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.

On the other hand, trusting one’s representatives — “misrepresentatives” is a more precise term — to watch over things is pointless: They don’t read the bills they vote on; deal-cutting is a higher priority anyway. In recent years they’ve voted to bail out Wall Street banks, “stimulate” the economy, invade countries, and inflate the power of government to violate civil liberties—all without reading the relevant materials. (Not that the executive always waited until Congress blindly passed the requested authorization.)

By what criterion are we entitled to call this “representative government”? Periodic elections are a necessary condition for that label to apply, but they are hardly a sufficient condition.

A government of self-defined powers is  hardly new in the United States; nor is it the monopoly of any one party. But it has accelerated in the last decade through the exploitation of fear: fear of economic calamity, fear of terrorism, fear of the unfettered market. From the beginning, fear has propelled the growth of the state. H. L. Mencken saw this more clearly than most –“The whole aim of practical politics is to keep the populace in a continual state of alarm (and hence clamorous to be led to safety) by menacing them with an endless series of hobgoblins, all of them imaginary.” — and Robert Higgs has spent a career explaining it.

Using powers the origins of which predate the New Deal, government has now extended its tentacles to encircle the entire economy. Bureaucrats exercise wide-ranging discretion with, at best, murky authority. The unaccountable Federal Reserve System creates money in order to buy not only government securities, but also “troubled” assets from investment banks and other favored firms. The FDIC now insures all bank debt, not just deposits, and guarantees government loans to hedge funds that buy the kinds of securities Treasury Secretary Timothy Geithner prefers. The Treasury last fall asked for $700 billion for one purpose (buying worthless mortgage-backed securities) but uses it for other things instead, such as buying stock in banks and bailing out insurance and auto companies that have earned the right to fail. As George Will writes, “TARP’s $700 billion, like much of the supposed ‘stimulus’ money, is a slush fund the executive branch can use as it pleases.” This points to another unsettling practice: congressional blank-check authorizations to the executive branch: “Here’s some money; do something good with it.” (Of couse it is not only in domestic policy that blank checks are handed out.)

All told, such government-run-amok financial undertakings have the hapless taxpayers on the hook for an amount of money rivaling the gross domestic product. The Fed has created trillions in funny money—portending a horrendous price inflation—and the current deficit is nearly half the entire budget. When Congress is asked to rubberstamp executive activities — as occasionally it is — most of our misrepresentatives faithfully comply. The news media call this being “responsible.” Dissenters, such as those in the House last fall who voted down the first TARP bill, are stigmatized as fringe characters unworthy of serious attention, and quite possibly nihilists.

The Chrysler Intervention

The latest example of government run amok is the Obama administration’s interference with the bankruptcy of Chrysler. Under the administration’s plan the UAW will get 43 cents on the dollar and a majority of the stock shares, while secured nonbank bondholders are offered about 30 cents and have their contractual rights nullified. When they balked in an attempt to fulfill their legal responsibilities to their investor clients, Barack Obama denounced them as greedy speculators. Where does the White House occupant get this authority? Does he know or care that he is engaged in the destruction of wealth? Does the public even wonder about these questions?

It is taken for granted that government can do whatever it wants so long as those doing it seem to be acting in good faith and aren’t benefitting too overtly. This trusting attitude is a far cry from the “jealousy” toward government that Thomas Jefferson prescribed for a free people.

Government has been exercising such power so long that people are accustomed to it. It’s normal. They don’t expect modest government in either domestic or foreign matters. If we think government runs amok in the economy, look at what it’s doing in Central Asia and the Middle East. Foreign policy not only gives government great scope for unmonitored mischief, it also efficiently drains the taxpayers. Like domestic intervention, foreign intervention is madly expensive—not to mention dangerous to innocents and those only suspected of crime but not yet proved guilty. Yet many people  who are distrustful of carte-blanche power over domestic affairs apply a different standard to government’s powers in foreign matters. It’s as though Foggy Bottom the Pentagon, and the CIA weren’t departments of the government — as though war,  intervention, and the resource-eating military budget had no effect on the marketplace. Freedom’s greatest advocates, including Adam Smith, Richard Cobden, and Frederic Bastiat, knew better. There could be no laissez faire at home and continuous war-making abroad.

Thus Rep. Ron Paul wisely writes, “We need to rein in our overseas empire, as quickly as possible. We need to bring our troops home, and get our economy back into the business of production, not destruction. The smartest thing we could do is admit we don’t know all the answers to all the world’s problems. If the new administration can take a closer look at real free trade and no entangling alliances, we would be much better off for it…. But unfortunately, it is not likely to happen.”

So those who understand had better get to work.

No one familiar with the origins of the Fed, or the other Progressive Era reforms, should be surprised. Those who have not studied the Progressive Era in any depth, however, are likely to believe those reforms were imposed by enlightened politicians to end abuses by big business. That is one of many fairy tales we learn in school. It’s not so, but it serves its purpose, which is to protect the left and right wings of the ruling party from the radical laissez-faire alternative. Those reforms, though of course cheered on by European-educated American intellectuals attracted to power and ambitious Progressive politicians, were in fact the brainchildren of the corporate elite. Its members disliked the vigorous market competition of the late nineteenth century because it cost them market share, and their efforts to stifle competition through mergers had failed miserably. So the elite turned to the state for protection. (See Roy Childs’s classic “Big Business and the Rise of American Statism” here.)

In no industry was this more true than in banking. There has hardly ever been anything we could call genuine free banking in America, even when a gold standard was in effect. States and the national government regulated the banks by, among other things, tying the issuance of currency to the holding of government bonds and banning interstate and intrastate branch banking.

“The banking system of the United States after 1865 was, therefore, a halfway house between free and central banking. Banking was subsidized, privileged, and quasi-centralized under the aegis of a handful of large Wall Street banks,” wrote Murray Rothbard (pdf), economist and historian. “Even at that, however, the large national banks and their financial colleagues were far from satisfied. There was no governmental central bank to act as the lender of last resort.”

The problem, Rothbard explained, was that when an inflationary boom went bust, the banks “were forced to contract and deflate to save themselves.” This was a problem of “inelasticity” of the money supply. “Translated into plain English, ‘inelasticity’ meant the inability of the banking system to inflate money and credit, especially during recessions.”

So, concerned about “inelasticity” and the rivalry of state and private banks and private trust companies, the national banks (Wall Street), led by J. P Morgan, turned their attention at the end of the nineteenth century to the establishment of a central bank.

Growing Consensus

To make a long story short, Rothbard writes in The Mystery of Banking: “The growing consensus among the bankers was to transform the American banking system by establishing a central bank. That bank would have an absolute monopoly of note issue and reserve requirements and would then insure a multilayered pyramiding on top of its notes. The Central Bank could bail out banks in trouble and inflate the currency in a smooth, controlled, and uniform manner throughout the nation.”

Essentially it would be a cartel that would allow concerted action free from competition. A cartel unsupported by government is vulnerable to independent competitors. To succeeded in defiance of market forces, a cartel needs government help, either to force everyone into it or to hamper outsiders.

