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Welfare Capitalism and the Social Security Act of 1935 Author(syf - L O O 6 4 X D G D J Q o Source: American Sociological Review, Vol. 49, No. 5 (Oct., 1984yf S S 7 Published by: American Sociological Association Stable URL: http://www.jstor.org/stable/2095421 Accessed: 11-07-2017 11:24 UTC JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://about.jstor.org/terms American Sociological Association is collaborating with JSTOR to digitize, preserve and extend access to American Sociological Review This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms WELFARE CAPITALISM AND THE SOCIAL SECURITY ACT OF 1935* JILL S. QUADAGNO University of Kansas A central concern of political theorists has been the relationship between the state and the economy, or more specifically, how political power gets translated into economic power. Recent debates have been shaped around critiques of the corporate liberal thesis, which contends that class-conscious capitalists manipulate the polity so that government comes to pursue policies favorable to capitalism. Alternative theories suggest that the state is capable of transcending the demands or interests of any particular social group or class. The Social Security Act of 1935, which represented the beginning of the welfare state in the United States, was a conservative measure that tied social insurance benefits to labor force participation and left administration of its public assistance programs to the states. In this paper the Social Security Act is used as a case study to adjudicate between several competing theories of the state. The analysis demonstrates that the state functions as a mediating body, weighing the priorities of various interest groups with unequal access to power, negotiating compromises between class factions, and incorporating working-class demands into legislation on capitalist terms. A central concern of political theorists has been the relationship between the state and the economy, or more specifically, how economic power gets translated into political power. Re- cent debates have been shaped around cri- tiques of the corporate liberal thesis, which stresses the strategies of class-conscious capitalists to manipulate the polity. Alternative theories suggest that the state is capable of transcending the demands or interests of any particular social group or class. The core agenda of those espousing some variant of corporate liberalism has been to ex- plain how major economic interests manipu- lated the polity in the twentieth century, so that government came to pursue policies favorable to capitalism (Domhoff, 1979; Kolko, 1963; O'Connor, 1973; Useem, 1983yf $ F F R U G L Q J W o this perspective, capitalists rationally pursued a series of policies designed to allow them control of the political process, resulting in a synthesis of politics and economics. For example, Kolko (1963yf K D V D U J X H G W K D W W K H U H J - ulatory "reforms" of the Progressive Era, traditionally explained as a respose to muck- raker's criticism, were actually desired by large industry as a way, not only of controlling competition, but also of driving smaller com- petitors out of business. As O'Connor (1973:68yf H [ S O D L Q V E \ W K H W X U Q R I W K H F H Q W X U \ , and especially during the New Deal, it was apparent to vanguard leaders that some form of rationalization of the economy was necessary. And as the twentieth century wore on, the owners of corporate capital generated the fi- nancial ability, learned organizational skills, and developed the ideas necessary for their self-regulation as a class."' In recent years corporate liberalism has been attacked on the grounds that it oversimplifies the more complex causal processes involved in policymaking, that it cannot specify the condi- tions under which interventions by dominant corporate interests will occur, and that it ne- glects to confront the fact that these inter- ventions sometimes fail (Block, 1977a:353; Skocpol, 1980:169yf 6 H Y H U D O D O W H U Q D W L Y H V R - lutions to the problem of explaining how the state serves the interests of the capitalist class have been posed. Block (1977b: 10yf D U J X H V W K D t there is a division of labor between those who accumulate capital and those who manage the state apparatus. While capitalists are generally not conscious of what is necessary to repro- duce the social order, state managers are forced to concern themselves to a greater de- gree because their continued power rests on the maintenance of political and economic *Lyf L U H F W D O O F R U U H V S R Q G H Q F H W R - L O O 6 4 X D G D J Q R , Department of Sociology, University of Kansas, Lawrence, KS 66045. This research was supported by a grant from the University of Kansas General Research Fund and by a grant from the Kansas Committee for the Humanities, an affiliate of the National Endowment for the Humanities. I am grateful to Gordon Streib, Joane Nagel, Norman Yetman, Brian Gratton, William Tuttle, Sandra Albrecht, William Julius Wilson, and Theda Skocpol for helpful comments on an earlier draft of this manuscript, to David James and Georgia Walker for participating in extensive discussions, and to Jack Hayes for assisting in the search for archival materials. 632 American Sociological Review, 1984, Vol. 49 (October:632-647yf This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms WELFARE CAPITALISM 633 order. The central constraint upon the decision-making power of state managers is that of "business confidence." Individual capitalists make investment decisions based on such tangible variables as the price of labor and the size of the market, as well as such intangi- bles as the political and economic climate. Business confidence falls during political tur- moil and rises when there is a restoration of order (Block, 1977b: 16yf 6 L Q F H V W D W H P D Q D J H U s are dependent upon the investment accumula- tion process, they will necessarily use what- ever resources they possess to aid that pro- cess. Normally, state managers formulate policies supportive of capital accumulation. During a crisis such as a depression, however, when the decline of business confidence is not a potent threat, pressures intensify to grant concessions to the working class (Block, 1977b:24-25yf . In Block's (1977b:22yf Y L H Z F O D V V V W U X J J O H L s the primary vehicle contributing to the expan- sion of the state's role in capitalist society. Class struggle arises from the desires of work- ers to protect themselves from the ravages of a market economy. Workers operationalize their concerns through pressures for reforms. State managers must then weigh three factors in granting concessions-the fear of damaging business confidence, the escalation of class antagonisms that might endanger their own rule, and their recognition that their own power and resources will grow if the state's role is expanded (Block, 1977b:23-24yf : K H n working-class demands for reforms do get in- corporated into state policy, they are rarely granted in their original form. Rather, they are geared to the needs of capital accumulation. Block's argument is useful in specifying the mechanism through which economic interests influence state actions without reducing state policy to the raw machinations of class- conscious capitalists. He fails, however, to provide a complete explanation of the relation- ship between the polity and the economy, be- cause he neglects to analyze the complexities of the political constraints on state managers. Skocpol, in contrast, specifies the political as well as economic constraints that affect policymaking. Using several New Deal measures as a test case of various theories of the state, Skocpol (1980:199yf I L Q G V V X S S R U W I R U % O R F N V E D V L c premises but argues that no self-declared neo-Marxist theory takes "state structures and party organizations seriously enough." Rather, these theories oversimplify political analysis by attributing political outcomes "to the ab- stract needs of the capitalist system, or to the will of the dominant capitalist class or to the naked political side-effects of working class struggles" (Skocpol, 1980:200yf 6 W D W e structures and party organizations have, ac- cording to Skocpol, independent histories and are not simply shaped in response to socioeco- nomic changes, dominant class interests or class struggles. "States and political parties within capitalism have cross-nationally and historically varying structures. These structures powerfully shape and limit state in- terventions in the economy, and they deter- mine the ways in which class interests and conflicts get organized into (or out ofyf S R O L W L F s in a given time and place" (Skocpol, 1980:200yf . What are these political constraints on policy formation'? They may include such factors as existing national administrative arrangements, governmental institutions, the extent of elec- toral democratization, patterns of political party organization and competition, and degree of bureaucratization. For example, in com- paring two New Deal measures, the Agricul- tural Adjustment Act and The National Indus- trial Recovery Act, Skocpol and Finegold (1982yf F R Q W H Q G W K D W W K H I R U P H U V X F F H H G H d whereas the latter failed because the AAA was placed inside an existing federal department that had the administrative means to imple- ment its programs. In contrast, the NRA, which had no "well-established state adminis- tration knowledgeable about and sympathetic to the needs and aims of the business self- regulators," foundered due to the lack of a strong bureaucracy (Skocpol and Finegold, 1982:267yf 6 L P L O D U