Download 1 The Siren Song of Collectivism: Mises on How Interventionism

The Siren Song of Collectivism:
Mises on How Interventionism Leads to Socialism
Shawn R. Ritenour Ph.D.
Introduction
Economic decisions are, indeed, economic because the means we use to achieve our ends
are scarce. We have more ends we desire to obtain than we have goods to satisfy them; therefore,
we are only able to achieve some ends while leaving others unfulfilled. Because goods are
scarce, therefore, we must economize on them and use our goods to satisfy our most highly
valued ends. If we used our goods in ways that failed to do this, we would be squandering them.
Likewise, if producers use scarce land, labor, and capital goods to make products people do not
want enough to offset their cost, scarce resources are wasted and society relatively impoverished.
The scarcity of economic goods is a major reason why decisions about economic systems
and economic policies are very important. The social institutions regulating economic activity
have a big impact on the ability of people to economize in their use of scarce goods, provide for
their families, and achieve human flourishing.
Mises’ Insights on Socialism
To assess our current economic environment, it is helpful to understand how we got here.
The chaotic economic and ideological soup in which we find ourselves did not spring full born
out of a vacuum. To understand how we got here, it is very helpful to glean from some of the
insights of the economist Ludwig von Mises.
Relatively early in his career, Mises established himself as an outstanding scholar and
critic of socialism, so much so that his works were included in comparative economic systems
courses at both the University of Chicago and Harvard at least as late as 1938 (Collier 2016a,
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2016b). One of the most important economic insights in the twentieth century was Mises’
explanation of the impossibility of pure socialism functioning as a viable economic system. He
did so by contrasting socialism with the market economy.
Many social problems manifest symptoms related to the allocation of economic goods.
These are often cases in which some people must do without some things others take for granted,
such as children going hungry, not receiving adequate medical care (however that is defined), or
not being blessed with the same educational opportunities as children from more wealthy
families.
The Free Society
The question is how to respond to such social problems? There are essentially two
fundamental alternatives: the free society or the state. A free society is defined as one in which
people are secure in their private property. Is such a society, everyone is free to use his property
as he sees fit so long as he does not violate anyone else’s same right to their property (Wayland
1853, 229). He is free to act according to his preferences as long has he does not aggress against
anyone else.
In a free society, there are two main ways in which people may interact to achieve their
ends and work to ameliorate social problems. There are non-market, civic institutions, such as
churches, clubs, neighborhood associations, and private charities. These organizations work to
satisfy certain ends not fully met by enterprises designed to make an economic profit (Rothbard
1981, 523–26). The other path toward solving social problems in a free society is entrepreneurial.
This is the way of participating in the free market.
The market economy is characterized by the social division of labor in which there is
private ownership of the means of production (Mises 1998, 258–60). This market division of
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labor creates an actual society in which everybody serves his fellow citizens and is served by
them. As such, everyone is both a means and an end (Mises 1949, 258). Scripture teaches us that
each person has eternal significance because each person is made in the image of God (Gen.
1:26–28). At the same time, each person is a means to other people achieving their own ends.
The activity in this economic system is steered by the market. When economists refer to
the market, they do not refer to a particular place or location or to some autonomous inhuman
force, but to the vast network of voluntary exchange. The market, therefore, features trade that is
free of coercion and compulsion. There is no interference by the state. Any civil magistrate only
acts to protect life, health, and property against violent or fraudulent aggression. As a composite
of the free choices of members in society, the market directs people to do that which best serves
the wants of their fellow men. Market exchange, therefore, is a process determined by people’s
value judgments. The state of the market at any instant is the price structure, the totality of
exchange ratios as established by the interaction of buyers and sellers, which, being the result of
voluntary exchange, is entirely the product of human action (Mises 1949, 258–59).
The intellectual basis for coordination in the market economy is monetary economic
calculation based on market prices (Mises 1922, 95–109; 1949, 259–60). Entrepreneurs direct all
production in a market society. When making production decisions, entrepreneurs compare the
expected selling price of their product with the sum of the prices of the factors used to produce
that product. In doing so, entrepreneurs are subject to consumers. If an entrepreneur does not sell
what people want, the entrepreneur earns losses and can go bankrupt. Those entrepreneurs who
do better at satisfying consumers replace the bankrupt.
Because customers generally buy from whoever sells what they want at the cheapest
price, all profit-seeking producers are ultimately dependent on consumers. Sellers of consumer
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goods are in direct contact with consumers. The desires of consumers are transmitted from
producers of consumer goods to the makers of producer goods via the market price system.
