Dear Friend of FEE,

A short time ago, a good friend and supporter of FEE explained the importance of what we do. I could not say it better myself, so I share his thoughts with you:

What FEE truly offers are intellectual lifelines for people who are drowning in the contemporary educational system. The painful isolation of being surrounded by left-wing orthodoxy, the thirst for politically-incorrect educational material that just isn’t available in many of our high schools and colleges, the courage of local parents looking for ways to help their children out, the kids’ gratitude at finding the rich resources at your website and finding both mentors and companions for their intellectual journey. There is a lot at stake emotionally that people can relate to from their own experience.

Plenty is also at stake when it comes to educating the future generation of leaders. The U.S. Department of Education last conducted an assessment of economic knowledge for 12^th graders in 2006. Of the 11,500 students surveyed, only 42 percent were rated as “proficient” in economics by the study. A mere 36 percent of students could identify the federal government’s primary source of revenue. And only 46 percent could determine the effects of a price control. Of course, being a government test, it was biased from the beginning. The questions go on about abstractions like interest rates, unemployment rates, and trade agreements without ever mentioning that economics is the study of real people. Ludwig von Mises would be horrified to know this is how the knowledge of human action is tested. This is why FEE’s educational services are needed.

To read the rest download the 2011 Year-End Appeal in PDF:

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Since 2008, Kofi has managed the Africa Youth Peace Call (AYPC), an independent, non-profit, research and educational organization devoted to the principles of individual liberty, private property rights, free markets, the rule of law and limited government. Kofi’s Facebook page (which I invite you to visit) declares that AYPC “is dedicated to the study and advancement of classical liberalism in Africa.”  Much like FEE, AYPC seeks “to change ideas and opinions by research, seminars and publications.” Its goal is nothing less than “to become the leading libertarian organization in the freedom education of young people in Africa.”

Through its “Liberty and Entrepreneurship Camps,” AYPC seeks “to arm students with ideas to be self sufficient instead of looking to the state to employ them after graduation.” Kofi says that, “Giving these future leaders the right ideas will free them and many others from the lies and depravity of socialist ideals which are so pervasive in Africa, especially in our institutions of higher learning.”

FEE publications have been a regular feature at AYPC’s camps and other programs. A favorite is the classic essay, “I, Pencil” by our founder, Leonard Read. As you can see from the accompanying pictures, copies are in the hands now of promising young students who just might change the future of Africa in the right direction. In a note to me in early November, Kofi wrote:

“I‘m proud to say that your moral, spiritual and financial support to the camps are paying off. In his speech at the last camp, Chris Kuranchie affirmed that we can only win the battle against poverty and tyranny if we expose our future leaders to free market principles at a very tender age. He’s collaborating with AYPC and his teacher colleagues to set up more clubs in other schools and communities. After showing John Stossel’s video on Greed, the leadership and the 12-to-16-year-old attendees affirmed a new motto: Liberty: Do Harm to No One; Take From No One His Own; Gold is Coined Freedom.

A reading session featuring “I, Pencil” at AYPC’s camps involves the students reading and discussing the essay one paragraph at a time. Kofi says it’s “amazing” how it teaches the students an appreciation for the “spontaneous order” of free markets.

If friends of FEE wish to communicate and/or donate to AYPC, feel free to write directly to Kofi at kofi@aypcghana.org. The organization’s web site is http://www.aypcghana.org/.

Kofi’s next Liberty and Entrepreneurship Camp is scheduled for January and as of today, AYPC is about half-way toward its fundraising goal for it. With only a $5 donation toward his “chip-in fundraiser,” you can help him spread liberty in Africa via this link: http://aypc2011finalpush.chipin.com/african-peace-youth-call-ghana

Capital without labor means machines with no operators, or financial resources without the manpower to invest in. Labor without capital looks like Haiti or North Korea: plenty of people working but doing it with sticks instead of bulldozers, or starting a small enterprise with pocket change instead of a bank loan.

There may be no place in the world where there’s a shortage of labor but every inch of the planet is short of capital. There is no worker who couldn’t become more productive and better himself and society in the process if he had a more powerful labor-saving machine or a little more venture capital behind him. Capital can refer to either the tools of production or the funds that finance them. It ought to be abundantly clear that the vast improvement in standards of living over the past century is not explained by physical labor (we actually do less of that), but rather to the application of capital.

This is not class warfare. I’m not “taking sides” between labor and capital. I don’t see them as natural antagonists in spite of some people’s attempts to make them so. Don’t think of capital as something possessed and deployed only by bankers, the college-educated, the rich, or the elite. We workers of all income levels are “capital-ists” too—every time we save and invest, buy a share of stock, fix a machine, or start a business.

And yet, we have a “Labor Day” in America but not a “Capital Day.”

Like most Americans, I’ve traditionally celebrated labor on Labor Day weekend—not organized labor or compulsory labor unions, mind you, but the noble act of physical labor to produce the things we want and need. Nothing at all wrong about that!

But this year on Labor Day weekend, I’ll also be thinking about the remarkable achievements of inventors of labor-saving devices, the risk-taking venture capitalists who put their own money (not your tax money) on the line and the fact that nobody in America has to dig a ditch with a spoon or cut his lawn with a knife. Labor Day and Capital Day—I don’t know why we should have just one and not the other.

Happy Capital Day, America!

Lawrence W. Reed

Two wonderful ladies, Juli Dalton and Ginger Hancock of the Yavapai Center for Constitutional Principles in Prescott, Arizona, organized local funding and brought several local students to Freedom Academy II in Estes Park, Colorado. During the week, the students did live interviews by phone on Prescott’s KYCA Radio about what they were learning. Upon their return, three of them appeared in the station’s studio to sum up their life-changing experience.

We hope you will be impressed with what these three young people have to say and with the teaching FEE provided. We are changing the future by turning lights on in the young minds of today!

The interview is 43 minutes (commercials have been deleted). Several people called in during the show and made some great comments.

Here’s the link: http://www.kyca.info/includes/audioPlayer.php?showAudio=KYCAPM_2011-08-10

So when statists denounce spending cuts, especially reductions in “sacred cow” entitlements, we must explain not only why their position is lousy economics and poor planning for the future. We must question their very moral fiber. They should be embarrassed by what their stance says about them. They should have a guilty conscience about perpetuating a system that jeopardizes the financial solvency and the freedoms of not just the present generations but of those innocent and yet-unborn. We need to ask them why they can’t muster the courage to do what’s right. We have to call them on the carpet for their apparent willingness to fund failed and unaffordable programs for some constituency’s short-term gratification. We need to ask them why they are such eager participants in massive theft that takes from the hard-earned treasuries of private people and transfers those earnings to the squandering wastrels of the federal treasury. If they have a conscience, let it be pricked now before it’s too late.

To those in power whose pending decisions will set the course of America for years to come: Stop thinking as though almost every problem in every country is a reason for you to put your own countrymen’s lives and treasure at risk. Read the Constitution not just one day of the year, but at every moment when you are considering a measure without first asking yourself, “Is this really my responsibility? Is it really within the power granted to me?”

Few things speak “hypocrisy” more plainly than calling for peace publicly but promoting war on the personal, economic and political lives of others. Remember that every time you spend more, you don’t get the money by selling cookies like the Girl Scouts do. You deploy force against your fellow citizens. That raises moral issues and is something which you must stop doing in such a cavalier fashion.

Please don’t assume you’re doing your duty by minor spending reductions that leave whole agencies, programs and Cabinet departments intact, only to grow back. Pull out, root and branch, what you or your predecessors shouldn’t have created in the first place. Start with entire departments like Energy and Education, which have neither Constitutional justification nor track records worth keeping.

Stop labeling as “tough choices” major spending reductions when in fact they ought to be the easy ones. The really tough choices are the token nips and tucks that only yield endless whining and future battles. Muster the courage to make the big ones now and you’ll avoid problems later. Don’t torture us with mere tinkerings.

Empowering this Leviathan State we now have, at the expense of your fellow Americans, is shameful, anti-social behavior. It is not what we expect of responsible adults.

Do your duty. Balance the budget—now. Raise no more debt ceilings. If you do these things, you will receive the gratitude of a restored nation and the rewards of a forgiving God. If you do not, prepare to bear the judgment of both.

Jefferson warned us that we must make the choice between economy and liberty or profusion and servitude. Will you who are in power go down in history as leaders who saved their country or as just another crop of barbarians who flung open the gates to their country’s destruction? It’s your call.

Lawrence W. Reed is president of the Foundation for Economic Education—with offices in Irvington, New York, and Atlanta, Georgia.

Democrats scored huge gains in the 1974 elections in the aftermath of Watergate. They took both houses of Congress from the Republicans in the depression year of 1932. Republicans swept to power in 1994 largely on fiscal issues, just as they had done in 1920 amid disenchantment with Woodrow Wilson’s tax-and-spend administration.

Predictions for the GOP in the 2010 mid-terms range from a pick-up of 35 to 50 seats. Even a figure at the lower end of that range would be regarded by pundits as large, but it pales in contrast to two massive realignments within the same decade, barely a hundred years ago.

The 1894 election was a whopper for party turnover. In a Congress with a hundred fewer seats than today’s, the incumbent Democrats lost 125 and the Republicans gained 130. The one issue on everybody’s mind that year was depression, heralded a year and a half earlier by the Panic of 1893. The party of President Grover Cleveland, a Democrat in the middle of his second (and nonconsecutive) term, took the heat for sky-high unemployment.

But just four years earlier, the Democrats nearly wiped the slate clean of Republicans. When the dust settled in the November 1890 mid-terms, Democrats had won an astonishing 235 seats in the House, leaving the Republicans with just 88. What was the number one issue of that campaign? Spending—reckless, feckless spending.

Grover Cleveland’s first term (1885-89) featured many battles with congressional Republicans over fiscal issues. A parsimonious Presbyterian who took his constitutional duties seriously, Cleveland vetoed more than twice as many bills as all of his 21 predecessors combined—414 vetoes in a single four-year term. “Though the people support the government,” he opined in a rejection of a measure to aid drought-afflicted farmers in Texas, “the government should not support the people.”

In his 1888 re-election bid, Cleveland won the popular vote but lost in the Electoral College to Republican Benjamin Harrison. With a small GOP majority in the Congress, and a passive president who largely deferred to his party’s congressional leadership, the spenders took the country on a grand ride. What Democrat Grover Cleveland had vetoed, the iron-fisted Speaker of the House, Maine’s Thomas B. “Czar” Reed, rammed through. The big spenders threw so much money at public works, defense and military pensions that a new political insult was coined, the “Billion Dollar Congress.” It was the first time in American history that Congress spent a billion dollars in a single two-year session.

The first half of the Harrison administration saw the Republicans not only breaking records for spending, but taking the country off the deep end on other fiscal matters as well. They squandered a budget surplus, passed the highest tariffs to date and put the federal government in the position of buying up nearly the entire annual output of the country’s silver mines for twice what the metal was worth. They also authorized the printing of a new paper money to help pay for it all. In massive numbers, voters repudiated the Billion Dollar Congress on November 4, 1890.

Here we are, 12 decades later, and the mood in the country is anything but tranquil. The first three of the four re-aligning conditions cited above are arguably in place. If you have doubts about the fourth (major scandal), think of how average Americans see the last 18 months of wasteful spending and bailouts of the politically well-connected. Some polls suggest that most people would think “scandalous” to be a rather charitable adjective.

Realignment elections demonstrate that Americans don’t much care for endless wars in faraway places, a sagging economy, spending and taxing binges, or politicians otherwise behaving badly. They’ve been known to turn a party out of power for perceiving it guilty of just one of those sins. If voters on November 2 see the Democrats as presiding over all four, a new benchmark in political history may be set.

Given how terribly disappointing the Republicans proved to be after they won control of Congress in 1994, how much difference a GOP tsunami this November will make in the years to come is anybody’s guess.

Lawrence W. Reed is president of the Foundation for Economic Education in Irvington, New York and Atlanta, Georgia.

Lawrence W. Reed is president of the Foundation for Economic Education, with offices in Irvington, New York and Atlanta, Georgia.

The cause of liberty lost a stalwart with the passing last evening (September 7, 2010) of Ralph Smeed of Caldwell, Idaho, at the age of 88. No one in the Gem State was ever more colorful and relentless in his defense of the free society.

“One of a kind” seems a trite understatement in Ralph’s case. If you knew him, you probably couldn’t think of anybody else quite like him. He was iconic and iconoclastic. He was gentle and grandfatherly on many occasions, cantankerous and irascible on others. He made everybody mad at one
time or another but it was almost always because he wanted to make us think—and he usually succeeded unless you were an utterly incorrigible statist. He always stood out in any crowd, partly because of his bolo ties but mainly because he was often the only one beseeching everybody else to stand for principle and not be afraid to defend it. He was known for his pithy, one-line zingers. He even improved upon Lord Acton’s famous remark (“Power corrupts and absolute power corrupts absolutely”) by adding, “And power attracts the corruptible.”

Thirty years ago, the free market movement could boast maybe four or five “think tanks” in the U.S., with all but one either located in Washington, D.C. or focused on national and international issues. The Foundation for Economic Education (FEE), on whose board Ralph proudly served, was the nation’s first but the earliest one founded within a state with programs focused in that state was the one that Ralph started in 1977 in Boise (later moved to Caldwell)—the Center for the Study of Market Alternatives (CSMA). That makes Ralph a think tank pioneer. I was privileged in 1984 to be called to Idaho by Ralph to run CSMA for almost three years.

Through CSMA, his newspaper columns, his conversations and his often painful prodding as Idaho’s libertarian gadfly, perhaps tens of thousands of Idahoans and other Americans were swayed toward liberty by this remarkable man. Among them were former U.S. Senator Steve Symms, who says, “There never would have been a Senator Steve Symms if it weren’t for Ralph Smeed. Ralph was always my biggest critic yet best supporter. When we weren’t together, we talked on the phone often. I will truly miss him.”

Ralph Smeed was born in Caldwell, Idaho on December 30, 1921. He was troubled by the bureaucracy he saw firsthand when he served in the Army during World War II but his intellectual blossoming really began in the late ‘40s when James Gipson of the venerable Caxton Printers gave him copies of Frederic Bastiat’s “The Law,” FEE’s journal, “The Freeman,” and other libertarian materials. He was a delegate for Goldwater at the 1964 Republican National Convention. In 1965, Ralph attended a FEE seminar where he came to know FEE’s founder, Leonard Read, and the works of such liberty luminaries as Ludwig von Mises, F. A. Hayek, Murray Rothbard, Henry Hazlitt and Ayn Rand. In short order, he became Idaho’s best known and most passionate, well-read and thoroughly principled lover of liberty.

Wayne Hoffman is one of those countless individuals whose life was changed by Ralph Smeed. A former journalist who once thought Ralph was off-base by suggesting the mainstream media possessed a statist bias, Hoffman later became a convert to free market ideas because of Ralph. He recalls Ralph’s own bias, a bias for action on behalf of liberty:

“Last year Ralph invited me to come to a regular Sunday brunch with his friends. That’s where we really debate the issues of the day, but Ralph always lamented that we didn’t accomplish anything at those meals. ‘We just meet, eat and retreat,’ he’d say. ‘We don’t do ANYTHING.’

“I got great value out of it, because those meetings helped me formulte many of my newspaper columns. The ‘meet, eat and retreat’ people did come up with a pretty neat idea, however, not long ago. After Ralph was diagnosed with pancreatic cancer and went on his trip to Houston for treatment, our brunch club, along with Dick Rowland and Chris Derry, came up with the idea of forming a leadership academy that will bear Ralph’s name. ‘Well, you finally did something besides meet, eat and retreat!’ Ralph said.”

Hoffman is now the president of CSMA’s successor organization, the Idaho Freedom Foundation—a group committed to the very ideas for which Ralph devoted his long life. IFF recently bestowed upon Ralph its first “Lifetime Achievement Award.”

Dick Rowland, president emeritus of the Grassroot Institute of Hawaii, fondly recalled Ralph this way in an e-mail to me a few days ago: “We, our children and our children’s children will be enriched and inspired by Ralph’s sturdy compass of passionate wisdom and hard work that produced accomplishments too numerous to count. He taught us to work harder, faster and smarter for cherished individual liberties. He urged us to make the statists say clearly what they stand for: a bigger, more intrusive government and a less effective citizen. ‘The bigger the government gets, the smaller you get,’ Ralph liked to say.”

Maurice Clements, one of Ralph’s closest and best friends for years, counts among Ralph’s lasting contributions the donation of hundreds of books and the funding of a vast libertarian library at Albertson College in Caldwell, formerly the College of Idaho. Clements notes that Ralph is even better known locally for constructing a 10 x 24-foot reader board sign at the edge of Caldwell near a freeway. For years it has “amused, tantalized and provoked the citizens of Idaho” to think about ideas and in ways they ordinarily wouldn’t. Among the comments Ralph posted on the board were these: “If you don’t believe in Christmas, don’t take the day off” and “What have you done today to save the republic?”

After one of Ralph’s recent hospitalizations, friends posted this on the reader board: “Ralph is back home from the hospital. Pray for him.” The when his health deteriorated, they posted this: “Ralph is back in the hospital. Pray for the staff.” Even Ralph laughed at that one. (Thanks to Smeed friend Laird Maxwell for information on the reader board.)

After a contentious and expensive ballot drive, voters in 1986 made Idaho the 21st right-to-work state. For the past 24 years, no worker in that state has been compelled to join or pay dues to a labor organization as a condition of employment. Many people worked to make that happen and significant credit goes to Ralph for planting the intellectual seeds that sprouted with that successful effort. It’s no small coincidence that since 1986, Idaho has been among the most economically healthy of the 50 states.