O \ W K H 6 R F L D O 6 H F X U L W \ $ F t took shape as three separate measures- national old age insurance and federal-state programs for old age assistance and unem- ployment insurance-because of previously existing and potentially competing state-level programs in the latter two areas (Skocpol and Ikenberry, 1982:74yf . Poulantzas (1978:14yf D O V R U H M H F W V F R U S R U D W e liberalism, arguing that "the state really does exhibit a peculiar framework that can by no means be reduced to mere political domina- tion." Like Block, he sees policy as the result of class contradictions, and like Skocpol et al., he views the structure of the state as a central determinant of the outcome of policy. In his terms, however, structure is not defined orga- nizationally or administratively. Rather, structure is determined by class contradictions inscribed within it: "Each state branch or ap- paratus and each of their respective sections and levels frequently constitutes the power- base and favored representative of a particular fraction of the bloc, or of a conflictual alliance of several fractions opposed to certain others" (Poulantzas, 1978:132yf 7 K H V H I U D F W L R Q V P D y include big landowners, nonmonopoly capital, monopoly capital, and the internationalized This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms 634 AMERICAN SOCIOLOGICAL REVIEW bourgeoisie or the domestic bourgeoisie. The contradictions that exist between the dominant fractions imbedded in the state make "it neces- sary for the unity of the bloc to be organized by the State." The state, then, is not a unified mechanism founded on a hierarchical distribu- tion of centers of power, but rather a mediating body that weighs priorities, filters information given and, because of its autonomy from any given class or faction, integrates contradic- tory measures into state policy (Poulantzas, 1978:132-35yf 3 R O L W L F V I R U 3 R X O D Q W ] D V L V L Q - teresting precisely because it involves media- tion between various power blocs to maintain the capitalist state. An adequate response to the question of how political power gets translated into economic power can be derived by analyzing how state managers respond to different power blocs, by examining the existing economic and political constraints unique to a particular period and to a particular state action, and by assessing how working-class demands get incorporated into social policy. The Social Security Act of 1935 represented the beginning of a national welfare state in the United States. As social legislation formulated during a major economic crisis to benefit workers through its provisions for old age pensions and unemployment insurance, we would expect to find all of the dynamics that various theories have specified-worker agita- tion for social reform, a decline in business confidence by capitalist interests, and in- creased pressure on state managers to play a mediating role by restoring business confi- dence without increasing class antagonisms. This reform measure will be used to test these various theories of the state. If corporate lib- eralism is confirmed, then we can expect to find major economic interests successfully ma- nipulating the policy. Block would predict state managers responding to business confidence while an organized working class presses for social legislation. On the other hand, from Skocpol' s organizational perspective en- trenched bureaucratic interests would deter- mine the success or failure of social security legislation. Finally, Poulantzas would expect the state to act as a mediating body to preserve and enhance capitalist interests, with the com- position of the power bloc determining the shape of the compromise. THE SOCIAL SECURITY ACT OF 1935 The Social Security Act brought the United States in line with other developed capitalist nations by legislating the first national welfare program. Yet it was a complex piece of legisla- tion that included three seemingly disparate measures, each operating under a different set of principles. The Old Age Assistance (OAAyf title of the act involved channeling federal funds to the states for old age pensions to needy persons over 65, on a fifty-fifty matching basis up to a maximum contribution of $15 a month (Schneider, 1937:82yf ( D F K V W D W H Z D s allowed to set its own standards for eligibility, and many states incorporated traditional poor-law criteria, such as means tests, familial responsibility clauses and residency require- ments (Quadagno, 1984yf , Q F R P S D U L V R Q W K e Old Age Insurance (OAIyf W L W O H Z K L F K E H F D P e the dominant program, was financed entirely from regressive payroll taxation with no gov- ernment contribution, and the original act in- cluded no benefits for spouses or dependents (amended in 1939 to include dependents' bene- fitsyf 3 D \ P H Q W V Z H U H Q R W W R E H J L Q X Q W L O 2 (amended in 1939 to begin in 1940yf D Q G E H Q H - fits paid to the first cohort of retirees were even lower than those for recipients of OAA (Schneider, 1937:79-80yf ( [ F O X G H G I U R P S D U - ticipation in OAI were all those in farm labor, domestic service, employees of religious, charitable and educational organizations and the self-employed (Schneider, 1937:82yf , Q D O O , nearly half of the working population was ex- cluded from coverage. Finally, the unemploy- ment insurance title also involved payroll con- tributions and left criteria for eligibility to the states. Although the rhetoric surrounding the pas- sage of the Social Security Act described it as radical social insurance providing protection for workers from the cradle to the grave, it offered little fundamental change in income re- distribution, and in fact some researchers have argued that it redistributes income in the oppo- site direction, from the poor to the rich (Ozawa, 1976:216yf ) X U W K H U L W V E H Q H I L W S U R - visions served several labor market functions. The old age insurance provisions were set up so that benefits would never be higher than minimum-wage levels and thus wouldn't inter- fere with existing wage structures. The con- tributory principle also reinforced the concept of earned benefits and tied old age security to labor force participation. Finally, welfare ben- efits in the dominant old age insurance program were ideologically defined in terms of age, not need. This set the agenda for future policy de- bates in which arguments for reform and ex- pansion were structured around intergenera- tional conflict rather than class conflict. Most of the explanations of the Social Se- curity Act can be interpreted as some variant on the corporate liberal theme. They include the view that the act was initiated as a means of containing socialism (Bernstein, 1968:273; Olson, 1982:44yf W K D W L W Z D V L Q W H Q G H G W R E H Q H I L t business by expanding purchasing power This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms WELFARE CAPITALISM 635 (Piven and Cloward, 1971:89; Graebner, 1980:191yf W K D W L W S U R P L V H G W R U H G X F H X Q H P - ployment by removing the aged from the labor force (Graebner, 1980:184yf D Q G W K D W L W Z D V W K e result of the intervention of corporate liberals who defined the boundaries of the debate (Brents, 1983b:84yf , Q W K L V S D S H U , Z L O O G H P R Q - strate that the explanation for the form of the Social Security Act is contained within a theory of the state that takes into account the role of working-class agitation, the economic limitations generated by the Depression, and the political constraints inherent in the federal system of government which embedded class interests into the state in a particular way. Although these issues would affect any piece of New Deal legislation, it is also necessary to recognize that the Social Security Act was a public welfare program, shaped by the traditional constraints on relief. The now classic explanation of public welfare programs asserts that relief arrangements regulate labor through periodic expansions and contractions of benefits (Piven and Cloward, 1971: 1yf 5 H O L H f programs vary regionally, however, so that local officials can mesh eligibility criteria with local labor requirements, while the "less eligi- bility" rule keeps welfare grants from becom- ing competitive with wages (Piven and Clo- ward, 1971:131yf 7 K X V W K H U H O L H I I X Q F W L R Q V R f social security must be incorporated into any theoretical explanation of policy formation. The political and economic constraints on public welfare legislation that came into play during the Depression were preceded by local welfare programs, and state pension and un- employment programs, formulated in a context of increasingly organized business opposition to any public pension. THE DEVELOPMENT OF STATE WELFARE PROGRAMS At the beginning of the twentieth century nearly all the programs for relief were locally administered and financed according to pre- vailing poor-law customs, which varied sub- stantially from state to state, county to county (Quadagno, 1984yf 8 Q H P S O R \ P H Q W E H Q H I L W V G L d not exist, and with the exception of a few pen- sions for teachers (Graebner, 1980:93yf S H Q V L R n benefits paid by the federal government to vet- erans, and a few pension programs in private industry (Latimer, 1932yf S H R S O H L Q Q H H G R I U H - lief were forced to apply to their local poor-law authorities. The same criteria for eligibility that applied to all workers, including means tests, family responsibility clauses and residency re- quirements, were applied to the aged. In 1970 the Massachusetts Commission on Old Age Pensions assessed the status of the dependent aged in Massachusetts