Stakeholder Capitalism: Postwar to 1960 (1 of 2)

This post discusses the role played by the business community from postwar to 1960, while the next post discusses business political involvement in the 1960s. Subsequent to these two posts, the following posts treat the role of labor similarly.

The business community from the era of the New Deal to the early ’70s often split in its political and governmental activities. On the one side, the US Chamber of Commerce (the Chamber) and the National Association of Manufacturers (NAM), represented what might be called the ultraconservative business community. On the other side were business moderates, often working under the umbrella of the Committee on Economic Development (CED), which was formed in the early ’40s. Many businesses in capital intensive industries, especially those that dominated international trade, supported various aspects of the New Deal. These moderate business interests earned enough profit and had enough stability to tolerate pro-labor legislation and to advocate for an international policy of free trade.

The ultraconservative business community strongly and continuously advocated anti-government, balanced budget, high-tariff, and isolationist viewpoints. The business ultraconservatives almost always aligned with southern Democrats and traditional Republicans of the era (Taft Republicans of the 1930s, ’40s. and ’50s), the congressional conservative coalition.

The moderate business community was willing to engage the liberal-labor coalition and effect comprises between the conservatives and the liberals. On some issues the moderate business community agreed with the liberals, while protecting business interests that were common to both the ultraconservatives and moderates. This discussion does not picture the moderate business community as being primarily liberal and pro-labor.

The Truman Years

The first postwar divide between the ultraconservatives and the moderates dealt with the structure of post-war taxation. Taxation represents a salient issue separating conservatives from liberals from WWII to this day. But CED’s postwar tax proposals gained support from many in the liberal-labor coalition.

CED’s general position was that postwar taxes needed to be lower than wartime taxes but higher than prewar taxes. It advocated maintaining the personal income tax. Contrary to the ultraconservatives, CED recommended higher estate and gift taxes, but like the ultraconservatives opposed a federal sales tax. CED also wanted to eliminate most special excise taxes except for those on alcohol, cigarettes, and gasoline used to fund highway construction.

On the income tax, CED preferred a normal rate of 18% before deductions and with progressivity measures included. It recommended eliminating income taxes on those earning less than $2000 (about $30,000 in 2018). And it suggested a rate of 9 percent for the lowest earners subject to the tax and a rate of 69.7% for those earning $5 million (about $70 million in 2018.) Along with conservatives, CED recommended immediately eliminating the wartime excess profits tax and taxes on corporations. In return for the elimination of corporate taxation the CED recommended that corporations withhold taxes on dividends similarly to employee income withholding with dividends taxed at the normal rate of 18%. Shareholder dividend income at this level would be taxed at a much lower rate than those who earned high incomes through salaries, such as executives and those in professional practices.

After WWII much of the moderate business community supported commercial Keynesianism. This brand of Keynesianism supported the use of the state’s fiscal and monetary powers to maintain a sound macroeconomic environment by stimulating consumption while helping to more broadly distribute the wealth generated by capitalism.

Support for this form of Keynesianism displaced what might be called social Keynesianism. Social Keynesianism formed the core of much of the New Deal, a form of Keynesianism that advocated strong state intervention in capital, labor, and consumer markets. The CED supported a mix of fiscal and monetary policies to keep the economy growing but argued against federal interference in any details of the market system.

The CED played influential roles in the creation of the International Monetary Fund in 1945 and the 1948 Marshall Plan, again a position contrary to the ultraconservative business community. The CED strongly supported the $12.7 billion (little over $1 trillion in 2018 dollars) Marshall Fund, a four-year program of financial aid to 16 European countries. It played an important role in overcoming the opposition of the ultraconservative business community and Republican isolationists. The Marshall Plan was largely a form of domestic government pump priming because the money never really left the country. Congress in 1951 ended the Marshall Plan, two years ahead of schedule as a result of the 1950 congressional election of many Republican ultraconservatives.