At FEE, we will always be grateful for Ralph’s work, his fealty to liberty and to our organization as a supporter and trustee. Most recently, in 2008, he teamed up with friend and fellow former FEE trustee Dave Keyston of California to fund the printing of a 50th anniversary edition of Leonard Read’s classic essay, “I, Pencil.” Ralph was passing it out by the hundreds right up until his health took a turn for the worse. He was pushing liberty 24/7 and never let up until his health forced him to.

I last spoke to Ralph on September 3, the Friday before he died. I called his hospital room. He answered, “Larry, how the Hell are you?” We quickly turned to a discussion of the health of “the cause.” One thing seemed to be uppermost in his mind at that moment: giving encouragement and credit to those who work for liberty. We don’t do enough of that, he explained. He never hinted at any need for recognition for himself, but he urged me to implore others in the movement to be constant encouragers of our kindred spirits. I assured him I would do that. It’s a sentiment I share, and I am proud to convey it here.

Kris Mauren of the Acton Institute (and a current FEE trustee) shares this sentiment with Ralph’s many friends and fans: “When I look back and think of Ralph’s single minded focus on liberty, I am embarrassed by how relatively little is my commitment, despite a professional life dedicated to promoting it. What a model of dedication, perseverance and energy he has been! The fight for liberty demands no less from each of us.”

Ralph Smeed, 1921-2010: A life devoted to the right things and never hesitant to say so. He is irreplaceable and will be sorely missed for a very long time.

Links to articles announcing the passing of Ralph Smeed:

Idaho Press-Tribune

IdahoStatesman.com

(put a check mark next to any that apply):

____ I raised it in a conversation and hopefully turned on a light in at least one person’s mind

____ I defended it when it was challenged by error

____ I improved my own knowledge of the literature of liberty so as to become a better advocate

____ I wrote a letter-to-the-editor in liberty’s defense

____ I recommended a good article, book or film that advances values consistent with a free and civil society

____ I sent a personal check to an organization I know to be working for the advancement of liberty ideas

____ I resisted temptation to subvert liberty by accepting something from government that didn’t belong to me

____ I took action to clean up my own act so that I can be a solid exemplar of the virtues necessary for a free society to flourish

____ I checked out at least one textbook my son or daughter was assigned in school, explained to my offspring any fallacies I found, and complained to the school about any that were especially egregious

____ I told at least one of my representatives that if he or she ever voted for more government again, I would pull out all the stops to see him or her defeated in the next election

____ I told my college or university alma mater that if they didn’t start hiring faculty who know how to present and defend the case for free enterprise, they’ll never, ever get another dime from me

____ I did nothing at all for liberty today, except enjoy the fruits of it while leaving the battle for its restoration and preservation to others. I was essentially a liberty freeloader today.

Thanking our friends and supporters for their generosity is a present I enjoy wrapping and giving many times over. In November, I sent you our year-end update and appeal. We posted it on the FEE web site and Facebook fan page. We e-mailed it to our “In Brief” subscribers and included a condensation of it on the inside cover of the January issue of “The Freeman” that was dispatched in December. We called many of you on the phone. Then we said a prayer, held our breath and watched the mail.

Our year-end letter is always very important to FEE, yielding as much as 30 percent of our annual budget. The most recent one was especially critical because the economy didn’t do us any favors in 2009, yet we very much wanted to build on the achievements of last year to do more and bigger things for liberty in 2010. (If you did not get a chance to read the letter, you can still see it here) .

It’s now far enough into January to close the books on 2009. We didn’t quite meet our optimistic budget projections but I’m happy to report that we came close—close enough that I want to supplement the normal thank you and receipt with this second note of appreciation. It may be trite to say so, but we really can’t thank you enough!

Our founder, the late Leonard E. Read, always believed that if you do your best and it’s of value to others, support will follow. No need to beg or borrow; just perform and make your case. Friends of liberty know that the cause is important enough to pitch in. He was proven right again. In spite of a difficult year for many of you, your gifts to FEE since late November will help us hugely to set new records for outreach in 2010. Though we fell a little short of projections, we’re not like the Congress. We’ll spend what we have, and not a nickel more.

You have many options with your hard-earned dollars. You’re under no obligation to give any of them away. No organization should ever feel “entitled” to any portion of what’s yours. At FEE, we want our work to merit your endorsement and we miss it greatly when for any reason you decide our work doesn’t measure up. So when you come through for us, we are grateful. Very grateful.

Thank you once again for being our partners for a noble cause. We promise you we will do our best (and get better at it every year), that we will not waver from the principles we share, and that our faith in our friends will never flag. Best wishes for the new year!

— Lawrence W. (Larry) Reed
President
Foundation for Economic Education

“I want my son or daughter to be exposed to free market economics after high school. What colleges or universities do you recommend?”

If I’ve been asked that question once, I’ll bet I’ve been asked it a thousand times. Parents who cherish the values of freedom, limited government and private enterprise have good reason to be concerned about where they send their offspring for higher “education.” Academia is full of statist bias, and statists usually aren’t comfortable when the first non-statist is accidentally hired for a teaching position (they think it’s a takeover). So when you find an economics program in which free market ideas are treated with respect and given a prominent forum, it’s news to celebrate.

Keep in mind that I am talking here about economics, period. If a college or university has a good econ program, that doesn’t mean it also has a good offering or even a decent balance in its other social science programs.

On that occasion, I wrote about Florida Gulf Coast University.

The school I want to acquaint readers with this time is one I’ve become familiar with over the last academic year, Mercer University. Mercer has campuses in Atlanta, Macon, and Savannah. Its core undergraduate campus, which consistently ranks in the Top 10 for beautiful campuses in America, is located in Macon, Georgia. It’s an urban campus with an extremely active student body and great Southern cuisine nearby.

Some libertarian-leaning professors teach in the history, philosophy, and political science departments, but it’s the group of economists on Mercer’s Macon campus, all of whom are solid free market economists, that I’m most familiar with. A brief biography of each is provided below.

SCOTT A. BEAULIER, BB&T Distinguished Professor of Capitalism and Department Chair of Economics, earned his undergraduate degree in economics and history from Northern Michigan University (2000) and his M.A. (2002) and Ph.D. (2004) from George Mason University. Much of his research has focused on issues of economic development; in particular, he is one of the leading experts on Botswana’s growth miracle. His research maintains that Botswana’s rapid growth can be attributed to their being economically free and open. He has also published research in the areas of Austrian economics, law & economics, public choice economics, and economic education. Some of his popular press publications have appeared in leading newspapers, such as the Atlanta Journal Constitution and the Wall Street Journal. He has been active with Liberty Fund, has taught for the Institute for Humane Studies, and will soon be teaching for the Foundation for Economic Education.

Professor Beaulier is also directing the Center for Undergraduate Research in Public Policy & Capitalism. The new center supports collaborative research between undergraduates and faculty members that addresses themes related to capitalism. This spring he will teach a course titled, “The Economic and Moral Foundations of Capitalism.”

WILLIAM S. MOUNTS, Associate Dean of the Stetson School of Business and Economics and Professor of Economics, earned his Ph.D. in Economics from the University of Georgia. Dr. Mounts has over 50 academic articles, books, and presentations. His presentations have been at national and international conferences including the Southern Economics Association, the Western Economics Conference, and the central bank of Switzerland. Journals in which he has published include the Economics of Governance, Journal of Macroeconomics, Southern Economic Review, Public Choice, Journal of Sports Economics, Journal of Money, Banking and Credit and the Swiss Journal of Economics and Statistics.

His current research interests include an examination of monetary regimes using extreme value estimation techniques, the aging of men and women, the economics of teamwork, and banking in the Great Depression. Much of this work focuses on how free market incentives create socially-desired outcomes and that governmentally-determined incentives do not.

Recently, Dr. Mounts and Dr. Beaulier have published opinion pieces in The Wall Street Journal and the Atlanta Journal Constitution.

ALLEN K. LYNCH, Director of Graduate Programs and Associate Professor of Economics, earned his earned his bachelor’s degree at the University of North Florida and his master’s and doctorate degrees at Florida State University. While at FSU, he was greatly influenced by many renowned public choice economists, such as Bruce Benson, Randy Holcombe, Jim Gwartney and David Rasmussen. He has taught at the University of North Florida and worked as a Senior Demographic Research Analyst for Blockbuster Entertainment Group prior to joining the Mercer University faculty in 2000.

He has published numerous journal articles, ranging from “Identifying the NCAA Tournament Dance Card,” a statistical model which accurately predicted 94 percent of college basketball teams that earned at-large bids for the NCAA tournament over the last 10 years (coauthored by B. Jay Coleman of the University of North Florida), to “Proximity, Neighborhood and the Efficacy of Exclusion,” recently published in Urban Studies (coauthored by David W. Rasmussen). While research related to the public choice aspects of real estate markets and crime dominate his research agenda, interest in the NCAA article resulted in substantial media attention. Over the last several years, stories related to this research appeared in The New York Times, Investors’ Business Daily, The Wall Street Journal, as well as several Associated Press outlets.

With so many campuses devoid of solid teaching that stresses the critical role of free markets and private property in economic progress, Mercer University is another welcome island in a sea of confusion.

If I’ve been asked that question once, I’ll bet I’ve been asked it a thousand times. Parents who cherish the values of freedom, limited government and private enterprise have good reason to be concerned about where they send their offspring for higher “education.” Academia is full of statist bias, and statists usually aren’t comfortable when the first non-statist is accidentally hired for a teaching position (they think it’s a takeover). So when you find an economics program in which free market ideas are treated with respect and given a prominent forum, it’s news to celebrate.

Keep in mind that I am talking here about economics, period. If a college or university has a good econ program, that doesn’t mean it also has a good offering or even a decent balance in its other social science programs.

Certain superb schools I am familiar with roll off the tongue quickly and easily: Very good economics programs and faculty are in place at Grove City College (my alma mater) in Pennsylvania, Hillsdale College and Northwood University in Michigan, George Mason University in Virginia, Houston Baptist and the University of Dallas in Texas, The Kings College in New York, San Jose State University in California, Auburn University in Alabama, Clemson University in South Carolina, Beloit College in Wisconsin, Florida State University and Webber International University in Florida, and the University of Arizona.

There are others as well, and I’ll write about them too in future weeks and months. The one I want to acquaint readers with on this occasion is one I’ve become familiar with in the last couple of years, Florida Gulf Coast University in Ft. Myers, Florida. It’s a place where students can get a good education in free market economics despite the distractions of a warm, sunny climate near the beach and great restaurants.

FGCU, as the locals call it, is one of the newest universities in the country, having opened its doors in 1997. Some of its dorms are better described as waterfront luxury apartments.  They share a lake with a golf-course community with multi-million dollar homes. Students have easy access to all sorts of watersports activities. More importantly, I know and have met four of the six members of the economics faculty and can vouch that they have strong free-market views. A brief biography of each is provided below.

BRADLEY K. HOBBS, BB&T Distinguished Professor of Free Enterprise, earned his undergraduate degree in history and his Ph.D. in economics from Florida State University in 1991. His research interests are wide in range, encompassing economic history, the moral and philosophical foundations of free markets, property rights, economic freedom, and teaching methodologies. He has published in Entrepreneurship Theory and Practice, the Journal of Accounting and Finance Research, Journal of Real Estate Research, Laissez-Faire, Journal of Executive Education, Financial Practice and Education, and Research in Finance, among others. He has also written for the Foundation for Economic Education, the Institute for Humane Studies, and the Florida Council on Economic Education.

Professor Hobbs has been active in leading undergraduate research and was recently recruited as the founding Faculty Advisor for a new undergraduate research journal, the Journal of Liberty and Society. He has been a member of the National Teaching Faculty for the Foundation for Teaching Economics since 2001, taught for the Institute for Humane Studies, The Koch Associate’s Program and is active in The Liberty Fund having participated in programs as a participant, Discussion Leader, and Director. He serves on the Executive Board of the Association for Private Enterprise Education. Professor Hobbs has received the FGCU Senior Faculty Teaching Award and was a recipient of a 2008 Excellence in Teaching award from the Acton Foundation for Entrepreneurial Excellence. He has taught a wide variety of courses, though he currently teaches primarily intermediate microeconomics and the moral foundations of capitalism.

CARRIE KEREKES is an Assistant Professor of Economics. She earned her Ph.D. in economics from West Virginia University in 2008. She teaches Principles of Microeconomics, Principles of Macroeconomics, and Economic Development. Her research interests are in the areas of public choice and economic development, with an emphasis on institutions and property rights. Professor Kerekes regularly attends the meetings of the Association of Private Enterprise Education and has also participated in seminars sponsored by the Foundation for Economic Education and the Institute for Humane Studies.

DEAN STANSEL, Associate Professor of Economics, earned his Ph.D. from George Mason University in 2002. Prior to entering academia, Professor Stansel earned an undergraduate degree in economics and political science from Wake Forest University in 1991.  He then worked at the Cato Institute through 1999, where he produced over 60 publications on fiscal policy issues. Stansel attended several Institute for Humane Studies (IHS) seminars (as both student and lecturer) and received fellowships from IHS, as well as the Bradley Foundation and the Center for the Study of Market Processes. His current research interests involve the impact of competition between local governments on fiscal and economic outcomes, the relationship between the size of government and economic growth, state fiscal crises, and a variety of other issues in the areas of public economics and urban economics. His research has been published in a variety of journals including the Journal of Urban Economics, Public Finance Review, and the Cato Journal. He teaches mostly microeconomics, public sector economics, and urban economics.  Professor Stansel regularly attends the meetings of the Association of Private Enterprise Education and the Southern Economic Association. He and his wife (Robin Hulsey, who also worked at Cato in the late 1990s) have two young children.

CAROL SWEENEY earned her Master of Science in Development Studies from the University College Dublin, Ireland in the fall of 1993. Ms. Sweeney earned her undergraduate degree in economics from George Mason University, where she studied under Professors Peter Boettke and the late Don Lavoie. While at George Mason, she was president of the economics club, which hosted a lecture by Nobel Laureate James Buchanan, and attended an Institute for Humane Studies seminar. Prior to working in academia Ms. Sweeney worked in the communications and education industry. She teaches both principles of microeconomics and macroeconomics. Her research interests are in sports economics, development economics, and public choice economics. Ms. Sweeney recently attended her first Association of Private Enterprise Education meeting in Guatemala.

Give the economics program at FGCU a look. I think you will be hearing more good news from their offices and classrooms in the years to come.

Introduction

Many volumes have been written about the Great Depression of 1929-1941 and its impact on the lives of millions of Americans. Historians, economists and politicians have all combed the wreckage searching for the “black box” that will reveal the cause of the calamity. Sadly, all too many of them decide to abandon their search, finding it easier perhaps to circulate a host of false and harmful conclusions about the events of seven decades ago. Consequently, many people today continue to accept critiques of free-market capitalism that are unjustified and support government policies that are economically destructive.

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How bad was the Great Depression? Over the four years from 1929 to 1933, production at the nation’s factories, mines and utilities fell by more than half. People’s real disposable incomes dropped 28 percent. Stock prices collapsed to one-tenth of their pre-crash height. The number of unemployed Americans rose from 1.6 million in 1929 to 12.8 million in 1933. One of every four workers was out of a job at the Depression’s nadir, and ugly rumors of revolt simmered for the first time since the Civil War.

“The terror of the Great Crash has been the failure to explain it,” writes economist Alan Reynolds. “People were left with the feeling that massive economic contractions could occur at any moment, without warning, without cause. That fear has been exploited ever since as the major justification for virtually unlimited federal intervention in economic affairs.”[1]

Old myths never die; they just keep showing up in economics and political science textbooks. With only an occasional exception, it is there you will find what may be the 20th century’s greatest myth: Capitalism and the free-market economy were responsible for the Great Depression, and only government intervention brought about America’s economic recovery.

A Modern Fairy Tale

According to this simplistic perspective, an important pillar of capitalism, the stock market, crashed and dragged America into depression. President Herbert Hoover, an advocate of “hands-off,” or laissez-faire, economic policy, refused to use the power of government and conditions worsened as a result. It was up to Hoover’s successor, Franklin Delano Roosevelt, to ride in on the white horse of government intervention and steer the nation toward recovery. The apparent lesson to be drawn is that capitalism cannot be trusted; government needs to take an active role in the economy to save us from inevitable decline.

But those who propagate this version of history might just as well top off their remarks by saying, “And Goldilocks found her way out of the forest, Dorothy made it from Oz back to Kansas, and Little Red Riding Hood won the New York State Lottery.” The popular account of the Depression as outlined above belongs in a book of fairy tales and not in a serious discussion of economic history.

The Great, Great,Great,Great Depression

To properly understand the events of the time, it is factually appropriate to view the Great Depression as not one, but four consecutive downturns rolled into one. These four “phases” are:[2]

I. Monetary Policy and the Business Cycle

II. The Disintegration of the World Economy

III. The New Deal

IV. The Wagner Act

The first phase covers why the crash of 1929 happened in the first place; the other three show how government intervention worsened it and kept the economy in a stupor for over a decade. Let’s consider each one in turn.

Phase I: The Business Cycle

The Great Depression was not the country’s first depression, though it proved to be the longest. Several others preceded it.

A common thread woven through all of those earlier debacles was disastrous intervention by government, often in the form of political mismanagement of the money and credit supply. None of these depressions, however, lasted more than four years and most of them were over in two. The calamity that began in 1929 lasted at least three times longer than any of the country’s previous depressions because the government compounded its initial errors with a series of additional and harmful interventions.

