The unintended consequences of the New Deal are slowly but surely being brought out into the open. Hoover’s Dam demonstrates how government policies can destroy the environment (in this case overusing the Colorado River), create unnatural and unsustainable economic development, and inevitably be brought to a point of collapse. This article was written by Douglas French.

Economics professor Bernard Malamud not once but twice invited the crowd in Las Vegas to visit nearby Hoover Dam to see for themselves an example of the productive assets that were created by Franklin Delano Roosevelt’s (FDR) New Deal. Professor Malamud was recruited to plead the Keynesian side of the argument in an “FDR’s Depression Policies: Good Deal or Raw Deal?” debate with the Foundation for Economic Education’s (FEE) Lawrence Reed during FreedomFest.

I finished my masters degree from UNLV under the tutelage of Murray Rothbard but I started my coursework with a class or two from professor Malamud, who, while being as Keynesian as they come, is at least sympathetic to the Austrian view when it comes to explaining speculative bubbles. He certainly took on Mr. Reed with good humor in front of an unfriendly, anti-FDR audience.

Malamud’s thesis is that no matter what your ideology, New Deal economics worked! The economy was in the midst of a terrifying deflation spiral. Treasury Secretary Andrew Mellon was saying things like “Liquidate labor, liquidate stocks, liquidate farmers.” The money supply was dropping, strangled by a rigid gold standard. The private sector was not eager to invest, so an alphabet soup of federal programs — like the CCC, CWA, WPA, FDIC, SEC, FSLIC — had to fill the void, putting people back to work, stimulating aggregate demand and providing for FDR’s four freedoms: freedom of speech, freedom of belief, freedom from want, and freedom from fear. At the same time, FDR’s “playing with the price of gold” as Malamud put it, loosened up the money markets.

Recovery (or reinflation) started as soon as 1933 and was only sidetracked in 1937, when the stimulus was pulled back. The “mistake of 1937″ was made, according to the UNLV professor, when FDR’s administration went back to listening to Andrew Mellon and instituted the austerity programs FDR had promised during his initial campaign.

When his turn came for rebuttal, Reed joked that he “felt like a mosquito at a nudist camp; I know what I need to do, but I don’t know where to begin.” After his free-market case was made and the Keynesian case was destroyed, Reed quipped, “The economy recovered when FDR didn’t.”

Keynesians erect a pretty low bar when judging the productivity of government stimulus projects, but the results of the concrete monster known as Hoover Dam have been devastating. Hoover described the dam as “the greatest engineering work of its character attempted by the hand of man.” The massive structure cost $49 million (or $736 million in inflation-adjusted dollars) and measures over 726 feet in height and more than 1,200 feet in length. It took five years and 4,360,000 cubic yards of concrete to build, and was finished two years ahead of schedule. About 16,000 people worked on constructing the dam, with over 100 losing their lives in the process.

Just as the Keynesian policies of the New Deal tried to cheat the laws of economics, government’s damming of the Colorado River attempted to cheat Mother Nature by bringing water to the desert southwest — water that just isn’t and never was there. The great western explorer John Wesley Powell was booed out of the room when he told the irrigation congress, “Gentlemen, you are piling up a heritage of conflict and litigation over water rights, for there is not sufficient water to supply the land.”

But 75 years ago, when the dam was nearly completed, FDR proclaimed during his dedication speech that millions of present and future residents of the southwest could count on “a just, safe, and permanent system of water rights.” The turbulent Colorado River that vacillated between droughts and floods would be tamed and become “a great national possession” and be counted on for irrigation to support a human migration seeking mild winters and new opportunities.

“The nation took him at his word,” writes Michael Hiltzik, author of Colossus: Hoover Dam and the Making of the American Century. “Since that dedication year, the population of the seven states of the basin has swelled by about 45 million. Much of this growth has been fueled by the dam and its precious bounties of water and electrical power.”

As Hiltzik points out, the dam’s water promise gunned the growth of southern California cities and attracted farmers to the west to grow water-intensive crops like cotton despite the lack of normal rainfall required to support this kind of agriculture.

Just as government stimulus programs and artificially low interest rates that promise to spur growth and make up for the lack of private investment never work, Hoover’s promise that his dam would, as Hiltzik writes, “provide all the water their states could conceivably need to fulfill their dreams of irrigation, industrial development and urban growth” is literally drying up. The water level at Lake Mead is down 120 feet from its high-water mark, revealing a white “bathtub ring.”

