-Caveat Lector-
Federal Government Growth Before the New Deal
by Randall G. Holcombe
Popular opinion holds that most of the credit (or
blame) for the incredible growth of the federal
government should go to President Franklin D.
Roosevelt and his New Deal. While Roosevelt certainly
was a willing participant in that process, the federal
government began its amazingly rapid growth well before
the New Deal, and it is unlikely that it would be much
smaller today even had FDR never come along.
The origins of federal growth are in the Constitutional
Convention. But the modern period of growth began with
the Progressive Era before World War I. Contrary to
popular belief, that growth continued through the
1920s. The percentage by which the federal government
grew was greater during Herbert Hoover's four years as
president than during the first seven years of the New
Deal. Roosevelt merely continued a long-standing trend.
The story of the growth of the federal government can
be divided into two parts: before and after 1913, when
the 16th amendment to the Constitution, which permitted
a federal income tax, was ratified. In 1913 federal
spending was a mere 2.5 percent of GNP (today spending
is almost ten times that level); so if the federal
government is measured only by spending, little growth
took place before the income tax. Before 1913, however,
the federal government grew in other ways, by enlarging
its power and changing its mandate. When the colonies
came together to form the United States, the founders
viewed the new government as the defender of its
citizens' liberty. That meant protecting their
rights -- and in those days the most significant
threat to the rights of individuals was, in nearly
everyone's eyes, the government itself. By 1913 the
federal government had been transformed into an
organization not to protect rights, but, ostensibly, to
further the nation's economic well-being.
The first part of our story, then, is how a government
that began in 1776 as a protector of individual rights
had by 1913 evolved into one that presumed to guarantee
the economic welfare of its citizens. The second part
of the story is how the federal government, armed with
a powerful new source of revenue, began a continuous
expansion that lasted throughout the twentieth century.
One might be tempted to argue that the income tax was
the cause of the federal government's growth, but that
answer would be simplistic for two reasons. First, it
focuses on spending alone and ignores the growth of the
federal government's legal and regulatory power that
began well before 1913. Second, it treats the income
tax as something thrust on the nation rather than
something chosen by its citizens. Constitutional
amendments must have substantial popular support to
gain the approval of two-thirds of both houses of
Congress and three-quarters of the state legislatures.
Americans wanted an income tax because they wanted
more government, and they wanted more government
because they believed it would enhance their
economic well-being.
World War I was a period of enormous federal
expansion, and the New Deal is likewise well known
as a period of government growth. Yet the time in
between, the 1920s, is often characterized as a
time of retrenchment. In fact, the 1920s continued
the growth that began in the Progressive era and
set the stage for the New Deal. Before getting
into details, we need to place the decade in the
context of the preceding history of the federal
government.
Federal Growth from 1776 to 1920
The first major event in the growth of the federal
government was the ratification of the Constitution
in 1789. Before that, the United States was governed
under the Articles of Confederation. The Constitution
is frequently praised as a document that protects
the rights of individuals and limits the powers of
government. But a comparison of the Constitution
with the Articles reveals that just the opposite
is true. Under the Constitution the federal government
gained more power, was less accountable, and had
greater latitude to determine its own scope of
action. That is what the Constitution was intended
to accomplish. (1)
The Constitution established the Electoral College
for the selection of presidents, but specified no
method for choosing electors. Several methods were
used, but in most states the legislatures picked
them. The framers expected that in most elections
no candidate would get a majority of electoral
votes. That would permit the House of Representatives
to name the president from the five top electoral
vote getters. That system never worked as envisioned,
and by 1828, with the election of Andrew Jackson, the
current system of popular voting for electors had
become firmly entrenched, and along with it the
party system. (2) From then on, successful candidates
owed their success to the support of their parties,
and in return used the political system to reward
those who helped them get elected. Undoubtedly the
biggest event in the growth of the federal government
was the Civil War, which established its supremacy
over the states. The Civil War brought much new
power to the federal government, and laid the
groundwork for the growth of interest groups. (3)
The first interest group to systematically raid the
Treasury for its own benefit was the war veterans.