Central Planners Fail at Monetary Policy

A popular explanation for the stock market collapse of 1929 concerns the practice of borrowing money to buy stock. Many history texts blithely assert that a frenzied speculation in shares was fed by excessive “margin lending.” But Marquette University economist Gene Smiley, in his 2002 book “Rethinking the Great Depression”, explains why this is not a fruitful observation:

There was already a long history of margin lending on stock exchanges, and margin requirements — the share of the purchase price paid in cash — were no lower in the late twenties than in the early twenties or in previous decades. In fact, in the fall of 1928 margin requirements began to rise, and borrowers were required to pay a larger share of the purchase price of the stocks.

The margin lending argument doesn’t hold much water. Mischief with the money and credit supply, however, is another story.

Most monetary economists, particularly those of the “Austrian School,” have observed the close relationship between money supply and economic activity. When government inflates the money and credit supply, interest rates at first fall. Businesses invest this “easy money” in new production projects and a boom takes place in capital goods. As the boom matures, business costs rise, interest rates readjust upward, and profits are squeezed. The easy-money effects thus wear off and the monetary authorities, fearing price inflation, slow the growth of, or even contract, the money supply. In either case, the manipulation is enough to knock out the shaky supports from underneath the economic house of cards.

One prominent interpretation of the Federal Reserve System’s actions prior to 1929 can be found in “America’s Great Depression” by economist Murray Rothbard. Using a broad measure that includes currency, demand and time deposits, and other ingredients, he estimated that the Fed bloated the money supply by more than 60 percent from mid-1921 to mid-1928.[3]  Rothbard argued that this expansion of money and credit drove interest rates down, pushed the stock market to dizzy heights, and gave birth to the “Roaring Twenties.”

Reckless money and credit growth constituted what economist Benjamin M. Anderson called “the beginning of the New Deal”[4] — the name for the better-known but highly interventionist policies that would come later under President Franklin Roosevelt. However, other scholars raise doubts that Fed action was as inflationary as Rothbard believed, pointing to relatively flat commodity and consumer prices in the 1920s as evidence that monetary policy was not so wildly irresponsible.

Substantial cuts in high marginal income tax rates in the Coolidge years certainly helped the economy and may have ameliorated the price effect of Fed policy. Tax reductions spurred investment and real economic growth, which in turn yielded a burst of technological advancement and entrepreneurial discoveries of cheaper ways to produce goods. This explosion in productivity undoubtedly helped to keep prices lower than they would have otherwise been.

Regarding Fed policy, free-market economists who differ on the extent of the Fed’s monetary expansion of the early and mid-1920s are of one view about what happened next: The central bank presided over a dramatic contraction of the money supply that began late in the decade. The federal government’s responses to the resulting recession took a bad situation and made it far, far worse.

The Bottom Drops Out

By 1928, the Federal Reserve was raising interest rates and choking off the money supply. For example, its discount rate (the rate the Fed charges member banks for loans) was increased four times, from 3.5 percent to 6 percent, between January 1928 and August 1929. The central bank took further deflationary action by aggressively selling government securities for months after the stock market crashed. For the next three years, the money supply shrank by 30 percent. As prices then tumbled throughout the economy, the Fed’s higher interest rate policy boosted real (inflation-adjusted) rates dramatically.

The most comprehensive chronicle of the monetary policies of the period can be found in the classic work of Nobel Laureate Milton Friedman and his colleague Anna Schwartz, “A Monetary History of the United States”, 1867-1960. Friedman and Schwartz argue conclusively that the contraction of the nation’s money supply by one-third between August 1929 and March 1933 was an enormous drag on the economy and largely the result of seismic incompetence by the Fed. The death in October 1928 of Benjamin Strong, a powerful figure who had exerted great influence as head of the Fed’s New York district bank, left the Fed floundering without capable leadership — making bad policy even worse.[5]

At first, only the “smart” money — the Bernard Baruchs and the Joseph Kennedys who watched things like money supply and other government policies — saw that the party was coming to an end. Baruch actually began selling stocks and buying bonds and gold as early as 1928; Kennedy did likewise, commenting, “only a fool holds out for the top dollar.”[6]

The masses of investors eventually sensed the change at the Fed and then the stampede began. In a special issue commemorating the 50th anniversary of the stock market collapse, U.S. News & World Report described it this way:

Actually the Great Crash was by no means a one-day affair, despite frequent references to Black Thursday, October 24, and the following week’s Black Tuesday. As early as September 5, stocks were weak in heavy trading, after having moved into new high ground two days earlier. Declines in early October were called a “desirable correction.” The Wall Street Journal, predicting an autumn rally, noted that “some stocks rise, some fall.”

Then, on October 3, stocks suffered their worst pummeling of the year. Margin calls went out; some traders grew apprehensive. But the next day, prices rose again and thereafter seesawed for a fortnight.

The real crunch began on Wednesday, October 23, with what one observer called “a Niagara of liquidation.” Six million shares changed hands. The industrial average fell 21 points. “Tomorrow, the turn will come,” brokers told one another. Prices, they said, had been carried to “unreasonably low” levels.

But the next day, Black Thursday, stocks were dumped in even heavier selling. The ticker fell behind more than 5 hours, and finally stopped grinding out quotations at 7:08 p.m.[7]

At their peak, stocks in the Dow Jones Industrial Average were selling for 19 times their earnings — somewhat high, but hardly what stock market analysts regard as a sign of inordinate speculation. The distortions in the economy promoted by the Fed’s monetary policy had set the country up for a recession, but other impositions to come would soon turn the recession into a full-scale disaster. As stocks took a beating, Congress was playing with fire: On the very morning of Black Thursday, the nation’s newspapers reported that the political forces for higher trade-damaging tariffs were making gains on Capitol Hill.

The stock market crash was only a reflection — not the direct cause — of the destructive government policies that would ultimately produce the Great Depression: The market rose and fell in almost direct synchronization with what the Fed and Congress were doing. And what they did in the 1930s ranks way up there in the annals of history’s greatest follies.

Buddy, Can You Spare $20 Million?

Black Thursday shook Michigan harder than almost any other state. Stocks of auto and mining companies were hammered. Auto production in 1929 reached an all-time high of slightly more than 5 million vehicles, then quickly slumped by 2 million in 1930. By 1932, near the deepest point of the Depression, they had fallen by another 2 million to just 1,331,860 — down an astonishing 75 percent from the 1929 peak.

Thousands of investors everywhere, including many well-known people, were hit hard in the 1929 crash. Among them was Winston Churchill. He had invested heavily in American stocks before the crash. Afterward, only his writing skills and positions in government restored his finances.

Clarence Birdseye, an early developer of packaged frozen foods, had sold his business for $30 million and put all his money into stocks. He was wiped out.

William C. Durant, founder of General Motors, lost more than $40 million in the stock market and wound up a virtual pauper. (GM itself stayed in the black throughout the Depression under the cost-cutting leadership of Alfred P. Sloan.)

Phase II: Disintegration of the World Economy

Though modern myth claims that the free market “self-destructed” in 1929, government policy was the debacle’s principal culprit. If this crash had been like previous ones, the hard times would have ended in two or three years at the most, and likely sooner than that. But unprecedented political bungling instead prolonged the misery for over 10 years.

Unemployment in 1930 averaged a mildly recessionary 8.9 percent, up from 3.2 percent in 1929. It shot up rapidly until peaking out at more than 25 percent in 1933. Until March of 1933, these were the years of President Herbert Hoover — a man often depicted as a champion of noninterventionist, laissez-faire economics.

“The greatest spending administration in all of history”

Did Hoover really subscribe to a “hands-off-the-economy,” free-market philosophy? His opponent in the 1932 election, Franklin Roosevelt, didn’t think so. During the campaign, Roosevelt blasted Hoover for spending and taxing too much, boosting the national debt, choking off trade, and putting millions on the dole. He accused the president of “reckless and extravagant” spending, of thinking “that we ought to center control of everything in Washington as rapidly as possible,” and of presiding over “the greatest spending administration in peacetime in all of history.” Roosevelt’s running mate, John Nance Garner, charged that Hoover was “leading the country down the path of socialism.”[8] Contrary to the conventional view about Hoover, Roosevelt and Garner were absolutely right.

The crowning folly of the Hoover administration was the Smoot-Hawley Tariff, passed in June 1930. It came on top of the Fordney-McCumber Tariff of 1922, which had already put American agriculture in a tailspin during the preceding decade. The most protectionist legislation in U.S. history, Smoot-Hawley virtually closed the borders to foreign goods and ignited a vicious international trade war. Professor Barry Poulson describes the scope of the act:

The act raised the rates on the entire range of dutiable commodities; for example, the average rate increased from 20 percent to 34 percent on agricultural products; from 36 percent to 47 percent on wines, spirits, and beverages; from 50 to 60 percent on wool and woolen manufactures. In all, 887 tariffs were sharply increased and the act broadened the list of dutiable commodities to 3,218 items. A crucial part of the Smoot-Hawley Tariff was that many tariffs were for a specific amount of money rather than a percentage of the price. As prices fell by half or more during the Great Depression, the effective rate of these specific tariffs doubled, increasing the protection afforded under the act.[9]

Smoot-Hawley was as broad as it was deep, affecting a multitude of products. Before its passage, clocks had faced a tariff of 45 percent; the act raised that to 55 percent, plus as much as another $4.50 per clock. Tariffs on corn and butter were roughly doubled. Even sauerkraut was tariffed for the first time. Among the few remaining tariff-free goods, strangely enough, were leeches and skeletons (perhaps as a political sop to the American Medical Association, as one wag wryly remarked).

Tariffs on linseed oil, tungsten, and casein hammered the U.S. paint, steel and paper industries, respectively. More than 800 items used in automobile production were taxed by Smoot-Hawley. Most of the 60,000 people employed in U.S. plants making cheap clothing out of imported wool rags went home jobless after the tariff on wool rags rose by 140 percent.[10]

Officials in the administration and in Congress believed that raising trade barriers would force Americans to buy more goods made at home, which would solve the nagging unemployment problem. But they ignored an important principle of international commerce: Trade is ultimately a two-way street; if foreigners cannot sell their goods here, then they cannot earn the dollars they need to buy here. Or, to put it another way, government cannot shut off imports without simultaneously shutting off exports.

You Tax Me, I Tax You

Foreign companies and their workers were flattened by Smoot-Hawley’s steep tariff rates and foreign governments soon retaliated with trade barriers of their own. With their ability to sell in the American market severely hampered, they curtailed their purchases of American goods. American agriculture was particularly hard hit. With a stroke of the presidential pen, farmers in this country lost nearly a third of their markets. Farm prices plummeted and tens of thousands of farmers went bankrupt. A bushel of wheat that sold for $1 in 1929 was selling for a mere 30 cents by 1932.

With the collapse of agriculture, rural banks failed in record numbers, dragging down hundreds of thousands of their customers. Nine thousand banks closed their doors in the United States between 1930 and 1933. The stock market, which had regained much of the ground it had lost since the previous October, tumbled 20 points on the day Hoover signed Smoot-Hawley into law, and fell almost without respite for the next two years. (The market’s high, as measured by the Dow Jones Industrial Average, was set on Sept. 3, 1929, at 381. It hit its 1929 low of 198 on Nov. 13, then rebounded to 294 by April 1930. It declined again as the tariff bill made its way toward Hoover’s desk in June and did not bottom out until it reached a mere 41 two years later. It would be a quarter-century before the Dow would climb to 381 again.)

The shrinkage in world trade brought on by the tariff wars helped set the stage for World War II a few years later. In 1929, the rest of the world owed American citizens $30 billion. Germany’s Weimar Republic was struggling to pay the enormous reparations bill imposed by the disastrous Treaty of Versailles. When tariffs made it nearly impossible for foreign businessmen to sell their goods in American markets, the burden of their debts became massively heavier and emboldened demagogues like Adolf Hitler. “When goods don’t cross frontiers, armies will,” warns an old but painfully true maxim.

Free Markets or Free Lunches?

Smoot-Hawley by itself should lay to rest the myth that Hoover was a free market practitioner, but there is even more to the story of his administration’s interventionist mistakes. Within a month of the stock market crash, he convened conferences of business leaders for the purpose of jawboning them into keeping wages artificially high even though both profits and prices were falling. Consumer prices plunged almost 25 percent between 1929 and 1933 while nominal wages on average decreased only 15 percent — translating into a substantial increase in wages in real terms, a major component of the cost of doing business. As economist Richard Ebeling notes, “The ‘high-wage’ policy of the Hoover administration and the trade unions … succeeded only in pricing workers out of the labor market, generating an increasing circle of unemployment.”[11]

Hoover dramatically increased government spending for subsidy and relief schemes. In the space of one year alone, from 1930 to 1931, the federal government’s share of GNP soared from 16.4 percent to 21.5 percent.[12] Hoover’s agricultural bureaucracy doled out hundreds of millions of dollars to wheat and cotton farmers even as the new tariffs wiped out their markets. His Reconstruction Finance Corporation ladled out billions more in business subsidies. Commenting decades later on Hoover’s administration, Rexford Guy Tugwell, one of the architects of Franklin Roosevelt’s policies of the 1930s, explained, “We didn’t admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started.”[13]

Though Hoover at first did lower taxes for the poorest of Americans, Larry Schweikart and Michael Allen in their sweeping A Patriot’s History of the United States: From Columbus’s Great Discovery to the War on Terror stress that he “offered no incentives to the wealthy to invest in new plants to stimulate hiring.” He even taxed bank checks, “which accelerated the decline in the availability of money by penalizing people for writing checks.”[14]

In September 1931, with the money supply tumbling and the economy reeling from the impact of Smoot-Hawley, the Fed imposed the biggest hike in its discount rate in history. Bank deposits fell 15 percent within four months and sizable, deflationary declines in the nation’s money supply persisted through the first half of 1932.

Compounding the error of high tariffs, huge subsidies and deflationary monetary policy, Congress then passed and Hoover signed the Revenue Act of 1932. The largest tax increase in peacetime history, it doubled the income tax. The top bracket actually more than doubled, soaring from 24 percent to 63 percent. Exemptions were lowered; the earned income credit was abolished; corporate and estate taxes were raised; new gift, gasoline and auto taxes were imposed; and postal rates were sharply hiked.

Can any serious scholar observe the Hoover administration’s massive economic intervention and, with a straight face, pronounce the inevitably deleterious effects as the fault of free markets? Schweikart and Allen survey some of the wreckage:

By 1933, the numbers produced by this comedy of errors were staggering: national unemployment rates reached 25 percent, but within some individual cities, the statistics seemed beyond comprehension. Cleveland reported that 50 percent of its labor force was unemployed; Toledo, 80 percent; and some states even averaged over 40 percent. Because of the dual-edged sword of declining revenues and increasing welfare demands, the burden on the cities pushed many municipalities to the brink. Schools in New York shut down, and teachers in Chicago were owed some $20 million. Private schools, in many cases, failed completely. One government study found that by 1933 some fifteen hundred colleges had gone belly-up, and book sales plummeted. Chicago’s library system did not purchase a single book in a year-long period.[15]

Phase III: The New Deal

Franklin Delano Roosevelt won the 1932 presidential election in a landslide, collecting 472 electoral votes to just 59 for the incumbent Herbert Hoover. The platform of the Democratic Party, whose ticket Roosevelt headed, declared, “We believe that a party platform is a covenant with the people to be faithfully kept by the party entrusted with power.” It called for a 25 percent reduction in federal spending, a balanced federal budget, a sound gold currency “to be preserved at all hazards,” the removal of government from areas that belonged more appropriately to private enterprise and an end to the “extravagance” of Hoover’s farm programs. This is what candidate Roosevelt promised, but it bears no resemblance to what President Roosevelt actually delivered.