While the New York bankers’ interest in central banking went back to the late nineteenth century, the Panic of 1907 provided the final impetus for action. Meetings were held, reports were issued, and legislation was drafted—all in the campaign for a European-style bank. Rothbard shows that the principals in this effort were associates of the most important groups in New York banking, particularly “the Morgans, the Rockefellers, and Kuhn Loeb.” Their point man in Congress was Sen. Nelson Aldrich, father-in-law of John D. Rockefeller, Jr.

Several men associated with these interests, including Aldrich, gathered on Jekyll Island, Georgia, in late 1910 “in a top secret conclave to draft a bill for a central bank.” As Rothbard commented, “There is no clearer physical embodiment of the cartelizing coalition of top financial and banking interests that brought the Federal Reserve System into being than the sometimes allied, often clashing Rockefeller-Kuhn, Loeb and Morgan interests, aided by economic technicians.” A plan for a central bank was drafted and, after modification, “introduced … as the Aldrich Bill, which in turn became in all essentials the final Federal Reserve Act passed in December 1913.” (With some technical changes, it later was known as the Glass bill.)

Rothbard added, “[T]he main difference between the draft and the eventual legislation is that in the former the national board of directors was largely chosen by the banks themselves rather than by the president of the United States. This provision was so blatantly cartelist that it was modified for political reasons to have the president name the board.” (The board of the New York Fed is dominated to this day by the Wall Street banking establishment. For an indication of its current difficulties see this.)

At a big conference in 1911 in Atlantic City, bankers from around the country embraced the draft legislation. As historian Gabriel Kolko summed things up: “[T]he real purpose of the conference was to discuss winning the banking community over to government control directed by the bankers for their own ends…. It was generally appreciated that the [Aldrich plan] would increase the power of the big national banks to compete with the rapidly growing state banks, help bring the state banks under control, and strengthen the position of the national banks in foreign banking activities.”

Rothbard added, “[T]he nation’s bankers, and especially the big bankers, were overwhelmingly in favor of a new central bank. As A. Barton Hepburn of the Chase National exulted at the annual meeting of the American Bankers Association in August 1913, in the course of his successful effort to get the bankers to endorse the Glass bill: ‘The measure recognizes and adopts the principles of a central bank. Indeed, if it works out as the sponsors of the law hope, it will make all incorporated banks together joint owners of a central dominating power.’”

Thus, summing up the thinking of Edward Hurley, vice chairman of the Federal Trade Commission in 1915, Rothbard wrote, “The railroads and shippers had the ICC [Interstate Commerce Commission], the farmers had the Agriculture Department, and the bankers had the Federal Reserve Board.”

Why does this matter now? The major banks wanted to inflate in unison and with impunity, reaping the profits of the perpetual boom they thought they could create. That, they understood, required a central bank. But fiat money inflation is the people’s nemesis. It knocks the economy out of alignment with their preferences, allocates incomes politically, robs people of their purchasing power, and throws them out of work when the inevitable bust comes. In this libertarian “class struggle,” the special interests prevailed. The people’s best interests lie in free banking and hard money.

The story, titled “Geithner, Member and Overseer of Finance Club,” chronicles Treasury Secretary Timothy Geithner’s close and repeated contacts with Wall Street moguls when he was the president of the Federal Reserve Bank of New York and on his way to becoming the “leading architect of [the financial] bailouts.” The Times story did not quite suggest corruption on Geithner’s part. Rather, its orientation is more systemic, the point being that whoever regulates banks, especially those on Wall Street, is bound to be caught up in a particular culture in which regulators and regulated tend to see things from the same perspective. It’s not that Geithner would knowingly put the interests of Wall Street ahead of those of the people in general. It’s that he would tend to equate those interests, even when they objectively diverge.

As the Times put it, “His actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.”

In fact, as the New York Fed is structured, the line between regulator and regulated is quite fine. The bank, the Times notes, oversees “many of the nation’s most powerful financial institutions.” At the same time, “The New York Fed is, by custom and design, clubby and opaque. It is charged with curbing banks’ risky impulses, yet its president is selected by and reports to a board dominated by the chief executives of some of those same banks. . . . [T]op executives of global financial giants fill many seats on the board. In recent years, board members have included the chief executives of Citigroup and JPMorgan Chase, as well as top officials of Lehman Brothers and industrial companies like General Electric” (emphasis added).

As to be expected, Geithner’s contact — personal and professional — with “bankers, hedge fund managers and others” was hardly infrequent. His meal and meeting partners were top people from Goldman Sachs, Citigroup, Morgan Stanley, and JPMorgan Chase. Some of these get-togethers were at the executives’ homes.

Geithner began his career with Kissinger and Associates, an international consulting firm founded by former Secretary of State Henry Kissinger, a Rockefeller family confidant. Geithner worked in various capacities for Treasury beginning in 1988, spent some time at the Council on Foreign Relations, then moved to the International Monetary Fund. His mentor is Robert Rubin, who was Treasury secretary under President Clinton. Before that, Rubin had been a top executive at Goldman Sachs. After leaving Treasury he went to Citigroup, “the largest bank under his [Geithner’s] supervision” at the New York Fed.

Thus before he took over the New York Fed at age 42, he was a man with deep connections to the financial establishment. Rubin was on the search committee that recommended Geithner for the job. Sanford Weill, a major Goldman Sachs figure, was on the board of the bank. “He didn’t have a lot of experience in dealing with the industry,” Weill said of Geithner. Thanks to what Weill calls “his willingness to listen to people,” however, he apparently quickly learned the ropes from the people he was monitoring.

Financial Meltdown

When Wall Street’s mortgage-related problems, which Geithner did not foresee, began to surface, he worked behind the scenes for a plan favored by Citigroup and others to reduce their capital requirements. Around this time, late 2007, when the company was looking for a new CEO (after Rubin became chairman), Weill proposed Geithner for the job. (Of course, he didn’t take it.)

As the government-built financial house of cards began to tumble, Geithner was a key designer of the bailouts, along with then-treasury secretary Henry Paulson (another Goldman alumnus) and Fed chairman Ben Bernanke. Geithner helped get JPMorgan Chase to assume control of Bear Stearns – with the aid of a $29 billion government check in exchange for Bear’s toxic paper.

When AIG (American International Group) started tottering, Geithner, again, was there. While looking for private money to save the insurance giant, he enlisted Goldman Sachs to assist in the rescue, even though AIG thought that would involve a conflict of interest. When the government took on the rescue itself, “A.I.G.’s trading partners, including Goldman, were compensated fully for money owed to them by A.I.G.”

As New York Fed chief, it was Geithner’s idea to have the FDIC guarantee the debt of banks and investment companies. “Mr. Geithner’s program was enacted and to date has guaranteed $340 billion in loans to banks,” the Times wrote. (The government has collected about $7 billion in fees from the banks.)

