provided by the guilds, the fraternal organizations and some trade unions would begin the practice of providing actuarially-based life insurance to their members. The friendly societies and the fraternal organizations would grow dramatically following the Industrial Revolution. By the beginning of the 19th century one of out every nine Englishmen belonged to one of these organizations. Among early U.S. fraternal organizations that we are familiar with even into the present day were: the Freemasons (which came to America in 1730); the Odd Fellows (1819); Benevolent and Protective Order of Elks (1868); Loyal Order of Moose (1888); and the Fraternal Order of Eagles (1898).
As the state began to assume responsibility for economic security, the English began the development of a series of "Poor Laws" adopted to provide help to the poor, as the problem of economic security was seen primarily as a problem afflicting the poor. The English Poor Law of 1601 was the first systematic codification of English ideas about the responsibility of the state to provide for the welfare of its citizens. It provided for taxation to fund relief activities; it distinguished between the "deserving" and the "undeserving" poor; relief was local and community controlled; and almshouses were eventually established to house those on relief. The law was at once both generous and harsh. Generous in that it acknowledged the government's duty to provide for the welfare of the poor, but harsh in that it viewed the poor as highly undesirable characters and treated them accordingly. There were a series of changes and "reforms" of the "Poor Laws" over the years, but this essential structure was the tradition the pilgrims brought with them when they journeyed to the New World. Economic Security in America When the English-speaking colonists arrived in the New World they brought with them the ideas and customs they knew in England, including the "Poor Laws." The first colonial poor laws were fashioned after those of the Poor Law of 1601. They featured local taxation to support the destitute; they discriminated between the "worthy" and the "unworthy" poor; and all relief was a local responsibility. No public institutions for the poor or standardized eligibility criteria would exist for nearly a century. It was up to local town elders to decide who was worthy of support and how that support would be provided. As colonial America grew more complex, diverse and mobile, the localized systems of poor relief were strained. The result was some limited movement to state financing and the creation of almshouses and poorhouses to "contain" the problem. For much of the 18th and 19th centuries most poverty relief was provided in the almshouses and poorhouses. Relief was made as unpleasant as possible in order to "discourage" dependency. Those receiving relief could lose their personal property, the right to vote, the right to move, and in some cases were required to wear a large "P" on their clothing to announce their status. Support outside the institutions was called "outdoor relief" and was looked upon with distrust by most citizens. It was felt that "outdoor relief" made things too easy on the poor who should be discouraged from the habit of poverty in every way possible. Nevertheless, since it was expensive to build and operate the poorhouses, and since it was relatively easy to dispense cash or in-kind support, some outdoor relief did emerge. Even so, prevailing American attitudes toward poverty relief were always skeptical and the role of government was kept to the minimum. So much so that by as late as 1915 at most only 25% of the money spent on outdoor relief was from public funds.
Although the need for economic security affects all ages and classes of society, one particularly acute aspect of this need is the problem of old age and the possibility of retirement after a long life of labor. Retirement, a feature of life we now take so much for granted, was not always readily available, and it was a struggle to develop adequate systems of retirement. One of the first people to propose a scheme for retirement security that is recognizable as a forerunner of modern social insurance was Revolutionary War figure Thomas Paine. His last great pamphlet, published in the winter of 1795, was a controversial call for the establishment of a public system of economic security for the new nation. Entitled, Agrarian Justice, it called for the creation of a system whereby those inheriting property would pay a 10% inheritance tax to create a special fund out of which a one-time stipend of 15 pounds sterling would be paid to each citizen upon attaining age 21, to give them a start in life, and annual benefits of 10 pounds sterling to be paid to every person age 50 and older, to guard against poverty in old-age.
