Frangois Furstenberg: What History Teaches Us About the Welfare State

Frangois 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.

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 (ampersand) Co., the nation’s premier investment bank. Like many other firms, Cooke (ampersand) 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....