Originally, Union veterans were entitled to pensions
only if they had been injured in battle; they had up
to five years to claim them. In 1870 veterans pensions
totaled $286 million in 1990 dollars and should have
then declined. Instead they rose to $1,548 million by
1890, because the Republicans, who dominated the
White House and looked to veterans for political
support, increasingly liberalized the pension laws
until every Union veteran of the Civil War
qualified. (4)
While veterans were a model for future interest groups,
the Treasury at that time had decidedly limited means.
At any rate, other groups were more interested in
regulatory benefits. The Interstate Commerce Commission
was created in 1887, and the Sherman Antitrust Act
passed in 1890. (5) The transformation of the U.S.
government continued as the turn of the century
ushered in the Progressive Era. The Food and Drug
Administration was created in 1906, the Federal Reserve
in 1913, and the Federal Trade Commission in 1914. A
government initially committed to protecting the
liberty of its citizens now seemed to be just as
firmly committed to looking out for their economic
welfare.
The Progressive Era was interrupted by World War I,
during which federal power advanced in unprecedented
ways. The railroads were nationalized, waterborne
shipping was regulated, and the United States Food
Administration, created in 1917, controlled all
aspects of the food industry, from agriculture to
distribution to sales. Similar regulation was applied
to fuels, and eventually to the whole economy. (6)
When the federal income tax was introduced in 1913,
the highest tax bracket was 7 percent for all income
above $20,000. Because of the demand for warrelated
spending, by 1918 the highest rate rose to 77 percent
beginning at $4,000. This was the context in which
Warren G. Harding was elected to the presidency in
1920 with the theme, a 'return to normalcy'.
Harding, Coolidge, and Hoover
If one looks only at total federal spending, it
appears that the Republican administrations of
Harding and Coolidge are a period of retrenchment
sandwiched between the big-spending Democratic
administrations of Woodrow Wilson and FDR. The
Hoover administration does not fit this view even
when examined superficially, because the percentage
increase in spending during those four years exceeded
the growth in the first seven years of FDR's New Deal,
before World War II caused spending to skyrocket.
Despite the conventional wisdom that big government
began with FDR, a closer examination reveals that
even the Harding and Coolidge administrations were
periods of substantial government growth. It was
masked, though, by the reduction in war-related
spending following World War I. (7) The 1920s,
then, were actually a continuation of Progressive
Era government expansion, which would last through
the New Deal.
Contemporary political-party ideological stereotypes
do not fit the pre-New Deal era. At the risk of some
oversimplification, they should be reversed. The
Republican party, the party of Lincoln, was the
advocate of a strong federal government with
increasing powers, while the Democratic party, which
had most of its power in the South, advocated states'
rights and a smaller federal government. Moreover,
Harding and Coolidge were not particularly strong
presidents, and the Congress was dominated by
Republicans with substantial Progressive leanings.
For Harding and, after Harding's death in 1923,
Coolidge, a return to normalcy meant a return to the
Progressive policies begun before the war. This was
even more true of Hoover, who was an engineer by
training and a firm believer in applying scientific
principles of management to government. During the
Wilson administration Hoover was the head of the U.S.
Food Administration. He was secretary of commerce
throughout the Harding and Coolidge years, before
being elected president in 1928.
Federal Spending During the 1920s
Aggregate federal spending declined slightly during
the 1920s, when measured in inflation-adjusted
dollars per person. However, that slight decline is
really a combination of two different underlying
trends. In 1916, federal spending per person was
$83.60. (All data are in 1990 dollars.) By 1919 it
had risen 16-fold, to $1,329.77. By 1927, federal
spending had fallen to its low point of the decade,
$180.57. The huge decline from 1919 is accounted for
by a reduction in war-related spending, but nonwar
spending actually increased sharply. Note that
spending in 1927 was well over double the prewar
1916 level.
A more detailed analysis reaches the same conclusion.