Although Social Security did not really arrive in America until 1935, there was one important precursor, that offered something we could recognize as a social security program, to one special segment of the American population. Following the Civil War, there were hundreds of thousands of widows and orphans, and hundreds of thousands of disabled veterans. In fact, immediately following the Civil War a much higher proportion of the population was disabled or survivors of deceased breadwinners than at any time in America's history. This led to the development of a generous pension program, with interesting similarities to later developments in Social Security. (The first national pension program for soldiers was actually passed in early 1776, prior even to the signing of the Declaration of Independence. Throughout America's ante-bellum period pensions of limited types were paid to veterans of America's various wars. But it was with the creation of Civil War pensions that a full-fledged pension system developed in America for the first time.) The Civil War Pension program began shortly after the start of the War, with the first legislation in 1862 providing for benefits linked to disabilities "incurred as a direct consequence of . . .military duty." Widows and orphans could receive pensions equal in amount to that which would have been payable to their deceased solider if he had been disabled. In 1890 the link with service-connected disability was broken, and any disabled Civil War veteran qualified for benefits. In 1906, old-age was made a sufficient qualification for benefits. So that by 1910, Civil War veterans and their survivors enjoyed a program of disability, survivors and old-age benefits similar in some ways to the later Social Security programs. By 1910, over 90% of the remaining Civil War veterans were receiving benefits under this program, although they constituted barely .6% of the total U.S. population of that era. Civil War pensions were also an asset that attracted young wives to elderly veterans whose pensions they could inherit as the widow of a war veteran. Indeed, there were still surviving widows of Civil War veterans receiving Civil War pensions as late as 1999! In the aggregate, military pensions were an important source of economic security in the early years of the nation. In 1893, for example, the $165 million spent on military pensions was the largest single expenditure ever made by the federal government. In 1894 military pensions accounted for 37% of the entire federal budget. (The Civil War pension system was not without its critics.) But these figures based on the federal budget exaggerate the role of military pensions in providing overall economic security since the federal government's share of the economy was much smaller in earlier times. Also, there were features of the system which meant that many veterans did not receive any benefits. For example, former Confederate soldiers and their families were barred from receiving Civil War pensions. So in 1910 the per capita average military pension expenditure for residents of Ohio was $3.36 and for Indiana it was $3.90. By contrast, the per capita average for the Southern states was less than 50 cents (it was 17 cents in South Carolina). Despite the fact that America had a "social security" program in the form of Civil War pensions since 1862, this precedent did not extend itself to the general society. The expansion of these types of benefit programs to the general population, under Social Security, would have to await additional social and historical developments.
The idea of a formal pension plan through one's work is a fairly recent innovation in America. Although we now have 401K plans and IRAs and other employment related pensions, the use of these forms of economic security is low. Even today, less than half of America's workers are covered by any type of employment-related pension program (other than Social Security). In the early decades of this century, the percentage of workers anticipating an employment-related pension from their company or their union was only slightly more than 2%. So the company pension was an option not available to most Americans during the time prior to the advent of Social Security. Prior to the rise of company pension plans, paternalistic companies sometimes "graduated" older workers to token jobs at reduced pay. A few paid some form of retirement stipend—but only if the company was so inclined, since there were no rights to any kind of retirement benefit. Most older workers were simply dismissed when their productive years were behind them. The first formal company pension plan for blue-collar workers was introduced in 1882 by the Alfred Dolge Company, a builder of pianos and organs. Dolge withheld 1% of each workers’ pay and placed it into a pension fund, to which the company added 6% interest each year. Dolge viewed providing for older workers as being a business cost like any other, arguing that just as his company had to provide for the depreciation of its machinery, he should also "provide for the depreciation of his employees." Despite Mr. Dolge’s progressive ideas and his best intentions, the plan proved largely unsuccessful since it required a worker to spend many years in continuous employment with the company, and labor mobility, then as now, meant that relatively few workers spend their whole working career with one company. Not only was the Dolge Plan the first formal company pension system in industrial America, it was also one of the first to disappear when the company went out of business a few years later.
The Great Depression of the 1930s was not the only one in America's history. In fact, it was the third depression of the modern era, following previous economic collapses in the 1840s and again in the 1890s. During the depression of the 1890s unemployment was widespread and many Americans came to the realization that in an industrialized society the threat to economic security represented by unemployment could strike anyone--even those able and willing to work. Protest movements arose--the most quixotic and notable being that of "Coxey's Army."
Although his march failed, Coxey's Army was a harbinger of an issue that would rise to prominence as unemployment insurance would become a key element in the future Social Security Act. (Ohio would continue to play an important role in the development of unemployment insurance as its state program was one of two looked to as models for the new federal program--the other being the program in operation in Wisconsin.)
