Part 1 | Part 2
While the movement towards socialism and interventionism in America had been slowly gathering steam in the late 1800s and early 1900s, it was during the Franklin Roosevelt administration in the 1930s that the statist revolution was won in the United States. It was Roosevelt, more than anyone else, who brought an end to one of the most amazing freedom experiments of all time — a society in which people were free to engage in economic enterprise without government control, to keep everything they earned, to decide for themselves what to do with their own money, and to transact business with sound money (i.e., gold coins and silver coins). It was Roosevelt’s New Deal that ended America’s era of economic liberty and ushered in the era of socialism and regulation — the era of the welfare state and regulated economy — the era of out-of-control federal spending, debt, and inflation.
The battle between the economic libertarians and the economic statists had been brewing for decades. In the late 1800s and early 1900s, Progressives began expounding their philosophy of economic statism, which they had acquired from German socialists. They were trying their best to convince Americans of the benefits of socialism and regulation. And they were meeting with some success.
In 1890, for example, the Sherman Antitrust Law was enacted. The idea behind the law was that economic liberty enabled firms to merge and combine into big companies, thereby lessening or even eliminating competition. Therefore, the statists argued, state intervention was necessary to prevent monopolies or big businesses that would exploit workers and oppress consumers.
What statists missed, however, was the fact that a free society is not about competition or even preserving competition. A free society is about freedom, and freedom encompasses the right to do whatever one wants with his own money and his own property, so long as it doesn’t involve coercion. If two companies wished to merge their operations, the principles of economic liberty entitled them to do that, given that it was their money and their property. The fact that the competition between the firms was eliminated was irrelevant from the standpoint of economic freedom.
The Industrial Revolution
In their attempt to subject economic activity to government control, the statists pointed to the horrific business conditions that characterized the Industrial Revolution — the long working hours in the factories, the unsafe working conditions, and child labor. Regulation was needed, they argued, to protect people from such things.
The statists, however, missed an important point: the reason that people were subjecting themselves to such conditions was to survive. In pointing out the horrors of the Industrial Revolution, statists ignored what life had been like prior to the Industrial Revolution. Life had been much worse in terms of economic conditions. Starvation and illness made life spans extremely short, including the life spans of children. Most people were desperately poor, barely eking out a living. Often-times, they would have many children, knowing that only a few of them would survive into adulthood.
The Industrial Revolution changed that. After it, the entire family had a chance to survive. Of course it was difficult. Of course working conditions were horrific. But why would anyone expect otherwise, given that society was going from a situation of abject poverty to one of the gradual accumulation of capital and wealth?
As Adam Smith had pointed out in The Wealth of Nations, one of the keys to rising standards of living in society lies in savings, which is then converted into capital, which businesses use to purchase tools and equipment that increase productivity. As productivity rises, the firm’s revenues increase, which enables it to pay higher wages and improve work conditions.
But that process obviously takes time, sometimes a few generations. The first generation barely ekes out a living, but most people survive. The children build on the small nest egg their parents leave them and then pass on a larger inheritance to their children. The grandchildren do even better. Meanwhile, living standards for nearly everyone in society rise, and people find that it’s no longer necessary to send their children into the factories to work. Over time, the accumulation of capital makes people in society better off.
That’s what the statists couldn’t see. It wasn’t that Americans loved sending their children into the horrible working conditions of the factories. The only way they could save their children from starvation was by sending them into the factories. Gradually, not only would the free market improve workplace conditions, it would enable people to begin leaving their children at home with one of the parents.
One can get a glimpse of the battle between economic libertarians and the statists that was taking place in the late 1800s and early 1900s by reading the Supreme Court’s opinions in such legal cases as the Slaughterhouse Cases and Lochner v. New York.
The Slaughterhouse Cases (1873) involved a Louisiana state law that gave a legal monopoly to one particular slaughterhouse in the city of New Orleans. All competing slaughterhouses were required to shut down. The law was sold as a public-benefit measure, but the evidence later established that it was more the result of bribes paid to the legislators. While the competing slaughterhouses lost their lawsuit in the U.S. Supreme Court, the dissenting opinions in those cases provide a fascinating insight into the fundamental principles of economic liberty.
Lochner v. New York (1905) involved maximum-hours legislation that had been enacted by the state to protect workers from having to work too many hours. The U.S. Supreme Court declared the law to be in violation of the Fourteenth Amendment’s Due Process Clause. The majority opinion makes fascinating reading. The Court held that liberty of contract between an employer and an employee is part of the liberty protected by the Fourteenth Amendment.
The end of economic liberty
Notwithstanding the decision in Lochner, however, the Progressives continued making headway with their statist philosophy. In 1913 the proponents of economic liberty suffered a double blow with the enactment of the Sixteenth Amendment and the establishment of the Federal Reserve System. Some 20 years later, the federal income tax and the central bank would play major roles in the Roosevelt economic revolution.
Throughout the 1920s, the Federal Reserve was expanding the supply of Federal Reserve bills and notes, creating a false sense of prosperity — the phenomenon that we today call a “bubble.” But keep in mind that at that time, gold coins and silver coins were still the official money of the United States and had been since the founding of the republic. The federal bills and notes were promises to pay money — promises to pay gold and silver. When Federal Reserve officials realized that they had dangerously overexpanded the quantity of bills and notes to a potential default situation, they panicked and overcontracted. As Milton Friedman and economists of the Austrian School have shown, it was that overcontraction that precipitated the stock market crash of 1929, which led to the Great Depression and to a revolutionary change in the economic system of the United States.
The Great Depression was all the statists needed to get their philosophy and programs adopted in America. People were scared, and the federal government promised to keep them safe. By that time, many Americans had been subjected to the public (i.e., government) school systems and, therefore, were more compliant and submissive and more willing to trust government officials.
