CHAPTER 10
So, as far as we can see, whether it’s about quality of life, social justice, or sustainability, our economic performance looks a little blue around the gills. Has it always been this way? Hardly. The United States was truly the envy of the world in the 1950s and ’60s, outperforming nearly every nation in virtually every category we’ve been looking at, while building the largest middle class in world history.
It was no accident. Americans transformed the economy in the first half of the twentieth century: the progressive movement, breakneck industrialization, conservation, booming agricultural production, an unparalleled educational system, the paradigm shift from laissez-faire to macroeconomics, the far-reaching government policies of the New Deal, World War II production, and the focus on a rising middle class. In a short half century our economy improved dramatically, as we shall see in this chapter. The changes were enormously beneficial. American economic history is impressive and laden with vital lessons for today.
Cowboy Politics
To the horrified shock of those enriched by the status quo, the youngest president in United States history, Republican Theodore Roosevelt, landed in the White House at age forty-two with seemingly limitless transformative energy after President William McKinley was assassinated. “I told William McKinley it was a mistake to nominate that wild man at Philadelphia. I asked him if he realized what would happen if he should die. Now look, that damn cowboy is President of the United States,” exclaimed the powerful and reactionary senator Mark Hanna, a member of Roosevelt’s Republican Party.1 Indeed, New York–born Teddy Roosevelt (TR) had spent three years as a cowboy on a ranch in Dakota Territory.
Great leadership crafts progress. But the tsunami of economic and political transformation about to hit the United States in 1901 was driven by far more than a lone cowboy. For the next twenty years, millions of Americans organized together for progress, taking seriously the words President Abraham Lincoln had uttered less than forty years before, “that government of the people, by the people, and for the people, shall not perish from the earth.”
The threats to freedom and democracy in America were not from belligerent foreign powers or a civil war, but from an economy and political system governed by very few people. Americans took it into their own powerful hands to remake the nation’s democratic institutions, change the national and state constitutions, reign in tyrannical corporations, and reshape the economy.
Ending slavery had required a brutal civil war and two constitutional amendments, yet in 1901, child labor—slavery by any other name—was rampant in America. An estimated 18 percent of children, between the ages of ten and fifteen, worked in 1900, often putting in sixty-hour weeks with no schooling.2 Children as young as five were wielding razor-sharp knives filleting fish all day, tending textile machinery, or sorting coal in mines.3
The average American adult worked ten hours a day, six days a week. Some laborers worked twelve- or fourteen-hour days, six days a week, in mines and factories.4 For many workers, job conditions were terrible and pay near subsistence level, while owners raked in enormous profits. Sharecroppers and factory workers in company towns were economic hostages to debts held by plantations and companies. Women lacked voting rights. Americans of Native American, African, Asian, and Latino descent faced pervasive discrimination. City, county, state, and federal governments were riddled with corruption. Party bosses selected most candidates.
There were no primary elections. American senators were not directly elected by the people. Farmers and workers paid escalating property and excise taxes, while the wealthy paid little or nothing. There was no income tax. Alcoholism was rampant. Using vicious tactics, monopolists secured strangleholds on essential industries and manipulated prices. Banks and the stock market were mostly unregulated. Banking collapses were routine. Financial scams were endemic. Natural resources were being plundered. Drinking water was contaminated nationwide. Diseases were widespread, and the medicines were nearly as bad as the diseases.
The Volunteer Poison Squad
For example, Bonnore’s Electro Magnetic Bathing Fluid claimed to “cure cholera, neuralgia, epilepsy, scarlet fever, necrosis, mercurial eruptions, paralysis, hip diseases, chronic abscesses, and ‘female complaints.’ ”5 Medicines had no standards, testing, or regulations. Who could differentiate between deadly drugs and authentic cures? Various “patent medicines” contained addictive drugs, such as heroin, morphine, opium, and cocaine (good customer retention), or formaldehyde, even radioactive ingredients. “Medicines” laced with neurotoxins demonstrated instant potency. One dose jolted patients into convulsive writhing until it wore off. Shock kills pain. So it seemed to work on all pains. Most people seemed to recover from neurotoxic medicines, though some were left permanently paralyzed.