Following the outbreak of the Great Depression, poverty among the elderly grew dramatically. The best estimates are that in 1934 over half of the elderly in America lacked sufficient income to be self-supporting. Despite this, state welfare pensions for the elderly were practically non-existent before 1930. A spurt of pension legislation was passed in the years immediately prior to passage of the Social Security Act, so that 30 states had some form of old-age pension program by 1935. However, these programs were generally inadequate and ineffective. Only about 3% of the elderly were actually receiving benefits under these states plans, and the average benefit amount was about 65 cents a day. There were many reasons for the low participation in state-run pension systems. Many elderly were reluctant to "go on welfare." Restrictive eligibility criteria kept many poor seniors from qualifying. Some jurisdictions, while having state programs on the books, failed to actually implement them. Many of the state-passed pension laws provided for counties within the state to opt to participate in the pension program. As a result, in 1929 of the six states with operating pension laws on the books only 53 of the 264 counties eligible to adopt a pension plan actually did so. After 1929, the States began enacting laws without county options. By 1932 seventeen states had old age pension laws, although none were in the south, and 87% of the money available under these laws were expended in only three states (California, Massachusetts and New York). State old-age pensions were also subject to the vagaries of state politics. In Louisiana in 1937, for example, the Governor issued an executive order cutting the old-age pensions of black citizens in half during the months of June and July as an inducement for elderly black pensioners to return to the cotton fields to help with the harvest. In many places throughout the cotton-belt local officials simply closed the relief offices during the harvest season.
Despite all of the institutional strategies adopted in early America to assure some measure of economic security, huge changes would sweep through America which would, in time, undermine the existing institutions. Four important demographic changes happened in America beginning in the mid-1880s that rendered the traditional systems of economic security increasingly unworkable:
The Industrial Revolution transformed the majority of working people from self-employed agricultural workers into wage earners working for large industrial concerns. In an agricultural society, prosperity could be easily seen to be linked to one's labor, and anyone willing to work could usually provide at least a bare subsistence for themselves and their family. But when economic income is primarily from wages, one's economic security can be threatened by factors outside one's control--such as recessions, layoffs, failed businesses, etc. Along with the shift from an agricultural to an industrial society, Americans moved from farms and small rural communities to large cities--that's where the industrial jobs were. In 1890, only 28% of the population lived in cities, by 1930 this percentage had exactly doubled, to 56%.
This trend toward urbanization also contributed to another significant shift in American society, the disappearance of the extended family and the rapid rise of the nuclear family. Today we tend to assume that "the family" consists of parents and children--the so-called nuclear family. For most of our history, we lived in "extended families" that included children, parents, grandparents and other relatives. The advantage of the extended family was that when a family member because too old or infirm to work, the other family members assumed responsibility for their support. But when the able-bodied left the farms to seek employment in the cities, often the parents or grandparents stayed behind. And when new immigrants first arrived in our land, it was often the breadwinner who first made the passage and only later could he bring the family over. And finally, another significant change happened in the early decades of this century. Thanks primarily to better health care and sanitation, and the development of effective public health programs, Americans began to live significantly longer. In three short decades, 1900-1930, average life spans increased by 10 years. This was the most rapid increase in life spans in recorded human history. The result was a rapid growth in the number of aged persons, to 7.8 million by 1935. The net result of this complex set of demographic and social changes was that America was older, more urban and more industrial, and fewer of its people lived on the land in extended families. The traditional strategies for the provision of economic security were becoming increasingly fragile.
