How Corporate Moderates Created the
|1936 poster by the Social Security Board|
(click to enlarge)
The story of the Social Security Act of 1935 is an enjoyable one to tell -- and hopefully to read, despite all the details -- because it is so counterintuitive to what all of us believe. Who'd have thought that leaders from some of the biggest corporations of the 1930s -- companies such as Standard Oil of New Jersey (now known as ExxonMobil) and General Electric -- were strong supporters of the Social Security Act? Or guessed that several of the key experts who worked on the details of the act were employed by the richest person in the United States at the time, John D. Rockefeller, Jr.?
Furthermore, most Americans assume that big business has always opposed Social Security. They assume this because the most outspoken businessmen of the time, the leaders in the National Association of Manufacturers and the U.S. Chamber of Commerce, railed against it when it was considered by Congress, and have been hostile toward it ever since. Furthermore, the most ultra of the ultraconservatives, often men with very large fortunes, have done everything they can to undermine the act since it first passed -- and they're still at it in 2013, their hopes renewed by the Tea Party advocates in Congress (even though most Tea Party supporters outside of Congress want to maintain Social Security).
The story is also an enjoyable one to write about because the kind of moderate conservatives that helped create the Social Security Act (mostly I will call them "corporate moderates") have tried to cut it back since the 1980s -- and they have partially succeeded. But they won't be satisfied until it is but a ghost of the robust program it became during the early 1970s with the support of Republican President Richard M. Nixon and many other Republicans of that era, a breed of Republican now known sneeringly by far-right Republicans as mere "RINOs" (Republicans In Name Only). So there's also a political angle to the conventional wisdom of the twenty-first century. Members of the liberal-labor alliance are happy to claim credit for the creation of the program they now defend so vigorously, ignoring the fact that the liberals of the 1930s thought the program was too centrist and meager. Modern-day members of the corporate-conservative alliance, on the other hand, who don't like Social Security, are equally glad to blame liberals for Social Security.
Finally, there's also an academic angle to my pleasure in preparing this document. The story I piece together from new archival sources casts strong doubts on the claims made about the Social Security Act made by members of the dominant theoretical school when it comes to studying power in the United States -- the historical institutionalists. But in this document I argue that they are wrong in claiming that the business leaders who supported Social Security were minor characters, and that Social Security was really fashioned by independent experts and liberal lawmakers. Eventually, they will have to refute or come to terms with the evidence that is presented in this document, some of which they haven't seen before. But the argument probably will have to be resolved by more disinterested social scientists and historians, present or future.
In talking about the Social Security Act, I will be focused on the two biggest pieces of it -- old-age insurance (which is what is now meant by "Social Security" or "pensions" in everyday parlance) and unemployment insurance (which is usually called "unemployment benefits"). But I first want to make clear that there were other parts to the overall Social Security Act that were important in many people's lives. However, those parts weren't as controversial, at least in the 1930s, and they haven't been the focus of the arguments about the origins of the Social Security Act among social scientists and historians. For example, there was a provision called "old-age assistance," which provided "means-tested" benefits for the elderly, that is, payments to low-income elderly people who had not worked long enough for enough money to be part of the original "insurance" program. Although old-age assistance was essential to many elderly people, it is only important from a theoretical perspective because the proponents of old-age insurance always saw it as a potential threat to their own program. They saw it that way because ultraconservatives insisted that old-age assistance was all that was necessary. From the moderate conservative and liberal point of view, an ultraconservative victory on this issue, which was raised again during the 1950s, would have stigmatized funds for the elderly as "welfare," which might have led to a reluctance to raise benefits to keep pace with inflation (Altman 2005).
Then, too, there was a title in the Social Security Act advocated by liberal women activists. It provided benefits for unmarried mothers, which was not controversial at the time because the single mothers were most often white widows, and there were relatively small numbers of them. But as the program grew and was reshaped after World War II, it was soon stigmatized as welfare for allegedly "undeserving" women (Gordon 1994b; Mink 1995; Poole 2006, Chapter 5). Although the amounts of money involved were trivial in terms of the overall federal budget, and the individual payments were meager, the program was constantly attacked by ultraconservatives as a generous handout to allegedly lazy people of color. Ultraconservatives really believe such things, which made the program a constant burr under their saddle, but they were also able to use their distaste for the program as one part of a successful effort to win over just enough white middle-income white-collar and blue-collar workers to put Republicans back in the White House for most of the years between 1968 and 2008.
After 40 years of effort, the ultraconservatives succeeded in drastically cutting the "welfare" program in 1996. They then renamed it "The Personal Responsibility and Work Opportunity Act" in order to reinforce the idea that those on welfare had supposedly lost moral fiber and needed to look harder for work opportunities. This "reform" was the outcome of President Bill Clinton's 1992 campaign promise to "end welfare as we know it," but his plan (harsh enough in itself) was made more stringent by the Republicans' insistence that his provisions for child care and health insurance for those on welfare had to be eliminated (Quadagno and Rohlinger 2009). The act put time limits on the number of years a person could receive welfare, added a work component, and reduced assistance for immigrants, due to the strong Republican belief that many immigrants came to the United States with the hope of receiving welfare assistance. The new law seemed to work in its first few years because there were more low-income jobs during the stock-market bubble of the late 1990s, but the changes left many people with only food stamps during the downturns of the twenty-first century (DeParle 2012).
As this introduction suggests, the issues surrounding just about anything to do with the Social Security Act of 1935 remain contentious. Ultraconservatives -- and especially the Libertarians among them, who positively deny that government should have any role in just about anything except fires and crimes -- are out to abolish old-age pensions, unemployment insurance, and other forms of government assistance. Most of them would eliminate minimal old-age assistance for the elderly poor as well, returning that function to churches and local charities. And while liberals and ultraconservatives fight over the preservation of the Social Security Act, academics do battle over its origins and its implications for their rival theories.
The first academic bone of contention is over when the first glimmers of a government social insurance program appeared. Was it in the nineteenth century or the early twentieth century? Are the precedents to be found in government programs or in corporate programs?
According to the historical institutionalists, and most other academicians as well on this issue, there are many precedents for old-age pensions that can be found in the nineteenth century in the government pensions for some types of government employees. Moreover, veterans of the Civil War received pensions that were gradually expanded over the years and came to include their widows and children. Such pensions lasted into the early twentieth century, so it is said by historical institutionalists that they provide paths, precedents, and social learning to guide the government officials that are given credit by historical institutionalists for creating and implementing the Social Security Act (Skocpol 1992). As for unemployment insurance, it first gained attention in the first decade of the twentieth century and received extended discussion in the 1920s, in part based on the experience of European countries with various forms of social insurance.
Although veterans' pensions and the European experience may have had a general influence in legitimating the idea of social insurance, I don't think they had much if any direct impact. I have written a critique of the historical institutionalists' misguided claims on this issue as part of another document on this website, so I will not repeat those arguments here (see the Civil War Pensions section in "The Death of State Autonomy Theory"). Instead, I will focus on a detailed account of the fact that the specific principles embodied in the old-age and unemployment provisions of the Social Security Act came from corporate experience with private insurance plans. I will also emphasize that the experts from a nonprofit, nonpartisan network of foundations, think tanks, and policy-discussion group, which I call the" policy-planning network," built on this corporate experience in designing the key parts of the act. Since the issues of old-age pensions and unemployment benefits often arose at the same time, I will be discussing both at the same time, which may make the early parts of the document seem a little jumpy, so readers need to be alert for sudden changes from one issue to the other.
In the case of old-age pensions, corporate leaders first thought about providing private corporate pensions, not government pensions, in the 1870s. From that time forward, they always saw pensions as having two main purposes, which varied in their importance from era to era, depending on circumstances. First, old-age pensions were most often seen as a way to replace superannuated workers with more productive younger workers, as demonstrated by a program put in place in 1875 by American Express, whose employees had to move heavy freight on and off railroad cars back then, as well as transport securities and currency. Second, a huge strike and much property destruction by railroad workers in 1877 led some railroad owners to think of old-age pensions for loyal employees as a potential way to quell labor unrest, at the least by creating new openings for younger workers. However, in terms of dealing with labor unrest, it's also the case that they saw death benefits, accident insurance, and unemployment compensation as potentially more important than old-age pensions (Graebner 1980; Sass 1997). Either way, by 1900 the Pennsylvania Railroad, the third-largest railroad in the country at the time, had a full-fledged pension plan for all employees at age 70, and a few others had smaller programs.
In the case of unemployment insurance, the first push, primarily on a state-by-state basis, was based on what were considered to be sound business principles that would appeal to moderate conservatives. It came from a small group of experts, most of them university professors, who formed the American Association for Labor Legislation (AALL) in 1906 to promote "uniform progressive state and local labor laws and, where possible, national labor legislation" (Eakins 1966, p. 59). Due to the fact that several of the founders were included in the National Civic Federation, a policy-discussion group formed by moderates in the corporate community in the early twentieth century, the experts in the AALL came to believe that some corporate moderates might be sympathetic to unemployment insurance, as well as some of the other labor law reforms that reformers and progressives in economics, political science, and sociology had been working for since the 1880s (with little success, be it noted).
In other words, we see right here the way in which corporate leaders and policy experts have discussed issues and worked together in the United States since the early twentieth century. It is also noteworthy that this is also the time when the corporate community came into existence in roughly its present form due to (1) the rapid adoption of the corporate form by industrialists (to fend off critics, dampen competition, and make their investments safer) and (2) a huge merger movement that created the kind of giant industrial corporations that still exist over a century later (Bunting 1987; Roy 1997). The founders of the AALL began their efforts by doing careful research, writing model legislation, and encouraging discussion of labor issues in the journal they created, the American Labor Legislation Review. They also served as a clearinghouse that answered questions from all levels of government across the country and did educational outreach work with professionals, government officials, and party leaders through speeches, conferences, books, press releases, and legislative testimony. It was a small expert group that in no way reached the general public.
The AALL had several overlaps in leadership and financing with the NCF, but it also included reformers and even a few socialists who were not invited to take part in NCF deliberations. In addition, progressive women reformers from the settlement house movement, the National Consumers' League, and the Women's Trade Union League served on its advisory board. It was financed by a small number of wealthy individuals, including some of the political economists and women activists, who came from well-to-do family backgrounds (Domhoff 1970, pp. 172-173).
|John R. Commons|
The key figure in the AALL, economist John R. Commons, was not from a wealthy background. Instead, he came from humble circumstances and involved himself in a variety of reform efforts in the 1890s while teaching at various colleges. However, he took a job running the New York office of the newly formed (and just mentioned) NCF in 1902. He also did research and involved himself in mediating labor disputes for the NCF. He became a firm believer in collective bargaining between corporations and unions, an idea championed by the NCF. Based on his experience dealing with businessmen, he also became convinced that the secret to reform was appealing to the profit motive. He left the NCF to take a job in the economics department at the University of Wisconsin in 1905, with half of his salary paid by two members of the NCF, but he always said that his years with the NCF were among the most important in his life (Commons 1934, p. 133).
Although he was by then in Wisconsin, Commons served as the secretary of the New York-based AALL from 1907 to 1909. He was succeeded as secretary by one of his Wisconsin students, John B. Andrews, who directed the organization and most of its activities from that point until his death in 1943, when the organization became inactive and disbanded soon thereafter. Many of Commons' other students, it should be stressed here, worked on projects for the AALL over the next several decades, and eventually for the government committees that formulated the Social Security Act as well. In doing so, they followed by Commons' lead by building their reform measures on business principles. They also gradually decided to concentrate on the state level because of the many defeats the AALL suffered at the federal level between 1906 and 1925 (Moss 1996). By the late 1920s, the AALL was focused even more on the state level because of its fear that the Supreme Court, based on several of its earlier rulings, would rule federal labor legislation unconstitutional. This is important to mention because it brought the AALL into arguments with the corporate moderates that eventually had the biggest impact on shaping the Social Security Act in the 1930s.
The AALL also had the support of one of the most brilliant and persuasive minds of the early twentieth century, Louis Brandeis, a corporate lawyer turned reformer. In addition, Brandeis was appointed to the Supreme Court in 1916 and became a powerful behind-the-scenes player in Washington in the 1930s. Born into wealth in 1856 and a graduate of Harvard Law School, Brandeis worked as a conventional corporate lawyer from 1879 until the late 1890s, when he became a critic of the "curse of bigness" and the legal counsel for the National Consumers' League, where his sisters-in-law, Josephine and Pauline Goldmark, were top leaders (Baltzell 1964, pp. 188-192; Gordon 1994b, pp. 83-84). He also joined the AALL's Advisory Council and in 1911 wrote draft legislation for unemployment insurance that contained an incentive feature meant to induce employers to minimize unemployment; the proposed bill lowered the required premiums for businesses if they had low lay-off records.
During its nearly 40 years of existence the AALL worked on a wide variety of labor legislation that ranged from old-age pensions to unemployment insurance to accident insurance to health insurance, with varying degrees of success. It had a strong impact on the health of workers through the legislation it helped write to combat industrial diseases, while failing on unemployment insurance (Domhoff 1970, pp. 174-175; Pierce 1953, pp. 27-34). However, there is one labor issue it did not include on its agenda, support for unions, which is a major reason why it could attract the financial support and participation of some corporate moderates as well as include reformers and socialists in its discussions. It is also noteworthy that the AALL's legislative approach did not attract much support from the American Federation of Labor (AFL) until the New Deal era because of the AFL's general wariness toward government, which its leaders assumed to be controlled by corporate interests (Skocpol 1992, pp. 208-209). Put another way, there was no "liberal-labor alliance" in the United States until the 1930s, which is much later than the ones that formed in several European countries (Mann 1993).
Although the AALL did not have much success in most of its campaigns because of resistance from the corporate community, it did attract support on one key insurance issue, workmen's compensation, and that became the seed, by a circuitous and indirect route, for the Social Security Act. Workmen's comp may seem far from old-age pensions, but in fact it was conflict over workman's comp that started giant private insurance companies thinking about old-age insurance. Workmen's comp, not old-age pensions or unemployment insurance, was the big issue of the early twentieth century because industrial accidents were a major personal tragedy for tens of thousands of workers and a costly and disruptive problem for American industry. The result was worker discontent and numerous individual liability lawsuits in which juries found against the companies and awarded expensive settlements to injured workers. As corporations lost more and more lawsuits, they became open to new alternatives.
In an effort to provide accident insurance for workers in a way that would be acceptable to employers, the AALL developed a plan that was structured to induce companies to reduce their rate of accidents in exchange for lower insurance payments. It began its campaign in 1906 by sending its model legislation to business executives, labor leaders, academic experts, and government officials, and by discussing it with NCF leaders. Just a year later, the members of the NCF decided to support the AALL initiative as a way to reduce uncertainty and expenses. Some corporate chieftains also argued that workmen's compensation might help reduce agitation for unions as well, because the high accident rate was such a contentious issue (Weinstein 1968, Chapter 2). Note, yes, that the ideas came from experts, but also that the experts built on business principles, and that the corporate moderates were receptive, which was the winning combination on most policy issues in the twentieth century.
By 1910 most members of the ultraconservative National Association of Manufacturers (NAM), which represented the other main political tendency within the corporate community, also favored workmen's compensation as a legal right. That's an amazing turn of events in itself, but they still differed from the corporate moderates because they were not willing to pay taxes for a plan administered by state governments. They therefore urged private insurance companies to develop commercial plans, which led to a trip to England by insurance company experts and NAM representatives to study European precedents (Klein 2003; Sass 1997). The result was a rival proposal for legally enforceable mandates that would stipulate that companies had to provide their employees with private accident compensation insurance. This approach also came to be preferred by many members of the National Civic Federation, because it expressed their own inclination toward as little government involvement in their affairs as possible. As this example suggests, the corporate moderates will sometimes take the ultraconservative route when they think it will work.
The original reaction by Samuel Gompers and other AFL leaders to the AALL's model legislation had been to oppose any form of social insurance that involved government because of their belief that the domination of government by business would lead to unsatisfactory programs. Instead, labor leaders preferred to continue to take their chances in individual court cases. By 1908, however, they had been persuaded by their corporate counterparts in the NCF to support insurance on this specific issue. But then they reacted negatively to the NAM push for the involvement of private insurance companies, as did many reformers and all members of the rising and highly visible Socialist Party of the pre-World War I era. The result was two rival camps that were pushing for two different approaches to government-mandated accident insurance programs. The AALL, NCF, and NAM were on one side and organized labor, liberal reformers, and the Socialist Party were on the other side. It was edging toward being something like "class conflict."
When the AALL/NCF/NAM campaign for legislation began in 1910 and 1911, the battles primarily centered around the disagreement over government versus commercial insurance, although there were also arguments concerning compensation rates, breadth of coverage, and other particularistic but vital issues that are not relevant here. In the end, corporate executives usually held firm for private insurance and conceded higher payout rates in exchange, which were generally above 50% of a week's pay. It was a compromise that organized labor and their liberal and Socialist Party allies only reluctantly accepted. By 1920, only six states, all in the South, lacked workmen's compensation laws (Fishback and Kantor 2000; Weinstein 1968). That's a fairly fast pace as American legislation goes, and it looks to me like a success story for the corporate-financed policy-planning network. It's also an example of how the policy groups help the moderate conservatives and ultraconservatives in the corporate community grope to compromises.
Over and beyond the immediate beneficial impacts of this legislation for the tens of thousands of workers injured each year, the battle over accident insurance had two long-lasting effects that influenced debates about social insurance during the New Deal. First, success on workmen's compensation reinforced AALL members in their belief that the use of sound business principles and the right incentives might convince corporations to drop their opposition to unemployment compensation. As a result, the AALL tried to kindle interest in Brandeis's company-specific unemployment insurance plan, which was structured to encourage companies to minimize layoffs for their workers through better anticipation of market fluctuations and more careful planning of production schedules. (Under this plan, recall, lower layoff rates would lead to lower payments into the unemployment insurance fund.) And once again, legislation would be passed by individual states.
Later experience revealed there was no chance that individual companies could have any effect on a major systemic problem such as unemployment. For that reason, the AALL emphasis on company layoff rates, individual company accounts, and state-level legislation became flashpoints of conflict when other experts within the policy-planning network came to believe that a federal system with uniform tax rates was necessary. But what has to be underscored here is that the long policy battle on unemployment insurance that is discussed later in this document is between rival business-oriented plans, which at bottom is an argument about how much government involvement could be forced upon the well-organized ultraconservatives in the corporate community and the Southern Democrats (who were the representatives of the plantation owners in that era and during the New Deal as well). Historical institutionalists sniff at this insight, but in fact these battles do not have any implications about the degree of business power during the New Deal.
More importantly, and now we have finally arrived at the starting point for the old-age insurance provisions of the Social Security Act, the outcome of the legislative conflicts over workmen's comp convinced private insurance companies that they might be able to underwrite other forms of group social insurance, starting with group life insurance programs for corporations, and maybe old-age pensions as well. Two of the three largest insurance companies, Equitable Life and Metropolitan Life, which shared many directors in common with major banks and corporations, began making the analyses necessary to offer such packages to corporations as a way to head off government insurance programs. Both companies also came to believe they could do a better job with private pensions than individual corporations, but only if contributions were made by both the companies and their employees (Klein 2003; Sass 1997). (Plans that mandate contributions by both the company and its employees are called "contributory" plans, a term that will reappear throughout this document.)
The gradual move toward actuarial soundness for private old-age pensions received a boost in 1918 from the president of the Carnegie Foundation for the Advancement of Teaching, which was founded to provide pensions for professors by Andrew Carnegie, one of the richest of the steel barons of that era. The plan was put on a solid footing by creating the Teachers Insurance and Annuity Association, a life insurance company, which then fashioned the first fully insured pension system (it is now part of a giant company called TIAA-CREF) (Sass 1997, p. 65). At this point the experience of the private insurance companies and the Carnegie Foundation for the Advancement of Teaching also began to have an influence on pension programs for government officials. This is best seen in the pension program designed for federal civil service employees in 1920 by a fledgling think tank of that day, the Institute of Government Relations, which was one of the forerunners of The Brookings Institution (Graebner 1980, pp. 77, 87; Saunders 1966, p. 25). In other words, by 1920 large corporations and organizations in the policy-planning network were shaping government insurance programs based on their own principles and experience. Contrary to the historical institutionalists, any lingering influence from past government pension plans had been swept aside by this point.
Although group insurance plans engaged the interest of corporate leaders during the 1920s, it's important to avoid any misunderstandings by stressing that group insurance plans provided coverage for only a tiny percent of the elderly at the time. Most people bought old-age insurance from actuarially unsound plans sponsored by fraternal organizations, ethnic lodges, or trade unions, but by the end of the 1920s almost all of those plans had failed. As a consequence of these failures, there was a gradual movement towards support for state-level government pensions by organizations such as the Fraternal Order of Eagles and some local and state union federations, using plans drawn up for them by the AALL. A more liberal reform-oriented group, the American Association for Old Age Security, joined them in these efforts in the mid-1920s. It advocated comprehensive social insurance at the state level paid for by general taxes, and thereby directly challenged the AALL approach (Loetta 1975). The incipient battle between the two reformist groups aside, as many as 25 states passed legislation allowing for old-age pensions in the late 1920s and early 1930s, usually without any state funding and at the option of individual counties. As a result, few people received a state pension and the benefits were meager if they did so.
As for any plans for unemployment insurance, which continued to be based on the AALL's emphasis on encouraging employers to prevent unemployment with an incentive-based insurance plan, they went nowhere in the 1920s (Nelson 1969, Chapter 6). Most unions ignored plans for government unemployment insurance and tended to favor the company-oriented incentive plans offered by the AALL and corporate moderates. One of the few exceptions involved the pragmatic leftists in the clothing industry, the Amalgamated Clothing Workers, within which the ethnic solidarity of the immigrant workers -- primarily Italian and Jewish Americans -- combined with their socialist ideology to push for programs to which companies and workers both contributed (Nelson 1969, Chapter 6). And, as we shall soon see, an expert hired by the Amalgamated Clothing Workers to help with this plan was soon hired away by John D. Rockefeller, Jr., to work on corporate social insurance plans.
Despite the grassroots and leftist efforts, the major developments of the 1920s, the ones that impacted the Social Security Act, were being made by the individual corporations that had pension plans of their own, as well as by the insurance companies that made their group programs more sound and less expensive by having both employers and employees contribute. By 1923, for example, Metropolitan Life was confident that it had a group pension plan that was better than anything any one corporation could offer on an equally sound basis. One of its main spokespersons therefore eagerly presented the new plan to the corporate executives that his company invited to a special conference. However, even though he presented evidence that most corporate plans were unsound, the biggest corporations of the era were not prepared to abandon their own plans. They liked to run their own show, and some of them still believed their pension plans were helpful in controlling their workforces and limiting strikes. (As a result, corporate plans sometimes had clauses saying a pension could be lost if the individual participated in a strike.) The corporate leaders present at the conference also liked the fact that they did not legally have to pay benefits if they decided not to do so.
