The Evolution of Social Insurance

Given all of the talk about the Great Depression and the New Deal lately, I thought this brief history of social insurance from the Social Security web site might be of interest. What I want to stress is that the New Deal was more than simply a stimulus program to lift the economy out of the depression, it was also a means of dealing with economic and social changes that rendered old forms of social insurance obsolete, and beyond that, it was a means of rebalancing power in society, an important factor that shouldn’t be overlooked.

We have heard a lot about lifting the economy out of the recession and whether this or that policy instrument will be effective at that task, and there have been lots of comparisons to the Great Depression along this dimension. But there hasn’t been much talk about the need to update our social insurance programs to cope with a world that is very different from the world in the 1930s, or the need to rebalance economic and political power. Perhaps our current social insurance institutions are adequate – though I would argue that health care is one area where there is a clear need for change – and perhaps the balance of power is as it should be – though there are reasons to suspect that it isn’t – so we should at least look at these issues to see if change is needed. And if change is needed in these and other areas such as employment insecurity related to globalization, and I think it is, we shouldn’t let this unique opportunity for change go to waste.

Here’s the (perhaps not so) brief historical account:

The March of Coxey’s Army

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.”

Jacob Coxey was an unsuccessful Ohio politician and industrialist who, in 1894, called on the unemployed from all over the country to join him in an “army” marching on Washington. Ten of thousands of unemployed workers started marches, but by the time Coxey and his group finally made it to Washington only about 500 hard-core believers remained. Coxey himself was promptly arrested for walking on the grass of the Capitol Building and the protest fizzled out. Coxey later became an advocate of public works as a remedy for unemployment and ran for president as the Farmer-Labor party candidate in 1932 and 1936. (Coxey was also an ardent proponent of the free-silver monetary policy and an opponent of the gold standard. Perhaps to demonstrate his earnestness on monetary issues he even named his son Legal Tender Coxey!)

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. …

America Changes

…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. …

The Stock Market Crash & The Great Depression

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.)

As America slipped into economic depression following the Crash of 1929, unemployment exceeded 25%; about 10,000 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.

Every Man a King:

Huey Long was Governor of Louisiana from 1928 to 1932 and was elected to the U.S. Senate in 1930. A nominal Democrat, Huey Long was a radical populist. He wanted the government to confiscate the wealth of the nation’s rich and privileged. He called his program Share Our Wealth. It called upon the federal government to guarantee every family in the nation an annual income of $5,000, so they could have the necessities of life, including a home, a job, a radio and an automobile. He also proposed limiting private fortunes to $50 million, legacies to $5 million, and annual incomes to $1 million. Everyone over age 60 would receive an old-age pension. His slogan was “Every Man A King.”

The Share Our Wealth program immediately became a movement. Clubs were formed in every state in the nation. By 1935 the movement claimed 27,000 local clubs with 7.7 million members. …

Fire & Brimstone:

Another influence on Depression-era public policy was the Union for Social Justice movement led by a radio preacher by the name of Father Charles E. Coughlin. Father Coughlin had a weekly radio program with 35-40 million listeners which he used to mix a little religion with a lot of politics. His enemies, in addition to the devil himself, were Roosevelt, international bankers, communists, and labor unions, and he was not shy in describing them in interchangeable terms. At the height of his popularity, Father Coughlin had a greater share of the weekly broadcast audience than Howard Stern, Rush Limbaugh, Paul Harvey and Larry King combined.

Although Father Coughlin’s main effort was to pillory his enemies, he did have a broad program of social reforms that included a deliberate inflation of the currency and the nationalization of all banks. He was also an anti-Semite and isolationist whose views were so extreme that the Catholic Church finally censured him and forced him to cease his political activities. In 1936, Coughlin, along with Townsend and the remnants of Huey Long’s Share the Wealth Movement, would join to form a third party to contest the presidential election in the hopes of preventing President Roosevelt from being re-elected.

