How Capitalism Saved America: The Untold History of Our Country, From the Pilgrims to the Present by Thomas Dilorenzo

Author:Thomas Dilorenzo [Dilorenzo, Thomas]
Language: eng
Format: epub
Tags: History, United States, General, Business & Economics, Economic History, Nonfiction
ISBN: 9781400081172
Google: aYj1jiWMgmAC
Publisher: Crown Publishing Group
Published: 2004-08-09T16:00:00+00:00

CHAPTER NINE

————

Did Capitalism Cause

the Great Depression?

The Great Depression was a failure not of capitalism but of the hyperactive state.

—Paul Johnson, introduction to Murray N. Rothbard’s America’s Great Depression (2000)

The ideas embodied in the New Deal legislation were a compilation of those which had come to maturity under [President Herbert] Hoover’s aegis. . . . We all of us owed much to Hoover.

—Rexford Tugwell, economic adviser to President Franklin D. Roosevelt (1946)

GENERATIONS OF American schoolchildren have been taught that the Great Depression of the 1930s was caused by a “breakdown” of capitalism, which supposedly suffers from certain inherent weaknesses. Every once in a while, the official story goes, the economy will go into a recession or, worse, a depression, because capitalism is by its very nature unstable. The most infamous example of this, of course, is the Great Depression, during which unemployment in the United States was as high as 25 percent.

A corollary to the breakdown-of-capitalism theory is that the solution to the Great Depression was—and should be for all future economic downturns—government intervention to “save” capitalism from itself. Tax increases, debt, inflation, wage and price supports, gigantic government spending programs, and pervasive regulation of business were allegedly necessary to “tame capitalism.”

But in fact, as will be discussed in this and the next chapter, this commonly accepted story is precisely the opposite of the truth. The tales of capitalism’s natural breakdowns and the necessity of government intervention are one big myth.

THE AMERICAN WAY OF DEALING WITH RECESSIONS

The Great Depression was not America’s first encounter with economic decline. The Panic of 1819 was quite severe, as was the depression of 1837. In these and other instances of economic downturn prior to the Great Depression, the government’s “response” was largely restricted to a policy of laissez-faire. The occasional attempts at government intervention to “do something” about an economic crisis were generally trivial. That was a good thing, for the economic crises themselves were mostly caused by misguided government banking and debt policies.

Why did the government not intervene to “solve” economic crises? Because American political leaders understood one of the first lessons of economics: the lesson of opportunity cost. The “opportunity cost” of government spending is, simply, the value placed on whatever the same funds would have been spent on (or would have generated in savings) had they remained in private hands. Government can never spend a single cent unless it taxes, borrows, or prints money. In each case, money and resources are diverted from the private sector (the capitalist economy) to government.

Thus, in any economic downturn, what is needed is more capitalism, the sole engine of wealth creation and job creation. Cutting back on government frees up more resources for the private sector. The best recipe is to cut taxes, cut government spending, quit engaging in inflationary finance through monetary creation, put an end to governmental borrowing, and deregulate or free up private enterprise so that it can do what it does best: create products, wealth, and jobs.

The U.S. government followed this laissez-faire model almost religiously during the depression of 1837.

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