Now that millions have migrated to the southwest and private industry has invested millions of dollars, Hoover and FDR’s promises have confined those living and doing business in the west “in the straitjacket of an ever-intensifying water shortage,” notes Hiltzik. And while Interior Secretary Gale Norton claimed to have stilled the “conflict on the river” back in 2003 with the signing of two-dozen agreements transferring water rights between various Indian tribes, cities, and governments, the battle for water will rage on. The supply will never catch up with the demand.

After the ten-year drought, another $700 million is now being spent to install an additional intake pipeline into the diminishing Lake Mead. Almost 90 percent of the drinking water for Las Vegas comes from the lake. The new intake pipeline, officially known as Intake No. 3, “will reach deeper into the reservoir to protect the valley’s water supply should the lake shrink low enough to shut down one of the two shallower straws,” reports the Las Vegas Review-Journal.

However, the cost of this project is likely to rise, because the tunnel being excavated for the pipeline unexpectedly filled with water earlier this month. But this cost overrun shouldn’t trouble Keynesians, because the additional taxpayer money just provides more stimulus, right?

Those in government never learn. They can’t print prosperity, and more water won’t magically appear if they dam a river. While the man on the street believes government infallible, politicians and bureaucrats cannot calculate the economic profits and losses of government interventions. Ludwig von Mises made the point that government interventions inevitably lead to unintended consequences, leading government to constantly intervene further. So governments will fight over scarce water, and private use is increasingly being restricted by local ordinances.

The New Deal dam project that professor Malamud is so proud of provided a few thousand jobs 80 years ago, but has spurred migration, farming, and development that is likely unsustainable and may ultimately be the biggest malinvestment in history.

http://www.campaignforliberty.com/article.php?view=1024

“Paper money eventually returns to its intrinsic value — ZERO.” – Voltaire (1694-1778)

The world champion athletes at the Winter Olympics receive gold, silver, and bronze medals that contain roughly the same amounts of metal as the last Summer Olympics.

• A gold medal contains 550 grams of silver and is layered with just 6 grams of gold.
• A silver medal has 509 grams of silver and about 41 grams of copper.
• The bronze medals likely contain about 450 grams of copper and 50 grams of mostly tin and zinc.

At current market prices, a gold medal is exchangeable for about $494, a silver for about $260, and a bronze for just $3. If the gold medal was solid gold with the same mass, it would be exchangeable for almost $20,000.
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When the Federal Reserve was signed into law in 1913, it was largely on the basis that the independent organization would assume the role of “lender of last resort” to struggling banks and institutions. This would allow the Fed to extend credit in order to prevent short-term economic hardships. As I wrote in my article, Deception in “Free Market” Banking, banks had not experienced troubles because of the free market as is regularly assumed, but through the government-protected fractional reserve system that allowed banks to overextend themselves and deceive depositors:

After the Panic of 1907 and the umpteenth failure of fractional reserve lending, the attacks still were not aimed at the fractional reserve system. This system, when protected through law, gave banks the undoubted opportunity to inflate the money supply, overextend themselves in ways that would never be sustainable in a free market economy, and give little regard to the customers’ original property. Instead, economists began calling for a “lender of last resort” to bail out banks if they were caught overstretched in commitments. Many people don’t realize it, but the U.S. financial system has been in bailout mode for nearly a century since this event.

The Federal Reserve’s “last resort” lending powers did not meet the expectation of politicians. Banks still overextended themselves with depositors’ money despite the new powers of the central bank. In fact, between 1921 and 1929 there was an average of 600 bank failures every year, which exceeded the previous decade’s average (the one in which the Fed was created) by ten times.

During the last few months of 1930 people grew increasingly weary and cautious of the banking system. Understandably, people did not react well when they realized the banks did not have their deposited money. Banks retracted credit and liquidated assets, building up a financial perfect storm that resulted in 9,096 banks suspending operations between 1930 and 1934.

Many politicians reacted by proposing a system (that had been discussed in recent years) of deposit insurance backed and paid by a federal agency, despite the failure of similar state setups of deposit insurance in the same era. Since the early 1800s many states had attempted to offer some form of deposit insurance, many failing to live up to their initial claims. All of them were broke by 1930 (some reached their demise many years earlier, such as Michigan, New York, and Vermont in the mid-1800s).