Washington was rife with both fear and optimism as Roosevelt was sworn in on March 4, 1933 — fear that the economy might not recover and optimism that the new and assertive president just might make a difference. Humorist Will Rogers captured the popular feeling toward FDR as he assembled the new administration: “The whole country is with him, just so he does something. If he burned down the Capitol, we would all cheer and say, well, we at least got a fire started anyhow.”[16]

“Nothing to fear but fear itself”

Roosevelt did indeed make a difference, though probably not the sort of difference for which the country had hoped. He started off on the wrong foot when, in his inaugural address, he blamed the Depression on “unscrupulous money changers.” He said nothing about the role of the Fed’s mismanagement and little about the follies of Congress that had contributed to the problem. As a result of his efforts, the economy would linger in depression for the rest of the decade. Adapting a phrase from 19th century writer Henry David Thoreau, Roosevelt famously declared in his address that, “We have nothing to fear but fear itself.” But as Dr. Hans Sennholz of Grove City College explains, it was FDR’s policies to come that Americans had genuine reason to fear:

In his first 100 days, he swung hard at the profit order. Instead of clearing away the prosperity barriers erected by his predecessor, he built new ones of his own. He struck in every known way at the integrity of the U.S. dollar through quantitative increases and qualitative deterioration. He seized the people’s gold holdings and subsequently devalued the dollar by 40 percent.[17]

Frustrated and angered that Roosevelt had so quickly and thoroughly abandoned the platform on which he was elected, Director of the Bureau of the Budget Lewis W. Douglas resigned after only one year on the job. At Harvard University in May 1935, Douglas made it plain that America was facing a momentous choice:

Will we choose to subject ourselves — this great country — to the despotism of bureaucracy, controlling our every act, destroying what equality we have attained, reducing us eventually to the condition of impoverished slaves of the state? Or will we cling to the liberties for which man has struggled for more than a thousand years? It is important to understand the magnitude of the issue before us. … If we do not elect to have a tyrannical, oppressive bureaucracy controlling our lives, destroying progress, depressing the standard of living … then should it not be the function of the Federal government under a democracy to limit its activities to those which a democracy may adequately deal, such for example as national defense, maintaining law and order, protecting life and property, preventing dishonesty, and … guarding the public against … vested special interests?[18]

New Dealing from the Bottom of the Deck

Crisis gripped the banking system when the new president assumed office on March 4, 1933. Roosevelt’s action to close the banks and declare a nationwide “banking holiday” on March 6 (which did not completely end until nine days later) is still hailed as a decisive and necessary action by Roosevelt apologists. Friedman and Schwartz, however, make it plain that this supposed cure was “worse than the disease.” The Smoot-Hawley tariff and the Fed’s unconscionable monetary mischief were primary culprits in producing the conditions that gave Roosevelt his excuse to temporarily deprive depositors of their money, and the bank holiday did nothing to alter those fundamentals. “More than 5,000 banks still in operation when the holiday was declared did not reopen their doors when it ended, and of these, over 2,000 never did thereafter,” report Friedman and Schwartz.[19]

Economist Jim Powell of the Cato Institute authored a splendid book on the Great Depression in 2003, titled “FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression”. He points out that “Almost all the failed banks were in states with unit banking laws” — laws that prohibited banks from opening branches and thereby diversifying their portfolios and reducing their risks. Powell writes: “Although the United States, with its unit banking laws, had thousands of bank failures, Canada, which permitted branch banking, didn’t have a single failure …”[20] Strangely, critics of capitalism who love to blame the market for the Depression never mention that fact.

Congress gave the president the power first to seize the private gold holdings of American citizens and then to fix the price of gold. One morning, as Roosevelt ate eggs in bed, he and Secretary of the Treasury Henry Morgenthau decided to change the ratio between gold and paper dollars. After weighing his options, Roosevelt settled on a 21 cent price hike because “it’s a lucky number.” In his diary, Morgenthau wrote, “If anybody ever knew how we really set the gold price through a combination of lucky numbers, I think they would be frightened.”[21] Roosevelt also single-handedly torpedoed the London Economic Conference in 1933, which was convened at the request of other major nations to bring down tariff rates and restore the gold standard.

Washington and its reckless central bank had already made mincemeat of the gold standard by the early 1930s. Roosevelt’s rejection of it removed most of the remaining impediments to limitless currency and credit expansion, for which the nation would pay a high price in later years in the form of a depreciating currency. Sen. Carter Glass put it well when he warned Roosevelt in early 1933: “It’s dishonor, sir. This great government, strong in gold, is breaking its promises to pay gold to widows and orphans to whom it has sold government bonds with a pledge to pay gold coin of the present standard of value. It is breaking its promise to redeem its paper money in gold coin of the present standard of value. It’s dishonor, sir.”[22]

Though he seized the country’s gold, Roosevelt did return booze to America’s bars and parlor rooms. On his second Sunday in the White House, he remarked at dinner, “I think this would be a good time for beer.”[23] That same night, he drafted a message asking Congress to end Prohibition. The House approved a repeal measure on Tuesday, the Senate passed it on Thursday and before the year was out, enough states had ratified it so that the 21st Amendment became part of the Constitution. One observer, commenting on this remarkable turn of events, noted that of two men walking down the street at the start of 1933 — one with a gold coin in his pocket and the other with a bottle of whiskey in his coat — the man with the coin would be an upstanding citizen and the man with the whiskey would be the outlaw. A year later, precisely the reverse was true.

In the first year of the New Deal, Roosevelt proposed spending $10 billion while revenues were only $3 billion. Between 1933 and 1936, government expenditures rose by more than 83 percent. Federal debt skyrocketed by 73 percent.

FDR talked Congress into creating Social Security in 1935 and imposing the nation’s first comprehensive minimum wage law in 1938. While to this day he gets a great deal of credit for these two measures from the general public, many economists have a different perspective. The minimum wage law prices many of the inexperienced, the young, the unskilled and the disadvantaged out of the labor market. (For example, the minimum wage provisions passed as part of another act in 1933 threw an estimated 500,000 blacks out of work).[24] And current studies and estimates reveal that Social Security has become such a long-term actuarial nightmare that it will either have to be privatized or the already high taxes needed to keep it afloat will have to be raised to the stratosphere.

Roosevelt secured passage of the Agricultural Adjustment Act, which levied a new tax on agricultural processors and used the revenue to supervise the wholesale destruction of valuable crops and cattle. Federal agents oversaw the ugly spectacle of perfectly good fields of cotton, wheat and corn being plowed under (the mules had to be convinced to trample the crops; they had been trained, of course, to walk between the rows). Healthy cattle, sheep and pigs were slaughtered and buried in mass graves. Secretary of Agriculture Henry Wallace personally gave the order to slaughter 6 million baby pigs before they grew to full size. The administration also paid farmers for the first time for not working at all. Even if the AAA had helped farmers by curtailing supplies and raising prices, it could have done so only by hurting millions of others who had to pay those prices or make do with less to eat.

Blue Eagles, Red Ducks

Perhaps the most radical aspect of the New Deal was the National Industrial Recovery Act, passed in June 1933, which created a massive new bureaucracy called the National Recovery Administration. Under the NRA, most manufacturing industries were suddenly forced into government-mandated cartels. Codes that regulated prices and terms of sale briefly transformed much of the American economy into a fascist-style arrangement, while the NRA was financed by new taxes on the very industries it controlled. Some economists have estimated that the NRA boosted the cost of doing business by an average of 40 percent — not something a depressed economy needed for recovery.

The economic impact of the NRA was immediate and powerful. In the five months leading up to the act’s passage, signs of recovery were evident: factory employment and payrolls had increased by 23 and 35 percent, respectively. Then came the NRA, shortening hours of work, raising wages arbitrarily and imposing other new costs on enterprise. In the six months after the law took effect, industrial production dropped 25 percent. Benjamin M. Anderson writes, “NRA was not a revival measure. It was an antirevival measure. …  Through the whole of the NRA period industrial production did not rise as high as it had been in July 1933, before NRA came in.”[25]

The man Roosevelt picked to direct the NRA effort was General Hugh “Iron Pants” Johnson, a profane, red-faced bully and professed admirer of Italian dictator Benito Mussolini. Thundered Johnson, “May Almighty God have mercy on anyone who attempts to interfere with the Blue Eagle” (the official symbol of the NRA, which one senator derisively referred to as the “Soviet duck”). Those who refused to comply with the NRA Johnson personally threatened with public boycotts and “a punch in the nose.”

There were ultimately more than 500 NRA codes, “ranging from the production of lightning rods to the manufacture of corsets and brassieres, covering more than 2 million employers and 22 million workers.”[26] There were codes for the production of hair tonic, dog leashes, and even musical comedies. A New Jersey tailor named Jack Magid was arrested and sent to jail for the “crime” of pressing a suit of clothes for 35 cents rather than the NRA-inspired “Tailor’s Code” of 40 cents.

In “The Roosevelt Myth”, historian John T. Flynn described how the NRA’s partisans sometimes conducted “business”:

The NRA was discovering it could not enforce its rules. Black markets grew up. Only the most violent police methods could procure enforcement. In Sidney Hillman’s garment industry the code authority employed enforcement police. They roamed through the garment district like storm troopers. They could enter a man’s factory, send him out, line up his employees, subject them to minute interrogation, take over his books on the instant. Night work was forbidden. Flying squadrons of these private coat-and-suit police went through the district at night, battering down doors with axes looking for men who were committing the crime of sewing together a pair of pants at night. But without these harsh methods many code authorities said there could be no compliance because the public was not back of it.[27]

The Alphabet Commissars

Roosevelt next signed into law steep income tax increases on the higher brackets and introduced a 5 percent withholding tax on corporate dividends. He secured another tax increase in 1934. In fact, tax hikes became a favorite policy of Roosevelt for the next 10 years, culminating in a top income tax rate of 90 percent. Sen. Arthur Vandenberg of Michigan, who opposed much of the New Deal, lambasted Roosevelt’s massive tax increases. A sound economy would not be restored, he said, by following the socialist notion that America could “lift the lower one-third up” by pulling “the upper two-thirds down.”[28] Vandenberg also condemned “the congressional surrender to alphabet commissars who deeply believe the American people need to be regimented by powerful overlords in order to be saved.”[29]

Alphabet commissars spent the public’s money like it was so much bilge. They were what influential journalist and social critic Albert Jay Nock had in mind when he described the New Deal as “a nation-wide, State-managed mobilization of inane buffoonery and aimless commotion.”[30]

Roosevelt’s Civil Works Administration hired actors to give free shows and librarians to catalog archives. It even paid researchers to study the history of the safety pin, hired 100 Washington workers to patrol the streets with balloons to frighten starlings away from public buildings, and put men on the public payroll to chase tumbleweeds on windy days.

The CWA, when it was started in the fall of 1933, was supposed to be a short-lived jobs program. Roosevelt assured Congress in his State of the Union message that any new such program would be abolished within a year. “The federal government,” said the president, “must and shall quit this business of relief. I am not willing that the vitality of our people be further stopped by the giving of cash, of market baskets, of a few bits of weekly work cutting grass, raking leaves, or picking up papers in the public parks.” Harry Hopkins was put in charge of the agency and later said, “I’ve got four million at work but for God’s sake, don’t ask me what they are doing.” The CWA came to an end within a few months but was replaced with another temporary relief program that evolved into the Works Progress Administration, or WPA, by 1935. It is known today as the very government program that gave rise to the new term, “boondoggle,” because it “produced” a lot more than the 77,000 bridges and 116,000 buildings to which its advocates loved to point as evidence of its efficacy.[31]

With good reason, critics often referred to the WPA as “We Piddle Around.” In Kentucky, WPA workers catalogued 350 different ways to cook spinach. The agency employed 6,000 “actors” though the nation’s actors’ union claimed only 4,500 members. Hundreds of WPA workers were used to collect campaign contributions for Democratic Party candidates. In Tennessee, WPA workers were fired if they refused to donate 2 percent of their wages to the incumbent governor. By 1941, only 59 percent of the WPA budget went to paying workers anything at all; the rest was sucked up in administration and overhead. The editors of The New Republic asked, “Has [Roosevelt] the moral stature to admit now that the WPA was a hasty and grandiose political gesture, that it is a wretched failure and should be abolished?”[32] The last of the WPA’s projects was not eliminated until July of 1943.

Roosevelt has been lauded for his “job-creating” acts such as the CWA and the WPA. Many people think that they helped relieve the Depression. What they fail to realize is that it was the rest of Roosevelt’s tinkering that prolonged the Depression and which largely prevented the jobless from finding real jobs in the first place. The stupefying roster of wasteful spending generated by these jobs programs represented a diversion of valuable resources to politically motivated and economically counterproductive purposes.

A brief analogy will illustrate this point. If a thief goes house to house robbing everybody in the neighborhood, then heads off to a nearby shopping mall to spend his ill-gotten loot, it is not assumed that because his spending “stimulated” the stores at the mall he has thereby performed a national service or provided a general economic benefit. Likewise, when the government hires someone to catalog the many ways of cooking spinach, his tax-supported paycheck cannot be counted as a net increase to the economy because the wealth used to pay him was simply diverted, not created. Economists today must still battle this “magical thinking” every time more government spending is proposed — as if money comes not from productive citizens, but rather from the tooth fairy.

“An astonishing rabble of impudent nobodies”

Roosevelt’s haphazard economic interventions garnered credit from people who put high value on the appearance of being in charge and “doing something.” Meanwhile, the great majority of Americans were patient. They wanted very much to give this charismatic polio victim and former New York governor the benefit of the doubt. But Roosevelt always had his critics, and they would grow more numerous as the years groaned on. One of them was the inimitable “Sage of Baltimore,” H. L. Mencken, who rhetorically threw everything but the kitchen sink at the president. Paul Johnson sums up Mencken’s stinging but often-humorous barbs this way:

Mencken excelled himself in attacking the triumphant FDR, whose whiff of fraudulent collectivism filled him with genuine disgust. He was the ‘Fuhrer,’ the ‘Quack,’ surrounded by ‘an astonishing rabble of impudent nobodies,’ ‘a gang of half-educated pedagogues, nonconstitutional lawyers, starry-eyed uplifters and other such sorry wizards.’ His New Deal was a ‘political racket,’ a ‘series of stupendous bogus miracles,’ with its ‘constant appeals to class envy and hatred,’ treating government as ‘a milch-cow with 125 million teats’ and marked by ‘frequent repudiations of categorical pledges.’[33]

Signs of Life

The American economy was soon relieved of the burden of some of the New Deal’s worst excesses when the Supreme Court outlawed the NRA in 1935 and the AAA in 1936, earning Roosevelt’s eternal wrath and derision. Recognizing much of what Roosevelt did as unconstitutional, the “nine old men” of the Court also threw out other, more minor acts and programs which hindered recovery.

Freed from the worst of the New Deal, the economy showed some signs of life. Unemployment dropped to 18 percent in 1935, 14 percent in 1936, and even lower in 1937. But by 1938, it was back up to nearly 20 percent as the economy slumped again. The stock market crashed nearly 50 percent between August 1937 and March 1938. The “economic stimulus” of Franklin Delano Roosevelt’s New Deal had achieved a real “first”: a depression within a depression!

Phase IV:

The Wagner Act

The stage was set for the 1937-38 collapse with the passage of the National Labor Relations Act in 1935 — better known as the “Wagner Act” and organized labor’s “Magna Carta.” To quote Sennholz again:

This law revolutionized American labor relations. It took labor disputes out of the courts of law and brought them under a newly created Federal agency, the National Labor Relations Board, which became prosecutor, judge, and jury, all in one. Labor union sympathizers on the Board further perverted this law, which already afforded legal immunities and privileges to labor unions. The U.S. thereby abandoned a great achievement of Western civilization, equality under the law.

The Wagner Act, or National Labor Relations Act, was passed in reaction to the Supreme Court’s voidance of NRA and its labor codes. It aimed at crushing all employer resistance to labor unions. Anything an employer might do in self-defense became an “unfair labor practice” punishable by the Board. The law not only obliged employers to deal and bargain with the unions designated as the employees’ representative; later Board decisions also made it unlawful to resist the demands of labor union leaders.[34]

Armed with these sweeping new powers, labor unions went on a militant organizing frenzy. Threats, boycotts, strikes, seizures of plants and widespread violence pushed productivity down sharply and unemployment up dramatically. Membership in the nation’s labor unions soared: By 1941, there were two and a half times as many Americans in unions as had been the case in 1935. Historian William E. Leuchtenburg, himself no friend of free enterprise, observed, “Property-minded citizens were scared by the seizure of factories, incensed when strikers interfered with the mails, vexed by the intimidation of nonunionists, and alarmed by flying squadrons of workers who marched, or threatened to march, from city to city.”[35]

An Unfriendly Climate for Business

From the White House on the heels of the Wagner Act came a thunderous barrage of insults against business. Businessmen, Roosevelt fumed, were obstacles on the road to recovery. He blasted them as “economic royalists” and said that businessmen as a class were “stupid.”[36] He followed up the insults with a rash of new punitive measures. New strictures on the stock market were imposed. A tax on corporate retained earnings, called the “undistributed profits tax,” was levied. “These soak-the-rich efforts,” writes economist Robert Higgs, “left little doubt that the president and his administration intended to push through Congress everything they could to extract wealth from the high-income earners responsible for making the bulk of the nation’s decisions about private investment.”[37]

During a period of barely two months during late 1937, the market for steel — a key economic barometer — plummeted from 83 percent of capacity to 35 percent. When that news emblazoned headlines, Roosevelt took an ill-timed nine-day fishing trip. The New York Herald-Tribune implored him to get back to work to stem the tide of the renewed Depression. What was needed, said the newspaper’s editors, was a reversal of the Roosevelt policy “of bitterness and hate, of setting class against class and punishing all who disagreed with him.”[38]

Columnist Walter Lippmann wrote in March 1938 that “with almost no important exception every measure he [Roosevelt] has been interested in for the past five months has been to reduce or discourage the production of wealth.”[39]

As pointed out earlier in this essay, Herbert Hoover’s own version of a “New Deal” had hiked the top marginal income tax rate from 24 to 63 percent in 1932. But he was a piker compared to his tax-happy successor. Under Roosevelt, the top rate was raised at first to 79 percent and then later to 90 percent. Economic historian Burton Folsom notes that in 1941 Roosevelt even proposed a whopping 99.5-percent marginal rate on all incomes over $100,000. “Why not?” he said when an advisor questioned the idea.[40]

After that confiscatory proposal failed, Roosevelt issued an executive order to tax all income over $25,000 at the astonishing rate of 100 percent. He also promoted the lowering of the personal exemption to only $600, a tactic that pushed most American families into paying at least some income tax for the first time. Shortly thereafter, Congress rescinded the executive order, but went along with the reduction of the personal exemption.[41]

Meanwhile, the Federal Reserve again seesawed its monetary policy in the mid-1930s, first up then down, then up sharply through America’s entry into World War II. Contributing to the economic slide of 1937 was this fact: From the summer of 1936 to the spring of 1937, the Fed doubled reserve requirements on the nation’s banks. Experience has shown time and again that a roller-coaster monetary policy is enough by itself to produce a roller-coaster economy.