and con- cluded that pensions would have a number of undesirable effects, including the imposition of "a heavy tax burden on the industries of the State" that would "put them at a disadvantage in competition with the industries of neighbor- ing states unburdened by a pension system." In addition, pensions would reduce wages, de- stroy family cohesion, and would testify to the failure of American economic and social in- stitutions (Report of the Massachusetts Com- mission on Old Age Pensions, Annuities and Insurance, 1910:322yf 7 K H F R P P L V V L R Q F R Q - cluded that "if any general system of old age pensions is to be established in this country, this action should be taken by the national Congress and not through State legislation" (Report of the Massachusetts Commission on Old Age Pensions, Annuities and Insurance, 1910:322yf 7 K X V L Q Z K H Q W K H I H G H U D O J R Y - ernment administered no national welfare pro- gram, the possibility of a federal pension was not inconceivable to industry, which feared unequal competition between industries in different states more than federal intervention. Couched in the ideology of preserving the traditional family, the commission preserved the interests of manufacturers by not imposing a tax that would reduce their ability to compete and by not guaranteeing welfare benefits that might prove to be a disincentive to labor. During the 1920s organizations associated with the social insurance movement argued for pensions financed out of state taxes, and be- tween 1923 and 1929 the majority of states enacted old age pension legislation. Nearly all these laws incorporated poor-law regulations into their criteria for eligibility, and a 1929 re- port by the Department of Labor concluded that the state pension system was "merely an extension of the principle of poor relief' (U.S. Department of Labor, Bulletin No. 489, 1929:75yf , Q V S L W H R I W K H W U H Q G W R Z D U G H Q D F W - ment of pension legislation by the states, as late as 1934 only 25 states had laws in operation (Quadagno, 1984yf . Many pension laws were passed in spite of intense lobbying against them by industry, which became increasingly organized in its op- position. The Pennsylvania Manufacturers' Association (1927:1yf D Q D V V R F L D W L R Q R I V P D O l manufacturers, defeated a pension amendment in 1927, a "costly and vicious scheme" that would "make necessary a Manufacturers' Tax, or an Income Tax, or both." In 1930 the House Committee on Labor began consideration of a national noncon- tributory old age pension proposal put forth by Representative William Connery (U.S. Con- gress, House Committee on Labor, 1930yf 5 H S - resentatives from the National Association of This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms 636 AMERICAN SOCIOLOGICAL REVIEW Manufacturers (NAMyf D Q G R W K H U V P D O O - business organizations argued against it, re- versing their opposition to state pensions under the threat of the intrusion of the federal gov- ernment into welfare legislation. As one NAM representative asserted, "Now we have Con- gress considering the matter of engaging in helping the people by a Federal old-age pen- sion, while not a State has been here saying it is necessary to have Federal aid care for such problems as may exist" (Testimony of Noel Sargent of the National Association of Manu- facturers, U.S. Congress, House Committee on Labor, 1930:192yf . When there appeared to be too much oppo- sition to a national program, Senator Clarence Dill proposed a modified plan before the Sen- ate for federal grants to states for one-third of their pension costs if they enacted state-wide, compulsory laws (U.S. Congress, Senate Sub- committee of the Committee on Pensions, Hearings on S. 3257, 1931yf % R W K S U R S R V D O s brought further heated opposition from manu- facturers' associations, whose representatives argued that "employers ... can not be ex- pected to favor new taxes, which will simply increase production costs, add to the difficul- ties of competition, and restrict employment and the welfare of industrial workers" (Tes- timony of Noel Sargent of the National Associ- ation of Manufacturers, U.S. Congress, Senate Subcommittee of the Committee on Pensions, 1931:64yf 7 K H V H W D [ H V W K H \ D U J X H G S D U W L F X - larly penalized those companies operating in highly competitive markets, whereas a monopoly could readily meet any new charge. After several more years of debate, a modified Dill-Connery bill authorizing a federal appro- priation of $10,000,000 per year to pay one- third of the cost of old age assistance extended by states to aged dependents (H.R. 8461 and S. 493yf S D V V H G W K H + R X V H & R P P L W W H H R Q / D E R U L n 1934 and almost passed the Senate. There was also strong momentum for a na- tional unemployment measure. The only existing unemployment plan had been passed by the state of Wisconsin. The Wisconsin plan or Andrews-Commons model, designed with the help of businessmen Henry Dennison and Edward Filene, was based on a philosophy of prevention to be achieved through the stabili- zation of industry (Schlesinger, 1958:328yf . Benefits were to be financed by employer taxes collected by the state in individual employer accounts. Since individual employer tax rates varied according to the amount of unemploy- ment experienced by a given company, the profit motive of employers would serve to stabilize industry and reduce unemployment (Cates, 1983:23yf . An alternative approach to unemployment insurance, termed the Ohio approach, rejected the concept of prevention as unrealistic, since the forces that caused unemployment were be- yond the control of individual employers. The focus on prevention, it was argued, diverted attention from the real purpose of such sys- tems: the provision of adequate support for the unemployed. Supporters of the Ohio school advocated pooled employer reserves that spread the costs of unemployment benefits among industries instead of passing them to consumers, higher benefit levels, and the financing of benefits out of general revenues (Cates, 1983:23yf . By 1935 a total of 56 unemployment bills were pending before state legislatures. Eight- een were modeled after the Wisconsin plan and provided separate employer reserves; 16 fol- lowed the Ohio plan of a pooled fund with merit rating; seven had industry reserves; six were radical bills of which two later emerged as the Lundeen plan; six provided for a pooled fund without merit rating (Smith, 1937:4yf . Manufacturers' associations also rallied against state unemployment measures because of their fears of interstate competition and because un- employment benefits had the potential to undermine existing minimum-wage laws (Tes- timony of George Chandler, Ohio Chamber of Commerce, U.S. Congress, Senate Committee on Finance, 1935:1102-1104yf ' X H W R W K H L Q I O X - ence exerted by these associations on state legislatures, none of the pending bills was enacted. Although the presence of state plans for un- employment insurance and old age pensions could have served as a political constraint on national policy measures, only Wisconsin had an unemployment program in operation, only half the states had pension laws, and among them few pensions were actually given (Quadagno, 1984yf 6 W D W H Z H O I D U H S U R J U D P V R I - fered only a minimal impediment to national legislation. INDUSTRIAL PENSIONS AND WELFARE CAPITALISM While business associations in highly competi- tive industries fought against any welfare pro- gram that might raise taxes and interfere with existing wage scales, monopoly corporations had begun to implement their own welfare capitalist programs, which served some of the I Until 1933 the NAM mainly represented small manufacturers. Between 1934 and 1935 it became dominated by large manufacturing companies (Burch, 1973:100yf 7 K H R S S R V L W L R Q W R D Q D W L R Q D O S H Q - sion came from the same individuals who had been fighting against state pensions. This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms WELFARE CAPITALISM 637 same functions of traditional relief measures, independent of state action. As Owen D. Young of General Electric explained to Bishop Francis J. McConnell, President of the Ameri- can Association for Old Age Security: I am not yet ready to commit myself to the principle of Government appropriation for old age pensions. It may be necessary, and probably will be, to do something along this line, but my feeling is that it should be only for the last fringe of people who cannot otherwise be provided for. I am deeply in- terested in seeing that the industries them- selves establish programs by which at least industrial workers will never become a charge on the taxing power of the state, but will be taken care of through the economic machinery of the industries themselves. (American Association for Social Security Archives, 1928yf In 1929 a study by Industrial Relations Coun- selors found that 329 industrial programs were in existence. Eighty percent of covered em- ployees were in railroads, public utilities, metal trades, oil, banking and insurance, electrical apparatus and supply industries. In contrast, among the highly competitive and largely un- regulated manufacturing companies, only one-eighth of all employees were potentially covered by a pension plan, and these were in the larger manufacturing establishments (Latimer, 1932:42yf ) R U V P D O O P D Q X I D F W X U H U s who relied on lesser amounts of working capi- tal beyond payrolls, whose ratio of payroll costs to value of manufacturing output was often higher than in larger companies, and who, in many cases, functioned seasonally with a high degree