This all changed when The Banking Act of 1933 was signed into law by Franklin D. Roosevelt on June 16, 1933. The Federal Deposit Insurance Corporation (FDIC) was established as a temporary agency that started operating on January 1, 1934. In its first year the FDIC fund carried a balance of $292 million. In 1935, with President Roosevelt’s signing of The Banking Act of 1935, the FDIC was established as a permanent government agency.The act also strengthened the Federal Reserve Board of Governors, the group of seven individuals who play a major role in controlling monetary policy.

The primary functions of the FDIC include insuring deposits through the Deposit Insurance Fund (DIF) and examining/supervising “financial institutions for safety and soundness and consumer protection.” This has been the basic mission of the FDIC in its 75 year existence, the details of which I won’t fully cover in this article.

Modern economics and politics often praise the development of the FDIC as a great and necessary banking program (this alone might be reason enough to question the FDIC’s role). The main curiosity that I have is the fact that rather than recognize the failure of a government-protected banking system that had failed numerous times leading up to the Great Depression, politicians decided to once again prop up the government system. According to information on the fdic.gov website, the original FDIC legislation drew support from those “who were determined to end destruction of circulating medium due to bank failures and those who sought to preserve the existing banking structure.” (Emphasis added.) These people either failed to realize or downright ignored that it was precisely the banking structure of the fractional reserve system that made such booms and busts so dreadful.

The failure of many banks in the Great Depression was not due to the free market. Fractional reserve banking, the process of banks loaning and investing more money than they actually have in reserve, had been shot down by market forces many times throughout the 1800s in the U.S. The numerous “financial panics” of the 19th century that people often pin on the free market would not have been possible had the states and federal government ceased in protecting the ability of banks to deceitfully loan away depositors’ money. A free market system would not involve government protecting banks in this process, but enforcing the distinction of contracts between demand deposits and time deposits.

• Click here for Part 2.
  

It’s hard to not go gaga over the ideas and intentions of “stimulus packages” and ramped up government programs. After all, won’t it create a lot of jobs, boost the economy, and lift us out of a rough spot? This is what we’ve constantly heard from politicians and the media especially over the past couple years. “Government needs to do something.”

Never forget how government gets its money. It does not earn it. It does not work for it. Every penny that goes to government must come forcefully from a productive area of the economy. Government can’t take money from a failing business or struggling individual, it must forcefully take money from wealthier (i.e. productive) businesses and individuals.

This brings us to the first problem with “stimulus projects” in the form of increased government programs, public works, and public spending in general. The only way any government can afford to spend billions and trillions of dollars “stimulating” the economy is to either tax, borrow, or print that money. In other words, people will either directly lose more money to government through taxes, the effect may be felt in the longer-term through debt and borrowing, or the currency will depreciate and prices will rise through the process of monetary inflation. Pick your poison; all three options for government to increase spending will inevitably pinch people the most either directly or indirectly.

“Stimulus packages” aim to boost the economy in the short-term. If government can provide jobs to build public entities (such as transportation options, buildings, etc.) the economy will correct quicker than if the market could work, right? The problem with this theory is people always ignore where that money comes from. Taking money from productive sources in the economy and throwing it to unproductive and expensive projects does not set the economy on a sustainable foundation.

Strong economies are not build on artificial spending. The more that government takes from productive sources in the economy and pumps it into unproductive government projects, the longer the correction and recession will be. Consider some of the projects being funded under Obama’s massive spending plan. One is building a light rail track. This is all well and good, but how is spending billions of dollars on a train track and system going to increase long-term productivity? Few people use government-operated trains as it is (witness Amtrak and its black hole of wasted money), it will simply require more funds sucked out of productive sources to survive.

People buy into the illusion that as long as people have jobs, regardless of productivity, it is good for the economy. Unproductive jobs do no good for the economy and will not expand sustainability and prosperity. Napoleon tried to create jobs and work just by paying people to dig up ditches and fill them back in. It’s a nice idea, but it won’t do a thing to improve the economic picture. It is when labor is efficiently and sustainably used that an economy will expand on a strong foundation.

Today we are seeing government promote and prop up unproductive entities like nothing else. First, we bail out companies who lived beyond their means, made terrible business decisions, and recklessly spent money. These companies were unproductive and hurting the economy. Second, we have the ongoing “stimulus package” pumping money into pork projects that will not be productive in the least. It may sound great to build roads and infrastructure to stimulate the economy, but it won’t create wealth and expand productivity. It is not beneficial to use productivity to fund nonproductive goals. It is a bogus and failed theory that we continue to follow. It will not help the long-term economic picture.

