The First Government Bailouts: The Story of the RFC - Burton W. Folsom Jr.

The idea of using federal money to bail out large failing corporations did not begin with the Bush administration. In the beginning was the RFC, the Reconstruction Finance Corporation, which President Herbert Hoover pretentiously named and bountifully funded during the Great Depression to bail out corporations deemed too big to fail. In 1932 Congress gave the RFC $2 billion—plus much more later—and the power to choose who got the money.

On the surface the idea behind the RFC sounds good. By 1932 the Great Depression had already been devastating. Banks were failing, railroads were going broke, workers had been laid off by the millions. Why not pump cash into some large struggling companies and keep them serving customers and hiring workers? Jobs would be saved, dollars would flow through the economy, and the Great Depression might be halted.

But there were two big problems. First, the $2 billion the RFC would dole out had to come from taxpayers. And they could have used that money instead to buy radios, shirts, gas, or a host of other products that would have put people to work making and selling these items. In other words, shifting capital from workers who earn it to central planners who spend it may not create or even save jobs.

Second, Hoover’s whole idea of an RFC assumed that a group of wise men could discern the U.S. economy clearly enough to pick the right banks, railroads, and corporations to resuscitate with the right amount of cash. What we find instead is that when an appointed committee like the RFC is matched with large amounts of money, the results quickly become politicized.

Thousands of large U.S. companies wanted capital, but only a fraction of them could get it. Rep. Louis McFadden (R, Pa.), himself a bank president, called the RFC “a scheme for taking $500,000,000 of the people’s money produced by labor at a cost of toil and suffering and giving it to a supercorporation for the sinister purpose of helping a gang of financial looters to cover up their tracks.”

Immediate Politicization

Hoover, a Republican, appointed former Republican Vice President Charles Dawes to head the new RFC. Dawes, however, resigned in June 1932 to care for his bank in Chicago, the Central Republic Bank and Trust Company. Three weeks after his resignation, Dawes won a $90 million loan for his failing bank (it went broke anyway). After that, Atlee Pomerene, the new RFC president, accepted a $12.3 million loan for his Cleveland bank. Joseph Nutt, treasurer of the Republican National Committee, won a $14 million loan for his bank in Cleveland. Republican Senator Phillips Goldsborough of Maryland received a $7.4 million loan for his Baltimore bank. Roy Chapin, Hoover’s secretary of commerce, won $13 million for his Detroit bank.

Some Democrats (Pomerene was a former Democratic senator) also finagled loans from the RFC, but the larger point is that choosing who got loans and who didn’t was a political process that gave capital to the winners and took more in taxes from everyone else. Funding federal programs was expensive. During 1932, for example, the top income earners saw their top tax rate hiked from 25 to 63 percent. Plus Congress that year passed a host of new excise taxes on gas, tires, telephone calls, and movie tickets.

The Other Side’s Turn

When Franklin Roosevelt was elected president, he installed a loyal Democrat, Texas banker Jesse Jones, as the new president of the RFC. Jones helped those Roosevelt sent his way—either through RFC loans or by using his influence with others. J. David Stern, for example, edited the Philadelphia Record, which backed Roosevelt and other Democrats enthusiastically in the election. Stern, however, almost went bankrupt in the 1930s, so Roosevelt asked Jones to help. Jones used his influence in the banking community to secure $1 million in loans to keep Stern publishing.

Some reporters were sensitive to the RFC money and influence offered by Jones. Walter Trohan, the Washington bureau chief for the Chicago Tribune, often interviewed Jones, who according to Trohan would often offer RFC loans and agency-controlled firms to him. “I turned these offers down, because I didn’t know anything about such businesses and because I didn’t think I would be honest in accepting,” Trohan revealed in his book Political Animals.

Others did not have Trohan’s scruples. Hall Roosevelt, the President’s brother-in-law, used White House telephones to request loans from the RFC. According to Jones, “Two or three loans were made in which it appeared Hall Roosevelt had some kind of interest.” At one point the President urged Jones to give Hall the loan he requested because, as Jones wrote in his book, Fifty Billion Dollars, “The president wanted to get Hall as far from the White House as possible.” Jones also helped FDR’s son Elliott escape a $200,000 debt from a failed radio business in Texas.

