by Melchior Palyi
hat tip: Mises Daily
Wednesday, March 31, 2010
[Excerpted from chapter 2 of Compulsory Medical Care and the Welfare State (1950)]
Obligatory health insurance started moderately enough — in Prussia. Compulsion under a law of 1845 was left in the hands of municipal administrations, with no government subsidy involved and no contributions from employers. The antisocialist law of 1878 suppressed many of labor’s voluntary associations for sickness benefits. The next step was the governmentalization of the associations’ functions.
It was no mere accident that the ideological forefathers of Nazism, Adolf Wagner and Eugen Dühring, happened to be the “brain trusters” behind Bismarck’s “nationalistic socialism to end international socialism,” using his own terms. When, on January 1, 1884, his compulsory sickness scheme went into operation it literally started a new era — a new age in the history of welfarism.
Bismarck’s role in modern history is rarely spoken of nowadays. Undoubtedly, his political and administrative “genius” has shaped history down to our times. His revolutionary innovation in welfare policy was preceded five years before, in 1879, by the imposition of a protective tariff that started Europe’s internecine commercial warfare which endures to this day. And it was followed by the introduction in 1889 of universal military service covering even the middle-aged manhood. This started a rearmament race leading into total wars with the objective of annihilating entire nations.
The shrewd Iron Chancellor — the dictator in constitutional disguise, quoting M.J. Bonn’s epigram — meant to kill several birds with one stone when he embarked on his program of appeasing labor. The reason, announced in the November 17, 1881, message of Kaiser Wilhelm I, to offer something positive to labor, not merely the repression of socialists by police force, may have been born of genuine worry over the unrest of the working classes due to the long depression that had engulfed Europe since 1875. But the true motive has been pointed out in the penetrating Bismarck biography (Vol. III, pp. 370–71) of Erich Eyck:
To his mind the State, by aiding the workers, should not only fulfill the duty ordered by religion, but it should obtain in particular a claim on their thankfulness, a gratitude that was to be shown by loyalty to the government and by loyal progovernment votes in elections.
In other words, it was the old-fashioned attempt of the monarchy to ally itself with the plebs against the “aristocracy” in between the two. However, the social-insurance legislation did not stop the Marxists from returning in increasing parliamentary strength. The attempt to subdue the socialist movement by appeasement ended in a political fiasco.
Prince Bismarck found other satisfaction. The state socialism of His Highness was directed against the business interests and the Liberal (free-trade) Party. The latter had accepted the principle that workers should be forced to insure themselves but stood for their freedom to choose their own, nongovernmentalized agencies.
What was even worse from the militarist point of view, the Liberals were blocking time and again the chancellor’s requests for armaments. The Reich he created had almost no revenues of its own other than from import duties and excises. It had to rely on contributions from the states, which were available only through unpleasant parliamentary procedures. The new social-insurance organizations were to place their resources at the federal government’s disposal, saving Bismarck the embarrassment of going, when need arose, with his hat in hand to a reluctant Reichstag.
Above all, the new system was an offshoot of his economic and political philosophy. Bismarck was a tradition-bound reactionary, altogether resentful of modern industrial development, although he himself owned a small paper mill. As did many of the ultraconservative contemporaries of his junker class, he trusted agriculture and handicraft but frowned on large-scale industrial enterprise and on trade unionism. To check both, if they had to be tolerated, was one of his goals. Governmentalizing, and thereby controlling through an appropriate bureaucratic apparatus, the providing of medical, accident, and old age care and of death (burial) benefits seemed an obvious way to put the reins on laissez-faire capitalism as well as on labor.
This approach conformed to the paternalistic makeup of his mind — as it conforms to the paternalism of modern dictators and of humanitarian social workers. It is no mere accident if pseudoliberals bubble over with praise of the archreactionary Prussian junker’s medical security legislation. It was especially palatable to the bureaucracy of the Habsburg Monarchy.
“Governmentalizing, and thereby controlling through an appropriate bureaucratic apparatus, the providing of medical, accident, and old age care and of death (burial) benefits seemed an obvious way to put the reins on laissez-faire capitalism as well as on labor.”