Finally, Geithner raised eyebrows by awarding three no-bid contracts, worth about $71 million, to the BlackRock financial company for help in managing the iffy assets bought by the Fed bank. “Mr. Geithner socialized with Ralph L. Schlosstein, who founded the company and remains a large shareholder, and has dined at his Manhattan home. Peter R. Fisher, who was a senior official at the New York Fed until 2001, is a managing director at BlackRock” reports the Times. Geithner says no other company had the expertise to handle the contracts.

Since becoming Treasury secretary in the Obama administration, Geithner has continued to devise ways to help struggling giant financial companies. For example, he launched a program to provide FDIC-backed loans to hedge funds for the purchase of consumer-debt-backed securities. Thanks to Geithner and others, the U.S government has committed the taxpayers to $12.8 trillion in various forms of assistance to the financial industry. That’s almost equal to the country’s GDP.

Geithner also advocates comprehensive new powers that would permit the government to take over (“rescue”) not only banks, but insurance and other financial companies, such as hedge funds, whose failure would allegedly pose a systemic risk.

The extent of Geithner’s connections are startling — but only until one understands the origins of the Federal Reserve System. Seen in that context, the Geithner saga seems more like business as usual. You’ll see why next week when we look at the Fed’s origins.

In the past few years, the cartels and other drug trafficking organizations have extended their reach across the United States and into Canada. Law enforcement authorities say they believe traffickers distributing the cartels’ marijuana, cocaine, heroin, methamphetamine and other drugs are responsible for a rash of shootings in Vancouver, British Columbia, kidnappings in Phoenix, brutal assaults in Birmingham, Ala., and much more.

United States law enforcement officials have identified 230 cities, including Anchorage, Atlanta, Boston and Billings, Mont., where Mexican cartels and their affiliates “maintain drug distribution networks or supply drugs to distributors,” as a Justice Department report put it in December.

In response the Obama administration says it will send nearly 500 additional agents to reinforce the Border Patrol, Immigration and Customs Enforcement, and Bureau of Tobacco, Firearms and Explosives.  Millions of dollars and military equipment, including three Black Hawk helicopters, will be given to the Mexican government. “If anything, this is really the first wave of things that will be happening,” said Homeland Security Secretary Janet Napolitano. She’s also considering requests by the governors of Texas and Arizona to deploy the National Guard.

These events are also fueling sentiment for new control of guns, especially so-called “assault weapons” (a bogus category dreamed up by gun controllers) since it has been reported that the cartels are entering the United States to buy guns to take back to Mexico.

Does anyone still think the “war on drugs” is a good idea?

That may strike some people as an odd question under the circumstances, so let’s take it from another direction. Have you seen the news stories about the violence on the border being perpetrated by the Mexican whiskey and cigarette cartels?

No? That’s probably because there was no such violence and are no such cartels.

So why are there violent cartels in the marijuana, cocaine, and heroin trades but not in the whiskey and cigarette trades?

All together now: prohibition.

Of course the politicians blame everything and everyone but themselves for this spreading violence. “Our insatiable demand for illegal drugs fuels the drug trade,” Secretary of State Hillary Clinton said. “Our”? Including hers? “Our inability to prevent weapons from being illegally smuggled across the border to arm these criminals causes the deaths of police officers, soldiers and civilians.” Her answer, in addition to sending the Mexican government taxpayer money, is to go after consumers of drugs and manufacturers and dealers of guns she doesn’t like.

Excuse me? Drug users and gun dealers are to blame for drug-cartel violence? That makes no sense. If it did, then drinkers and smokers, along with gun dealers, would be creating violence, too. What’s missing?

Once again in unison: prohibition. Who brought us prohibition?  Politicians. Every politician, bureaucrat, and agent who facilitates or enforces prohibition is an accomplice in the violence because he or she helps to create the conditions in which thugs have a comparative advantage in dealing drugs.

Variety of Evils

For years advocates of free trade in drugs—that is, basic rights to life, liberty, and property for drug consumers, producers, and merchants—have pointed out that prohibition, in addition to being an immoral invasion of liberty by the State, sets in motion a variety of concrete evils that harm innocent people. (No one has been more consistent and rigorous in this than Thomas Szasz). These evils include the corruption of law enforcement, violent crime, and the expansion of intrusive government. Besides these domestic evils, the U.S. government has alienated farmers in foreign lands by helping to destroy their crops and livelihoods. If that’s not terrorism, nothing is. Crop destruction has been a recruiting tool for guerilla organizations, while black-market profits finance them and others with malign intent.

Few listened to these Cassandras against the anti-drug crusade. Maybe they will listen now.

While violent gangs that make their money selling drugs in the black market are murdering and kidnapping people, invading homes, and committing other atrocities, the politicians have nothing to say but the same bromides they’ve been repeating for years. Thinking we’re either simpletons or amnesiacs, they expect us to be comforted by their words. (Will they be right?) They promise to defeat the cartels, crack down on drug use, and disrupt the gun trade. It won’t work. It’s never worked. It can’t work. Black-market operators are always steps ahead of the plodding bureaucrats. Break up one gang and another emerges. The drugs keep flowing (there’s plenty of bribe money), and consumers will have what they want when they want it. The profits made possible by the black market are powerful incentives to keep the industry going. Government is impotent.

Out of Business

Yet the gangs could be put out of business overnight. How? By removing the criminal penalties for the production, trade, and consumption of all drugs; by bringing the black market into the open, so disagreements can be resolved through civil channels and the talent for violence is no longer an advantage; by dissolving the extraordinary profits that illegal industries always reap.

Yes, it is that easy.

People will recoil. We can’t do that! No? Then accept as normal the unspeakable violence that is starting to spread from city to city, because that is the alternative to the stubborn refusal to end the “war on drugs,” which is really a war on people. Even full police-state tactics will not be able to control it, though that won’t stop demagogic politicians from giving them a try. (They can’t keep drugs out of prisons!)

I don’t expect the multitude of officials who depend on the drug war for their livelihoods and power to endorse an end to prohibition. They have shown themselves more than willing to accept the violence (against others) as the price of their ambition. The new threat to us is an opportunity for them to amass more power, bigger budgets, and higher salaries.

But the rest of us have no reason to support the complex of government and “private” tax-financed agencies that grow fat prosecuting this detestable war. The worn-out rationalizations can’t stand examination. Prohibition keeps no one from getting any drug he wants at an affordable price. On the contrary, it encourages the creation of cheaper, more potent drugs, just as alcohol prohibition replaced wine and beer with hard liquor. (More bang in a more compact form.) Prohibition doesn’t keep our children safe. It makes drugs into enticing forbidden fruits and pushes the trade into less visible channels. Drugs aren’t “dangerous,” though people are capable of doing harmful things with drugs and many other things. (Jacob Sullum’s  Saying Yes is an eye-opening book that I highly recommend.) Addiction is not a disease; it’s a choice.

Everything the drug warriors have said is wrong—and often a conscious lie.

