Essays In Political Economy FROM THE LUDWIG VON MISES INSTITUTE The Revolution of 1935: The Secret History of Social Security By Gregory Bresiger1 Social Security was not just about the provision of publicly funded old-age pensions in the name of social insurance. It was designed as a tool of macroeconomic policy, a social arm of central planning passed in age of boundless faith in the power of the state. As such, the program was steeped in economic fallacy and became an integral part of the discredited Keynesian plan to turn stones into bread. Far from achieving its stated aims, it helped prolong the Great Depression and has contributed mightily to the decline of American liberty. 1 Gregory Bresiger is assistant manger editor of Traders Magazine and a business and financial writer/editor in Kew Gardens, New York. [email protected] Brad Edmonds helped with editing. © 2002 Mises.org Essays in Political Economy 2 _______________________________________________________________ Section I: peaks and valleys of deflation and 4 Introduction inflation.” Social Security was representative of A second American revolution national planning schemes, some of occurred almost 70 years ago. On which had been tested during World August 14, 1935, after very little War I and regained popularity with public or congressional debate, intellectuals after the crash of 1929. President Franklin Delano Roosevelt Many intellectuals believed the signed the Social Security Act into government could wage war on law on. Many of his allies were poverty and, by using the techniques disappointed because they wanted of wartime planning so popular with more than the act provided; FDR progressives during World War I, assured them much more was manage the business cycle.5 coming.2 He said, on signing the bill into law, that Social Security Social Security was a Keynesian “represents a cornerstone in a device meant to ensure that buying structure which is being built but is 3 power would remain strong in times by no means complete.” In the midst of high unemployment. By of the Great Depression, and with Keynesian, I mean a kind of thinking most of his New Deal initiatives that pre-dated John Maynard Keynes failing to restore the economy, FDR by centuries but which he would hoped that the federal government, popularize with his writings in the through programs such as Social 1920s and 1930s. Keynes had Security, would temper and control rediscovered it in his reading of the the business cycle. Social Security, FDR said, would “flatten out the 4The Public Papers and Addresses of Franklin D. Roosevelt, Samuel Rosenman, ed., Vol. IV, pp. 324-325 (Random House, New York). 2Although the Social Security system 5Some socialists said FDR was moving initially covered a relatively small part of toward central planning and economic the workforce, FDR assured his allies it nationalism. Said Stuart Chase: “National would expand: “I see no reason why Planning and economic nationalism must go everybody in the United States should not be together or not all. President Roosevelt has covered,” FDR privately told Francis accepted the general philosophy of Perkins. “Cradle to the grave—from the planning.” He added that the nation could cradle to the grave they ought to be in a confidently move toward autarchy. Also see social insurance system.” See Arthur George Soule’s comments in Walter Schlesinger, Jr.’s The Coming of the New Lippmann’s The Good Society, p. 91 Deal, p. 308 (Houghton Mifflin Company, (Grosset & Dunlap, New York, 1936): “It is Boston, 1959). nonsense to say that there is any physical 3See Policymaking for Social Security , by impossibility of doing for peace purposes Martha Derthick, p.5 (Villard Books, New the sort of thing we did for war purposes.” York, 1991). ________________________________________________________________ Ludwig von Mises Institute Essays in Political Economy 3 _______________________________________________________________ philosopher Bernard Mandeville,6 of Keynes was not appreciated,10 but whose “Fable of the Bees” was Keynes’s philosophy helped justify a considered an example of how deficit massive welfare state. spending could restart an economy.7 Myriad additional programs followed This philosophy held that, by using over the years because of the initial fiscal and monetary policies, a triumph of the Social Security Act. government could inject inflation into One of FDR’s newspaper friends a weak economy and thereby work called the act “a monumental miracles. Keynes, for all his achievement,”11 even as he brilliance, was merely another complained that the benefit amounts member of this inflationist school were “miserably inadequate.”12 This that dated back centuries.8 And one new program helped bring about although Keynes seemed to have a fundamental change in American little direct influence when he met culture and government: The federal with FDR, he did influence many of government that pushed ahead with the president’s key economic Social Security took on many new advisers.9 The latter, in turn, helped powers and radically changed our change FDR’s economic