When an executive from Otis Elevator frankly told the Metropolitan Life speaker that the circumstances of each corporation varied too greatly to go along with what the insurance companies had to offer, the insurance representative argued back. His reply led to a sharp rebuke by none other than the top industrial relations executive at Standard Oil of New Jersey, Clarence Hicks, who figures prominently in this document. Hicks put an end to the discussion with these frank words:
"It is impossible and impracticable. For 20 years the [Standard Oil] company has been experimenting on plans. I do not know why it becomes suitable at this time to stop experimenting. If we had done this a week ago, we would not have had the benefit of what we did today" (Sass 1997, p. 72)
When Hicks concluded his remarks, the executive from Otis Elevator made a motion to end the meeting and offer Metropolitan Life a "hearty thanks," which led to immediate adjournment (Sass 1997, p. 72). So it is not like these corporate executives are far seeing and immediately sensible in a big-picture sense. They like to hold on to their baronial power as long as their corporate fiefdoms make that possible. In this case, it took the crisis of the Great Depression to expand their horizons, as will soon become apparent. But in fact the individual company plans did not help with control of the workforce and they were not actuarially sound. Shortly after the Metropolitan Life conference, for example, a meat packing company went bankrupt, sold its assets, and left its 400 retirees with 14 months of benefits (Sass 1997, p. 57). So it was not long before the Metropolitan Life plan became more attractive to smaller companies, especially when it packaged group old-age pensions with life, health, or disability insurance.
It was at about this time that an entirely new organization entered the picture, one that was destined to have far more impact on the Social Security Act than anyone ever would have imagined at the time, or than any historian or social scientist has since comprehended. That's a strong statement, I realize, but I am going to back it up with at least month-by-month detail when it gets down to the crunch time on all this, in 1934 and 1935. Furthermore, my claim looks worse before it looks better because this new organization was founded and funded by the richest man of his day, John D. Rockefeller, Jr., the son of the founder of the Standard Oil companies that were among the largest ten companies in the country at the time. Then, too, Walter Teagle, the president of the biggest Rockefeller oil company, Standard Oil of New Jersey, played a key role in coordinating the personal employees of Rockefeller, Jr., during the legislative battles over Social Security. The organization in question was called Industrial Relations Counselors, Inc. (IRC for short), and it was created to combat unions and diminish labor-management conflict through in-plant discussion and grievance-presentation groups called Employee Representation Plans.
|John D. Rockefeller, Jr.|
In another document on this site, "The Rise and Fall of Unions in the U.S.," I have told the detailed story of why and how the IRC emerged from Rockefeller, Jr.'s attempts to deal with violent and deadly strikes between 1914 and 1917 at two of his companies; this link will take you straight to the section detailing the full extent of Rockefeller's economic and philanthropic power in that era. (Hereafter, Rockefeller, Jr., will be called simply "Rockefeller" because his father was long retired by then and died in 1937 at age 97). Suffice it to say here that the IRC began as an informal consulting service and was expanded and incorporated in 1926. The trustees for the IRC at the time of its formal incorporation -- three corporate leaders, two Rockefeller employees, and the president of Dartmouth College -- provide a good sense of how well the Rockefeller group was integrated into the corporate community, the policy-planning network, and the political parties.
One of the most noted corporate executives of the era, Owen D. Young, was the chairman of General Electric and a Democrat; he sat on the boards of General Motors, RCA, NBC, and the National Bureau of Economic Research, which was a think tank heavily financed by the Rockefeller foundations. Another IRC director from the corporate community, Cyrus McCormick, Jr., was the chairman of International Harvester, a director of National City Bank of New York, and a trustee of Princeton University, as well as being Rockefeller's brother-in-law. Like Young, McCormick was a Democrat, and in addition had been a strong backer of Woodrow Wilson's presidential candidacy in 1912. The third business member on the board, Henry Dennison, president of the Dennison Manufacturing Company in Boston, was a highly visible corporate moderate and a co-founder of a new foundation, the Twentieth Century Fund, in 1919 (now it's called the Century Fund and is still going strong).
The two Rockefeller employees, Arthur Woods, a Republican and friend of Herbert Hoover, and Raymond Fosdick, a Democrat and acquaintance of Franklin D. Roosevelt, served as directors of corporations, foundations, and think tanks for Rockefeller. Woods was a vice president at Colorado Fuel and Iron, a director of Bankers Trust and Consolidation Coal, and a trustee of three Rockefeller philanthropies: the General Education Board, the Rockefeller Foundation, and the Laura Spelman Rockefeller Memorial Fund (which became the Spelman Fund a few years later). Fosdick, one of Rockefeller's lawyers since 1912, sat on the boards of Consolidation Coal, Davis Coal, and Western Maryland Railroad, and was a trustee of the Institute of Public Administration (soon to be a key part in The Brookings Institution), the Rockefeller Foundation, the General Education Board, the Laura Spelman Rockefeller Memorial Fund, and the Rockefeller Institute for Medical Research. Fosdick was also one of Rockefeller's two or three closest advisors on industrial relations and social insurance. As for the sixth and final IRC trustee, Ernest Hopkins, the president of Dartmouth College, he also served as a trustee for the Laura Spelman Rockefeller Memorial Fund at the time.
Over and beyond the applied work by the IRC employees, Rockefeller and his aides started industrial relations institutes at major universities in order to develop the expertise needed to bring about harmonious labor relations. The first grant supported a new Department of Industrial Relations within the Wharton School of Business at the University of Pennsylvania, chaired by Joseph Willits. Shortly thereafter, Willits became involved in the work of the Social Science Research Council, which received 93% of its funding from Rockefeller philanthropies in the decade after its creation in 1923 (Bulmer and Bulmer 1981; Domhoff 1996, p. 60; Karl 1974). He then served on many committees related to Rockefeller projects, had a hand in fashioning the administrative structure of the Social Security Board, and in 1939 became director of the Rockefeller Foundation's Division of Social Sciences (Fisher 1993, pp. 54-55, 121, 183). The Rockefeller group's second academic initiative involved the formation of an Industrial Relations Section in the Department of Economics at Princeton, starting with direct overtures from Rockefeller and Fosdick (Fosdick was a graduate of Princeton, John D. Rockefeller 3rd was then a student there). This project was developed under the guidance of Hicks from his industrial relations post at Standard Oil of New Jersey. Shortly thereafter, industrial relations institutes were created at several other universities, including MIT, the University of Michigan, and Stanford, and in the late 1930s another one was developed at the California Institute of Technology (Gitelman 1984, p. 24).
This brief overview of IRC's leadership, and the quick glance at the companies, foundations, and think tanks that Rockefeller supported, almost brings us to where we need to be. It was at this point that the IRC began to pay serious attention to company-level old-age pension and unemployment compensation plans to see if they needed to be reorganized or otherwise improved upon. But first, another key piece of the Rockefeller network for industrial relations has to be added to the picture. Adding it now sets us up for its eventual incorporation into the New Deal as a committee of a government advisory council.
As part of his effort to create better, and non-union, relations between corporations and their employees, Rockefeller and the top executives at Standard Oil of New Jersey created an informal and off-the-record meeting group in 1919 for the presidents (today they would be called "CEOs") of the largest corporations of that era and their industrial relations vice-presidents. Called the Special Conference Committee, its purpose was to keep these key executives in touch with each other on major labor relations and social insurance issues, and to push the idea of Rockefeller's Employee Representation Plan whenever possible. In addition to Standard Oil of New Jersey, by 1926 the group included nine of the largest industrial companies in the country and one bank: U.S. Steel, General Motors, General Electric, AT&T, DuPont, Bethlehem Steel, International Harvester, U.S. Rubber, Goodyear, Westinghouse, and Irving Trust (AT&T was added in 1925) (e.g., Gordon 1994a, pp. 152-155; Scheinberg 1986, pp. 152-158). The vice-presidents for industrial relations met several times a year and the presidents joined them for one meeting a year. Hicks of Standard Oil of New Jersey was the chair from its inception until he retired in 1936. Edward S. Cowdrick, a former journalist, who became a personal Rockefeller employee after he wrote a favorable article on the Employee Representation Plan, served as its secretary from 1922 until his death in 1951. Although the group was unknown at the time, its correspondence and other records were subpoenaed and published in the Congressional Record by a Senate committee investigating corporate violence against union organizers in the late 1930s, so we know it is not the figment of someone's imagination (Auerbach 1966; Senate 1939). (It turned out that several companies in the Special Conference Committee were stockpiling dynamite and other weapons in the mid-1930s, and all but one or two of them were part of the failed attempt, coordinated by Cowdrick, to defeat the National Labor Relations Act in 1935.)
Finally, we are now set to hone in on the real origins of the Social Security Act.
The new emphasis on social insurance at the IRC was signaled by the employment of two very well trained independent experts on these issues, Murray Latimer and Bryce Stewart, who ended up at the center of the legislative drafting for the Social Security Act in 1934. Latimer, a 25-old instructor in finance at the Harvard Business School at the time he was hired in 1926, was born and educated in Clinton, Mississippi, where his father had an automobile dealership. (Latimer received an M.B.A. at Harvard in 1923 before joining the faculty.) During his years at the IRC, Latimer helped to establish new pension plans at Standard Oil of New Jersey as well as three other Rockefeller oil companies and an independent steel company, American Rolling Mill. His 1932 book for IRC on Industrial Pension Systems in the United States and Canada was well known and respected at the time, and is still frequently cited in historical accounts (Klein 2003; Orloff 1993; Sass 1997). Latimer also did a study of union pension plans for the AFL in 1928-1929, shortly before the stock market crash, concluding that "the experiments are far from having reached a sound basis and that unless drastic financial reorganization is made they are almost certain to end in failure in the relatively near future" (Klein 2003, pp. 56-57).
Stewart, 44 years old when he joined the IRC staff in 1927, was a Canadian with many years of experience working with employment and labor issues. A graduate of Queens University in Kingston, Ontario, he earned a Ph.D. at Columbia University and worked as a researcher, chief statistician, and editor for the Canadian Department of Labor, and then as an organizer and director of the Employment Service of Canada (Kelly 1987). Most interesting of all in terms of my emphasis on the relative openness of moderate conservatives in the corporate community on unemployment and pension issues, Stewart is the person I was referring to earlier as an employee of the Amalgamated Clothing Workers in Chicago. He came back to the United States in 1922 to develop and administer an employment exchange for the union, which was later supplemented by an unemployment insurance fund.
Created at the insistence of Sidney Hillman, the Amalgamated's leader and a major figure during the 1930s, the union's employment exchange and its insurance fund were jointly financed by labor and management, but controlled by the union. Stewart (1925) wrote an article for the International Labor Review about this "American experiment." After leaving the union to join the IRC staff, he became its director of research in 1930. He held that position until his retirement in 1952, except for a return to Canada as deputy minister of labor during World War II. Like Latimer, he was well known in the early 1930s for his publications on social insurance (Stewart 1928; Stewart 1930). These are not mystery people that are unknown to the historical institutionalists, but their personal employment by Rockefeller (he financed the IRC out of his own pocket) is considered a piffle by them.
In fact, historical institutionalists discount most of the information I have or am about to present, although they may have some second thoughts based on my new archival information. Based on a chapter I wrote on the origins of the Social Security Act in 1996, which contained some of the information in this document, they say that information on the connections between corporate moderates and policy experts ignores differences between corporate executives and policy experts, and also overlooks the "multiple affiliations" and "complex career histories" of the independent policy experts: "Domhoff's research implies that all policy designers with past or present ties to corporate-funded research groups accurately reflect the sentiments of big business, ignoring the multiple affiliations and complex career histories of many of these experts, as well as the overwhelming number of New Deal figures, especially in top positions, who had no such ties" (Hacker and Pierson 2002, p. 308). Besides, they continue, to the degree that the corporate moderates had any involvement in the Social Security Act, their stance was merely a "strategic accommodation, driven by fear of less attractive alternatives," by which they mean "the Townsend movement," a legislative pressure group formed in the summer of 1934 that I will discuss later in this document as being too late and too hapless to really matter (Hacker and Pierson 2002, pp. 298, 307-308). For now, readers can keep this historical institutionalist critique in mind as they look at the rest of the document, and decide what they think for themselves.
Returning to the specifics on Latimer and Stewart, and their subsequent network of affiliations, they were often joined in their efforts by economist J. Douglas Brown, the director of the Rockefeller-financed Industrial Relations Section of the Department of Economics at Princeton. Since he, too, figures in the origins of the Social Security Act, a few words about him are in order. The son of an industrial executive in Somerville, New Jersey, Brown received his B.A. and Ph.D. at Princeton and taught for a year in the industrial relations program at the Wharton School at the University of Pennsylvania. He then returned to Princeton as a professor. Brown also worked closely with Hicks, the industrial relations executive at Standard Oil of New Jersey, and later helped him write his autobiography (Hicks 1941). In addition, Brown hosted an annual industrial relations conference at Princeton in conjunction with Hicks and the IRC staff. One of his other tasks was to talk with corporate executives around the country and make periodic reports to Hicks and John D. Rockefeller, III, who was overseeing the IRC for his father at the time. For example, Hicks wrote the following letter to Rockefeller to alert him to a forthcoming scouting report from Brown, who was also going to tell Hicks about the work agenda for the Industrial Relations Section at Princeton during the next year:
"During this past summer Mr. J. Douglas Brown, who has charge of the Industrial Relations Section at Princeton, has been making a trip as far west as California, interviewing representatives of a large number of corporations and getting in personal touch with the industrial relations situation in various sections of the country. Tomorrow, Friday, he is coming to take luncheon with me to review his trip and to discuss the work of the Industrial Relations Section for the coming year." (Hicks 1930)
A pamphlet written for the American Management Association in 1928 by Cowdrick, the former journalist personally employed by Rockefeller, best exemplifies the pre-depression thinking about company pensions within the Rockefeller-financed industrial relations network. Furthermore, the pamphlet reflects the thinking of other corporate moderates as well, as shown shortly. According to Cowdrick's detailed analysis, which contains discussions of the moral, economic, and technical issues involved in industrial pensions, a pension is part of a good personnel program. Especially in the case of corporations that have been around for many years, a pension is "a means, at once humane and approved by public opinion, of purging its active payroll of men who, by reason of age or disability, have become liabilities rather than assets" (Cowdrick 1928, p. 10). Pensions also provide the "opportunity to promote their younger subordinates." Cowdrick concluded with the prediction that industrial pensions will be "increasingly valuable to employers" (Cowdrick 1928, pp. 11, 21).
Cowdrick's summary aside for the time being, and returning to the IRC, it undertook its first consulting for a government agency in 1928 when Frances Perkins, recently appointed by Governor Franklin D. Roosevelt as New York's industrial commissioner, established an Advisory Committee on Employment Problems "to effect some improvement in the State Employment Service" (Perkins 1930). Very striking in terms of my emphasis on the importance of the corporate-funded network of foundations, think tanks, and policy-discussion groups, the legislation enabling the demonstration project called for private funding. So Perkins wrote to a man named Beardsley Ruml, who was the director of the Spelman Fund, which was by then a relatively small policy-oriented foundation because most of the Laura Spelman Rockefeller Memorial Fund had been folded into the Rockefeller Foundation as its Social Sciences Division. She asked him "if the Spelman Fund of New York would grant an annual appropriation of $25,000 for a period of three to five years," which was one-third of the estimated annual expenses (Perkins 1930). Her letter indicated that another foundation was also willing to help out.
At about the same time, Perkins appointed the director of the IRC, Arthur H. Young, as the chair of her advisory committee. His report to Perkins recommended that demonstration projects be developed to test the effectiveness of public employment centers. The recommendation led to a demonstration project in Rochester in 1931 based on a grant of $75,000 over a three-year period by another one of the Rockefeller philanthropies. Stewart was put in charge of the project as chair of the Committee on Demonstration, through which he came to know Perkins. The Rochester project also brought Stewart into contact with a transplanted Southerner, Marion Folsom, the assistant treasurer of Eastman Kodak, who had taken a leadership role since the early 1920s in experimenting with forms of unemployment insurance, with the approval and support of the company president. (Since Folsom became involved in the passage of the Social Security Act, let's add that he was born and raised in southeastern Georgia, where his father was a merchant and a trustee of Southern Georgia College, then educated at the University of Georgia and the Harvard Business School, and then hired by the treasury department at Eastman Kodak in 1915. After serving as a captain in World War I, he returned to Eastman Kodak and was soon promoted to assistant treasurer (Jacoby 1993; Jacoby 1997, pp. 206-220).) Stewart also worked for a three-person federal government study group on unemployment in 1931, which included Senator Robert Wagner of New York, the leader of the urban liberals in the Senate, as one of its members (Huthmacher 1968, p. 83). Clearly, then, the IRC and the Spelman Fund had developed close connections well before the 1932 presidential elections with other corporate moderates and the two liberals -- Senator Wagner and Secretary of Labor Perkins -- that would play a lead role in shaping the New Deal on social insurance issues.
Although corporate moderates and IRC employees had a strong interest in old-age pensions and unemployment compensation plans, they had zero desire at this point to move toward government old-age pensions, a point demonstrated in a report by the National Industrial Conference Board in 1931. Based on work by IRC employees and a survey of a large number of industrial executives, Elements of Industrial Pension Plans concluded that pension plans were becoming more important in the minds of industrialists and urged that the plans be made actuarially sound, in part through having employees contribute to them. No longer was there any mention of the usefulness of these plans in controlling employees. Now the emphasis was on staving off government plans by demonstrating that industry can "take care of its worn-out workers through pension plans resting on voluntary initiative and cooperation" (NICB 1931, p. vi). Showing even more clearly how much the corporate leaders wanted to avoid government pensions, the report stated:
"In proportion as such plans are established and become successful there is thus effected a reduction in the number of dependent aged that must be taken care of by society or the state. The extension throughout the field of industry of pension plans adequate in their provisions, equitably administered, and soundly financed will do much toward removing any real need or excuse for resort to the dubious expedient of state pensions." (NICB 1931. P. vi)
At the same time that the insurance companies and IRC were shoring up company pension plans, IRC employees also became involved in the growing problem of unemployment. Although most members of the Rockefeller group had accepted the cautious and optimistic approach to dealing with the depression that Hoover insisted upon -- indeed, Teagle, the aforementioned president of Standard Oil of New Jersey, served as chair of Hoover's Share-the-Work Program -- they nonetheless began to take new initiatives. Very quickly, the Rockefeller Foundation, which was chaired by Rockefeller, came to the fore as the center of Rockefeller efforts to help combat the growing depression. Its first step in this new direction was the creation of an Economic Stabilization Program in early 1930, a framework that was used to fund a variety of initiatives over the next three years. The second step was to tell the Social Science Research Council (hereafter SSRC) that there would be no further grants for general academic research. Times were tough and money was tight, so from then on only socially useful applied research would be supported. The SSRC would consist primarily of policy-oriented committees made up primarily of experts and business executives (Fisher 1993).
Shortly thereafter, in February, the SSRC created a Committee on Unemployment. Arthur Woods, the personal Rockefeller employee who was also a friend of President Hoover, chaired the new committee. His vice chair was Willits from the Wharton School and the SRCC (Fisher 1993, p. 122). Stewart of IRC was a member, as were two other men who figure later in the creation of the Social Security Act: William Leiserson, a Wisconsin-trained economist, well known labor mediator, and a professor at Antioch College; and Morris Leeds, a corporate moderate, the president of Leeds & Northrup (a manufacturer of precision instruments in Philadelphia), a director of the AALL, and a member of the SSRC's Committee on Industry and Trade.
By October 1930, Hoover was becoming less certain that prosperity was just around the corner, so he appointed a President's Emergency Committee on Employment, drawing heavily on the think tanks in the policy-planning network, including The Brookings Institution, the National Bureau of Economic Research, and the SSRC. In spite of his concerns, Hoover was at the same time fearful that such a committee might contribute to an atmosphere of pessimism and call for greater involvement by the federal government in creating employment. He therefore stressed the temporary nature of the committee and limited its options to voluntary efforts at the state and local level. He chose his friend Woods as the chair, who then dovetailed the work of the emergency committee with that of the SSRC committee he also chaired (Fisher 1993, p. 122). Once again, that is, a think tank (the SSRC in this case) and the government were joined at the hip. Along with Woods, there were ten business leaders and eight experts from the policy-planning network on the 33-person presidential committee, including Ruml, Willits, Stewart, and Brown from the network of Rockefeller-supported experts. In addition, the Rockefeller Foundation gave the presidential committee $50,000 in 1930 and $75,000 in 1931 to help with its work. Ruml's Spelman Fund provided an additional $25,000 in 1931.
The committee's experts drafted a proposed message to Congress for Hoover that presaged what the New Deal would eventually do, calling for "a public works program, including slum clearance, low-cost housing, and rural electrification" (Schlesinger 1957, p. 170). They recommended speeding up a large program of highway construction. They also advocated a national employment service, but there was no mention of unemployment insurance. These suggestions were resisted by Hoover, however. When Woods asked Hoover to start an emergency program in the near-starvation conditions of Appalachia, he was sent to the Red Cross, which refused to help because the problem was not due to a natural disaster such as a flood or drought. At that point the Rockefeller philanthropies provided money to charitable and community groups for the Appalachian relief effort (Bernstein 1960, p. 301).
Woods later removed most hints of the considerable tensions between Hoover and his presidential committee from the historical account of the committee's efforts, leading to a long delay in the appearance of the book written about it. As one of Woods's aides later wrote to a key Rockefeller lawyer, "Colonel Woods was somewhat doubtful as to the wisdom of publishing the report in exactly the form as first prepared by Mr. Hayes, since it went into considerable detail as to certain differences of view which arose between the Committee and President Hoover" (Eden 1936). Willits of Wharton and the SSRC was assigned the task of making the manuscript revisions. I think these conflicts highlight the difference between anti-government ideological purists and the more pragmatic approach of the moderate conservatives within the corporate community.
Despite the obvious failure of the emergency employment committee, it had longer-term research consequences, although they were not at first apparent. It did so through a supplemental Advisory Committee on Unemployment Statistics chaired by Willits, with Stewart as its technical adviser. The committee sent out questionnaires to businesses and government agencies all over the country; its main finding was the inadequacy of unemployment figures and the impossibility of determining the number of people needing direct relief (Hayes 1936, p. 29). This finding supported later SSRC efforts to develop better data-gathering capabilities under governmental auspices.
The work by Hoover's emergency committee also led to research collaboration between the IRC and the Economic Stabilization Research Institute at the University of Minnesota on a pilot program on the usefulness of employment centers. The Rockefeller Foundation's Economic Stabilization Program awarded a two-year grant for $150,000 to carry out the research, which was supplemented by smaller grants from the Carnegie Corporation and the Spelman Fund. One of the outcomes of this collaboration was a book presenting a plan for unemployment insurance, written by Stewart in conjunction with three University of Minnesota employees. The first of these three co-authors, economist Alvin Hansen, who later had a staff role in the formulation of the Social Security Act, was soon to be appointed a professor at Harvard, where he became persuaded of the correctness of Keynesian theory in 1937. The second, Merrill Murray, trained in economics at Wisconsin and previously employed by the Wisconsin Industrial Commission, was in charge of the actual field study and took part in an unsuccessful campaign to pass an unemployment insurance bill in the state. Four years later he joined with Stewart in writing a draft of the unemployment insurance provisions of the Social Security Act. The third co-author, Russell Stevenson, the dean of the School of Business Administration at the University of Minnesota, had no further role in the events recounted in this document.