Drugs are to our society what Eurasia and East Asia were to Oceania in Orwell’s 1984: a convenient conjured-up demon to justify expansion of power and the usurping of liberty—in the name of keeping us safe.

What will it take, if not the current violence from Mexico, to make people see through the scam?

Look around. It’s our self-proclaimed protectors from whom need we protection most.

There can be no doubt anymore as to what the government is doing as the economy implodes; it is printing money as fast as it can in hopes that people will grab the cash and start spending. Furthermore, the Fed’s actions bring together the twin frauds of monetary and fiscal policy in a double-whammy on what is left of the economy. It is true that the markets jumped when the news of Bernanke’s move hit the streets, but within a day, buyers’ remorse had set in along with the very things that one might expect to see when inflation has become the economic watchword.

According to Keynesian macroeconomists, governments can follow two sets of policies when attempting to “fine tune” the economy. The first is monetary policy, in which the central bank manipulates bank reserves to expand or contract the amount of money in the system. The second is fiscal policy, in which the government attempts to drive and guide the economy through taxation, spending, and borrowing.

Keynesians admit, unfortunately, that there are limits to both actions. On the monetary side, the Fed can fill up bank reserves (as it has done recently through both its bailouts and purchases of government bonds), but if banks do not see good lending opportunities, the new money does not circulate, a situation Keynesians call a “liquidity trap,” while others refer to it as the Fed “pushing on a string.”

Thus the Keynesians (including Paul Krugman) believe that active fiscal policy is needed to stimulate an economy in the doldrums. Government borrows from the credit markets or takes in taxes and then spends the money on various “stimulus” activities such as public works or anything else politicians want. (Tax cuts also are part of “fiscal policy,” although it is clear that the current administration does not want any part of reducing taxes.)

However, there also are limits to what fiscal policy can do, given the limitations of taxation and borrowing. There is only so much a government can take in taxes, and not everyone is jumping to purchase the Treasury’s latest round of debt. Therefore, what is a government to do?

Bernanke has provided the “solution,” if one can call it that. The Fed is going to become a buyer of “first resort” for a lot of government paper, which means that Bernanke is not going to make the government go through the possibly-humiliating experience of putting bonds out for sale with no takers.

(Secretary of State Hillary Clinton recently told Chinese monetary authorities they had better continue to purchase U.S. Treasuries, since, in her words, “We are all in this together.” Because the U.S. government is steering the economy over the cliff, everyone supposedly will be much happier if the Chinese and Japanese also point their economies in the same direction. Call it the March of the Lemmings.)

For all of the talk of boldness, however, there is nothing courageous about government authorities printing wads of money. The government in Zimbabwe has been doing it for some time, and the results have followed the proud tradition of Germany in 1923, Argentina, and Bolivia. Unfortunately, Bernanke and his Ivy League-educated friends seem to believe that their “vast intelligence” and knowledge of monetary issues will keep them from steering the country in the same disastrous direction that other inflation-minded cranks of the past have gone.

Inflation and the disaster it brings are no mystery. Instead of putting the economy back on the right road, Bernanke, Congress, and the Obama administration are shunting the economy down the wrong track and tying down the throttle. The markets soon enough will let everyone know what is happening – even if the voters and the state-worshiping media never catch onto the government’s latest inflationary caper.

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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?

By Lawrence W. Reed and Benjamin Stafford

Editor’s Update:  Since the initial publication of this essay, the co-authors have assumed new positions. Lawrence W. Reed is president of the Foundation for Economic Education (FEE) and Benjamin D. Stafford is director at Training Leaders International.

Nicky Winton has flown two more times in an ultra-light aircraft, the most recent being on his 99th birthday in 2008, maintaining his status as the world’s oldest man to do so. On May 18, 2009, he turned 100.

The truest hero does not think of himself as one, never advertises himself as such and does not perform the acts that make him a hero for either fame or fortune. He does not wait for government to act if he senses an opportunity to fix a problem himself. On July 27, 2006 in the quiet countryside of Maidenhead, England, we spent several hours with a true hero: Sir Nicholas Winton. His friends call him “Nicky.”

It is not enough to mock these editorials, given that it seems I might be piling onto yet another troubled company. The larger point is that our government, not to mention the mainstream of public intellectuals, is claiming that if it, as well as governments around the world, can spend enough, perhaps we can climb out of this recession.

If one believes that public intellectuals like Paul Krugman are beyond reproach, then there is nothing to read here. Should the U.S. government be able to print enough money and shove it out into the larger economy, then somehow that is supposed to magically lift the economy back into a state of prosperity, or at least preserve it until a recovery occurs.

It is time someone understood and told the truth. Actually, some people have been telling the truth, but many public intellectuals, not to mention newspaper editorialists and those who now hold power in Washington, have been telling a much different story: all it takes is a little more borrowing and spending. (Actually, they are saying that it takes a lot more borrowing and spending and that the printing press will work magic.) Unfortunately, people who tell the truth are neither in political power nor in control of the major editorial offices.

We have to remember that understanding the truth and power are not exactly synonymous. In fact, those who often have held power have not understood or told the truth, and that is what is happening today. Americans are being told that all it takes to make the economy recover is for the U.S. government to borrow trillions of dollars and direct it to be spent wherever the politicians wish.

It is intuitive to most people that we cannot spend our way to prosperity. For example, if I were to tell someone who was going through hard economic times that all it would take to pull them out of their troubles would be to obtain a few more credit cards and max out, they most likely would think I had lost my mind. Yet, we are told that governments somehow can spend profligately and create prosperity.

The reason that people seem to think governments can magically create prosperity is that governments have a legal monopoly on creating money. As I emphasized several weeks ago, the creation of new “money” by governments does not create wealth. Indeed, it does the opposite; it makes most people worse off than before the new money was created.

There is another reason that governments cannot spend a country into prosperity: an economy is not a perpetual motion machine that is driven by new money, despite what one might read on the New York Times editorial pages. Economies grow when entrepreneurs can take resources and create more goods than before. Period. They cannot grow any other way, and they certainly cannot grow when governments shower people with newly printed money. If that were the case, the countries like Zimbabwe, Bolivia, and Germany in 1923 would have been the richest countries in the world.

The U.S. economy will grow only when people begin to save money and entrepreneurs have the freedom to find new and improved ways to use resources. Unfortunately, the powers that be have decided otherwise, and we are going to have to learn some painful lessons–again.

Most commentators I have read are treating the “stimulus” as a mechanism through which the government is able to “get money into the hands of consumers” in order to cover a supposed “large hole” in consumer spending until the economy “recovers.”  Thus, according to this reasoning, Obama simply is throwing out a lifeline to people who really can use the money.

However, that is not what is happening, and the sooner we understand what the government is doing, the sooner we can speak out against it.  I am going to make a statement that will seem almost conspiratorial in nature, and I am decidedly not a conspiracy theorist.  Nonetheless, I am going to say it: there will be no recovery, and the government is going to make sure that it does not happen.

Yes, I know this seems counterintuitive.  Everyone supposedly knows that the politicians in power want a strong economy so they can get credit for it.  Sorry, people, but that is not how politicians operate.