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. …

Technocracy:

Out of America’s fascination with technology came another eccentric “reform” movement known as Technocracy. Founded in 1918 by a California patent attorney it would briefly flare as a serious intellectual movement centered around Columbia University; although as a mass-movement its real center was California where it claimed half a million members in 1934. Technocracy counted among its admirers such men as the novelist H.G. Wells, the author Theodore Dreiser and the economist Thorstein Veblen.

Technocracy held that all politics and all economic arrangements based on the “Price System” (i.e., based on traditional economic theory) were antiquated and that the only hope of building a successful modern world was to let engineers and other technology experts run the country on engineering principles. Technocracy’s rallying cry was “production for use,” which was meant as a contrast to production for profit in the capitalist system. Production for use became a slogan for many of the radical-left movements of the era. Upton Sinclair, among others, affirmed his belief in “production for use” and the Technocrats briefly made common cause with Sinclair, and even Huey Long, in California. But the Technocrats were not of the political left, as they held every political and economic system, from the left to the right, to be unsound. The Technocrats believed that the solution to all problems of economic security were the same, the rigorous application of engineering principles in a system freed from the Price System. They conceived of retirement as being made possible at age 45 for everyone due to the vast prosperity the new age of Technocracy would usher in. Rejecting all forms of traditional political science, the Technocrats refused to even use standard geographical maps because their boundaries were political, so they would refer to states only by their geographical coordinates. Names, too, were suspect for some reason so members of the movement in California were designated only by numbers. A speaker at one California rally was introduced only as 1x1809x56!

Oddly enough, alone among this collection of radical movements of the 1930s, the Technocracy movement survives, if not quite thrives, into the present day. …

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.

The Do Nothing Response

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 “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 a difficult ideal to achieve.

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.

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 seemed to work. 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 moderately conservative, yet activist, response to the challenges of the Depression.

The Social Insurance Movement

The Social Security program that would eventually be adopted in late 1935 relied for its core principles on the concept of “social insurance.” Social insurance was a respectable and serious intellectual tradition that began in Europe in the 19th century and was an expression of a European social welfare tradition. It was first adopted in Germany in 1889 at the urging of the famous Chancellor, Otto von Bismarck. Indeed, by the time America adopted social insurance in 1935, there were 34 nations already operating some form of social insurance program (about 20 of these were contributory programs like Social Security). Philosophically, social insurance emphasized government-sponsored efforts to provide for the economic security of its citizens. The tradition of social insurance would come to be seen as the reasonable, practical alternative to the radical calls to action represented by Townsend, Long, Sinclair and the others.

Although the definition of social insurance can vary considerably in its particulars, its basic features are: the insurance principle under which a group of persons are “insured” in some way against a defined risk, and a social element which usually means that the program is shaped in part by broader social objectives, rather than being shaped solely by the self-interest of the individual participants. 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 the early social insurance theorists conceived of retirement, as producing a loss of income due to cessation of work activity.

One of the first American books on social insurance was by a Columbia University economics professor named Henry Seager. …

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:

“We must protect the crushable elements at the base of our present industrial structure…it is abnormal for any industry to throw back upon the community the human wreckage due to its wear and tear, and the hazards of sickness, accident, invalidism, involuntary unemployment, and old age should be provided for through insurance.” TR would succeed in having a plank adopted in the Progressive Party platform that stated: “We pledge ourselves to work unceasingly in state and nation for: . . .The protection of home life against the hazards of sickness, irregular employment, and old age through the adoption of a system of social insurance adapted to American use.” TR 1911 pin

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. President Franklin Roosevelt would choose the social insurance approach as the “cornerstone” of his attempts to deal with the problem of economic security.

About Mark Thoma 243 Articles

Affiliation: University of Oregon

Mark Thoma is a member of the Economics Department at the University of Oregon. He joined the UO faculty in 1987 and served as head of the Economics Department for five years. His research examines the effects that changes in monetary policy have on inflation, output, unemployment, interest rates and other macroeconomic variables with a focus on asymmetries in the response of these variables to policy changes, and on changes in the relationship between policy and the economy over time. He has also conducted research in other areas such as the relationship between the political party in power, and macroeconomic outcomes and using macroeconomic tools to predict transportation flows. He received his doctorate from Washington State University.

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