In the wake of the economic crash, which has led to soaring budget deficits, Democrats and Republicans are negotiating “to move forward to trillions of spending cuts,” as House Majority Leader Eric Cantor said recently. A report from House Speaker John Boehner’s office called for “eliminating [government] agencies and programs” and “reducing transfer payments to households.” These changes would result in unprecedented reductions in the size of the welfare state and the American social compact as it developed over the last century.
Lost in this debate is an appreciation of the historical origins of the American welfare state — long before FDR and the New Deal, after another epochal financial crash.
Much like our time, the Gilded Age was an era of economic booms and busts. None was greater than the financial crisis that began in September 1873 with the collapse of Jay Cooke & Co., the nation’s premier investment bank. Like many other firms, Cooke & Co. overextended itself by offering risky loans based on overvalued real estate.
Cooke’s collapse launched the first economic crisis of the Industrial Age. For 65 straight months, the U.S. economy shrank — the longest such stretch in U.S. history. America’s industrial base ground to a near halt: By 1876, half of the nation’s railroads had declared bankruptcy, almost half of the country’s iron furnaces were shut and coal production collapsed. Until the 1930s, it would be known as the Great Depression.
In the face of economic calamity and skyrocketing unemployment, the government did, well, nothing. No federal unemployment insurance eased families’ suffering and kept a floor on demand. No central bank existed to fight deflation. Large-scale government stimulus was a thing of the distant future.
As demand collapsed, businesses slashed payrolls and reduced wages, and a ruinous period of deflation began. By 1879, wholesale prices had declined 30 percent. The consequences were catastrophic for the nation’s many debtors and set off a vicious economic cycle. When economic growth eventually began, progress was slow, with periodic crises plaguing the economy through the end of the century.
Neither political party offered genuine solutions. As historian Richard Hofstadter put it, political parties during the Gilded Age “divided over spoils, not issues,” and neither Democrats nor Republicans were inclined to challenge their corporate masters.
“There are two things that are important in politics,” Republican political operative Mark Hanna famously said in 1895. “The first is money and I can’t remember what the second one is.”
With laissez-faire ideas dominant and the political system in stasis, economic decline persisted. The collapse in tax revenue only strengthened calls for fiscal retrenchment. Government at all levels cut spending. Congress returned the country to the gold standard for the first time since the Civil War: “hard money” policies that favored Eastern financiers over indebted farmers and workers.
With neither major party responding to the crisis, new insurgent movements arose: antimonopoly coalitions, reform parties and labor candidates all began to attract support. Writer Henry George, running for mayor of New York, decried the “speculative” gains of financial barons and the monopolists who appropriated “unearned” profits.
The continued economic misery for the many, juxtaposed against fabulous wealth for the few, generated intense hostility to great fortunes. Workers, suffering the most without a welfare state, responded with ever-greater militancy.
The labor struggles of the age were as epic as the fortunes of the tycoons: the Molly Maguires of the Pennsylvania coal fields; the great railroad strike of 1877 that nearly paralyzed the nation; the Haymarket affair of 1886, in which a bomb killed eight people in a Chicago demonstration; the Homestead strike of 1892, probably the most violent labor conflict in American history.
But these were just the most famous episodes of labor unrest: Between 1881 and 1890, there were 9,668 strikes and lockouts, according to the Bureau of Labor Statistics. In 1886, more than 600,000 workers engaged in 143 strikes and 140 lockouts. State and federal militias were repeatedly called out to quash labor unrest. In the Pittsburgh rail yards in 1877, Pennsylvania militia members fired into the crowds and violence broke loose. President Rutherford B. Hayes sent federal troops to restore order.
The vast disparities between rich and poor, the spectacular concentration of wealth amassed by the richest Americans in the previous two generations, and the inability of government policies to mitigate the crisis brought the nation to the edge of class warfare and social disintegration.
The specter of a European social order, with societies irredeemably divided between aristocrats and a permanent underclass, seemed to have arrived on U.S. shores. Wealthy Americans began to fear for the stability of the social order.
What force, the wealthy asked in desperation, might mitigate the social chaos and misery, and mute what one public official called “the antagonism between rich and poor”?
Today, new fortunes have been accumulated that rival those of the Gilded Age. Some of that wealth, possessed by people like Charles G. Koch and David H. Koch or Peter G. Peterson, has been used to promote cuts to social spending. Before these opponents and their allies in Congress move forward with the dismantling of the welfare state, however, they might think harder about the reasons such policies were put in place.
The Gilded Age plutocrats who first acceded to a social welfare system and state regulations did not do so from the goodness of their hearts. They did so because the alternatives seemed so much more terrifying.
François Furstenberg is the author of “In the Name of the Father: Washington’s Legacy, Slavery, and the Making of a Nation” and is an associate professor of history at the Universite de Montreal.