The 1920s saw huge declines in federal military and
transportation spending (because so much transportation
was nationalized during World War I). When civilian
spending programs are isolated, they show substantial
growth. Throughout the 1920s the average annual growth
rate of federal spending on commerce, overseen by
Secretary Hoover, was 13 percent. Agricultural
spending increased by more than 11 percent a year,
and spending on labor interests grew more than 12
percent a year. Federal spending on education grew
by more than 10 percent per year, as did spending
on public improvements and the public domain. Among
broad categories, the fastest growth was federal law
enforcement, which averaged more than a 17 percent
growth rate during the 1920s. Thus, one can see
that civilian spending during the 1920s grew
rapidly and that spending remained substantially
higher than it ever had been before World War I.
Measured by spending alone, the 1920s was a decade
of major federal government growth.
Prohibition
Much of the rapid growth in the federal law-enforcement
budget was due to the prohibition of alcohol, which
began in 1920 with the passage of the 18th amendment
and lasted until repeal by the 21st amendment in 1933.
The Department of Justice enforced prohibition, along
with the Customs Service, Coast Guard, and Bureau of
Internal Revenue. The bureau participated because,
while alcoholic beverages were illegal, nonbeverage
alcohol was to be taxed. But even when illegal
alcohol was discovered, as far as the Treasury
Department was concerned, the reason it was illegal
was that the taxes were not paid. From 1920 to 1930
bureau spending on enforcement regarding illegal
alcohol rose from just over $2 million to more than
$12 million, while revenues rose from just over $1
million to about $5.4 million. In no year during
Prohibition did the bureau collect more than it spent
on enforcement. Apparently, even the Bureau of Internal
Revenue viewed the law on alcohol not as a method of
generating revenue but rather of extending federal
law enforcement. Prohibition is probably the most
visible area in which the federal government attempted
to increase its control over the behavior of Americans
during the 1920s.
Federal Corporations
Early in its history, the United States incorporated
the First and Second Banks of the United States. After
the charter of the Second Bank expired in 1836, the
federal government did not charter another corporation
until 1904, when one was formed to construct the Panama
Canal. Federally owned corporations proliferated during
World War I, beginning with the Merchant Fleet
Corporation in 1917. After the war, most of these
federal corporations continued in business and lost
huge sums of money. The War Finance Corporation,
chartered in 1918 to help strategic industries borrow
money, had its charter extended in 1921 to assist
American business in general. The Federal Land Bank,
Spruce Production Corporation, and Sugar Equalization
Board were other federal corporations begun during
the war that lived on.
These corporations provided a model for government
growth that extended through the 1920s to the present
day. In 1923, 12 federally owned banks were created
by the Federal Agricultural Credits Act. In 1924 the
Inland Waterways Corporation was established to
operate vessels on the Mississippi River, and in
1929 the Federal Farm Board was established to finance
agricultural price supports. Creation of those
corporations was integral to the growth of the
federal government during the 1920s, but their
purpose was also significant. In each case they
were established to help further the economic well-being
of a particular group of Americans, reinforcing the
federal government's transition from a guardian of
liberty to an organization designed to oversee the
national economy.
Agriculture
The 1920s were a difficult decade for American
agriculture, largely because the world market
for farm products was increasingly competitive.
As a result, the decade is sometimes viewed as
having favored business over agriculture. But in
fact, the federal government began a number of
initiatives to further the economic interests of
farmers. In 1921 Congress passed tariffs on farm
imports, and in 1922 the Capper-Volstead Act
exempted agricultural cooperatives from antitrust
laws. The Agricultural Credits Act of 1923 made it
easier for farmers to get credit from the Federal
Farm Loan Board. In 1926 the Department of
Agriculture established a Division of Co-operative
Marketing. The Agricultural Marketing Act of 1929
created the Federal Farm Board and, as noted, began
federal price supports for agricultural products.
Adjusting for inflation, federal spending on
agriculture expanded from $17 million (1930
dollars) in 1920 to $49 million by 1930. Whether
evaluated in terms of budgets or number of federal
programs, the increased support for agriculture in
the 1920s was substantial. The charge that the
federal government slighted agricultural interests
is incorrect.
Antitrust
An examination of federal spending gives some indication
of the growth of government, but regulation, though
harder to measure, also had a big impact. Beginning
with the Sherman Act in 1890, the federal government
tried to limit the economic power of business
through antitrust laws. Before 1905 only 22 cases
were brought under the Sherman Act. But antitrust
enforcement picked up later in the decade, with 39
cases brought from 1905 to 1909. From 1910 to 1919,
134 cases were brought, indicating more vigorous
enforcement. In the 1920s, the number declined s
lightly to 125 cases.