One does not need to look very hard to see how terribly these government shenanigans have failed in the past. The Great Depression is the first obvious example. Hoover and Roosevelt both increased taxes, public projects, and expanded government with hopes of curing economic ills. Subsidies, public works projects, and many other government programs were created and expanded in the 1930s. Roads were built, prices were propped up, and government would not let the market organize labor and money on its own. Despite the intervention and spending efforts from government, unemployment was higher in 1939 than in 1931. The New Deal cost billions of dollars and expanded the federal government like never before, but unemployment and productivity still did not improve.

Let’s take a brief detour to the recession of 1921. Few people have heard of this recession because government actually decreased its size, spending, and taxes during the rough economic period. The government and Federal Reserve did next to nothing as the economy began to correct after the government’s market intervention during World War 1. The government (to the disappointment of some interventionist politicians), rather than increase its role as it would do disastrously just eight years later, ended up sitting this recession out. Prices fell, unproductive businesses failed and reorganized, and the economy was back on its feet after no more than 18 months. The pain was brief, the correction and reorganization was quick, and it all happened largely because government reduced its size and let the market shift money and labor to productive areas of the economy.

In more modern times, Japan’s “Lost Decade” can be another example of the botched intervention of government and the central bank. Some believe that Japan did too little to “stimulate” the economy, when the government and central bank actually took a nearly identical road to the U.S. today. Failed businesses were propped up by government, the central bank lowered interest rates to 0% for a time and pumped cheap money and credit into the economy, and huge amounts of Yen were spent on unproductive and essentially worthless public projects. All of this did nothing but lead to huge government debt and a devastated economy.

It’s hard to understand how much money Keynesians want to spend on “stimulating” the economy. Paul Krugman, the front-runner of the Keynesian crowd, is calling for a second and larger stimulus package. The trillions of dollars already pumped into unproductive businesses and projects wasn’t enough? How much do these guys think we need to spend to bring about their Keynesian Utopia? Rather than realize that government intervention and central manipulation have done more to agitate the economy than help, people are crying for more of the same that historically has done more damage than good.

Government is great at managing the time, labor, and money of other people. It also guarantees that politicians won’t manage that time, labor, and money more efficiently than the people who own that time, labor, and money. The very concept that by taking from productive parts of the economy and spreading it to various unproductive jobs and projects is downright silly. The worst recessions and depressions have come in many countries when government prevents the market from reallocating funds from unproductive businesses and sectors to the strong and productive areas of the economy.

Preventing the failure of a large corporation because jobs would be lost is the equivalent of saying that government should have propped up horse and buggies and the many jobs in the industry regardless of its uselessness to society. The natural order of a free market is to shift funds to the strongest, smartest, and most productive businesses and industries. When government gets in the way with bailouts, “stimulus plans,” and countless other intervention methods, it only guarantees inefficiency, unsustainable activities, and prolonged suffering.

The answer to our economic problems does not lie in government spending as Paul Krugman and many other Keynesians would like, but in more freedom for the market and people to reallocate money and labor to the productive and sustainable portions of the economy.

The philosophy of competition has taken a backseat to government interference. In the recent cases of Bear Stearns, Lehman Brothers, and Fannie Mae, among others, it was the government, not the marketplace, that determined whether the companies were fit to fail or survive. Traditionally, businesses are required to adjust to the harshest of circumstances if they want to survive over the long run. Great businesses grow stronger, not weaker, in the worst of downturns and certainly don’t come crawling to the government for help.

During the middle 1920s, Ford sold roughly ten vehicles to every one sold by Chevrolet, a strong competitive cushion for any company. To reverse this trend, Chevrolet continually increased its advertising, starting in 1927, and in 1931 actually overtook Ford’s lead in automobile sales. You wouldn’t take vehicles to be a hot item in a very rough economy, especially with everything we see today with GM, Chrysler, and Ford. But with smart management and a stellar advertising strategy, Chevrolet kept its business healthy and took advantage of weaker competition. Similar strategies were used successfully by other businesses in the era.

Camel lost its number one spot in the tobacco industry to Lucky Strike in 1929 and Chesterfield in 1931, quickly putting it in the number three position. In response to this sudden fall in market share, Camel greatly increased its advertising budget and once again regained the top spot in 1935. Remember, this was happening in a time when unemployment was climbing as high as 25%, yet with smart advertising programs Chevrolet and Camel, two companies selling non-essential items, expanded their profits and market share.

