Wait…What?
I just watched an interview of a well-known political pundit who has just written a book about how great FDR was. He talked about how the Twenties were a time of rampant free market activity that led to the Depression and about how FDR saved the middle class and saved capitalism.
Huh?
Could this be an alternative history novel in which things play out differently in an alternate universe, Star Trek style? Oh, wait…no, it’s just another purportedly ‘non-fiction’ work in a long line of works that use straw man arguments to impugn free markets and glorify statism and oppression.
Did the Roaring Twenties really happen as a result of free market capitalism? Of course not. The closest thing our country ever had to a free market system was abolished years earlier. The boom of the Twenties was artificial and the direct result of expansion by the Federal Reserve of credit far beyond the amount in which market forces would have resulted. The excess credit led to stock market and real estate speculation and malinvestment (sound familiar?). Also, commodity prices were artificially high due to the demands of WWI. So the Roaring Twenties were the result not of free markets but of government intervention.
Did FDR save capitalism? Well, yes, if by “capitalism” you mean “an economy that was somewhat more free than many others in the world at that time,” and if by “save” you mean “abolish it and replace it with an oppressive, near-omnipotent, socialist state.”
FDR, upon getting himself dictatorial powers, began a series of government interventions that turned what should have been a brief but painful correction into a decade-long debacle by preventing individuals and businesses from taking the actions necessary to reallocate capital and adjust investment. And on top of that, we ended up with a country far closer to socialism/fascism than we ever would have previously imagined possible. The moral of the story seems to be that when Hitler and Mussolini create totalitarian states it’s wrong, but when Roosevelt does so it’s a great day in American history.
We’re now reliving the nightmare that inevitably must occur every so often when government has a monopoly on the monetary system, uses central banking to artificially expand and contract money and credit, and engages in a multitude of regulatory interventions and taxation.
The moral of my story is: Franklin D. Roosevelt is not someone that should ever—ever—be held up as a hero or a good president or someone who saved capitalism or ended the Depression. The man, by virtue of his freedom-ending and economy-destroying policies, was a monster. The history books must be rewritten to expose him and his New Deal for what they were. Just as the media and intellectuals of today rightly condemn Bush, so should they play fair and condemn FDR and demand that we cease and desist the resurgence of his statist, poverty-inducing policies.
Yeah, I’m not holding my breath.
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Comments
Comment from Darren
Time: November 4, 2008, 6:38 pm
I don’t think it’s fractional reserve banking per se that’s the problem. The problem is artificial interference with it. After all, fractional reserve banking would likely emerge as a natural part of banking in a stateless society, and the only way to stop it would be to violate the primary libertarian principle and initiate force against those banks. In a free market, reserve ratios would be market driven, and money wouldn’t really be “created” because most loans would be backed by collateral that has inherent value (and I imagine unsecured loans would simply have market driven interest rates that would somehow ripple through the economy resulting in no actual change in money supply?–this obviously isn’t my area of expertise). Money can only be created when the medium of exchange is actually increased (as in mining additional gold). The problem we have in the real world today is that the government monopolizes the creation of legal currency, subsidizes deposit insurance, ‘prints money’ backed by nothing more than their presumed ability to continue to indefinitely confiscate our earnings, etc.
Free banking, with banks issuing their own currency backed by assets of inherent value at reserve ratios determined by the give and take of the market is something that has worked when tried in the past (Scotland, I believe?) and is worth trying here in the so-called “land of the free.”
Comment from Jimmy
Time: November 5, 2008, 4:15 pm
American banks did issue their own banknotes during the 19th century (ostensibly they were backed by specie, but it was only fractionally backed). Bank panics, runs, and collapses were fairly frequent, and it was not uncommon for people to lose their life savings. A lot of loans were backed by collateral of dubious value (as is the case today). Whether banks issue banknotes fractionally backed by specie (19th century model) OR checks written on bank deposits are accepted in transactions (20th century model), the net effect is the same- the medium of exchange IS increased. The total money supply is primarily driven by commercial bank deposits, rather than more Federal Reserve liabilities. So you have private banks issuing most of the money, not the Fed. The system works, but is only as tenable as long as public confidence in the banks remains. The point is that private banks, absent government interference, are perfectly capable of creating too much money/credit which then subsequently contracts in a vicious deflationary spiral when credit has been overextended and the bubble pops.
This is why Jefferson said “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
Comment from Darren
Time: November 5, 2008, 8:18 pm
Well, I guess this is one instance where I vehemently disagree with Jefferson. There’s nothing inherently dangerous about banking. It’s a natural part of a free economy. Using organized violence (government) to regulate and restrict banking and money supply is something I can only find morally indefensible. In fact, government monopoly of legal tender and central banking seems to be leading us exactly where Jefferson feared: broke and homeless vis a vis the regulated bankers who benefit from being at the entry point of politically driven money creation.
Comment from Jimmy
Time: November 6, 2008, 3:19 pm
Dude, that last sentence is a non sequitur. The regulated bankers have not benefited from the current crises- they are suffering becaue of the cumulative effects of their (largely unregulated) imprudential decisions that haved caused this massive asset deflation. If the Fed had not stepped up the way it has, we’d already been in the early stages of a Depression. I mean, failing to regulate banks is like failing to grant the state a monopoly on the use of force- then mercenary armies call the shots (no pun intended.)
Anyone who lived in the 19th or early 20th centuries would tell you that banks are highly dangerous. We’ve forgotten this because we haven’t seen a true banking crisis in 75 years. Guess we were due.
Comment from Darren
Time: November 12, 2008, 3:25 pm
My last sentence was simply referring to the fact that those at the entry point of new money/credit benefit the most from it because it hasn’t yet caused inflation at that point, and those injections are driven by politicians and bureaucrats instead of market processes. As for a depression, we unfortunately need one. If it doesn’t happen now, we’ll just be pushing it off to the future when it will be even worse. And you should know by now that I don’t agree with the state monopoly on the use of force–but that’s a whole other blog post 
Comment from Jimmy
Time: November 12, 2008, 6:57 pm
It’s entirely possible for banks to create excessive money/credit without the influence of politicians. It happened repeatedly during the 19th century. Of course, the central bank can initiate (or exacerbate) the process, as the recent experience shows. And yes, we do need a “soft depression.” Greenspan should have let it happen seven years ago. I guess I’m not yet convinced that a responsibly run central bank is necessarily bad, given the high information costs associated with a completely unregulated banking system. In other words, if Volcker had been running the Fed for the last 20 years, would we be in this mess?
Comment from Jimmy
Time: November 4, 2008, 5:36 pm
While I agree with the Austrian thesis that the Fed artificially manipulates the real cost of credit, the market is certainly capable of misallocating assets absent the Fed’s impetus. The problem is that when an asset bubble is compounded by bank lending against the asset class, the market can’t easily return to equilibrium because the leverage unwind ignites a deflationary asset spiral via negative feedback loops.
While the Fed gets a bad rap for keeping the cost of money too low (and rightly so), not enough public attention is paid to its other (and arguably more important) mission: oversight of the banking system. Stupid lending and excessive leverage exaggerated the crisis in the 1930s as well as the current crisis. Rothbard, I believe, gets at the heart of this matter as he indicts fractional reserve banking, which essentially allows commercial banks to create money. Federal Reserve liabilities only constitute $1.9 trillion, or 20-25% of the total money supply (that number was a lot smaller six months ago!)
So I think society is faced with two choices: 1) end fractional reserve banking 2) end Humphrey-Hawkins and practice diligent oversight of the banking sector
Here’s Bernanke’s take on Fed activities during the Depression:
http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm
BTW Congratulations on your imminent addition to the family.