The government chemist and drug safety activist Harvey Wiley formed the “Volunteer Poison Squad” in 1902, as part of a campaign for regulation. Young men voluntarily ate food preservatives to have their effects scientifically recorded.6 Muckrakers such as Upton Sinclair7 exposed the injustices of child labor, low wages, and filthy food, urging the populace to action. An outraged American public had had enough of laissez-faire economics and demanded government oversight of markets and business. In 1906, over the ferocious opposition of powerful companies, President Roosevelt pushed through the nation’s first food and drug regulations: the Meat Inspection Act and Pure Food and Drug Act.8
BUYER BEWARE was replaced with SELLER BE HONEST. That’s good economics. No market is “free” when filled with liars and thieves. Increased transparency and truthful consumer information improved markets. Outlawing deadly ingredients and requiring testing with the burden of proof on those bringing the product to market solved problems. Regulations secured better public health and delivered greater profits to companies that produced medicines that actually cured illnesses. Regulation was the ruin of ruinous medicine-makers. Quacks went bust. Or, as in the case of Coca-Cola, dropped the false medicinal claims, replaced cocaine with caffeine, and marketed a successful “soft drink.”
Progressives Build a Movement
The regulation of drugs was not an isolated case. The Progressive Era (1900–1920) saw a broad swath of Americans join forces to reject laissez-faire economics, fundamentally transforming the nation.
Three presidents, Theodore Roosevelt, William Taft, and Woodrow Wilson, though often at odds, supported greater federal regulation and progressive agendas. A loose amalgam of farmers, laborers, women, prohibitionists, children’s advocates, government reformers, environmentalists, birth control advocates, churches, doctors and nurses, students, banking reformers, and antitrust advocates chose to work together to solve many problems all at once. Progressives of both the Republican and Democratic parties had to work together because they were up against an unbridled economic ideology and the most sophisticated, powerful array of moneyed special interests in the nation’s history. The Supreme Court long upheld both of these enemies of progress.
In 1905, Supreme Court justice Oliver Wendell Holmes aired his disgust in a dissenting opinion when the majority ruled unconstitutional a New York law limiting bakery working hours to sixty hours a week: “The case is decided upon an economic theory which a large part of the country does not entertain … But a constitution is not intended to embody a particular economic theory, whether paternalism and the organic relation of the citizen to the state or of laissez faire.”9
Most powerful were the “trusts,” enormous corporate conglomerates, run by ruthless, unregulated monopolists. They controlled scores of critical industries including steel, banking, meatpacking, flour milling, cast-iron, railroads, and oil. John D. Rockefeller had secured a stranglehold on the nation’s oil industry, owning or otherwise controlling nearly all oil exploration, oil rigs, refineries, petroleum products, transportation, and retail outlets. Rockefeller manipulated the market with secret shipping agreements with railroads that gave him a discounted rate and raised rates for his competitors. In 1911, in a landmark case the Supreme Court broke up Rockefeller’s Standard Oil into thirty-nine separate companies, ensuring healthy competition in a growing oil-based economy until the 1980s.10
With banking, steel, and railroad trusts threatened, the banker J. P. Morgan went to the White House to meet with President Roosevelt. Morgan reportedly told the president, “Send your man to my man and they can fix it up.” But Morgan left empty-handed. Roosevelt wasn’t bending. This was not a business deal, he told Morgan. The government was neither in collusion nor in competition with the corporations. Companies were not the government’s peers. The president wasn’t out to ruin anyone, proposing “to proceed by evolution and not revolution.”11 Monopoly power was against the law, and Roosevelt intended to enforce the law.