In the heady days of the Roaring Twenties another idea arose for providing economic security to average Americans--the presumed ever-upward march of the stock market. Few things are more tempting than the lure of easy riches. This siren has led many an individual, and some whole nations, to ruin. In Holland in the 17th century "tulip mania" drove much of a nation to a kind of madness. Not having a stock market in which to speculate, the Dutch used tulip bulbs in the same way we use stocks and bonds, trading them, buying on margin, selling and reselling next year's tulip crop before the first bulb was in the ground, chasing the elusive dream of ever-increasing riches. Theoretical fortunes were made. The mania started in 1634 and ended in February 1637, when the price for some bulbs increased 2000% and then fell to nothing in a matter of days. At its peak, single bulbs sold for more than $50,000. During the "roaring twenties" the temptation to easy money was running wild through the American economy. First the game was played in land speculation, especially in Florida swampland, and then, when the inevitable happened, the action turned to the stock market. From 1927 to 1929 the volume of shares traded on the stock market doubled. One exciting new idea was introduced by industrialist, financier and builder of the Empire State Building, John J. Raskob. As a General Motors official Raskob introduced to America the practice of buying on installment credit. In the 1920s he argued successfully that buying stocks on "the installment plan" made just as much sense as buying Chevrolets that way. Raskob reassured the nation that the stock market could only increase in value as the economy grew, so buying on credit was an absolutely safe practice. As a result of the Raskob innovation, much of the stock purchased during the boom was bought on "margin" where investors actually had to pay as little as 10% of the full price of a stock. By late 1929 the amount of stock debt outstanding was nearly three times larger than the total federal budget for that year. In the spirit of the times people believed that the stock market could only go up. A week before the stock market crash a Yale University economist would say that the stock market had reached "what looks like a permanently high plateau." A major Wall Street financier published an article in the Ladies Home Journal entitled "Everybody Ought to Be Rich" in which he told the Journal's readers that they could be worth $80,000 in ten years by investing only $15 a week in the stock market (this was at a time when the average worker's take-home pay was $1,300 per year). As one historian described the resulting era: ". . .such figures were extraordinary, magical, intoxicating. What was more, any number could play, and as many as a million did. They were, most of them, amateurs. . .On their lunch hours, they crowded into the customer's rooms of the brokerage houses to watch their money, ‘feverish young men and heated elders, eyes intent upon the ticker tape'." As a basis for economic security, the stock market can be a fickle provider. The problem with stock markets is that they serve two purposes: stock markets provide a means of ownership of the productive wealth of the nation; and they also provide an arena for speculation. As a result, the value of a stock can sometimes bear only the most remote relationship to the real economic value of the underlying business. Real economic wealth is generated when businesses create additional goods and services. Paper wealth is created in the stock market when someone pays more today for a stock than someone else paid for it yesterday. This is why the economy could grow only 8% from 1926-1929 but the stock market could increase in value 125% during the same period. Or why the stock market could lose 87% of its value from 1970-1975 (as measured by the DOW) at a time when the real economy increased in value by 57%. And it is why "wealth" in the form of stocks can disappear in moment, as it did in the 1920s. So despite all the promises of unlimited wealth, all the expectations of an endless upward spiral in national income, and despite all those eyes intently watching the ticker tapes, the stock market would crash, and with it the Roaring Twenties would come to a screeching halt, and the economic security of millions of Americans would disappear overnight.
In the 1920s, the promise of overnight wealth in the stock markets was real. If an investor bought $25,000 of stock in the General Motors Company in late 1920, after the crash of that year, by September 1929 that stock would be worth a million dollars. (However, $25,000 in available investment funds represented almost 20 years of the full take-home pay of the average worker in the 1920s--so this was an opportunity for riches that was not within everyone's reach.) Indeed, the founder of General Motors, William C. Durant, had become one of the richest men in America largely by virtue of his ownership of General Motors stock. But in the Crash, he lost his fortune as General Motors and many other stocks plummeted, and William C. Durant, titan of industry, ended his days as the manager of a bowling alley. If you had less patience, and more money, by investing $175,000 in the RCA Corporation at the start of 1928, you could have a million dollars by September 1929--at least on paper. And if you were even less patient, and considerably richer, you could have bought into the Initial Public Offering (IPO) of the Goldman Sachs Trading Corporation in December 1928 and turned a $500,000 stock holding into a million-dollar portfolio in less than two months. But there was trouble ahead for these paper millionaires. Our General Motors millionaire would wake up in November 1929 and discover his stock that was worth a million dollars in September was now worth less than half that. The RCA millionaire faired even worse as his million declined to $270,000 in two months. In 1932, the chairman of the Goldman Sachs Trust would admit before a Senate hearing that stock in his company that had been worth a million dollars back in February 1929 was now worth just $8,000. Hundreds of other companies suffered an even grimmer fate, falling into the oblivion of bankruptcy and disappearing from the scene. And all their investors were left with was