of labor turnover in the off season, the disadvantages of pension costs outweighed any potential advantages (Mulford, 1936:5yf . Industrial pension plans served a variety of labor control functions for welfare capitalists. Nearly all had a length-of-service requirement which reduced the mobility of labor and de- creased rates of turnover among employees. Pensions were also justified by employers as a deferred wage and thus became a means of forcing workers to accept a lower wage scale. Further, the majority of company plans were discretionary on the part of the employer. Even if the worker fulfilled every condition set, the worker had no legal right of any kind to a pension but received it as a gratuity which could be suspended, reduced or revoked at the employer's option (Brandes, 1976:105; Graebner, 1980:129-30yf ) R U H [ D P S O H P D Q y plans contained clauses designed to protect the employing company against increasing costs (U.S. Department of Labor, 1929, Bulletin No. 489:290yf & R Q W L Q X R X V V H U Y L F H F O D X V H V Z H U H D O V o used to bar workers from taking part in strikes. One limited pensions to employees who "have not been engaged in demonstrations detrimen- tal to the company's best interests," while an- other flatly stated that "employees who leave the service under strike orders forfeit all claims to the pension benefit" (U.S. Dept. of Labor, 1929, Bulletin No. 489:291yf ) X U W K H U V R P e plans allowed the company to call upon retired workers to return to work as strikebreakers: The employing company reserves the right to recall pensioners to the service of the company, in which event pensions cease for the time being, and wages are paid in accordance with the standard wage rates for the occupation for which the pensioner has been recalled. (U.S. Department of Labor, 1929, Bulletin No. 489:291yf . Finally, employers paying hidden pension costs by continuing to employ inefficient older workers could retire them at no extra cost. Industrial pension plans also benefited cor- porations through tax savings. In 1916 corpo- rations were granted the right to deduct pay- ments to retirees and their families as part of necessary expenses. The tax benefits of pen- sion plans were extended in 1919 when the Internal Revenue Service also allowed corpo- rations to deduct employer contributions to pension funds as long as they were placed in a separate trust. The tax law was liberalized even further in 1928 to allow deductions for monies transferred from pension reserves to trusts and for contributions to newly created pension plans (Graebner, 1980:134yf . In the 1920s pensions were usually funded as an operating expense, making them highly un- stable during business downturns. Sixty-nine new industrial pension plans were im- plemented between 1929 and 1932, but a greater number of existing plans were discon- tinued as the Depression grew worse, under- mining the "deferred wage" concept. As politi- cal pressure increased for some sort of federal action to provide a more secure economic re- source for older people, big business mobilized to create a counterproposal, one regulated by the federal government but under the control of industry. Several different joint government-industry plans were proposed by members of the busi- ness community. The two most influential were those of Henry Harriman (1932yf R I W K e New England Power Company and the U.S. Chamber of Commerce and Gerard Swope (1932yf 3 U H V L G H Q W R I * H Q H U D O ( O H F W U L F D Q G D O V R a prominent member of the Chamber. Both plans encompassed welfare provisions under broader programs for economic recovery through the This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms 638 AMERICAN SOCIOLOGICAL REVIEW stabilization of industry, coordinating produc- tion and consumption through trade associ- ations. Included was a call for industry to set aside "reserves to care for unemployment, old age, sickness and accidents" (Harriman, 1932:74yf . Swope devised a joint employer-employee contributory pension program to be adopted by all members of trade associations, subject to approval by a federal supervisory body. If an employee moved from one company to another within an association or to a company in an- other association, the funds accumulated would be transferred. Any employee leaving an occupation covered by a trade association could withdraw the amount of his or her contributions plus the interest accrued (but not the employer's contributionyf 6 Z R S H , 1932:167-68yf $ V L P L O D U S O D Q Z D V V H W I R U W K I R r unemployment insurance, including a pro- vision to reward companies with low unem- ployment rates by removing the one percent charge to the employer (but not the employeeyf (Swope, 1932:169yf , Q V W U H V V L Q J K R Z K L V S O D n would contribute to the stabilization of indus- try, Swope (1932:184yf D U J X H G W K L V S O D Q V H H N s to place the same social burdens on companies competing in various parts of the United States." Industry had learned that if it had to pay the costs of pension programs, then it needed to remove differential costs of pen- sions. The solution could be found in trade associations under government regulation that forced compliance. Over the vigorous objections of the NAM, trade associations were established under the jurisdiction of the National Recovery Admin- istration. No industry-wide pension programs were implemented, however, and as the De- pression deepened, even those companies with welfare programs in operation found them- selves unable to maintain benefits (Berkowitz and McQuaid, 1980:82yf 7 K H ' H S U H V V L R Q U H - vealed the limits of voluntary business organi- zation for solving the nation's problems, and welfare capitalists now clearly understood that their company programs required substantial federal underpinning to be effective. THE CREATION OF THE SOCIAL SECURITY ACT Setting the Parameters of the Debate As the country moved toward a national pro- gram of old age pensions and unemployment insurance, competing factions attempted to set the parameters of the debate. State managers had to respond to the economic crisis gener- ated by the Depression as well as to labor un- rest. Yet in the advocacy of welfare programs, it was not organized labor but a reform move- ment of the aged that placed the greatest pres- sure on the government to establish national pensions. This movement, led by retired phy- sician Frances Townsend, proposed a proto- Keynesian measure to solve both the nation's woes and the problem of insecurity in old age. Townsend demanded that anyone over the age of 60 be paid a flat pension of $200 a month from the federal treasury on the single condi- tion that the recipient spend the entire amount within that month (Townsend, 1943yf 7 K H S X U - chasing power generated by the pensions would stimulate the economy and help produce economic recovery. Funds were to be gathered from a 2 percent tax on the "gross dollar value of each business, commercial and/or financial transaction" and distributed to all older people, regardless of residency, number of living rela- tives, or income level (Committee on Old Age Security, 1936:16yf + X Q G U H G V R I W K R X V D Q G V R f elderly people supported Townsend, and members of Congress were bombarded with petitions from elderly constituents (Holtzman, 1963:88yf . The Townsend plan created a political furor, and the Roosevelt administration, through an investigation by the Committee on Old Age Security (1936yf O D X Q F K H G D Q D W W D F N R Q L W G H - scribing it as unworkable and financially un- sound. All respected policymakers agreed, and yet the Townsend plan was really a moderate measure. With its lack of progressive taxation and its emphasis on the expansion of purchas- ing power, it was functionally compatible with the existing economic system. The only truly radical alternative was the Lundeen bill. Al- though it attracted less public attention, it had the potential to expand the boundaries of existing welfare policy and to alter significantly the distribution of wealth. The Lundeen bill called for compensation equal to average local wages for all unemployed workers, for sup- plementary benefits for part-time workers un- able to secure full-time employment, and for payments to all workers unable to work be- cause of sickness or old age, the source of funds being the general treasury of the United States. Any further funds necessary were to be provided by taxes levied on inheritances, gifts and individual and corporate incomes of $5,000 a year or over (U.S. Congress, House Sub- committee of the Committee on Labor, 1935:1-2yf . The Lundeen bill had the support of numer- ous local unions and unemployment councils. They argued for its passage on the grounds that it would maintain the standard of living of workers by providing benefits equal to average wages, that it would protect workers from being disqualified from benefits on the basis of participation in strikes, that it provided for the This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms WELFARE CAPITALISM 639 participation of trade unions in the administra- tion of benefits, and that it put the financial burden on those most able to pay (Testimony of Elmer Johnson, representing the Chicago Branch of the American Federation of Labor, U.S. Congress, House Subcommittee of the Committee on Labor, 1935:522yf $ S H Q G L Q g Wagner-Lewis unemployment bill was rejected by these same organizations, because it ex- cluded the presently unemployed from cover- age, because it made employees pay through the tax on wages and through the increased cost of commodities, and because the cost of insurance would not be