We do not wish to destroy corporations, but we do wish to make them subserve the public good … The biggest corporation, like the humblest private citizen, must be held to strict compliance with the will of the people as expressed in the fundamental law. The rich man who does not see that this is in his interest is indeed short-sighted. When we make him obey the law we ensure for him the absolute protection of the law.12
The government would set rules for the public, markets, and corporations, and by enforcing fair rules would provide the framework for efficient markets, fair competition, consumer protection, and a prosperous economy. Roosevelt’s rejection of laissez-faire economics in favor of more productive and fair, regulated, markets set the stage for a successful twentieth-century American economy. Presidents Taft and Wilson both aggressively prosecuted monopolies, and Wilson strengthened antitrust legislation.
To overcome entrenched opposition, progressives built majorities and successes at the city, county, and state levels, working together across issues. Wyoming was the first state to recognize women’s right to vote. Massachusetts passed the first child labor laws. Oregon created the initiative, referendum, and recall processes. Wisconsin approved the first permanent income tax. All were expanded to other states. With reformed state legislatures representing the population rather than political machines, the progressive movement gained the momentum to pass constitutional amendments.
Four amendments to the Constitution were ratified in the first twenty years of the twentieth century. In February 1913, the Sixteenth Amendment, allowing the federal government to collect income tax, was enacted. In April 1913, the Seventeenth Amendment, for the direct election of the U.S. Senate, followed. In January 1919, alcohol was banned under the Eighteenth Amendment (repealed in December 1933). And in August 1920, the Nineteenth Amendment, giving women the vote in all elections in the United States, was enacted. “I voted in the first national election that women could vote in,” Dave’s grandmother once declared. “I was thrilled. I was proud. And I never missed an election since.”
At the federal level, the National Park Service and the National Forest Service were established, to protect natural resources; the Food and Drug Administration, to protect health; and the Commerce Department, to strengthen interstate commerce regulation, break up monopolies, and promote economic expansion.
About nine hundred amendments to state constitutions were also passed. Oregon passed forty-five state constitutional amendments in two decades. In that same time, thousands of city and county charters were changed to clean up government, give people rights, and regulate markets and businesses. Public utilities multiplied to solve the practical problems of growing cities. Initiative, referendum, and recall processes as well as primary elections were created, undermining corrupt party bosses with more direct democracy. States approved worker’s compensation, public health, sanitation, prison reform, state highways, civil service, child labor, worker safety, fire safety, and consumer protection laws. Progressives also focused on education, building public school and university systems and increasing enrollment in existing institutions. Ninety-four percent of the population was literate.13
Unions and workers fought for higher and minimum wages, shorter working hours, workplace safety, and an end to child labor. Their victories improved pay and labor conditions for other workers. These changes built a stronger economy and a budding middle class. Industrialists fought them, but some, like Henry Ford, believed that their employees should receive rising real wages, sufficient incomes to purchase the products they made. Ford paid autoworkers high wages and shortened work to an eight-hour day, while increasing production.14
The odd structure of the Federal Reserve Bank reflected U.S. politics. A banking panic in 1907 convinced most in Congress that the United States needed a central bank. Creating the Federal Reserve System in 1913 was wildly divisive. Many progressives opposed it. Banking conservatives proposed a privately owned and run central bank. Farmers demanded a bank wholly owned and run by the government. Western and southern states wanted the bank nowhere near Wall Street. In the end, the Federal Reserve System would be owned by private banks, but controlled by the U.S. government, with twelve branches.15
Every victory required a political struggle, and a battle with archaic ideology. For example, consider three arguments used against women’s suffrage.