The statist strategy was ingenious. First of all, the statists blamed the Great Depression on “the failures of free enterprise” and then argued that Roosevelt’s New Deal programs were simply reforms to “save free enterprise.”
The truth was that Roosevelt’s New Deal was modeled on the statist programs that were being adopted in the 1930s in Italy and Germany under Mussolini and Hitler.
The primary purpose of the federal government became to take care of the citizenry, adopting a paternalistic role in the life of the American people. That was when Social Security, a program that gave money to seniors, came into being. Not surprisingly, it was already in effect in Hitler’s Germany, given that the idea of Social Security had originated under the regime of Otto von Bismarck, the so-called Iron Chancellor of Germany, who himself had gotten the idea from German socialists. (That’s why today the U.S. Social Security Administration has a bust of Bismarck prominently displayed on its website.)
Roosevelt’s National Recovery Administration, which put businesses and industries into cartels that had the power to set wages, prices, and production, was similar to what Mussolini was doing with fascism in Italy. In fact, Roosevelt’s infamous “Blue Eagle” campaign, whereby businessmen were intimidated into embracing and supporting the NRA, could easily have come out of Mussolini’s playbook.
Government–business “partnerships” were also an important part of the New Deal, just as they were under the economic programs of both Hitler and Mussolini.
One of the main things that Roosevelt, Hitler, and Mussolini had in common was their over-arching commitment to the importance of massive government spending. All three rulers believed that federal spending was a key to restoring economic prosperity to the nation.
Removing the obstacle
Roosevelt, however, faced one big obstacle: the gold standard. If he expanded the quantity of federal bills and notes, at some point people would start redeeming them for gold and silver. He couldn’t have that. So he came up with a solution that would open the floodgates of federal spending. He declared that gold and silver would no longer be the official money of the United States. He nationalized gold in the hands of private Americans and ordered them to turn in their gold to the government. He also made it a felony offense to own gold, and he decreed that the paper bills and notes of the federal government would thereafter constitute the official money of the United States. His nationalization of gold was no different, in principle, from the nationalization of industries being carried out by Joseph Stalin, the socialist-communist ruler of the Soviet Union.
Once the statists were freed from the constraints on spending provided by the gold standard, there was nothing to prevent federal officials from going on massive spending sprees, both on welfarism and warfarism, which is precisely what they did. Decade after decade, federal spending soared, to such a point that U.S. officials had to sever the tie between gold and the dollar in international affairs in 1973, since foreign banks were increasingly redeeming their debt instruments for gold.
When tax revenues failed to keep up with the spending binges, the feds simply went into the private capital markets and borrowed the difference, setting the stages for ever-increasing levels of debt for which U.S. taxpayers would ultimately be liable.
As the amount of federal debt soared, U.S. officials resorted to the tried-and-true method for liquidating debt that had long characterized crooked and corrupt regimes: inflation. That’s what the Federal Reserve was for — to print the money to pay the debt, so that public officials wouldn’t have to raise taxes to do so. That’s why the paper dollar today is worth about 5 percent of its value in 1913, when the Fed was established. Over the decades, as federal spending and federal debt skyrocketed, the Fed simply expanded the money supply and debased the currency. As prices rose in society as a direct consequence of the debasement, federal officials simply blamed the increasing prices on such things as greed, speculation, and the rich.
For decades, the private sector was able to manage the ever-increasing loads of taxation that were being imposed on it, both for welfare spending and warfare spending. But over a long period of time, libertarians continued warning that such a system of massive welfarism, warfarism, spending, borrowing, taxation, regulation, and inflation was ultimately going to lead the nation into bankruptcy.
The statists, on the other hand, kept assuring people that everything was okay. Happy days could last forever, especially since the Federal Reserve could print whatever amount of money was necessary to get the economy humming again.
Today, however, things seem to be coming to a head. Greece is providing a signal of what lies ahead. For decades, Greek governments have been expanding the size and payments of their welfare state. When tax revenues couldn’t keep up with spending, the governments resorted to borrowing. But the debt has gotten so large that investors have lost confidence in the government. Today, the Greek government faces the prospect of default on its indebtedness, especially if foreign governments fail to provide cash infusions and loan guarantees. It’s the ultimate crack-up in the statist welfare state.
It’s the same position that the United States is in. Spending continues to soar out of control, as does the government’s debt. American statists say that the United States is more prosperous than Greece, which is true. But they’re ignoring a critical component: America’s warfare state — the national security state — the U.S. empire — now consists of hundreds of military bases all over the world that must be maintained, along with the occupations of two foreign countries, foreign aid to numerous dictatorships and democracies, and millions of people in the private sector who are now dependent on military largess.
Everyone knows that the recipients of America’s welfare largess and warfare largess are going to vehemently oppose any reduction in their payments as much as Greek welfare recipients are resisting any reduction in their dole. Once a person begins receiving government largess, he’s going to hang onto it as though his life depends on it, because in his mind his life does depend on it.
Meanwhile, the statists refuse to acknowledge that the root causes of America’s woes are its welfare state and its warfare state. Believing that the welfare state and warfare state must be permanent features of American life, they propose reforms, which usually involve the policies that got them into the mess in the first place — more spending, more borrowing, more inflation — more statism.
But the real causes of the problems are the statist paradigms themselves — the welfare state and the warfare state. Those two paradigms constitute a cancerous overlay on the foundational principles of our nation — the principles of fundamental, God-given rights and a limited-government, constitutional republic.
It is both of the paradigms — the welfare state and the warfare state — that must be challenged and dismantled if we are to restore the founding principles of economic liberty and free markets to our nation.
Part 1 | Part 2
This article originally appeared in the December 2011 edition of Freedom Daily.