The demand for factors of production are derived from the demand for consumer goods.
If people demand more pizza, for example, the market price of pizza will increase, and pizzamaking will become more profitable. Insightful entrepreneurs will demand more flour,
pepperoni, tomato sauce, mozzarella cheese, ovens, labor, and land. This will increase the prices
of all those factors. Entrepreneurs who can supply those factors at the cheapest possible price
will be the ones chosen by pizza makers.
If the increased popularity of pizza is facilitated by a decrease in the demand for
hamburgers, this will result in a decrease in market price for hamburgers. Entrepreneurs will
decrease demand for factors of production, such as ground beef, buns, ketchup, cheese, pickles,
grills, labor, and land, decreasing all of their prices. Those entrepreneurs that cannot make a
profit at these lower prices leave the market.
The beauty of the free market is that the same price system that provides entrepreneurs
with the mental tool to make meaningful profit and loss calculations also provides the incentive
for economic decision-makers to act according to their economic calculation. If an entrepreneur
forecasts a future profit based on economic calculation and produces accordingly, he actually
earns a profit if his forecast is correct. The potential for profit or for loss, therefore, provides
producers the incentive to act in accordance with their calculation.
Additionally, the market price system also directs income toward those who are most
productive—those who most successfully serve others in society, judged by the people in society.
Because the market prices entrepreneurs use to calculate profit and loss are the result of
voluntary exchange, they are manifestations of people’s subjective values. When entrepreneurs
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reap profits, therefore, they do so precisely because they are doing what people in society want
them to do—provide them with the goods they most desire at the prices they are most willing to
pay, given their circumstances.
The State
The second way people have sought to fix social problems is by turning to the state. This
is the path of authoritarian paternalism. It is a system that necessarily is backed up to some extent
by violence as its ends must be assured by force. If people do not, for example, follow statemandated guidelines, they will be fined, sent to jail, or in extreme cases, executed.
The most extreme form of state economic control is socialism. Socialism is a system in
which, theoretically, the community owns all of the means of production (Mises 1922, 110–12).
Because “the community” never makes decisions as an entity, factors of production are directed
by a state czar or central planning board, as if the state is one firm.
One of the great economic insights of the twentieth century was made by Ludwig von
Mises (1920; 1922, 112–16) when he explained that in a socialist state, economic calculation is
impossible. In such a system, economic decision-makers cannot calculate profit and loss,
because there is no exchange of the factors of production. Where there is no exchange, there are
no exchange ratios—what we call prices. With no prices, there can be no economic calculation.
Without economic calculation, economic decision makers are left rudderless when trying
to steer the economic system. As Mises (1998, 696) strikingly notes: “The paradox of ‘planning’
is that it cannot plan, because of the absence of economic calculation. What is called a planned
economy is no economy at all. It is just a system of groping about in the dark.” Such a system
quickly descends into chaos, which was the experience of the Soviet Union from the 1917
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revolution until Lenin’s New Economic Policy of 1922. The economy came to a standstill and
over five million people died from the ensuing famine (Pipes 2001, 44–49).
Progressive Interventionism
After the early years of the Soviet experiment, it was all too obvious that hard-core
Soviet-style socialism was an economic and humanitarian disaster. At the same time, many did
not want to embrace what they took to be necessary consequences and perceived excesses of
“unbridled capitalism.” There came calls for a third way between pure socialism and capitalism.
It was the path of a hampered market economy. Its advocates did not want to abolish the market,
but wanted to alter outcomes that would occur in a free market. This was the path of
interventionism—a policy of continual government involvement in the economy via price
controls, business regulations, monetary manipulation, and income redistribution through the
government’s budget.
This policy of social engineering via interventionism was the one chosen by American
politicians for the United States throughout the 20th and into the 21st century. Ludwig von Mises
(1929, 24–29, 144–50; 1949, 855–57; 1950; 1998, 27–28), always prescient in his analysis of
economic systems, also made an important contribution to economic thought by developing his
theory of progressive interventionism. The theory of progressive interventionism is a theory of
political economy in that it explains not only the economic consequences of a specific policy, but
also notes how the economic consequences of a policy encourages certain political responses that
produce additional economic consequences. Mises’ theory is helpful as we attempt to make sense
of how our own economic system developed into its current state.