1. The founding fathers intentionally excluded women from voting.
2. Women didn’t pay taxes, so they didn’t deserve representation.
3. Women, by nature “excitable and emotional,” would vote without proper thinking and wreck the country.16
The period was not all positive. African Americans were effectively excluded from equal opportunity, education, and voting. Native American lands were taken. Racist immigration laws blocked many. Americans adopted racist policies most likely because the majority of Americans at that time were racist. But the foundation for better confronting racism was also laid. Overall, the hard work of a generation of politically active American citizens brought improvements all across the country. Progressive voters generally supported the greatest good for the greatest number over the longest run, and their success built a better economy and quality of life for future generations.
The Roaring Twenties
America’s entry into World War I in 1917 shifted resources from domestic progress to building a fighting machine. The war increased demand for food and manufacturing. Incomes in rural and urban America rose. Elected president in 1920, the Republican Warren G. Harding was no friend of labor, yet he still signed legislation regulating agricultural markets to defend farmers against commodity traders. But his administration was most famous for corruption. Scandals included oil giveaways, stolen medical supplies, kickbacks of government money, purchased paroles, and more. Harding said, “I have no trouble with my enemies … but my friends, they’re the ones that keep me up all night.”17 He died in office, and the staunchly conservative vice president, Calvin Coolidge, took over.
Coolidge defended his hands-off, pro-corporate policies, proclaiming that “after all, the chief business of the American people is business … If the federal government should go out of existence, the common run of people would not detect the difference in the affairs of their daily life for a considerable length of time.”18 Coolidge argued that if the wealthy paid fewer taxes, they’d invest and increase employment. Yet at the same time, he increased the budget for national parks, forests, and highways, regulated the radio airwaves, and initiated federal flood control projects.
In 1928, Commerce Secretary Herbert Hoover was elected president. Urban incomes rose in the 1920s, while farm revenues declined and the income gap in America widened dramatically. Unemployment in rural America rose to an estimated 10 percent. The fortunes of the wealthy rose with the booming stock market. Wall Street and the banking system had successfully dodged progressive reforms. Banks were poorly supervised, while the stock market remained virtually unregulated.
During the 1920s, an unregulated financial bubble expanded, as it would eighty years later. “Buying on margin,” a stock purchaser could pay as little as 10 percent of the stock value, borrowing the rest with a call loan provided by a stockbroker on commission, who borrowed money from a bank. The stock was the collateral for the loan. If the price dipped, the stock would be sold to cover the loan. Stock purchasers expected rising value and the opportunity to sell at a higher price, paying off their loans and pocketing a profit.
When borrowed money is used to purchase stock, foreign currency, real estate, or companies, it is called leveraging. The less you pay of your own cash, and the more you pay in borrowed money, the more leveraged the deal. Purchasing on margin became the rage on Wall Street. Stock prices soared as increasingly leveraged, and more numerous, investors bid them up. As prices skyrocketed, returns skyrocketed, too, pulling more investment into the market. But rising stock values were not based on goods and services produced and sold at profit. Easy lending, borrowed money, little cash down, high expectations, big profits, and rising prices set the stage for the crisis to come (as in 2007).
Standard Oil of New Jersey, John D. Rockefeller’s remaining company after the antitrust breakup, provides a good example of what happens when markets shift corporate finance from productive investment into speculative bubbles. Rather than investing the company’s money in real production, like oil drilling, shipping, or refining, Rockefeller lent $65 million a day, at interest, to brokers for loaning to speculators. Why invest in a well when short-term loans have a higher rate of return? Investment in productive assets declined as capital shifted to high-return, but unproductive, speculation.
Investment provides the capital to expand production, including hiring employees to produce real economic goods and services. Speculation is the allocation of capital, not to produce any goods or services, but simply to redistribute wealth from those that produce goods and services to the speculators. Currency trading (arbitrage) is a good example. Arbitrage speculators bet on the rise or fall of currencies. This activity does not produce any real goods or services. However, by predicting or manipulating currency prices, speculators can skim a bit of value from currency holders. Everyone in the productive economy loses a small bit of value as the currency they hold loses value, and the few speculators who make the right bets gain.