a handful of colorfully engraved stock certificates, fit, as some were used, only for office wallpaper. Even more ancient forms of human folly were on display during the Crash as well. In the heyday of the market's run-up a group of bankers at Flint, Michigan's Union Industrial Bank decided to leverage their market investments with a little extra money "borrowed" from their depositors' bank accounts. The bankers reasoned that since the market could only go up, they could borrow the money, invest it in stocks, sell the stocks after their inevitable rise, return the borrowed money to the bank accounts and keep the profits for themselves. No one would be hurt and no one would be the wiser. But when the market reversed course, the investments lost money and there was no money to return to the accounts. Suddenly what had looked somewhat innocent, at least to the conspirators, came to look very much like embezzlement. When the bubble burst, 15 officials of the bank were under arrest and millions of dollars of depositors' money had disappeared. Even the very high and mighty were subject to similar temptation. The President of the New York Stock Exchange himself, Richard Whitney, strode like a colossus each morning across the floor of the Exchange as part of the ceremonial opening of the market. Whitney, like the bankers in Flint, had for many months been skimming money from the accounts on the Stock Exchange. Like the bankers, he was just "borrowing" a little extra leverage for his investments. After the Crash, Whitney found himself striding back and forth in a prison cell at Sing Sing. All of this tragedy and folly was set in motion by the Stock Market Crash. The Crash started unexpectedly one Thursday morning in October. When the New York Stock Exchange opened on the morning of October 24, 1929, nervous traders sensed something ominous in the trading patterns. By 11:00 a.m. the market had started to plunge. Shortly after noon a group of powerful bankers met secretly at J.P. Morgan & Co. next door to the Exchange and pledged to spend $240 million of their own funds to stabilize the market. This strategy worked for a few days, but the panic broke out again the following Tuesday, when the market crashed again, and nothing could be done to stop it. Before three months had passed, the Stock Market lost 40% of its value; $26 billion of wealth disappeared. Great American corporations suffered huge financial losses. AT&T lost one-third of its value, General Electric lost half of its, and RCA's stock fell by three-fourths within a matter of months. (It would take 25 years for the stock market to return to its pre-crash level following the 1929 crash.) All of this was hardly unprecedented. Stock markets go down as well as up, and crashes have happened many times over the years. In fact, during the 20th century there were 15 major stock market crashes during which the market lost 20% or more of its value. As America slipped into economic depression following the Crash of 1929, unemployment exceeded 25%; nine thousand banks failed; the Gross National Product declined from $105 billion in 1929 to only $55 billion in 1932. Compared to pre-Depression levels, net new business investment was a minus $5.8 billion in 1932. Wages paid to workers declined from $50 billion in 1929 to only $30 billion in 1932.
Radical Calls to Action The decade of the 1930s found America facing the worst economic crisis in its modern history. Millions of people were unemployed, two million adult men ("hobos") wandered aimlessly around the country, banks and businesses failed and the majority of the elderly in America lived in dependency. These circumstances led to many calls for change.
More Photos of the Depression
The Townsend Movement: Francis E. Townsend was a lean, bespectacled doctor from Long Beach, California. In 1933 he found himself unemployed at age 66 with no savings and no prospects. This experience galvanized him to become the self-proclaimed champion of the cause of the elderly. He devised a plan known as the Townsend Old Age Revolving Pension Plan, or Townsend Plan for short.
A Writer & his EPIC: Upton Sinclair was a famous novelist and social crusader from California , and an avowed Socialist, who in 1933 was asked by a dissident group of Los Angeles Democrats to help them draft a platform proposal for dealing with the state's economic problems. They were so impressed by Sinclair's plan--which he christened the End Poverty in California, or EPIC plan--that they persuaded him to change his registration to Democratic and to run for the party's nomination for governor in 1934. Sinclair's EPIC scheme was a 12-point program to remake the Californian economy. It involved the issuance of scrip currency, the creation of large state-run bartering enterprises, a tax on idle land and floating a large state bond for $300 million. Point 10 of the plan was a proposal to give pensions of $50 a month to all needy persons over 60 who had lived in California for at least three years. There was a state pension plan in operation in California at the time, but its benefits were very low, and the eligibility requirements were so severe that most elderly Californians could not qualify. (This was true of many of the state pension programs around the country.) Sinclair's pension proposal was very popular because in one fell swoop it reduced the minimum age for pensions by 10 years, almost doubled their value, and eliminated restrictive eligibility requirements. Sinclair's EPIC program, and especially its pension proposal, had a great appeal in Depression-weary California. Sinclair and his supporters organized EPIC clubs, published newsletters, formed ad hoc organizations and found a large chorus of supporters with unlimited enthusiasm for his ideas. In short order, Upton Sinclair's EPIC movement captured the Democratic party and Sinclair became the Democratic nominee for governor in the election of 1934. The party's platform became the EPIC program, including the pension plan. When the votes were counted, Upton Sinclair got 37% of the vote, the Republican candidate got 48% and a third-party progressive candidate took another 13%. Had it been a two-man race, Upton Sinclair might have become Governor of California and the EPIC pension plan might well have become the California model.