The process of progressive interventionism begins with a perceived social problem,
usually economic in nature. Some, perhaps many, lobby for the state to “do something” to fix the
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problem. Whether we like it or not, it is in the interest of politicians and lobbyists to repeatedly
find crises that need fixing. If there were not more problems for them to solve, they would be out
of a job and out of money. They would much rather play the knight in shining armor and slay any
dragon that they can find.
The state responds with policy that often speaks to symptoms of the problem, but does
nothing to strike at its root. The Federal Reserve, our nation’s central bank, for example, is
primarily responsible for a massive increase in the money supply since its inception in 1913
(Engelhardt 2014; Ritenour 2014; Woods 2014). Sound monetary economics understands that a
direct result of government monetary inflation is higher overall prices. In the 1970s Nixon’s New
Economic Plan responded to such rapid increases in overall prices resulting from monetary
inflation, not by halting or reversing the growth of the money supply, but with price controls.
Instead of dealing with the root problem—monetary inflation—the President and Congress
mandated policy designed to fix symptoms of the inflation—higher overall prices.
This policy of mandating price ceilings to deal with higher overall prices insightfully has
been called “repressed inflation” by Wilhelm Röpke (1947). It is an attempt to repress the
consequences of inflationary monetary policies without dealing with the actual causes. Another
example of such symptom band-aids are subsidies and bailouts in response to recessions.
All interventionist economic policies hamper voluntary exchange and, in doing so, bring
with them various negative consequences. Hence, the consequences of the initial intervention
work against the desires of the very people calling for the intervention. The state is then called
upon to intervene even more to fix the problems caused by the initial intervention. Eventually
such a process could result in the entire economy being so heavily regulated that ownership of
property is merely on paper. Legal owners of businesses would still possess deeds to their
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establishments, but, in fact, the state controls and, hence, claims de facto ownership over
everything. To placate calls for the government to “do something” to fix social ills, the state
regulates what is produced, which materials may be used in production, what prices
entrepreneurs must pay for their factors of production, and also the prices at which they may sell
their goods. In short, we arrive at a fascist economy, similar to that of Fascist Italy and Nazi
Germany during World War II (Mises 1944; Hoppe 2010, 83–114).
Health Care Policy
An excellent case study demonstrating Mises’ theory of progressive interventionism is
the history of health care policy in the United States. The issue of health care and medicine is
very emotionally charged, because it is often so closely connected with issues of life and death.
Living in perpetual pain also is not easy to bear. In the midst of the uncertainty regarding life and
health, people have often sought solace in the provision of medical care by the state.
Sound economic analysis of health care policy begins by remembering that health care
services are economic goods. As such, the services of doctors, nurses, specialists, lab technicians,
hospitals, medical devices, and pharmaceuticals are all scarce. Consequently, they must be
rationed in some way. As mentioned above, the market price system is crucial for the
coordination of the action in the market division of labor.
If the market result is not perceived as good enough by some standard, the state is often
called to intervene in an industry or economy as a whole to fix or at least mitigate the undesirable
outcome. Economic theory and history teaches, however, that government intervention makes
the situation worse. Our current problems regarding access to and costs of health care are, in fact,
the product of too much government intervention, not too little.
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During the middle of the 1800s there was a relatively free market in medicine in the
United States. Increased popularity of alternative homeopathy led to the formation of the
American Medical Association (AMA), which desired to restrict entry of competition into their
profession, to eliminate for-profit medical schools and replace them with non-profits, and to
eliminate alternative doctors, such as homeopaths and chiropractors (Blevins 1995; Hamowy
1979). Still, at the turn of the 20th century the virtually negligible amount of government
spending on health care was by state and local governments. State governments spent only 0.13
percent of GDP on health care. Local governments spent 0.12 percent of GDP (Chantrill 2014).
The beginnings of major government involvement in the health care industry can be
traced back to the Franklin Roosevelt Administration. In 1934 Roosevelt commissioned the
Committee on Economic Security to examine issues related to the elderly, including medical
care. It subsequently developed desired principles of health reform, which were not immediately
enacted. In his 1944 State of the Union Address, Roosevelt put forward an “economic bill of
rights” which asserted a right to “adequate medical care and the opportunity to achieve and enjoy
good health” (Eyermann 2012, 2).