Although this multi-authored book is only of historical interest now, its preface has a noteworthy comment that highlights the way in which research carried out in the policy-planning network helps to bring about a new consensus. Hansen, Murray, and Stevenson report that they had come to doubt the usefulness of the AALL plan to create incentives that presumably would induce businessmen to reduce unemployment. Now they favored a national-level rather than a state-level plan, crediting Stewart for their change of view: "Many of the modifications in the original plan are the result of the research and thought brought to bear upon the subject by Bryce M. Stewart of the Industrial Relations Counselors, Inc., and his staff" (Hansen, Murray, Stevenson, and Stewart 1934, p. v). And yes, let's give the experts full credit on this one, even while remembering the source of their financial sustenance.
Throughout 1931 the Rockefeller Foundation's Economic Stabilization Program made a series of grants to the IRC, drawing what had been a business-oriented consulting group further into the policy arena. The first grant, for $30,000, provided at Woods's request, paid for a study of unemployment insurance plans in Great Britain. The second, for $16,000, supported a study of the administration of employment offices, supplemented a year later with $7,500 to support the IRC's role in the demonstration projects on employment offices in Rochester and Minneapolis. Another $16,000 made possible a study of employment offices in Europe. Finally, the IRC received $10,000 to help it set up the New York State Employment Service, which brought it into collaboration with Perkins once again. In short, the IRC was on its way to developing unique expertise on the administration of employment offices and on unemployment insurance.
Even with this increased support from the Rockefeller Foundation, the great bulk of IRC's funding continued to come directly from Rockefeller himself, who was still kept informed of its activities by John D. Rockefeller III, Hicks, and Fosdick, his trusted personal lawyer. It is thus significant that Fosdick wrote to Rockefeller as follows in 1933 in regard to the IRC's work on social insurance:
"As to the value of the work of this organization I cannot speak too highly. In reviewing the current year's work, I would mention the completion of our series of reports on Unemployment Insurance, which are everywhere acclaimed as authoritative and timely, and the publication of the report on Industrial Pension Systems." (Fosdick 1933)
Fosdick also notes that the quality and visibility of the work of the IRC "has led to engagement of our staff by the Wisconsin Industrial Commission and the Minnesota Employment Stabilization Research Institute to assist in shaping and administering legislation." But he does not neglect what IRC was doing to stabilize pension funds in several different companies, by switching over to contributory plans. Several of these companies were oil and pipeline companies owned by Rockefeller,
"There is much concern over the problem of funding of pensions plans just now, and in the last two years we have directly aided the New York Transit Co., National Transit Co., Buckeye, Northern, Indiana, Cumberland, Eureka, Southern and South West Pennsylvania Pipe Line Companies, Standard Oil Company of Ohio, Solar Refining Co., Ohio Oil Co. and other clients in revising and refunding their plans on a sound basis, in nearly all cases securing adoption of a plan providing for assumption of part cost by the employees, and other desirable and conservative provisions that have aggregated several millions of dollars in savings to those companies as well as affording greater security to the employees. This work has required intimate consideration of the financial status of the companies and on several occasions has permitted us to make suggestions of general management and economic value which I believe Mr. Debevoise [Rockefeller's lawyer for business matters and a close friend] or Mr. Cutler [a personal Rockefeller employee who was a director of Metropolitan Life] could attest." (Fosdick 1933)
Fosdick's mention of concern about pensions reflected a new reality that now faced corporations: by 1932 the ongoing depression was starting to take its toll on even the best of the company plans. More workers were reaching retirement age and retirees were living longer at a time when corporate profits had been flat or declining for three straight years. In addition, low interest rates meant that the investments by corporate pension funds were not generating the cash flow that was needed to pay current monthly obligations. As economic historian Steven Sass (1997, p. 88) concludes, "The Great Depression of the 1930s sent a massive shock wave through the nation's fragile private pension system." This was especially the case for the railroads, which had an older workforce than many industries on top of unsound pension plans. Even the switch to contributory plans over the previous three years had not been enough to save the railroad pension plans. But it was not just corporate plans that were in trouble: the handful of small pension plans controlled by the AFL and other unions also began to suffer, as Latimer had predicted they would even before the depression began.
As the depression deepened and Roosevelt took office in March, 1933, the Rockefeller Foundation created a Special Trustee Committee to administer emergency funds of up to $1 million in an expeditious manner (to keep things in perspective, that's $17.4 million in 2013 dollars). The committee consisted of Rockefeller, Fosdick, and Walter Stewart, an investment banker (no relation to Bryce Stewart), who served as a trustee of the Rockefeller Foundation. In addition, Woods and other advisers were sometimes present for the committee's deliberations. The largest of ten projects for that year was $100,000 for work by the SSRC's Committee on Governmental Statistics and Information Services, which followed up on concerns expressed by Willits, Stewart, and others about the dismal state of government statistics. This project, the largest undertaken by the SSRC to that date, led to the creation of a new Central Statistics Board for the federal government, the first small exercise in state building on social insurance at the national level by the policy-planning network (Fisher 1993, pp. 128-129). Then, too, the foundation gave $5,000 to the SSRC's Committee on Unemployment for a study of unemployment reserves by Bryce Stewart.
While the Rockefeller Foundation was funding projects concerned with unemployment benefits and other forms of and social insurance, Roosevelt's Southern-born Secretary of Commerce, Daniel Roper, a former lobbyist for corporations with extensive contacts throughout the corporate world, was creating a new governmental advisory agency in the early spring of 1933. Originally called the Business Advisory and Planning Council of the Department of Commerce, its name was soon shortened to the Business Advisory Council (hereafter usually called the "BAC").
Although the BAC was a government advisory group, originally focused on issues of concern to the Department of Commerce, the corporate community itself selected its members. Through consultation with the leading policy groups and trade associations, the corporate leaders who set it up made a deliberate attempt to enlist a wide range of highly visible national and regional business executives (McQuaid 1976; McQuaid 1982). At the outset it had 41 members, representing a cross-section of business and financial executives. Based on my research in biographical reference sources, 18 of the 60 largest banks, railroads, utilities, and manufacturing corporations of the day were linked to the BAC through the multiple corporate directorships held by some BAC members. There were also numerous regional businessmen from across the country.
Gerard Swope, the president of General Electric, long one of the largest and most respect corporations in the country, was named chairman of the new council. Teagle of Standard Oil was selected as chairman of its Industrial Relations Committee, which means that the Rockefeller industrial relations perspective would at least be part of the deliberations on labor issues. In fact, one of Teagle's first decisions was to appoint all the members of the Special Conference Committee to the Industrial Relations Committee, thereby making that private group into a governmental body. Rockefeller's personal employee, Edward Cowdrick, the aforementioned secretary of the Special Conference Committee, was made secretary of the new BAC committee. Reflecting the seamless overlap of the corporate community and government in the early New Deal, Cowdrick wrote as follows to an AT&T executive. The memo deserves to be quoted because it reveals one of the ways the corporate leaders discussed their involvement in government advisory groups, as well as a decision to avoid any mention of the Special Conference Committee, even though the government advisory meetings were part of Special Conference Committee meetings. The members were told they would be there as individuals, not as representatives of their companies or as members of the Special Conference Committee:
"Each member is invited as an individual, not as a representative of his company, and the name of the Special Conference Committee will not be used. The work of the new committee will supplement and broaden -- not supplant -- that of the Special Conference Committee. Probably special meetings will not be needed since the necessary guidelines for the Industrial Relations Committee's work can be given at our regular sessions." (Senate 1939, p. 16800)
Not surprisingly, perhaps, the first task of the new Industrial Relations Committee was to prepare a report endorsing Rockefeller's Employee Representation Plan and criticizing unions (Scheinberg 1986, p. 163). Shortly thereafter, when Teagle spent much of the summer of 1933 in Washington helping to set up the administrative apparatus for the National Recovery Administration, which was charged with setting minimum prices, minimum wages, and maximum production levels in a very wide range of business sectors, he brought Hicks with him to help him keep abreast of what was unfolding.
Members of the IRC contributed their first direct official service to the New Deal in 1933 when Stewart became chair of a committee to advise Secretary of Labor Perkins on selecting the members for her Advisory Committee to the Department of Labor. He also served as a member of the Advisory Council of the United States Employment Service and chaired its Committee on Research (Stewart 1933). At the same time, Latimer provided the Department of Commerce with estimates on the amount of pension income that was being paid out in the country. He became a member of the Advisory Committee of the Department of Labor, where he spent part of his summer months assisting "in the revision of the employment and payroll indexes and in making studies which would lead ultimately to the revision of the price indexes" (Latimer 1933).
As this mundane statistical work was grinding along, a grassroots efforts by the railroad workers in craft unions, which had been building since 1929, began to pick up momentum. It did so in good part because the railroads owners announced they would be making 10% cuts in both salaries and pensions. In a context in which at least 84% of railroad workers had been covered by pension plans since the early 1920s, and with young workers backing the older workers so they could move into the senior jobs, the rank-and-file organized on their own because of the lack of interest in government pensions on the part of their union leaders (Klein 2003; Latimer and Hawkins 1938; Sass 1997). In 1931 and 1932, the railroad workers' independent actions -- organized as the Railways Employees National Pension Association, which was outside the confines of their union leadership -- generated major support among workers in the face of the impending pension crisis in the railroad industry. At the least, it was enough to convince Senator Henry D. Hatfield, a one-term Republican Senator from West Virginia, to introduce legislation in 1932 that ended up having a big impact on corporate thinking about government pensions.
A physician who was a staunch supporter of unions and a former governor of his home state, Hatfield had a special sympathy for railroad workers because he had worked for 18 years as a surgeon for the Norfolk and Western Railroad. Significantly, the legislation he introduced, written for the most part by the Railways Employees National Pension Association, called for contributions by workers and employers as well as an option for early retirement and generous benefits. This legislation grabbed the attention of the railroad union leaders. "As pension agitation mounted," concludes sociologist Jill Quadagno (1988, p. 73), "labor leaders began to recognize that their indifference to the pension issue was alienating them from the rank and file, and in the same year they succeeded in inducing Senator Robert Wagner to introduce an alternative proposal." The liberal Hatfield version and the more cautious Wagner version were eventually reconciled, so Congress passed the Wagner-Hatfield bill in 1933 despite strong opposition from railroad executives, (see also Graebner 1980, pp. 171-176; Huthmacher 1968, p. 177).
Although the federal coordinator of transportation advised Roosevelt to sign the legislation because "it is in line with sound social policy," he added that he would have preferred to wait in order to improve it (Latham 1959, p. 160). One of the problems he worried about was the actuarial soundness of the plan. This concern caused him to bring Stewart, Latimer, and Brown to Washington in late 1933 as members of an Employment Advisory Council that would design the new social insurance system for railroad workers, and here the plot thickens even more, and the noose grows tighter around the historical institutionalists' empirical account. As Brown tells the story:
"The group of us that went down [to Washington] on that centered very much on Industrial Relations Counselors, in New York.... So Latimer and I began working on the old-age protection of railroad workers. We put Hawkins [a student of Brown's] to work on the dismissal compensation. Bryce Stewart worked on the unemployment insurance." (Brown 1965, p. 6)
Latimer, Stewart, and Brown lacked the information needed for the actuarial studies on which to base a sound program, and they did not have an army of clerks at their disposal to develop the information. They therefore applied for a $300,000 grant from the recently established Civilian Works Administration and then hired laid off railroad clerks that had dealt with the relevant employment records for their respective companies. As a result, 1,500 people ended up collecting records on 400,000 employees and 110,000 pensioners. The threesome also hired a staff of 500 in New York to analyze the data (Brown 1965, pp. 8-9; Latimer and Hawkins 1938, p. 111). The result was a new set of records within the space of a few months, which proves how rapidly government capacity can be created when there is the desire to create it. This may seem to be a small point, but think of it. Historical institutionalists constantly say that it's a big problem when a state lacks "capacity," and that the American state used to lack capacity. Then look at how fast capacity can be created, and ask why there was so little capacity in the first place. Could it be that the corporate community -- and the plantation owners in the South, who will come into the Social Security picture very soon -- did not want the American government to have much capacity?
Latimer, Stewart, and Brown then crafted a plan that was satisfactory to all concerned even though the benefit levels were lower than those originally proposed. Everyone supported it because the study discovered that the original actuarial assumptions were unsound (Latimer and Hawkins 1938, pp. 123-127). Employers were pleased because they were relieved of the cost of private pensions and their tax rates were lower. Railroad workers accepted the plan because the pensions were satisfactory -- in fact, much higher than those later established for the Social Security Act -- and there were disability and survivor benefits as well (Latimer and Hawkins 1938, p. 274). In the end the Railroad Retirement Act was a victory for all those who were willing to allow the government to play a role in providing social insurance. Because of this work, Latimer was appointed chairman of the three-person Railroad Retirement Board in the summer of 1934.
Strikingly, the railroad workers' success did not lead to similar efforts by other workers, which Quadagno (1988, p. 74) attributes to the division of American workers along craft lines. This lack of involvement by other unions supports my contention, stated explicitly later in this document, that pressures from organized labor in general had very little to do with the development of the Social Security Act over the next two years.
However, the lessons from this successful effort were not lost on Latimer, Stewart, and Brown. They began to understand the possibilities for using the group insurance policies developed by the private insurance companies, with whom they were always in close contact, as a model for government insurance plans. They realized they could package old-age pensions and unemployment compensation in a way that would be compatible with the major concerns of corporate leaders. They also realized that such plans would be far less expensive for corporations than having their own programs, some of which were on increasingly shaky grounds in any case. From this point forward they worked to convince corporate executives, fellow experts, liberal reformers, and social workers of the soundness of their ideas. Their efforts are a textbook example of how experts function in the United States, which contradicts the historical institutionalists' emphasis on independent experts as well as anything could, while at the same time showing there is originality and complexity built into their role.
The large amount of time being spent in government service by IRC employees led to another series of grants from the Rockefeller Foundation to the IRC beginning in January 1934. The first grant request, entitled "Grant from Rockefeller Foundation to Cover Expense of Cooperation with Government Agencies," captures much of the argument for the growing importance of the IRC in the policy making process. The grant request, written by Young, also relates to the issue closest to the hearts of historical institutional theorists, "state-building," as in creating new agencies and departments by the supposedly autonomous state officials. It begins by noting "increasing inroads have been made on our time by such agencies as the New York State Advisory Council on Employment Problems, the Labor Statistics Committee of the American Statistical Association and the Social Science Research Council" (Young 1933, p. 1).
The proposal then outlines the many governmental and SSRC tasks undertaken by Stewart and Latimer, including work on the railroad retirement program, and in addition reports that another employee had been serving full time as the assistant director of the United States Employment Service for the previous six months. Young then listed his own government involvements "as a member of the Federal Advisory Council of the United States Employment Service, as a member of the Executive Committee, and chairman of the Committee on Veterans' Placement Service and, since June as a special representative of the United States Department of Labor, actively assisting the Director of the United States Employment Service in the organization and administration of the National Reemployment Service" (Young 1933, p. 2).
All of this service, the grant proposal continues, was voluntary, and it had been costing IRC money in both salary expenses and lost opportunities to do paid consulting work for businesses. The proposal concludes with a request for "an emergency appropriation of twenty-five thousand dollars," which was granted by the foundation shortly thereafter (Young 1933, p. 3). Similar supplemental grants were approved for $10,000 in June 1935 and $6,000 in February 1936. Even when Latimer began to be paid by the government, he stayed on the IRC payroll and turned over his government salary to the organization, which is one reason why the Rockefeller Foundation grants for 1935 and 1936 could be smaller (Latimer 1934).
This series of grants has theoretical implications that open large holes in the historical institutionalist's theoretical hull. In effect, the Rockefeller Foundation became part of the government by paying the salaries of men who were de facto state employees. The foundation thereby provided the capacity to build new processes and agencies into the government through the expertise of a private consulting firm, Industrial Relations Counselors, Inc. Contrary to historical institutionalists, the American federal government did not build its own capacity, and those who administered it were not independent of the corporate community and its closely affiliated policy-planning network. In fact, I'd call it "state-building by the corporate community." But so far the evidence only opens gaping holes in their theory. The rest of the document sinks the whole theoretical edifice when it comes to their favorite topic, Social Security.
By November 1933, the experts in the policy planning network, who had been working on social insurance for nearly four years by this point, felt confident enough with what they had accomplished to bring it to the attention of experts just outside their circles. They did so through a small conference in Washington under the auspices of the SSRC. Meredith Givens, an economist trained by Commons at the University of Wisconsin, who had been a member of the research staff at the National Bureau of Economic Research since 1928, made the arrangements. Givens also became the executive secretary to the SSRC's Committee on Industry and Trade in 1929 and was the main force behind the successful effort to create the aforementioned Central Statistics Board within the government. In addition, he served as a staff member for the SSRC's Committee on Unemployment Insurance, often working with Stewart. His example, like those of Alvin Hansen and Merrill Murray in the case of the IRC/University of Minnesota collaboration, suggests that the line between the John R. Commons and IRC camps was not a hard and fast one.
Twenty-two people attended this conference, representing a wide range of social service organizations as well as government agencies related to social insurance and social provisioning. Fourteen of the twenty-two had served on an SSRC committee or were connected to the policy-planning network in some other way. Several were affiliated with the local-level policy-planning network created in good part by Rockefeller philanthropies and housed by the Public Administration Clearing House at the University of Chicago (Roberts 1994). The most prominent representative of the social service organizations was Edith Abbott, one of the most famous women reformers of the Progressive Era and since 1921 the dean of the School of Social Service Administration at the University of Chicago. The social welfare representatives also included the director of the Public Administration Clearing House and leaders from the Institute of Public Administration and the American Association of Social Workers.
Perhaps the most important government official present was Harry Hopkins, the head of the Federal Emergency Relief Administration (Cohen 2009, Chapters 8 and 9). Arthur Altmeyer, Perkins's main assistant on social insurance issues, was second only to Hopkins. Altmeyer, who is yet another former Commons student, had been the executive secretary of the Wisconsin Industrial Commission for many years before joining the New Deal. Also present were John Dickinson, the Assistant Secretary of Commerce, who helped draft the National Industrial Recovery Act just a few months before; Morris Leeds, the president of Leeds & Northrup; Isador Lubin, a former Brookings Institution employee who had been appointed by Perkins as the Commissioner of Labor Statistics; and Mary Anderson, the director of the Women's Bureau in the Department of Labor, which had jurisdiction over the "mother's pensions" that would become known as "welfare payments" when they were enfolded into the new Social Security Act. (Anderson, who grew up in the working class, became involved in social reform through the outreach efforts during the Progressive Era of Jane Addams and Hull House (Anderson and Winslow 1951, p. 32).) There were also several experts present who worked closely with government agencies, starting with Brown, the director of the Industrial Relations Section at Princeton, who had worked on the railroad retirement plan. Frank Bane, head of the American Public Welfare Association, who had played a key role in a November, 1932 conference in Chicago that established the principles for the new federal relief program, attended as an advisor to Hopkins (Brown 1940).
The starting point for the discussions at the SSRC conference was a document prepared by Stewart listing the nature of the studies needed to understand several problems that had to be resolved to design a comprehensive social insurance program. It set the stage by noting that his earlier work focused strictly on issues of unemployment and relief had soon led him to the realization that these issues were linked to many other questions. For example, they related to the ability to return to the work force due to old age or physical or mental disabilities, as well as to the relation of government unemployment insurance to recently established government employment centers to aid job seekers and to programs for vocational training. He added that it also would be necessary to explore the need for minimum wages to guard against any tendency by employers to reduce wage rates to help pay their unemployment insurance taxes.
In the case of old-age pensions, the draft plan embodied three basic principles that the corporate moderates insisted upon based on several years of experience with private pension plans, especially in conjunction with the efforts of the major life insurance companies (Klein 2003). First, the level of benefits must be tied to salary level, thus preserving and reinforcing the values established in the labor market. Second, unlike the case in many countries, there would be no government contributions from general tax revenues, if at all possible. Instead, there would be a separate tax for old-age pensions, which would help to limit the size of benefits. Third, there had to be both employer and employee contributions to the system, which would limit the tax payments by the corporations.
Although the attendees were unanimous in encouraging the SSRC to move forward in refining its proposal, the liberals and reformers of that era, many of them social workers, did not give their approval without expressing their disagreements with what they called "the insurance crowd," which meant experts such as Latimer and Stewart. This difference flared up most prominently over the issue of funding old-age pensions when Abbott stated her preference for "one welfare statute" that would be paid for out of general tax revenues and "available to all without stigmatizing qualifications" (see Gordon 1994b, p. 261 for Abbott's general views; see Witte 1963, pp. 15-16, for the fact of disagreement). Moreover, liberals and social workers did not like the idea of employee contributions to unemployment compensation because they agreed with labor leaders that unemployment was a failure of the economic system that should be paid for by its primary beneficiaries, the owners, perhaps with the help of general tax contributions. These differences of opinion suggest that Stewart and other insurance-oriented experts in the policy-planning network were not liberals in the eyes of the liberals of that era.
The same group of people then met for a second SSRC conference in early April, 1934, to consider a second version of Stewart's proposal, this one co-authored with Givens. However, they did so under very different circumstances because Senator Wagner had introduced a new state-oriented unemployment insurance bill on February 5. He did so on behalf of the AALL reformers, who were being provided with ideas, advice and encouragement from behind the scenes by Supreme Court Justice Louis Brandeis. Brandeis conveyed his policy ideas through a number of different people, the most important of whom was his daughter, Elizabeth Brandeis, who became a professor of economics at the University of Wisconsin in the late 1920s after studying with Commons. He also conferred with her husband, Paul Raushenbush, also an economist at Wisconsin, who was in charge of administering the state's unemployment insurance law passed in 1932, which included the AALL's incentive policy. Both Elizabeth Brandeis and Paul Raushenbush were leaders in the AALL and championed its basic principles.
Louis Brandeis also had an extensive network of legal and political contacts, especially among lawyers who had clerked for him or former Justice Oliver Wendell Holmes (e.g., Carter 1934, pp. 315-316). His most important confidant was Felix Frankfurter, a professor at Harvard Law School and an informal advisor to Roosevelt since working with him during World War I; Frankfurter was renowned for sending his students to both corporate law firms and the New Deal (Irons 1982). One of those students, Thomas Corcoran, worked very closely with Roosevelt and served as a direct communication link between Brandeis and Roosevelt. In short, the AALL was not simply a group of academic experts by the time of the New Deal, but a part of the prestigious Brandeis/Frankfurter network rooted in the stature and resources of the Supreme Court, Harvard Law School, the University of Wisconsin, and the state government in Wisconsin, along with the financial help of a handful of well-to-do donors and corporate moderates.