First, no politician–no president, senator, representative, or judge–can “provide prosperity.”  At best, they can help create a playing field in which the participants in an economy can face consistent laws, protection of property rights, enforcement of contracts, and the other things that entrepreneurs and business owners need to create a prosperous economy.  In other words, the “positive” role that legislators can play is largely negative in practice; it is those things that legislators and others do not do that often help to determine whether or not a nation’s economy will be prosperous.

Second, politicians love to be seen as doing something.  Look at the press treatment given to those members of Congress who have voted against the “stimulus” and to those few governors who have said they won’t take the cash.  (The editorial page of the New York Times seems to be “Stimulus Promotion Central,” and anyone who opposes this legislation is portrayed either as evil or just plain stupid.)

Third, and most important, politicians do not gain votes by doing nothing for their constituents.  A politician who stands before voters and declares, “I have not voted to send you money, but instead voted to create an arena in which entrepreneurs and business owners can help create a stronger economy without government largess,” is not a politician who is going to win an election.

Politicians cannot help individuals who are able to find work in a recovering economy.  However, if an economy consistently has 10-15 percent unemployment and people have to ask politicians for lots of favors, especially when it comes to employment, that presents a wonderful opportunity for those in power.

Indeed, I believe that this administration plans to institutionalize double-digit unemployment and turn the United States into a European-style social-welfare system in which unemployment is high and the economy grows slowly at best, a condition that has been called “Eurosclerosis.”  To those who claim Americans will not put up with this state of affairs, I remind readers that during the New Deal, Franklin Roosevelt and his political allies won election after election despite high unemployment and slow growth.  A recent Thomas Friedman column approvingly lays the new roadmap to this brave, new economy.

From the new financial restrictions to new draconian environmental policies, the government clearly is going to stand in the way of new economic growth.  The “green jobs” path to greater employment is just a myth.  For every new “green job” created, many other sources of employment are destroyed.

Right now, the government is talking recovery.  A year from now people will be trying to survive, and it always is easier to survive when those in power are on your side.

• “News Flash: FDR Didn’t Restore Prosperity,” by Sheldon Richman
• “Rome and the Great Depression,” by Lawrence W. Reed
• “The Great Depression According to Milton Friedman,” by Ivan Pongracic
• “The Great Escape from the Great Depression,” by Robert Higgs
• “Mysteries of the Great Depression Finally Solved,” by Mark Skousen
• “The Great Duration, 1929 – 1941,” by Robert Higgs
• “The Great Depression,” by Hans Sennholz
• “Myths of the New Deal,” by Burton Folsom Jr.
• “Great Depression,” by Gene Smiley (From the Concise Encyclopedia of Economics.)
• “Our Economic Past~The Great Contraction, 1929-33,” by Robert Higgs

Books About the Great Depression

Great Myths of the Great Depression By Lawrence W. Reed

“Old myths never die; they just keep showing up in economics and political science textbooks.” – Lawrence W. Reed

Read Online or purchase hard copies available in FEE’s Store

Listen to Lawrence W. Reed discuss the “Great Myths” on the Mike Rosen Show.

New Deal or Raw Deal:How FDR’s Economic Legacy Has Damaged America By Burton W. Folsom Jr.

In this shocking and groundbreaking new book, economic historian Burton W. Folsom exposes the idyllic legend of Franklin D. Roosevelt as a myth of epic proportions.

Buy from Amazon

FDR’s Folly by Jim Powell

In FDR’s Folly, historian Jim Powell argues that it was in fact the New Deal itself, with its shortsighted programs, that deepened the Great Depression, swelled the federal government, and prevented the country from turning around quickly.

Buy from Amazon

The Roosevelt Myth by John Flynn

“This book is in no sense a biography of Franklin D. Roosevelt. It is rather a critical account of that episode in American politics known as the New Deal. As to the President, it is an account of an image projected upon the popular mind which came to be known as Franklin D. Roosevelt. It is the author’s conviction that this image did not at all correspond to the man himself and that it is now time to correct the lineaments of this synthetic figure created by highly intelligent propaganda, aided by mass illusion and finally enlarged and elaborated out of all reason by the fierce moral and mental disturbances of the war. The purpose of this book, therefore, is to present the Franklin D. Roosevelt of the years 1932 to 1945 in his normal dimensions, reduced in size to agree with reality.” – John Flynn

Buy from Amazon

The Forgotten Man by Amity Shales

“Its duration and depth made the Depression “Great,” and Shlaes, a prominent conservative economics journalist, considers why a decade of government intervention ameliorated but never tamed it.” -Booklist

Buy from Amazon

America’s Great Depression By Murray Rothbard

“To portray the interventionist efforts of the Hoover administration to cure the depression we may quote Hoover’s own summary of his program, during his Presidential campaign in the fall of 1932.” -Murray Rothbard

Download PDF

[W]e entered the slump with a core inflation rate of about 2.5 percent. If we experienced a disinflation comparable to that of the 1980s, that would mean ending up with deflation at a rate of -3.5 percent.

And bear in mind that neither the CBO nor the Obama team really explains where recovery comes from; it’s just assumed.

So tell me why we aren’t looking at a very large risk of getting into a deflationary trap, in which falling prices make consumers and businesses even less willing to spend. Tell me why this risk wouldn’t remain high, though lower, even with the Obama plan, which as far as I can tell is expected to reduce cumulative excess unemployment by about a third.

We also see headlines like “Deflation risk stalks global economy” (Oxford Analytica’s Daily Brief Services) and read warnings of deflation from St. Louis Federal Reserve President James Bullard, who:

urged policymakers to take steps to guide the economy away from the deflationary outcome, warning that failure to prevent ongoing deflation could be “particularly pernicious,” warning that the already crumbling housing market could see further deterioration.

“With sustained deflation, the foreclosure experience that we have seen in the subprime market could generalize to a wider spectrum of homeownership,” he warned, an outcome that would likely prolong the recession.

The scenario supposedly works as follows: (1) consumer prices fall, (2) producer prices then fall, cutting the “purchasing power” of workers, (3) consumer prices fall even more, and (4) payrolls fall even more.  This allegedly is a never-ending process until the economy is obliterated in Krugman’s “deflationary trap.”  Thus supposedly the only thing that can stop the bleeding is for government to print money and spend it directly in the economy–which Keynesians call “fiscal policy.”

However, there is another story that never seems to be told: deflation is not an act of destruction but rather the economy’s healing itself from the inflationary boom that has busted.  That’s right; far from being disastrous, deflation is a sign that the economy is moving in the direction of recovery.

The key to understanding this is realizing that money is not a neutral good.  As a medium of exchange used in a proper way, money is a productive marvel that makes the modern economy a possibility.  However, we should not forget that in an economy, there are real relationships between goods and factors of production.  When these relationships are in reasonable balance, the economy does not fall into the boom and bust stages.

