The Townsend Plan

The era of the Great Depression is one characterized by strong public distaste for big banks and other products of excessive capitalism. As American families suffered intensely from the depression, Americans distanced themselves from their traditional identity as capitalistic individuals, and began to harbor more socialist sympathies. These sentiments grew to such an extent that president Roosevelt, despite advocating socialist welfare programs, was criticized by fellow liberals for being too soft on capitalism. Of these critics, the most influential was a retired doctor by the name of Francis Townsend, who became widely known for his old-age pensions plan. This plan was often referred to as the Old Age Revolving Pension Plan, or Townsend Plan for short.

Francis Townsend

The Townsend Plan main proposal was to give a pension to all people over the age of 60, paid for by a 2% national sales tax. These people would all receive the same $200 a month, provided they were retired, carried no criminal background, and they spent all of the $200 they received within a month. Ideally, this plan would keep the elderly out of poverty ($200 per month was twice the national average at the time), provide young workers with more job opportunities by encouraging earlier retirement, and stimulate the economy by forcing all of the $200 to be spent by the end of the month. For these reasons, public support of the Townsend Plan grew rapidly. At the height of Townsend's popularity, a 1935 study showed 56% popular support of the plan, and Townsend was able to send petitions with 10 million signatures to the government. Unfortunately, despite seeming like a valid proposal and attracting an abundance of popular support, the Townsend Plan was entirely impractical for various reasons.

The reason why the Townsend Plan was able to promise retirees a seemingly incredible $200 per month was because of Townsend's general lack of understanding of economics. Simply put, his 2% transaction tax would generate only between $4 and $9.6 billion dollars, about a third of what Townsend needed. In fact, at Townsend's hearing in front of Congress, his own witness, an economist, stated that the tax would have to be somewhere between 6% and 14%. Townsend, in response, might have argued that the economic stimulus caused by encouraged spending would increase the amount the tax would bring in. However, this too, would be an incorrect assumption. The $200 put into the retiree's pockets would come from a sales tax, meaning that it was already being spent. The economy would not be stimulated by giving $200 dollars for spending that would have been spent anyway. Townsend's assumption was that the taxed dollars were originally not being spent, but, because it was a sales tax, this was innately untrue and meant that the promised economy boost was entirely unfounded.

In spite of all its faults, the Townsend Plan still holds a large significance in American history. Before Townsend's proposal, Roosevelt had not announced his social security plan. Although it has not been proven, there is evidence that Roosevelt finally proposed social security because of the pressure Townsend and his followers had applied. Roosevelt's Secretary of Labor, Frances Perkins, reported the president to have said, "The Congress can't stand the pressure of the Townsend Plan unless we are studying social security, a solid plan which will give some assurance to old people of systematic assistance upon retirement." The Townsend Plan, however faulted it was, plainly represented an idea that would soon after become a cornerstone of American society.



http://study.com/academy/lesson/dr-francis-townsend-biography.html
https://www.ssa.gov/history/townsendproblems.html
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