determined by the ca- pacity to pay (Testimony of Frank Trager, Chairman of the People's Unemployment League of Maryland, U.S. Congress, House Subcommittee of the Committee on Labor, 1935:534yf ) X U W K H U W K H : D J Q H U / H Z L V E L O O O H I t provisions for unemployment relief under local control, a system that was still used as a means of manipulating labor. As Thomas Crawford of the Agricultural and Cannery Workers Indus- trial Union explained: In Deerfield Township, the head of the relief administration was Mr. Seabrook who is the biggest farmer-owner in the East. When the C.W.A. was started ... Mr. Seabrook, who was overseer of the roads during the winter months gave the jobs to the people on his own farm instead of to the workers who were unemployed. ... He gave the jobs, too, to the small farmers that were close to his farm, in order to keep the agricultural workers down at the point of starvation. This was so that he could then hire them at very low wages when the season started. This is the way it is done all over south Jersey. (U.S. Congress, House Subcommittee of the Committee on Labor, 1935:65yf Also rejected was the Townsend plan, be- cause its advocates "direct various kinds of verbal attacks against capitalists even while they bend all their effort to the task of saving the capitalist system." Further, it only pro- vided insurance for those who reached the age of 60 and not all who needed it (Testimony of Herbert Benjamin, executive secretary, Na- tional Joint Action Committee for Genuine So- cial Insurance, U.S. Congress, House Sub- committee of the Committee on Labor, 1935:183yf . By linking the Lundeen bill with the Townsend plan, critics were effectively able to represent both as fantastic and unworkable schemes. The opposition of the AFL's national leadership to the Lundeen bill also contributed to its defeat. Although representatives from several locals testified before the House com- mittee, the national leadership of the AFL was notably absent. It took no position on this bill and instead argued for liberalization of the Wagner-Lewis payroll-tax plan for unemploy- ment insurance. Why did the AFL take this stand when so many smaller unions endorsed it'? In part, the ambivalence of the AFL na- tional leadership toward national welfare mea- sures was related to its long-standing opposi- tion to both employer and government welfare programs, which they had seen used against labor and which they believed were designed to discourage the formation of unions. Union benefits provided an inducement to workers to join unions, whereas government-sponsored plans, even those gained under pressure from labor, potentially undermined this inducement. The CIO was even less involved because union leaders at this time were most directly con- cerned with issues of organization maintenance and establishing rights to collective bargaining. Thus, the foundation of the welfare state was constructed with minimal input from organized labor.2 Roosevelt thus had before him the Lundeen bill, the Dill-Connery bill, and the Wagner- Lewis bill as three separate welfare measures. As Governor of New York, Roosevelt had sponsored a contributory pension bill which was not passed, so the contributory philosophy was not unfamiliar to him (Chambers, 1963:166yf 2 Q 0 D U F K 5 R R V H Y H O W L Q Y L W H d Gerard Swope, author of the Swope Plan, to lunch to get his views on unemployment insur- ance and old age pensions. Swope described to Roosevelt GE's own joint contributory pension plan, in which both employer and employee had a vested interest (Loth, 1958:235yf % H I R U e the luncheon was completed, Roosevelt-his political imagination triggered by Swope's pro- posal for a federal system that provided cover- age from the cradle to the grave-asked Swope to summarize his ideas. Two weeks later, Swope presented the completed proposal to the president, a detailed statistical document that included plans for unemployment, dis- ability and old age pensions. Roosevelt im- mediately began pushing for a comprehensive social security measure that incorporated both unemployment and pensions (Loth, 1958:236yf . In a speech on June 8, 1934, he clearly dis- carded income redistribution as a goal of Social Security and committed himself to a contribu- tory plan, declaring, "I believe that the funds necessary to provide this insurance should be raised by contribution rather than by an in- crease in general taxation" (Roosevelt Papers, Official Files, 494a, Box 1yf 7 K X V W K H S D U D P H - 2 In contrast, the first old age pension bill in En- gland was passed because of direct pressure from organized labor (Quadagno, 1982yf . This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms 640 AMERICAN SOCIOLOGICAL REVIEW ters of the debate were narrowed to contribu- tory measures that had already been used by monopoly industries and that did not affect the existing distribution of wealth. Organized labor's struggle for bargaining power and union survival precluded its in- volvement in social welfare issues, so the potential pressure from workers for a radical income-redistribution welfare program was lost. Townsendites, who rallied the most ef- fective political constituency, based their arguments on the issue of age rather than class, a strategy that focused the debate on pensions for the aged rather than adequate protection for workers. An age-based rather than a class- based movement in effect gave state managers the freedom to shape welfare programs in a way that was functionally compatible with the existing economic structure. The Creation of the Committee on Economic Security In order to implement this program, Roosevelt selected the members of the legislative plan- ning committee, the Committee on Economic Security (CESyf W R H [ F O X G H D O O D G K H U H Q W V W R D Q y school of thought advocating a more radical, redistributory social welfare policy. Instead, supporters of the Wisconsin approach who be- lieved in a preventative, business-centered philosophy and who supported contributory pension plans were chosen. Prevention, ac- cording to Princeton economist, J. Douglas Brown, could be achieved through the individ- ualization of benefit rights, which related the prevention of old age poverty "to the individu- al's customary way of life and the normal costs of sustaining that way of life" (Brown, 1977:5yf . In other words, social insurance was not to be used to redistribute income; existing inequities in income need not be leveled through the mechanism of old age pensions. Secretary of Labor Frances Perkins, Harry Hopkins, Director of the Federal Emergency Relief Administration, and Secretary of Ag- riculture Henry Wallace were given the task of selecting the membership of the CES. In tes- timony before the Senate Finance Committee, which held the hearings on what came to be called the Social Security Act, Perkins repre- sented the administration's viewpoint. Welfare benefits, she argued, would help to resolve the economic crisis, for "by paying over moneys to persons who would otherwise not have any income, you are creating purchasing power which will regularly, year after year and month after month, sustain the purchases which are to be made from the great manufacturing and mercantile systems of the country"' (U.S. Con- gress, Senate Finance Committee, 1935:104- 105yf ) U R P W K H D G P L Q L V W U D W L R Q V S H U V S H F W L Y H , the stabilization of the economy, not the wel- fare of workers, was the goal of national wel- fare programs-a goal that coincided with the interests of monopoly capital. Arthur Altmeyer, former secretary of the Wisconsin Industrial Commission, which supervised the administration of unemploy- ment relief in that state, and former Director of the Labor Compliance Division of the National Industrial Recovery Administration, was given the task of organizing the CES and later be- came Chairman of the Technical Board on Economic Security, one of the subcommittees to the CES (Altmeyer, 1966:xiyf $ O W P H \ H U Z D s not only well schooled in the Wisconsin philosophy but had also worked closely with businessmen in the NRA, who approved of his selection. As Folsom (n.d.:95yf U H F D O O V L Q K L s memoirs "I naturally liked Altmeyer' s ap- proach because he came from Wisconsin.... and they were on an individual reserve basis.' Altmeyer invited Edwin Witte, former stu- dent of John Commons and secretary of the Wisconsin Industrial Commission, to chair the CES, and Witte was given the task of selecting other staff members. Before making these selections, he consulted with a number of people who had some part in the development of the program "or who were reported to me to have valuable ideas on the subject" (Witte, 1963:16yf $ W W K H V S H F L I L F U H T X H V W R I 5 R R V H Y H O W , he made a special trip to consult with Gerard Swope, John Raskob of General Motors and Walter Teagle of Standard Oil, all members of the Business Advisory Council. In trying to decipher the will of the President, Witte's first impression was that Roosevelt had only con- sulted with Perkins and his advisor Raymond Moley prior to the creation of the CES. He later learned that Roosevelt had also discussed the subject with Swope, Raskob and Owen Young (Witte, 1963:19yf 7 K X V W K H P D L Q S X U - pose of Witte's visit to the industrialists was to "get from them their ideas on what ought to be done, which they had previously presented to the President" (Witte, 1963:19yf $ V : L W W e (1963:89yf U H F D O O V . I had several conferences with Mr. Harriman [President of the United States Chamber of Commerce] during the fall and again im- mediately preceding his testimony before the Senate Finance