years after the Great Depression began, the literature on this painful episode
of American history is undergoing an encouraging metamorphosis. The
conventional assessment that so dominated historical writings for decades
argued that free markets caused the debacle and that FDR's New Deal saved the
country. Surely, there are plenty of poorly informed partisans, ideologues and
quacks that still make these superficial claims. Serious historians and economists,
however, have been busy chipping away at the falsehoods. The essay you have
just read cites many recent works worth careful reading in their entirety.
At the very moment this latest
edition of "Great Myths of the Great Depression" was about to go to press,
Simon & Schuster published a splendid new volume I strongly recommend.
Authored by the Foundation for Economic Education's senior historian and
Hillsdale College professor, Dr. Burton W. Folsom, the book is provocatively
titled "New Deal or Raw Deal? — How FDR's Economic Legacy Has Damaged America."
It's one of the most illuminating works on the subject. It will help mightily
to correct the record and educate our fellow citizens about what really
happened in the 1930s.
Another great addition to the
literature, appearing in 2007, is "The Forgotten Man: A New History of the
Great Depression" by Amity Shlaes. The fact that it has been a New York Times
bestseller suggests there is a real hunger for the truth about this period of
While Americans may be
unlearning some of what they thought they knew about the Great Depression,
that's not the same as saying we have learned the important lessons well enough
to avoid making the same mistakes again. Indeed, today we are no closer to
fixing the primary cause of the business cycle — monetary mischief — than we
were 80 years ago.
The financial crisis that
gripped America in 2008 ought to be a wake-up call. The fingerprints of
government meddling are all over it. From 2001 to 2005, the Federal Reserve
revved up the money supply, expanding it at a feverish double-digit rate. The
dollar plunged in overseas markets and commodity prices soared. With the banks
flush with liquidity from the Fed, interest rates plummeted and risky loans to
borrowers of dubious merit ballooned. Politicians threw more fuel on the fire
by jawboning banks to lend hundreds of billions of dollars for subprime
bubble burst, some of the very culprits who promoted the policies that caused
it postured as our rescuers while endorsing new interventions, bigger
government, more inflation of money and credit and massive taxpayer bailouts of
failing firms. Many of them are also calling for higher taxes and tariffs, the
very nonsense that took a recession in 1930 and made it a long and deep
The taxpayer bailouts of
agencies such as Fannie Mae and Freddie Mac, as well as a growing number of
private firms in the early fall of 2008, represent more folly with a monumental
price tag. Not only will we and future generations be paying those bills for
decades, the very process of throwing good money after bad will pile moral
hazard on top of moral hazard, fostering more bad decisions and future
bailouts. This is the stuff that undermines both free enterprise and the
soundness of the currency. Much more inflation to pay these bills is more than
a little likely, sooner or later.
"Government," observed the
renowned Austrian economist Ludwig von Mises, "is the only institution that can
take a valuable commodity like paper, and make it worthless by applying ink."
Mises was describing the curse of inflation, the process whereby government
expands a nation's money supply and thereby erodes the value of each monetary
unit — dollar, peso, pound, franc or whatever. It often shows up in the form of rising prices, which most
people confuse with the inflation itself. The distinction is an important one
because, as economist Percy Greaves explained so eloquently, "Changing the
definition changes the responsibility."
Define inflation as rising
prices and, like the clueless Jimmy Carter of the 1970s, you'll think that oil
sheiks, credit cards and private businesses are the culprits, and price
controls are the answer. Define inflation in the classic fashion as an increase
in the supply of money and credit, with rising prices as a consequence,
and you then have to ask the revealing question, "Who increases the money
supply?" Only one entity can do that legally; all others are called
"counterfeiters" and go to jail.
Nobel laureate Milton Friedman
argued indisputably that inflation is always and everywhere a monetary matter.
Rising prices no more cause inflation than wet streets cause rain.
Before paper money, governments
inflated by diminishing the precious-metal content of their coinage. The
ancient prophet Isaiah reprimanded the Israelites with these words: "Thy silver
has become dross, thy wine mixed with water." Roman emperors repeatedly melted
down the silver denarius and added junk metals until the denarius was less than
one percent silver. The Saracens of Spain clipped the edges of their coins so
they could mint more until the coins became too small to circulate. Prices rose
as a mirror image of the currency's worth.
Rising prices are not the only
consequence of monetary and credit expansion. Inflation also erodes savings and
encourages debt. It undermines confidence and deters investment. It
destabilizes the economy by fostering booms and busts. If it's bad enough, it
can even wipe out the very government responsible for it in the first place and
then lead to even worse afflictions. Hitler and Napoleon both rose to power in
part because of the chaos of runaway inflations.
All this raises many issues
economists have long debated: Who or what should determine a nation's supply of
money? Why do governments so regularly mismanage it? What is the connection
between fiscal and monetary policy? Suffice it to say here that governments
inflate because their appetite for revenue exceeds their willingness to tax or
their ability to borrow. British economist John Maynard Keynes was an
influential charlatan in many ways, but he nailed it when he wrote, "By a
continuing process of inflation, governments can confiscate, secretly and
unobserved, an important part of the wealth of their citizens."
So, you say, inflation is nasty
business but it's just an isolated phenomenon with the worst cases confined to
obscure nooks and crannies like Zimbabwe. Not so. The late Frederick
Leith-Ross, a famous authority on international finance, observed: "Inflation
is like sin; every government denounces it and every government practices it."
Even Americans have witnessed hyperinflations that destroyed two currencies —
the ill-fated continental dollar of the Revolutionary War and the doomed Confederate
money of the Civil War.
Today's slow-motion dollar
depreciation, with consumer prices rising at persistent but mere single-digit
rates, is just a limited version of the same process. Government spends, runs
deficits and pays some of its bills through the inflation tax. How long it can
go on is a matter of speculation, but trillions in national debt and
politicians who make misers of drunken sailors and get elected by promising
even more are not factors that should encourage us.
Inflation is very much with us
but it must end someday. A currency's value is not bottomless. Its erosion must
cease either because government stops its reckless printing or prints until it
wrecks the money. But surely, which way it concludes will depend in large
measure on whether its victims come to understand what it is and where it comes
from. Meanwhile, our economy looks like a roller coaster because Congresses,
Presidents and the agencies they've empowered never cease their monetary
Are you tired of politicians
blaming each other, scrambling to cover their behinds and score political
points in the midst of a crisis, and piling debts upon debts they audaciously
label "stimulus packages"? Why do so
many Americans want to trust them with their health care, education, retirement
and a host of other aspects of their lives? It's madness writ large. The
antidote is the truth. We must learn the lessons of our follies and resolve to
fix them now, not later.
end, I invite the reader to join the education process. Support organizations
like FEE and the Mackinac Center that are working to inform citizens about the
proper role of government and how a free economy operates. Help distribute
copies of this essay and other good publications that promote liberty and free
enterprise. Demand that your representatives in government balance the budget,
conform to the spirit and letter of the Constitution and stop trying to buy
your vote with other people's money.
Everyone has heard the sage observation of philosopher George Santayana: "Those who cannot remember the
past are condemned to repeat it." It's a warning we should not fail to heed.