That decline is deceiving, however, because after the
increased enforcement in the prior decade, businesses
acted more cautiously. The Scope of antitrust enforcement
was broadened in the 1920s, and cases were brought against
firms in unconcentrated industries for conduct that was
not obviously in violation of the antitrust laws as
previously enforced. Antitrust enforcement is another
area in which the federal government increased its
power -- yet another reason to question the conventional
wisdom that it was excessively probusiness in the 1920s.
Academic Influences
John Maynard Keynes, in a famous passage in his 1936 General
Theory of Employment, Interest, and Money, remarked,
"The ideas of economists and political philosophers,
both when they are right and when they are wrong,
are more powerful than is commonly understood.
Indeed, the world is ruled by little else."
Intellectuals also pushed the federal government to
broaden its scope in the 1920s. The ideas of Karl Marx
were gaining credibility and moving governments into
economic matters. Perhaps just as significant, although
with less ideological content, were the concepts of
scientific management that were gaining credibility
throughout the United States. Civil Service reform had
been initiated late in the 1800s to create a more
professional federal work force, and there was increasing
interest in applying the principles of scientific business
management to government.
In 1920 the National Bureau of Economic Research was
established in cooperation with government, private
foundations, and academic institutions to better measure
economic performance statistically so that government could
apply those principles to the economy. Secretary Hoover was
a strong supporter of that effort. Indeed, many of the tenets
of Keynesian economics that gained prominence during the
1930s were already part of the conventional wisdom of
American economists in the 1920s. (8) The alliance of
academic institutions, private foundations, and government
in the 1920s was yet another aspect of the growth of the
federal government during the decade.
Conclusion
The New Deal is often seen as the pivotal event in the
growth of America's twentiethcentury Leviathan. But the
federal government has grown since its inception. The
most important event in the history of federal government
growth was undoubtedly the Civil War. Then, supported by
the popular demand for more government involvement in the
economy, the ideological foundation of the massive growth
in federal spending was laid during the Progressive Era
at the beginning of the twentieth century. The federal
income tax made that growth in spending possible.
That the federal government grew during FDR's presidency
is undeniable. But Wilson and Lincoln had already set
precedents for increases in government power in wartime.
Thus, the main factors underlying the growth in government
were firmly in place well before the New Deal.
1. See Randall G. Holcombe, "Constitutions as Constraints:
A Case Study of Three American Constitutions,"
Constitutional Political Economy, vol. 2, no. 2
(Fall 1991): 303-328.
2. See Forrest McDonald, The American Presidency
(Lawrence, Kan.: University Press of Kansas, 1994),
for a thorough history of the evolution of the office.
3. For an excellent history of the Civil War following
this theme, see Jeffrey Rogers Hummel, Emancipating
Slaves, Enslaving Free Men: A History of the American
Civil War (Chicago: Open Court Press, 1996).
4. A good reference on the subject is Theda Skocpol,
Protecting Somiers and Mothers: The Political Origins
of Social Policy in the United States (Cambridge,
Mass.: Belknap, 1992).
5. In Terry L. Anderson and Peter J. Hill, The Birth
of a Transfer Society (Stanford, Cal.: Hoover
Institution Press, 1980), the origin of big government
is the Supreme Court's Munn v. Illinois case, which
allowed the state regulation of grain elevator rates.
6. An excellent study of the growth of the federal
government during the twentieth century, including
the effects of World War I, is Robert Higgs, Crisis
and Leviathan: Critical Episodes in the Growth of
American Government (New York: Oxford University Press,
1987).
7. A more detailed exposition of this material appears in
Randall G. Holcombe, "The Growth of the Federal
Government in the 1920s," Cato Journal, vol. 16, no.
2 (Fall 1996), pp. 175-199.
8. See J. Ronnie Davis, The New Economics and the Old
Economists (Ames, Iowa: Iowa State University Press,
1971).
***
The preceding article is from The Freeman, Ideas on Liberty
September 1997 ... for more information see www.fee.org
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