THE TRUMAN–EISENHOWER YEARS
The Truman Years
Truman inherited a presidency in the war’s final days. Without an instruction manual and governing with a hostile Congress, Truman reconstructed international political and financial systems, helped rebuild Europe and defended South Korea in an Asian land war. Amazingly, Truman also found time for domestic policy. In 1946 Republicans won majorities in both houses of Congress (the first time since 1928); they won a majority of governorships as well. Republicans were determined to roll back the more controversial New Deal programs.
Truman pressed hard for the Employment Act of 1946. As originally submitted to Congress, the Act would have set up a workable “Keynesian” economic system. A strong federal role in the business cycle would have far-reaching implications for sub-state economic developers. Full employment and fiscal tools such as tax cuts and deficit spending implied conscious federal involvement in local economies. These grandiose hopes, however, did not materialize.
The 1946 Employment Act triggered a die-hard fear against national planning. The legislation, while approved, was gutted, merely establishing a Council of Economic Advisors who produced a State of the Economy Report and little else. No commitment to full employment was made, and no stimulative deficit spending approved. The Employment Act, the highlight of Truman’s first years in office, demonstrated the critical role the 1946 congressional elections played in a New Deal Thermidor. Republicans wanted to break the power of unions on federal legislation; and, this must come as a surprise, Republicans voted several rounds of tax cuts and passed meaningful budget cuts—which Truman vetoed. The most critical ED-relevant legislation approved in the 1946 Congress, still around today, was the Taft–Hartley Act.
Taft–Hartley had lasting effects on state/sub-state economic development. The Act overturned the 1935 Wagner Act, permitting states to restrict a “closed shop” requiring compulsory union membership as a condition for a job. Truman vetoed Taft–Hartley; the veto was overturned. Taft–Hartley prompted a burst of state “right to work” laws, setting in motion a regional business climate competition. Other bills modified FDR’s southern economic development strategy. The Hays–Bailey Bill (1945), proposed by southern legislators, committed the federal government to an area-wide jobs to people or place-based approach. That legislation foreshadowed Kennedy’s ARC and Johnson’s creation of the Economic Development Administration (EDA). The bill was not approved, however. Truman, nevertheless, created the Bureau of Employment Security and the Area Development Division, expanding the Federal Employment Act.1
Truman unexpectedly won the 1948 election. His 1949 “Fair Deal” increased minimum wage and social security benefits, but he was unable to increase aid to farmers, pass civil rights legislation, provide aid to education or create a national health program. An important Truman victory, heavily compromised, was the 1949 Housing Act discussed earlier. Approved in 1948, Puerto Rico’s “Operation Bootstrap” resulted in Puerto Rico’s first Industrial Tax Exemption Act—a program similar in its core concept to, believe it or not, BAWI. The Act, designed to attract industrial firms to Puerto Rico, was the first in a string of programs that continues to the present time (Benjamin, 1980, p. 678ff).
The Korean War commenced in June 1950, and industrial decentralization moved to the front-burner.
The Eisenhower Years
Eisenhower’s moderate Republicanism consolidated the New Deal. Mixing budget cuts, tax reductions and a Privatist rationale into Eisenhower-era programs gravitated toward traditional chamber-style ED: infrastructure and assistance to firms. It was, after all, a time characterized by Charles Wilson’s (General Motors’ president/Secretary of Defense) quote: “What was good for our country was good for General Motors, and vice versa.” Eisenhower’s federalism worked through states where possible, following four major principles. Federal assistance should:
- help communities help themselves;
- create permanent jobs (not temporary work programs);
- be implemented by governments close to the troubled community; and
- not be extended “if the proposed project create[s] unemployment in some other area.”2
Congress was also active in sub-state economic development. It conducted hearings and commissions on the IDB, military industrial decentralization and purchasing polices, as well as discussion on how to deal with chronically depressed areas or troubled sectors such as textiles and coal. The Eisenhower years were punctuated by three recessions, and, despite budget cuts, federal deficits increased. The Democrats regained control of Congress in 1954, but the federal government could no longer be described as activist.
Still they were years of considerable change and flux. The Civil Rights Movement began and Brown v. the Topeka Board of Education was issued. The South reacted to both, and Eisenhower cautiously applied the law, essentially on an event-by-event basis—without trying to polarize the South.
Agriculture and Rural Economic Development
After years of studies and bureaucratic resistance (principally from Agriculture Extension Agents), the Department of Agriculture (DOA) submitted rural economic development legislation to Congress in 1955—which was approved. Inspired (prodded would be a better word) by Deputy Undersecretary of Agriculture True D. Morse, the federal government had entered into ED for deeply challenged heartland rural communities/counties. In many rural communities, farmers were no longer able to supplement income by working temporarily in mining and lumber; decline of these industries had reduced farm incomes. Prompted by the Department of Agriculture’s Human Resources: A Report on Problems of Low Income Farmers, the DOA urged federal programs to foster non-farm employment opportunities in targeted rural areas (over 1000 counties). The report outlined 14 initiatives—including lending programs to start farms; encouraging defense industries to develop employment opportunities in rural areas; and educational and vocational training—and stressed need for greater federal involvement in rural loan and technical assistance.