Still stinging from his earlier Supreme Court defeats, Roosevelt tried in 1937 to “pack” the Supreme Court with a proposal to allow the president to appoint an additional justice to the Court for every sitting justice who had reached the age of 70 and did not retire. Had this proposal passed, Roosevelt could have appointed six new justices favorable to his views, increasing the members of the Court from 9 to 15. His plan failed in Congress, but the Court later began rubber-stamping his policies after a number of opposing justices retired. Until Congress killed the packing scheme, however, business fears that a Court sympathetic to Roosevelt’s goals would endorse more of the old New Deal prevented investment and confidence from reviving.

Economic historian Robert Higgs draws a close connection between the level of private investment and the course of the American economy in the 1930s. The relentless assaults of the Roosevelt administration — in both word and deed — against business, property, and free enterprise guaranteed that the capital needed to jump-start the economy was either taxed away or forced into hiding. When FDR took America to war in 1941, he eased up on his anti-business agenda, but a great deal of the nation’s capital was diverted into the war effort instead of into plant expansion or consumer goods. Not until both Roosevelt and the war were gone did investors feel confident enough to “set in motion the postwar investment boom that powered the economy’s return to sustained prosperity.”[42]

This view gains support in these comments from one of the country’s leading investors of the time, Lammot du Pont, offered in 1937:

Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don’t know. Is labor to be union or non-union? . . . Are we to have inflation or deflation, more government spending or less? … Are new restrictions to be placed on capital, new limits on profits? … It is impossible to even guess at the answers.”[43]

Many modern historians tend to be reflexively anti-capitalist and distrustful of free markets; they find Roosevelt’s exercise of power, constitutional or not, to be impressive and historically “interesting.” In surveys, a majority consistently rank FDR near the top of the list for presidential greatness, so it is likely they would disdain the notion that the New Deal was responsible for prolonging the Great Depression. But when a nationally representative poll by the American Institute of Public Opinion in the spring of 1939 asked, “Do you think the attitude of the Roosevelt administration toward business is delaying business recovery?” the American people responded “yes” by a margin of more than 2-to-1. The business community felt even more strongly so.[44]

In his private diary, FDR’s very own Treasury Secretary, Henry Morgenthau, seemed to agree. He wrote: “We have tried spending money. We are spending more than we have ever spent before and it does not work. … We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started … and an enormous debt to boot!”[45]

At the end of the decade and 12 years after the stock market crash of Black Thursday, 10 million Americans were jobless. The unemployment rate was in excess of 17 percent. Roosevelt had pledged in 1932 to end the crisis, but it persisted two presidential terms and countless interventions later.

Whither Free Enterprise?

How was it that FDR was elected four times if his policies were deepening and prolonging an economic catastrophe? Ignorance and a willingness to give the president the benefit of the doubt explain a lot. Roosevelt beat Hoover in 1932 with promises of less government. He instead gave Americans more government, but he did so with fanfare and fireside chats that mesmerized a desperate people. By the time they began to realize that his policies were harmful, World War II came, the people rallied around their commander-in-chief, and there was little desire to change the proverbial horse in the middle of the stream by electing someone new.

Along with the holocaust of World War II came a revival of trade with America’s allies. The war’s destruction of people and resources did not help the U.S. economy, but this renewed trade did. A reinflation of the nation’s money supply counteracted the high costs of the New Deal, but brought with it a problem that plagues us to this day: a dollar that buys less and less in goods and services year after year. Most importantly, the Truman administration that followed Roosevelt was decidedly less eager to berate and bludgeon private investors and as a result, those investors re-entered the economy and fueled a powerful postwar boom. The Great Depression finally ended, but it should linger in our minds today as one of the most colossal and tragic failures of government and public policy in American history.

The genesis of the Great Depression lay in the irresponsible monetary and fiscal policies of the U.S. government in the late 1920s and early 1930s. These policies included a litany of political missteps: central bank mismanagement, trade-crushing tariffs, incentive-sapping taxes, mind-numbing controls on production and competition, senseless destruction of crops and cattle and coercive labor laws, to recount just a few. It was not the free market that produced 12 years of agony; rather, it was political bungling on a grand scale.

Those who can survey the events of the 1920s and 1930s and blame free-market capitalism for the economic calamity have their eyes, ears and minds firmly closed to the facts. Changing the wrong-headed thinking that constitutes much of today’s conventional wisdom about this sordid historical episode is vital to reviving faith in free markets and preserving our liberties.

The nation managed to survive both Hoover’s activism and Roosevelt’s New Deal quackery, and now the American heritage of freedom awaits a rediscovery by a new generation of citizens. This time we have nothing to fear but myths and misconceptions.

- END -

Postscript:

Have We Learned Our Lessons?

Eighty years after the Great Depression began, the literature on this painful episode of American history is undergoing an encouraging metamorphosis. The conventional assessment that so dominated historical writings for decades argued that free markets caused the debacle and that FDR’s New Deal saved the country. Surely, there are plenty of poorly-informed partisans, ideologues and quacks that still make these superficial claims. Serious historians and economists, however, have been busy chipping away at the falsehoods. The essay you have just read cites many recent works worth careful reading in their entirety.

At the very moment this latest edition of “Great Myths of the Great Depression” was about to go to press, Simon & Schuster published a splendid new volume I strongly recommend. Authored by the Foundation for Economic Education’s senior historian and Hillsdale College professor, Dr. Burton W. Folsom, the book is provocatively titled “New Deal or Raw Deal? — How FDR’s Economic Legacy Has Damaged America.” It’s one of the most illuminating works on the subject. It will help mightily to correct the record and educate our fellow citizens about what really happened in the 1930s.

Another great addition to the literature, appearing in 2007, is “The Forgotten Man: A New History of the Great Depression” by Amity Shlaes. The fact that it has been a New York Times bestseller suggests there is a real hunger for the truth about this period of history.

While Americans may be unlearning some of what they thought they knew about the Great Depression, that’s not the same as saying we have learned the important lessons well enough to avoid making the same mistakes again. Indeed, today we are no closer to fixing the primary cause of the business cycle — monetary mischief — than we were 80 years ago.

The financial crisis that gripped America in 2008 ought to be a wake-up call. The fingerprints of government meddling are all over it. From 2001 to 2005, the Federal Reserve revved up the money supply, expanding it at a feverish double-digit rate. The dollar plunged in overseas markets and commodity prices soared. With the banks flush with liquidity from the Fed, interest rates plummeted and risky loans to borrowers of dubious merit ballooned. Politicians threw more fuel on the fire by jawboning banks to lend hundreds of billions of dollars for subprime mortgages.

When the bubble burst, some of the very culprits who promoted the policies that caused it postured as our rescuers while endorsing new interventions, bigger government, more inflation of money and credit and massive taxpayer bailouts of failing firms. Many of them are also calling for higher taxes and tariffs, the very nonsense that took a recession in 1930 and made it a long and deep depression.

The taxpayer bailouts of agencies such as Fannie Mae and Freddie Mac, as well as a growing number of private firms in the early fall of 2008, represent more folly with a monumental price tag. Not only will we and future generations be paying those bills for decades, the very process of throwing good money after bad will pile moral hazard on top of moral hazard, fostering more bad decisions and future bailouts. This is the stuff that undermines both free enterprise and the soundness of the currency. Much more inflation to pay these bills is more than a little likely, sooner or later.

“Government,” observed the renowned Austrian economist Ludwig von Mises, “is the only institution that can take a valuable commodity like paper, and make it worthless by applying ink.” Mises was describing the curse of inflation, the process whereby government expands a nation’s money supply and thereby erodes the value of each monetary unit — dollar, peso, pound, franc or whatever. It often shows up  in the form of rising prices, which most people confuse with the inflation itself. The distinction is an important one because, as economist Percy Greaves explained so eloquently, “Changing the definition changes the responsibility.”

Define inflation as rising prices and, like the clueless Jimmy Carter of the 1970s, you’ll think that oil sheiks, credit cards and private businesses are the culprits, and price controls are the answer. Define inflation in the classic fashion as an increase in the supply of money and credit, with rising prices as a consequence, and you then have to ask the revealing question, “Who increases the money supply?” Only one entity can do that legally; all others are called “counterfeiters” and go to jail.

Nobel laureate Milton Friedman argued indisputably that inflation is always and everywhere a monetary matter. Rising prices no more cause inflation than wet streets cause rain.

Before paper money, governments inflated by diminishing the precious-metal content of their coinage. The ancient prophet Isaiah reprimanded the Israelites with these words: “Thy silver has become dross, thy wine mixed with water.” Roman emperors repeatedly melted down the silver denarius and added junk metals until the denarius was less than one percent silver. The Saracens of Spain clipped the edges of their coins so they could mint more until the coins became too small to circulate. Prices rose as a mirror image of the currency’s worth.

Rising prices are not the only consequence of monetary and credit expansion. Inflation also erodes savings and encourages debt. It undermines confidence and deters investment. It destabilizes the economy by fostering booms and busts. If it’s bad enough, it can even wipe out the very government responsible for it in the first place and then lead to even worse afflictions. Hitler and Napoleon both rose to power in part because of the chaos of runaway inflations.

All this raises many issues economists have long debated: Who or what should determine a nation’s supply of money? Why do governments so regularly mismanage it? What is the connection between fiscal and monetary policy? Suffice it to say here that governments inflate because their appetite for revenue exceeds their willingness to tax or their ability to borrow. British economist John Maynard Keynes was an influential charlatan in many ways, but he nailed it when he wrote, “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

So, you say, inflation is nasty business but it’s just an isolated phenomenon with the worst cases confined to obscure nooks and crannies like Zimbabwe. Not so. The late Frederick Leith-Ross, a famous authority on international finance, observed: “Inflation is like sin; every government denounces it and every government practices it.” Even Americans have witnessed hyperinflations that destroyed two currencies — the ill-fated continental dollar of the Revolutionary War and the doomed Confederate money of the Civil War.

Today’s slow-motion dollar depreciation, with consumer prices rising at persistent but mere single-digit rates, is just a limited version of the same process. Government spends, runs deficits and pays some of its bills through the inflation tax. How long it can go on is a matter of speculation, but trillions in national debt and politicians who make misers of drunken sailors and get elected by promising even more are not factors that should encourage us.

Inflation is very much with us but it must end someday. A currency’s value is not bottomless. Its erosion must cease either because government stops its reckless printing or prints until it wrecks the money. But surely, which way it concludes will depend in large measure on whether its victims come to understand what it is and where it comes from. Meanwhile, our economy looks like a roller coaster because Congresses, Presidents and the agencies they’ve empowered never cease their monetary mischief.

Are you tired of politicians blaming each other, scrambling to cover their behinds and score political points in the midst of a crisis, and piling debts upon debts they audaciously label “stimulus packages”?  Why do so many Americans want to trust them with their health care, education, retirement and a host of other aspects of their lives? It’s madness writ large. The antidote is the truth. We must learn the lessons of our follies and resolve to fix them now, not later.

To that end, I invite the reader to join the education process. Support organizations like FEE that are working to inform citizens about the proper role of government and how a free economy operates. Help distribute copies of this essay and other good publications that promote liberty and free enterprise. Demand that your representatives in government balance the budget, conform to the spirit and letter of the Constitution and stop trying to buy your vote with other people’s money.

Everyone has heard the sage observation of philosopher George Santayana: “Those who cannot remember the past are condemned to repeat it.” It’s a warning we should not fail to heed.

Endnotes

1 Alan Reynolds, “What Do We Know About the Great Crash?” National Review, November 9, 1979, p. 1416.

2 Hans F. Sennholz, “The Great Depression,” The Freeman, April 1975, p. 205.

3 Murray Rothbard, America’s Great Depression (Kansas City: Sheed and Ward, Inc., 1975), p. 89.

4 Benjamin M. Anderson, Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-46, 2nd edition (Indianapolis: Liberty Press, 1979), p. 127.

5 Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960 (New York: National Bureau of Economic Research, 1963; ninth paperback printing by Princeton University Press, 1993), pp. 411-415.

6 Lindley H. Clark, Jr., “After the Fall,” The Wall Street Journal, October 26, 1979, p. 18.

7 “Tearful Memories That Just Won’t Fade Away,” U. S. News & World Report, October 29, 1979, pp. 36-37.

8 “FDR’s Disputed Legacy,” Time, February 1, 1982, p. 23.

9 Barry W. Poulson, Economic History of the United States (New York: Macmillan Publishing Co., Inc., 1981), p. 508.

10 Reynolds, p. 1419.

11 Richard M. Ebeling, “Monetary Central Planning and the State-Part XI: The Great Depression and the Crisis of Government Intervention,” Freedom Daily (Fairfax, Virginia: The Future of Freedom Foundation, November 1997), p. 15.

12 Paul Johnson, A History of the American People (New York: HarperCollins Publishers, 1997), p. 740.

13 Ibid., p. 741.

14 Larry Schweikart and Michael Allen, A Patriot’s History of the United States: From Columbus’s Great Discovery to the War on Terror (New York: Sentinel, 2004), p. 553.

15 Ibid., p. 554.

16 “FDR’s Disputed Legacy,” p. 24.

17 Sennholz, p. 210.

18 From The Liberal Tradition: A Free People and a Free Economy by Lewis W. Douglas, as quoted in “Monetary Central Planning and the State, Part XIV: The New Deal and Its Critics,” by Richard M. Ebeling in Freedom Daily, February 1998, p. 12.

19 Friedman and Schwartz, p. 330.

20 Jim Powell, FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression (New York: Crown Forum, 2003), p. 32.

21 John Morton Blum, From the Morgenthau Diaries: Years of Crisis, 1928-1938 (Boston: Houghton Mifflin Company, 1959), p. 70.

22 Anderson, p. 315.

23 “FDR’s Disputed Legacy,” p. 24.

24 Anderson, p. 336.

25 Ibid., pp. 332-334.

26 “FDR’s Disputed Legacy,” p. 30.

27 John T. Flynn, The Roosevelt Myth (Garden City, N.Y.: Garden City Publishing Co., Inc., 1949), p. 45.

28 C. David Tompkins, Senator Arthur H. Vandenberg: The Evolution of a Modern Republican, 1884-1945 (East Lansing, MI: Michigan State University Press, 1970), p. 157.

29 Ibid., p. 121.

30 Albert J. Nock, Our Enemy, the State (online at www.barefootsworld.net/nockoets1.html), Chapter 1, Section IV.

31 Martin Morse Wooster, “Bring Back the WPA? It Also Had A Seamy Side,” Wall Street Journal, September 3, 1986, p. A26.

32 Ibid.

33 Johnson, p. 762.

34 Sennholz, pp. 212-213.

35 William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal, 1932-1940 (New York: Harper and Row, 1963), p. 242.

36 Ibid., pp. 183-184.

37 Robert Higgs, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War,” The Independent Review, Volume I, Number 4: Spring 1997, p. 573.

38 Gary Dean Best, The Critical Press and the New Deal: The Press Versus Presidential Power, 1933-1938 (Westport, Connecticut: Praeger Publishers, 1993), p. 130.

39 Ibid., p. 136.

40 Burton Folsom, “What’s Wrong With The Progressive Income Tax?”, Viewpoint on Public Issues, No. 99-18, May 3, 1999, Mackinac Center for Public Policy, Midland, Michigan.

41 Ibid.

42 Higgs, p. 564.

43 Quoted in Herman E. Krooss, Executive Opinion: What Business Leaders Said and Thought on Economic Issues, 1920s-1960s (Garden City, N.Y.: Doubleday and Co., 1970), p. 200.

44 Higgs, p. 577.

45 Blum, pp. 24-25.

Photo Credits

Cover, Artwork based on a poster created by Works Progress Administration between 1941 and 1943.

Page 1, Library of Congress, Prints and Photographs Division, [LC-USF34-T01-018258-C DLC].

Page 2, Federal Reserve Building, Library of Congress, Prints and Photographs Division, Theodor Horydczak Collection [LC-H814-T-F03-003 DLC].

Page 3, Unemployment, Michigan State Archives.

Page 5, Farm Relief Act, Library of Congress, National Photo Company Collection, [LC-USZ62-111718 DLC].

Page 6, Roosevelt, Library of Congress, Prints and Photographs Division [LC-USZ62-117121 DLC].

Page 7, Roosevelt, Franklin D. Roosevelt Library and Museum.

Page 9, Bridge, Library of Congress, Prints and Photographs Division, Historic American Buildings Survey or Historic American Engineering Record, Reproduction Number [HAER,?TEX,42-VOS.V,4-].

Page 11, Steel Mill, Library of Congress, Prints and Photographs Division, Theodor Horydczak Collection [LC-H814-T-0601 DLC].

Page 12, Supreme Court Building, Library of Congress, Prints & Photographs Division, FSA-OWI Collection, [LC-USF34-005615-E DLC].

Page 13, Strikers, Archives of Labor and Urban Affairs, Wayne State University.

The media not only lap it up, but they dish out more of their own—often conferring the “czar” title on officials whom even the government isn’t brash enough to label that way. While browsing the Internet, I came across an article from the January 20 Berkeley Daily Planet with a headline that caught my eye: “Bush Homeless Czar Pays a Visit.”

It wasn’t about a government official without a home. It was about the President’s homelessness czar, in town to promote “the development of 10-year plans to end chronic homelessness.” Other stories I found referred to a “timber czar,” a “cybersecurity czar,” a “health care czar,” and a “regulatory czar,” to cite but a few examples.