However, when government authorities expand the amount of money, they also change the relationships between goods and factors, which means that we have relative changes in the values of things.  Certain goods and factors during the early stages of an inflation-fed boom become more valuable relative to other things.  (We saw this during the housing boom, when housing prices skyrocketed even though prices of other goods were not rising as quickly.)

Resources quickly are poured into the production of these highly valued goods, but that boom cannot be sustained.  As the Austrian theory of the business cycle tells us, the overvalued goods and factors now find their real value is less than what originally it was predicted to be, which means that in order for the economy to get back into balance, prices for those goods and factors used to make those goods must fall.

Contra Krugman, this is not a downward spiral.  It is the economy getting things back into balance so a recovery can begin.  When the government tries to reflate the financial bubbles, as we see now, such actions actually prevent the recovery from occurring.  That is what happened during the 1930s with the New Deal, and apparently the government today wants to repeat that sorry tale.

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.

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Reed wrote:

In a sense, this fallacy is a summary of the previous five.

Some actions seem beneficial in the short run but produce disaster in the long run: drinking excessively, driving fast, spending blindly, and printing money, to name a few. To quote the venerable Henry Hazlitt again, “The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences.”

Politicians seeking to win the next election frequently support policies which generate short- run benefits at the expense of future costs. It is a shame that they sometimes carry the endorsement of economists who should know better.

The good economist does not suffer from tunnel vision or shortsightedness. The time span he considers is long and elastic, not short and fixed.

Today the prime example of this fallacy is the so-called stimulus bill, which President Barack Obama and his supporters are touting as a way to save our declining economy.  According to the President and others, a short-term burst of spending will fill the hole of lost consumption and enable the economy to repair itself.  New York Times columnist Bob Herbert, an Obama supporter,  declares as he excoriates those who oppose this latest orgy of borrowing and spending:

[The opponents] act as if they don’t understand that in this radical economic downturn the demand for goods and services has fallen off a cliff, and that government spending is needed — and needed quickly — to replace a large portion of that lost demand.

The goal is twofold: to alleviate some of the enormous suffering (something that is easily understood if you have a heart), and to revive the battered economy (equally easy to understand by anyone with a brain).

Herbert approvingly quotes Obama to rebut those who say the “stimulus” bill was really just a spending bill. “What do you think a stimulus is? [Spending] is the whole point.”

Herbert has based his defense of the “stimulus” precisely on short-run thinking.  People are hurting now.  They need help now.  We must spend and spend now. Somehow, the future will take care of itself if only we act now.

Yet not a thought is given to the consequences of taking on almost a trillion dollars more in debt overnight—the inflation, the economic distortion, the future taxes, and the hardship they will bring. The very resources that are needed for economic recovery will be consumed by politicians and bureaucrats.

Pointing out the fallacy of the short run is not nitpicking.  Those who fall to its lure really are paving the way for a bigger crisis later.  The “battered economy,” as Herbert calls it, cannot be repaired by more government borrowing, spending, and printing money.  Whatever short-term fix that might occur will give way to even longer-term tragedy.

Good economists recognize this important fact.  Unfortunately, bad economists seem to be controlling the debate. We will be poorer for it.

Next Week: The fallacy of economics by coercion

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.

In light of the resurrection of the at least twice-interred Keynes (1946 and some time in the 1970s, the long run and the longer run), I decided to revisit some of the gentleman’s writings. It occurred to me that before people started tattooing Keynes’s name on their forearms, they might like to become better familiar with what he actually believed. I realize that many who profess Keynesian views on the economy may not feel obliged to embrace his political or social views. But the categories may not be as distinct as they think. Keynes, at least, didn’t seem to think so. Let us recall that in 1936 he introduced the German edition of The General Theory of Employment, Interest, and Money by noting that “[T]he theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state [emphasis added], than is the theory of the production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire.” My translation: your system and mine are made for each other.

For the purposes of today’s symposium, I chose Keynes’s 1926 essay, “The End of Laissez-Faire,” which was based on lectures he had given around that time. I’ll skip his synopsis of the intellectual history of individualism and cut to the chase.

One of the revealing passages of the essay is where Keynes explains why he rejects “State Socialism.”  But first he enumerates those features which he does not find  objectionable: “I criticise doctrinaire State Socialism, not because it seeks to engage men’s altruistic impulses in the service of society, or because it departs from laissez-faire, or because it takes away from man’s natural liberty to make a million, or because it has courage for bold experiments. All these things I applaud. [Emphasis added.] I criticise it because it misses the significance of what is actually happening; because it is, in fact, little better than a  dusty survival of a plan to meet the problems of fifty years ago, based on a misunderstanding of what someone said a hundred years ago.”

In other words, the problem with State Socialism is only that it’s out of date and confused. Other than that, it has much to recommend it. It engages our altruistic impulses, and it isn’t hung up on the freedom to make lots of money. Best of all, it isn’t afraid to experiment. To fully appreciate Keynes’s sentiment, take a moment and remind yourself what was going on around this time in the Bold Socialist Experiment taking place to the east.

Keynes prefers the “semi-socialism” of “semi-autonomous corporations.” (We might call this fascism.) He writes, “It is true that many big undertakings, particularly public utility enterprises and other business requiring a large fixed capital, still need to be semi-socialised. But we must keep our minds flexible regarding the forms of this semi-socialism. We must take full advantage of the natural tendencies of the day….” Like his fellow Progressives, he had nothing against giant monopoly firms; quite the contrary — as long as they are directed at the public interest and not private profit. What he disliked was decentralization and money making.

“I suggest, therefore, that progress lies in the growth and the recognition of semi-autonomous bodies within the State-bodies whose criterion of action within their own field is solely the public good as they understand it, and from whose deliberations motives of private advantage are excluded, though some place it may still be necessary to leave, until the ambit of men’s altruism grows wider, to the separate advantage of particular groups, classes, or faculties — bodies which in the ordinary course of affairs are mainly autonomous within their prescribed limitations, but are subject in the last resort to the sovereignty of the democracy expressed through Parliament.

“I propose a return, it may be said, towards medieval conceptions of separate autonomies.” Now that sounds progressive.

Deliberate Control

Keynes proposes to cure the great economic evils that are “the fruits of risk, uncertainty, and ignorance.” These are what create disparities in wealth and unemployment. “I believe that the cure for these things,” he writes, “is partly to be sought in the deliberate control of the currency and of credit by a central institution, and partly in the collection and dissemination on a great scale of data relating to the business situation, including the full publicity, by law if necessary, of all business facts which it is useful to know. These measures would involve society in exercising directive intelligence through some appropriate organ of action over many of the inner intricacies of private business, yet it would leave private initiative and enterprise unhindered.”

Keynes was a master euphemist. For him, government, which at its foundation is nothing but legalized aggressive force, is simply “society . . . exercising directive intelligence through some appropriate organ of action.” This organ will centrally control money and credit, determining who does and doesn’t have access to capital. (He endorses this idea again ten years later in The General Theory.) Yet initiative and enterprise will be “unhindered.” Keynes was a magician as well.