Defenders of the RFC are quick to cite its many loans and gifts during World War II to big corporations to make weapons and supplies that helped the U.S. government win the war. But even if we assume the right corporations got the right loans and gifts, that still leaves the RFC with no reason to exist after the war. The Great Depression had ended and unemployment had stabilized at under 4 percent in 1946 and 1947, yet the RFC was still aiding corporations.

The Closest Thing to Immortality

True, the RFC had lost its economic purpose, but with all those tax dollars on hand it never lost a political purpose. To repeat what FDR once said about Social Security, the RFC loans “were never a problem of economics. They are politics all the way through.” In other words, congressmen eagerly sought RFC money to bring back to corporations in their districts. President Truman noted that “a great many members of Congress had accepted fees for their influence in getting RFC loans for constituents.”

Not only were congressmen profiting, but RFC staffers were using these loans to get jobs with the lucky companies. John J. Hagerty, for example, head of the RFC in Boston, endorsed a loan to the Waltham Watch Company. Hagerty soon accepted a job with the company for three times his RFC salary.

In 1953 President Eisenhower ended the reign of the RFC, but not completely. Parts of it reemerged as the Small Business Administration—which began making loans to favored small businesses.

What do we learn from the RFC? First, that government programs are easier to start than stop; second, that those programs will cost more than the originators intended; and third, that federal money becomes politicized very quickly, helping politicians to win votes.

Read more and comment at The Freeman

Social Cooperation, Part 2 - Sheldon Richman

Last month I wrote about Ludwig von Mises’s emphasis on social cooperation as the basis of his economic philosophy, particularly in his magnum opus, Human Action. I thought I’d follow up with more thoughts on this subject.

Mises was no maverick in this regard. Interest in social cooperation pervades the best classical-liberal and libertarian thought. Paradoxical as it sounds, it is at the heart of the philosophy of individualism. If opponents of the freedom philosophy base their criticism on an atomistic model of the individual, it’s largely because too many libertarians overlook their heritage and emphasize that side of the coin to the neglect of the social side.

Leading thinkers in the liberal tradition have sought a synthesis of individual and society. In Social Statics (1850), Herbert Spencer discussed the “tendency to individuation,” which is most pronounced in the human race:

[The person] is self-conscious; that is, he recognizes his own individuality. . . . [W]hat we call the moral law—the law of equal freedom—is the law under which individuation becomes perfect, and that ability to act up to this law is the final endowment of humanity. . . . The increasing assertion of personal rights is an increasing demand that the external conditions needful to a complete unfolding of the individuality shall be respected. Not only is there now a consciousness of individuality and an intelligence whereby individuality may be preserved, but there is a perception that the sphere of action requisite for due development of the individuality may be claimed, and a correlative desire to claim it. And when the change at present going on is complete—when each possesses an active instinct of freedom, together with an active sympathy—then will all the still existing limitations to individuality, be they governmental restraints or be they the aggressions of men on one another, cease. Then none will be hindered from duly unfolding their natures.

But in the next section Spencer wrote:

Yet must this higher individuation be joined with the greatest mutual dependence. Paradoxical though the assertion looks, the progress is at once toward complete separateness and complete union. But the separateness is of a kind consistent with the most complex combinations for fulfilling social wants; and the union is of a kind that does not hinder entire development of each personality. Civilization is evolving a state of things and a kind of character in which two apparently conflicting requirements are reconciled.

Thus Spencer foresaw “at once perfect individuation and perfect mutual dependence.”

Just that kind of individuality will be acquired which finds in the most highly organized community the fittest sphere for its manifestation, which finds in each social arrangement a condition answering to some faculty in itself, which could not, in fact, expand at all if otherwise circumstanced. The ultimate man will be one whose private requirements coincide with public ones. He will be that manner of man who, in spontaneously fulfilling his own nature, incidentally performs the functions of a social unit, and yet is only enabled so to fulfill his own nature by all others doing the like.

For Spencer, to violate the law of equal freedom—“that vital law of the social organism”—is to assault society itself. It sounds as though Spencer is saying that we need society not only for economic exchange and security but something more—because our very nature requires it.