In addition to the incentive provisions, the legislation introduced by Wagner included a new feature suggested by Brandeis that would apply strong pressure on states to create unemployment insurance plans. Called the "tax offset plan," it imposed a federal tax on employers to pay for federal unemployment insurance, but it would not be collected if they paid an equivalent tax to their state government. This was of course an incentive for state-oriented employers and elected officials to urge passage of an unemployment insurance plan in their states (Nelson 1969, p. 199).
Reformers to the left of the AALL, such as those involved in the American Association for Old Age Security, which had just changed its name to the American Association for Social Security, vowed to defeat the AALL/Wagner bill because it was so cautious. They also feared it would undercut their efforts toward more liberal programs in several states, which they thought had a good chance of legislative success. At the same time, most business groups were equally opposed to the AALL/Wagner bill for their own reasons. Nonetheless, Perkins urged Roosevelt to push for this legislation and held a conference on February 14-15 to drum up support for it. However, Roosevelt soon made clear in the midst of all the strong disagreement that he wanted a contributory unemployment compensation plan as part of a larger social insurance plan that included old-age pensions (Nelson 1969).
Within this context, Roosevelt invited Gerard Swope, the president of General Electric, to the White House on March 8. (Swope was in Washington for a meeting of the Business Advisory Council). They then had a long discussion of social insurance that may have had considerable impact on Roosevelt. During their discussion Swope argued that it was feasible to have government social insurance for everyone. It would begin at birth with a government life insurance policy, and would require small payments from the parents until their children were grown. At age 20 both the individual and the employer would contribute (Loth 1958, p. 234). Swope also outlined plans for unemployment and old-age insurance that had been shown to be workable through the experience of private corporate plans, stressing the need for employee contributions. Although Swope thought that one-third of the cost from employees and two-thirds from employers would be sufficient, Roosevelt thought that the split should be fifty-fifty.
According to Swope in extensive interviews with his biographer, Roosevelt expressed enthusiasm for these ideas and asked for a detailed memo outlining a plan, which Swope sent him two weeks later (Loth 1958, p. 235). His plans later were seen as too ambitious by Roosevelt's other advisors, but at the least the visit from Swope may have led Roosevelt to anticipate support for a comprehensive social insurance program from the corporate moderates on the BAC. If so, this fits with political scientist Peter Swenson's (2002, Chapters 9-10) expectations theory of why the Roosevelt Administration moved ahead with social insurance legislation despite the possible opposition of ultraconservatives in the corporate community. According to this view, political leaders often put forth plans that they have reason to believe will be accepted by groups that are initially hesitant or skeptical.
In the context of the legislative disagreements swirling around in Congress on social insurance, the SSRC-sponsored group met again in early April and gave its general approval to the evolving plan that had emerged from the IRC/Rockefeller Foundation/SSRC efforts over the past several years. Stewart and Givens then revised their report to take into account concerns expressed at the meeting and to emphasize their support for a unified plan of the kind Roosevelt also was talking about. As they explained in a report to the SSRC, which has some elements of the proverbial smoking gun: "In a draft report, revised following the April conference, the unified character of the task of planned protection was developed, and the several phases of relief and social insurance were considered in terms of (a) the problems of planning, administration, and coordination, (b) the present state of knowledge in each field, and (c) further work specifically required for the proper integration of each major segment into a unified program" (Stewart and Givens 1934b, p. 1).
Stewart and Givens sent Perkins and Hopkins copies of their conference report in an effort to reinforce the idea that general, not piecemeal, legislation was necessary. From their point of view, their efforts were successful in influencing the creation of the Cabinet-level Committee on Economic Security, as explained in the same SSRC report of November 16 that was just quoted. I find the following paragraph to be strong evidence that the experts within the policy-planning network were working closely with Perkins and Hopkins to shape the government's agenda:
"At the request of officials of the Department of Labor [I read that as Altmeyer and Perkins] and the Federal Emergency Relief Administration [I read that as Bane and Hopkins], these materials were made informally available in the formulation of plans for a government inquiry. A draft plan for such an inquiry, developed upon the basis of the exploratory study, was placed in the hands of a Cabinet committee, and these plans have eventuated in the establishment by Executive Order, June 29, 1934, of the Committee on Economic Security. Thus the original project became merged in a major planning venture at the Administration." (Stewart and Givens 1934b, p. 1)
Is Stewart just puffing himself up in the SSRC files when he says the SSRC plans he worked on "have eventuated in the establishment" of the Committee on Economic Security and that "the original project became merged in a major planning venture at the Administration?" I don't think so.
Once the Roosevelt initiative was announced, Stewart and Givens anticipated (on the basis of the liberal social workers' dissents at the two SSRC conferences and the strength of conservatives in Congress) that there might be aspects of the final legislation that would not be acceptable to corporate moderates. They therefore revised their earlier proposal for immediate research funds from the SSRC to make it a call for a large SSRC study that would begin after the shape of the final legislation became clear. They argued it was very unlikely that any new legislation would be thoroughly satisfactory, which meant that future SSRC studies would be important in influencing inevitable revisions in the program (Stewart and Givens 1934a, p. 1). Thus, members of the policy-planning network were already preparing for likely amendments -- and for shaping the administration of the Social Security Act -- well before the plan was finalized and sent to Congress in early 1935 (cf. Fisher 1993).
As this brief history demonstrates, experts from the policy-planning network, and especially those in and around the IRC and SSRC, were actively involved in developing plans for social insurance right up until the moment the governmental process began. And these weren't just experts with "multiple affiliations" and "complex career histories," as historical institutionalists claim in dismissing the possibility that they are part of a corporate-financed policy-planning network. Latimer and Stewart had been employees of the IRC (still funded primary by Rockefeller at the time, although consulting fees and grants were providing more of its revenue) since 1926. Arthur Young went back a few years before that. Brown and Willits worked in university industrial relations units funded primarily by Rockefeller monies, and the National Bureau of Economic Research and the SSRC received a majority of their funding from Rockefeller foundations.
The next step in the refutation of historical institutionalist claims about the Social Security Act is to determine whether or not the same people and organizations were involved in the drafting process inside the government and if so, if they had any impact.
Roosevelt announced the plan for a comprehensive study of a program for economic security on June 8, 1934. A cabinet-level committee, the Committee on Economic Security (CES), chaired by Perkins and including Hopkins, who always was in attendance at its meetings, would conduct the study. The committee also included the secretary of agriculture, who sometimes sent one of his very liberal assistant secretaries, Rexford Tugwell to represent him. The committee was filled out by the secretary of treasury, who often sent one of his economic advisors, and the attorney general, who always sent an assistant that was instructed to vote with Perkins. The CES was assisted by a "Technical Board," a group of 20 government-employed experts drawn from several different agencies (several of the "government" experts had been employees of foundations, think tanks, and universities until shortly before the process began).
|Walter Teagle |
|Gerard Swope |
|Morris Leeds |
|Marion Folsom |
The CES also had the input of an Advisory Council on Economic Security, which was made up of 23 private citizens, including many prominent corporate moderates, labor leaders, and social welfare advocates. The members of the advisory council were supposed to have a minimal role and serve in part as window dressing, but they nonetheless inserted themselves into the process with considerable vigor, to the growing dismay of Roosevelt and Perkins. The business representatives included four corporate moderates that have been mentioned earlier as being heavily involved in social insurance issues: Swope of General Electric, Teagle of Standard Oil of New Jersey, Leeds of Leeds & Northrup, and Folsom of Eastman Kodak (who was by then its treasurer). The advisory council also included a corporate moderate not yet mentioned, Sam A. Lewisohn, the scion of a mining and investment banking fortune, and the vice president of his family's Miami Copper Company.
In addition, there were five labor leaders, including the head of the AFL, but they attended few meetings and generally had very little impact. However, they unfortunately did have a shortsighted influence on the financing of unemployment insurance, as shown shortly. There were also several public members, who came from advocacy organizations and voluntary associations that stretched back to the Progressive Era, along with the social service organizations housed at the Public Administration Clearing House, which was the centerpiece in the aforementioned network of organizations concerned with city government and social welfare issues mentioned earlier (Chambers 1952, pp. 255-256; Roberts 1994; Witte 1963, pp. 49-53). In today's terms, the representatives from the social services organizations would be thought of as the sensible and acceptable liberals on the advisory council. (We come to the unacceptable liberals in a minute.) In addition, the National Grange (a farm organization), and the Fraternal Order of Eagles, which had advocated for old-age pensions since the 1920s with an AALL model bill, were represented. These two representatives wanted some form of social insurance, but were cautious and centrist.
To do the necessary detail work, there was a research staff made up of experts brought in from the IRC, SSRC, other think tanks, and universities. It was the staff's job to draft the proposals to be discussed by the appropriate committees of the Technical Board and the Advisory Council on Economic Security before they were passed up the hierarchy to the CES (and Roosevelt from behind the scenes through his interactions with Perkins and Hopkins). Finally, there was an executive director to lead the staff and serve as secretary to the CES.
Significantly, the most visible reformers on this issue, who had worked for social insurance at the grassroots for well over a decade and written several influential books, such as Abraham Epstein, the leader of the American Association for Social Security, and Isaac Rubinow, who had both a Ph.D. in economics and an M.D. degree, and made his living as an actuary, were not included in the formal process. Like the acceptable liberals and the social workers, they advocated protection for everyone without qualification and wanted to finance the program out of general taxes. But they were far less willing to compromise than were the social workers, who were part of the New Deal coalition through their many connections to Eleanor Roosevelt, Perkins, Anderson of the Women's Bureau, and several other government appointees.
Rubinow, Epstein, and their colleagues and followers made it clear that they would disagree with several of the basic premises of the corporate moderate/IRC approach, which would only slow down the drafting process. In addition, it was feared that their involvement would serve as a red flag and rallying point for ultraconservative opponents in the corporate community and Congress. Their agitation, writing, and lobbying may have helped to create a more favorable climate for doing something about old-age pensions, and it was their phrase -- "social security" -- that came to designate what had been called "economic security," "social insurance" or "industrial pensions" up until that time (Klein 2003, pp. 78-80). Although they were briefly consulted when the process was well under way, they had no direct involvement in formulating the act, which led to many personal tensions among the supporters of Social Security.
On the basis of a strong recommendation from Altmeyer, Perkins offered the important position of staff director to Edwin Witte. Witte had studied with Commons at the University of Wisconsin and then was appointed the executive secretary of the Wisconsin Industrial Commission in 1917. In 1922 he became the chief of the Legislative Reference Library, a service for the state's legislators who needed help in writing their bills, and in 1933 he became a professor of economics at the University of Wisconsin, shortly before he was hired to direct the social security drafting process. He did collaborative work with Commons and wrote reports on labor law for him, but he respectfully disagreed with Commons and the AALL that incentives to encourage employers to reduce unemployment would have any impact (Nelson 1969). Once again, not all AALL members were of exactly the same mind.
Unknown to anyone at the time, Witte maintained a diary of the unfolding events to help him keep things straight in a complex situation. The diary became the basis for a memorandum he wrote in 1936 at the request of the SSRC's Committee on Public Administration, which used it as part of its efforts to help shape the administration of the Social Security Act (Witte 1963, p. xi). Later the SSRC asked Witte if it could have his permission to publish his memorandum as a book, which appeared in 1963 and became the basis for just about every analysis of the origins of the Social Security Act since that time. It remains a valuable book, and it contains many statements supporting the idea that IRC experts had a key role, but it is too brief to tell the whole story in detail.
With this background material on Witte and his book in mind, we can turn to an inquiry into the impact of the policy planning network in general, and the IRC in particular, on the act itself. The first interesting fact is that the structure and process for the program, and much of its research agenda, were developed by Altmeyer, Givens, and Stewart based on the report written after the second SSRC conference (Schlabach 1969, p. 99). This conclusion, based on interviews and a statement in the CES files written for Roosevelt by Altmeyer, Givens, and Stewart, is consistent with Stewart and Givens' (1934b) statement in their SSRC report that their proposals were made informally available to government officials. In addition, and a clincher to my way of thinking, Witte (1963, pp. 15-16) notes that he made "some little use" of the research suggestions in this report "in outlining the fields to be covered by various members of the staff." Moreover, Stewart was put in charge of unemployment studies and Givens in charge of the study of employment opportunities (Witte 1963, pp. 13-14, 31). All in all, this is impressive preliminary evidence that the policy-planning network, including the IRC employees, were an integral part of the governmental process.
To our unexpected good fortune, it is at this point that IRC experts began to provide inside information on the drafting process to industrial relations executives through periodic IRC memorandums prepared for the organization's clients and for members of the Special Conference Committee. In other words, the IRC memorandums I am about to introduce as new evidence prepared for a rich and powerful group of people: Rockefeller, his personal employees, the top executives at the oil, mining, and railroad companies in which he had a strong ownership position, and the presidents and industrial relations vice presidents at nine of the largest industrial corporations in the country. This is not a small-time information and power network. And, to put it mildly, these memorandums give us a new window into the thinking of the corporate moderates on government social insurance that has never been utilized in detail (but see Kaufman 2003, a labor economist who kindly gave me copies of these memorandums, for a brief overview of them, and Scheinberg, 1986 #2694, who made cursory use of them).
The first of the memos, for July 10 1934, provided a thorough overview of how the drafting process would be carried out by the CES, concluding that "It is patent that the Administration is determined to develop a program of social welfare to be presented at the next session of Congress, and that broad departures in the field of industrial relations may be anticipated" (Memorandum to Clients, No. 1, p. 2). Two paragraphs later it reminded its readers "to prepare for the advent of various forms of social insurance." There's no question, then, that we are being treated to insider information. And it only gets better and more interesting.
Three pages later in that first memorandum, the IRC staff began an analysis of the various alternatives for unemployment insurance by noting the role of two key outposts of the corporate community. "The United States Chamber of Commerce has suggested to the code authorities [i.e., the National Recovery Administration] that they should consider the development of industrial plans of unemployment insurance, and the Industrial Relations Committee of the Business Advisory Council [i.e, the Special Conference Committee] has also been giving the subject much attention" (Memorandum to Clients, No. 1, page 5). In order words, the IRC was in touch with the industrial relations vice presidents on this issue. The analysis that is presented outlines the advantages of a plan such as Stewart would be proposing to the CES. It is noteworthy, and confirmatory, that the Annual Report for the Special Conference Committee for 1934 also stated that "there probably will be need for funds built up and administered under the direction of public authorities" (Gordon 1994a, p. 256).
So far I have established that the IRC/SSRC nexus prepared the planning process that the CES would follow (with administration appointees Altmeyer, Bane, and Hopkins in attendance at key meetings), and that Standard Oil of New Jersey and nine large industrials were keeping a close eye on the proceedings, through the IRC memorandums and meetings of the Special Conference Committee. Now it is time to look at the plans that eventuated. I begin with old-age pensions because they were the biggest financial component of the Social Security Act in the long run, the easiest to trace as to their origins, and the most important in theoretical arguments of recent decades. To anticipate what might be expected by this point, the corporate moderates and IRC experts had extensive day-to-day involvement in the development of the plan for old-age insurance.
Describing his search for a staff to study old-age pensions and draft a proposal, Witte (1963, p. 29) reported that "It was agreed by everyone consulted that the best person in the field was Murray Latimer, who was unavailable because he was chairman of the Railroad Retirement Board." That's a strong endorsement of an IRC employee and shows once again that he and the organization were well known at the time. In any case, Latimer was able to take a role in the process by serving as chair of the Technical Board's Committee on Old Age Security, an important policy role in itself. He also was given the opportunity to recommend a leader for the pension research staff, and then worked closely with the staff in drafting the legislation. His suggestion for staff leader was his friend and co-worker J. Douglas Brown, one of his collaborators on the railroad retirement study, whom he also knew through IRC and annual conferences at Princeton on social insurance (Witte 1963, p. 3). When Brown decided that he could only give part of each week to the work at hand, Professor Barbara Nachtrieb Armstrong, a professor in the law school at the University of California, Berkeley, was placed in charge of the old-age study (Armstrong 1965, p. 36). Latimer and Brown worked very closely with her, along with Otto Richter, an actuary on loan from AT&T.
Armstrong is an intriguing and interesting figure who by all accounts was an inspirational professor and an outstanding researcher. She also figures importantly in theoretical arguments with the historical institutionalists because she is one of their few examples of an independent expert who was important in the drafting of the Social Security Act (Hacker 2002, p. 102). And I can heartily agree that she had "multiple affiliations" and a "complex career history." Although there's not much riding on the presence of one person's participation in the process at this point, she's worthy of further discussion as a case study in how historical institutionalists pick and choose their evidence when they discuss rival theories.
|Barbara Nachtrieb Armstrong|
Armstrong earned her law degree in 1915 at the University of California, Berkeley, and went to work for California's Commission on Social Insurance, producing a report on sickness as a cause of poverty in California, which earned her a Ph.D. at Berkeley in 1921. Armed with both an L.L.B and a Ph.D., she then taught both law and economics at UC Berkeley for the next several years before becoming the first woman to be appointed a professor of law at a major university in the United States. During the 1920s she immersed herself in the study of European social insurance systems and produced one of the most respected books in the field at the time, Insuring the Essentials (1932), with the help of an SSRC grant. In addition to all else, she is indeed an example of the kind of independent expert that historical institutionalists emphasize out of all proportion to their frequency and impact.
Armstrong (1965, p. 38) reports in an oral history that she knew no one in Washington when she was asked to join the research staff and never learned who suggested her inclusion. She says she had received positive letters about her book from Roosevelt intimates Swope and Frankfurter, and speculates that Swope may have been responsible for her selection (Armstrong 1965, p. 30). However, since she also knew many of the experts in the field and was highly respected for her book, it may be that one of the other experts recommended her.
Originally hired to work on the unemployment compensation program, she was switched to old-age insurance when she arrived because Latimer and Brown did not have the time to take on the task. The last-minute nature of the switch to old-age pensions is telling in itself. She was an afterthought on that key issue. Like Latimer and Brown, she favored a nationwide contributory system administered by the federal government, which I think was a key factor in why they were glad to have her as their leader. And sure enough, Armstrong soon clashed with Witte because she had little use for his ideas about social insurance, derived in good part from the AALL/Wisconsin tradition, calling them "absurd" (Altmeyer 1968, pp. 5-6; Armstrong 1965. p. 42). Nor did she have much respect for Perkins, who never bothered to meet with her, which Armstrong attributed to Perkins's preference for the AALL/Wisconsin approach (Armstrong 1965, p. 31). In turn, Perkins was highly critical of Armstrong; she characterized Armstrong as an "arrogant academic" (Downey 2009, p. 234). Her former colleagues and law school students, on the other hand, characterized her as bursting with energy, enthusiasm, frankness, and insight, and as not afraid to challenge the conventional wisdom of her era (Traynor, Kragen, Kay, Riesenfeld, Kagel, Dinkelspiel, and Gehrels 1977).
In contrast to her views of Witte and Perkins, Armstrong had the highest regard and affection for Brown and Stewart, whom she describes as kind and gentle people. She told the interviewer for the oral history project that she felt sorry for Stewart because he was not as tough as she was. "He suffered awfully at their hands," she continued, meaning Perkins, Altmeyer, and Witte (Armstrong 1965, p. 36). After playing a central role in the drafting process, she went back to California, never returning to Washington to testify before Congress, in part because of time pressures, in part because she feared she might be too acerbic as a witness before congressional committees (Graebner 1980, p. 187). She went on to gain renown in family law and as an administrator of rent control in San Francisco during World War II, all the while teaching at the UC Berkeley law school, raising her daughter, and enjoying life with her businessman husband.
The plan prepared by Armstrong and her colleagues, which contained all the provisions the IRC had come to advocate, sailed through the Technical Board's Committee on Old Age Pensions. However, its two main features, its national scope and the inclusion of employee contributions, were worrisome to Perkins and the other members of the CES for a combination of political and legal reasons. However, the original plan prevailed on both issues when the CES finally voted. Thus, the process produced a clear policy victory for the approach first developed by the insurance companies and the experts at IRC. However, their plan did contain one funding issue that emerged later and caused last-minute problems. To keep taxes on both employers and employees as low as possible, they said there would be a need for a government contribution from general tax revenues beginning in 1965 and lasting for another 15 years, unless payroll taxes were increased (Witte 1963, pp. 147-149). When Roosevelt grasped the details of this funding plan several months later, just before the proposal was about to be sent to Congress, he insisted that payroll taxes should be set at a higher rate to maintain his rhetorical fiction that the funding came from "contributions," not taxes. The result would be a very large reserve fund, which neither the corporate moderates nor the liberals liked. This result led to amendments after the plan passed, which are discussed in a later section.
Of more immediate concern, the plan may have faced a different kind of challenge. There may have been some inclination on the part of Roosevelt, Perkins, and Witte to exclude old-age insurance from the final package sent to Congress because they feared that opposition to it might interfere with the passage of the program that mattered the most to them, unemployment insurance. Perkins and Witte always denied there was any such move afoot, but Armstrong, Brown, and Latimer were convinced otherwise. They quickly spoke off the record to reporters to that effect after they were jolted to attention by an ambiguous comment by Roosevelt in a speech to a national conference on economic security in Washington in November 1934. "I do not know," Roosevelt intoned, "whether this is the time for any federal legislation on old age security" (Davies 1999, p. 60). The immediate uproar in the newspapers led to assurances by all concerned that old-age pensions would be included in the legislative proposal (Armstrong 1965, pp. 88-89; Brown 1965, p. 13; Schlabach 1969, p. iii, based on his interview with Latimer).
Shortly after the public phase of this dust-up ended, the corporate moderates came into the picture in a supporting role through their membership on the Advisory Council on Economic Security. According to Armstrong (1965, pp. 82-83) and Brown (1972, p. 21), they were crucial in convincing Roosevelt and Perkins to retain the old-age provisions in the legislation. As Brown recalled it:
"The likelihood of gaining the support of the Cabinet Committee for our proposals was still in doubt. At this critical time, December 1934, help came from an unexpected source, the industrial executives on the committee's Advisory Council. Fortunately included in the Council were Walter C. Teagle of the Standard Oil Company of New Jersey, Gerard Swope of General Electric, and Marion Folsom of Eastman Kodak, and others well acquainted with industrial pension plans. Their practical understanding of the need for contributory old-age annuities on a broad, national basis carried great weight with those in authority. They enthusiastically approved our program. Just as the newspaper writers had carried us through the November crisis, the support of progressive industrial executives in December ensured that a national system of contributory old-age insurance would be recommended to the President and Congress." (Brown 1972, p. 21)
Brown also summarized what he called the "American philosophy of social insurance" in a retrospective book. Echoing Cowdrick in his 1928 pamphlet for the American Management Association, Brown's (1972, pp. 90-91) emphasis was on "the need for a perpetual corporation to assure a flow of effective and well-motivated personnel for the year-by-year operation of the company." More specifically, "retirement programs with adequate pensions became necessary to prevent an excessive aging of staff or the loss of morale which the discard of the old without compensation would involve;" thus, old-age insurance was simply "a charge on current production to be passed on to the consumer"(Brown 1972. pp. 90). This is exactly the conclusion most corporate moderates and some ultraconservatives had reached by the late 1920s. It was an industrial relations plan, not a social welfare plan, as at least some historical institutionalists claim (Orloff 1993; Orloff and Parker 1990). However, as mentioned earlier, it did take the "massive shock wave" of the Great Depression (Sass 1997, p. 88), along with the grassroots efforts of the Railways Employees National Pension Association, and careful actuarial work by Latimer, Stewart, Brown, and other experts to convince the corporate moderates that they would have to realize their purposes through a narrowly circumscribed government program.
