5000 Year Leap (20 page)

   2.
Fraud
in misrepresenting the quality, location, or ownership of the item being sold or bought.

   3.
Monopoly
which eliminates competition and results in restraint of trade.

   4.
Debauchery
of the cultural standards and moral fiber of society by commercial exploitation of vice -- pornography, obscenity, drugs, liquor, prostitution, or commercial gambling.

   The perspective of the Founders in the economic role of government may be gathered from sentiments such as these by Washington:

   Let vigorous measures be adopted; not to limit the prices of articles, for this I believe is inconsistent with the very nature of things, and impracticable in itself, but to punish speculators, forestallers, and extortioners, and above all to sink the money by heavy taxes. To promote public and private economy; encourage manufacturers, etc.
179

   In spite of the fact that the fruits of the free-market economy were making the United States the biggest and richest industrial nation in the world, the beginning of the twentieth century saw many prominent and influential leaders losing confidence in the system. These included wealthy industrialists, heads of multi-national banking institutions, leaders in the academic world, and some of the more innovative minds in the media. The same feverish restlessness was taking hold in similar circles in Europe.

   It was true, as it is with all systems, that the freemarket economy was in need of some adjustments and fine tuning, but these leaders were getting ready to throw the entire system overboard. The problems of the day included a number of large-scale strikes, the rise of powerful trusts, the mysterious recurrence of boom-and-bust cycles, and the rise of a new Populist movement in which certain agriculture and labor groups were demanding that the government get involved in the redistribution of the wealth.

   Many of these problems were either caused or aggravated by the very people who were demanding "a new system." The new system would involve extensive government regulation if not outright expropriation of major industries and natural resources. In Europe, certain confederations of wealthy families had gained control of their respective governments and were making a financial killing. Some of the wealthy families in America coveted the rich government monopolies of their trans-Atlantic cousins.

   It was in this climate that Adam Smith and the freemarket economy fell out of favor. We have already discussed the rise of the Intercollegiate Socialist Society, which was billed on major university campuses as the vanguard of the new era. Collectivism, socialism, government ownership of industry, subsidy of the farmers, and a whole spectrum of similar ideas were permeating the country when World War I broke out. This greatly accelerated the idea of strong centralized government with regulatory power over every aspect of the marketplace.

   By the 1920s, the debunking of the Founding Fathers was in full swing. The obsolescence of the Constitution was discussed openly. The ideas of Adam Smith were considered archaic. John Chamberlain, one of the foremost writers of our own day, was just coming up through college. He describes the academic climate of that era:

   "When I was taking a minor in economics as a congruent part of a history major back in the 1920s, Robert Hutchins had not yet started his campaign to restore a reading of the "great books" to college courses. So we never read Adam Smith's
The Wealth of Nations
. We heard plenty about it, however. The professors treated it condescendingly; we were told it was the fundamentalist Bible of the old dog-eat-dog type of businessman.

   "The businessmen, in that Menckenian time, were considered the natural enemies of disinterested learning. We, as students, regarded them as hypocrites. They talked competition, and invoked the name of Adam Smith to bless it. Then they voted for the high-tariff Republican Party. Somehow Adam Smith, as the man who had justified a business civilization, got the blame for everything. We weren't very logical in those days, and we were quite oblivious to our own hypocrisy in making use of our businessmen fathers to pay our college tuition fees and to stake us to trips to Europe."
180

   John Chamberlain eventually came to realize what the intellectual leaders of the day were doing. They were deprecating the Founders and the free-market economy to create a vacuum which would then be filled with a completely new formula. Their new economic nostrum was the very toxin the Founders had warned against. Chamberlain describes what happened:

   "The depression that began in 1929 is generally considered the watershed that separates the new (collectivist) age from the old, or rugged individualist, age. Before Franklin Roosevelt, we had had the republic (checks and balances, limited government, inalienable rights to liberty and property, and all that). After 1933 we began to get the centralized state and interventionist controls of industry. Actually, however, the inner spirit of the old America had been hollowed out in the Twenties. The colleges had ceased to teach anything important about our heritage. You had to be a graduate student to catch up with
The Federalist Papers
, or with John Calhoun's
Disquisition on Government
, or with anything by Herbert Spencer, or with
The Wealth of Nations
. We were the ignorant generation.

   "The depression began our education. But the first "great book" in economics that we read was Marx's
Capital
. We had nothing to put against it. Talk of "planning" filled the air. We read George Soule and Stuart Chase on the need for national blueprints and national investment boards and "government investment." Keynes was still in the future, but his system was already being laid brick by brick. And Adam Smith was still a word of derision."
181

   My own education was similar to that of John Chamberlain. I was less than a decade behind him. We were all part of a generation of lost Americans who had to rediscover our heritage the hard way. For nearly a quarter of a century the Founders had been relegated to the pre-industrial past. Certain professors spoke disparagingly of what they called the "myths the Founders believed." The Founding Fathers were all very old-fashioned.

   Gradually, however, the intellectual light of day dawned on many thousands of that lost generation. Ivor Thomas wrote his book,
The Socialist Tragedy
(New York: The Macmillan Company, 1951), explaining what socialism had done to Europe. Max Eastman wrote his
Reflections on the Failure of Socialism
(New York: The Devin-Adair Company, 1962), explaining what socialism had done to America and the world.

