A “cheap money” policy was the guiding idea and goal of these officials. Banks were no longer to be limited in making loans by the amount of their gold reserves. Interest rates were no longer to rise in response to increasing speculation
and increasing demands for funds. Credit was to remain readily available—until and unless the Federal Reserve decided otherwise.8
The government argued that by taking control of money and credit out of the hands of private bankers, and by contracting or expanding credit at will, guided by considerations other than those influencing the “selfish” bankers, it could—in conjunction with other interventionist policies—so control investment as to guarantee a state of virtually constant prosperity. Many bureaucrats believed that the government could keep the economy in a state of unending boom.
To borrow an invaluable metaphor from Alan Greenspan: if, under laissez-faire, the banking system and the principles controlling the availability of funds act as a fuse that prevents a blowout in the economy—then the government, through the Federal Reserve System, put a penny in the fuse-box. The result was the explosion known as the Crash of 1929.
Throughout most of the 1920’s, the government compelled banks to keep interest rates artificially and uneconomically low. As a consequence, money was poured into every sort of speculative venture. By 1928, the warning signals of danger were clearly apparent: unjustified investment was rampant and stocks were increasingly overvalued. The government chose to ignore these danger signals.
A free banking system would have been compelled, by economic necessity, to put the brakes on this process of runaway speculation. Credit and investment, in such a case, would be drastically curtailed; the banks which made unprofitable investments, the enterprises which proved unproductive, and those who dealt with them, would suffer—but that would be all; the country as a whole would not be dragged down. However, the “anarchy” of a free banking system had been abandoned—in favor of “enlightened” government planning.
The boom and the wild speculation—which had preceded every major depression—were allowed to rise unchecked, involving, in a widening network of malinvestments and miscalculations, the entire economic structure of the nation. People were investing in virtually everything and making fortunes overnight—on paper. Profits were calculated on
•See Benjamin M. Anderson, Economics and the Public Welfare, Princeton, New Jersey: D. Van Nostrand Co., 1949. This is the best financial and economic history of the United States from 1914 through 1946.
hysterically exaggerated appraisals of the future earnings c companies. Credit was extended with promiscuous abandoi on the premise that somehow the goods would be there t back it up. It was like the policy of a man who passes oi rubber checks, counting on the hope that he will somehow find a way to obtain the necessary money and to deposit it i the bank before anyone presents his checks for collection.
But A is A—and reality is not infinitely elastic. In 192S the country’s economic and financial structure bad becom impossibly precarious. By the time the government finally an frantically raised the interest rates, it was too late. It i doubtful whether anyone can state with certainty what eveni first set off the panic—and it does not matter: the crash hai become inevitable; any number of events could have pulled th trigger. But when the news of the first bank and commercia failures began to spread, uncertainty swept across the countr in widening waves of terror. People began to sell their stocks hoping to get out of the market with their gains, or to obtai the money they suddenly needed to pay bank loans that wer being called in—and other people, seeing this, apprehensive! began to sell their stocks—and, virtually overnight, an ava lanche hurled the stock market downward, prices collapsed securities became worthless, loans were called in, many o which could not be paid, the value of capital assets plum meted sickeningly, fortunes were wiped out, and, by 1932 business activity had come almost to a halt. The law o causality had avenged itself.
Such, in essence, was the nature and cause of the 192! depression.
It provides one of the most eloquent illustrations of thi disastrous consequences of a “planned” economy. In a frei economy, when an individual businessman makes an error o economic judgment, he (and perhaps those who immediatel] deal with him) suffers the consequences; in a controllee economy, when a central planner makes an error of econom ic judgment, the whole country suffers the consequences.
But it was not the Federal Reserve, it was not governmen intervention that took the blame for the 1929 depression—i was capitalism. Freedom—cried statists of every breed anc sect—had had its chance and had failed. The voices of th< few thinkers who pointed to the real cause of the evil wen drowned out in the denunciations of businessmen, of th< profit motive, of capitalism. Had men chosen to understand the cause of the crash, th( country would have been spared much of the agony thai followed. The depression was prolonged for tragically unnecessary years by the same evil that had caused it: government controls and regulations. Contrary to popular misconception, controls and regulations began long before the New Deal; in the 1920's, the mixed economy was already an established fact of American life. But the trend toward statism began to move faster under the Hoover Administration—and, with the advent of Roosevelt's New Deal, it accelerated at an unprecedented rate. The economic adjustments needed to bring the depression to ar end were prevented from taking place—by the imposition of strangling controls, increased taxes, and labor legislation. This last had the effect of forcing wage rates to unjustifiably high levels, thus raising the businessman's costs at precisely the time when costs needed to be lowered, if investment and production were to revive. The National Industrial Recovery Act, the Wagner Act, and the abandonment of the gold standard (with the government's subsequent plunge into inflation and an orgy of deficit spending) were only three of the many disastrous measures enacted by the New Deal for the avowed purpose of pulling the country out of the depression; all had the opposite effect As Alan Greenspan points out in "Stock Prices and Capital Evaluation,"4 the obstacle to business recovery did not consist exclusively of the specific New Deal legislation passed; more harmful still was the general atmosphere of uncertainty engendered by the Administration. Men had no way to know what law or regulation would descend on their heads at any moment; they had no way to know what sudden shifts of direction government policy might take; they had no way to plan long-range. To act and produce, businessmen require knowledge, the possibility of rational calculation, not "faith" and "hope"— above all, not "faith" and "hope" concerning the unpredictable twistings within a bureaucrat's head. Such advances as business was able to achieve under the New Deal collapsed in 1937—as a result of an intensification of uncertainty regarding what the government might choose to do next. Unemployment rose to more than ten million and business activity fell almost to the low point of 1932, the worst year of the depression. •Paper delivered before a joint session of the American Statistical Association and the American Finance Association on December 27, 1959. It is part of the official New Deal mythology that Root velt "got us out of the depression." How was die problem the depression finally "solved"? By the favorite expedient all statists in times of emergency: a war. The depression precipitated by the stock market crash 1929 was not the first in American history—though it w incomparably more severe than any that had preceded it. one studies the earlier depressions, the same basic cause ai common denominator will be found: in one form or anotb by one means or another, government manipulation of t money supply. It is typical of the manner in which interve tionism grows that the Federal Reserve System was institut as a proposed antidote against those earlier depressions which were themselves products of monetary manipulate by the government. The financial mechanism of an economy is" the sensiti center, the living heart, of business activity. In no other ar can government intervention produce quite such disastro consequences. For a general discussion of the business eye and its relation to government manipulation of the mon supply, see Ludwig von Mises, Human Action.6 One of the most striking facts of history is men's failure learn from it. For further details, see the policies of t present Administration. (AUGUST 1962.) THE ROLE OF LABOR UNIONS DO LABOR UNIONS RAISE THB GENERAL STANDARD OF UVTN One of the most widespread delusions of our age is t belief that the American worker owes his high standard living to unions and to "humanitarian" labor legislation. Tl belief is contradicted by the most fundamental facts a principles of economics—facts and principles which are s] tematically evaded by labor leaders, legislators, and intelle tuals of the statist persuasion. A country's standard of living, including the wages of workers, depends on the productivity of labor; high produ tivity depends on machines, inventions, and capital inve ment; which depend on the creative ingenuity of individi