In the wake of the great depression in the 1930's the Franklin D. Roosevelt delivered one of the most remembered lines in American history. "We have nothing to fear but fear itself''. This line is still revered in our current age and the line was delivered by a man who has come to symbolize the coming welfare state that dominated much of the last century. FDR was the man who was credited with bringing us out of the great depression and setting us on the path to renewed prosperity.
What was lost in the 1930's was confidence in the economic philosophy that had dominated America for the first two centuries. Our financial struggles and shortcomings were blamed on capitalism, and the failure of the free market was indicted for bringing on economic collapse. The popular cry was that the free market left unchecked spirals out of control and the market collapse was a symptom of the disease of free market capitalism. The public opinion had swayed toward government control and the welfare state. These have been our inheritance from a generation misinformed.
The biggest misconception of that time was that the great depression was a product of the free market. Milton Friedman, a nobel prize winning economist and the chief economic advisers to Ronald Reagan argued extensively that the depression was caused primarily by the failure of the federal reserve to control the money supply during the economic slow down. He won a nobel prize for his monetary theory and has argued his point to the satisfaction of most economists today. Ben Bernanke, current head of the Federal Reserve, provided the ultimate incrimination on government's role in the great depression when he addressed the subject at a dinner honoring Friedman's 90th birthday:
'Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.' (read the complete speech here)
The Austrian school of economics holds a very convincing argument that boom and bust cycles are generated by the credit expansion from the central bank. When the federal reserve has a loose monetary policy it results in credit expansion and mal-investment. Resources and capital are over-invested during the boom period and the bust period or depression are the necessary period of readjustment of the marked where bad investments can be liquidated.
Studies among economists as earlier posts have alluded to have also shown that the policies of FDR in price controls, wage controls, rent controls, and instituting the welfare state were actually instrumental in prolonging the great depression by 7 to 15 years. This is not a fringe idea. It is a generally held position among economists today. (For a better understanding of this read this pdf.)
Perception is everything in politics. The public culture of opinion was convinced that capitalism was the culprit, and government the answer in the 1930's and this gave us 70 years of big government and the welfare state. The big government instituted by FDR and the new deal is still growing today. The culture of opinion is vitally important in our current financial crisis also. Government's role in the current meltdown needs to be understood. More to come...
