This article appears in the Fall 2016 issue of the Intercollegiate Review.
Socialism: “state control of the means of production.” That was the definition I heard over and over again during my undergraduate years at Columbia, which came to an end in that fateful year for Communism, 1989. In the 1980s Marxism was all the rage in the academy. Syllabi featured not only The Communist Manifesto (which remains widely assigned today) but also Marx’s Capital and commentaries from innumerable Marxist scholars.
Then the Berlin Wall fell, and soon thereafter the Soviet Union collapsed. Many commentators celebrated the triumph of democratic capitalism and the “end of history,” in Francis Fukuyama’s famous phrase. Fukuyama spoke of “a universal evolution in the direction of capitalism” and said that government planning was “woefully inadequate” to postindustrial economies.
But now socialism is enjoying a comeback in America. A Gallup poll released in May shows that 55 percent of eighteen- to twenty-nine-year-olds have a positive image of socialism. Other recent surveys show that young people think more favorably of socialism than they do capitalism.
What’s happening here?
It could be a simple matter of misunderstanding: as Emily Ekins and Joy Pullmann write in The Federalist, “millennials don’t seem to know what socialism is.” That definition of socialism that was hammered into me in college? According to a CBS/New York Times survey, only 16 percent of young Americans could come up with it today.
Socialism is not a dirty word to Americans who have no memory of the Cold War. Still, a lack of direct experience with centrally planned economies should not be an excuse for ignorance.
In this presidential election, as in practically every other before it, the economy is one of the most important issues for voters. But somehow a self-proclaimed “democratic socialist” drew more primary votes from under-thirty voters than the eventual major-party nominees combined.
This, frankly, is preposterous. We need to understand that socialism involves a lot more than slogans like “free college!” The record is clear: the socialist path leads to economic stagnation at best. To understand that, we need not look at something as manifestly disastrous as the Soviet economy, which was marked by privation and was almost laughably unsustainable. We can simply look at what has happened when American presidents tried to push our economy in the collectivist direction.
The picture isn’t pretty. If we don’t understand this history, our government may double down on economic policies that have caused so much trouble in the past.
Somehow the socialist impulse in America, unlike in Britain and other places, never quite fit the Marxian definition. It never included actual government ownership of industries, at least on any scale. The few examples are of outfits that provoke laughter and derision: Amtrak for passenger rail service; TSA for airport security.
Socialism in America took a more indirect route. There came to be not quite government ownership of the means of production but government control of a good share of personal income and of the monetary system. The federal government grabbed those powers in 1913, a pivotal year in which the United States inaugurated both the income tax and the Federal Reserve banking system.
The income tax permitted the federal government to take a portion of a person’s income “from any and all sources derived,” as the tax code put it, with no constitutional prohibition of how high that portion could be. It could be as little as 1 percent, which was the bottom rate of the income tax in 1913. Or it could be as high as 100 percent for income over a certain threshold, as President Franklin D. Roosevelt actually proposed.
The Federal Reserve enabled the United States to print money that was “legal tender for all debts public and private,” as the saying on the dollar bill has it. This means that if you are selling something, you have to accept this government paper in exchange for it. The Federal Reserve enabled the government, in theory at least, to buy anything it wanted, perhaps the entire economy (including the means of production). The Fed could create legal tender ex nihilo, and it faced no obstacle to using new money to underwrite government purchases via the buying of federal debt on the open market. The United States had a credit line of unlimited potential.
These revolutionary changes in 1913 planted the possibility of socialism in the United States. The federal government, though, did not immediately exploit its newfound powers to push the country toward socialism. In the 1920s the United States prospered mightily as the government slashed the marginal income tax rate while the Fed stepped out of the way. But as soon as the fabled prosperity of the Roaring ’20s wavered, in stepped the government with socialist policy.
Contrary to the common view, the onset of the Great Depression was not at all a “crisis of capitalism.” In fact, the years 1929–33 brought historic governmental intrusions in the economy. In the early 1930s the Fed refused to let the gold standard operate and permit the money supply to expand as the market required. Meanwhile, the government jacked up the top income tax rate from 25 percent to 63 percent. Savage unemployment resulted; the United States experienced conditions as horrendous as any developed country had since the dawn of the industrial age.
All this government intervention in the economy occurred during Herbert Hoover’s administration, before Franklin Roosevelt took office and instituted his New Deal.
Under FDR, the U.S. government did something rather fascistic, actually rather National Socialistic: it confiscated and made illegal all private money—namely, all privately held gold. In 1933, by executive order, Roosevelt told the American people that if they did not hand in to the feds, at a deep-discount price, all their gold worth more than $100, they would face a $10,000 fine and/or up to ten years in prison, an order the Supreme Court upheld the next year. The gold haul from American citizens was so great that the government had to build a place to house it all: Fort Knox. By the mid-1930s, the only thing usable as currency, or as a store of savings, was Federal Reserve scrip.