thinking, so economy.13 Keynes’s thought became influential in the 1930s. This was the period in Most important of all, Social Security which America formally reversed its transformed American culture in historic individualist principles. One ways the authors of the original of the founding fathers of Social Social Security Act may not have Security has said that the contribution expected: The foundational social 6The General Theory of Employment, 10Madam Secretary: Frances Perkins, by Interest and Money, Vol. VII, from The George Martin, p. 346 (Houghton Mifflin, Collected Writings of John Maynard Boston, 1976). Keynes, p. 378 (St. Martin’s Press, Royal 11Half Way with Roosevelt, by Ernest K. Economic Society, London). Lindley, p. 218 (Viking Press, New York, 7Ibid. 1937). 8For more on this, see Ludwig von Mises, 12Ibid, p. 219. Human Ac tion, Fourth Revised Edition, p. 13Reviewing the achievements of FDR, 466, in which he discusses the inflationist Doris Kearns Goodwin writes: “No longer view of history: “A very popular doctrine would government be viewed as merely a maintains that progressive lowering of the bystander and an occasional referee, monetary unit’s purchasing power has intervening only in times of crisis. Instead, played a decisive role in historical the government would assume responsibility evolution.” (FEE, Irvington-on Hudson, for continued growth and fairness in the N.Y.,1966,). distribution of wealth.” No Ordinary Time; 9See The Keynesian Episode: A Franklin and Eleanor Roosevelt: The Home Reassessment, by W.H. Hutt, pp. 269-70 Front in World War II, p. 625 (Simon & (Liberty Press, Indianapolis, 1979). Schuster, New York, 1994). ________________________________________________________________ Ludwig von Mises Institute Essays in Political Economy 4 _______________________________________________________________ insurance14 program, among other people in our society would vegetate; things, discouraged savings, they would do fewer things, write expanded the state’s reach into the fewer letters, and, most important, family, and redistributed income in work less. Some physicians call this ways no one imagined (quite often “the theory of disengagement.”16 from the working poor and the lower middle class to the upper middle The program was designed to foster class—the latter tend to have more senior inactivity by a clause that political clout as exercised through would allow recipients to earn only organizations such as the AARP). It what one Social Security advocate also created a huge unprecedented called “pin money.”17 To make more peacetime bureaucracy, a than pin money would mean a bureaucracy that frequently—and penalty to anyone receiving Social quietly—pushed for more expansion Security. This idea was added to the of the program under the guise of original bill by the labor unions, serving the people. Many of the which until the 1930s had been leaders of the program became highly suspicious of welfare state quietly political, despite their measures such as social insurance.18 ostensibly apolitical civil service FDR and his allies readily agreed to status.15 the penalty notion. We will see later that they had little expectation that The program had another profound the economy would fully recover; effect on American culture: It created the institution of mass retirement. 16 Social Security, along with other See Dare to Be 100, by Walter M. Bortz, III, p. 52 (Random House, New York, modern welfare state programs, 1997). encouraged the concept of golden 17Barbara Armstrong, executive director of years in which individuals would stop the Committee on Economic Security (CES) working. Some of the best and wisest that wrote the Social Security plan, said retirement would mean “that you’ve stopped working for pay.” See The History of 14I will discuss this term in a later section. Retirement: The Meaning and Functioning 15The best example is one of the of an American Institution, 1885-1978, by administrators of Social Security, Wilbur William Graebner, p. 185 (Yale University Cohen. With the Republicans back in power Press, New Haven, Conn., 1980). in 1953, the supposedly non-partisan Cohen 18“The American antistatist tradition,” write quietly “wrote speeches and supplied a pair of historians, “produced a union information” for the Democrats. Says a movement which in principle, though often friendly biographer: “It was not the first not in action, refused to look to the time that the non-partisan Social Security government to improve the position of the administration shaded into partisan politics.” government.” See It Didn’t Happen Here: See Mr. Social Security: The Life of Wilbur Why Socialism Failed in the United States, Cohen, by Edward Berkowitz, p. 41 by Gary Marks and Seymour Martin Lipset, (University Press of Kansas, Lawrence, p. 31 (W.W. Norton & Company, New 1995). York, 2000). ________________________________________________________________ Ludwig von Mises Institute Essays in Political Economy 5 _______________________________________________________________ they believed work had to be As measured by unemployment and rationed.