To me, this looks like a victory for the corporate moderates and their employees at the IRC. It built on private insurance company plans going back 20 years by that point and on the experience of a few big companies in the 1920s, as refined by the IRC staff. But it does not look that way to historical institutionalists. The purported independence of the experts aside, recall that they see corporate involvement as mere "strategic accommodation, driven by fear of less attractive alternatives," by which they mean a plan for guaranteed old-age pensions for everyone over age 60 that was developed in 1934 by a former physician and real estate salesman, Francis Townsend (Hacker and Pierson 2002, p. 308). To anticipate my discussion of the "Townsend movement" further down the line, let me just say that it didn't even exist on paper until the summer of 1934, while these issues were being hashed out in Washington, and it did not make its first appearance in Washington until it launched a belated letter-writing campaign in the fall of 1934.
When we turn to unemployment compensation, the other major title of the Social Security Act of theoretical interest, the story begins as another triumph for the corporate moderates and experts in the policy-planning network. Not only was Stewart put in charge of the staff study, he installed one of his co-authors from the Minnesota study, Merrill Murray, as his principal assistant, and then insisted on using employees of IRC to make the study. As Witte explained, Stewart would only take the position if he could also stay with IRC in New York and use his own staff as well:
"It developed that he did not feel that he could leave his position and would consider only an arrangement under which his work for the committee could largely be done in New York, and under which he could use his own staff to assist him. Such an arrangement was objected to by some members of the technical board, but was finally made. Almost the entire research staff of the Industrial Relations Counselors, Inc., was placed on the payroll of the Committee on Economic Security, so that the arrangement in effect amounted to employing the Industrial Relations Counselors, Inc., to make this study." (Witte 1963, p. 29)
Witte then explains a little further in a footnote:
"Dr. Stewart himself was never on the payroll of the Committee on Economic Security, pursuant to his express request. Instead, his staff was put on the payroll, with the understanding that both he and the staff would work simultaneously for the committee and the Industrial Relations Counselors, Inc." (Witte 1963, p. 29, footnote 24)
This seems to me to be a strong set of demands for a government free of corporate dominance to accept. To retain the services of the expert it needed, the CES had to hire staff members from a private firm that everyone in Washington knew to be closely affiliated with Rockefeller and Standard Oil of New Jersey, and it had to allow them to stay in New York as well. On top of that, Stewart and his staff were also consulting at the same time for Teagle, who was chair of the Business Advisory Council's newly formed Committee on Unemployment Insurance in addition to being on the president's Advisory Council on Economic Security. It therefore seems very likely that Teagle, Stewart, and the IRC were the main links in the network that included key corporate moderates and government officials on the issue of unemployment compensation. If the full network of personal and financial ties could be drawn, I think they would be at the center. The substance of the IRC memorandums cited in the remainder of this document also supports this inference.
It would thus appear the story of unemployment insurance should have a similar ending to the one on old-age insurance, but it doesn't. Stewart did recommend that unemployment compensation should be a national system, not a state-by-state one. He and his colleagues wanted to ensure there would be adequate and uniform standards of taxation and benefits, and that employees should contribute to the fund as well as employers. But these recommendations generated enormous conflict, causing the CES to change its recommendation several times. In the end, Stewart and the corporate moderates lost -- lost, mind you -- because the CES finally decided on the federal-state system favored by the AALL and Southern Democrats (i.e, the plantation owners that did not want to pay into Social Security or have their field hands collect pensions of any kind, private or public). The CES also eliminated contributions to unemployment insurance by employees and the government. Nor were there any minimum standards that states had to meet, to the chagrin of both Stewart and members of the AALL. In terms of the theoretical issues addressed in this document, the interesting question is why the corporate moderates' lost on these issues.
For now, though, we need to go back to the details on the battle over unemployment insurance, because the answer is in the details. Stewart's report first went to the Technical Board's Committee on Unemployment Insurance. The committee was chaired by Murray, the economist who had worked with Stewart on the Minnesota project and was his principal assistant in writing the report for CES. The executive secretary of the Business Advisory Council, Edward Jensen, also served on this committee, along with another one of Stewart's former co-authors, economist Alvin Hansen. In addition, the committee also included William Leiserson, the economist who was also a member of an SSRC Committee on Unemployment; economist Jacob Viner from the University of Chicago, an adviser to the Department of Treasury; and Thomas Eliot, a lawyer from a longstanding upper-class family, who worked for Perkins at the Department of Labor. No surprise, the committee was unanimous in its general support for Stewart's proposal, but differed on a few details (Witte 1963, pp. 112-113).
The committee's recommendations then went to the executive committee of the Technical Board, where Altmeyer of Wisconsin presided. The executive committee made a very general statement of endorsement, but expressed concern about the idea of any "public contribution," meaning funds from general taxes, and about the constitutionality of a national-level system. Because of this hesitation, Perkins and other members of the CES asked for more definite recommendations before they reached any conclusions. A month of discussions then followed that included experts who had not been consulted before on this specific issue, including Armstrong and Brown, who weighed in on Stewart's side. As disagreement and acrimony increased, the germ of a compromise was finally proposed. It would allow the federal government to collect taxes from employers and employees, but then return the money to the individual states "subject to the state's compliance with standards to be prescribed by the federal government" (Witte 1963, pp. 115-116). This became known as the "subsidy" plan even though there were no subsidies involved, but it was sometimes called the "federal" plan as well. Stewart, Armstrong, and Brown saw it as an acceptable fallback position because it gave some assurance of federal standards, that is, it helped insure that firms in low-wage states would not be able to undercut large national firms by paying less into the fund for unemployment insurance.
IRC Memorandum to Clients, No. 4, for October 31, provided readers with an overview of most of these issues, but first it urged its clients to keep the memorandum confidential because of IRC's direct involvement and its concern with, ahem, "possible embarrassment":
"We have refrained from comment until we could have the advantage of the discussion in meetings held during the past week. Because this organization has worked with various committees and interests, much of our information is confidential. Therefore, to avoid any possible embarrassment, we request that the following discussion be limited to confidential circulation among the executives of our client companies." (Memorandum to Clients, No. 4, p. 1)
In addition to discussing the conflicts over unemployment insurance along the lines I already have outlined, the memorandum notes that there was talk of delay for old-age insurance because "the administration is trying to improve business psychology," that is, postpone any program that business thought to be an impediment to recovery. But the memorandum is certain that unemployment insurance would be enacted in the next Congress: "At this stage the outstanding feature of the development is that some kind of legislation on unemployment insurance seems fairly certain to be enacted in the next Congress" (Memorandum to Clients, No. 4, p. 2).
The first-round success enjoyed by Stewart's plan did not last long because the unemployment insurance committee of the Technical Board reversed its earlier decision when it met again in early November. Now it unanimously supported the cooperative federal-state system favored by Roosevelt, Perkins, Witte, and the AALL. This plan differed from the federal approach in that states would collect the money and set their own tax levels and benefit payments. The Technical Board apparently was influenced by questions of constitutionality and political viability (Schlabach 1969, p. 118).
When the proposal went to the CES for a second look, the members met with Altmeyer, Hansen, Stewart, and Viner to hear a debate on the issues before making a decision. The CES members then concluded that a fully national system was out of the question, but the issue of the federal plan favored by Stewart versus the cooperative federal-state plan favored by many AALL members was left somewhat open. Nonetheless, Perkins immediately told Roosevelt the sentiment was primarily in favor of the federal-state system. Roosevelt liked that recommendation and supported it in a speech on November 14, the same speech mentioned earlier in which he gave at least some listeners the impression that the old-age insurance plan might not be included in the legislative package (Witte 1963, pp. 118-119). Put another way, it seems plausible to me that Roosevelt was using this speech to try to shape the legislation before it was sent to Congress. If so, he failed to postpone the old-age provisions. Now we shall see if he had his way on unemployment insurance.
After all, it would seem to be the end of the matter because the president had spoken. But Stewart and his colleagues would not accept the decision. The next day Stewart discussed the issue with a group of experts that he personally invited to an informal discussion. They voted 14 to 3 in favor of a national plan over a state federal one (Witte 1963, p. 121). Stewart also contacted the business members on the Advisory Council on Economic Security. Three of the five (Teagle, Swope, and Leeds) were also members of the Business Advisory Council's unemployment insurance committee for which Stewart and the IRC were serving as consultants. Stewart and Armstrong also lobbied the chair of the Advisory Council on Economic Security, who was also the president of the University of North Carolina, at a dinner party arranged by a mutual friend (Burns 1966, p. 44).
There then followed a battle within the Advisory Council on Economic Security, much to the displeasure of Roosevelt, Perkins, and Witte. The full council heard directly from Stewart, Armstrong, and Murray. Then it created a committee on unemployment insurance to draft its own proposal, with the help of Stewart and Murray. But the committee's efforts failed because the same divisions appeared within the Advisory Council when it discussed the committee report (Witte 1963, pp. 56-57). Finally, on December 9, the Advisory Council on Economic Security voted nine to seven in favor of the nationally oriented federal plan over the AALL's federal-state plan. Three liberals and the president of the AFL joined with the five business executives in supporting the federal plan. Voting in opposition to a federal plan were the representative from the Fraternal Order of Eagles, the president of the Wisconsin Federation of Labor, and the five people from charity and social work backgrounds that were not supporters of the "insurance crowd" (i.e., IRC, Stewart, and Latimer). That is, one of the corporate moderates' major problems had surfaced once again: they were not able to gain the full support of the social workers and liberals they first tried to persuade at the SSRC conference in November, 1933.
However, the corporate moderates were not deeply concerned, as Folsom explained in a long letter to Frank W. Lovejoy, the president of Eastman Kodak, after discussing the outcome of the vote:
"The Committee was almost evenly divided as to the Wagner-Lewis type [i.e., AALL type in our terms] and the subsidy [federal] type of bill. The employers all favored the subsidy type because under that plan it would be possible to set up inter-state industry funds, in which Mr. Teagle, Mr. Lewisohn, and Mr. Swope are very much interested. The subsidy plan received a majority vote but it seems that the Cabinet Committee and the Technical Board favor the Wagner-Lewis bill. We have it protected, I think, so that under either plan the plant reserve system can be set up with the decision left to the states." (Folsom 1934)
Folsom's mention of the importance of the "plant reserve system" as a fallback position if the "inter-state industry funds" were not included is an important reminder that market considerations were a major issue for the corporate moderates. They could gain a cost advantage if they maintained their workforce at a steady size and therefore have lower unemployment insurance payments than smaller companies that were more likely to take on or drop workers with small swings in demand. That is, the need to maintain a company reserve might give the big companies a competitive advantage in the pricing of their products (Swenson 2002, pp. 226-231 for a detailed discussion of this issue).
Meanwhile, the CES already had agreed to reconsider the issue even before it received the report from the Advisory Council on Economic Security. This was in part because it had received a new report sent to Roosevelt by the BAC's Committee on Unemployment Insurance, which recommend the federal plan. As might be suspected by now, the BAC report was written by Stewart (Schlabach 1969, p. 140). The CES then decided on a federal system after all, but then changed back again after floating the federal option with key members of Congress. As Perkins later explained:
"After long discussion we agreed to recommend a federal system. We went back and informed colleagues in our own Departments. Within the day, I had telephone calls from members of the Committee saying that perhaps we had better meet again. There was grave doubt, our latest interviews with members of Congress had shown, that Congress would pass a law for a purely federal system. State jealousies and suspicions were involved. So we met again, and after three or four hours of debate we switched back to a federal-state system"(Perkins 1946, pp. 291-292, my italics).
In the end, I think the corporate moderates and the IRC lost to members of Congress on the federal-level versus state-level issue, not to Roosevelt, the AALL, or those who wanted to protect the unemployment program that had been launched in Wisconsin. That is, the decision was a political one, not a constitutional one. But what were the "state jealousies and suspicions" to which Perkins alluded? Some historical institutionalists argue that supporters of the AALL and Wisconsin's state program were the key opponents, but back in those highly racist and Southern-dominated days, I doubt that anyone would have agreed with that argument. The most important opponents of Stewart's plan were the Southern Democrats, a claim I base on the objections that soon surfaced in Congress,. But let's hear first on this topic from IRC expert Murray Latimer, whose credentials on this issue include the fact that he was raised in Mississippi. He wrote as follows in a frank personal letter to a professor at the University of Virginia early in 1935 that anticipated the outcome of the congressional debate:
"Almost without exception, congressmen and Senators from the South indicated extreme skepticism of the wisdom of any legislation of a social character which would concentrate further power in Washington. Behind this feeling was obviously a fear that unsympathetic administrations in Washington would require southern states to pay Negroes a benefit which would be regarded locally as excessive." (Latimer 1935)
For me, Latimer's social background and his deep involvement in the Social Security Act clinches the case. I think he knew whereof he spoke. As with so much else in American history, and in the American present, just about anything you can think of is shaped by the intransigence of the former slaveholders and then their offspring, who used violence and voting restrictions to institute the Jim Crow segregation system that lasted until the Civil Rights Act of 1964 and the Voting Right Act of 1965. And so too it was with Social Security and other key acts during the New Deal. The Southern rich were not as rich as the Northern rich, and they were still bitter over the North's victory in the Civil War, which was burned into the upbringing of every Southern white for many generations. But they had veto power because they stuck together in one party -- their party, the Democrats. And they accumulated seniority in Congress. And they never hesitated to use the filibuster, as seen with anti-lynching laws in the 1930s, during which there were about 100 lynchings in the South. When the AALL is matched up against the Southern Democrats on issues of power, it is strictly no contest.
Stewart's opponents are more clear and visible when it comes to the rejection of his proposal to have both employers and employees contribute to unemployment insurance. Contributions by workers were opposed by both organized labor and reform-oriented social workers because they believed that unemployment was the fault of the corporations, which therefore should take full responsibility for compensating workers when they lost their jobs. In their eyes this "fact" (which was wrong, and based on a dubious analysis) made unemployment compensation different from old-age pensions, where employee contributions were considered to be fair. Unfortunately for the reformers, this line of reasoning reduced unemployment benefits, made them easier to stigmatize, and put payment levels and the number of months of coverage at the mercy of Congress in later decades. In a word, the liberal-labor "victory" over the IRC on this issue was a shortsighted one.
The failure to include employee contributions to the unemployment insurance fund is also very telling in light of Roosevelt's statement at the outset of the process that he favored a contributory plan for both old-age pensions and unemployment compensation. Nevertheless, he quietly accepted the narrow demands by the nascent liberal-labor coalition on this issue. Perhaps future commentators on the New Deal should keep this point in mind when they praise Roosevelt for claiming that he insisted on contributions by workers "to give the contributors a legal, moral, and political right to collect their pensions and unemployment benefits" and thus ensure that "no damn politician can ever scrap my social security program" (Schlesinger 1958, pp. 308-309). But workers did not contribute to unemployment benefits, at least at the outset or publicly, which was the program that seemed to be most important to him at the time. Instead, it seems likely that he decided not to challenge the liberal-labor alliance on an issue about which it felt very strongly. If that's the case, it is an example of how elected officials provide politically appealing rationales for policy outcomes that are based in power battles that the rationales obscure.
This said, the long march through the land of detail is not over yet. The legislation still has to be enacted, which means there is another opportunity to see how the corporate moderate/IRC/SSRC network did in its battle with the Southern Democrats. And even then, it's not over, because the corporate moderates won out, with a huge assist from the SSRC, with amendments that were added a few years after the original legislation passed.
The CES's overall Social Security legislation for a range of social insurance programs was introduced into Congress in mid-January, 1935, with the apparent support of a wide cross-section of the corporate community, including a committee of the National Association of Manufacturers (Brents 1984; Jenkins and Brents 1989). Then, too, a committee of the Chamber of Commerce endorsed the bill in March, 1935, while it was still being dissected by Congressional committees, and went one step further by favoring the nationally oriented federal plan for unemployment insurance that Teagle and Stewart advocated (Nelson 1969, p. 214). That's a turn of events that creates some problems for the historical institutionalists, but it was soon reversed for political reasons that are ignored in the usual tale of Social Security legislation. The plans embodied in the draft legislation also had support from reformers and labor leaders.
Nevertheless, the proposal had to survive a seven-month legislative gauntlet that included highly critical testimony by the ultraconservative National Association of Manufacturers leaders and the leaders of the organization's affiliates in leading industrial states, and then a complete redrafting in the House, and near defeats in key Congressional committees, and finally, last-minute changes in the preamble due to a Supreme Court decision (Altman 2005, for an insightful account of the legislative battles). It also faced a last-minute amendment to allow companies with their own pension plans to opt out of the government plan, which was so controversial that it almost led to a deadlock between the House and Senate. In the end, however, all of the policy provisions survived even though Southern Democrats insisted upon further restrictions on federal regulation of both the old-age and unemployment insurance provisions.
The IRC Memorandum to Clients, No. 5, provided a detailed eight-page overview of the bill for its clients on January 25, eight days after it was introduced. It then criticized the unemployment insurance plan because it would lead to 48 sets of state records, causing many costly problems in transferring files in what was coming to be a nationwide labor market. The IRC also was disappointed by the small measure of control that the federal government would have over state plans. It predicted opposition to the unemployment provisions for several reasons, all of which reflected the IRC's ongoing preferences for a national plan. The IRC also still favored a tax on employees as well as employers, and uniform federal standards that must be adhered to by all states.
The memorandum was more positive toward the old-age insurance provisions, noting that the contributions to the program were low "as compared with the pension plans of progressive companies..." (Memorandum to Clients, No. 5, p. 10). However, it did worry that the government might not be able to "assure the contractual character of this obligation so long as Congress has the power later to change the terms of the law." It also expressed concern that the bill gave "no recognition to industrial pension plans that have been adopted in several industries, and a number of which have become well established and have accumulated considerable reserves" (Memorandum to Clients, No. 5, p. 10). Within a few days, however, they saw this lack of recognition for established industrial pension plans as a very real opportunity for the companies that had them.
As Roosevelt and Perkins had feared, most of the discussion in Congress focused on old-age social insurance. This part of the legislation was explained and defended at length and in detail by Witte, Brown, and Latimer. Latimer and others believe that Witte was by far the most creditable witness for the great majority of congressmen (Schlabach 1969:144). However, Brown and Latimer's testimony is of greater theoretical interest to us because it stressed labor market concerns, which supports my claim that the program was created with industrial relations in mind, not social welfare (Graebner 1980, pp. 187-189 ). For example, Latimer's only concern was that higher benefits might be needed to induce the large number of retirements that he thought necessary to help improve the unemployment problem. (Armstrong's oral history suggests the same kind of emphasis, which is worth mentioning because she speaks from an independent perspective. She told her interviewer that the objective "was not only to protect the older worker, but it was also to get him out of the labor market" (Armstrong 1965, p. 255).)
Responding to the concerns of companies that already had their own pension plans, the IRC's Memorandum to Clients, No. 6, for February 1 1935, explained for the first time that the government plan would be less costly for these companies. It also proposed that the current company plans could be seen as supplementary to the government program, making it possible to provide more attractive pensions for higher-income workers: "The combined cost to companies of the revised company plan and the national plan would presumably be less than the cost of their present plans, since the contribution rates levied by the Security Bill are set below actual cost on the assumption that the additional amounts needed later will be drawn from general tax funds" (Memorandum to Clients, No. 6, p. 1). This memo is very important because it proves that the IRC realized there would be cost savings and the opportunities to provide better retirement benefits for executives earlier than previous accounts state (e.g., Hacker 2002; Klein 2003).
Memorandum No. 6 then explains why the employees themselves might prefer Social Security to company plans that claimed they would pay higher benefits. These reasons also are an admission of the weaknesses inherent in company pension plans discussed by Sass (1997). It first notes that there is an "absence of real guarantees" in company plans, which is a damning admission if there ever was one. Second, it notes that there had been "widespread cuts in the amounts paid to pensioners and reductions in the rate of pension which have occurred during the past four years," which is an admission that many company plans were not actuarially sound over the long run (Memorandum to Clients, No. 6, p. 2).
Memorandum to Clients No. 6 is also important because it provides the first mention of "contracting out," which would "permit a company to operate a separate plan outside the federal scheme if it is in no way less favorable than that of the government and has its current credits fully financed." The memorandum concedes that such a provision would have "a decided appeal from the industrial relations viewpoint of the individual company," implying that privately controlled pension plans might help the company in retaining and restraining employees. But it then adds "we understand that the experts who drafted the bill believe such a provision would weaken the effectiveness of the measure for the great number of wage earners who are not under company plans" (Memorandum to Clients, No. 6, p. 2, my italics). In other words, the IRC experts, as exemplified by Latimer and Stewart, had decided that contracting out was not a good idea for the corporate community. The memorandum then added that a separate plan would be burdensome besides: "Certainly the inclusion of the proposed provision would be accompanied by requirements for financial guarantees from the companies of a character that might prove burdensome and difficult to meet and to that extent would lessen its acceptability" (Memorandum to Clients, No. 6, p. 2).
These comments are part of a process of disseminating a new perspective within the corporate community, starting with the Rockefeller-related oil companies and the large companies with membership in the Special Conference Committee. They are also the first of several pieces of evidence that the historical institutionalists who have written in the most detail about the origins of the Social Security Act are wrong when they conclude that most of the corporate moderates were in favor of contracting out because of their alleged continuing opposition to federal old-age insurance (Hacker 2002, p. 101; Orloff 1993, p. 293).
The depth of the IRC experts' concern over contracting out is revealed in a letter that Brown sent to Witte shortly thereafter, on February 13, reporting on what he had learned through his discussions of contracting out with corporate executives at the annual meetings of the American Management Association. Once again serving as the eyes and ears of the Rockefeller group, Brown reported that most of the executives understood that this provision was not to their advantage. He also had learned that the Philadelphia insurance agent who was lobbying for the idea, Walter Forster, had very little support among insurance agents or the large insurance companies, with the exception of Prudential and Metropolitan:
"The Prudential Company has been rather inept in the matter and I think that you will find that the dozen or more companies other than the Prudential and the Metropolitan are not particularly in sympathy with the tactics of those two companies. I heard in Pittsburgh, however, that the Metropolitan, at least on the surface, is saying the bill will be a boon to the insurance companies in expanding the demand for supplementary group annuity contracts. Both the Prudential and the Metropolitan are somewhat frightened by the threat of investigation of industrial insurance, and may not be as anxious to push the amendment on account of a backfire in this respect" (Brown 1935a).