During the 1930s California was a virtual hot-house for new pension schemes, and one of the most creative (and dubious) of the pension schemes of the 1930s went by the unlikely moniker of "Ham & Eggs." Ham & Eggs was the brainstorm of a self-promoting huckster in-aptly named Robert Noble. The scheme was based on a call for the state government to issue special currency called "scrip" that would be paid each week to every unemployed Californian age 50 and older. Questions about the validity of the economics did not dampen the enthusiasm of the movement's supporters, nor even did the numerous scandals, financial and otherwise, involving the movement's leaders. The eventual form of the plan called for the state to issue "$30 every Thursday," which became the rallying cry of the movement. The simplicity of the movement was expressed in a bit of doggerel from the organization's newsletter the National Ham and Eggs:
The Ham & Eggs movement had more than 300,000 members--and many more supporters. In 1938 the successful Democratic candidate for governor, Culbert Olsen, openly supported the plan and a proposition was placed on the ballot to adopt the Ham & Eggs plan as California state policy. The proposition was narrowly defeated by a vote of 1,143,670 in favor to 1,398,999 against. The Ham & Eggs movement was based on dubious economics, it was founded and run by a succession of characters of questionable integrity, it suffered from internecine rivalries and frequent scandals, and yet, at the peak of its influence in 1938, more than a million Californians, including the state's Governor, believed that it was the solution to the problem of income security for the aged. That such a poor candidate for a public policy would be so widely embraced is strong evidence of how hungry the public was for action to address the problem of income security for the elderly.
In Ohio, Reverend Herbert S. Bigelow initiated a proposed State amendment to guarantee an income of $50 a month ($80 for married couples living together) to those over sixty years of age who were without gainful employment. This particular plan was to be financed partly out of an increased tax on real estate (2% hike on land valued at more than $20,000 an acre), and partly out of an income tax equal to one-fourth the federal income tax paid by individuals and corporations. The Bigelow pension plan garnered nearly half a million voters before it was defeated. As some experts of the time calculated, the plan would cost more than the existing state budget for two years.
A woman in South Carolina scrawls a note to a man in Washington whom she addresses as "Dear Mr. President." "I'm 72 years old and have no one to take care of me." Another letter comes to the White House from Virginia. "I'm a 60 year-old widow greatly in need of medical aid, food and fuel, I pray that you would have pity on me." Letters such as these came by the thousands from old folks across the country to the President, to Mrs. Roosevelt, to almost every one in Washington whose name was familiar to them. It isn't any wonder then, why the elderly looked to the various organizations
that sprang up around the country offering salvation in some form of an old-age pension plan. One such organization
was the General Welfare Federation of America. Headquartered in Washington, DC, and founded by Arthur L. Johnson,
who denounced the newly established Social Security Act as a "great American fraud." He was just as severe
in attacking other organizations such as the Townsend, Ham-and-Eggs, and Bigelow plans as "crackpot"
pension schemes.
The Establishment Response If America was to avoid the siren songs of the "radical calls to action," responsible political leaders would need to offer some persuasive alternatives. As the Depression grew, three general approaches emerged: do nothing; rely on voluntary charity; and expand welfare benefits for those hardest hit by the Depression.
It seemed to many politicians and leading public figures that the Depression was just another dip in the economic cycle and that it would right itself soon enough. These voices counseled a restrained response, or no response at all. In the early aftermath of the stock market crash such views were especially common. This view that nothing very much was wrong and nothing very much needed to be
done, began to fade quickly as the Depression deepened. Even so, it held considerable sway in the early years after
The Crash. President Hoover's own innate optimism would also cause him to make several statements about the economic
crisis that seemed at considerable variance with the day-to-day experience of most Americans (see "Some Prophets
Who Weren't," box above), which undermined the persuasiveness of this viewpoint. Hoover's "Volunteerism" President Hoover had a distinguished career before becoming president. He made a name for himself in international relief efforts before and after World War I. He helped feed millions of starving people, through the efforts of voluntary partnerships of government, business and private giving. He knew this kind of "volunteerism" worked, on a massive scale, and he saw no reason why it should not work to solve the problems of the Depression. So although he engaged in some limited federal relief efforts, his main response to the Depression was to advocate voluntary efforts, which never materialized. The main problem with this strategy was that America was able to help rebuild Europe in the aftermath of World War I because America's economy was basically sound. In the Depression the total wealth of the nation was cut in half during the first three years after The Crash. This made voluntary charity an impossible ideal.