Proctor & Gamble also performed impressively in this time period, essentially by starting the era of radio advertising and programming. The key to success for many companies remained in a well-managed advertising plan, especially through the new medium, radio, which happened to be one of the fastest growing industries during the Depression. “Print media” (newspapers, magazines, etc.) and billboards also picked up as advertising outlets.

Coca-Cola is another business that took advantage of advertising possibilities. In 1929 there were enough fears going around that the company worried sales were going to decline. Coca-Cola started a new advertising campaign in 1929, and per capita consumption of the drink doubled that year. Interestingly, the other popular drink business of the early 20th century, Moxie, decided to cut back on its advertising budget around the same time, which was the start of its ending days.

Obviously we can’t forget about the many businesses that did fail, but the progress that was made by the free market in the harshest of circumstances is often ignored. What strikes me about the above examples is the fact that because of their strong advertising, all of the companies became popular, household names largely in the Great Depression.

Today the competitive process has been incredibly limited by the government. It was the competition in the Great Depression that promoted the creativity and originality of businesses like Coca-Cola, Camel, and Proctor & Gamble, boosting them into the spotlight over the long run. In the 1930s the auto companies competed like everyone else, and the smart ones took the opportunity to open up to customers and expand their market share. The consumers made the final decision on the success of the businesses, leading to the success of Chevrolet. Today, it is the federal government deciding whether or not GM, Chrysler, and Ford can fail, how they will fail, and has even gone so far to reorganize the management at GM.

Competition created the healthiest areas of the economy in the Great Depression. It was when government got overly involved in areas like farming and international trade that consumers and individuals felt the pinch, businesses struggled, and employees were laid off. Companies who were prepared for a downturn used it as an opportunity to increase advertising, gain market share, and keep a steady base for employees.

When people have the choice to purchase a product, it motivates a business to improve their products to the liking of the most customers, and provides the incentive for other businesses to enter in the “race,” so to speak. It is only in a free, competitive market that the power and choice of the individual is upheld.

When the government starts handing out money to keep certain businesses and industries afloat, you know something is wrong with the process and system. We’re supposed to believe that the fate of the financial system rested on the success of Bear Stearns, Lehman Brothers, Fannie Mae, etc. If this were the case, is this even a system that we should consider keeping afloat? People realized they couldn’t afford the mortgages, the banks who had provided the mortgages expected this but didn’t do a thing to prepare for it. Instead of letting the businesses fail, restructure, and allow new competing businesses and ideas have a shot, the government prevented all of this by throwing taxpayer dollars at a system that is supposedly resting on the fate of several corporations.

Corrections outside the influence of the government, and central bank, are necessary and useful for the long-term strength of businesses and the economy. If a correction comes along like today and the government prevents the floundering businesses from failing, it does not send the message that risky and stupid practices come with potentially devastating consequences. If anything, it encourages more of the exact same practices that got us into this mess.

Common sense alone tells us that a strong economic system does not rest on the fate of a few corporations, the willing hand of government to throw taxpayer dollars at failed ideas, or the ability of the government to interfere at will in the affairs of the market. Clearly the events we have witnessed over the past year do not represent the actions of a free and consumer-controlled economy.

As hard as the federal government and Federal Reserve may try, no manipulated system will outrun the foundation or principles of freedom. The principles and practice of competition, risk and reward, and free choice – not government and central manipulation – will build the strongest, most sustainable, and freest economies.

Since World War I, the U.S. has generally accepted a foreign policy of military involvement overseas. It almost seems as though we believe things would completely fall apart were we not to be militarily present around the world. However much we may accept these ideas, they do not represent the foreign policy of a free, sovereign, and leading nation.

It was the Treaty of Versailles that played a major part in the popularity and rise of Adolph Hitler in Germany. For starters, the U.S.’s national security was not threatened during WWI, yet we still felt the urge to get involved in the mess in Europe. The Treaty of Versailles was essentially created by all major countries involved with WWI, except Germany, in an effort to promote peace in Europe. The U.S. took a large role, as well as France and Britain, in creating and finalizing the Treaty.