Brown had further encouraging conversations that he reported on in a letter to Witte on February 23. The list of companies he provides that lacked interest in contracting out is long and impressive:
"I am continuing to receive word from industrial relations executives of their lack of interest in the contracting out amendment. Confidentially, the last word I had was from Art Young, Vice-President of the United States Steel Corporation. [Brown is referring to Arthur Young, the former head of IRC, who had moved to U.S. Steel in 1934 to help the company fight off unions.] I have been in touch also with the American Telephone and Telegraph Company, Socony-Vacuum, DuPont, United States Rubber, Union Carbide and Carbon, Western Electric, and a number of other companies. The men in question are the chief personnel officers, and since I have known most of them for six or eight years, I have confidence in what they tell me." (Brown 1935b)
While committees in the House and Senate were deciding whether to permit the report from the Committee for Economic Security to be voted upon by the full House and Senate memberships, Stewart and the SSRC hosted a conference in Atlantic City on March 22-23. It was the outcome of the funding request they had submitted in spring, 1934, when they had anticipated that amendments to the final legislation would be necessary. This conference unanimously recommended funding for studies of the soon-to-be social security administrative board. Two SSRC committees, the Committee on Public Administration and the Committee on Social Security, would carry out the studies. The Rockefeller Foundation immediately gave approval to this request, which led to donations of $611,000 between 1935 and 1940 ($10.3 million in 2013 dollars) (Fisher 1993, p. 139). (The impact of the SSRC's Committee on Social Security is discussed later in this document.)
Shortly after the SSRC conference, the IRC's next Memorandum to Clients included two attached statements from (unnamed) insurance companies stating their belief that the legislation will "result in renewed appreciation and greater stimulation of life insurance activities both individual and group rather than the reverse" (Memorandum to Clients, No. 9, March 27, 1935, p. 8). This is further evidence that the IRC and at least some insurance companies understood the potential of the Social Security Act before the date claimed by historical institutionalists.
At the same time as the IRC and the insurance companies were realizing that contracting out was not a good idea, the administration's general legislative proposal was being totally rewritten in the House Ways and Means Committee for reasons that had nothing to do with IRC and the insurance companies. Minimum benefits and merit hiring of state-level administrators were eliminated at the insistence of Southern Democrats on the committee, which is of course further good evidence for an emphasis on their power during the New Deal (Witte 1963, pp. 125, 143-145).
The IRC's Memorandum to Clients, No. 10, dated April 10, provided a thorough summary and evaluation of the revised legislation that the Ways and Means Committee introduced into the House on April 4, starting with the fact that the title had been changed from the Economic Security Act to the Social Security Act. It noted that the unemployment section of the new bill "makes no provision" for any of the major concerns expressed in Memorandum to Clients, No. 5, leaving that portion of the legislation very unsatisfactory:
"Coverage is reduced and federal supervision of state personnel is struck out. In short, the principles of board coverage and competitive equality insisted on at the outset have been violated while a door has been opened to permit political appointments and high administrative costs." (Memorandum to Clients, No. 10, p. 2)
There were also changes in the plans for old-age insurance that did not meet the IRC's expectations. For example, benefits would now be higher for low-wage workers than they were in current company plans and lower than they would be for high-wage workers. Death benefits would now be higher than planned after short periods of employment and lower than after lengthy periods of employment.
When the revised legislation reached the House floor on April 12, 1935, it first had to survive two brief challenges -- one by the Communist Party, the other by the pressure group for the elderly called the Townsend Plan. Both received attention in the media at the time and subsequent attention by historians and social scientists, but in fact neither alternative had any chance of passage or any influence on the proceedings. The Communist bill, with a sweeping call for a guaranteed annual income adjusted for region of the country, received only 40 votes, and the Townsend Plan, which originally called for payments of $200 per month to every person over age 60, with the proviso that all of it be spent within the month, only received 56. Moreover, over half of the votes in both instances came from conservatives who opposed any form of government social insurance (Witte 1963, p. 99). If the votes on the Communist and Townsend bills are any indication, there were not more than 15 to 20 representatives in the House who stood to the left of the New Deal.
However, as already noted, historical institutionalists put great emphasis on pressure on Congress from the Townsend Plan, so more should be said about it. They think the threat from this plan, which they wrongly call a "movement," frightened the corporate moderates and conservative members of Congress alike. In fact, it's why the corporate moderates made their "strategic accommodation." They were "driven by fear of less attractive alternatives" (Hacker and Pierson 2002, p. 308).
The Townsend Plan ballyhooed by several historical institutionalists as having a big impact on the passage of the Social Security Act (e.g., Hacker 2002; Hacker and Pierson 2002; Weir, Orloff, and Skocpol 1988) was formalized in early 1934, several months after a 66-year-old physician, Francis Townsend, recently eased out of his city government position, wrote a series of letters-to-the-editor that appeared in a newspaper in Long Beach, California. The letters simply presented his own version of various plans that were being discussed in retirement communities in that city and nearby Los Angeles (Bernstein 1985, pp. 61-66 for a colorful and informative portrait of Townsend). Townsend suggested that in order to revive the economy and at the same time help the elderly, the federal government should give $200 a month to every American citizen over age sixty, on the condition that they would retire, thereby making room for younger employees, and spend all their pension money by the end of each month. The funds would come from a new 2% sales tax. (Later the plan called for a more general transaction tax, roughly akin to the value-added tax (VAT) that is now used in many European countries.)
|Decorative stamp created by supporters of the Townsend Plan|
(click to enlarge)
Based on an enthusiastic local response to his letters, Townsend and one of his former real estate partners incorporated his plan as a non-profit organization. It was only in the summer of 1934 that they began to set up local clubs and publish a newsletter. Moreover, their efforts did not grow immediately and there were very few Townsend clubs in late 1934, especially outside of California. So the Townsend Plan was hardly in a position to influence or scare the Social Security drafters, who had nearly completed their old-age insurance proposal at that point. However, Witte did keep a close eye on the rise of the Townsend Plan, and personally worried that it might eventually prove to be troublesome.
The Townsend Plan made its first splash in late November 1934, with a barrage of letters against omitting the old-age provisions from the Social Security Act. It might seem that these letters may have had some impact, but according to more recent and detailed work on the Townsend Plan by sociologist Edwin Amenta (2006, p. 76), himself a longstanding historical institutionalist who rejects any significant role for corporate leaders, the letters began to arrive well after Roosevelt and Perkins had given public assurances that those provisions would be included.
Despite the fact that the Townsend Plan's total membership and ability to lobby were not as impressive even in early 1935 as they appeared to be in some media accounts, Townsend himself was able to draw national media attention during the Congressional debate over the Social Security Act. He was even invited to testify before House and Senate committees in February, where his lack of specifics, or even a clear understanding of his own plan, proved to be an embarrassment. Although the plan suffered a resounding defeat a month after his testimony, one trio of historical institutionalists (Weir, Orloff, and Skocpol 1988) claim that the Townsend Plan did have an impact in Congress because it had membership groups in many congressional districts that might challenge those legislators that opposed the plan. This claim is contradicted by another fact reported by Amenta (2006, p. 98): at that time the Townsend Plan "had little presence outside the far West and had not yet decided on targeting congressional districts."
Given all this evidence that the Townsend Plan was too late and too weak to matter much beyond media chatter, it is interesting that Witte (1963, p. 103) would mention it in mid-May, well after it had been completely rejected in the House, when he was asked by members of the Senate Finance committee to present the best argument he could for the administration's old-age social insurance proposal. In reply, he said that something like the Townsend Plan might be forced upon Congress if the administration's bill did not pass. This sounds like bogey man stuff to me, but this rhetorical assertion is taken at face value by political scientists Jacob Hacker and Paul Pierson (2004, p. 187) when they allege the influence of "well-organized populist challenges, such as the Townsend Movement for old-age pensions." Contrary to their claim, Amenta concludes that Townsend Plan had little or no impact on the passage of Social Security legislation:
"...it is difficult to identify anything the Townsend Plan did in Washington that buoyed old-age benefits. Almost all the beneficial effects of the Townsend Plan on old-age policy would doubtless have materialized regardless of whether its leaders had drafted the McGroarty [the sponsor of the Townsend Plan in the House] bill, come to Washington to testify and lobby for it, induced Townsendites to threaten legislators to pass it, to amend it, and to attack the security bill and support no alternatives, as they did." (Amenta 2006, p. 96)
The way I read it, that summary quote is devastating to all previous claims by historical institutionalists about the alleged effects of the Townsend Plan. There's no evidence that its bill-drafting, testifying, lobbying, or threatening had any impact.Furthermore, I think it is a stretch to use the phrase "the Townsend movement" (Hacker and Pierson 2002, p. 308). A social movement involves collective opposition to established rules and customs by people who have organized to make sustained challenges against elite opponents and authorities, and such challenges usually involve social disruption, whether violent or nonviolent (e.g., Tarrow 1994). But the Townsend Plan did not involve its elderly members in rule-breaking, let alone marching and demonstrating. It was just a traditional interest group -- a narrow group that seeks to influence specific legislative issues of concern to it. To call the Townsend Plan a "movement" drains the concept of any real meaning beyond the idea of interest groups and pressure groups long familiar and carefully studied in political science.
The Senate Finance Committee, which Witte feared as the biggest threat to the legislation because it contained many Southern conservatives, finished its hearings in February, but then postponed further action on the Social Security proposal until April. It did not approve a report until May 17, after coming within a vote or two of stripping the bill of old-age insurance. During the final weeks of deliberation, a new element was added to the picture when corporate anger over the imminent passage of the National Labor Relations Act spilled over to a harsh attack on the Social Security Act in early May. It came from the newly elected ultraconservative president of the Chamber of Commerce at the group's annual meeting in Washington, who had replaced a corporate moderate. The attack came as a surprise because the previous Chamber leadership had been quietly accepting of the Social Security Act.
And then something interesting happened that shows that more than just Teagle of Standard Oil, Swope of GE, and one or two other corporate moderates were for the Social Security Act. In response to the new Chamber president's criticism, the BAC decided that it had to restate its support for Social Security by going to the White House the next day, despite its opposition to the National Labor Relations Act. "Business Leaders Uphold President," said the New York Times headline on page 1 on May 3. Among the 20 people appearing at the White House were, first and most symbolically, the outgoing Chamber president, who was also a Boston utility company executive. Next in symbolic importance might be the head of Chase National Bank, the largest bank in the country at the time (now part of JPMorgan Chase), who was also John D. Rockefeller's brother-in-law. The top partners in two Wall Street investment banks, Brown Brothers Harriman and Goldman Sachs, were present, along with the presidents or chairs of Remington Rand, Kennecott Copper, United States Rubber, Cannon Towels, Procter and Gamble, Lambert Pharmaceutical Company, and the Mead Corporation (Domhoff 1970, pp. 214-215 for the full list of names and corporate affiliations).
In the aftermath, but probably not because of the BAC, the Senate Finance Committee's bill ended up much improved over the version passed by the House, in spite of Witte's fears. According to the IRC's Memorandum to Clients, No. 12, for May 27, 1935 (p. 1), The Senate Finance Committee "restored to the bill several features that appeared in it originally but were omitted in the House draft." This may have been in good part because the Southern-dominated committee was extremely impressed by the testimony of their fellow Southerner, Folsom of Eastman Kodak, which led to changes in the details of the bill's unemployment provisions that were more in keeping with the corporate moderates' top preferences (Jacoby 1993; Jacoby 1997, pp. 211-212; Swenson 2002, p. 228-229).
The bill also had a new preamble due to a Supreme Court decision in early May declaring the Railroad Retirement Act unconstitutional. Because the reduction of unemployment and the efficiency and morale of the workforce could no longer be considered to be within the purview of the constitution, the emphasis in the revised preamble was on the country's general welfare. This change, which obscured the major role of industrial relations experts such as Latimer and Stewart in writing the act, was made because the constitution allows the government to support the general welfare through its taxing power:
"Now, to achieve the original purpose, the administration turned to the taxing power and the general welfare clause of the Constitution. In the process, the ideology of social security was given formal sanction. After May 1935, proponents of retirement legislation talked less about efficiency, economy and unemployment relief than about social security and the needs of older workers, which were now a central policy goal rather than ancillary to some larger purpose." (Graebner 1980, pp. 162-163)
Put another way, the Social Security Act was concerned with labor relations, but that fact could not be stated directly due to the composition of the Supreme Court and the nature of its past decisions. It was therefore necessary to refer to the general welfare clause. With the role of industrial relations experts in creating the Social Security Act soon lost from view, the preamble and subsequent accounts of the Social Security Act by liberal historians opened the way for the claims about the role of social workers that appear in the first full-length treatment of the Social Security Act by a historical institutionalist (Orloff 1993).
|Bennett Champ Clark|
Just as the bill was about to pass the Senate, it faced one final obstacle: an amendment to allow the "contracting out" for companies with established pension plans that was so vigorously opposed by IRC and most of the corporate moderates interviewed by Brown a few months earlier. The amendment was formally offered by a conservative Democrat from Missouri, Bennett Champ Clark, so it came to be called the Clark Amendment. From the point of view of the corporate ultraconservatives and the Senators that opposed the whole social insurance program, the amendment was a perfect way to undercut the Social Security Act without voting against it. Despite protests from Roosevelt and Perkins, along with actuarial arguments against the amendment by Witte and other experts, it passed by the wide margin of 51 to 35 on June 19, followed by passage of the act in general by a 77 to 6 vote the same day (Witte 1963, p. 106). The large vote for the Clark Amendment is revealing -- and supportive of my general analysis -- because it underscores the power of Southern Democrats and others sympathetic to corporate ultraconservatives in a seemingly liberal Senate.
|FDR signing the Social Security Act|
(click to enlarge/expand)
Roosevelt then made it clear that he would not sign legislation that included the Clark Amendment because it would create major actuarial and administrative problems, especially when companies -- or their pension plans -- went bankrupt, or when employees left companies that had private pension funds before their retirement age. The standoff led to a two-month delay while the Congressional conference committee argued about the issue and searched for a compromise. Congress finally agreed that the bill would be passed without the Clark Amendment, but with the provision that the Clark Amendment would be reconsidered in the next session of Congress after experts had a chance to see if contracting out could be made compatible with the overall system. Roosevelt signed the legislation on August 14.
The IRC sent out a brief summary of the act's provisions on August 16, so it was Johnny-on-the-spot. The memorandum first repeated its disapproval of the Clark Amendment, concluding, "it seems clear that from the practical operating viewpoint such companies would have nothing to gain from the amendment" (Memorandum to Clients, No. 14, p. 1). It then noted that members of the IRC staff were meeting with "the representatives of leading insurance companies and other interests concerned primarily with the sections on pensions." Finally, the memorandum announced that the organization already was working on supplemental plans:
"Industrial Relations Counselors is now engaged in the formulation of several types of private plans which will supplement the pension benefits provided under the federal scheme and more adequately cover employees in the higher salary brackets. Our recommendations on future procedure may vary as between companies installing a plan for the first time and companies that have operated a formal plan for some years" (Memorandum to Clients, No. 14, p. 1, my italics).
This brief memorandum was followed on August 23 by a longer and more reflective one, No. 15, which nicely reveals the corporate moderates' viewpoint and presages their agenda for defeating the Clark Amendment. By and large, IRC experts were satisfied with the overall legislative outcome, calling it a program that "will increase mass purchasing power and act as a shock absorber for our economic system," which makes them sound like proto-Keynesians (Memorandum to Clients, No. 15, p. 2). The memorandum also said that the old-age pension provisions "were much better drawn than the unemployment compensation phase," a conclusion that comes as no surprise because IRC experts -- and their ally, Barbara Armstrong -- wrote them (Memorandum to Clients, No. 15, p. 3). This satisfaction with federal old-age insurance is further support for the conclusion that IRC experts were involved in creating it.
In addition, the memorandum also contained some surprisingly moderate and even progressive comments that explained the empirical basis for their policy analyses. For example, the report said that IRC's cross-national studies of social insurance systems convinced its authors "that a very considerable proportion of the costs must be borne by the public treasury," which put them in greater accord with the social workers than originally seemed to be the case (Memorandum to Clients, No. 15, p. 3).
The summary also contained several criticisms of the Clark Amendment that past memorandums had refrained from mentioning because the IRC's leaders wanted "to avoid any comment which might have been misconstrued as being political argument..." (Memorandum to Clients, No. 15, p. 6). First, contracting out would be more costly for corporations by as much as 33% to 100%. Second, the need to make back payments to the government for "each employee leaving a company before retirement age would subject a company fund to an unpredictable cash withdrawal, which would tend to force investments into a form suitable for commercial banks rather than proper insurance investments" (Memorandum to Clients, No. 15, p. 7). Third, private plans would have "burdensome administrative and reporting problems" so that the government could oversee them properly. Finally, the existence of private plans "would tend to weaken the actuarial basis of the government old-age benefit plan" due to the fact that companies with the lowest costs were most likely to set up their own plans, leaving the government "to deal with the poorest risks" (Memorandum to Clients, No. 15, pp. 6-7).
This list of objections to the Clark Amendment was the opening salvo in the effort to make sure that it was not adopted. In the end, no substitute for the Clark Amendment was ever offered, but the behind-the-scenes effort to deal with it will be discussed in the next section because it provides further evidence for the power of the corporate moderates in and around the Rockefeller/IRC/SSRC network.
But first, a paragraph or two by way of summary and reflection on this detailed account of the origins of the Social Security Act. Yes, the process was long and drawn out, but the final outcome fits well with the idea that corporate moderates created its most important principles. It also shows they did the "state-building" in this case that is claimed for state officials by the historical institutionalists. Along the way, restive workers made their presence felt through the grassroots activity of the Railways Employees National Pension Association, and the AFL demonstrated its power on the Social Security Act by helping to foist its crabbed, non-systemic view of the economy into the provisions for unemployment insurance by shortsightedly rejecting contributions by workers. As for liberals and social workers, they wanted something better and more generous than the corporate moderates' plans, but they ended up as lobbyists for the plan that emerged from the policy-planning network. Finally, the agitation and plans from the Communists and Townsend Plan advocates, while drawing headlines at the time and many academic what-if and if-only analyses decades later, had little or no impact on the formulation or passage of the act (Manza 1995, p. 345 for a similar conclusion about the Townsend Plan).
As for the Southern Democrats, they were the Disposers. They were the reason why agricultural and domestic workers were not covered by old-age insurance until 1950, even though an early study by the Committee on Economic Security's research staff said that such coverage was feasible (Alston and Ferrie 1999). And as I said earlier, the legislative battles in Congress strongly suggest that the Southern Democrats were the main reason why unemployment insurance was placed under the control of the states. Southern Democrats also eliminated the civil service requirements for the staff that administered the programs and any minimal federal standards for payment levels, which both the IRC experts and the AALL reformers favored. This allowed the representatives of the plantation owners to put their local cronies in charge of agencies and keep benefit payments low enough to maintain full control of their workforce (see Quadagno 1988, for detailed information on the powerful impact of the Southern Democrats on this legislation). In the end, then, it was a battle between corporate moderates and the fledgling liberal-labor alliance on the one side and ultraconservative corporados and plantation owners on the other. The corporate moderates and their hired experts shaped the general act, but the Southern Democrats carved out the exceptions the plantation owners wanted.
No sooner did the Social Security Act pass than the corporate moderates and their experts began to make plans for the several changes that had to be made to make the legislation fully to their liking. The way in which those changes were worked out is highly revealing in terms of the role of the policy-planning network in implementing social policies that are favored by the corporate moderates, and once again leaves the historical institutionalists with egg on their faces. In this instance, two SSRC committees, the Public Administration Committee and the Committee on Social Security, were the key links with government, but it is also noteworthy that the Rockefeller Foundation was standing behind them with both advice and money (Fisher 1993). Since the SSRC and the Rockefeller Foundation are not corporations, and include many experts, they provide the escape hatch for the historical institutionalists. Even with all that egg on their faces, they continue to insist that all this was the work of independent experts (Hacker 2002)
But notice that the IRC is not mentioned in the previous paragraph, and that's for a reason. The Rockefeller Foundation and the SSRC committees gradually edged the IRC, and Stewart in particular, to the sidelines precisely because they were too closely identified with employers. However, this decision did cause hard feelings, which we know about due to two letters I found in the Rockefeller Archive Center. The first was sent by Stacy May, the coordinator for public administration programs for the Rockefeller Foundation, to Joseph P. Harris, the research director for the SSRC's Public Administration Committee. May told Harris that "it is entirely sound for you to attempt to straighten out on the feeling of strain between your committee and the Industrial Relations Counselors" (May 1936). May then stated the basis for the tension, namely, a decision to give the SSRC the visible role because it would have more legitimacy as a disinterested source: "It seems to me clear that your group is much more apt to be accepted than the Industrial Relations Counselors as an objective body the advice of which might be of service to the Social Security Board" (May 1936). So any corporate involvement would be one step removed, and therefore it's no wonder the historical institutionalists can't see any corporate leaders.
Nonetheless, the IRC would continue to be valuable, the letter continues, because it had compiled very useful information and might be helpful in reassuring reluctant companies that it made sense to support the Social Security Administration:
"On the other hand, the Industrial Relations Counselors has done an impressive amount of work in the field and, as I have reviewed their publications recently, it seems to me that they have collected a considerable amount of material even on the detailed administrative aspects of the problem such as forms, etc. Furthermore, the field is so huge that I am all in favor of having everyone who is equipped to make any contribution to it proceed to do so. Everyone, I suppose, accepts the fact that administrative procedure will not get very far unless it is able to win the support of industrial groups, and it is likewise agreed that those industrial groups have a considerable experience which may be drawn upon for guidance in the operation of their own pension schemes, etc., because of the fact that many of the largest firms have operated abroad and have had actual experience in working under social insurance schemes of a number of types. If, then, the Industrial Relations Counselors are interested in continuing their past work and have the resources to do so it would seem to me that they might be encouraged to make it their special task to see that the industrial side of the case is heard and that the industrial experience is available" (May 1936).
If that's not enough, there's more. According to a memo on March 26 to top foundation officials from one of their employees, John Van Sickle, who was associate director of the foundation's Division of Social Sciences, and its major contact with the SSRC's two committees, Stewart probably came to terms with the new arrangement:
"I lunched today with Bryce Stewart. The main purpose of the meeting was to discover to what extent he felt aggrieved by the Foundation's recent action in appropriating funds for the investigations of the Public Administration Committee notably in the field of unemployment insurance administration and employment office procedures. He appeared to have accepted our action as evidence that it would not be feasible for him to push ahead with his own project." (Van Sickle 1936)
Van Sickle's two-page memo, which is also of interest because it once again spotlights how the Rockefeller Foundation combined money and information to play a pivotal role in the implementation of the Social Security Act, then went on to summarize the work that the IRC was doing and discuss how that work might fit into the SSRC committees' larger plans. A possible grant request to the foundation from Stewart is mentioned, along with the fact that the IRC would remain valuable in advising employers about meeting the requirements of the Social Security Act. In short, the IRC and Stewart would now have a more peripheral role than they did in the drafting of the act.
