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