Aristotle

Despite some differences this reminds me of Aristotle. (Fred D. Miller, Jr., finds classical-liberal themes in Aristotle.) In Politics Aristotle states that a polis is not merely a collection of individuals seeking gains from trade and safety. It “is a community of families and aggregations of families in well-being, for the sake of a perfect and self-sufficing life. . . . The end of the state [polis] is the good life. . . .”

Aristotle famously identified the human being as a social/political animal, a concept inseparable from the capacity to reason, use language, and discourse. In Aristotle’s view a human being can live like a human being only in society. We need other people to be fully human because we can’t know what we need to know or do what we need to do except through interaction in a community. “For each individual among the many has a share of virtue and prudence,” Aristotle writes.

Likewise in the Nicomachean Ethics he writes, “For the final and perfect good seems to be self-sufficient. However, we define something as self-sufficient not by reference to the ‘self’ alone. We do not mean a man who lives his life in isolation, but a man who also lives with parents, children, a wife, and friends and fellow citizens generally, since man is by nature a social and political animal.”

Endoxa

Auburn University philosopher Roderick T. Long (to whom I am indebted for his discussion of Aristotle in Reason and Value: Aristotle versus Ayn Rand) emphasizes Aristotle’s view that we can’t know very much without help from society. Discussing Aristotle’s theory of knowledge and belief, Long notes that for the Greek philosopher endoxa, or “reputable beliefs,” are critical to the individual. No one builds up her knowledge from scratch on a bedrock foundation. We are born into a particular context and are taught many things, some true and some false. It would be impossible to start over, and fortunately there is no need to. We can begin with the beliefs we have and move forward making adjustments as we find inconsistencies and learn new information. This is necessarily a social process. Long writes: “But Aristotle thinks I will have good reasons for including the endoxa of others—the collective wisdom of mankind, as it were—among my endoxa or phainomena. The pursuit of knowledge is a cooperative endeavor, and will be more successful if everyone is allowed to make a contribution.”

Aristotle says, “For each man has something personal to contribute toward the truth. . . .” For him, society is not just a bridge to the good life, it is constitutive of the good life.

I could also invoke Ludwig Wittgenstein (no classical liberal), who drew attention to the intrinsically public nature of language (and hence thought) itself. Wittgenstein, like F. A. Hayek, underscored the communality of rules. “The word ‘agreement’ and the word ‘rule,’” Wittgenstein wrote, “are related to one another, they are cousins [like Wittgenstein and Hayek]. If I teach anyone the use of the one word, he learns the use of the other with it.”

Only individuals value, choose, and act, of course, but in an important sense the resulting social whole is greater than the sum of its individual parts. Thus the defense of personal liberty is the defense of society. Let’s hear liberalism’s opponents criticize that.