More bluntly, these memos show beyond the shadow of a doubt that the Rockefeller Foundation was running the whole show at this point, but it doesn't count as evidence for my views in the eyes of historical institutionalists because it is not a corporation. And its chair, John D. Rockefeller, the richest person in America at that point, doesn't count because he's not a corporate executive, only a rich owner. However, the president of the foundation at that point, Rockefeller lawyer Raymond B. Fosdick, does count because he was a director of three relatively small Rockefeller companies. And then there are were other business leaders on the foundation's board, such as the heads of General Electric and Chase National Bank; and corporate lawyers, such as the 1924 Democratic presidential candidate and the future of Secretary of State (in the Eisenhower Administration).
Although the SSRC's Public Administration Committee made many contributions to the development of the Social Security Board between 1935 and 1937, its Committee on Social Security took primary responsibility for Social Security in 1937 so that the Public Administration Committee could concentrate on other governmental issues. In 1937-1938 industrial relations expert Joseph Willits of the Wharton School, whose work with the Rockefeller industrial relations experts and the SSRC reached back to the early 1920s, took over as chair of the Committee on Social Security. In addition, J. Douglas Brown joined the committee and thereby provided another close link to the Rockefeller industrial relations circle, and to the staff that wrote the Social Security Act as well; he became chair of the committee the next year. The committee also included an AT&T executive, Chester I. Barnard, who was the president of New Jersey Bell Telephone; he had made somewhat of a scholarly name for himself with his lectures on enlightened management that became a Harvard University Press book entitled The Functions of The Executive (1938). (A few years later, he became a trustee of the Rockefeller Foundation, and then its president in 1952.) The other member from the corporate community was Albert Linton, the president of a major insurance company in Philadelphia, Provident Mutual Life. In addition to Brown, there were three other university professors with expertise on unemployment or old-age benefits, along with the director of the Russell Sage Foundation, the head of the railway and steamship clerks union, and representatives of the American Public Welfare Association and the American Association of Social Workers.
There is evidence that the officers of the Rockefeller Foundation were "exerting direct control over appointments to the committee" (Fisher 1993, p. 148). For example, they vetoed the idea of including Leo Wolman, a professor of economics at Columbia who served as an advisor to Hillman of the CIO. Instead, the union leader for railway and steamship clerks was appointed. Then, too, the SSRC accepted a Rockefeller Foundation suggestion that a representative of the American Public Welfare Association be added to the committee.
The first key issue facing the SSRC committees concerned the defeat of any attempt to revive the Clark Amendment. The task was assigned to the Committee on Social Security, which hired a highly respected actuarial expert, Rainard B. Robbins, who had first worked on old-age pensions for the Carnegie Foundation for the Advancement of Teaching 15 years earlier. Robbins began by writing to the industrial relations officers at a wide range of companies, along with the relevant executives at six major insurance companies, to find out if they were favorable to the amendment. The way in which he operated can be seen in an exchange of letters he had with Marion Folsom of Eastman Kodak, who had served to the Committee on Economic Security's Advisory Council on Social Security.
Robbins' letter to Folsom on December 16, 1935, began by calling attention to the well-known people who served on the committee: "The Committee indicated by this letterhead has asked me to find for them, if possible, the views of a number of leading employers with reference to a provision for "contracting-out" in the old age annuity sections of the Social Security law" (Robbins 1935). He then asked if Eastman Kodak had "reached a decision as to how it will modify its retirement plan, if at all," and invited Folsom to lunch if he happened to be coming to New York City in the next few weeks.
Folsom replied two days later saying he would be happy to discuss the issue, but first he noted that "I was quite interested in seeing the personnel of your committee; it is a high-grade committee and I am sure that this investigation will be very helpful" (Folsom 1935). He then went on to say he had originally supported the Clark Amendment, but that he had changed his mind because of the headaches of transferring funds to the government when an employee leaves before retirement and of dealing with government oversight. (Please recall that these two issues were among the concerns mentioned in the IRC's Memorandum to Clients, No. 15.). After noting that Eastman Kodak already had supplemental plans to attract higher-wage workers to its factories in France, Belgium, and The Netherlands, where government pensions were low, Folsom said that the company would turn its current American pension plan into a supplemental plan.
According to the report written by Robbins (1936), there were many executives with views similar to those expressed by Folsom. Of the seventeen who were acquainted with the details of the amendment, thirteen were opposed to it, two were working to improve it, and two were undecided. When Robbins asked executives if they were aware of the various restrictions and standards built into the amendment, he learned that most of them replied, "I had not thought of that" (Robbins 1936, p. 9). Based on this line of questioning, maybe we can infer that the questions asked by Robbins were also meant to educate executives about the amendment and to discourage them from supporting it.
In the case of insurance companies, Robbins found that five of the six had "no enthusiasm for the Clark Amendment" (Robbins 1936, p. 22). However, they did favor "the general idea of an employer being permitted to conduct his retirement plan independently of the government plan if a way can be found" (Robbins 1936, p. 9). At the same time, they did not see any practical way to improve upon the unsatisfactory Clark Amendment, so they were advising corporate employers to develop plans that supplemented the government plan (cf., Klein 2003, Chapter 3). Most corporate executives caught on fast, although a few ultraconservatives used the passage of the Social Security Act as an opportunity to shrink their plans (Quadagno 1988, p. 118).
Robbins' findings were made known to both friends and critics of the Clark Amendment. In addition, they were used by Latimer as one basis for a report he submitted to the Social Security Board on March 23, 1936. Latimer also drew upon his own personal discussions with executives and a letter to him from Brown, which reported that he had talked to "scores" of executives on a visit to several western states, but found "never even a wishful thought for the Clark Amendment." (Brown then added "I think Forster [the insurance agent who led the lobbying effort for the Clark Amendment] and Graham [an executive for one major insurance company] will have something to explain away" (Brown 1935c). Latimer concluded his memorandum summarizing what he had learned from Brown's letter, the SSRC report, and his own inquiries by asserting that "With the possible exception of Standard Oil Company of New York, I know of no industrialists favoring the Clark Amendment, if such amendment has all or most of the following features" (Latimer 1936, p. 1). The report then lists several basic features, such as being at least as favorable as the Social Security Act.
When it came time for a joint Congressional committee to convene in the spring of 1936 to discuss the Clark Amendment, the meeting was cancelled. According to the recollections of one labor department lawyer assigned to help draft a new version of the Clark Amendment, the meeting was cancelled because Forster and the insurance companies that had sided with him no longer had any interest in it (Eliot 1992, p. 130-131). I therefore conclude yet again that the advantages of accepting and then building upon the government's social security program were understood by corporate moderates and their experts earlier than historical institutionalists realize when they overlook the role of the IRC in creating the Social Security Act and of the SSRC in its implementation (e.g., Hacker 2002; Hacker and Pierson 2002; Klein 2003).
Once the Clark Amendment was finally out of the way, SSRC committee members could turn their full attention to providing advice on Social Security Board procedures and suggesting changes in the Social Security Act. The SSRC also arranged "for the employment of people when the government was unable to hire [them] because of the inflexibility of federal personnel recruitment or because of the restrictions against the employment of noncitizens" (Fisher 1993, p. 155). Even before the Social Security Board was established, the Committee on Social Security was providing technical assistance and helping with the selection of personnel: "The committee assisted in the selection of personnel, brought together officials and nongovernmental experts, advised on research plans generally, and, on the details of specific studies, called attention to sources of pertinent data or accumulated experience, participated in innumerable technical conferences and discussions, and facilitated interagency coordination" (Fisher 1993, p. 150).
In addition to the massive informational, organizational, and staffing problems that faced such a major undertaking, the SSRC committees and the Social Security Board had to deal with the many criticisms that had been raised about the program by organized business, liberals, social workers, and supporters of the Townsend Plan and similar senior citizen pressure groups. (These pressure groups had gained strength, not lost it, after the passage of the Social Security Act, and often were able to directly influence state legislatures to improve their old-age assistance programs; this meant they were in a position where they could have an indirect influence on the Social Security Board and Congress to improve benefits (Amenta 2006, Chapter 7, especially p. 173).) Corporate leaders were most exercised by the reserve fund that Roosevelt and his secretary of treasury had insisted upon at the last minute so that general tax revenues would not have to be used to finance the program decades later. They first of all worried that a large reserve fund would lead to pressures to raise benefits or be used to buy public enterprises, a concern that Teagle (1935) expressed to Swope three years earlier. They also feared that the money might be used to help pay for other government social welfare projects, such as public housing.
On the other side of the fence, liberals, social workers, and advocates from old-age groups wanted to raise pension payments and extend them to more occupational groups than were originally covered, including the self-employed, agricultural workers, and domestic workers. Most worrisome of all to the centrist social insurance experts and leaders of the Social Security Board, many social workers and liberals wanted to merge the old-age insurance program with the old-age assistance plan for those who had not earned enough money over the years to qualify for old-age insurance. The centrists rejected this option, also supported by the Townsend Plan and its imitators, as a form of welfare that could be easily stigmatized and cut back by conservatives. Furthermore, the social workers still wanted to pay for this generous old-age benefit for everyone out of general tax funds.
In the face of the corporate community's criticisms of the reserve fund, which were soon voiced by Republicans in the Senate, the Social Security Board's chair, Arthur Altmeyer, Perkins's former assistant in the Department of Labor, reluctantly agreed in 1937 to a temporary Advisory Council that would examine the issues closely and recommend any needed amendments to Congress. J. Douglas Brown, still serving on the SSRC's Committee on Social Security, became chair of the twenty-five-member Advisory Council, and one other member of the Committee on Social Security, Linton of Provident Mutual Life, joined him. The committee also included six other business leaders in addition to Linton (Swope and Folsom were among them, along with a high executive from U.S. Steel). Six union representatives were appointed, three from the AFL and three from the CIO. There were six other professors in addition to Brown, including Witte, by this time back to teaching economics at the University of Wisconsin, and economist Alvin Hansen, a former member of the Technical Board, from Harvard. The general secretary of the National Consumers' League was appointed, along with a recent president of the Association of Schools of Social Work.
Based on historian Edward Berkowitz's (1987, pp. 62-66) analysis of the Advisory Council's minutes, which were almost verbatim transcripts of the meetings, Witte, Linton, Folsom, and Brown took the lead in the arguments and compromises, with the labor leaders once again seldom attending meetings and having very little impact, just like in 1934-1935. It seems likely, then, that the historian who studied the issue from the perspective of the Rockefeller Foundation's internal documents and exchanges with the SSRC's Committee on Social Security, Donald Fisher (1993, p. 155), is correct when he concludes that research and reports by the Committee on Social Security "laid the basis for the 1939 amendments to the Social Security Act." For example, in a study similar to the earlier analysis of business leaders' attitudes toward the Clark Amendment, the Committee on Social Security surveyed organized labor, insurance companies, and other businesses on their attitudes towards various proposed modifications of the act, which very likely provided Brown and Linton with a good sense of what amendments would be acceptable to all parties.
After months of negotiations, usually with Witte in one corner and Linton and Folsom in the other, Brown was able to fashion a compromise that satisfied just about everyone. To begin with, all parties agreed that the reserve fund should be whittled down to a "reasonable contingency" size by several means. They included raising benefits, providing higher benefits for married couples, extending benefits to widows at age sixty-five and to the dependent children of deceased recipients, and starting to pay out benefits in 1940 rather than waiting until 1942, as originally planned (Berkowitz 1987, p. 72). Furthermore, all concerned could agree to a payment schedule that gave a slight boost to low-income retirees while restraining benefits at the top. Liberals, social workers, labor, and Townsendites favored these changes because of their concern that low-income people might not otherwise have enough money to live on. The changes suited Keynesian economists such as Hansen because they avoided the drag on the economy that a reserve fund might create and put money into the hands of those most likely to spend it.
As part of this bargain, the insurance companies and other corporations were satisfied that payroll taxes would be kept as low as possible. The corporate moderates also appreciated the fact that the reserve fund would decline, although the issue of its continuing existence was purposely left ambiguous. Additionally, insurance companies liked the compromise because it left plenty of room for their profitable private plans for employees with higher incomes, especially for the corporate executive plans that were their biggest customer target. This became one basis for one of the historical institutionalists' biggest claims for a new insight -- there is a "divided welfare state" in the United States, part public, part private (Hacker 2002). To hurry things along, Linton even helped finance some of the liberal reformers who lobbied for "adequacy" in old age pensions (Sass 1997, p. 282, footnote 17).
Congress accepted most of these recommendations, but no new occupational categories were added, which reflected the continuing desire of the Southern Democrats and ultraconservatives to exclude low-wage workers, especially agricultural workers. Very significantly in terms of future arguments over the solidity of Social Security reserves, the reduced fund was made into a trust fund with a strong unanimous statement from the advisory council, endorsed by Congress, which was meant "to put to rest claims that the Treasury bonds in which the Social Security funds were invested were somehow not real and in some way represented a misuse of funds..." (Altman 2005, p. 132). The ultraconservatives had made such claims from the moment the Social Security Act passed, but the transformation of the reserves into a trust fund based on 1,000 years of Anglo-Saxon and American custom, precedents, and laws did not deter them from continuing their efforts to undermine public confidence in a government program they heartily despised as contrary to their deeply held values about the need for individual autonomy and the limited role of government in caring for citizens.
In any case, as we will now see, the years between 1947 and 1976 provide further evidence that the corporate moderates were supporters of the Social Security Act.
|The Advisory Council in 1948|
(click to enlarge/expand)
During the eight-year period following the enactment of the 1939 amendments, the conservative coalition froze Social Security pensions in order to stop the expansionary plans developed by the Wisconsin reformers that staffed what was by then called the Social Security Administration. As a result, means-tested old-age assistance became more important in terms of both number of recipients and the size of the benefits, putting guaranteed pensions in a precarious position by the late 1940s (Brown 1999, pp. 112-113). By 1947, however, all moderates and many ultraconservatives in the corporate community were in general agreement that expansionary changes could be made in old-age insurance, thanks to the conservative way in which the system was administered and to educational efforts by CED trustee Folsom of Eastman Kodak, who chaired the social insurance committees of both the NAM and the U.S. Chamber of Commerce (Manza 1995). At this point, Congress agreed to appoint yet another Advisory Council to reconsider Social Security.
The chair of U.S. Steel headed the new Advisory Council, which should not come as a shock by now, especially since he also served on the Advisory Council leading to the 1939 amendments. But it is a little surprising that he rarely attended meetings and left most decisions to the associate chair, Sumner Slichter, a Harvard economist. Slichter was well known in the corporate community as a key economic advisor to the Committee for Economic Development, a policy-discussion group established in 1942 by members of the BAC to develop a commercial Keynesianism that could make sure the Great Depression did not return after the war (Domhoff 2013, for the story of the Committee for Economic Development and its important role into the 1980s). Slichter also was a consultant for several major corporations and had two brothers who were corporate executives. As the de facto leader of the Advisory Council, he worked closely with the member with the most experience on these matters, J. Douglas Brown, who had helped write the old-age provisions of the original act and then chaired the 1937 Advisory Council. The new council also included two business holdovers from the previous council, Folsom and Albert Linton, the insurance company executive. Along with a policy analyst from the AFL and another from the CIO, Slichter, Brown, Folsom, and Linton were part of a six-person steering committee (Altman 2005, pp. 152-153).
|Robert M. Ball|
At Brown's suggestion, the steering committee hired a former Social Security administrator, Robert M. Ball. Brown came to know Ball after Ball took a position at a new University-Government Center on Social Security, which provided training sessions for professors and federal employees about the Social Security program. Ball, whose previous work as a Social Security employee had given him the opportunity to develop an understanding of the business viewpoint, proved to be both knowledgeable and pragmatic, which made it possible for him to introduce new ideas and fashion compromises, a role he was to play for the next 36 years in relation to new developments in the Social Security system (Berkowitz 2003, pp. 55-73).
The representatives of organized labor, by this point eager and forceful participants in the process, wanted to raise the level of income that could be taxed for Social Security purposes to $4,800, with most corporate leaders insisting on a much lower level, $3,000. In the end, the advisory council compromised at $4,200 (Altman 2005, pp. 155, 165). Benefits were increased by 77%, but most of this increase simply overcame the 74% rise in prices since the first payments were made, and the increase was only two-thirds as large as the rise in wages since 1939. The Advisory Council also recommended the inclusion of self-employed, agricultural, and domestic workers, but most agricultural workers in the South would still be excluded because they worked part-time or seasonally (Quadagno 1988, p. 148). A majority of the Advisory Council also advocated the addition of disability insurance, but Folsom and Linton were opposed, as were the Chamber of Commerce and the American Medical Association.
Congress once again accepted most of the recommendations, but pared down the number of occupations to be included. Disability insurance was supported in the Senate, but it lost to the conservative coalition in the House. In general, Social Security became somewhat more inclusive, but not more generous. More importantly from the liberal-labor perspective, the changes seemed to guarantee that old-age pensions, not means-tested old-age assistance, would be the way in which most of the elderly would receive benefits in the future.
When Republicans won control of both the White House and Congress in 1952, the first time that had happened since 1928, ultraconservatives in the corporate community and Congress made their usual pitch to limit old-age benefits to a single flat sum for anyone over age 65, whatever a person's work record or previous income levels. But at this point organized labor was poised to put up a major battle, and in any case President Dwight Eisenhower rejected the ultraconservative proposal. He thereby sided with the corporate moderates, who favored the strengthening of Social Security through raising the cap on the amount of a person's income subject to the Social Security tax and slight increases in benefit levels. Moderates also wanted to enlarge the Social Security pool by expanding coverage to include public employees, self-employed professionals, farmer owners, farm workers, and domestic workers, and to make payments slightly higher for some beneficiaries by only counting years in which the person could work enough months to contribute to the pension fund (Altman 2005, pp. 180-181). The ultraconservatives and the American Medical Association (AMA) opposed all of these improvement when they were presented to Congress, but the new amendments to the Social Security Act passed in August 1954, after self-employed professionals were removed due to AMA lobbying.
|1956 poster advertising Social Security disability benefits|
(click to enlarge/expand)
A year later, the liberal-labor alliance won its first victory on a Social Security initiative with an amendment to include disability benefits. Based on concerted Congressional lobbying and a compromise with insurance companies and Southern Democrats, an amendment covering all disabled workers passed in the House in spite of the fact that the Eisenhower Administration and the AMA opposed it. Then the bill was delayed by the conservative coalition in the Senate Finance Committee. When the committee finally voted, and ended up in a 6-6 deadlock, the bill went to the floor for a vote by the full Senate. At this point liberal and labor lobbyists made two key concessions that opened the way for partial success. They supported an amendment that would give states control of the program, which met the key demand by Southern Democrats, and they agreed to exclude employees under 50 years of age, which neutralized opposition from insurance companies. In exchange, a majority of Southern Democrats in the Senate voted for the compromise, and the insurance industry did not lobby against the bill (Quadagno 2005, pp. 53-55). In 1958, Congress extended the disability program to include benefits for the families of disabled workers, and in 1960 it was extended to include employees under age 50.
Little attention was given to Social Security during the tumultuous Kennedy and Johnson administrations, but the program was significantly improved during the presidency of Richard M. Nixon. The president was supportive of Social Security in the context of a general concern on the part of moderate Republicans to improve social insurance and welfare benefits as a way to reduce inner-city tensions and gain more support for their party among the elderly. Benefits were increased by 15% in 1969, 10% in 1971, and 20% in 1972, albeit in the face of growing inflation. In 1972 Congress legislated automatic cost-of-living increases that would begin in 1975. In connection with the significant increase in benefits between 1969 and 1972, the automatic cost-of-living adjustments ensured that most elderly Americans could live the remainder of their lives above the poverty line, a dramatic change from just a few years earlier. In addition, Congress put benefits for low-income, blind, disabled, and elderly people into a new program, Supplement Security Income, which was funded out of general revenues and administered by the Social Security Administration (Altman 2005, p. 211; Bernstein and Brodshaug 1988, p. 34).
Although liberals in Congress enthusiastically supported all of these changes and additions to Social Security, they were in air measure due to the initiative of Nixon and Congressional Republicans. Their sudden solicitude for Social Security beneficiaries provides a genuine example of how the competition for voters in the electoral arena can allow average citizens to have an impact on government. At the same time, these changes were acceptable to corporate moderates. More generally, the contrast between the corporate moderates' support for government insurance programs and their campaign against unions at the time could not be more dramatic, continuing a pattern that began in 1935.
|Nancy Altman, who has been involved in the fight over Social Security legislation since the early 1980s, provides the most readable account of the problems facing Social Security in the '70s and '80s in her book, The Battle for Social Security.|
[View on Amazon.com]
Shortly after Social Security benefits reached a level at which they were alleviating poverty among the elderly and making it possible for a widowed parent to raise children in at least modest circumstances, the program began to have financial problems. The large increase in inflation in and after 1973, caused for the most part by sudden and unexpected increases in the price of foodstuffs and oil, caused prices to rise faster than wages. This totally unprecedented situation distorted benefit formulas in ways that involve technicalities that are not relevant to the story being told in this document (see Altman 2005, p. 216 on the lack of funds and her Chapter 12 for an explanation of why the fund had financial problems). The problems were compounded by the fact that the recent indexing of Social Security benefits made it impossible to cut monthly benefits through inflation, as had been the case in the past. In addition, more people than expected were leaving the workforce through successful claims for disability benefits (Kingson 1984, p. 134). This combination of events caused pensions and benefits to rise faster than payroll tax payments, resulting in a decline in the small cushion in the Social Security Trust Fund. In 1975, Social Security actuaries warned that the funds could be gone by 1979.
Congress dealt with the problem in 1977 in a bipartisan way that raised the maximum income that could be taxed for Social Security purposes and increased payroll taxes equally on employers and employees. Nevertheless, the outcome did involve slight long-term cutbacks in benefits. Actuaries then reassured the general public in the annual trustees' report that the amendments "restore the financial soundness of the cash benefit program throughout the remainder of this century and into the early years of the next one" (Bernstein and Brodshaug 1988, pp. 34-35). However, a second round of oil shocks in 1979 soon proved them wrong. Instead of 28% inflation and 13% growth in real wages between 1978 and 1982, there was 60% inflation and a decline in real-wage growth by 7% (Pierson 1994, p. 65). The ensuing economic upheaval once again threw the projected relationship between payroll tax collections and cost-of-living increases out of balance. Further adjustments therefore were seen as necessary so the fund would not be exhausted during 1983 (Altman 2005, p. 222; Kingson 1984, pp. 136-138).