It was during World War II, however, that politicians inadvertently set in motion a
process of progressive intervention, resulting in our current third-party-payer system. The
Roosevelt Administration intervened in the economy by enacting wage and price controls as war
measures. Not legally able to offer higher wages to attract workers, businesses began offering
non-wage benefits including health insurance. In 1943, the U.S. Supreme Court boosted demand
for insurance further by ruling that employer-provided health insurance was exempt from
taxation (Reisman 2009).
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After World War II, in the remainder of the 1940s and early 1950s, labor unions made
paid health insurance a standard part of their compensation demands. Even most nonunion firms
began to provide it to avoid encouraging their employees to unionize. By the end of the 1950s,
employer-financed insurance had become the chief way of paying for medical expenses in the
United States (Reisman 2009).
Such third-party-payer systems greatly reduce the marginal cost to users of actions paid
for by the third party. The party using the good is not the party directly paying for it. Since the
marginal cost is much lower, the optimal quantity of the good—from the perspective of the
individual using but not directly paying for it—will be greater than if users must pay directly the
marginal costs of operation. Such systems tend, therefore, to artificially increase demand for the
good. Higher demand puts upward pressure on prices.
By the mid-1960s, the collectivization of medical costs in the insurance pools and lack of
direct payment for services imposed by the government had fostered severe new problems. The
rising demand for medical services it had created was pricing medical care more and more
beyond the reach of the poor and the elderly. At this point, the government added intervention
upon intervention, namely, the Medicaid and Medicare programs. These programs made the U.S.
government the nation’s largest purchaser of healthcare services. The medical costs of those
covered—the poor and elderly—are bankrolled, not by a private insurance plan, but funded
instead by the U.S. taxpayers (Reisman 2009). In 2003 President George W. Bush signed into
law Part D of Medicare, a major addition in the form of a prescription drug benefit (Eyermann
2012, 3).
Because Medicare and Medicaid both subsidize payment for healthcare for those covered,
they contribute to significantly increasing the demand for health care services, which
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significantly increases medical costs. While prices for all goods have increased 8.1 times since
1960, those for medical care have increased by more than 20 times during the same period.
Annual Medicare spending has skyrocketed—from $64 million in 1964 to $648 billion in 2015
(Moffit 2016). This major increase in demand has, not surprisingly, resulted in progressively
stratospheric increases in health care expenditures in general. Total health care expenditures
more than tripled from 1965 to 1985 (in real terms). They nearly tripled again from 1985 to
2005. Per capita health care expenditures increased about 640% from 1965 to 2005 (Eyerman
2012, 3–6).
In 2006 Medicare and Medicaid together accounted for 22 percent of federal outlays and
4.5 percent of GDP according to the Congressional Budget Office March 2007 baseline
(Eyermann 2012, 3–8). In 2015 these programs absorbed 24 percent of the federal budget
(Cubanski and Neuman 2016).
Increasingly costly health care resulting in increasingly higher total expenditures worked
against the very desires of those who implemented Medicare and Medicaid as ways to allow
more people to obtain less expensive health care. Again there were calls for the government to do
something to make things better. These calls were answered, not by moving to a more free
market in health care, but by centralizing the health care industry even more via the Affordable
Care Act.
So-called Obamacare merely promised the same general policies, while extending the
collectivization of medical care (Goodman 2014). With more socialization, there is even less
economization. There is even more waste. There is even more pressure for health care costs to
increase. With insurance premiums drastically increasing, one can anticipate pressure will be
mounting for a fully controlled, fully government-managed, single-payer system, such as the
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United Kingdom’s National Health Service. A middle-of-the-road, interventionist health care
policy leads to socialism.
Money and Banking Policy
Another example of Mises’ theory of progressive interventionism at work can be found in
the history of central banking in the United States. While many today are taught that the Federal
Reserve was necessary to ameliorate financial crises, many assume that such crises were inherent
to the market economy that existed before 1913. They fail to realize that these crises were
themselves the natural consequences of government intervention in the banking industry that can
be traced back at least to the U.S. Civil War.
The execution of the Civil War was certainly an act of government intervention. In order
to fight wars, the state obviously needs funding. The Civil War was no exception. Federal
government spending in 1865 was 20.6 times that in 1860 (Hughes and Cain 1998, 256). As with
all wars, there were three methods the U.S. government could have used to finance the Civil
War: increase taxes, borrow from the non-bank public, or government inflation (Rothbard 2002,
131; Timberlake 1993, 84–86).