Keynes elaborates: “I believe that some coordinated act of intelligent judgement is required as to the scale on which it is desirable that the community as a whole should save, the scale on which these savings should go abroad in the form of foreign investments, and whether the present organisation of the investment market distributes savings along the most nationally productive channels. I do not think that these matters should be left entirely to the chances of private judgement and private profits, as they are at present.”

We are to presume that leaving these matters to politicians and bureaucrats entails no chance. Unlike the money-motivated, they are not moved by “animal spirits.” Can you imagine a man being taken seriously after proposing that the government — “some coordinated act of intelligent judgement” — dictate how much the population should save? (Bear in mind that Keynes thought saving was antisocial.)

The Scary Part

As he nears the end of his essay, Keynes gets downright scary in thinking of things for the state to do that “at present are not done at all.” I shall simply quote him:

“The time has already come when each country needs a considered national policy about what size of population, whether larger or smaller than at present or the same, is most expedient. And having settled this policy, we must take steps to carry it into operation. The time may arrive a little later when the community as a whole must pay attention to the innate quality as well as to the mere numbers of its future members.”

Well, no surprise here. If we can intelligently design an economy, why not the human race itself? The eugenics movement once teemed with Progressives, although after the program’s gory bold experiment in totalitarian Germany, some biographies were airbrushed to obscure that fact.

Keynes could speak like a politician whose last intention was to frighten anyone. He winds up by saying that “These reflections have been directed towards possible improvements in the technique of modern capitalism by the agency of collective action. There is nothing in them which is seriously incompatible with what seems to me to be the essential characteristic of capitalism, namely the dependence upon an intense appeal to the money-making and money-loving instincts of individuals as the main motive force of the economic machine.”

Remember that when he says “capitalism,” he does not mean the free market. He means the sort of state-regulated economy then in practice in both Britain and the United States, complete with central bank. The laissez-faire whose end he foresaw and favored was not an existing system but a philosophy. He laments that the Great War, with its “centralised social action on a great scale,” had not turned the old stalwarts into reformers despite its impressive record. “War socialism unquestionably achieved a production of wealth on a scale far greater than we ever knew in peace, for though the goods and services delivered were destined for immediate and fruitless extinction, none the less they were wealth [!].” He concedes, however, that the waste and obliviousness to cost were “disgusting.” Minor details.

For Keynes, capitalism is the system driven by the “money-motive of individuals.” There must be a better way, but most of us are too reactionary to see this.

“A preference for arranging our affairs in such a way as to appeal to the money-motive as little as possible, rather than as much as possible, need not be entirely a priori, but may be based on the comparison of experiences.. . . On the other hand, most men today . . . do not doubt the real advantages of wealth. Moreover, it seems obvious to them that one cannot do without the money-motive, and that, apart from certain admitted abuses, it does its job well. In the result the average man averts his attention from the problem, and has no clear idea what he really thinks and feels about the whole confounded matter.”

Not to worry. The Enlightened, such as Keynes, will show the way to a new world.

“Confusion of thought and feeling leads to confusion of speech. Many people, who are really objecting to capitalism as a way of life, argue as though they were objecting to it on the ground of its inefficiency in attaining its own objects. Contrariwise, devotees of capitalism are often unduly conservative, and reject reforms in its technique, which might really strengthen and preserve it, for fear that they may prove to be first steps away from capitalism itself. Nevertheless, a time may be coming when we shall get clearer than at present as to when we are talking about capitalism as an efficient or inefficient technique, and when we are talking about it as desirable or objectionable in itself. For my part I think that capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.” (Emphasis added.)

He sought to assure us that with him and like-minded people at the helm, we were in good hands. His spiritual descendants do the same today. Who will protect us from our protectors?

Barack Obama says his roughly $800 billion American Recovery and Reinvestment Plan could save or create between three and four million American jobs by 2010. Many of these proposed jobs are New Deal-esque, involving the building or repairing of government infrastructure, such as roads, bridges, and buildings. There is a modern twist, of course, with the promise to develop “alternative energy sources” such as wind farms, solar panels, fuel-efficient cars, and the like. “The jobs we create will be in businesses large and small across a wide range of industries,” Obama promised, “and they’ll be the kind of jobs that don’t just put people to work in the short term, but position our economy to lead the world in the long-term.” (Emphasis added)

First, one may ask: how can Obama and his economic advisers know what kind of jobs will position our economy to “lead the world” in the long-term? Indeed, how can we expect anyone to know what kind of jobs will be able to offer such a guarantee of wealth and security, considering the enormous complexity of our world, which includes billions of individuals constantly making decisions based on their own expectations about the future, as well as potential ideological shifts and the inevitable changes in policy funding and support they bring. This is without considering technological advancements that can turn the best-laid central plans into white elephants. There is little an individual or group can possibly know or predict for the future, particularly on such a large scale as three to four million jobs.

However, assuming Obama and his advisers are right — that his plan will indeed save or create that many jobs — what proof do we have that it will leave us better off than if it’s not implemented at all?

In his essay “What Is Seen and What Is Not Seen,” the French classical-liberal economist Frédéric Bastiat explained that there is a tendency to only recognize the intended consequences of an action (what is seen). However, there are often other, subsequent effects that are not perceived as connected to the action (what is not seen). Furthermore, the short-run effects of an action can sometimes be quite different from the longer-run, unseen consequences.

In the case of public works, Bastiat explained that government produces nothing independent from the resources and labor it diverts from private uses. When government borrows money to create jobs, what is readily seen are people employed and the fruits of their labor. However, what is generally not considered are the many things that could have been produced if the capital had not been removed from the private sector to fund the government programs in the first place. Such policies necessarily benefit some (the favored workers) at the expense of others (those who would have had the jobs that were not created) and eventually the taxpayers who have to repay the debt.

New Deal

Bastiat’s theory is evidenced in New Deal public-works projects, which not only failed to help lift the economy out of the Great Depression, but also served to make it “great.”

First, many jobs created under FDR had little benefit to anyone other than those employed, such as studying the history of the safety pin, collecting campaign contributions for Democratic Party candidates, chasing tumbleweeds, and cataloguing 350 different ways to cook spinach, (See Lawrence Reed’s
Great Myths of the Great Depression.)

In addition, much of the “job creation” was directed according to political preferences, rather than where jobs were arguably needed most. For instance, a disproportionate amount of public relief went to western “swing states” expected to help Roosevelt win votes in future elections, rather than to the poorest states, such as those in the South, which were already solidly Democratic during this period. Relief and public-works spending seemed eerily to increase during election years, and it has been shown that votes for FDR correlated closely with jobs and other special government benefits given. (See Burton Folsom’s New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America.)

New Deal job-creation projects also impeded productivity by discouraging private firms from adopting new technologies. A prime example is a government farm in Arizona where a dairy crew discovered that it could turn a profit only by using milking machines, rather than milking by hand, and eliminating some the jobs. But that would have violated the terms of a government loan. So the machines were not brought in, and the staff members who made the suggestion were fired. (See Amity Shlaes’s New Deal Jobs Myth.)

