Francois Furstenberg: What History Teaches Us About the Welfare State

Source: The Muskegon Chronicle, 7-5-11

In the wake of the economic crash, which has led to soaring budget deficits, Democrats and Republicans are negotiating “to move forward to trillions of spending cuts,” as House Majority Leader Eric Cantor said recently. A report from House Speaker John Boehner’s office called for “eliminating government agencies and programs” and “reducing transfer payments to households.” These changes would result in unprecedented reductions in the size of the welfare state and the American social compact as it developed over the last century.

Lost in this debate is an appreciation of the historical origins of the American welfare state — long before FDR and the New Deal, after another epochal financial crash.

Much like our time, the Gilded Age was an era of economic booms and busts. None was greater than the financial crisis that began in September 1873 with the collapse of Jay Cooke (ampersand) Co., the nation’s premier investment bank. Like many other firms, Cooke (ampersand) Co. overextended itself by offering risky loans based on overvalued real estate.

Cooke’s collapse launched the first economic crisis of the Industrial Age. For 65 straight months, the U.S. economy shrank — the longest such stretch in U.S. history. America’s industrial base ground to a near halt: By 1876, half of the nation’s railroads had declared bankruptcy, almost half of the country’s iron furnaces were shut and coal production collapsed. Until the 1930s, it would be known as the Great Depression.

In the face of economic calamity and skyrocketing unemployment, the government did, well, nothing. No federal unemployment insurance eased families’ suffering and kept a floor on demand. No central bank existed to fight deflation. Large-scale government stimulus was a thing of the distant future.

As demand collapsed, businesses slashed payrolls and reduced wages, and a ruinous period of deflation began. By 1879, wholesale prices had declined 30 percent. The consequences were catastrophic for the nation’s many debtors and set off a vicious economic cycle. When economic growth eventually began, progress was slow, with periodic crises plaguing the economy through the end of the century.

Neither political party offered genuine solutions. As historian Richard Hofstadter put it, political parties during the Gilded Age “divided over spoils, not issues,” and neither Democrats nor Republicans were inclined to challenge their corporate masters.

“There are two things that are important in politics,” Republican political operative Mark Hanna famously said in 1895. “The first is money and I can’t remember what the second one is.”

With laissez-faire ideas dominant and the political system in stasis, economic decline persisted. The collapse in tax revenue only strengthened calls for fiscal retrenchment. Government at all levels cut spending. Congress returned the country to the gold standard for the first time since the Civil War: “hard money” policies that favored Eastern financiers over indebted farmers and workers.

With neither major party responding to the crisis, new insurgent movements arose: antimonopoly coalitions, reform parties and labor candidates all began to attract support. Writer Henry George, running for mayor of New York, decried the “speculative” gains of financial barons and the monopolists who appropriated “unearned” profits….READ MORE

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