In short, the Versailles Treaty brought enormous pressure and devastation upon Germany; forcing the country to reduce its army size, give up land, and pay for many of the rebuilding efforts in Europe. This is not to downplay Germany’s role in the war, but the Treaty did not give the German people a warm and fuzzy feeling about the outside countries dictating the rules to Germany. Adolph Hitler took advantage of the anger and resentment felt by Germans by uniting the country, partly by downplaying and attacking the outlines of the Versailles Treaty and the people behind it. Hitler came to power in 1933.

In 1930, Herbert Hoover and the U.S. Congress enacted the Smoot-Hawley Act, raising tariffs to record levels on thousands of items. Incredibly high tariffs led to decreased trade, and other countries enacted similar policy to retaliate and show resentment to the U.S. for heavily limiting trade. The U.S. was in the midst of starting a period of protectionist economic policy worldwide, after getting much more involved in world affairs in WWI and the Treaty of Versailles.

Ever since the Versailles Treaty and Smoot-Hawley Act, the U.S. has struggled to find the balance between forceful intervention overseas and domestic protectionism. Both policies are costly and counterproductive in the long run, but today we fail to recognize the dangers of foreign and domestic intervention.

Foreign intervention is simply built on bad principles. We do not carry the right to occupy other sovereign nations because we are a superpower. We do not have the moral authority or the constitutional authority to do this. Plus, it is costly in money, lives, and creates resentment towards the U.S., and in extreme cases will backfire in terrible measures such as terrorism.

Protectionism and isolationism are no better. Shutting down trade also leads to resentment, as we saw in the Great Depression, and keeping ourselves out of the rest of the world will greatly hold back the ultimate goals of world peace, friendship, and cooperation. If countries can’t freely exchange goods between each other without putting up a fight, that alone will be the beginning of major long-term problems.

Both interventionism and protectionism are shortsighted policies. Today we accept government-managed trade in the forms of NAFTA, NATO, etc., as free trade, but it is nothing more than a cover for more government interference and control in the marketplace. Pursuing either an interventionist foreign policy or protectionist domestic policy eventually leads to its own brand of isolationism, rarely serving the interests of the people.

As with domestic policy, the U.S. has maintained a very short-term view of how the world works. Truthful, sustainable, reliable cooperation will come by empowering people to trade and travel between countries. Governments have biases and lust for control that always seem to get in the way of creating a lasting and principled foreign policy. At least, this is how history has shown it.

Ever since the U.S. decided to get actively involved militarily in foreign problems, we have seen much bloodshed, war, and violence. The Vietnam War dragged on for years, but only when we pulled out our troops did the country start to recover to be the prosperous and expanding country that it is today. We have been in Korea for sixty years, yet the tension there is still high and lasting today. We continue to isolate ourselves from Cuba, despite the fall of the Soviet Empire years ago and no threat to our national security.

Fire does not disappear with more fire, yet even in many of the smallest skirmishes that occur in the world, violence is seen as the first retaliation. The 20th century saw many governments get forcefully involved in world affairs and it turned out to be the bloodiest period in the records of history.

Despite the high levels of interference from the U.N. and numerous governments (primarily the U.S.), the violence and wars continue unabated. Just look at the ongoing messes we face in Afghanistan and Pakistan. Iraq is years from reaching a conclusion with U.S. presence. And don’t forget, we have military bases in nearly 130 different countries today.

Just think for a moment. How would we feel if China built several military bases in the U.S.? How would we react if Russia deployed even as little as three hundred soldiers on our soil? We would not accept it without putting up a serious fight. Is it so hard to comprehend that when we build permanent military bases in sovereign nations, sometimes even on their holy land, it won’t result in serious blowback?

It was in the first grade when I first learned the golden rule: treat others the way you want to be treated. This simple principle that six-year-olds are learning isn’t understood by our own government. Even the people who support military intervention today can’t pretend that these policies won’t have consequences.

Foreign policy is much too dangerous of an area to follow a flawed belief, principle, or argument. A lasting, sustainable, and prosperous foreign policy will come not from government force, but with honest free trade, strong diplomatic relations and discussions, and a relentless pursuit of friendship before force.

Recently I have grown deeply concerned with the potential power grab by the central government over credit card interest rates. In a time of weak economic conditions in many industries and the overall economy in general, the White House and Congress assume they have the power and responsibility to lower credit card rates and greatly increase regulation over the industry, in order to protect the consumer.

Prior to 1937, Congress’s role in the regulation of commerce was quite simply defined as the “movement of goods” between states, and put most production and manufacturing outside of the regulatory power of Congress. This definition has essentially been abandoned ever since the Supreme Court, in 1937, upheld an act allowing Congress to regulate many aspects of labor through the National Labor Relations Board.