The West resisted at first. It still was imbued with the 19th-century tradition of individual freedom and responsibility. But even before World War I its resistance began to soften under the fascination of the power emanating from Wilhelminian Germany and under the German propaganda that labor’s patriotism has to be bought by social concessions. Shortly before or during that war, Britain, Norway, Iceland, Russia, etc., introduced modified replicas of the German compulsory panel system, followed by more countries after 1918. A dead and defeated Bismarck proved to have a wider spiritual influence than the living and victorious one ever enjoyed.
The triumphant march of authoritarian medicine received a fresh boost at the outset of the Great Depression when, among others, France, after a decade of political oratory and wrangling on the subject, instituted a system of its own. It was modeled on the German but with significant modifications.
However, 1943–1946 was the most crucial time since 1881–1884 in the Western history of compulsory health service. It was the hour of the liberation from Nazi occupation, with the parliamentary systems of the liberated nations in a semichaotic condition, and with Communists either in cabinet posts or having decisive influence in public affairs. As a result, far-reaching legislation was hurried through, which under normal conditions would have run into serious obstacles.
In France, in November 1944, a new social security law of communistic coloring was voted in a virtually empty Chamber of Deputies. Left-wing rule in Belgium was responsible for its sickness scheme of 1944. It was also under abnormal wartime and postwar conditions that Italy and Holland “reformed” their sickness plans. New plans were put into operation or the old ones were revamped thoroughly in Australia, Argentina, Brazil, Chile, Spain, the Russian satellite countries, Costa Rica, Ecuador, and of course in Britain. Legislation has been passed, but is not as yet in effect in three Canadian provinces and in Sweden.
It is a fact, and a very remarkable one, that the great demagogues of our age appear to be greatly worried about the health of their subjects. No one was more so than Adolf Hitler. His racism was the last word in “biological” demagoguery, unless the new antihereditary biology of the Soviets exceeds it, an expression of the identical nationalistic purpose. In terms of political results, it was a most effective demagoguery due to its emphasis on health and virility. As a committee report on health insurance of the Canadian House of Commons put it (March 16, 1943): “During the early years of Hitler’s regime, the government’s medical program was looked upon by many observers as one of the greatest props of the totalitarian state.”
Before coming to power, the Nazis were violently critical of the social-insurance setup, considering it a weapon in the hands of their enemies, the Social Democrats. They objected especially to the extravagance and corruption in compulsory medicine and to its alleged effect in “softening” German manhood. Thereby they earned the applause of doctors as well as of businessmen and the approval of the disgruntled middle classes.
They promised thoroughgoing reform and drove their opposition home so forcefully that Chancellor Brüning was constrained to introduce in 1931–1932 several measures affecting the medical care system which were most unpopular with labor. A three-day waiting period before cash benefits became available was made mandatory. A small tax (“deductible”) on prescriptions and a levy of fifty Pfennigs on each quarterly sickness ticket of the patient were imposed. This charge of twenty cents in American money per quarter, imposed on patients many of whom were unemployed, resulted at once in cutting the number of applications by about one-quarter! But these “deflationary” measures, together with the liquidation of the totally bankrupt unemployment insurance, also had the consequence of arousing an ill-feeling among the workers which had no small influence in bringing down the house of the Weimar Republic. Brüning took the blame; Hitler got the credit.
Once in power, the latter soon reversed his strategy. The ill-famed Dr. [Robert] Ley, boss of the Nazi labor front, did not fail to see that the social-insurance system could be used for Nazi politics as a means of popular demagoguery; as a bastion of bureaucratic power; as an instrument of regimentation, and as a reservoir from which to draw jobs for political favorites and loanable funds for rearmament. Brüning’s extra tax on panel patients was cut in half. By 1935, with Hitlerian full employment under way, the few pennies of extra tax represented a purely nominal charge. The sting was taken out of it.
