How Badly Can the Government Screw up?

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December 20, 2021 by Scott Crosby - Views: 66

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How Badly Can the Government Screw up?

S223-1.jpgMany types of government are inherently corrupt:  Socialist, Communist, Fascist, National Socialist (“Nazi”), monarchies, tyrannies, dictatorships – the list is as long as all the variants of top-down forms of government.  

People – every person – has limited knowledge, and by nature does not always making the best decisions.  Strong central governments magnify the impact of those personal limits on the lives of the individuals in that country.  

Conversely, a limited government is not so damaging; the many millions whose actions are determined only by their own decisions moderate the economic impact of bad decisions, keeping the impact localized and of shorter duration.  Without legal enforcement that must be repealed, the economic impacts of bad decisions are minimal, and quickly disappear as people move on to further economic progress.  

In a country of limited government, economic depressions are short-lived:  they may last only days, or be limited to one region of the country; they never linger on for more than a year or two.

The Great Depression, in contrast, lasted twenty-five years.  It began in October of 1929, and the U.S. did not return to the same economic level until 1954.  An entire generation suffered as a result.

What happened???

The first seeds that would lead to the Great Depression were sewn in mid-1921, when the Federal Reserve began increasing the money supply.  By 1928, the Fed had increased the amount of money and credit by 60 percent.  One result was low interest rates, which increased the amount of borrowing of money.

The next step was a decision by the Fed to contract the money supply and credit.  

Like any commodity, the reduced money supply hurt the growth and even regular operation of businesses.  The result was the crash of October 1929.  

Despite its impact, the Fed continued that policy for three years, shrinking the country’s money supply by 30 percent.  Deflation was the result:  prices fell.  In September 1931, the Fed made the biggest hike in interest rates ever.  Many businesses could no longer operate, and closed.  Bank deposits fell 15 percent as a result.  Sales of automobiles fell 75 percent.  

To make matters far worse, in June of 1930, President Hoover signed the Smoot-Hawley Tariff “protectionist” bill, choking international trade:  887 tariffs on 3,218 items were sharply increased, including 34% on agriculture, 47% on wine and spirits, 60% on woolen products.  U.S. industries, including paint, steel, paper, and automobiles were severely impacted.  80,000 people were put out of work just due to the woolen tariffs alone.

The consequences resulting from tariffs made it clear that when you shut off imports, you shut off exports as well.  

Farmers lost a third of their markets.  Due to their bankruptcies, 9,000 rural banks had to close.  The stock market, not surprisingly, fell even further as a result.  

Smoot-Hawley similarly impacted foreign countries.  Germany, still recovering from World War I, was particularly hard hit.  Millions of people out of work responded to Adolf Hitler’s call, setting in motion the sequence of events that would lead to World War II.

The recovery from a depression is dependent on new investments.  New investments, of course, require money.  In this most dire of times, in 1932 Congress severely increased taxes.

By 1933, unemployment had skyrocketed to 25 percent.  In Cleveland, unemployment was 50 percent; in Toledo, 80 percent.  New York schools were shut down.  Teachers in Chicago were owed $20 million.  Declining revenues bankrupted many city governments.  By 1933, 1500 colleges had closed.

In 1933, Franklin Roosevelt became President.  FDR closed the banks – arguably illegal, and a move that has been called a cure “worse than the disease.”  When allowed to reopen, 5,000 banks could not.  

FDR’s New Deal, created by the National Recovery Act (NRA), also had an effect.  Prior to its passage, employment had begun to rebound, and was up 23 percent.  The NRA increased business taxes by 40 percent.  

The Supreme Court ruled much of the NRA illegal, reducing the economic burden somewhat, but earning FDR’s wrath.  In response FDR tried to pack the Court with more members to his liking.  Luckily, he failed.

FDR’s socialist thinking propelled him to further destructive actions, including making private ownership of gold illegal, and devaluing the dollar by 40 percent.  FDR called businessmen “economic royalists” and that, as a class, were “stupid”.

FDR’s deliberate assault on freedom and capitalism were widely denounced.  “Property-minded citizens were scared by the seizure of factories.”  He made every effort to seize the wealth of the individuals who were most responsible for private investments.  FDR’s every decision made clear that his intent was to “reduce or discourage the production of wealth.”

FDR “never saw a tax he didn’t like and hike.”  By word and deed, he continued his relentless assault against business, property, and free enterprise, guaranteeing that the capital needed for recovery was taxed away or driven into hiding.  One result was the “depression with in a depression” in 1938.  

Was FDR delaying America’s recovery?  Surveys showed 2 out of 3 Americans thought so.  

It was not until FDR and World War II were in the past that America began its recovery.■

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