Before this case, activities within the states were left strictly to the states to regulate and it was out of the boundaries of the federal government to intervene. Today, this description of regulation would be laughed at by the bureaucrats in Washington arguing to regulate practically anything that the government doesn’t already have its hands on.

The issue of whether credit card rates and businesses should be regulated is a viable discussion. Traditionally, and constitutionally, this is an issue that should absolutely be left to the states. It is a local issue and not an interstate issue, thus taking it out of Congress’s regulation jurisdiction. At least, this is what the case would have been before 1937 when a more clear interpretation was used to define the Commerce Clause in the Constitution.

The troubling aspect of the new potential regulations of credit cards is that it is the Federal Reserve Board who is making many of the new decisions and regulations limiting credit-rate increases, set to take effect in 2010. Now, think for a moment.

If it used to be out of the constitutional boundaries of Congress to regulate local and state matters like credit card rates, where on earth does the Federal Reserve get the constitutional authority to set and carry out these regulations? It is troubling that the Constitution can be trampled on this much without so much as a peep asking where the constitutional authority for these powers is derived from.

The issue of whether these regulations are needed or worthwhile is one thing. But rough problems today will easily turn into a disaster tomorrow if there is no check on government. Today we are seeing a federal government with few boundaries or concern for following the Constitution. Our government was created under the Constitution, and the federal government and Congress specifically were given very specific and limited powers. This was generally respected for the first 150 years of our nation’s history.

Credit card regulation may certainly be beneficial on a state level. If the regulation is needed, constitutionally it is clearly and definitively a decision to be debated and made by the states, not the federal government or Federal Reserve. Currently not only is state power being trampled on, but Congress has turned and continues to turn the responsibility of the states over to a closed-off, powerful, independent agency whose very constitutionality itself is questionable.

In today’s time of calls for more federal regulation, intervention, and control over finance, it is hard to imagine a time when Congress’s role in commerce was so narrowed down to regulating the movement of goods between states. It isn’t too unlikely that the Federal Reserve will gain even more regulatory powers over the financial industry over the next several years. What’s ironic is that it is all being carried out in the name of protecting the consumer.

It is absurd to think that allowing the Federal Reserve to carry more regulatory responsibility will help consumers. They have no constitutional authority to regulate, the operators of the Fed are not elected by the people, and the primary operations of the Fed are off-limits to audits. You cannot tell me that this group can adequately protect consumers and not pander to the banking interests who run the agency.

True regulatory representation of the consumer can only be achieved through the states. If it isn’t the individuals who decide the regulations, it isn’t right to call it consumer protection, is it? It’s a head scratcher to think that the same organization who has destroyed the value of our currency (which hits the lower and middle class hardest) can stand up for consumers with a straight face.

It is largely a lack of understanding and respect for the Constitution that got us into this mess in the first place. Many in government either do not understand, or simply ignore, the restraints placed on Congress’s regulatory power and the 10th Amendment’s clear language bringing issues not given to the federal government back to the states and the people.

If it is consumers who you want to protect, all you have to do is follow, respect, and protect the Constitution. Through their local, state, and own regulatory power, the free individuals of this country can do the rest.

“If the provisions of the constitution be not upheld when they pinch as well as when they comfort, they may as well be abandoned.” — Former Associate Justice of the Supreme Court George Sutherland

The Great Depression has become one of the most misunderstood events in U.S. history. Many people believe the free market to be culprit that caused the incredible economic downturn, that the government didn’t do enough to stop it, and that it was largely President Hoover’s fault for not intervening enough into the economy. Today, to my best ability, I hope to dismiss these false assumptions.

Herbert Hoover was elected President of the United States in 1928, and from the beginning it was clear he was not a supporter of laissez-faire, nonintervention economic policies. Hoover preferred regulation, government involvement, and over the course of his presidency he greatly expanded the role of the federal government in the economy. During his presidential campaign he spoke of helping the agriculture industry by raising tariffs and discouraging agriculture imports.

Hoover’s intervention began in 1929 with the Mexican Repatriation, leading to the “voluntary and involuntary” migration of approximately half a million Mexicans; the reasons primarily being high unemployment in the U.S. and the incentives welfare created for Mexicans. Rather than look at the root reason for the Mexicans wanting to be here (jobs and welfare), Hoover ignored the cause and instead only dealt with the effect; not too far off from the immigration policies the U.S. has employed with Mexico ever since. The Mexican exodus would last through 1937.