In the 1860s taxes were primarily tariffs on imported goods. Foreign trade, however, was
impaired during the War, so increased tariffs couldn’t finance the necessary increased
expenditures (Hammond 1961, 3). In the fall of 1861, the U. S. Treasury attempted to issue $150
million in bonds. Secretary of the Treasury, Salmon P. Chase, tried to force banks to pay for their
loans in gold specie. This caused a severe enough drain on gold reserves at commercial banks
that specie payments for money substitutes were suspended that year (Rothbard 2002, 1123). The
government also resorted to merely printing fiat money. In February 1862 the U. S. Government
had the Treasury Department issue what became known as Greenbacks. Fiat paper money has
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always been an inflationist’s dream, especially during wartime. Not surprisingly the issuing of
the fiat paper Greenbacks ended in the utter, absolute debasement of the money supply. Issuance
of the greenbacks allowed the money supply to increase by 92.5% from 1860–63. The effects
were what economic theory teaches us to expect. Overall prices more than doubled from 1860–
65 (Mitchel 1903, 248.) The purchasing power of the dollar fell while the demand to hold gold
increased.
The government intervened further with the passage of the National Bank Act which was
sold to American politicians as a war measure necessary to facilitate increased borrowing by the
government to finance the War. It created national banks ostensibly to buy war bonds (Hammond
1961, 8–9). In fact, the Act socialized the nation’s monetary system (Rothbard 2002, 132–47;
Timberlake 1993, 86–88).
The national banking system essentially attempted a form of central banking without a
central bank. It was a three-tier system featuring large central reserve city banks in New York
City, reserve city banks in municipalities with a population greater than 500,000, and a plethora
of smaller country banks throughout the nation. The central reserve city banks were required to
maintain a twenty-five percent reserve ratio and their reserves could be a combination of gold,
silver, or greenbacks. Reserve city banks also had a twenty-five percent reserve requirement, but
their reserves could be spread between fifty percent money and fifty percent reserve deposits at
central reserve city banks. Country banks were required to maintain smaller fifteen percent
reserve ratios and their reserves could be a mix of forty percent money and sixty percent reserves
deposited at a reserve city or central reserve city bank. To encourage national banks to lend
money to the U.S. Treasury via purchasing war bonds, national banks’ issuance of notes were
linked to the amount of debt purchased from the U.S. government.
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To encourage success of the new system, the government granted the new national banks
many special privileges. Every national bank was required to redeem other national bank notes at
par. National bank notes were also received by the government for taxes at par. National Banks
were only required to redeem their bank notes, however, at their home office. Finally, in 1865 the
government imposed a ten percent tax on banknotes issued by state banks, encouraging more
banks to become National Banks. At the same time, state banks could only create money by
issuing demand deposits. State bank note issue, therefore, became a thing of the past (Hughes
and Cain 1998, 373–74; Rothbard 2002, 142–44; 2008, 219–29).
The individualized structure of the pre-Civil War state banking system was replaced,
consequently, by an inverted pyramid of country banks expanding on top of reserve city banks,
which, in turn, expanded on top of New York City banks. Before the Civil War, every bank had
to keep its own specie reserves, and any pyramiding of notes and deposits on top of specie was
severely limited by calls for redemption in specie by other, competing banks as well as by the
general public. After the National Bank Acts, however, all the national banks in the country
would pyramid in two layers on top of the relatively small base of reserves in the New York
banks, and these reserves could consist of inflated Greenbacks as well as metallic specie.
Such a system facilitated inflationary booms causing recurring financial panics in 1873,
1884, 1893, and 1907. These panics were the result, in large part, of reserve pyramiding and
excessive deposit creation by reserve city and central reserve city banks. The panics were
triggered by currency withdrawals that took place in periods of relative prosperity when banks
were fully extended (Rothbard 2008, 229–30). The panics were made more severe because of
banking regulations in many states that prohibited branch banking across state lines (Woods
2014). The various forms of government intervention in the monetary and banking systems in
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order to finance the Civil War created a less stable banking system that fostered recurring
financial panics. These panics increasingly served to create support for the government to
intervene even more.
The 1907 panic was severe enough to produce calls for further centralizing the banking
system (Rothbard 2008, 233–34). Pro-central banking intellectuals and politicians wanted a
lender of last resort. Many large bankers realized that one of the first steps in the march to a
central bank was to win the support of the nation’s economists, academics, and financial experts.