In the late ’40s and early ’50s the threat of communism grew much greater as the Soviets successfully exploded an atomic bomb and the communists took control of China and then unexpectedly invaded South Korea. Given this environment the corporate moderates immediately supported increased taxes and greater military spending. CED advocated an increase in corporate taxation but opposed an excess profits tax. Congress, however, increased corporate tax rates from 45% to 47% as well as a 30% excess profits tax. The CED helped the Truman administration raise revenue and increase military spending for the Korean War and to rearm Western Europe.

The Eisenhower Years

Corporate moderates were active in the Eisenhower years. They helped Ike gain in 1948 the presidency of Columbia University and became active in his presidential campaign. After Ike’s election several CED players became important members of the administration, chief among them being Arthur Burns as chairman of the Council of Economic Advisors.

The CED quickly pressed Eisenhower to enact some policy changes. These included ng liberalizing trade policy via lower tariffs, streamlinining custom procedures, eliminating shipping restrictions, and increasing loans to countries that wanted to increase trade with the U.S. Besides these points, however, CED favored high military expenditures and significant tax reforms and reductions, especially for high income earners.

But in opposition to the Chamber, NAM, and the Republican Party platform, CED did not seek an immediate decrease in taxes. This surfaced a major policy difference among the business community. The ultraconservatives saw tax decreases as an important means of reducing government expenditures (“starving the government”). The moderates saw the necessity to increase military expenditures while remaining vigilant about combatting inflation. The CED was willing to risk some inflation that may accompany higher federal expenditures because the moderates thought it also important to try to maintain high levels of employment.

Notwithstanding their support of Eisenhower, the CED was not highly successful. The ultraconservatives and the congressional conservative coalition delayed and diluted many CED proposals. CED scored only minor success in reducing tariffs and liberalizing trade. One of the reasons for absence of significant trade victories was that textile industry began the mid-’50s to advocate for protective tariffs.

CED was more successful in pushing loans to underdeveloped countries, in part to counter the spread of communism. After the Soviets successfully launched a satellite the CED became strong supporters of the 1958 National Defense Education Act, after which CED continued to strongly support higher education.

In the late 1950s inflation rose to 5% but at the same time prices and wages did not fall as unemployment gradually climbed in the mid- and late-50s. The Republicans argued that inflation was now cost-push inflation, where price increases were caused by increases in materials and especially by higher wages due to union demands. Inflation in this view was no longer demand-pull, where too much money was seeking too few available goods. Unions argued that the inflation was caused largely by corporate price-fixing and argued for stronger antitrust laws.

Debate on the inflation issue ensued within CED. The CED suggested that unions were largely to blame for both inflation and rising wages because wage demands tended to outrun the rate of productivity. But at the same time it argued for voluntary restraint in wage and price policies. However, many in the CED were opposed to wage and price controls, taking the ultraconservative position, fearful that government would become involved in formulating wage-price guidelines.

Overall in the 1950s the ultraconservatives were more successful policy-wise in the Eisenhower years, although the labor-liberal alliance made some small gains in the areas of civil rights, improvements in Social Security, and increases in the minimum wage.

Why is this significant?

Often this time period is labeled “managerial capitalism” to distinguish it from earlier capitalism, when entrepreneurs and business owners managed corporations. However, the term “stakeholder capitalism” seems to better fit because many corporate executives focused on national and international issues that went beyond short-term profitability of their specific business.

As we read through this post and the next three keep in mind how the post-WWII to 1970 era differed from today. During this period, the business community and labor, and their representatives, often made news. Today one rarely hears anything from labor officials. Discussions about work now tend to be muted and rarely antagonistic. While the Chamber and NAM are still lobbying, one rarely sees senior executives from large corporations working directly with academics and researcher to engage federal officials on national issues.

Business activity from post-WWII to 1960 showed that although the business community was generally conservative, a moderate segment of the business community was actively involved in government. CED worked with academics and other researchers to develop policy recommendations directed toward changes that would benefit business as well as society more generally. The moderates worked to create a tax system more to their liking but also one that would raise the revenue they thought necessary for the federal government, mostly regarding foreign aid and military spending.

Given the strength of Taft Republicans in Congress, who held an isolationist foreign policy and were opposed to international trade, the moderates significantly assisted Democratic and Republican administrations to adopt policies and legislation that they otherwise would have been unable to do.