My problem with all of this goes beyond the notion of hiring yet another bureaucrat. It’s the use of the term “czar” itself to refer to anybody at all in what is supposed to be a free society. Jefferson, Madison, Franklin, and the others who risked their lives to fashion a constitutional republic must be turning in their graves. Just as George Washington rejected a suggestion he be named a king, so should any self-respecting, freedom-loving American citizen eschew any offer to be a “czar” over anything or anybody.

In his book Freedom in Chains: The Rise of the State and the Demise of the Citizen, James Bovard laments what this czarist fetish says about the state of American thinking: “Americans of earlier generations would be as shocked by the current adulatory use of the term ‘czar’ as contemporary Americans should be shocked of the use of ‘fuehrer’ as a compliment for a political leader.” Bovard cites an attorney who, in an 1895 case, condemned a particular tax as granting sweeping powers to the federal government “worthy of a Czar of Russia proposing to reign with undisputed and absolute power. . . .”

The origin of the word is “Caesar” from the ancient Roman autocrat Julius Caesar, who arrogated great power to himself and helped bring an end to the Roman republic. Later emperors embraced his name as their title; to be a “Caesar” was to possess almost limitless, life-and-death authority over the rest of society. In more modern times we think of a “czar” as a tyrant of pre-1917 Russia. Look it up in any thesaurus and you’ll find synonyms such as “usurper,” “despot” and “oppressor.”

Words say a lot about a culture. Americans of 1900 never referred to one of their own as a “czar” because they understood the term. Because they generally embraced liberty and limited government, they knew that it was pejorative. No respectable American of that day would have accepted the title, and no job at any level of government at that time even pretended to bestow czarist-like authority. Americans of today haven’t forgotten what the term means.

Sadly, they simply put far more faith in powerful, centralized government than did their ancestors. Their acceptance of the term “czar” is symptomatic of the same shift in thinking that has given us a government that commands a share of our lives and personal income many times what it claimed in 1900.

One hopeful sign of the prospects for liberty would be a widespread revulsion at the very thought of a fellow citizen possessing either a position or a title such as the one we’re discussing here. Let’s pray for the day when Americans tell their leaders in no uncertain terms: “Give us no more czars! Give us no pharaohs, emperors, shoguns, sheikhs, sachems, commissars, or potentates of any kind! Just give us good and limited government, and leave the rest to us!”

]]> http://www.fee.org/articles/czars/feed/ 3 http://www.fee.org/from-the-president/give-kidding/ http://www.fee.org/from-the-president/give-kidding/#comments Mon, 08 Jun 2009 16:37:38 +0000 Lawrence W. Reed http://fee.org/?p=7071 Note: This is a preview from FEE president Lawrence W. Reed’s upcoming column in the July/August 2009 issue of The Freeman.

These are the times that try men’s souls. The summer soldier and the sunshine patriot will, in this crisis, shrink from the service of their country; but he that stands by it now, deserves the love and thanks of man and woman. Tyranny, like hell, is not easily conquered; yet we have this consolation with us, that the harder the conflict, the more glorious the triumph. What we obtain too cheap, we esteem too lightly: it is dearness only that gives everything its value. Heaven knows how to put a proper price upon its goods; and it would be strange indeed if so celestial an article as freedom should not be highly rated.

So began the first of 16 pamphlets under the title “The American Crisis,” by patriot Thomas Paine. These very words were read aloud to General George Washington’s forlorn and bedraggled men on Christmas 1776, the night before the Battle of Trenton.

Consider the backdrop: For the six months since the Declaration of Independence, Americans had been in almost constant retreat. To a disinterested observer, the American cause must have seemed hopelessly quixotic.To many patriots as well, it appeared all but lost. But Paine’s stirring words helped give the troops the morale boost they needed. The next day they accomplished the impossible, capturing nearly the entire force arrayed against them. Desertions plummeted and reenlistments soared.

Lovers of liberty need a little Paine today in the face of all the pain around us. It seems at times that the world has gone mad. Companies that lose billions are being bailed out by a government that loses trillions.The same federal Leviathan that outlaws competition in first-class mail delivery but still can’t deliver letters at a profit now supposedly knows how to run auto companies, banks, and insurance firms. Debt, deficits, bureaucracy, regulation, government spending–the depressing stuff already in frightful superabundance pre-financial crisis–now threaten our diminishing liberties more than ever before. The cover of the March 15 issue of Newsweek proclaimed, “We Are All Socialists Now.”

No Sunshine Soldiers

Maybe we have good reason to feel like those dispirited troops on Christmas Day in 1776, but we should learn from what they did just a day later. We can either be summer soldiers and sunshine patriots, or we can let the very principles we profess be our rallying cry for the battles ahead.

Eternal optimist though I am, I admit that pessimism really tugs at me when I read the morning papers. At every speech I give these days, there’s a sizable portion of the crowd that seems ready to crawl under a rock and let the world go to a statist hell in a hand basket.  

But then I ask myself, what good purpose could a defeatist attitude possibly promote? Will it make me work harder for the causes I know are right? Is there anything about liberty that an election or events in Congress disproves? If I exude a pessimistic demeanor, will it help attract newcomers to the ideas I believe in? Is this the first time in history that believers in liberty have lost some battles? If we simply throw in the towel, will that enhance the prospects for future victories? Is our cause so menial as to justify deserting it because of some bad news or some new challenges? Do we turn back just because the hill we have to climb got a little steeper?

Readers of this magazine should know the answers to those questions.

This is not the time to abandon time-honored principles. I can’t speak for you but someday I want to go to my reward and be able to look back and say, “I never gave up. I never became part of the problem I tried to solve. I never gave the other side the luxury of winning anything without a rigorous, intellectual contest. I never missed an opportunity to do my best for what I believed in, and it never mattered what the odds or the obstacles were.”

A Tradition of Courage

Remember that we stand on the shoulders of many people who came before us and who persevered through far darker times. The American patriots who shed their blood and suffered through unspeakable hardships as they took on the world’s most powerful nation in 1776 are certainly among them. But I am also thinking of the brave men and women behind the Iron Curtain who resisted the greatest tyranny of the modern age, and won. I think of those like Hayek and Mises who kept the flame of liberty flickering in the 1930s and ’40s. I think of the heroes like Wilberforce and Clarkson who fought to end slavery and literally changed the conscience and character of a nation in the face of the most daunting of disadvantages. And I think of the Scots who, 456 years before the Declaration of Independence, put their lives on the line to repel English invaders with these thrilling words: “It is not for honor or glory or wealth that we fight, but for freedom alone, which no good man gives up except with his life.”

As I think about what some of those great men and women faced, the obstacles before us today seem rather puny.We just need to gird our loins.We have to get a lot smarter and better at reaching more fellow citizens with a compelling alternative to the dead hand of the corrupt and incompetent State. We need to put confident smiles on our faces and sally forth.

Time to Rally

We should not squander a second feeling bad for ourselves.This is a moment when our true character, the stuff we’re really made of, will show itself. If we retreat, that would tell me we were never really worthy of the battle in the first place. But if we resolve to let these tough times build character and rally our dispirited friends to new levels of dedication, we will look back on this occasion someday with pride at how we handled it. Have you called a friend yet today to explain to him or her why liberty should be a top priority?

Nobody ever promised that liberty would be easy to attain or easy to keep. The world has always been full of greedy thieves and thugs, narcissistic power seekers, snake-oil charlatans, unprincipled ne’er-do-wells, and arrogant busybodies. Sometimes they’re nattily dressed in custom-tailored, pin-stripe suits and give good speeches; sometimes they’re bedecked in jewel-studded robes and give lousy speeches; on yet other occasions they wear well-worn street clothes and don’t bother with a speech at all as they hold you up. It doesn’t matter how they’re dressed or what they say. No true friend of liberty should just roll over and play dead for any of them.

Wipe that frown off your face and get to work. Liberty’s future depends on you.

Imagine a thief who spends an afternoon pick pocketing a sizable crowd. In a few hours, he’s nabbed thousands of dollars in cash and a bag full of credit cards. He then spends a small fortune at some jewelry stores and makes off with the loot as a suspicious citizen who recognizes him cries “Stop!”

If Nossiter were covering this little episode, the story in the Times the next day would read as follows: “A Good Samaritan yesterday gave several gem shops a big boost when he bought more diamonds than the stores usually sell in a month. The benefits of the spending binge were confirmed by no less an authority than the store owners themselves, who promise to hire more employees if the generous customer comes back regularly. An obviously disgruntled passerby attempted to interfere in the matter by shouting as the customer left, but he was told by an angry store manager to leave well enough alone. Meanwhile, economists at the nearby state university are hailing the increase in local GDP.”

Make these substitutions and you have the gist of the actual Nossiter story in the April 5 Times: The Good Samaritan is the federal government, the jewelry store is Louisiana and the passerby who tried to rain on their parade is Louisiana Governor Bobby Jindal. Oh, I almost forgot: the people in the crowd whose pockets got picked are representative of the taxpayers of America but it doesn’t matter because they’re not mentioned in Nossiter’s story anyway.

The Times story notes that the feds have dumped more than $50 billion in money on Louisiana since Hurricane Katrina. “Indicators suggest,” notes ace reporter Nossiter, that “dumping a large amount of reconstruction money into a confined space . . . has had a positive outcome.” It’s an “experiment” that he says bodes well for the flood of stimulus spending Washington is doling out to alleviate the nation’s financial woes.

Lo and behold, guess what has happened to construction in Louisiana? It’s up! (Apparently, not even government can spend $50 billion on construction without yielding some construction.) Nossiter quotes a professor who says this proves that “stimulus can have an effect.”

What amazing magical powers our benevolent government has! It stimulates when it spends, unlike what happens when the rest of us spend. I suppose the difference is that when you and I spend, the money comes from somewhere.

Gov. Bobby Jindal, like the meddlesome passerby in my fictional story, is raising objections to this “free” money from Washington. He warns of “dire consequences” to the nation’s future of the federal spending spree. But Nossiter says not to worry: “In Louisiana, the consequences have hardly been dire — just the opposite, in fact.” What more proof could you want than the fact that all the recipients of the spending say they were stimulated?

Sadly, the Nossiter story is not all that untypical of what passes these days for mainstream journalism. Its reasoning is so infantile, its evidence is so transparent, and its economics is so woefully deficient that one can’t help but wonder if it was printed simply to advance somebody’s big government agenda.

Nah, the Times would never do that.

Think about that. The American people were mad as wet hens because Congress spent half a billion dollars in twelve months and then another half billion again the very next year. But the lawmakers of 1890 were skinflints compared to the porkers in Washington these days.

Since Barack Obama took office in January 2009, the Congress has spent a full billion dollars every single hour!

Today the numbers are mind-numbing, to be sure — so much so that most members of Congress don’t even bother to read the appropriations bills they pass. Let me numb your mind a little more before trying to make some sense of it all:

Before President Obama’s term is half over, federal spending will have doubled in just a decade.  And it’s not a surplus of revenues that they’re spending. Indeed, the deficit in a single year’s budget is now as large as the entire budget in George W. Bush’s first year as president, 2001. The flood of red ink is adding to the national debt to the tune of about $4 billion every day. At more than $11 trillion, that debt amounts to $36,000 for every living American.

Certain private firms are widely believed to be “too big to fail.” So we’re in the process of handing big chunks of them over to the government. Companies that lose billions are being told what to do by an outfit that loses trillions.

The question we all should be asking ourselves is this: Are we trusting our economy and our lives to a government that is too big to succeed?

Once upon a time in America, most citizens expected government to keep the peace and otherwise leave them alone. We built a vibrant, self-reliant, entrepreneurial culture with strong families and solid values. We respected property and largely kept the spirit of the 8th and 10th Commandments against coveting and stealing. We understood that government didn’t have anything to give anybody except what it first took from somebody, and that a government big enough to give us everything we want would be big enough to take away everything we’ve got. We practiced fiscal discipline in our personal lives and we expected nothing less from the people in the government we elected, or we threw them out.

Somewhere along the way, we lost our moral compass. And just like the Roman Republic that rose on integrity and collapsed in turpitude, we thought the “bread and circuses” the government could provide us would buy us comfort and security.

We gave the government the responsibility to educate our children, though government can never be counted on to teach either liberty or character or just about anything very well, for that matter. We asked the government to give us health care, welfare, old age pensions, college education, farm subsidies and now our politicians are bankrupting the country to pay the bills. This welfare state of ours has become one big circle of 305 million people, each with his hands in the next fellow’s pocket.

This is a government whose reach even before the financial crisis scarcely left an aspect of American life untouched, from the cradle to the grave and the volume of our toilet bowl water in between. As a portion of our personal income, its tax and regulatory burden consumes at least five times what it did just a century ago. But to the majority on the Potomac, government is nowhere yet big enough.

Remember In Search of Excellence, the 1982 bestselling management book by Tom Peters and Robert Waterman? One of its salient points is that an organization gets off track when it no longer “sticks to the knitting.” When it allows its mission to blur and be stretched far beyond its founding design, when it becomes distracted by endless and dubious new responsibilities, its core competency evaporates. It will fail to do what it is supposed to do, because it’s doing too much of what it’s not supposed to do.

It may come as a surprise to those who see aspirin made in Washington as the cure for every ailment, but the federal government is not God. It can’t even be a good Santa Claus because it can’t give anybody anything that it doesn’t first take from somebody else. It’s no Mother Theresa either, because on those occasions when it does some good it usually costs an arm and a leg and sends a big part of the bill to generations yet unborn. The fact is, the bigger government gets, the more it starts to look like Moe, Larry and Curly.

Americans can’t expect government to do virtually everything for them and do it well. They can’t have their proverbial cake and inhale it too; to assume otherwise is infantile, fairyland thinking.

I am not worried that General Motors may be too big to fail. I am infinitely more concerned that every man, woman and child in America is becoming hogtied to the fortunes of a monster that is far too big to succeed.

By last count, I’ve given this address in about 100 different places, including probably 20 states and a dozen foreign countries. The text has been translated into at least 12 foreign languages, including Chinese, Korean, Spanish and Kiswahili. In a twist stranger than fiction, I was invited to deliver this speech at the People’s University in Beijing. Readers familiar with my views or with the seven principles will no doubt be struck by the irony — and the victory — inherent in my espousing these principles in the heart of the world’s largest communist state.

Why has interest in the “Seven Principles of Sound Public Policy” exceeded all expectations? Looking back, I think it was due to a gamble I took when I first wrote and delivered this address. At the time, I began by telling the audience:

“I know that (the Detroit Economic Club) has heard many policy addresses by many leaders in government, business and academia — policy addresses that dealt in some detail with specific pressing issues of the day, from transportation to education to health care and countless other important topics. At the Mackinac Center for Public Policy, our specialty is researching and recommending detailed prescriptions for today’s policy questions, and I thought about doing that very thing here today.

“But upon reflection, I decided instead to step back from the minutiae of any particular issue and offer you something a little different: a broad-brush approach that is applicable to every issue. I’d like us all to think about some very critical fundamentals, some bedrock concepts that derive from centuries of experience and economic knowledge. They are, in my view, eternal principles that should form the intellectual backdrop to what we do as policymakers inside and outside of government.”

The reception the speech received that day and in the years since suggests that at bottom, people value a serious attempt to deal with issues that matter. They recognize that principles that can be expressed in simple words are not necessarily simplistic.

Moreover, they realize that approaching issues with an open mind does not mean approaching them with an empty one. After all, we’ve learned a few things over the centuries. It’s not uninformed bias that prompts us without debate to accept the notion that the sun comes up in the east. It isn’t blind ideology that tells us that a representative republic is superior to dictatorship or monarchy. The general assumption that private property and free-market economies are superior to state ownership and central planning is no longer just an opinion; rather, it is now a settled truth for people who value reason, logic, facts, evidence, economics and experience.

The seven principles of sound public policy that I want to share with you are pillars of a free economy. We can differ on exactly how any one of them may apply to a given issue, but the principles themselves, I believe, are settled truths.

These principles are not original with me; I’ve simply collected them in one place. They are not the only pillars of a free economy or the only settled truths, but they do provide a solid foundation. In my view, if the cornerstone of every state and federal building were emblazoned with these principles — and more importantly, if every legislator understood and attempted to be faithful to them — we’d be a much stronger, much freer, more prosperous and far better-governed people.

One

Free people are not equal, and equal people are not free.

First, I should clarify the kind of “equalness” to which I refer in this statement. I am not referring to equality before the law — the notion that you should be judged innocent or guilty of an offense based upon whether or not you did it, with your race, sex, wealth, creed, gender or religion having nothing to do with the outcome. That’s an important foundation of Western civilization, and though we often fall short of it, I doubt that anyone here would quarrel with the concept.

No, the “equalness” to which I refer is all about income and material wealth — what we earn and acquire in the marketplace of commerce, work and exchange. I’m speaking of economic equality. Let’s take this first principle and break it into its two halves.

Free people are not equal. When people are free to be themselves, to be masters of their own destinies, to apply themselves in an effort to improve their well-being and that of their families, the result in the marketplace will not be an equality of outcomes. People will earn vastly different levels of income; they will accumulate vastly different levels of wealth. While some lament that fact and speak dolefully of “the gap between rich and poor,” I think people being themselves in a free society is a wonderful thing. Each of us is a unique being, different in endless ways from any other single being living or dead. Why on earth should we expect our interactions in the marketplace to produce identical results?

We are different in terms of our talents. Some have more than others, or more valuable talents. Some don’t discover their highest talents until late in life, or not at all. Magic Johnson is a talented basketball player. Should it surprise anyone that he makes infinitely more money at basketball than I ever could? Will Kellogg didn’t discover his incredible entrepreneurial and marketing talent until age 46; before he struck out on his own to start the Kellogg Company, he was making about $25 a week doing menial jobs for his older brother in a Battle Creek sanitarium.

