October 2001 | Volume 52, Issue 7
THE CRACKPOT IDEA THAT LED TO SOCIAL SECURITY
But crackpot physics is nothing compared with the nutty convictions that abound in the field of economics. Consider an idea that was whizzing around the Internet last spring to bring down the price of gasoline. In this scheme, everyone would agree to boycott Exxon, the largest American oil company, and buy their gasoline at other stations. Falloff in demand for its gas would force Exxon to lower prices, and that would compel all the other oil companies to lower prices as well. Voilà! Cheap fuel.
The only trouble was that the scheme wouldn’t lower total demand for gasoline. Exxon, facing a decline in demand for its gasoline, would jigger its refining to maximize output of its thousand and one other petroleum products. Other companies, facing increased demand, would do the opposite and make up for any shortfall by buying gasoline on the wholesale market from … Exxon. Prices would stay the same.
This idea is unlikely to get beyond the back-fence chatter of the Internet. But other ideas, equally devoid of economic sense, have launched national movements. The free coinage of silver movement in the latter decades of the nineteenth century—basically a disguised means of triggering inflation to benefit debt-ridden farmers—is one example. It gave William Jennings Bryan the Democratic nomination for President three times. Another, the Townsend Plan, made an obscure, elderly California doctor one of the most famous men in the country in the 1930s. More important, it proved instrumental in bringing into being one of the most popular federal programs in history.
Francis E. Townsend was born in 1867 into an impoverished Illinois farming family. They soon moved to Nebraska, where he graduated from high school and began a varied and not notably successful career. He tried farming and selling in Kansas, land speculation in Los Angeles, and working as a laborer in Colorado. By 1899 he had enough money to enroll in the Omaha Medical College, and he graduated in 1903 at the age of 36.
In World War I he worked as an Army doctor. When he returned to South Dakota following the armistice, he became very sick with peritonitis, and to help recover his health in a gentler climate, he moved in 1919 to Long Beach, California. There, besides practicing medicine, he dabbled in real estate. But the Depression wiped out most of his savings, and he had to take a job as assistant director of the city health office.
In 1933 he lost that job when the city was forced to cut back in the face of steadily falling tax revenues. At the age of 66, Dr. Townsend found himself both poor and out of work in the depths of the greatest economic calamity in the nation’s history. There were millions of elderly people in the same boat, of course, and Dr. Townsend suddenly had a vision of how to help them and the country as a whole.
He wrote a letter to a newspaper outlining his plan. It had the virtue of great simplicity. In its fully evolved form, the government would pay $200 a month to everyone over the age of 60 who agreed to stop working. The only proviso was that the money couldn’t be saved. It had to be spent within 30 days. The plan would be paid for with a 2 percent federal tax on every transaction in the country.
Dr. Townsend saw nothing but virtue in his plan. It would make secure the old age of everyone in the country. By allowing many older people to retire, it would open up jobs for the young. By giving the elderly greatly increased purchasing power, it would kick-start the economy back to prosperity.
Economists saw it a bit differently. In 1933 the gross national product of the United States was a dismal $55.6 billion. But there were about 11.4 million people aged 60 or over in the country. That meant that under the Townsend Plan, the government would have to pay them an annual sum amounting to $12.8 billion—almost half the GNP and equal to 13 times total government revenues.
Further, the average per capita income that year was only $374, and the cost of living was even much lower. Three thousand dollars was a solidly middle-class income, yet Townsend’s Plan would have paid an elderly couple $4,800 a year. So the plan amounted to a massive transfer of income from the working young to the retired elderly, with little change in net consumption.
While the Townsend Plan was crackpot economics, it had, not surprisingly, a powerful appeal to the elderly. Letters poured into the Long Beach newspaper in which the suggestion first appeared. Townsend clubs sprang up across the country, and petitions were signed demanding the plan’s implementation.
Franklin Roosevelt, his exquisitely sensitive political antennae atingle, knew he had a problem. In January 1934, Townsend incorporated his movement as Old Age Revolving Pensions, Ltd. A year and a half later, Townsend’s supporters claimed there were 7,000 Townsend clubs in operation, and some 2.5 million Americans had signed petitions calling for the enactment of the plan. Townsend had to hire 95 workers to handle the mail. Many of California’s congressmen were elected with the support of the Townsendites in 1934, and one of them introduced a bill in Congress that proposed implementing Townsend’s plan virtually verbatim. Townsend, of course, was not the only person attracting a following with radical ideas. Sen. Huey Long, with his Share-the-Wealth plan, and Father Charles Coughlin were in their heydays at the time. Although Townsend relied on an anti-Establishment appeal that resembled the populist crusades of Long and Coughlin, his movement was more creative and less reliant on demonizing political and economic elites.
Roosevelt was already moving to counter the trend with what came to be known as the Second New Deal. Its principal features, outlined in his message to Congress on January 4, 1935, were a national works program to employ the able jobless, banking reform, increased taxes on high incomes and inheritances, and programs to guarantee security against the hazards of unemployment, old age, and illness. Although the Republicans naturally denounced the package as the very end of the American way of life, Roosevelt said he was trying to “save our system, the capitalist system,” from “crackpot ideas.” Which of those he had in mind were clear: “I am fighting Communism, Huey Longism, Coughlinism, Townsendism.”
He put Secretary of Labor Frances Perkins, the first female cabinet member, in charge of designing the old-age insurance program. Roosevelt wanted a self-financed plan that would include payments by the workers themselves. His reasoning was simple: With the workers paying into the system, it wouldn’t be a dole, and they would be gaining a property right to receive their benefits when they retired. “With those taxes in there,” he said, “no damn politician can ever scrap my social security program.” In the end, of course, they were not called taxes; they were called “contributions,” although there was nothing voluntary about them. But FDR was exactly right about the political sanctity that would grow up around what was soon called Social Security.
Roosevelt would have preferred to have had the Social Security system be self-financing from the beginning. But Perkins explained that that would require either very high taxes and very small payouts or a postponement of any payouts for many years. Neither was accept- able to the President, who told Perkins, “We have to have it [payments relatively soon]. The Congress can’t stand the pressure of the Townsend Plan unless we have a real old-age insurance system.…”
The Social Security sausage that finally emerged from the political process excluded, at first, farm laborers, domestic servants, and people working at establishments with fewer than 10 employees (in other words, the very people likely to need it most). It wouldn’t begin making payments until January 1, 1942. Then the payments might be as low as $10 a month. It was a far cry from Townsend’s scheme to put everyone over 60 in the upper middle class. But hardly had the program become law, on August 14, 1935, when Congress, seeing its irresistible vote-getting potential, began to expand its benefits.
With the passage of the Social Security Act, Dr. Townsend’s time in the spotlight ended, and his plan was soon forgotten. But because he lived to be 93, dying only in 1960, he lived plenty long enough to see the essence of his vision—a measure of security for every American in old age—come true.
Not a bad fate for a “crackpot.”