Read more and comment at The Freeman

Social Cooperation Pt.1 - Sheldon Richman

At FEE’s Advanced Austrian Economics Seminar last summer, more than one speaker mentioned that Ludwig von Mises considered a different title for the book we know as Human Action. The other title?Social Cooperation.I’ve heard that story before, but this time it got me thinking: Would the free-market movement have been perceived differently by the outside world if Mises had used the other title? With the question phrased so narrowly, the answer is probably no. So let’s broaden it: Would the free-market movement be perceived differently if its dominant theme was social cooperation rather than (rugged) individualism, self-reliance, independence, and other synonyms we’re so fond of?Maybe.There’s no mystery why that other title occurred to Mises. I haven’t tried to make a count, but I would guess that “social cooperation” (or “human cooperation”) is the second most-used phrase in the book. The first is probably “division of labor,” which is another way of saying “social cooperation.” Human Action is about social cooperation or it isn’t about anything at all. The first matter Mises takes up after his opening disquisition on the nature of action itself is . . . cooperation. He begins, “Society is concerted action, cooperation. . . . It substitutes collaboration for the—at least conceivable—isolated life of individuals. Society is division of labor and combination of labor. In his capacity as an acting animal man becomes a social animal.”It is through cooperation and the division of labor that we all can live better lives. Naturally, Mises laid great stress on the need for peace, since the absence of peace is the breakdown of that vital cooperation. This put Mises squarely in the pacifistic classical-liberal tradition as exemplified by Richard Cobden, John Bright, Frédéric Bastiat, Herbert Spencer, and William Graham Sumner. Mises wrote in Liberalism:The liberal critique of the argument in favor of war is fundamentally different from that of the humanitarians. It starts from the premise that not war, but peace, is the father of all things. . . . War only destroys; it cannot create. . . . The liberal abhors war, not, like the humanitarian, in spite of the fact that it has beneficial consequences, but because it has only harmful ones.Given Mises’s orientation it is unsurprising to see him attach so much importance to what he calls the Ricardian Law of Association. This is known as the law of comparative advantage (or cost), which states that two parties can gain from trade even if one is more efficient at making every product they both want.The key is opportunity cost. A $500-an-hour lawyer who is also the fastest, most accurate typist in the world will likely find it advantageous to hire a typist. Why? Because every hour the lawyer spends typing instead of practicing law costs him $500 minus what he would have paid a typist. The typist faces no such opportunity cost. So lawyer and typist both benefit by cooperating. This is true of groups (countries) too. People will discover the benefits of concentrating on what, comparatively, they make most efficiently (or least inefficiently) and trading with others. As a result more total goods will be produced.This law is an important part of the argument for free international trade because it answers the objection that a national group that can’t make anything as efficiently (absolutely) as others will be left out of the world economy. But Mises understood that the law of comparative advantage was merely an application of the broader law of association. As he wrote in Human Action:The law of association makes us comprehend the tendencies which resulted in the progressive intensification of human cooperation. We conceive what incentive induced people not to consider themselves simply as rivals in a struggle for the appropriation of the limited supply of means of subsistence made available by nature. We realize what has impelled them and permanently impels them to consort with one another for the sake of cooperation. Every step forward on the way to a more developed mode of the division of labor serves the interests of all participants. . . . The factor that brought about primitive society and daily works toward its progressive intensification is human action that is animated by the insight into the higher productivity of labor achieved under the division of labor.This seemingly simple idea leads to counterintuitive conclusions. As a result of expanding cooperation, human beings compete to produce, not to consume. Mises expressed this with my favorite sentence in Human Action: “The fact that my fellow man wants to acquire shoes as I do, does not make it harder for me to get shoes, but easier.” The expansion of cooperation also means dealing with strangers at great distance—a further incentive for peace.Unfortunately the emphasis on cooperation is not what nonlibertarians are likely to “know” about free-market economics and the normative freedom philosophy. They are more apt to associate these with “rugged individualism” than “social cooperation.” I have no doubt that a major reason for this is that our opponents who know better want the public to have a distorted sense of the genuinely liberal worldview. When President Bill Clinton declared (disingenuously) in his 1996 state of the union address, “The era of big government is over,” he followed up that sentence with this: “But we can’t go back to the era of fending for yourself.” But human beings have always been social/political animals. There was no era when men and women fended for themselves individually. The choice is between free and forced association.Of course libertarians and free-market advocates do emphasize the importance of the division of labor. Nevertheless we are partly responsible for the public misperception. Our rhetoric too often implies atomism, however inadvertently. (The appropriate individualism is molecular individualism.) I understand the value of the terms “individualism,” “self-reliance,” and “independence,” but we should realize that they can easily lead to undesirable caricatures. Let’s not encourage anyone to think that the libertarian ideal is Ted Kaczynski minus the mail bombs.We’re all grappling with an uncertain future. Social cooperation unquestionably makes that task easier than if we attempted to go it alone. That’s why individuals formed mutual-aid (fraternal) organizations. Besides camaraderie, these groups provided what the welfare state feebly and coercively supposes to provide today: islands of relative security in a sea of uncertainty.If people support the welfare state, don’t be puzzled. It’s because they cannot see a better voluntarist alternative. That’s where libertarians come in.We libertarians might have an easier time persuading others if we emphasized that freedom produces ever-more innovative ways to cooperate for mutual benefit and that when government dominates life, social cooperation is imperiled.Read more and comment at The Freeman

Employer Speech and Freedom of Association - Charles W. Baird

I have argued that forcing a worker to submit to the will of a majority of his colleagues on the question of whether a union will represent him is a violation of that worker’s freedom of association. Association with a union is rightly a matter of individual not collective choice. Here I want to consider attempts by unions further to diminish worker freedom of association by trying to silence or at least obstruct employer campaign speech in the run-up to representation elections.