We are different in terms of our industriousness, our willingness to work. Some work harder, longer and smarter than others. That makes for vast differences in how others value what we do and in how much they’re willing to pay for it.

We are different also in terms of our savings. I would argue that if the president could somehow snap his fingers and equalize us all in terms of income and wealth tonight, we would be unequal again by this time tomorrow because some of us would save our money and some of us would spend it. These are three reasons, but by no means the only three reasons, why free people are simply not going to be equal economically.

Equal people are not free, the second half of my first principle, really gets down to brass tacks. Show me a people anywhere on the planet who are indeed equal economically, and I’ll show you a very unfree people. Why?

The only way in which you could have even the remotest chance of equalizing income and wealth across society is to put a gun to everyone’s head. You would literally have to employ force to make people equal. You would have to give orders, backed up by the guillotine, the hangman’s noose, the bullet or the electric chair. Orders that would go like this: Don’t excel. Don’t work harder or smarter than the next guy. Don’t save more wisely than anyone else. Don’t be there first with a new product. Don’t provide a good or service that people might want more than anything your competitor is offering.

Believe me, you wouldn’t want a society where these were the orders. Cambodia under the communist Khmer Rouge in the late 1970s came close to it, and the result was that upwards of 2 million out of 8 million people died in less than four years. Except for the elite at the top who wielded power, the people of that sad land who survived that period lived at something not much above the Stone Age.

What’s the message of this first principle? Don’t get hung up on differences in income when they result from people being themselves. If they result from artificial political barriers, then get rid of those barriers. But don’t try to take unequal people and compress them into some homogenous heap. You’ll never get there, and you’ll wreak a lot of havoc trying.

Confiscatory tax rates, for example, don’t make people any more equal; they just drive the industrious and the entrepreneurial to other places or into other endeavors while impoverishing the many who would otherwise benefit from their resourcefulness. Abraham Lincoln is reputed to have said, “You cannot pull a man up by dragging another man down.”

Two

What belongs to you, you tend to take care of;
what belongs to no one or everyone tends to fall into disrepair.

This essentially illuminates the magic of private property. It explains so much about the failure of socialized economies the world over.

In the old Soviet empire, governments proclaimed the superiority of central planning and state ownership. They wanted to abolish or at least minimize private property because they thought that private ownership was selfish and counterproductive. With the government in charge, they argued, resources would be utilized for the benefit of everybody.

What was once the farmer’s food became “the people’s food,” and the people went hungry. What was once the entrepreneur’s factory became “the people’s factory,” and the people made do with goods so shoddy there was no market for them beyond the borders.

We now know that the old Soviet empire produced one economic basket case after another, and one ecological nightmare after another. That’s the lesson of every experiment with socialism: While socialists are fond of explaining that you have to break some eggs to make an omelette, they never make any omelettes. They only break eggs.

If you think you’re so good at taking care of property, go live in someone else’s house, or drive their car, for a month. I guarantee you neither their house nor their car will look the same as yours after the same period of time.

If you want to take the scarce resources of society and trash them, all you have to do is take them away from the people who created or earned them and hand them over to some central authority to manage. In one fell swoop, you can ruin everything. Sadly, governments at all levels are promulgating laws all the time that have the effect of eroding private property rights and socializing property through “salami” tactics — one slice at a time.

Three

Sound policy requires that we consider long-run effects and all people, not simply short-run effects and a few people.

It may be true, as British economist John Maynard Keynes once declared, that “in the long run, we’re all dead.” But that shouldn’t be a license to enact policies that make a few people feel good now at the cost of hurting many people tomorrow.

I can think of many such policies. When Lyndon Johnson cranked up the Great Society in the 1960s, the thought was that some people would benefit from a welfare check. We now know that over the long haul, the federal entitlement to welfare encouraged idleness, broke up families, produced intergenerational dependency and hopelessness, cost taxpayers a fortune and yielded harmful cultural pathologies that may take generations to undo. Likewise, policies of deficit spending and government growth — while enriching a few at the start — have eaten at the vitals of the nation’s economy and moral fiber for decades.

This principle is actually a call to be thorough in our thinking. It says that we shouldn’t be superficial in our judgments. If a thief goes from bank to bank, stealing all the cash he can get his hands on, and then spends it all at the local shopping mall, you wouldn’t be thorough in your thinking if all you did was survey the store owners to conclude that this guy stimulated the economy.

We should remember that today is the tomorrow that yesterday’s poor policymakers told us we could ignore. If we want to be responsible adults, we can’t behave like infants whose concern is overwhelmingly focused on self and on the here-and-now.

Four

If you encourage something, you get more of it; if you discourage something, you get less of it.

You and I as human beings are creatures of incentives and disincentives. We respond to incentives and disincentives. Our behavior is affected by them, sometimes very powerfully. Policymakers who forget this will do dumb things like jack up taxes on some activity and expect that people will do just as much of it as before, as if taxpayers are sheep lining up to be sheared.

Remember when George Bush (the first one) reneged under pressure on his 1988 “No New Taxes!” pledge? We got big tax hikes in the summer of 1990. Among other things, Congress dramatically boosted taxes on boats, aircraft and jewelry in that package. Lawmakers thought that since rich people buy such things, we should “let ‘em have it” with higher taxes. They expected $31 million in new revenue in the first year from the new taxes on those three things. We now know that the higher levies brought in just $16 million. We shelled out $24 million in additional unemployment benefits because of the people thrown out of work in those industries by the higher taxes. Only in Washington, D.C., where too often lawmakers forget the importance of incentives, can you aim for 31, get only 16, spend 24 to get it and think that somehow you’ve done some good.

Want to break up families? Offer a bigger welfare check if the father splits. Want to reduce savings and investment? Double-tax ‘em, and pile on a nice, high capital gains tax on top of it. Want to get less work? Impose such high tax penalties on it that people decide it’s not worth the effort.

Right now in both state and federal legislatures, much attention is being given to the question of how to deal with deficits due to recession and declining revenues. At the Mackinac Center, we believe that government ought to deal with such circumstances the way you and I and families all across the state deal with similar circumstances: curtail spending. That’s especially true if we want to stimulate a weak economy so it will produce more jobs and more revenue. When the patient is ill, the doctor doesn’t bleed him.

Five

Nobody spends somebody else’s money as carefully as he spends his own.

Ever wonder about those stories of $600 hammers and $800 toilet seats that the government sometimes buys? You could walk the length and breadth of this land and not find a soul who would say he’d gladly spend his own money that way. And yet this waste often occurs in government and occasionally in other walks of life, too. Why? Because invariably, the spender is spending somebody else’s money.

Economist Milton Friedman elaborated on this some time ago when he pointed out that there are only four ways to spend money. When you spend your own money on yourself, you make occasional mistakes, but they’re few and far between. The connection between the one who is earning the money, the one who is spending it and the one who is reaping the final benefit is pretty strong, direct and immediate.

When you use your money to buy someone else a gift, you have some incentive to get your money’s worth, but you might not end up getting something the intended recipient really needs or values.

When you use somebody else’s money to buy something for yourself, such as lunch on an expense account, you have some incentive to get the right thing but little reason to economize.

Finally, when you spend other people’s money to buy something for someone else, the connection between the earner, the spender and the recipient is the most remote — and the potential for mischief and waste is the greatest. Think about it — somebody spending somebody else’s money on yet somebody else. That’s what government does all the time.

But this principle is not just a commentary about government. I recall a time, back in the 1990s, when the Mackinac Center took a close look at the Michigan Education Association’s self-serving statement that it would oppose any competitive contracting of any school support service (like busing, food or custodial) by any school district anytime, anywhere. We discovered that at the MEA’s own posh, sprawling East Lansing headquarters, the union did not have its own full-time, unionized workforce of janitors and food service workers. It was contracting out all of its cafeteria, custodial, security and mailing duties to private companies, and three out of four of them were nonunion!

So the MEA — the state’s largest union of cooks, janitors, bus drivers and teachers — was doing one thing with its own money and calling for something very different with regard to the public’s tax money. Nobody — repeat, nobody — spends someone else’s money as carefully as he spends his own.

Six

Government has nothing to give anybody except what it first takes from somebody, and a government that’s big enough to give you everything you want is big enough to take away everything you’ve got.

This is not some radical, ideological, anti-government statement. It’s simply the way things are. It speaks volumes about the very nature of government. And it’s perfectly in keeping with the philosophy and advice of America’s Founders.

It’s been said that government, like fire, is either a dangerous servant or a fearful master. Think about that for a moment. Even if government is no bigger than our Founders wanted it to be, and even if it does its work so well that it indeed is a servant to the people, it’s still a dangerous one! As Groucho Marx once said of his brother Harpo, “He’s honest, but you’ve got to watch him.” You’ve got to keep your eye on even the best and smallest of governments because, as Jefferson warned, the natural tendency is for government to grow and liberty to retreat. You can’t wind it up and walk away from it; it takes eternal vigilance to keep it in its place and keep our liberties secure.

The so-called “welfare state” is really not much more than robbing Peter to pay Paul, after laundering and squandering much of Peter’s wealth through an indifferent, costly bureaucracy. The welfare state is like feeding the sparrows through the horses, if you know what I mean. Put yet another way, it’s like all of us standing in a big circle, with each of us having one hand in the next guy’s pocket. Somebody once said that the welfare state is so named because in it, the politicians get well and the rest of us pay the fare.

A free and independent people do not look to government for their sustenance. They see government not as a fountain of “free” goodies, but rather as a protector of their liberties, confined to certain minimal functions that revolve around keeping the peace, maximizing everyone’s opportunities and otherwise leaving us alone. There is a deadly trade-off to reliance upon government, as civilizations at least as far back as ancient Rome have painfully learned.

When your congressman comes home and says, “Look what I brought for you!” you should demand that he tell you who’s paying for it. If he’s honest, he’ll tell you that the only reason he was able to get you something was that he had to vote for the goodies that other congressmen wanted to take home — and you’re paying for all that, too.

Seven

Liberty makes all the difference in the world.

Just in case the first six principles didn’t make the point clearly enough, I’ve added this as my seventh and final one.

Liberty isn’t just a luxury or a nice idea. It’s much more than a happy circumstance or a defensible everyday concept. It’s what makes just about everything else happen. Without it, life is a bore at best. At worst, there is no life at all.

Public policy that dismisses liberty or doesn’t preserve or strengthen it should be immediately suspect in the minds of a vigilant people. They should be asking, “What are we getting in return if we’re being asked to give up some of our freedom?” Hopefully, it’s not just some short-term handout or other “mess of pottage.” Ben Franklin went so far as to advise us, “Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety.”

Too often today, policymakers give no thought whatsoever to the general state of liberty when they craft new policies. If it feels good or sounds good or gets them elected, they just do it. Anyone along the way who might raise liberty-based objections is ridiculed or ignored. Today, government at all levels consumes more than 42 percent of all that we produce, compared with perhaps 6 percent or 7 percent in 1900. Yet few people seem interested in asking the advocates of still more government such cogent questions as, “Why isn’t 42 percent enough?”; “How much more do you want?”; or, “To what degree do you think a person is entitled to the fruits of his labor?”

I yearn for the day when all Americans practice these seven principles. I think they are profoundly important. Our past devotion to them, in one form or another, explains how and why we fed, clothed and housed more people at higher levels than any other nation in the history of the planet. And these principles are key to preserving that crucial element of life we call liberty. Thanks for the opportunity to share them with you today and thanks for whatever you may do from this day forward to put these principles into common practice.

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To their eternal credit, the team and the town, dejected though they were, rallied behind the school’s decision. The coach said, “We didn’t know he was ineligible at the time … but you’ve got to do what’s honest and right and what the rules say. I told my team that people forget the scores of the games; they don’t ever forget what you’re made of.”

In the minds of most, it didn’t matter that the championship title was forfeited. The coach and the team were still champions — in more ways than one. Could you have mustered the courage under similar circumstances to do as they did?

Commencement addresses at both high schools and colleges are full of paeans and platitudes that reduce to one cliché: “You are the future.” Well, that’s an important point but it’s also something we already know because it’s pretty self-evident, wouldn’t you say? So I’ll not tell you in a dozen different ways that the future is yours. I have a different message.

I want to talk to you about one thing that is more important than all the good grades you’ve earned, more important than all the high school and college degrees you’ll accumulate, and indeed, more important than all the knowledge you’ll ever absorb in your lifetimes. It’s something over which every responsible, thinking adult has total, personal control and yet millions of people every year sacrifice it for very little. It will not only define and shape your future, it will put both a concrete floor under it and an iron ceiling over it. It’s what the world will remember you for more than probably anything else. It’s not your looks, it’s not your talents, it’s not your ethnicity and ultimately, it may not even be anything you ever say. What is this incredibly powerful thing I’m talking about? In a word, it’s character.

Character is what the coach and the players in Conyers, Georgia, possessed. And what an example they set! People like me who have never met them will be telling that story for a long, long time. People who do know them surely must admire and look up to them with great pride and respect. Thank God for people with character. They set the standard and exert a pressure on everyone to strive to meet it.

Here’s another example from personal experience: In my travels to some 67 countries around the world, I have witnessed many sterling examples of personal character (as well as the startling lack of it), but this is one of the best.

In 1989 I visited Cambodia with my late friend, Dr. Haing S. Ngor (who won an Academy Award for his role in the movie “The Killing Fields”). In advance of the trip, there was considerable local press attention because I was rustling up donated medical supplies to take with me to give to a hospital in the capital, Phnom Penh. A woman from a local church who saw the news stories called and explained that a few years before, her church had helped Cambodian families who had escaped from the Khmer Rouge communists and resettled in my town of Midland, Michigan. The families had moved on to other locations in the U.S. but stayed in touch with the woman who called me and other friends they had made in Midland.

The woman — Sharon Hartlein is her name — said she had told her Cambodian friends about my pending visit. Each family asked if I would take letters with cash enclosed to their relatives in Cambodia. I said yes.

Three of the families were in Phnom Penh and easy to find, but one was many miles away in Battambang. Going there would have involved a train ride, some personal risk, and a lot of time it turned out I didn’t have. I was advised in any event not to return with any money. If I couldn’t locate any of the families I was told to just give the cash to any needy Cambodian I could find (and they were everywhere!).

On the day before my return home, when I realized I just wasn’t going to make it to Battambang, I approached a man in tattered clothes whom I had seen several times in the hotel lobby. He always smiled and said hello, and spoke enough English so that we could briefly converse. He, like most Cambodians at that time, was extremely poor. I told him I had an envelope with a letter and $200 in it, intended for a family in Battambang. I asked him if he thought he could get it to them and I told him he could keep $50 of it if he did. He consented, and we said goodbye. I assumed I would never hear anything of what had become of either him or the money.

Several months later, I received an excited call from Sharon. She said she had just received a letter from the Cambodians in Virginia whose family in Battambang that envelope was intended for. When she read it on the phone, I couldn’t help but shed a few tears. The letter read, “Thank you for the two hundred dollars!”

That poor man found his way to Battambang, and he not only didn’t keep the $50 I said he could keep, he somehow found a way to pay for the $10 train ride himself. Now, that is character! I think I would probably trust my life in his hands, even though I never got to know him and didn’t ask him for his address.

To help us understand what character is, let me tell you what the absence of it looks like. Sadly, evidence of a lack of character is in abundance these days.

In 1995, students on the quiz team at Steinmetz High School in Chicago made national news when it was discovered that they had cheated to win a statewide academic contest. With the collaboration of their teacher, they had worked from a stolen copy of a test to look up and memorize the correct answers in advance. Perhaps worse than the initial deed was the attitude of the same students five years later, expressed in the New York Times by one of them this way: “Apologize for what? I would do it again.”

What a contrast to the values on display in the Conyers story — and even more so the Cambodian one! No one would say that the teacher or those students in Chicago exhibited character in the positive sense that I am using the term here today. Assume for a moment that the Chicago students had never been caught. Knowing everything else that I’ve told you in these true stories, which group of students would you most want to be like — the ones in Conyers who walked away from a trophy or the ones in Chicago who cheated to win a contest? If you said Conyers, then you have a conscience. You have character, and hopefully a lot of it. And you know something of the inestimable value of being able to look back on your life some day and know that you tried hard in every circumstance to do the right thing.

I love the words of the Apostle Paul, in prison, shortly before he was martyred. It is recorded in Scripture as II Timothy 4:7: “I have fought the good fight, I have finished the race, I have kept the faith.” He had character, even in the midst of extreme adversity. If he had sacrificed it for short-term, selfish gain, all his good words and deeds would hardly carry the weight they do today, nearly 20 centuries later.

A deficit of character shows up every time somebody who knows what the right thing to do is neither defends it nor does it because doing so might mean a little discomfort or inconvenience. I work in the field of public policy, which brings me into contact often with legislators, congressmen and candidates for public office. Far too many times I’ve heard, “I know you’re right but I can’t say so or vote that way because I won’t get reelected.”

You can blame a politician when he behaves that way but don’t forget the voters who put him in that spot. I see character deficits every time I see people pressuring the government to give them something at the expense of others, something which they know in their very gut should come instead from their own efforts and merit.