Speculation is possible with any market asset, but well-designed rules can eliminate many of its incentives and excesses. For example, a small charge on currency transactions would eliminate the profitability of arbitrage, and that capital would move elsewhere, possibly into the productive economy. Speculative bets gone wrong can have catastrophic effects on the real economy. Real companies go bust. Real people are thrown out of productive work and lose their incomes. That’s not the speculator’s intent, but at times the resulting economic collapse is so great, it sinks all boats, speculators included. In 1929, the speculators went under fast.
The Great Depression
By 1929, recognizing that stock prices were wildly overvalued, some stockholders began selling. In a few days in October 1929, the stock market crashed, losing a third of its value by mid-November. WALL STREET LAYS AN EGG, read a headline in Variety magazine. But while the stock market crash has been considered the catalyst for the ensuing Great Depression, it was not the actual cause of the calamity. The causes were falling consumer demand, goods sales, and incomes, coupled with rising defaults, bank failures, foreclosures, and unemployment.
As purchasing declined, factory orders fell, prices fell, and manufacturers laid people off, lowering incomes, so purchasing declined further. Federal, state, and local tax revenues declined, spurring layoffs. Banks held little cash. Depositors “ran” to withdraw their money. As bank deposits disappeared, loans were called in, straining borrowers. Banks failed, and slow-footed depositors lost their savings. The Federal Reserve had fueled the bubble with easy money, but then it tightened the money supply when banks needed it most, making things worse. As the crisis began to affect other countries, wild currency rate fluctuations made international trade difficult. The United States raised tariffs to support domestic producers, kicking off a global tariff war. International trade declined dramatically.
At the helm of a sinking economy, President Hoover felt that volunteerism, aid from churches, and voluntary groups could solve the problem. Church food kitchens fed many, but the program was hopelessly insufficient. The bitter suffering that fell upon millions of Americans is hard to imagine today. There was no unemployment insurance, welfare, or food stamps. People without regular income had no money when their savings dried up. Homeless millions built shantytowns called “Hoovervilles” in every American city. Desperate poverty engulfed millions of Americans. By 1933, unemployment rose to an estimated 25 percent nationally and as high as 80 percent in the hardest-hit cities. Farm prices fell by 60 percent.19
A drought caused by climate change and unsustainable farming practices brought biblical dust storms across the Midwest, blackening the sky with airborne soil and choking people. Dave’s mother, Nell Batker, grew up on a thirty-acre California farm and vividly remembers the Depression. “We never had it as hard on the farm as many city people did. We always had enough to eat. But we only got one pair of shoes each year when school started. In the summer we all ran barefoot.”
While Americans worked hard to keep family and farm afloat, economists were trying to figure out what was happening. There were two basic economic philosophies for approaching the Depression: do nothing, or do something. Indeed, the predominant economic policy prescription of the time was to do nothing, believing that the business cycle and market adjustments would eventually fix the economy, delivering another boom cycle. The prescription of nineteenth-century laissez-faire economics to do nothing was the problem. Shrinking incomes reduced spending and demand in a downward spiral, which combined with tight monetary policy to drive the country deeper into the crisis.
The New Deal
Elected president in 1932 by a populace growing hopeless, the Democrat Franklin Delano Roosevelt was a consummate politician and coalition builder. Perhaps more important, he was a free thinker, unencumbered by economic ideology. Roosevelt was pragmatic, experimenting with policy, keeping the good and culling the bad. His New Deal was designed to build a new economy, not to bring back the economy of the 1920s. It was a plan to bring about an economy of greater fairness, stability, and prosperity. FDR confronted a stunning array of problems. As he took office, thousands of banks were on the verge of collapse. The day after his inauguration, Sunday, March 5, 1933, FDR called Congress into special session and declared a “banking holiday,” temporarily closing all the banks in the United States. He ordered Hoover’s appointees and his own appointees to cooperate and write banking legislation in four days. They did. It was approved by Congress the next Thursday. FDR completed his first week in office with his first fireside chat that Sunday, and America’s banks reopened on Monday.