The Repatriation was not too unreasonable compared to the other policies put into action by Hoover. On June 17, 1930, the President signed into the law the Smoot-Hawley Tariff Act. The Act raised tariffs on more than 20,000 goods imported into the U.S. to historically record levels. Prior to the bill’s passing, 1,028 American economists signed a petition urging Congress and President Hoover to not support or pass the act, explaining that it would force consumers to pay higher prices on countless items.

The reasoning behind the bill was that it would encourage people to buy American products, by greatly increasing the prices of imported goods. It was also assumed that it would lead to greater revenue for the federal government. This turned out to be terribly misguided thinking, as it would help slice American imports by 66% and exports by 61%, between 1929 and 1933. Exports declined sharply because many countries increased their own tariffs on American goods in particular, as a result of Smoot-Hawley, leading to a period of reduced trade and economic isolationism and protectionism.

There is a good possibility that the passage of Smoot-Hawley may have played a good sized part in the collapse and decline of the stock market starting in 1929. As the Wall Street Journal explains:

Though many associate the Great Depression with the stock market crash on Oct. 29, 1929, the market actually rallied during the six months following Black Tuesday, while the defeat of Smoot-Hawley appeared likely. The market turned south again in April 1930 as those hopes of defeat gradually dimmed.

The Dow Jones Industrial Average sank a full 8%, from 250 to 230, over just two trading days in June 1930, in direct response to the Senate’s passage of Smoot-Hawley and Hoover’s announcement that he would sign it. Exacerbated by other flawed governmental policies, an international trade war continued to drive the market down until the Dow hit a low of 41 on July 8, 1932, having lost 89% of its value from its September, 1929 high.

The initial and continuing effects of the bill certainly did not help revive the U.S. economy as originally intended. This was not the end of the list of legislation, signed into law by Hoover, heightening government interference in the market.

As a result of the faltering economy, revenue from the corporate tax dropped to $550 million in 1932 from $1.1 billion in 1930, and income tax revenue fell to $370 million from $1 billion over the same period. This made way for a growing budget deficit of more than $2 billion in 1932. In response to the government’s financial problems Congress enacted the Revenue Act of 1932, which Hoover signed into law on June 6, 1932.

Among other things, the Revenue Act increased the top income tax rate to 63% from 25%, doubled the estate tax, increased corporate tax rates nearly 15%, and added new and increased excise taxes on goods such as tires, lubricating oil, refrigerators, chewing gum, soft drinks, electricity, and many other items.

Government looked at its revenue problem in 1932 and seemed to see increased taxes as the only solution. Cutting the increased federal programs and spending, for some reason, did not appear to be a viable option. Rather than even considering the federal government might be unnecessarily involved in areas that it shouldn’t have been, creating new taxes and increasing current ones was seen as the only reasonable solution.

Amazingly, Franklin Roosevelt actually attacked the President on this issue while campaigning, explaining that Hoover had spent money in a “reckless and extravagant” manner that the U.S. had never before seen. John Nance Garner, Roosevelt’s running mate in 1932, said Hoover was “leading the country down the path of socialism.” While these accusations may very well have been true, it is laughable to compare these words coming from Roosevelt and Garner, to the New Deal policies they implemented once in power. The New Deal that the Roosevelt administration pushed and championed was nothing more than a continuation and escalation of the policies pursued by Herbert Hoover, the same ones Roosevelt had blasted while on the campaign trail.

Both Hoover and Roosevelt tried to push economic beliefs and theories that helped prolong and worsen the Great Depression. They both believed the federal government should manipulate the economy, and stimulate it out of a correction through spending and government involvement. The two presidents subscribed to the same flawed, short-term focused, interventionist, Keynesian belief in economics. The failure of their philosophy is evident in the performance of the economy during the period in which they tried their shenanigans. The country’s unemployment rate in 1939, despite all the efforts from Hoover and Roosevelt, was still higher than it was in 1931.

The free market does not come without its own flaws. Humans are not perfect, but with a free market system it is the individuals making the calls; not an elevated, select few who regulate and control society. In whatever economic model you choose, humans will always be behind the system.

It is not through more laws, regulation, and intervention that we find the right path to a prosperous society. Only by learning freely from our mistakes and failures can we expect to grow stronger, smarter, and more sustainable over the long-term.