They promoted the idea that the United States needed a system that would provide “elastic
currency,” a money supply that would expand and contract with the needs of finance and
commerce. Such was the conclusion of a number of pre-Federal Reserve monetary commissions
(Rothbard 2002, 240–45; Weston, 1922). It was argued that the national banking system lacked a
centralized and coordinated banking system, resulted in the rigidity and immobility of reserves,
and thereby caused an alleged inelasticity of National Bank notes, causing financial stress during
times of increased demand for money. The Federal Reserve Act was passed by Congress and
signed into law by Woodrow Wilson in December 1913.
Despite various lines of rhetoric alleging the Federal Reserve System was a central
banking system that promoted the public good, from its beginning it was deliberately designed as
an engine of inflation to be controlled and kept uniform by the central bank. By law, only the
Federal Reserve Banks were granted a legal monopoly on issuing bank notes. Member
commercial banks, therefore, could only obtain currency by drawing down their reserve accounts
on deposit at the Federal Reserve Banks. The Federal Reserve was now the single base of the
entire banking pyramid. Gold was increasingly centralized at the Fed which could expand
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deposits at a ratio of 2.86 to 1 on top of gold and bank notes at a ratio of 2.5 to 1 on top of gold
(Rothbard 2008, 235–36).
The Federal Reserve System functioned as a banking industry cartelization mechanism
(Rothbard 2002, 258). All national banks were required to become members of the Federal
Reserve System. State banks were given an ostensible choice, but nonmembers were constrained
by the system. In order to get cash for redemption of customer checking accounts, non-member
commercial banks had to keep their own deposit accounts with member banks plugged into the
Federal Reserve. Such an arrangement greatly reduced competition between banks and facilitated
much more uniform monetary inflation.
After only a few years in operation, the Fed adopted the policy of withdrawing gold
certificates from circulation and substituting Federal Reserve notes. This encouraged inflation all
the more because Federal Reserve notes only had to be forty percent backed by gold certificates.
The policy released sixty percent more gold to serve as reserves upon which to multiply even
more money. Remember that the full-orbed socialization of our nation’s money supply via the
Federal Reserve was originally thought necessary due to negative consequences of previous
intervention via the National Bank Acts. The history of central banking in the United States,
therefore, is an excellent example of Mises’ theory of progressive interventionism.
The economic consequences of the Federal Reserve were what should have been
expected from an institution designed to facilitate easier monetary inflation. There was a direct
and immediate increase in the money supply. Bank loans and deposits doubled from 1914 to
1920 (Phillips, et. al. 1937, 20). The creation of so much new money led to much higher overall
prices. Wholesale prices increased 124% from 1915 through 1920 (Bureau of Labor Statistics
1922, 15).
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This Federal Reserve-induced inflation led to the boom/bust business cycle that
culminated in the depression of 1921–22. It was a particularly steep recession—the
unemployment rate increased to 11.7%—however, it was over quickly, because the Harding
administration did little to intervene in the economy (Anderson 1949, 90–94).
The Federal Reserve, however, utilized open market operations, buying Treasury Bonds
and thereby injecting newly created money into the economy in 1922, 1924, and again in 1927,
facilitating a significant monetary inflation (Anderson 1949, 95–99, 125–30; Newman 2016;
Phillips, et. al. 1937, 79–84; Rothbard 1963, 85–135). Because the United States benefited from
significant advances in technology during this same period, overall prices remained relatively
stable throughout the 1920s despite the increased money supply.
The monetary inflation of the 1920s, however, fueled an inflationary boom that turned
into a significant recession in 1929. In October of 1929, the stock market famously crashed.
What turned out to be well founded public distrust of banks, including the Fed, led to widespread
demands for redemption of bank deposits in cash, and Federal Reserve notes for gold. All of this
began putting commercial banks under considerable stress. The Fed tried to re-inflate after the
1929 crash via historically large open market purchases and aggressive lending to banks. While
interest rates did fall, fear of both bank runs by their depositors and defaults by their borrowers
led commercial banks to accumulate excess reserves to levels not seen before the 1930s,
neutralizing the Fed’s attempts to increase the money supply (Rothbard 2008, 247).