By this juncture, however, ultraconservatives inside and outside the government thought that changes in the political climate, along with the Republican gains in the 1978 elections, made it possible to define the new problem as a major crisis, not the temporary shortfall projected by centrist and liberal experts. Moreover, they could take advantage of the fact that "Social Security was also becoming a more noticeable portion of the federal budget because it was included as part of the unified federal budget, which was adopted during the Nixon Administration at the urging of a blue-ribbon presidential commission appointed by President Johnson (Kingson 1984, p. 133). Now it could be claimed that Social Security was both a big part of the budget and another reason to worry about future government debt, even though it was funded by payroll taxes, not federal income and excise taxes
It was in these altered circumstances that the ultraconservative think tanks used the actuarial assessments from 1977 to claim that experts were either covering up the deep problems in the system or else did not know what they were talking about. The ultraconservatives published reports that readily gained dramatic coverage in the media, in part because any "crisis" attracts readers and viewers, in part because the media tries to report all sides of an issue. For example, the ultraconservative reports talked of "bankruptcy," even though the worst-case scenario involved shortfalls of 4% to 10% without any increases in payroll taxes, and even though bankruptcy was impossible because payroll taxes always would continue to flow into the Social Security Trust Fund. The seemingly inviolate nature of the trust fund established by Congress in 1939 was now ignored or forgotten (Estes 1983; Myles 1981). Taking advantage of the ultraconservative media campaign, Congressional conservatives made a further change in Social Security in 1980 by reducing disability benefits on the grounds that they were overly generous (Bernstein and Brodshaug 1988, pp. 34-35).
Then came a right turn on Social Security by the corporate moderates, which became fully apparent during the Reagan Administration. It is this right turn that created the atmosphere in which the historical institutionalists wrongly concluded that the vocal opposition to Social Security by all members of the corporate community in the 1980s meant that the entire corporate community had always opposed it. Based on their 1980s and 1990s perspectives, they downplayed all the evidence that I presented earlier on the crucial role of the corporate moderates in the creation of the Social Security Act. Swope of General Electric and Teagle of Standard Oil were said to be marginal mavericks and the IRC and SSRC employees were independent experts with multiple affiliations and complex career histories, not employees of organizations that were overwhelmingly funded by Rockefeller largesse.
The Reagan Administration's original attempt to cut Social Security, which backfired, revealed that the corporate moderates, as epitomized by this time by the corporate bigwigs in the Committee for Economic Development, were now ready to join with ultraconservatives in limiting it. However, as this detailed section now shows, the liberal-labor alliance, even though it was on the defensive by then, was able to hold on to most of the basic features of the Social Security program because it made concessions and played its cards well. Moreover, it had some built-in advantages due to the structure of the program, such as its inclusiveness, the fact that higher earnings lead to higher payroll taxes and higher pensions, and the sheer number of people already receiving benefits due to its long history, as nicely emphasized by historical institutionalist Paul Pierson (1994, Chapter 3).
As already noted, the opening shots occurred in a context in which the small Social Security Trust Fund was dwindling due to the continuing high inflation in the early 1980s. As was the case just two years earlier, relatively easy adjustments could have been made, but the corporate-conservative alliance mounted another large-scale scare campaign. Although national surveys soon reported that most people, and especially those under 35, believed that the system would be bankrupt by the time they were eligible to receive benefits, the respondents also made clear they wanted to preserve the system through tax increases. Their fears were encouraging to those who wanted to privatize Social Security, but the fact that most people wanted to preserve the current system was encouraging for the program's supporters (Bernstein and Brodshaug 1988, p. 42).
The Committee for Economic Development (hereafter CED) contributed to the crisis atmosphere with a report entitled Reforming Retirement Policies, which claimed "a retirement disaster is on the way early in the twenty-first century." Using projections that assumed a declining birth rate and an increasing number of retired workers, the CED warned that the rate of growth in the labor force might decline and that older workers would become a "burden" on "future generations." In addition, the presumed shrinkage in the growth of the workforce, which was in fact being countered by millions of Latin American and Asian immigrants in the 1970s, supposedly meant that older workers who remained productive might have to continue working for the sake of the economy. The CED report therefore concluded that the retirement age should be gradually raised two months a year until it reached age 68 in the year 2000. After all, people were living longer, although in fact it was only people in the upper half of the income distribution that were living longer among those who made it to age 65. The CED also called for changes in the formula used to determine cost of living increases, which were said to "overcompensate" for inflation (CED 1981, pp. 3-5).
As with other issues, the seemingly nonpartisan nonpolitical CED did extensive non-lobbying lobbying in relation to its report. One retrospective CED document (n.d.), put together in the late 1980s for a manuscript a CED staff member was working on, reported that trustees and staff discussed it with every member of the Senate Finance Committee as well as with every member of the House Ways and Means Committee when it appeared. Although CED's chief lobbyist of the previous few years, Kenneth Duberstein, was by then on the White House staff as a Deputy Assistant for the President for Legislative Affairs, he encouraged the distribution of the CED report. On February 11 1981, he wrote a note from the White House to a member of the CED's public relations staff saying that "the report will come in handy," and in the process urged that if one of CED's employees "would only hurry with the retirement statement, we might be able to do something positive about Social Security (while assuring the integrity of the program, of course)" (Duberstein 1981).
At this point, the Reagan Administration overplayed its hand. In doing so it drew on suggestions from a Social Security Task Force set up during the 1980 presidential campaign, which was chaired by an economist at the ultraconservative and libertarian Hoover Institution. More generally, the task force consisted primarily of free-market economists at several universities. Starting with this report, the director of the Office of Management and Budget, David Stockman, a former Republican member of the House from Michigan, created a draconian plan in early May 1981, which would produce twice as much savings as were actually needed through a variety of benefit cuts, with a special -- and politically shortsighted -- focus on solving the administrations immediate deficit problems with large immediate cuts (Altman 2005, p. 231; Kingson 1984, pp. 140-141).
The result was a barrage of criticism aimed at the White House, including from some Republicans, who feared that such drastic changes might put them in danger of losing their Congressional seats in 1982. The proposed policies also solidified and energized Save Our Security, a liberal-labor-elderly leadership group formed in 1979, which spoke for a coalition of nearly 100 liberal, labor and senior citizens organizations. A well-known liberal of that era, Wilbur Cohen, whose involvement in Social Security stretched back to a minor role in helping Witte on the original Social Security Act, and included a strategic role in the passage of Medicare, served as the Save Our Security chair.
The ambitious White House plan was withdrawn before it was formally presented to Congress. But the bad publicity it received short-circuited the efforts to cut Social Security that were moving forward quietly in the House under the direction of Southern Democrat Jake Pickle of Texas, the chair of the Social Security Subcommittee of the Ways and Means Committee. Pickle's plan would have dealt with the short-term budgeting problems by means of a six-month delay in the next cost of living adjustment (COLA) and with the elimination of long-term shortfalls by increasing the retirement age to 68 between 1990 and 2000, both of which were consistent with the CED's recommendations. His plan also would have eliminated minimum benefits and payments to college children of deceased beneficiaries. Due to the outcry caused by the Reagan plan, Pickle had to settle in 1981 for a cutback in payments to the 775,000 children of deceased beneficiaries who were 22 years old and still in college. The average reductions of $259 a month for these students saved $700 million the first year (less than one percent of the Social Security payments in 1982).
Faced with a potential political backlash, the White House suggested to Thomas ("Tip") O'Neill, a Boston Democrat and the Speaker of the House, that the president and Congress should jointly appoint a bipartisan Commission on Social Security to examine the issues and make recommendations. The plan called for Reagan to select three Republicans and two Democrats. In addition, the Republican leader of the Senate would suggest three Republicans and (with the advice of the Senate Minority Leader) two Democrats. Finally, O'Neill would add three Democrats and (with the advice of the Republican Minority Leader) two Republicans. This formula led to an eight to seven majority for the Republicans, but the more important point is that conservatives outnumbered liberals by ten to five because two of the Democrats appointed by Reagan were very conservative. The first of these nominal Democrats -- former oilman and chemical executive Alexander Trowbridge -- was the president of NAM. The second, a small-town banker from Louisiana, Joe Waggonner, had been an informal leader among Southern Democrats in the House from 1961 until his retirement in 1979.
For the chair, Reagan selected business economist Alan Greenspan, who had been the chair of President Gerald Ford's Council of Economics Advisors. Reagan also appointed the president of Prudential Life, Robert Beck, who was a member of the CED's Research and Policy Committee, the chair of the Business Roundtable's task force on Social Security, and a trustee of both the Conference Board and the Business Council (the new name for the Business Advisory Council). In a meeting with the president of the CED, Robert Holland, two years earlier, Beck had told Holland of his interest in the CED's Social Security project and said he wanted "to keep the two projects [ie., the CED and Business Roundtable projects] coordinated insofar as feasible." Holland asked Beck "to name a staff man that we could invite to all our retirement meetings, and Beck said Mr. James Swenson," who worked on corporate pension plans for Prudential. Holland then instructed a CED economist to call Swenson and become acquainted with him, and told Duberstein to send Swenson the relevant CED materials on retirement (Holland 1979). Based on Beck's corporate stature and policy-group connections, it can be safely inferred that he represented the general CED and Business Roundtable views on Social Security.
Reagan's final appointment was a business woman, Mary Falvey Fuller, who earned a B.A. from Cornell and an MBA from Harvard, took her first job at her family's Falvey Automobiles, Inc., and then worked for McKinsey and Co., Citibank, and Blyth Eastman Dillon before becoming the vice president for finance with the Shaklee Corporation in 1981. She had legitimacy on the Social Security issue as a member of a 1979 Advisory Council on Social Security. Her business executive husband, Craig Fuller, was a White House aide who had been in charge of organizing business support during Reagan's presidential campaign.
The Republican congressional representatives included three moderates, Senator Robert Dole, chair of the Senate Finance; John Heinz, chair of the Senate Special Committee on Aging; and Barber Conable, a member of the Ways and Means Committee. There were also two Republican ultraconservatives, Senator William Armstrong, chair of the Senate Finance Committee's Subcommittee on Social Security, and William Archer of Texas, the ranking Republican member of the House Ways and Means Committee's Subcommittee on Social Security. Both Armstrong and Archer were outspoken opponents of the Social Security program.
The Democratic appointees started with two emblematic elected Democrats. Senator Patrick Moynihan, a CED advisor in the late 1960s and one of the drafters of Nixon's Family Assistance Plan, had been elected to the Senate from New York in 1976. Representative Claude Pepper, who first served in Congress as a liberal Senator from Florida from 1936 to 1951, had been a member of the House from a Miami district since 1963. The third and fourth Democrats were a former House member from Michigan, Martha Keyes, who had been the Assistant Secretary of Health and Human Services during the Carter Administration, and Lane Kirkland, the president of the AFL-CIO.
Perhaps most significant of all, the fifth Democratic appointee was Robert M. Ball, the executive director for the Advisory Committee on Social Security in 1947 and a key strategist in the fight for Medicare. Still highly respected for his patience and ability to forge compromises, he immediately became the de facto leader for the other four liberal Democrats, who knew that he spoke for Speaker Tip O'Neill on Social Security issues. Ball was in almost daily touch with O'Neill and consulted regularly with the leaders of Save Our Security, AARP, the National Council of Senior Citizens, and dozens of individuals, so that there would be no surprises for any of them, thereby making it possible to alter the Democrats' bargaining stance rapidly as the process moved forward (Ball 2010, pp. 12-13; Bernstein and Brodshaug 1988, p. 39). (Trowbridge and Waggonner, although nominal Democrats, did not attend the frequent meetings held by the other five Democrats to discuss strategy.) Overall, the balance of forces represented a classic match-up between the corporate-conservative and liberal-labor alliances.
The commission met seven times before the elections, heard testimony, and discussed numerous issues. For the most part, the commissioners did no serious bargaining during this period because the main unstated goal of the Republicans was to keep Social Security out of the forthcoming midterm elections. However, the commission did agree to set Medicare aside, which greatly simplified the problems, despite repeated objections by Beck of Prudential Life, who wanted to deal with both issues at the same time so that major cuts could be made in benefits. It also ruled out, with an unexpected assist from ultraconservative Waggonner, a quasi-privatization plan put forward by a prominent young Stanford economist (Ball 2010, pp. 20, 27, for the information on Beck and Waggonner). More generally, it agreed to leave the basic structure of the system as it was and then to work from the most pessimistic projections concerning the short run and more moderate projections about the long run. Within that context, it also agreed that it had to close a short-run deficit of between $150 and $200 billion and make up for a gap of about 1.8 percent over the 75-year period between 1983 and 2056. The Democrats doubted that any meaningful projections could be made over such a long time period, but they accepted them as part of their plan to restore confidence in the stability of the system (Bernstein and Brodshaug 1988. pp. 41-43).
Despite the Republicans' hope that the establishment of the commission would render the Social Security issue less visible until after the elections, the Democrats made the earlier Republican attempt to cut Social Security a major campaign issue in 1982. They did so by deploying Pepper, who was 82 years old and widely known to senior citizens as "Mr. Social Security," to give fiery speeches in favor of Democratic candidates in a large number of House districts. Although the ongoing recession was the Republican's most serious electoral problem, some Republicans believed that the overreach on Social Security contributed to the near loss of the Senate majority and a decline of 26 seats in the House, which in turn made it more likely that they would seek compromise on the issue.
The commission met for three consecutive days shortly after the elections and made substantial progress toward a bargain. The five liberal Democrats then decided to offer a three-month delay in the COLA, but there was no further give on the Republican side. At this point a key Reagan aide of a moderate stripe held secret discussions with Ball that signaled that Reagan and at least some members of his staff wanted to make a deal. Then, just when it seemed unlikely that any agreements could be reached, Dole wrote an op-ed column for the New York Times in early January 1983, stating in effect that the crisis was solvable "through a combination of relatively modest steps" (Altman 2005, pp. 245-246). This public signal led to a discussion between Moynihan and Dole on the Senate floor, and then a suggestion from Dole that a small group of commissioners (Dole, Conable, Greenspan, Moynihan, and Ball) begin a series of private meetings. The meetings soon involved Reagan's White House Chief of Staff James Baker, and then two of his assistants, Richard Darman and Duberstein, along with Stockman from the Office of Management and Budget.
Duberstein's role in the process is often overlooked because he said little, but as Ball told me in a telephone interview in 1990, he was important because he was a likable person who had good relations with both Democrats and Republicans in Congress, and was committed to bringing about an agreement. In particular, he had a close connection to Daniel Rostenkowski, a machine Democrat from Chicago, who chaired the Ways and Means Committee. Ball later made similar assertions about Duberstein's role in a posthumously published insider account of how the negotiations unfolded (Ball 1990; Ball 2010, p. 36).
With Reagan's approval ratings lower than President Jimmy Carter's at a comparable point in his administration, the White House was faced with a deadline for reporting the likely large deficits that would occur in the unified budget due to the large tax cuts that Congress passed in 1981 to fulfill a key Regan campaign promise. Reagan and his aides therefore became even more eager to find a compromise. The final bargain started with the six-month delay in the COLA, which was originally advocated by the Reagan Administration and Representative Pickle of Texas. It added up to about a 2% cut in benefits in the long haul and savings in the short run that cut one-fourth of the gap. In return, the Republicans agreed to tax those retirees in higher income brackets on up to half of their Social Security benefits, a significant concession. However, it could be spun by the Republicans as a cut in benefits rather than a tax increase, which made it symbolically acceptable. The Republicans also agreed to move forward to 1984 a payroll tax increase that had been scheduled for 1999, which meant a large increase in the taxes on middle-income individuals. In addition, they agreed to extend coverage to new federal employees and to the small percentage of employees in nonprofit organizations who were not yet covered, which would help to build up a substantial reserve in a short time. There were a few smaller changes as well, some quite technical, but most of the savings and new revenues came from the large changes just mentioned (Ball 2010, pp. 46-52; Bernstein and Brodshaug 1988, pp. 50-55).
By agreeing to the acceleration in payroll tax payments, the Republicans in effect agreed to something that had been anathema to them before, a large reserve fund that might ensure the full stability of Social Security for 50 to 75 years. This time, though, it was left unmentioned that such reserves could be used to fund ongoing government operations until the Treasury bonds purchased by the Social Security Trust Fund with the new taxes came due in future decades (Altman 2005, p. 135, for an excellent discussion of the firm legal status of these trust assets). According to Robert Hormats (2007, p. 241), a former state department official, and a retired vice chair of Goldman Sachs, the large reserve fund provided the American government with "a surplus it could draw on to cover increases in the regular operating deficit." He then added: "And American leaders did not hesitate to raid those funds on a regular basis, relieving the pressures on the president and Congress to slash the deficit." More specifically, the payroll tax could be used to partially cover tax cuts for the wealthy and increases in the defense budget.
In spite of the general agreement forged between the five Democrats and the Republican moderates on the major issues, there was nonetheless resistance to the overall deal by six conservative members of the commission. The fact that the three business representatives (Beck, Fuller, and Trowbridge) were part of this dissident group was of great concern to the White House staff. It arranged a personal meeting for Beck with Reagan, which led to his decision to join the majority. Beck then convinced Fuller and Trowbridge to join the compromise, which left retired Southern Democrat Waggonner, Senator Armstrong, and Representative Archer on the losing end of a 12-3 vote to accept the report (Altman 2005, p. 248, on Beck's meeting with Reagan; Ball 2010, p. 50 for Beck's influence with the other business representatives). To complete the compromise, the commission left it up to Congress to fill the remaining one-third of the long-run gap through one of two options. The conservative members, including the two conservative Democrats, suggested that the retirement age should be raised from 65 to 67 through monthly increments that would begin in 2000. The five liberal Democrats proposed that the gap should be filled through gradual tax increases that would begin in 2010 if they were needed. With the 1982 elections safely over, the conservative coalition accepted the general compromise offered by the commission. Then it opted to increase the retirement age starting in 2000 rather than leave it to a future Congress to decide if taxes actually needed to be raised in 2010. This preemptive decision once again reveals conservatives' deep-seated desire to limit any government support for social benefits as much as possible. Because many people already retired before age 65, it also in effect meant another benefit cut because few people were likely to wait until age 67 to retire in order to collect full benefits (Pierson 1994, p. 67).
Both Republicans and Democrats declared victory and breathed a sigh of relief, but the CED leaders stated publicly that they were disappointed in the results, which they had tried to influence through meetings with Greenspan, Dole, and other key participants, as well as with staff members of the relevant Senate and House committees. In the aftermath, they expressed their dissatisfaction in a 1984 report, Social Security: From Crisis to Crisis (1984), which repeated CED's 1981 recommendations. They complained that the cuts were too small and cautious, leaving too small a margin of safety. Ball called the new CED report "quite irresponsible" and predicted large surpluses by 1988, while claiming that the CED was "looking for any excuse to push their proposals for further benefit cuts" (AP 1984, p. 16). According to Ball, the corporate executives he knew were willing to support Social Security at a minimum level of payments, but they did not want to see any expansion in it because of their general anti-government ideology and their resulting preference for private pension plans (Ball 1990). So things had come full circle between the early 1930s, when the crisis hit private pension plans amidst the turmoil of the Great Depression, and the 1980s, when things seemed all hunky-dory to the corporate community.
Ball turned out to be more than correct in predicting large surpluses. According to testimony before Moynihan's Senate Subcommittee on Social Security and Family Policy in 1988, the trust fund was taking in $109.4 million per day by that year and had grown to almost $100 billion in just four years (Moynihan 1988). By 2010, the Social Security Trust Fund had $2.6 trillion in Treasury notes, enough to pay benefits for at least three decades. However, ultraconservatives continued to claim that Social Security was in crisis because the Social Security Administration did not have any actual money in the bank, only the "IOU's" from the Treasury. They thereby ignored the fully protected legal standing of the trust funds, or perhaps hoped that the Supreme Court would take their side if the issue came to a court fight. In the eyes of liberal economists, the issue that really concerns the conservatives is that federal taxes might have to be raised, including income taxes on the well-to-do, when the time comes for the Social Security Trust Fund to collect on its Treasury bonds (e.g., Baker 2001; Baker and Weisbrot 1999).
Still, the fact remains that the corporate community and the Reagan Administration did not win all that they hoped to on Social Security in the early 1980s. True, benefits were trimmed significantly through delaying the cost-of-living adjustments and increasing the retirement age, and the money collected for the trust fund was used to pay for part of the large budget deficits over the next 30 years. But the liberal-labor alliance was able to restore public confidence in the system and give it legitimacy for the next 20-25 years in the face of a predominantly conservative Congress eager to make larger reductions or privatize the whole system. It was also able to make some changes that benefited women and brought all employees of the federal government and nonprofit organizations into the system. The overall result accurately reflects the comparative power of the two rival power alliances as the corporate-conservatives consistently pushed national policy in a rightward direction.
|The importance of Social Security income to non-wealthy Americans over 65|
|Source: EBRI (2011).|
The story of the years between 1984 and 2012 is quickly told because very little changed even though the battle continued and two Democratic presidents, Bill Clinton and Barack Obama, were ready to accept long-term cuts in Social Security in an attempt to placate the corporate community and the conservatives in Congress. This attack began shortly after the compromise and has continued ever since. Ultraconservatives and libertarians, whose think tanks are funded by some of the richest families in the country, took the lead, but corporate leaders at the least wanted to limit the program severely. Although the fact was soon forgotten, President Clinton was on the verge of making a debt-reduction compromise with the Republican congress in the late 1990s, but this possible deal was pushed aside when he faced impeachment charges over a lack of candidness (called lies by liberals and perjury by ultraconservatives) about sexual escapades with a young White House intern. President George W. Bush then tried to push a semi-privatization plan in 2005 in the aftermath of his 2004 election victory, but the pushback was strong enough that he quietly abandoned the plan (Baker 2007).
President Barack Obama appointed a debt-reduction commission in 2010 whose centrist members, Democrat and Republican, wanted to cut the inflation adjustment built into Social Security pensions by a "mere" .03% a year, which would have added up to a 3% cut over ten years and 6% after 20 years. Although liberal and ultraconservative members of the commission scuttled the recommendation for very different reasons, the co-chairs of the commission continued to push debt reduction through Social Security cuts for the next two years as if the whole commission had agreed with them. Obama continued to speak approvingly of the co-chairs' recommendation, indicating he was still open to such a compromise. He even declined to rule out Social Security cuts during the presidential campaign in 2012, in which he was fighting for his political life. Only a strong push by the liberal-labor alliance kept Social Security cuts out of the deal that averted the fiscal cliff at the turn of 2013.
The Republican attack on Social Security, with full backing from the corporate community through its "Fix-The-Debt" committee and various think tanks, is likely to continue for many years to come. The moderate conservatives do not want to pay the taxes that will be needed to make sure that the Treasury Department can pay its bills to Social Security, and the ultraconservatives dislike the very concept of Social Security because of their fear of government power and their beliefs about the needed for rugged individualism, not "handouts."
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