Morse had seized upon the DOA report, appeared before House Agricultural committees, and, in 1955, secured approval of a program (an amendment to the 1914 Smith–Lever Act) authorizing the Extension Service to “give assistance and counseling to local groups in appraising resources for … improvements in agriculture or introduction of industry designed to supplement farm income … and furnishing all possible information as to existing employment opportunities” (Rasmussen, 1989, p. 193; emphasis added). In total 120 new extension agents were hired to implement the program. To minimize congressional opposition to federal involvement in nonagricultural economic development (chair Jamie Whitten was at best a mild supporter), Morse’s Rural Development Program was treated as a “pilot” program, initially available to 57 counties and expanded gradually to 200 counties by 1960 (Roth et al., 2002).
Further research, press and media commentaries followed. In 1958 a conference in Memphis evaluated Morse’s program, considered the impact of tourism in rural areas likely to be opened up by the 1956 Highway Act, and assessed ways to make rural areas more attractive to industries seeking to relocate. Eisenhower himself followed up by establishing a Committee for Rural Development Programs (1959). The National Planning Association issued a report in support, praising Morse and his tireless efforts. In October 1960 at a University of Nebraska conference on Regional Rural Development, Morse’s Rural Development Program was again reviewed. The report that followed indicated the seriousness of the rural crisis and the need for further federal involvement. Surprisingly, in 1961, the new Kennedy administration picked up the report (having read The Other America by Michael Harrington, 1962) and the Rural Development Program was retained and expanded—supplemented by a new federal approach to area-wide rural development.
Morse had pioneered federal rural initiatives that would endure. Now entitled the Rural Intermediary Relending Programs (IRP), they still function today. The program capitalizes revolving loan funds (RLFs) operated by intermediate lending entities. RLFs eligible purposes include: development of business facilities, starting new business, expanding existing business, developing new employment, rural job retention and CD projects in communities of 25,000 or less.
Besides Morse and rural ED, the Eisenhower administration, pulling back from FDR’s more aggressive federal-led marble cake federalism, made several decisions that impacted state and sub-state ED. The National Park Service Mission 66 initiative built necessary infrastructure for significant increase in park tourism after 1966. The Submerged Lands Act of 1953, legislation that stirs the hearts of Americans today, granted states full rights over coastal submerged lands up to the 3-mile US limit. The most obvious effect was oil-drilling responsibilities and proceeds accrued to the states—greatly affecting both California and Alaska in particular. Eisenhower was also more inclined to acknowledge and incorporate local pressures in power development, mineral and logging, and energy uses of federal-owned land. National Park expansion in the late 1940s and 1950s (Jackson Hole and Grand Teton) was tempered by compromise with state and local officials who wanted more opportunities for economic development—opposing the Park Service that was more inclined to seal off areas to preserve and protect natural beauty and the wilderness environment.
Power development on the Snake River was left to the state utilities rather than federal government. One of the more complex decisions (regarding dam construction) on federal land ownership, the Dinosaur National Monument initiative, pitted the Bureau of Reclamation against the Park Service, several states, environmentalists, preservationists and local cattle breeders and industry sectors (Nash, 1999, pp. 66–72). The compromise was controversial, and a later related decision (Glen Canyon) was even more controversial, serving as a warning that in future years federal land, western state rights and appropriate usage of federal lands by locals and industry would be escalated into its own political/economic development movement.
The Small Business Administration
In 1953 a new federal independent agency entered into the lexicon of sub-state economic development: the Small Business Administration (SBA). SBA, while new, did not appear deus ex machina; its origins lay within Hoover’s Depression-era Reconstruction Finance Corporation (RFC), his “bank” for corporations of all sizes during his last year in office. FDR retained the RFC, making it an important instrument of his New Deal–Depression business support system. WWII war production was mostly a big-business affair, and that raised concerns small business would be unable to compete with industry behemoths. So, in 1942, Congress created the Smaller War Plants Corporation (SWPC) to make loans to smaller manufacturers and encourage banks to extend financing to such firms. SWPC advocated for small business in defense contracts as well. Terminated at war’s end, a successor agency, the Small Defense Plants Administration, was recreated upon entry into the Korean War. When finally terminated, the SWPC’s functions (limited management counseling and education) were transferred to the Department of Commerce’s Office of Small Business.