   For some, there was a genuine awakening. The traditional values of the Founders began to emerge with a new message of promise so long neglected. John Chamberlain describes his rediscovery of Adam Smith:

   "We had to discover the real Adam Smith the hard way, by living our mistakes, and by being led to the whole body of the literature of freedom that had created the American federal system. Only then were we able to appreciate Smith. Ironically, our education paralleled that of Adam Smith himself, which took place over a period of a dozen years between the close of the Seven Years War and the outbreak of the American Revolution. We would have been saved so much trouble if we had only been compelled to read -- and digest --
The Wealth of Nations
in a
first
college course in economics, with James Madison's political theory as a side dressing.

   "Smith's book is, indeed, the beginnings of everything that is important to economic theory, the lack of clarity on value theory notwithstanding. It should be the natural starting point for students of economics for the simple and compelling reason that it anticipated Ludwig von Mises by a full century and a half in considering economics as part of a wider science of human choices. Smith backed into his study by way of a general preoccupation with human destiny in a way that should be utterly convincing to our own pragmatic day."
182

   As this book goes to press, America is strenuously struggling to restore a few of the lost jewels from the Founders' treasury. An appreciation for Adam Smith is looming larger. If it continues, there is hope for a brighter future for the next generation than for the one just passing.

A genuine return to the Founders, however, will also involve the completion of something which has never been done, neither in the Founders' day nor in ours. It is the need for a genuine monetary reform along the lines the Founders envisioned but were never able to launch.

   At the Constitutional Convention, the Founders determined that they would make the American dollar completely independent of any power or combination of powers outside of the American people. They therefore gave the exclusive power to issue and control money to the people's representatives -- the Congress -- and forbade anybody, even the states, to meddle with it.

   Not only was Congress to be held responsible for the issuing of money, but it was to see that its purchasing power remained fixed. In other words, the "value" of the money was to remain steady and reliable not only in the United States, but also in relation to foreign money. They therefore stated in the Constitution that Congress would have the power "To coin money, regulate the value thereof, and of foreign coin...."
183

   All money was to be "coined" in precious metal. Paper "notes" were to be "promises to pay" in gold or silver, not legal tender as such. States were strictly forbidden to allow debts to be paid except in terms of gold or silver (Article I, Section 10).

   Washington stated:

   "We should avoid ... the depreciation of our currency; but I conceive this end would be answered, as far as might be necessary, by stipulating that all money payments should be made in gold and silver, being the common medium of commerce among nations."
184

   Here is one area where a great idea of the Founders was never adequately implemented. The Founders were just coming out of a devastating depression when the Constitution was adopted, and under pressure from both European and American financial interests, a whole series of policy errors were committed which have continued to this day. For example:

   The issuing of money was turned over to a private consortium of bankers who set up a privately owned bank called the Bank of the United States. (A similar arrangement exists today under the Federal Reserve System.)

   The indignant protest of Thomas Jefferson can be heard across the vista of two whole centuries:

   "If the American people ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied. The issuing power of money should be taken from the banks and restored to Congress and the people to whom it belongs."
185

   The bank was allowed to issue three or four times more paper notes or loans than it had in assets. This is called "fractional banking" because the bank has only a fraction of the assets needed to back up the paper money or credit which it has issued.

   Once again Jefferson protested: "The banks themselves were doing business on capitals [assets], three-fourths of which were fictitious...."
186

   Jefferson foresaw that the banks would inflate the economy by loaning out fictitious paper money (with no assets behind it). This would "boom" the economy. Then, when the financiers had lured borrowers into a precarious position, they would call for a "bust" and foreclose on the property for which the bank had virtually furnished nothing.

   At the first signs of a pending "bust," Jefferson lamented:

   "This fictitious capital ... is now to be lost, and to fall on somebody; it [the bank] must take on those who have property to meet it, and probably on the less cautious part, who, not aware of the impending catastrophe, have suffered themselves to contract, or to be in debt, and must now sacrifice their property of a value many times the amount of the debt. We have been truly sowing the wind, and are now reaping the whirlwind."
187

   Amazingly, this disastrous pattern of "boom and bust" has been repeated off and on for over 200 years without the cause of it being corrected. A sound monetary reform program is still begging for a hearing.

   The financiers who gained control of American finance built the economy on debt instead of wealth. Jefferson's protest came out as follows:

   "At the time we were funding our national debt, we heard much about "a public debt being a public blessing"; that the stock representing it was a creation of active capital for the aliment of commerce, manufactures and agriculture. This paradox was well adapted to the minds of believers in dreams...."
188

   Jefferson, Jackson, and Lincoln all tried to get the monetary program turned around so that Congress would issue its own money and banks would be required to loan on existing assets rather than use fictitious money based on merely a fraction of their assets. In other words, they wanted to get rid of the "boom and bust" cycle. At one point when the idea seemed to be catching on, the London Times came out with a frantic editorial stating:

   "If that mischievous financial policy, which had its origin in the North American Republic during the late war in that country (the Civil War), should become indurated down to a fixture, then that Government will furnish its own money without cost. It will pay off its debts and be without debt. It will have all the money necessary to carry on its commerce. It will become prosperous beyond precedent in the history of the civilized governments of the world. The brains and the wealth of all countries will go to North America. That government must be destroyed or it will destroy every monarchy on the globe."
189