Roosevelt is still celebrated for his job-creating measures because the people who gained employment were easily seen. However, what wasn’t (and isn’t) so easily recognized is that to pay for his public-works experiments, the government sucked up much of the available capital by selling bonds and collecting taxes, including a 5 percent withholding tax on corporate dividends and ever-rising income taxes, with a top income tax rate that hit a staggering 90 percent. Thus the New Deal had the unintended consequence of prolonging the Great Depression by diverting resources that could have been used to create wealth.

Barack Obama and his advisers should take a lesson from history: the New Deal and its public-works projects were a disaster, and it would be remiss to think they should be given another try. As Bastiat explained, government doesn’t create wealth; it only diverts it. When wealth is in the hands of the government it inevitably tends to serve political ends rather than consumers. FDR’s New Deal policies are a testament to that, and if they are repeated in response to our current economic crisis, it will only hinder the recovery.

FEE Analysis of Economic Stimulus Bills

• “Keynes Returns,” by Sheldon Richman
• “Smoot and Hawley Return,” by Sheldon Richman
• “What is Seen and Unseen: Government Job Creation,” by Larissa Price
• “Fallacy of the Free Lunch,” by William Anderson

Analysis of Economic Stimulus Bill from other sources

• “Spending is not stimulus,” by Daniel Mitchell, Cato Institute
• “The Troubling Return of Keynesianism,” by Ike Brannon, Former Senior Advisor, U.S. Treasury, and Chris Edwards, Cato Institute

Background on Economic Stimulus and Keynesianism

• “The Trouble with Keynes,” by Roger W. Garrison (The Freeman, October 1993)
• “John Maynard Keynes: The Damage Still Done By a Defunct Economist,” By Richard M. Ebeline (The Freeman, May 2006)
• “Keynesianism in a Nutshell,” by Henry Hazlitt (The Freeman, Novemeber 1982)
• “Inflationism,” William Peterson (The Freeman, August 1977)

Background on Economic Depression

• “The Great Depression According to Milton Friedman,” by Ivan Pongracic Jr. (The Freeman, September 2007)
• “The Mysteries of the Great Depression Finally Solved, by Mark Skousen (The Freeman, July 1997)
• “Great Myths of the Great Depression,” by Lawrence W. Reed

That’s a lot of money, but some people, including recent Nobel Prize winner Paul Krugman, believe that the amount being proposed is too stingy.  Krugman writes that $800 billion isn’t “enough to fill the looming hole in the U.S. economy, which the Congressional Budget Office estimates will amount to $2.9 trillion over the next three years.”

There is term to use for someone who insists that government can costlessly come up with hundreds of billions of dollars to throw out in new spending; it is called someone who believes in the “fallacy of the ‘free lunch.”  Fortunately, Lawrence Reed dealt with this point nearly three decades ago.  He wrote:

The Garden of Eden is a thing of the distant past yet some people (yes, even some economists) occasionally think and act as if economic goods can come with no cost attached. Milton Friedman is one economist who has warned repeatedly, however, that “there is no such thing as a free lunch!”

Every “something for nothing” scheme and most “get rich quick” plans have some element of this fallacy in them. Let there be no mistake about this: if economics is involved, someone pays!

An important note here regards government expenditures. The good economist understands that government, by its very nature, cannot give except what it first takes. A “free” park for Midland, Michigan is a park which millions of taxpaying Americans (including Midlanders) actually do pay for.

A friend of mine once told me that all one needs to know about economics is “What is it going to cost and who is going to pay for it?” That little nutshell carries a kernel of advice for the economist: don’t be superficial in your thinking!

All of this relates to the story told by Frederic Bastiat about the young boy who becomes a “public benefactor” by throwing a brick through a shop window.  The people who gather after the incident become convinced that the money the shop owner has to pay to replace his window will circulate through the economy, creating new wealth, providing jobs, and generally helping to bring new prosperity.

What the crowd – like many “sophisticated” economists today – had forgotten is what good economists call “opportunity cost,” which is the value of the forgone alternative.  Since the shop keeper has to buy a window, he can’t spend his money on something else. There is no gain to the community.

The “lunch” is not free precisely because it is a scarce good, and all scarce goods have an opportunity cost. There is no way around that little truth.  Let us look at the opportunity cost of the proposed “stimulus.”

The “stimulus” will be financed by huge amounts of government borrowing, which means that taxpayers will have to pay back that amount plus interest in the future.  Furthermore, the funds raised by the huge government borrowing will be diverted from other uses.  The “jobs” funded by the “stimulus” will go to people with political connections, which imposes the real cost of politicizing the economy.

Unfortunately, President Obama and Krugman are touting the “stimulus” as something akin to a “free lunch”—as though in a free market the resources would otherwise be left idle.  They argue that unless government spends these “new” funds — and quickly — the economy will go into a freefall.  That is nonsense.  As Reed has eloquently noted, this kind of action imposes a real cost on the economy. While the media no doubt will focus their coverage on the people receiving the “benefits,” those who have to bear the costs will be invisible

Next Week: The Fallacy of the Short Run

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FEE is pleased to announce our 47th consecutive summer of student seminars. We have altered a few things in the program, and it promises to be a rewarding seminar season.

One of the exciting changes on the agenda is our expansion to include different seminar locations. In addition to our home in Irvington, New York, we will host seminars at Northwood University’s state-of-the-art conference center in Midland, Michigan, and at Colorado Christian University’s campus in Denver, Colorado.

The Denver location will be this year’s home to Freedom 101, our seminar specifically designed for high school-aged students (after a one-year hiatus, we are delighted to re-introduce this valuable seminar).

A new addition to the schedule is our Introduction to Austrian Economics seminar. We are quite pleased to offer this primer on the Austrian school of economics. As always, all of our seminars will be intellectually stimulating and filled with excellent speakers. We will welcome back many of our top-notch faculty guests, as well as welcoming a few new faculty lecturers. It is our hope that you will come and join us at one (or more!) of our seminar weeks.

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Bettina Bien-Greaves of the Foundation for Economic Education was present and recorded these lectures.  A transcription of each lecture, as well as her daily personal observations of the event, are part of the FEE Archives and are made available below:

Introduction/Summary by Bettina Bien-Grieves
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We wish to honor her in a way that speaks to her first love — reaching young minds for liberty — and does so for many years to come. Accordingly, and with the approval of her husband, Peter, and son, Ted, we are pleased to announce the Beth A Hoffman Memorial Scholarship Fund. This fund will offer full and half scholarships to students from all over the world to attend our summer seminars.

If you wish to make a contribution, please click the “Donate” button above. Let us know if we may list you on our website as a donor (amounts will be kept confidential). Unless you wish to remain anonymous, we would also like to make your names known to recipients so they may thank you personally by letter.

Thanks for contributing to this memorial to Beth Hoffman and her tireless work on behalf of the cause we share.