The newly elected Eisenhower and Republican Congress wanted to close the RFC, believing it unnecessary government interference in business-economy (the RFC had been implicated in influence peddling during the Truman administration). Also, the 1949 Hoover Commission on government reorganization urged an end to federal government direct lending because it “invites political and private pressure or even corruption” (Bean, 2001, p. 8). Congressional politics and widespread popular support for small business, however, led Eisenhower to substitute a new small business version of the RFC for the old and discredited one. So in 1953 Congress ended the RFC but created the SBA, which was given a mere four-year authorization. Neither Eisenhower nor Congress envisioned a long-term federal small business financing commitment.
At inception, SBA was authorized to “aid, counsel, assist and protect … the interests of small business concerns” and specifically tasked with including small business in government contracts. By 1954, SBA was already making direct loans and guaranteeing loans to small businesses. SBA further expanded to loans for natural disasters, and picked up counseling and education functions formerly entrusted to the Department of Commerce: “Between 1954 and 1960, SBA financial assistance quadrupled, and agency personnel expanded from 550 employees to 2200 employees” (Bean, 2001, p. 19). SBA services are sometimes referred to as the “three C’s: capital, contracting and counseling.” In 1957 SBA was reapproved as a permanent independent agency. By 1999 it had issued nearly $14 billion from its direct lending program, and in 2010 SBA was granted Cabinet status by President Barack Obama.
Despite its programmatic success, the SBA has always been controversial:
- Should the federal government be a direct lender to business at all?
- If yes, should it favor a subset of firms—small business over medium and large firms?
- What about its vulnerability to political favoritism and outright corruption?
Reflecting these concerns, Main Street business interest groups have not consistently supported the SBA over its history of 60 plus years. The US Chamber of Commerce did not support the SBA’s creation and periodically has advocated its termination. The National Federation of Independent Business (NIFB), while supportive of SBA’s creation, has not been a consistent ally either, and usually is reserved to SBA’s programs. The SBA enjoys fragile support from the small business community, where one still encounters hesitancy to use its programs.
The Republican Party has sometimes called for SBA’s elimination. Eisenhower cut its funding, and the Reagan administration, the 1996 Contract for America and the George W. Bush administration advocated its termination. Democrats, on the other hand, have mostly supported and used the SBA when in office. Yet, SBA survives and prospers—even when Republicans are in charge; banks have increasingly turned to the SBA for financing. This ambivalence suggests something deeper is “going on” than partisanship and business conservative ideology. I suggest small business and SBA straddles the two cultural streams, and has been a perennial “fault line” between Privatism and Progressivism.
Small business taps into the mindset and ideological fabric of many Americans.
Concern for the underdog and the average Joe’s seemingly endless desire to escape meddling bosses by becoming one’s own boss is enduring. The small farmer and now businessman remains the yeoman of American politics. The franchise McDonald’s owner may have been substituted for the yeoman farmer, but that also seems to fall into the fault line. Still, many believe starting a small business is the best way to achieve upward personal, economic and social mobility, and a persistent fear of big business and concentration of industry have from time to time united business Privatists– Progressives. This ad hoc mixture of political cultures and intermittent political and economic congruence has arguably created a residue of support and, at times, patience for small business into which the SBA has tapped.
Expansion of SBA functions/programs was not long in coming. In 1958 legislation introduced by Wright Patman (Texas, chair of Housing Banking and Commerce) and Lyndon Johnson (Texas, Senate Majority Leader and presidential candidate) created a new program, extending the SBA’s financing scope rather dramatically. Under provisions of the 1958 Small Business Investment Act, SBA could license a new type of lending corporation, the Small Business Investment Corporation (SBIC), which then could finance startup firms through long-term loans or purchase of their convertible debt, which was used as a match for private investment in the SBIC. The SBIC, ultimately using SBA dollars, could then make “loans” to small firms—a loan very close in function and subordination to equity or venture capital. The 1958 legislation was controversial; business interest groups opposed SBIC as “direct equity ownership of business by government.”
The need for this “near equity” financing arose because of the inherent structure of small business itself. Small business is composed of (1) firms which through scale, maturity and size generated sufficient sales and cash flow to reasonably be expected to pay down a loan; and (2) other firms young, very small and startup, with few sales that could not satisfy conventional bank due diligence. Until 1958, the SBA could lend only to the first, “bankable” small business. The SBIC was designed to fill that gap. As such SBICs constitute a major innovation in public financing of new, young startup firms. In 2013 more than 300 SBICs were in operation, guaranteeing nearly $18 billion in obligations. So extensive is the SBIC network that it has been referred to as the “fourth banking system” after commercial, investment and mortgage banking. If so, it is a little noticed element of “shadow banking.” The SBIC may be the first meaningful entry by economic developers into startup venture capital financing.
SBICs would be used by states as their model for state entry into small business/ startup financing. Since the early sixties, there has been a small explosion in SBIC-structured EDOs (not all SBIC licensed) at state and regional levels. These agencies are prime candidates for “siloization” in that they are based on specialized expertise, possess a unique funding stream and serve a limited clientele.
Ron W. Coan 