Freedom of association in union representation elections requires that workers be able to cast an informed vote. Workers must have access to both pro- and anti-unionization arguments. We can count on union organizers vigorously to present pro-unionization arguments. They start doing so long before any representation election is scheduled because they must get 30 percent of eligible workers to sign cards requesting unionization before the National Labor Relations Board (NLRB) will order an election.

We usually can count on employers vigorously to present anti-unionization arguments, but they have less time than union organizers have to make their case. They often don’t know about union organizing efforts until the union has collected the requisite signatures. The time between the NLRB’s order to have an election and the actual election is crucial if workers are to be able to hear the employer’s side of the story and thus be able to make an informed choice about how to vote.

In 1947 Congress amended Section 7 of the National Labor Relations Act (NLRA) to make explicit the right of workers to refrain from unionization. To give effect to that right, Congress added Section 8(c), which affirmed the right of employers to engage in free speech during election campaigns. Congress wanted workers to hear both sides of the debate over whether to unionize so that they could make informed decisions.

In 1948 the NLRB endorsed this intent of Congress by declaring, in General Shoe Corp., that its primary duty under the new law was to support workers’ right to “make a free and fair choice” on the question of whether to unionize. Absent force or fraud, election debate is, the Board asserted, the best way to enable workers to do so.

In Linn v. United Plant Guard Workers (1966) the Supreme Court noted approvingly that the NLRB does not “police or censor propaganda used in the elections it conducts, but rather leaves to the good sense of the voters the appraisal of such matters, and to opposing parties the task of correcting inaccurate and untruthful statements.” The Court went on to affirm that “debate . . . should be uninhibited, robust, and wide-open, and that it may well include vehement, caustic, and sometimes unpleasantly sharp attacks.”

Notwithstanding the clear intent of the 1947 Congress, and the eager endorsement of that intent by the 1948 NLRB, and the 1966 Supreme Court, the present NLRB demurs. It takes its orders from unions, and unions seek to silence employer speech.

The failed card-check bill would have silenced employer speech because it would have forced an employer to recognize a union as the monopoly bargaining agent over his employees if it collected the signatures of at least 50 percent of them on cards requesting such recognition. There would be no election campaign during which employers could give their side of the debate.

Card Check by Fiat

Union cronies in Congress failed to deliver on card check, but on August 26, 2011, the pro-union NLRB troika—Mark G. Pearce, Craig Becker, and Wilma B. Liebman—created a limited form of card check by regulatory fiat. In its Lamons Gasket decision the troika overturned the Board’s 2007 decision in Dana Corp.

The NLRA permits an employer voluntarily to recognize a union as the monopoly bargaining agent over his employees if the union collects the signatures of at least 30 percent of them on cards that request such recognition. In Dana Corp. the NLRB ruled that when an employer chooses to grant recognition to a union without first letting the employees vote on whether to be subjected to union rule, the affected employees could immediately demand an election to challenge the employer’s voluntary recognition.

In Lamons Gasket the troika declared that the affected employees would have to wait for at least six months, and in some cases up to one year, before they could hold a challenge election. This means that union rule over workers, lasting at least six months, can be achieved by a 30-percent card check rule.

Why would an employer choose to turn his workers over to union rule without a secret ballot election? Because he fears a “corporate campaign.” Following Saul Alinsky’s Rules for Radicals, a union picks a target enterprise to unionize and demands that the target not resist. If the target chooses to defend itself and its workers against unionization, the union forms coalitions with leftist community-activist groups to try to destroy the target’s standing in the community and its relationships with lenders, suppliers and customers. The union and its allies smear the target and its officials as monsters who want to take away their employees’ freedom of association. The union and its allies, often including benighted clergy, claim the moral high ground. But employers who choose to resist really occupy the moral high ground. They promote their employees’ freedom of association.

Shortened Election Process

In another attack on employer campaign speech, in June 2011 the NLRB troika decided to cut the representation election process from its present median of 38 days to ten days. With less time to speak, employers will speak less.

There are several reasons for workers to choose to be union-free. For example, union-free enterprises offer more job security than their union-impaired counterparts because the latter are too sclerotic to frequently changing global market conditions. Union-free firms can reward workers on the basis of productivity. In union-impaired firms pay is based on job classifications and seniority. Union-free workers are free to excel, while union-impaired workers are chained to a contract. Unions promote an adversarial relationship between workers and employers, while union-free employers are free to enlist workers as partners in building durable and growing value.