On the tax side, FDR built on the Hoover precedent and raised the top rate to 73 percent—nearly triple that of the Roaring ’20s. In 1942 Roosevelt proposed a 100 percent top tax rate; every penny a person earned over $25,000 (about $368,000 today) would go to the government. He even tried to get what he wanted by executive order. Congress approved a 94 percent top tax rate.
FDR perceived that having very high rates on the top earners also made it possible to hit the little guy with substantial taxes. If the top rate was 25 percent, as in the 1920s, the average American preferred that income taxes be reserved for the richest few. But if the top rate was 94 percent, the average American was comfortable paying 20 percent, because the differential was so large.
Let’s be clear: the period from 1932 to 1945—when the United States invoked its socialistic powers, dominating the monetary system and introducing confiscatory taxation—brought the very worst years in American history in terms of economic growth, unemployment, and living standards. World War II, for all its feats of production, ate up living standards, manifested both by rationing and by the war bonds that radically depreciated against inflation. World War II represented the one time the United States tended toward classic socialism. Government ownership (or close direction) of the means of production proved useful at producing military goods, but not anything close to a normal way of producing civilian goods.
Kennedy and Reagan
The top income tax rate dropped to 91 percent in 1945 and stayed at that level for another two decades. It took a Democrat to push for change.
President John F. Kennedy called for “an across-the-board, top-to-bottom” tax cut, and in 1963 he signed the reduction into law. The JFK tax cuts slashed all twenty-four rates in the tax code: the top rate fell from 91 to 70 percent; the bottom, from 20 to 14 percent.
It was an avowed effort to desocialize the country. Despite the common myth of “Eisenhower prosperity,” the 1950s had brought a recession every twenty-four or thirty-six months. The socialist tax power had hindered economic growth in at least two ways. First, it meant that people couldn’t get ahead, because if they made more money, they got taxed at higher rates. Second, entrepreneurs feared taking a leap, because government was right there implying that it might use its tax, if not its monetary powers, to soak up any income it might deem excessive. Tellingly, the term venture capital came into common usage in 1964, the year JFK’s big tax cut took effect.
So what happened when the U.S. government turned away from socialist policies? The economy boomed, just as it had during the laissez-faire 1920s. The long-term growth rate doubled, to 5 percent. In the 1960s the nation was bereft of recession for the longest period—nine years—possibly in all of American history.
By contrast, in the 1930s and ’40s, when the United States indulged the socialistic powers it had given itself decades earlier, the economy proved incapable of maintaining living standards, at times even of keeping people above destitution. When we had socialism-lite, in the 1950s, the economy had a nagging case of the slows.
Despite that clear record, the U.S. government meddled in the economy again in the 1970s, going wild with monetary and tax policy. The United States went off the gold standard, leading to hideous inflation—upwards of 14 percent per year. Because the tax code was not adjusted for inflation, tax rates were raised by stealth: if your income merely kept up with the inflation engineered by the Fed—that is, if you saw no actual gain in income—you could be pushed into a higher tax bracket. (This is the phenomenon known as bracket creep.) The tally was predictable: a 75 percent decline in the stock market, a tripling of the “misery index” (unemployment and inflation added up), and a new consensus that America was in decline, caught in a “malaise,” as President Jimmy Carter put it in 1979.
In the 1980s, under President Ronald Reagan, the government walked back its socialistic powers. The Reagan administration stabilized the dollar against the external price of gold (legal again to hold) and cut tax rates just as Kennedy had, but twice—first in 1981 and again in 1986. Up bounded the economy: stocks increased fifteenfold in the following two decades, unemployment was cut in half, and inflation became a thing of the past.
The Lessons of the Past
Anyone even tempted to entertain socialism as a cure to what ails the American economy need only consult the historical record. The story could not be clearer: American prosperity is the product of a free people cooperating together to make and do things. When the government has exerted its powers to control the monetary system and confiscate income, slow growth and unemployment, if not economic misery, have been the result.
Tell that to the next person you meet who says our country needs socialism. America owes its legendary prosperity to our ability to get the government to refrain from meddling in the economy.
We need presidents who understand that too.
Brian Domitrovic is a historian, professor, and columnist at Forbes.com. He is the author of Econoclasts and the coauthor, with Lawrence Kudlow, of the new book JFK and the Reagan Revolution: A Secret History of American Prosperity.
Complement with Steven F. Hayward on the role of character in the presidency, Art Carden on why you should read Adam Smith, George Leef on why you'll still pay for "free" college, and the humanities student's guide to economics.