Regulating Wall Street, preventing bank runs, strengthening regulations, and building the middle class were all central pillars of the New Deal. The Federal Deposit Insurance Corporation (FDIC), for example, guaranteed people’s savings to $5,000 in member banks. Coupled with banking regulation, the FDIC helped end the chronic banking instability that had plagued the nation since its birth. Some had advocated for the nationalization of banks. Roosevelt’s solution was pragmatic and dramatically effective. His actions brought clear goals (stabilize the banking sector), new measures (bank reserves), new policies (reserve requirements), and well-governed, new institutions (FDIC), with the necessary authority at the scale required to deal with the whole problem. Institutions like the FDIC and the Securities Exchange Commission were found to be sound and inspired countries worldwide to implement their own version of banking reform with similar institutions.
Roosevelt set a high mark for future presidents with his record of accomplishments during his first hundred days in office. These were not just Roosevelt’s victories. He was a pragmatist and adopted good ideas from both political parties. In addition, many Republicans considered themselves New Dealers. There was no lockstep party line to be held. The New Deal was far more pragmatic, experimental, and internally contradictory than policy based on any single economic theory would have allowed. New Deal legislation included an alphabet soup of programs and laws. Here are a few.
1. The Works Progress Administration, which put people to work building parks, schools, and bridges in virtually every community in the nation and distributed food, clothing, and other necessities.
2. The Public Works Administration, which constructed power plants, hospitals, and water and sewer systems.
3. The Federal Deposit Insurance Corporation, which established the foundation for what was for a long time the most stable banking system in the world.
4. The Civilian Conservation Corps, which employed 3 million Americans improving national parks, planting over 3 billion trees, and improving devastated farmlands with soil conservation. Politicians credited the CCC for reducing the crime rate as the unemployed went to work.
5. The Emergency Banking Act, which gave the government the power to close and reorganize insolvent banks. This legislation proved critical in 2008 and 2009, when the government seized control of failing banks, preventing a cascade of banking failures.
6. The Farm Credit Act, which provided emergency funds to farms for refinancing mortgages and prevented further foreclosures.
7. The Wagner Act and the Fair Labor Standards Act, which gave labor unions collective bargaining rights, banned industrial child labor, limited working hours, established minimum wages, and created production and pricing regulations.
8. The Federal Emergency Relief Act, which continued an initiative under President Hoover providing grants to states and local governments to hire people.
In five years between 1933 and 1938, legislation was passed that transformed virtually every sector of the American economy. This change was delivered despite the stiff resistance of about one third of the nation’s population, most of the economics profession, conservative Democrats, a hostile Supreme Court (until 1936), and powerful corporate interests.
Though the Depression dragged on, millions of Americans were put back to work. President Roosevelt achieved unprecedented popularity. World War II demanded an even greater increase in the government’s role in the economy. The Japanese attack on Pearl Harbor united a country torn between isolationism and joining the fight against fascism. The war brought cooperation between private industry, labor, and government, deficit spending, price and wage controls, rationing to keep prices down, and full employment. The United States unleashed unimaginable manufacturing capacity. A deficit-driven “stimulus” put Americans and industry back to work as the government spent unprecedented amounts of money on war production. Japanese and German commanders were consistently stunned, finding more American equipment and men on the battlefield than their planners deemed possible. By 1944, the economy had been remade, the private sector had fully recovered, and a new rising middle class was emerging in America.
After World War II
By war’s end, the United States was the last major industrialized nation standing. European and Asian economies lay in ruin. There was no competition for U.S. products. The U.S. dollar became the global currency. The productivity of the U.S. economy and generosity of the Marshall Plan assisted in the rapid reconstruction of Europe and Asia.