Committee. Mr. Harriman's general attitude was that some legislation on social security was inevitable and that busi- ness should not put itself in the position of attempting to block this legislation, but should concentrate its efforts upon getting it into acceptable form. In addition to the technical board, an Advi- This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms WELFARE CAPITALISM 641 sory Council on Economic Security was created to assist the CES. The members of the Advisory Council selected by Roosevelt from a list prepared by Altmeyer and Witte included labor, citizen and employer representatives. The employers selected were a group of mod- erate welfare capitalists, including Swope, Marion Folsom of Eastman Kodak, and Teagle, along with Morris Leeds, president of Leeds and Northrup, and Sam Lewison, vice president of Miami Copper Company. Roosevelt had preferred to have Swope or Young chair the council, because they were businessmen who recognized the inevitability of social security legislation, but was advised by Perkins that this would be politically unwise ("Suggestions for an Advisory Council," Altmeyer Papers, CES File 2, Box 1yf , Q V W H D G , a Southerner, Frank Graham, president of the University of North Carolina, was selected as a means of restraining some of the expected op- position from the South. Business Reaction In its official capacity the Advisory Council had little impact, but the employer members exerted considerable influence on the legisla- tion in a variety of unofficial ways. One of the major concerns of the employers was to obtain as much federal control over the legislation as possible to regulate competition from com- panies who might otherwise find ways to cir- cumvent the proposed taxes. As Brown ex- plained in testimony before the Senate Finance Committee (1935:284yf K H D U L Q J V R Q V R F L D O V H - curity, the benefit of the employer contribution was that it makes uniform throughout industry a minimum cost of providing old-age security and protects the more liberal employer now providing pensions from the competition of the employer who otherwise fires the old person without a pension when superanu- ated. It levels up the cost of old-age pro- tection on both the progressive employer and the unprogressive employer. Business leaders were satisfied with the shape of the old age insurance (OA1yf S R U W L R Q R f the act, for it involved complete federal control over the imposition of employer and employee contributions. In fact, when this plan ran into opposition by CES members because it was national in scope, "help came from an unex- pected source, the industrial executives on the Committee's Advisory Council . . . their prac- tical understanding of the need for contributory old age annuities on a broad, national basis carried great weight with those in authority" (Brown, 1972:21yf . The OAI provisions thus represented the ac- ceptance of approaches to social welfare created by private businessmen. They retained the joint contributory format reminiscent of private pension plans and did little to redistri- bute income. Only those with employment records received benefits, insuring that America's social welfare system would con- tinue to be connected with the private labor market. Further, benefit levels were set low so as not to compete with existing wage levels. In contrast to OAI, the unemployment in- surance portion of the Social Security Act stimulated great debate among the various committees charged with creating the legisla- tion. The technical board proposed three pos- sible options: an exclusively federal system in which the federal government would collect payroll taxes and provide uniform compensa- tion to workers; a federal subsidy plan in which the federal government would collect payroll taxes and distribute them to states operating unemployment compensation systems ac- cording to acceptable national standards; and a federal tax-offset plan, comparable to the Wagner-Lewis bill, in which the federal gov- ernment would assess payroll taxes but forgive 90 percent of them if employers paid required contributions to insurance systems set up ac- cording to each state's standards (Altmeyer, 1966:17yf 6 L Q F H 5 R R V H Y H O W K D G Y L U W X D O O \ H O L P L - nated the possibility of an exclusively federal plan, the choice was really between the sub- sidy plan, which gave the federal government the power to regulate the states to insure uni- formity in state laws, and a tax-offset plan, which gave the states greater flexibility in es- tablishing their own programs. The Advisory Council as a whole was di- vided and voted 9 to 7 in favor of the subsidy plan, which was unanimously favored by the employer members. They preferred the sub- sidy plan because it could incorporate contri- butions by both employer and employee into its format and "because they operated in many states and didn't want to be caught in the vari- ations and the requirements of the separate states" (Altmeyer, Memoirs:15 1yf , Q F R Q W U D V W , the tax-offset plan required only employer contributions. Employee contributions were viewed as a way of keeping employer costs down (Wilbur Cohen, telephone interviewyf . When it appeared that the CES favored the tax-offset plan, the employer members of the Advisory Council made several attempts to in- fluence the direction of the proposed legisla- tion. After a meeting between members of the Advisory Council and the CES in which it ap- peared that the CES was not going to take the Advisory Council recommendations seriously, members of the Business Advisory Council This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms 642 AMERICAN SOCIOLOGICAL REVIEW (which included Leeds and Teagle, who were also Advisory Council membersyf O H D N H G D V W R U y to the New York Times reporting that the Advi- sory Council favored the subsidy plan and that this was an upset for the administration (New York Times, December 7, 1935yf 7 K H H P S O R \ H r members of the council also made a direct at- tempt to obtain the agreement of Witte and Stewart by inviting them to a private dinner at the Hotel Shoreham on December 6. As Witte (1963:60yf U H F D O O V : I was invited by Mr. Teagle to have dinner with him that evening and found that all em- ployer members of the advisory council were present, plus Dr. Stewart, and that the pur- pose of the meeting was to talk over the position the employer members should take on the several controversial issues affecting unemployment insurance. I excused myself as soon as I decently could do so following the dinner, but Dr. Stewart remained. Finally, the BAC prepared a confidential memorandum entitled "Preliminary Memoran- dum on Unemployment Insurance" presenting their position, which was also leaked to the newspapers. Given a great deal of publicity, it caused the CES considerable embarrassment (Witte, 1963:90yf . When the employers realized that the sub- sidy plan might fail, they expressed their con- cerns in a joint letter to Frances Perkins on December 15, 1934, proposing a substitute plan to reduce unemployment taxes for companies with low rates of unemployment, i.e., a system of merit rating. Companies that stabilized un- employment, they argued, should be rewarded by lower contributions to the fund, for if com- panies with lower unemployment rates were forced to subsidize competing factories or plants, "there would arise a species of unfair competition that might even force out of busi- ness the truly low cost concern" (Altmeyer Papers, 1934, CES File 1, Box 1yf $ V ) R O V R m explained in his defense of a plan that would penalize companies with high unemployment rates: We're saying that if the needle trades indus- try can't operate any other way besides having periods of idle time, that ought to be reflected in the price and charged to the con- sumer and not be made a burden on the other industries in the state . . . We say, it's the consumer's fault if they have this seasonal lay-off. Why not let the consumer pay for it'? (Folsom, Memoirs: 105-106yf The idea of merit rating, which intensified individual employer responsibility for the op- eration of the economy, was favored by Roosevelt because it was the only part of the entire social security measure that provided employers with incentive to reduce unem- ployment. Initially rejected by the House Ways and Means Committee, it was unanimously re- stored by the Senate Finance Committee and further liberalized to favor monopoly indus- tries. In its restored form there were fewer limitations on additional credits for employers, and states were not required to establish pooled funds (Witte, 1963:141yf . The employers did lose a major battle, be- cause the subsidy plan they favored, which ensured uniform costs and allowed the possi- bility of employee contributions, was not adopted by Congress. The inclusion of merit rating, however, did provide more stable com- panies a distinct advantage over companies with greater yearly fluctuations in unemploy- ment rates. According to Schlesinger (1958:314yf P H U L W U D W L Q J L Q F U H D V L Q J O \ S O D F H d the burden of unemployment compensation on the industries least able to bear it; costs which might have been socially distributed were in- stead assessed in a way which further weakened the already weak." When the merit- rating clause was introduced into the bill, the employers were reasonably satisfied and dropped their support for the subsidy plan (Wilbur Cohen, telephone interviewyf . Why did the employers lose the battle for the subsidy plan? The main reason was the heated opposition from manufacturers associations, such as the National Metal Trades Association (of which