Once the malinvestments made during the Roaring 20s were sunk, nothing could stop the
recession. Unsound banking practices came home to roost in 1931, what Benjamin Anderson
(1949, 235) called “the Tragic Year.” Industrial production collapsed, as did a record number of
banks. Unfortunately, the pattern of progressive intervention showed up again as first Herbert
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Hoover and then Franklin Roosevelt intervened at an unprecedented level in attempts to mitigate
the consequences of depression (Rothbard 1963, 185–348; Sennholz 1969; Simpson 2014, 202–
18). Such intervention only made things worse. Hoover’s efforts thwarted the necessary
liquidation process and were rewarded with a deep depression. Roosevelt double downed on
Hoover’s intervention, undertaking what became known as the New Deal.
The cumulative interventions were legion. Enormous amounts of federal money were lent
to try to keep unsound businesses afloat. The state provided unemployment relief, expanded
public works, supported farm prices, and ran up higher federal deficits. The Fed ultimately
succeeded in inflating money and credit. This massive government intervention prolonged the
recession indefinitely, changing what would have been a shorter, swifter recession into a chronic
debilitating depression. As Mises (1931, 163–79) noted at the time, such measures merely make
things worse, and the negative results serve as a motive for calls for even more intervention.
Roosevelt’s program also included a number of specific policies affecting the monetary
system. In 1933 Roosevelt took the United States off the domestic gold standard. Within the
United States the dollar became merely fiat paper notes printed by the Federal Reserve. The
dollar was debased by decree as its definition in terms of gold being changed from 1/20th to
1/35th of a gold ounce. The dollar did remain on the gold standard internationally, with dollars
redeemable to foreign governments and central banks at the newly debased weight. Meanwhile,
U.S. citizens were forbidden to own gold and their stocks of gold were confiscated by the
government as a depression emergency measure.
Another far-reaching intervention was the institution of federal guarantee of bank
deposits through the Federal Deposit Insurance Corporation in 1933. Since then, bank runs, and
bank fears thereof, have virtually disappeared. Only a dubious hope of Federal Reserve restraint
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now remains to constrain bank credit inflation. The Federal Reserve’s continuing inflation of the
money supply in the 1930s only succeeded in inflating prices without getting the United States
out of the Great Depression. Indeed, the United States did not recover from the Great Depression
until after World-War II, when wartime economic central planning was dismantled (Higgs 2006,
101–23).
After World War II world leaders adopted the Keynes-inspired Bretton Woods System, a
U.S. dollar backed by gold with all other world currencies backed by the dollar. The U.S.
Treasury was increasingly able to rely on the Federal Reserve to monetize a significant portion of
government debt, hopefully without tears. Leaders and many economists in the U.S. expected
that the Federal Reserve now could inflate the money supply without the pesky consequences of
higher overall prices, because they thought that foreign central banks would continue to hold
dollars and use them as the foundation for monetary inflation in their own countries. During the
1950s and 1960s, however, countries in Western Europe, especially France, began to demand
gold for dollars until in 1971 Nixon was forced to “close the gold window” (Groseclose 1980,
235–50; Rothbard 2002, 249–52; Timberlake 1993, 316–47).
Thanks to Federal Reserve monetary inflation, consequently, the United States remains
on a pure fiat dollar standard. The last check on inflation was removed and inflation spiked and
the value of the dollar has plunged. A simple calculation based on the Consumer Price Index
reveals that the U.S. Dollar has lost eighty-three percent of its purchasing power since 1971. The
Federal Reserve also induced a series of business cycles culminating in the Great Recession of
2008-09.
The economic crisis of 2008–09 was due to massive intervention at many levels in the
economy. Post 9/11 massive credit expansion on the part of the Federal Reserve resulted in
19
artificially low interest rates. From January 2001 through September 2004, the Federal Funds
rate dropped from 6% to 1%, and mortgage rates fell to an all-time low.
Federal Reserve-induced credit expansion triggered a process of malinvestment.
Commercial banks more than doubled their real-estate loans. Along with an increased quantity of
loans came decreased quality of loans as loans were extended to people with lower and lower
credit ratings. The lending created the infamous housing bubble (Thornton 2014; Woods 2009).
Two contributors, Freddie Mac and Fannie Mae (government-sponsored entities), caused the
malinvestment to be felt most acutely in the housing industry as they bought up, securitized, and
resold hundreds of billions of dollars’ worth of mortgage-backed debt (O’Driscoll 2011). This
encouraged banks to expand credit, because they knew they had a ready demand for the
mortgages that they originated. Additionally the Community Re-investment Act made it more
likely that an increased quantity of loans were given to people with lower credit ratings.