After World War II, New Deal ideas were expanded. The GI Bill provided education and low-interest housing loans to returning veterans. After their unprecedented wartime cooperation, business and labor in America built a social contract: Productivity gains were shared, providing steadily increasing middle-class wages and benefits for laborers, with little social unrest and good profits returned to business owners. Life for most Americans became far more secure. Jobs were more secure. That allowed Americans to purchase their homes. Incomes, education, and retirement were equally secure. Health and life span improved. Leisure time was increasing. Perhaps the most powerful product and driver rising out of the Depression and New Deal was macroeconomics.
A New Economic Paradigm
Hoover and Roosevelt (and their predecessors) had one thing in common. None entered office with a model or theory of how a national economy works. By Roosevelt’s second term, a revolution in economics was under way. Hands-off laissez-faire economics neither required nor generated any understanding of how prices, employment, consumption, government, and other economic phenomena are bound into a national economy and contribute to growth or collapse. The Great Depression revealed laissez-faire economics as incomplete, incorrect, and incapable of solving modern problems.
John Maynard Keynes, indisputably the twentieth century’s most influential economist, created modern macroeconomics, providing a framework for how a national economy works, and swept other theories aside for decades.20
Creating a national-scale theory of economics had profound implications. New goals included growth in domestic production, full employment, and stable prices. New economic measures included the gross national product, employment, and inflation. New policies included deficit-financed stimulus spending. New national institutions included the Social Security Administration and a host of other agencies forming the superstructure of a twentieth-century federal government.
Economic theory is a powerful lever for moving policy. Child labor had proven impossible to regulate federally. The employment economist Joan Robinson utilized Keynes’s new macroeconomics in 1937 to argue for keeping children in school while the otherwise unemployed could work the jobs children had held. Thus “a year of unemployment is exchanged for a year of education.”21 The next year, federal regulation of child labor was passed and subsequently upheld by the Supreme Court. Millions of American children were freed from work to attend school, and millions of adults were hired. Macroeconomics helped reverse the laissez-faire policies that had dominated child labor law.
After World War II, Keynesian macroeconomics, particularly the concept of economic growth (measured by the GNP), became the economic doctrine for both political parties, for liberals, conservatives, and libertarians. Macroeconomic theory is now utilized by virtually every nation in the world today (including communist China). Macroeconomics and King GDP have ruled ever since.
Macroeconomics Rules
President Harry Truman advocated for a national health care program and almost achieved it before the Europeans and Canadians did. The wartime income tax rate hit 94 percent on marginal income of more than $1 million per year. The Republican president Dwight Eisenhower maintained that high income tax. With the revenue, he paid off huge chunks of the World War II and Korean War debts, built the interstate highway system, and kept New Deal programs (such as Social Security, the FDIC, and more) well funded.
Eisenhower’s successor, John F. Kennedy, poured federal money into science, math, and engineering, to keep pace with the Russians in the Cold War, while states invested heavily in universities to improve education. A college education became cheaper, more accessible, and of higher quality in the United States than in any other nation.
The progressives, New Dealers, and even conservative leaders advanced regulations and programs to improve the economy and environment and to achieve a fairer society. Their efforts produced the biggest middle class of all time and prosperity never before known in human history. Economists of the 1960s thought that macroeconomics had solved all economic problems. Letting the unregulated market rule, or laissez-faire economics, seemed moribund. Macroeconomics attained a near religious status based on a central measurement, the Gross National Product, and on a central idea: economies must grow or die.
But as the 1960s unfolded, a generation of young people, raised in the prosperity that macroeconomics had wrought, began to question the very lifestyle that had become the envy of the world. Material prosperity struck them as hollow; they felt, as the Berkeley Free Speech leader, Mario Savio, put it in 1964, like meaningless cogs in a well-oiled machine, children in a chrome-plated consumers’ playground. They looked for a new quality of life, and they found a surprising ally, a president himself.