Perhaps we should ask, “Where does character come from?” or, putting the question slightly differently, “Why is it that when we speak of character, we all seem to know what it is that we’re talking about?” Well, theologians and philosophers can speak to this much better than I. But I will say this: There is something in the way that we humans are wired. Down deep within us we have a sense of what is right and what is wrong, what is good and what is bad. And when we ignore our wiring, something within us — that voice we call our conscience — cries out to us that such and such is simply wrong. In complex situations, the voice can be difficult to discern, and we can even learn how to dull that voice into submission, but we cannot really deny that it is there. It is simply the human experience. We can argue about its origins, but it is there.

When a person spurns his conscience and fails to do what he knows is right, he subtracts from his character. When he evades his responsibilities, succumbs to temptation, foists his problems and burdens on others, or fails to exert self-discipline, he subtracts from his character. When he is so self-absorbed he ceases to be of service to others unless there’s something in it for him, he subtracts from his character. When he attempts to reform the world without reforming himself first, he subtracts from his character.

As I’ve written elsewhere, a person’s character is nothing more and nothing less than the sum of his choices. You can’t choose your height or race or many other physical traits, but you fine tune your character every time you decide right from wrong and what you personally are going to do about it. Your character is further defined by how you choose to interact with others and the standards of speech and conduct you practice. Character is often listed as a key leadership quality. I actually think character and leadership are one and the same. If you’ve got character, others will look upon you as a leader.

Ravaged by conflict and corruption, the world is starving for people of character. Indeed, as much as anything, it is on this matter that the fate of individual liberty has always depended. A free society flourishes when people seek to be models of honor, honesty and propriety at whatever the cost in material wealth, social status or popularity. It descends into barbarism when they abandon what’s right in favor of self-gratification at the expense of others; when lying, cheating or stealing are winked at instead of shunned. If you want to be free, if you want to live in a free society, you must assign top priority to raising the caliber of your character and learning from those who already have it in spades. If you do not govern yourself, you will be governed.

Character means that there are no matters too small to handle the right way. Former football star and Congressman J.C. Watts once said that your character is defined by what you do when no one is looking. Cutting corners because “it won’t matter much” or “no one will notice” still knocks your character down a notch and can easily become a slippery slope. “Unless you are faithful in small matters,” we learn in Luke 16:10, “you will not be faithful in large ones.”

Here’s an example of exemplary character from a recent movie, Ron Howard’s “Cinderella Man.” The film is a masterpiece from start to finish but I especially loved an early scene in which boxer James Braddock (played by Russell Crowe) learns that his young son has stolen a sausage. The family is hungry and destitute at the bottom of the Great Depression. The boy was fearful that, like one of his friends whose parents couldn’t provide enough to eat, he would be sent to live with relatives who could afford the expense. Braddock does not hesitate on the matter for a second. He immediately escorts the boy to the store to return the sausage and apologize to the butcher. He then lectures his son:

“There’s a lot of people worse off than we are. And just because things ain’t easy, that don’t give you the excuse to take what’s not yours, does it? That’s stealing, right? We don’t steal. No matter what happens, we don’t steal. Not ever. You got me?”

His son replies, “Yes,” but Braddock presses the point, two more times: “Are you giving me your word?”

“Yes.”

“Come on.”

“I promise.”

Braddock’s character ascends to new heights later in the film when he does what no welfare recipient is ever asked to do and what perhaps not one in a million has ever done: He pays the taxpayers back. Now that is character! And he certainly knew how to encourage those qualities in his son — both by his words and by his example.

Hollywood turns out so little these days that inspires character but in 2005 it did produce another movie that I rank among the very best of all time. It’s “The Greatest Game Ever Played,” the true story of the son of an immigrant, Francis Ouimet, who won the 1913 U.S. Open Golf Championship at the age of 20. Buy it, or rent it, and watch it as a study in character. Both the main figure, Francis, and the story’s secondary hero, Harry Vardon, ooze character from every pore. The traits they so magnificently exhibit include professionalism, perseverance, integrity, sportsmanship, loyalty and honor. You watch that movie and you’ll come away with boundless admiration for Francis and Harry and it’s not so much for their great golf abilities as it is because of their sterling characters.

In history, the men and women we most admire and best remember are those whose character stands out because they lived it 24 hours every day and did not compromise it. They are not like that fictional character played by the great comedian Groucho Marx, who said, “Those are my principles! If you don’t like them, well, I have others.”

George Washington was perhaps our best president because he knew at every moment that maintaining the highest standards in every aspect of life, public and private, was critical to putting the new nation on the right path. A man of lesser character might not have carried us through such a critical period, or would have put us on a different and more perilous path.

Washington understood the link between character and liberty. Listen to him speaking to the nation in his Farewell Address of 1796:

“It is substantially true that virtue and morality is a necessary spring of popular government. The rule, indeed, extends with more or less force to every species of free government. Who that is a sincere friend to it can look with indifference upon attempts to shake the foundation of the fabric?”

And Washington was not alone.

James Madison wrote in 1788 that “To suppose that any form of government will secure liberty or happiness without any virtue in the people, is a chimerical idea.”

Listen to Thomas Jefferson’s words of wisdom on this issue of character:

Give up money, give up fame, give up science, give up the earth itself and all it contains, rather than do an immoral act. And never suppose, that in any possible situation, or under any circumstances, it is best for you to do a dishonorable thing, however slightly so it may appear to you. Whenever you are to do a thing, though it can never be known but to yourself, ask yourself how you would act were all the world looking at you, and act accordingly.

Encourage all your virtuous dispositions, and exercise them whenever an opportunity arises; being assured that they will gain strength by exercise, as a limb of the body does, and that exercise will make them habitual. From the practice of the purest virtue, you may be assured you will derive the most sublime comforts in every moment of life, and in the moment of death. If ever you find yourself environed with difficulties and perplexing circumstances, out of which you are at a loss how to extricate yourself, do what is right, and be assured that that will extricate you the best out of the worst situations. Though you cannot see, when you take one step, what will be the next, yet follow truth, justice, and plain dealing, and never fear their leading you out of the labyrinth, in the easiest manner possible. The knot which you thought a Gordian one, will untie itself before you. Nothing is so mistaken as the supposition that a person is to extricate himself from a difficulty, by intrigue, by chicanery, by dissimulation, by trimming, by an untruth, by an injustice. This increases the difficulties ten fold; and those who pursue these methods, get themselves so involved at length, that they can turn no way but their infamy becomes more exposed.

What those Founders were getting at is the notion that liberty is built upon the ability of a society to govern itself, without government intervention. This ability to self-govern is itself built upon — you guessed it — individual character.

Here’s a name you may not have heard of: Fanny Crosby. Fanny Crosby holds the record for having written more hymns than any other human being — at least 8,000 — including the popular “Blessed Assurance.” She died in 1915 at the age of 95. She was the first woman in our history to address the United States Congress. She personally met or knew every president of the United States from John Quincy Adams to Woodrow Wilson, maybe more than any other single person in our country’s history, alive or dead. And guess what? She never in her 95 years had any recollection of ever having seen a thing. She was blind from the age of six months. When she addressed Congress, she spoke of how important it was for a person’s character to shine so it could overcome any and all handicaps and obstacles. Many who knew her regarded her as a saint of enormous inspiration.

In June 2003, my best friend and business colleague Joe Overton was killed in a plane crash at the age of 43. He taught me more about the importance of character than anyone else I have ever known. He could teach it because he lived it. While composing a eulogy for his funeral, I came across a few lines about what the world needs. I’ve never learned who the author was so I can’t offer appropriate credit, and in any event, I added a lot to it. It not only describes what the world desperately needs, it described my friend Joe perfectly. I share it with you as I close:

The world needs more men and women who do not have a price at which they can be bought; who do not borrow from integrity to pay for expediency; who have their priorities straight and in proper order; whose handshake is an ironclad contract; who are not afraid of taking risks to advance what is right; and who are honest in small matters as they are in large ones.

The world needs more men and women whose ambitions are big enough to include others; who know how to win with grace and lose with dignity; who do not believe that shrewdness and cunning and ruthlessness are the three keys to success; who still have friends they made twenty years ago; who put principle and consistency above politics or personal advancement; and who are not afraid to go against the grain of popular opinion.

The world needs more men and women who do not forsake what is right just to get consensus because it makes them look good; who know how important it is to lead by example, not by barking orders; who would not have you do something they would not do themselves; who work to turn even the most adverse circumstances into opportunities to learn and improve; and who love even those who have done some injustice or unfairness to them. The world, in other words, needs more men and women of character.

Make this day the start of a lifelong commitment to building character. Be the kind of virtuous example that others will respect, admire, emulate and remember. You’ll not only go to your reward some day with a smile and a clear conscience, you will enhance many other lives along the way. How can any of us settle for any less?

Commentators on the present financial crisis have noted some interesting parallels to the Great Depression of the 1930s. Even if we survive Washington’s spending spree, Congress and the Obama administration could still tip us into catastrophe if they sharply raise taxes or tariffs as Congress did in 1930 and ’32. But more ominous parallels to an earlier age should not escape our notice.

Monumental sums for bailouts. Staggering increases in public debt. Concentration of power in the central government. A mad scramble by interest groups with endless claims on the treasury. Demagogic class warfare appeals. These things ring familiar in the ninth year of 21st century America just as surely as they dominated the ill-fated Roman welfare state of two millennia ago.

In the waning years of the Roman republic, a rogue named Clodius ran for the office of tribune. He bribed the electorate with promises of free grain at taxpayer expense and won. Thereafter, Romans in growing numbers embraced the notion that voting for a living could be more lucrative than working for one. This set into motion Kershner’s First Law, named for the late economist Howard E. Kershner: “When a self-governing people confer upon their government the power to take from some and give to others, the process will not stop until the last bone of the last taxpayer is picked bare.”

Candidates for Roman office spent huge sums to win public favor, then plundered the population afterwards to make good on their promises to the rent-seekers that elected them. As the republic gave way to dictatorship, a succession of emperors built their power on the huge handouts they controlled. Nearly a third of the city of Rome itself received public relief payments by the time of the birth of Christ.

In response to a severe money and credit crisis in 33 A.D., the central government extended credit at zero interest on a massive scale. Government spending in the wake of the crisis soared. 

In 91 A.D., the government became deeply involved in agriculture. Emperor Domitian, to reduce the production and raise the price of wine, ordered the destruction of half the provincial vineyards.

Following the lead of Rome, many cities within the empire spent themselves deeply into debt. Beginning with Emperor Hadrian early in the Second Century, municipalities in financial difficulty received aid from Rome and lost a substantial measure of their political independence in the bargain.

The central government also assumed the responsibility of providing the people with entertainment. Elaborate circuses and gladiator duels were staged to keep the people happy. The equivalent of a hundred million dollars per year in the city of Rome alone is one modern historian’s estimate of what was poured out on the games.

Under Emperor Antoninus Pius, who ruled from 138 to 161 A.D., the Roman bureaucracy reached mammoth proportions. Eventually, according to the historian Albert Trever, “the relentless system of taxation, requisition, and compulsory labor was administered by an army of military bureaucrats. . . .Everywhere were the ubiquitous personal agents of the emperors” employed to crush tax evaders.

There were plenty of taxes to evade. Emperor Nero is said by Roman historian Gaius Suetonius in De Vitae Caesarum to have once rubbed his hands together and declared, “Let us tax and tax again! Let us see to it that no one owns anything!” Taxation ultimately destroyed the wealthy first, followed by the middle and lower classes. “What the soldiers or the barbarians spared, the emperors took in taxes,” according to historian W. G. Hardy. 

Late in the Third Century, Emperor Aurelian declared government relief payments to be a hereditary right. He provided recipients government-baked bread (instead of the old practice of giving them wheat and letting them bake their own bread) and added free salt, pork, and olive oil. 

Rome suffered from the bane of all welfare states, inflation. The massive demands on the government to spend and subsidize created pressures for the multiplication of money. Roman coinage was debased by one emperor after another to pay for expensive programs. Once almost pure silver, the denarius by the year 300 was little more than a piece of junk containing less than five percent silver. 

Prices skyrocketed and savings vanished. Businessmen were vilified even as government continued its spendthrift ways. Price controls further ravaged a battered and shrinking private economy. By 476 A.D. when barbarians wiped the empire from the map, Rome had committed moral and economic suicide.

Another Great Depression should indeed concern us. The one that followed the Roman welfare state is known as the Dark Ages and it lasted for several hundred years.

The turpitude of the subsidy-seekers and handout con artists in Washington should rattle Americans of conscience to their very core. At the most basic level, it’s simply and inexcusably wrong to rip off a dollar from the innocent or the responsible and pass it on to the guilty or the irresponsible. Does it somehow become right if we do it a trillion times? Quite the contrary. It simply becomes a trillion times more wrong if not worse because the sheer magnitude means we can’t dismiss it with the palliative that “it’s only pocket change.”

This is a sign of neither strong character nor a sustainable economy. It reeks of the same moral cowardice and fiscal insanity that doomed great civilizations of the past. The bread and circuses that helped mightily to bankrupt ancient Rome come to mind. Where are the men and women of courage and integrity who will keep their hands in their own pockets?

As the fiscal alarm bells are going off, even state governments that once jealously guarded their financial independence are hearing dinner bells instead. Governor Mark Sanford of South Carolina is virtually alone in resisting the “come and get it” mentality.

Consider House Concurrent Resolution No. 2 of the 85th General Assembly of the State of Indiana, passed by that state’s House and Senate in January 1947. Written in the quaint, commonsense vernacular of the day, its sentiments probably couldn’t muster more than a handful of votes in the state legislatures of 2009. It begins thus:

Indiana needs no guardian and intends to have none. We Hoosiers—like the people of our sister states—were fooled for quite a spell with the magician’s trick that a dollar taxed out of our pockets and sent to Washington will be bigger when it comes back to us. We have taken a good look at said dollar. We find that it lost weight in its journey to Washington and back. The political brokerage of the bureaucrats has been deducted. We have decided that there is no such thing as ‘federal’ aid. We know that there is no wealth to tax that is not already within the boundaries of the 48 states.

So we propose henceforward to tax ourselves and take care of ourselves. We are fed up with subsidies, doles and paternalism. We are no one’s stepchild. We have grown up. We serve notice that we will resist Washington, D.C. adopting us.

The resolution urged the legislatures and citizens of all the states to “restore the American Republic and our 48 states to the foundations built by our fathers.”

If we had listened to the Indiana legislature in 1947, we might be several trillion dollars freer today.

Eternal optimist though I am, I admit that when I looked at the morning papers the pessimist temptation briefly had me in its grip. Then I asked myself, “What good purpose could a defeatist attitude possibly provide? Will it make me work harder for the causes I know are right? Is there anything about liberty that yesterday’s election disproves? If I exude a pessimistic demeanor, will it help attract newcomers to the ideas I believe in? Is this the first time in history that believers in liberty have lost some battles? If we simply throw in the towel, will that enhance the prospects for future victories? Is our cause so menial as to justify deserting it because of some bad news or some new challenges? Do we turn back just because the hill we have to climb got a little steeper?

I think you know the answers to those questions.

This is NOT the time to abandon principles. I can’t speak for you but some day I want to go to my reward and be able to look back and say, “I never gave up. I never became part of the problem I tried to solve. I never gave the other side the luxury of winning anything without a fight. I never missed an opportunity to do my best for what I believed in, and it never mattered what the odds or the obstacles were.”

Let’s remember that we stand on the shoulders of many people who came before us and who persevered through far darker times. I think of the brave men and women behind the Iron Curtain who resisted the greatest tyranny of the modern age, and won. I think of those like Hayek and Mises who kept the flame of liberty flickering in the 1930s and ‘40s when the whole world must have seemed mad for statism in one form or another. I think of the heroes like Wilberforce and Clarkson who fought to end slavery and literally changed the conscience and character of a nation in the face of the most daunting of disadvantages. I think of the patriots who shed their blood for American liberty and suffered through unspeakable hardships as they took on the world’s most powerful nation in 1776. I think of martyrs of the Reformation. And I think of the Scots who, 456 years before the Declaration of Independence, put their lives on the line to repel English invaders with these stirring words: “It is not for honor or glory or wealth that we fight, but for freedom alone, which no good man gives up except with his life.”

As I thought about what some of those great men and women faced, the obstacles before us today seemed rather puny. I’m ashamed that for a moment I let a little election get me down.

If you want my advice, we should not squander a second feeling bad for ourselves. This is a moment when our true character, the stuff we’re really made of, will show itself. If we retreat, that would tell me we were never really worthy of the battle in the first place. But if we resolve to let these tough times build character, teach us to be better and smarter at what we do, and rally our dispirited friends to new levels of dedication, we will look back on this occasion some day with pride at how we handled it. It’s already past 9 am. Have you made any calls to cheer anybody up yet?

Believe me, the folks who for the moment are basking in victory and salivating for the opportunities they may soon have to deploy more force and coercion in our lives are not divinely-inspired geniuses. They are not going to be the first bunch in the history of the planet to figure out how to make big government work. They are far more likely, in fact, to give those who believe in liberty some unique opportunities to drive home our arguments with more eloquence and effect than ever before. When they flop, will the right ideas be lying around, ready to go, to make change for the better? That depends on us. Will we rise to the occasion?

Use this time to think about how you can do more for liberty and do it better, reaching larger audiences in ways that turn lights on in people’s minds. Support others who are working full-time on liberty’s behalf. INspire, don’t EXpire!

So in the course of a few hours, I’m happy to say I’ve traversed from a moment of despair to a smile and a sunny optimism, to an eagerness to accept the challenge and get down to work. To all those out there who are hoping people like you and me will go quietly into the night, just keep thinking that. You’re in for some unexpected surprises.

Onward and upward!

—Lawrence W. Reed
President, Foundation for Economic Education
Irvington, NY