United States Steel Corporation was not a memberyf W K H , O O L Q R L V 0 D Q X I D F W X U L Q J $ V - sociation, the Connecticut Manufacturer's As- sociation, and the Ohio Chamber of Com- merce, who represented manufacturers in highly competitive industries. One concern of these manufacturers was that numerous other costs could still vary from company to com- pany, depending on such factors as prevailing wage rates and access to raw materials, even though welfare costs might be equalized. Further, monopoly industries had a buffer that protected them from the costs of the proposed taxes in the form of a greater percent of work- ing capital beyond payroll costs, whereas nonmonopoly manufacturers were unlikely to have cash working capital greater than 10 per- cent of the total annual payroll. According to Illinois Manufacturing Association representa- tive John Harrington (U.S. Senate Committee on Finance, 1935:686yf S H U F H Q W R I W K H P D Q - ufacturers in Illinois are today reduced to a hand-to-mouth basis as regards cash-working capital." These companies also had a poorer ability to pass the taxes on to the consumer; since this involved a period of adjustment they would have to finance themselves out of their This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms WELFARE CAPITALISM 643 immediate working capital.3 Finally, busi- nesses that were primarily local wanted direct assurance that unemployment benefits would not undermine prevailing minimum wages. Thus, they argued "that a person who declines to accept the wage provided in the minimum wage laws or in industry in which a minimum wage agreement is in effect, should not be a beneficiary of the fund" (Testimony of George Chandler of the Ohio Chamber of Commerce, U.S. Senate Committee on Finance, 1935:1104yf . While nonmonopoly companies preferred no legislation, if legislation was inevitable, then they argued for as much state control as possi- ble. The legislation that was eventually passed reflected the sensitivity of congressmen to the local business community, whose support was more critical for their continued political sur- vival than that of monopoly capitalists operat- ing on the national political scene. Monopoly capitalists could use direct inter- vention with national state managers to shape federal welfare programs to conform to business standards, whereas companies in the competi- tive sector of the economy asserted their dif- ferent goals through political pressure on their congressional representatives. Clearly, there can be no single one-to-one relationship be- tween the interests of capitalists and the form of the state when different groups within the business community disagree on economic goals. Each group may exert political influ- ence, but the means at their disposal varies. State managers, who vary in their position in the state hierarchy, have different constituen- cies to respond to and different barometers of business confidence to weigh in decision mak- ing. The Southern Comnpromuise As of 1935 no Southern state had passed any pension legislation, and the aged poor in the South had only the poor law. Because both the unemployment title and the old age insurance title of the Social Security Act excluded ag- ricultural and domestic labor and because ap- proximately three-fifths of all black workers were employed in these categories, most black workers were not covered by either program (Wolters, 1975:194yf 7 K H V W U X F W X U H R I W K e legislation left most black workers with old age assistance as the only source of support. Southerners, who packed the powerful House Ways and Means Committee, raised the greatest objections to the old age assistance title, which threatened to set federal standards that would intervene in existing local regu- lations. The particular focus of concern of Southern congressmen was a clause specifying that states had to furnish assistance sufficient to provide 'a reasonable subsistence compati- ble with decency and health."' High rates for old age assistance grants would, they feared, subsidize the children of aged blacks, who would then be more independent and less will- ing to perform farm labor for low wages (Roosevelt Papers, Official'Files 494a, Box 1yf . Further, Southern industrial wage scales, which were in fact considerably lower than Northern wage scales, could also be under- mined. For example, the ratio of payrolls to the value of output was 33.9 percent in Massachu- setts, but only about 25 percent in Georgia, North Carolina and South Carolina in cotton manufacturing (Mulford, 1936:17yf . In response, black leaders argued for greater federal control of standards, explaining that, " In many communities there is a prevailing idea that Negro persons can have such a rea- sonable subsistence on less income than a white person,' and that local standards would become the rationale "'to give less assistance to aged Negroes than to aged whites" (U.S. Sen- ate, Committee on Finance, 1935:489yf . Further, the residence requirements for OAA were likely to be particularly unfair to blacks engaged in migratory labor since they could be used to deny benefits. Southern congressional support, however, was necessary for passage of the act, and blacks had no political power. The "decency and health" provision was eliminated, leaving the states free to pay pen- sions of any amount and still recover 50 per- cent of the costs from the federal government. States were also granted the right to impose additional provisions to make criteria for eligi- bility more stringent than those stipulated in the bill. Finally, unlike OAI, recipients of OAA could remain in the labor force as long as their wages were low enough for them to qualify for assistance under locally established criteria. Thus, OAA could be used as a supplement to earnings and continue to function as a traditional form of labor control. I A study conducted by the Bureau of Research and Statistics in 1936 concluded that "there is a basis for the claim of inequality in the pay-roll taxes . . . between major industries." The profits of industry would not be seriously affected, however, because ''ultimately it is believed the employer's share will be practically entirely passed in some manner either to the consumer in the form of higher prices or back to labor in the form of suppressed wages" (Mulford, 1936:38yf . 4 Austria, Belgium, Bulgaria, Czechoslovakia, France, Great Britain, Italy, the Netherlands and Spain all had coverage for agricultural workers and domestics in their pension plans (U.S. Senate, Committee on Finance, 1935:51yf . This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms 644 AMERICAN SOCIOLOGICAL REVIEW The absence of state pensions in the South rather than the presence of state pensions elsewhere was the more significant factor in shaping national legislation. It was not an en- trenched bureaucratic structure but an en- trenched planter aristocracy that made OAA a locally administered program. The Aftermath A poll taken by Fortune magazine in 1939 asked businessmen to evaluate the New Deal. Overall, business reaction to the Social Secur- ity Act was moderate. Only 17.3 percent felt it should be repealed, while 2.43 percent were satisfied with it in its present form and 57.9 percent wished some modifications (Fortune, 1939:52yf , Q F R Q W U D V W R Y H U Q L Q H W H H Q S H U F H Q t wanted to see the Federal Housing Authority repealed, 21.4 percent the Wages and Hours Law, 44.4 percent the Works Progress Admin- istration, 40.9 percent the Wagner Act, and 66.2 percent the undistributed-profits tax (Fortune, 1939:52yf 1 R Q H R I W K R V H Z K R Z D Q W H d the Social Security Act repealed were large manufacturers (Fortune, 1939:90yf . Big business had good reason to react posi- tively. When the Social Security Board faced its first major task of establishing 26 million accounts for individuals, they consulted with BAC members, and Marion Folsom helped plan the creation of regional centers. In July the board, assisted by the BAC, hired the di- rector of the Industrial Bureau of the Philadel- phia Chamber of Commerce to serve as head registrar, and the BAC insisted on starting regis- tration as soon as possible (McKinley and Frase, 1970:347yf $ W W K H V X J J H V W L R Q R I * H U D U d Swope, J. Douglas Brown was appointed chair of the new Advisory Council (Brown, 1972:23yf . Thus, businessmen helped select the personnel for a major federal welfare program. Businessmen also found that there were de- cided benefits to the legislation. Folsom (1939:42yf Z U R W H D Q D U W L F O H H [ S O D L Q L Q J K R Z K e integrated the Eastmen Kodak pension plan with social security: We adjusted our plan so that the cost to the company remained practically the same as before and the employee received the same benefits from the company contribution he previously received, part coming from the Government and part from the insurance company. We have since 1936 adopted sup- plementary plans for several subsidiary companies. According to Folsom (1939:41yf S H Q V L R Q V Z H U e good business, for they allowed employers to eliminate the hidden pension costs of keeping on older employees, and the help afforded by the Social Security Act allowed Kodak to ex- tend its coverage to its subsidiaries, secure in the knowledge that competing companies had the same costs. The strongest reactions against the Social Security Act came, not from the business community, but from those who had advocated more radical measures. Members of the American Association for Social Security claimed that many states had turned "their old age pension system into sinks of corruption," that the residency requirements had to be changed "to- permit pensioners to migrate freely from state to state without loss of pen- sion privileges," that the benefit structure was inadequate and did not include wives of pen- sioners, and that it was "socially unfair and economically dangerous for the government to shift its responsibility for the accumulated bur- den of old age dependency to the workers" (Epstein, 1938:2-3yf 7 K H D P H Q G P H Q W V W o the Social Security Act increased the size of benefits, extended them to dependents, and advanced the date on which they were to begin. They were supported by social- insurance advocates who found themselves curiously aligned with members of the Busi- ness Advisory Council and the insurance in- dustry. What led business leaders to support expan- sion of the program'? The critical issue was the impact of the build-up of the large reserve of accumulated insurance funds on the economy. Between 1935 and 1938, welfare capitalists Leeds, Filene and Dennison did a study of the causes of the Depression. In their report, enti- tled "Toward Full Employment," they advo- cated a Keynesian solution based on compen- satory fiscal policy (Brents, 1983a:17yf , Q V X U - ance executives also expressed concerns about the build-up of a huge reserve on the grounds that it would induce unwarranted expansion of the program (U.S. Congress, Senate Com- mittee on Finance, 1937:14-15yf 7 K H S D V V D J e of the 1939 amendments mollified social- insurance advocates' demands for liberaliza- tion of benefits, while simultaneously reducing the amount of the full reserve. CONCLUSION Several conclusions about how economic power gets translated into political power can be drawn from this analysis. In regard to cor- porate liberalism, there is certainly ample evi- dence in the historical record of substantial welfare-capitalist involvement. Business exec- utives had a direct impact on the Social Secur- ity Act by serving on policy-forming commit- tees and by testifying before Congress. They also exerted influence in a less formal manner This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms WELFARE CAPITALISM 645 through a variety of interactions with state managers who held varying degrees of power. Tactics included informal discussions with Roosevelt and committee members, letter writ- ing, proposal development, and attempts to coopt lesser figures. Although these business executives were di- rectly involved in the policy-formation pro- cess, they were only partially successful in in- fluencing the shape of legislation. Their lack of success on the issue of unemployment insur- ance in particular reflects the divergence in interests between monopoly and nonmonopoly companies. Monopoly corporations, which op- erated on a multistate and often multinational basis, were unconcerned with traditional means of labor control reflected in state and local welfare policies, such as unemployment and old age pension laws, because many had already implemented more sophisticated mea- sures through company-sponsored unemploy- ment and pension schemes. In contrast, busi- nesses operating in highly competitive markets with great seasonal or cyclical fluctuations and lesser amounts of working capital feared losing the more traditional labor-control mechanisms that supported the needs of local economies. They also feared the imposition of taxation which would further hamper their ability to compete. Not having direct access to national state managers, they pressured their congres- sional representatives and fought to keep the proposed welfare legislation under state rather than federal control. In a hierarchical state structure, capitalist groups with varying economic interests exerted their influence at different levels in the hierarchy. State managers could not act auton- omously, but were, as Block (1977byf K D s argued, highly responsive to business confi- dence. Business confidence, however, was not a single variable. National state managers operating within the broad constraints of the economic crisis of the Depression were more immediately responsive to the goals of monopoly capitalists, but the implementation of those goals was confined within the param- eters of a federal system in which non- monopoly corporations could exert pressure on local state managers. Since no legislation could pass without congressional support, a "states rights" agenda served to maintain the confidence of the rest of the business commu- nity. Economic power, then, gets translated into political power through the direct inter- vention of corporate liberals and through the hierarchical structure of the state, which allows competing factions to petition state managers for direct agendas in social policy. State managers' concerns with business confi- dence are not just reflected in their sensitivity to the determinants of investment decisions; rather they are directly expressed in political decisions resulting from direct pressures from factions that organize. This analysis also demonstrates the inade- quacy of Skocpol's model (Skocpol, 1980; Skocpol and Finegold, 1982; Skocpol and Ikenberry; 1982yf Z K L F K D U J X H V W K D W R U J D Q L - zational or administrative factors such as pat- terns of political party organization, degree of bureaucratization or the presence of existing state programs are primary policy determi- nants. The fact that states had local poor laws, pension plans, and unemployment insurance proposals already in operation or pending was a factor in shaping the outcome of the Social Security Act. But by 1935 few states were ac- tually giving out old age pensions and only Wisconsin had actually implemented unem- ployment insurance. The reason why there was such concerted resistance to the idea of federal intervention was because of the threat such intervention posed to local control of labor. More important than existing bureaucratic structures were political pressures exerted by locally dominant economic interest groups. Dominant groups won't support state actions that aren't in their best interests, and state ac- tions cannot succeed without this support. Political structures simply cannot be analyzed as autonomous entities but must be considered in terms of their underlying economic dimen- sions. It is also important to explain why a piece of legislation with such a high level of "class content,' i.e., a social-welfare measure, was implemented with almost no working-class input. This can be partially explained by the fact that the pension debate was structured around age-based rather than class-based is- sues. The Townsend movement, not organized labor, was the source of pressure for reform, and the argument the Townsendites used to advocate a national pension did not challenge the prevailing ideology on how to resolve the crisis of the Depression. According to Towns- endite arguments, pensions would preserve the free-market system by stimulating the economy through the expansion of purchasing power. Organized labor, ambivalent about the benefits of a national welfare system, focused its concerns instead on issues more directly involved with organization maintenance and never supported a radical alternative that could have expanded the limits of the debate and led to a major redistribution of income. Thus, state managers remained free to lay the groundwork for a social-welfare program that could sustain and enhance the conditions for capitalist eco- nomic activity. Their mediating or organi- zational function was not between workers and This content downloaded from 198.246.186.26 on Tue, 11 Jul 2017 11:24:28 UTC All use subject to http://about.jstor.org/terms 646 AMERICAN SOCIOLOGICAL REVIEW capitalists but between divergent groups within the capitalist class. The most complex issue to resolve still is whether class interests are imbedded within the state or whether various factions operate outside the formal structure of the state. What was at stake in the debate surrounding the So- cial Security Act was the nature of the state itself. Organized labor, nonmonopoly capital, and Southern agricultural interests were struggling to keep social-welfare measures out- side the jurisdiction of the state, whereas a core group of influential monopoly capitalists, national state managers and various citizen co- alitions argued for increased centralization. The outcome of this battle was a reorganization of the state in a manner that expanded its role and incorporated previously fractionated inter- est groups more firmly within its jurisdiction. In the final analysis, this case study provides substantial support for Poulantzas's thesis that the state functions as a mediating body, weighing the priorities of various power blocs within it. While Block's distinction between corporate leaders and state managers is rele- vant, state managers do not respond to a un- ified set of concerns centering solely around business confidence. Rather they are respon- sive to the interests of competing factions un- equally represented within the state. Dominant economic interests operate at a higher level within the state hierarchy, giving them greater access to decision makers. This fact has pro- vided ample ammunition for corporate liberal arguments, for direct intervention by monopoly capitalists is often most visible. Corporate liberal arguments cannot explain why these interventions sometimes fail, how- ever, because corporate liberalism underesti- mates the weight other power blocs carry. The state mediates between various interest groups who have unequal access to power, negotiat- ing compromises between class factions and incorporating working-class demands into legislation on capitalist terms. 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