Expanding Opportunity—the Great Society
President Lyndon Johnson described the goals of his “Great Society” in a speech at the University of Michigan on May 22, 1964. It was a speech whose clarity and values have yet to be matched by an American president.
The purpose of protecting the life of our nation and preserving the liberty of our citizens is to pursue the happiness of our people. Our success in that pursuit is the test of our success as a nation.
For a century we labored to settle and to subdue a continent. For half a century we called upon unbounded invention and untiring industry to create an order of plenty for all of our people. The challenge of the next half century is whether we have the wisdom to use that wealth to enrich and elevate our national life, and to advance the quality of our American civilization.
Your imagination, your initiative, and your indignation will determine whether we build a society where progress is the servant of our needs, or a society where old values and new visions are buried under unbridled growth. For in your time we have the opportunity to move not only toward the rich society and the powerful society, but upward to the Great Society. The Great Society rests on abundance and liberty for all. It demands an end to poverty and racial injustice, to which we are totally committed in our time. But that is just the beginning.
The Great Society is a place where every child can find knowledge to enrich his mind and to enlarge his talents. It is a place where leisure is a welcome chance to build and reflect, not a feared cause of boredom and restlessness. It is a place where the city of man serves not only the needs of the body and the demands of commerce but the desire for beauty and the hunger for community.
It is a place where man can renew contact with nature. It is a place which honors creation for its own sake and for what it adds to the understanding of the race. It is a place where men are more concerned with the quality of their goals than the quantity of their goods.22
In the early 1960s, a lot of Americans remained left out of the prosperity that was stifling some. Minorities still faced discrimination at every turn. While schools in the South had been integrated, private businesses had not. Even the admission of a black man, James Meredith, to the University of Mississippi in 1962 produced riots and the deployment of the National Guard to protect Meredith. The civil rights movement grew, and thousands of Americans were inspired to action by Martin Luther King’s dramatic “I Have a Dream” speech at the Lincoln Memorial on August 28, 1963.
The next summer, thousands of activists, including many white college students from the North, traveled to Mississippi to register voters and help protect the civil rights of African Americans there. For their trouble, three activists ended up murdered by Klansmen and sheriff ’s deputies, their bodies buried in an earthen dam in Mississippi. As a horrified country watched these developments on television, support for a comprehensive civil rights act grew, and President Johnson signed it into law on July 2, 1964. He famously acknowledged that he was consigning the Democratic Party to defeat in the South for at least a generation.
Thousands of youths responded to President Kennedy’s Peace Corps initiative and to the “War on Poverty” proposed by Johnson. In the early 1960s, poverty in America was still widespread among minorities, and one fifth of all senior citizens fell below the poverty line. Johnson’s ambitious “Great Society” tackled poverty with government initiatives, including the VISTA (Volunteers in Service to America) program, a domestic Peace Corps that sent young volunteers to work in poor communities from urban ghettos to Appalachia and the rural South.
John was an early VISTA volunteer. From 1965 through 1967, he worked as a community organizer on the Bad River Chippewa Indian Reservation in northern Wisconsin. As a native of suburban California, he had never encountered poverty before. Living in a tarpaper house without running water in temperatures dropping to thirty degrees below zero in winter, he saw firsthand how the poor in America lived, the racism experienced by Native American children, and how the American Dream had not been extended to all. These experiences still shape his view of the economy today.
Though often maligned by some, the War on Poverty actually worked. In the late 1960s and early ’70s, millions of Americans were lifted from poverty and the middle class continued to expand. The War on Poverty’s programs were not perfect, and in some cases they helped perpetuate what critics called a “cycle of poverty,” but they were certainly not the failure that revisionist history has painted them to be. For many, they were a godsend.
Americans began the twentieth century with the progressive movement rejecting laissez-faire economics. The New Deal, World War II, and the following two decades created macroeconomics, the problem-solving alternative to laissez-faire, and built the superstructure of a modern economy and the unparalleled expansion of the middle class. However, laissez-faire was far from dead.