PRESIDENT HOOVER'S CANDID VIEWS ON THE DEPRESSION
Expand Welfare Even before the Depression hit, the States had been forced to deal with the problems of economic security in a wage-based, industrial economy. Workers Compensation programs were established at the state level before Social Security, and there were state welfare programs for the elderly in place before Social Security. Prior to Social Security, the main strategy for providing economic security to the elderly, in the face of the demographic changes discussed above, was to provide various forms of old-age "pensions." These were welfare programs, eligibility for which was based on proof of financial need. By 1934, most states had such "pension" plans. Even at the state level, however, these plans were inadequate. Some had restrictive eligibility criteria which resulted in many of the elderly being unable to qualify. The most generous plan paid a maximum of $1 per day. In the Congress, the consensus of conventional wisdom was for more old-age assistance like that available in the states. This was an attitude widely shared in both major political parties. Conservatives preferred this approach because it restricted government aid to the smallest possible number of people (the truly needy) thus restricting the role of government in the provision of economic security. And because it fit with the idea that the Depression was a temporary problem that would soon go away, and when it went away the old-age pensions could go away too--again, reducing the role of government. This became the conservative viewpoint on economic security for the elderly. For example, Alf Landon, the Republican presidential candidate in 1936, advocated replacing Social Security with expanded welfare benefits in his losing presidential campaign. The problem with this strategy was that the Depression didn't go away, and the underlying challenges to the traditional approaches to economic security were being driven by factors much larger and more permanent than the economic crisis of the 1930s. That is, this approach was based on the belief that nothing fundamental had changed about America and that the old tried and true approaches would continue to work. But as we saw in the section titled "America Changes," there were permanent and fundamental changes in our nation with the coming of the Industrial Revolution. The "New" Alternative With the coming to office of President Roosevelt in 1932, and the introduction of his economic security proposal based on social insurance rather than welfare assistance, the debate changed. It was no longer a choice between radical changes and old approaches that no longer worked. The "new" idea of social insurance, which was already widespread in Europe, would become an innovative alternative. Social insurance, as conceived by President Roosevelt, would address the permanent problem of economic security for the elderly by creating a work-related, contributory system in which workers would provide for their own future economic security through taxes paid while employed. Thus it was an alternative both to reliance on welfare and to radical changes in our capitalist system. In the context of its time, it can be seen as a conservative, yet activist, response to the challenges of the Depression. The Social Insurance Movement
Social insurance coverage can be provided for a number of different types of insured conditions, from disability and death to old-age or unemployment. We may find it obvious to think of death, disability or unemployment as conditions causing loss of income and which can be ameliorated by pooling of risk. It is at first a little odd to think of old-age or retirement in these same terms. But that is precisely how social insurance conceives of retirement, as producing a loss of income due to cessation of work activity. So in terms of the eternal problem of economic security, social insurance endeavors to solve it by pooling risk assets from a large social group and providing income to those members of the group whose economic security is being threatened. One of the first American books on social insurance was by a Columbia University economics professor named Henry Seager. Seager explained the principle of old-age security based on social insurance in his 1910 book, "Social Insurance, A Program of Social Reform": "As changing economic conditions are rendering the dependence of old people on their descendants for support increasingly precarious, so, on the other hand, new obstacles are arising to providing for old age through voluntary saving. . . The proper method of safeguarding old age is clearly through some plan of insurance. . . for every wage earner to attempt to save enough by himself to provide for his old age is needlessly costly. The intelligent course is for him to combine with other wage earners to accumulate a common fund out of which old-age annuities may be paid to those who live long enough to need it." One of the earliest American advocates of a plan that could be recognized as modern social insurance was Theodore Roosevelt. In 1912, Roosevelt addressed the convention of the Progressive Party and made a strong statement on behalf of social insurance:
The Threshold of Change So as 1934 dawned the nation was deep in the throes of the Depression. Confidence in the old institutions was shaken. Social changes that started with the Industrial Revolution had long ago passed the point of no return. The traditional sources of economic security: assets; labor; family; and charity, had all failed in one degree or another. Radical proposals for action were springing like weeds from the soil of the nation's discontent. The social insurance movement, and a new President, would come together at the right moment in time to produce historic change. Social insurance would prove to be an idea whose time had come. |
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