Much of the new money created by the banking system was poured into the derivatives
market as investors bought mortgage-backed securities, collateralized debt obligations, and
structured investment vehicles whose value derived from that of the mortgages upon which these
derivatives were based. Increases in leveraged buyouts were also financed and equity stock
prices skyrocketed. The Dow Jones Industrial Average increased 45% between 2003 and 2006
while the S&P 500 increased 55%.
When the Federal Reserve merely slowed the rate of monetary inflation, the Federal
Funds rate increased through September 2007. The inflationary boom in housing had led to an
excess supply of houses and their prices began to fall (Haughwout, et. al. 2012). Loan default
rates increased as adjustable rate mortgages reset upward and borrowers were not able to
refinance.
20
The malinvestment in the real economy led to a financial crisis. With mortgage defaults
increasing, the securities that were backed by the mortgages began to turn sour. Without a
transparent market for structured investment vehicles, financial institutions didn’t know how
much exposure each other really had (Stacey and Morris 2009). They became very cautious and
greatly reduced their lending to each other. Many financial institutions had very high debt
exposure and went bankrupt or sold at bargain basement prices. The stock market crashed.
Capital intensive manufactures posted losses and banks began to increase their lending
requirements. Unemployment increased as bad investments were liquidated. Official
unemployment peaked at 10.1% in October 2009, and it took over 6 years to recover all the lost
jobs, making the aftermath of the Great Recession, the longest jobs recovery of any recession
since WWII.
How did the U.S. government respond? Did it get out of the way, reduce government
spending and regulation as it did in 1921? No, exactly the opposite. The U.S. government
enacted TARP, a massive program to bail out troubled investment banks. The Federal Reserve
embarked on the largest inflationary project in its history, driving the Federal Funds rate to near
zero for years.
In 2010, the U.S. government also passed the Dodd-Frank Wall Street Reform and
Consumer Protection Act, an elephantine banking industry regulatory regime that still has not
had all of its rules written. The law itself spanned 850 pages of legislation (Gattuso and Katz
2015). Over 19,000 pages of regulations have been crafted by the SEC for its implementation
and they continue to increase. As of July 19, 2016—six years since the passage of the law—only
70.3 percent of the total required rules have been finalized (DavidPolk 2016).
21
The history of money and banking in the United States since the Civil War is a
quintessential example of progressive interventionism. Again and again we see the cycle of
intervention, negative (sometimes disastrous) consequences, followed by even more intervention.
With each cycle comes a more centralized and socialized monetary system—all of it to no
positive avail. As Gretchen Morgenson and Josh Rosner (2011) conclude in their Reckless
Endangerment, the flurry of bailouts, monetary activism, and regulation has merely further
enshrined the doctrine of “Too Big to Fail,” leaving the system even more precarious than ever.
At the same time the economic meltdown and subsequent bailouts spawned the politics of
discontent. The Occupy Wall-Street movement, sympathy for Bernie Sanders’ on the Left, and
Trump’s mercantilism on the Right were all fueled by the mess made by the state and its
continued centralization of money production and the banking industry. All of these movements
have a legitimate gripe. As indicated above, however, the problems that need alleviating were
created by various forms of economic interventionism. They, therefore, cannot be solved by
more collectivism.
Conclusion
It has been rare for a nation in the West to have socialism thrust upon it as a result of
revolution. It has not been rare, however, for society after society to embrace socialism—either
in part or in whole—gradually over time. Ludwig von Mises’ theory of progressive
interventionism helps explain the mechanism by which society makes such seemingly disastrous
decisions.
Once people take to their bosom the notion that the state is there to fix the big problems,
the problems so big that they cannot be fixed by free people using their own property, they all
too easily take the first step down the yellow brick road to the emerald city of economic
22
socialism. The history of health care policy in the United States bears this out. The history of
central banking in the United States further confirms this. Pretty soon the state is looked to not
only to solve the really big problems but the middle-size and small problems as well.
Intervention breeds negative consequences that merely serve as fodder for even more
intervention. The siren song of intervention to fix a social problem tempts us into a process by
which we are wrecked on the rocky shoals of socialism.
The only way out is to move forward by rolling back the interventionism of the state
whose yoke is hard and whose burden is crushing. The best way to nurture human flourishing
and to promote an economy for the common good is to reintroduce the Christian ethic of private
property (Ritenour 2010, 76–84). As a society defends and holds dear the right to property, it will
reverse the decades of progressive interventionism that leads to socialism. All that is necessary is
for citizens to make the choice.
23
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