The führer gained in popularity by reducing to negligible proportions an unpopular measure which he himself had instigated. He lost no time in making a positive contribution of his own to the organization of compulsory medicine by extending it in 1939 to small business (handicraft), by tightening it in Austria (1938), and by establishing compulsory healthcare in occupied Holland (1941). One of his last “social” measures, in March 1945, was to have workers in certain irregular types of employment included. But his attempt to abolish the autonomy of the panels and to regiment them by centralization had been checked by the concerted resistance of the medical profession, the panel bureaucracy, and public opinion. Similar abortive attempts at complete bureaucratization of the panels were made under the Kaiser in 1909 and in the Weimar Republic’s revolutionary days in 1919. The same goal is on the Social Democratic Party’s agenda again in 1949.
The original schemes of compulsory medicine have been imposed on the respective countries without the consent and often against the very vocal resistance of those who were supposed to benefit. That was the case in Germany and also in France. The following is a good summary of what happened there:
Social insurance was introduced in France on a really universal scale by the Law of April 5, 1928, which later was amended by the Law of April 30, 1930. At that time it was believed that this was the crowning piece of work completing the entire edifice of French social legislation. Its application nevertheless met with strong opposition culminating in strikes and violent labor disturbances in several industrial districts, particularly in the Northern Roubaix-Tourcoing region. Labor resented the 4 per cent tax imposed upon wages, and the immediate hardship outweighed in its eyes the possibility of future benefits. Not only did the communists immediately seize upon this occasion to foment strikes by interpreting the new measure as being purely and simply a tax on payrolls, but even the socialists joined the opposition, arguing with a certain degree of justification that the increased price of finished products resulted in all-round higher cost of living, superimposed upon the reduction of salaries.
It is of interest to note in connection with the early strikes that the textile consortium of Roubaix-Tourcoing offered to pay the employees’ share of the tax for all operatives employed for over one year. Strangely enough, this proposal met with especially violent labor opposition in spite of its obvious justification by the greater skill and experience of steadily employed workers, compensating employers for the supplementary charge which they offered to undertake. The efforts of M. Laval were at that time successful in bringing about a compromise solution.
The law met, moreover, with much less spectacular but perhaps even greater difficulties from passive resistance. In 1933, for instance, it was not applied to some 3,470,000 workers, mostly operating for small concerns having not more than five employees. Excessive bureaucracy, opposition of labor and carelessness were principally blamed. Enterprises complying with the law were soon menaced by sharper competition from the non-observers. These were later converted to a more conciliatory attitude by stricter control and penalties.
Just as the German workers did half a century earlier, the French resisted being forced into a humanitarian scheme. Their trade unions recognized that they would have to pay the price themselves in the form of contributions and increased costs of living. But the real reason for opposition was political rather than economic. They understood that a tremendous power position and a new bastion of bureaucracy were being built up at their expense. Accordingly, they made an about-face in 1944–1945 when the scheme was to be reformed, i.e., expanded under a procommunist regime. By that time the trade unions were to be vested with the power which before they had so energetically opposed.
Melchior Palyi (1892–1970) was an American citizen of Hungarian descent — a distinguished, internationally recognized educator, author, economist, and financial expert. He taught in the Universities of Kiel, Goettingen, and Berlin. In 1928 he was appointed chief economist to the Deutsch Bank in Berlin. From 1931 to 1933 he served in the capacity of scientific advisor to the Reichsbank of Germany. In the United States, he taught at the Universities of Chicago, Wisconsin, and Northwestern. He acquired a national reputation as a scientific and popular writer, public lecturer, radio commentator and consulting economist. See Melchior Palyi’s article archives.
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 M.J. Bonn, Wandering Scholar (New York: John Day Co., 1948), chs. 2 and 3.
 See, e.g., J.L. Cohen, “Health Insurance,” Encyclopedia of Social Sciences 7 (1932): 294: “It was Bismarck’s great achievement that he took advantage of the expanding mutual aid movement, led the humanitarian sentiment of the 1870’s and 1880’s and made acceptable the thesis that compulsion was inevitable … Bismarck made it clear that the thorough-going paternalism removed the legitimate causes of socialism.” The learned author not only makes a humanitarian out of Bismarck, but also implies there is no socialism left but of an illegitimate sort.
 W.A. Sollohub, “Social Security in France,” Harvard Business Review (Spring 1937): 283 ff.
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