The NLRA illegitimately forces workers into representation elections. To make matters worse, the current NLRB seeks to obstruct the access of workers to arguments in favor of remaining union-free. Employers are the most reliable conveyors of those arguments. Employers must be free to speak.

 Read more and respond at The Freeman

Destroying Value - Sheldon Richman

In Cleveland and other American cities homes are being demolished because five years after the housing bust there is nothing better to do with them. Therein lies a lesson in Austrian business cycle theory.

In a world of uncertainty, waste—the destruction of value—is inevitable. Human action, which aims to replace inferior circumstances with superior circumstances, often involves laboring to transform scarce resources from a less useful form to a more useful form. For example, I transform money earned by my labor into raw beef (by using time and gasoline to drive to the supermarket and engaging in exchange), then I transform the raw beef into a medium-well hamburger through the time-consuming process of cooking. If after I eat the hamburger I wish I had done something else with the money and time (say, bought a chicken), I will regret my course of action and feel I’d wasted both.

We have all devoted time and resources to some project that we later realized was the wrong project. That’s the price of imperfect knowledge, which plagues all human beings. If we’re lucky some of the resources we used might be salvageable and put to other purposes, but the time, effort, and other resources are gone.

The same thing of course occurs in commercial production. An entrepreneur buys inputs and hires labor, thinking the finished product will bring a price that covers costs and yields a competitive return—only to find that people don’t want the product, or not badly enough to pay the anticipated price. The loss represents the destruction of value: The value of the inputs before the transformation took place turned out to be greater than the value of the finished product.

As I say, this happens because our knowledge is imperfect. It’s too bad, but perhaps not a tragedy—just a fact of life we learn to live with and minimize. The tragedy occurs when government intervention distorts price signals and induces people en masse unwittingly to make value-destroying plans. That’s part of the story told by the Austrian theory of the business cycle. In the present economic case the Federal Reserve’s low-interest-rate policy in the early 2000s and several federal agencies’ decade-long easy-housing policies induced builders to produce too many houses relative to what the demand would have been without those unsustainable policies. The result was the infamous housing boom and inevitable bust. With housing prices apparently on an unstoppable upward trajectory, and government-backed Fannie Mae and Freddie Mac—not to mention too-big-to-be-allowed-to-fail banks—willing to buy lenders’ mortgages no matter how shaky, builders and buyers were found in great abundance. Buying more house than one could afford seemed smart when one could get a low teaser rate on an adjustable-rate mortgage for a low-to-no-down-payment home and expect its price to rise significantly in six months. When the higher rate kicked in, one could refinance or sell and walk off with the equity.

But when interest rates rose, the bubble burst, and demand plummeted, this smart scheme turned sour. Houses stood unsold, and many people couldn’t pay their mortgages, refinance, or sell at a profit. Foreclosures skyrocketed and the multitude with underwater homes simply disappeared, leaving banks holding a slew of vacant houses that cost money in taxes, code violations, and so on.

As a result, banks now would rather donate the properties to government-created nonprofit land banks and pay for the demolition than hold them and hope for future sales. This is happening in Cleveland, and the Washington Postreported that similar programs were being discussed elsewhere.

How does this relate to the waste identified by the Austrian business-cycle theory? To the extent the homes were vacated and allowed to deteriorate because of the process described above, the demolitions represent destruction of value attributable to government. In the absence of the unsustainable bubble-inflating policies, some of those houses wouldn’t have been built.

In the case of older homes, fewer newly built houses would have competed with them in the real estate market. They would still be occupied and therefore would have been maintained. (There would have been no Great Recession and high unemployment.) Demolition would not have been an attractive alternative.

The tragedy is that because of government policy, demolition is the most attractive alternative. Think of the resources and labor—now seen to have been squandered—that went into making each house. Imagine what products might have been created instead. It’s worse than that: Products always summon complementary products. A housing boom stimulates the production of related shopping centers, office parks, and myriad smaller facilities and products. The resources required to make those things also would have gone elsewhere. Now all those resources, along with much labor and time, are gone because people in government thought they knew how to plan the housing market.

 Read more and respond at The Freeman

Occupying Wall Street - Sheldon Richman

The Occupy Wall Street agenda is vague, but the protesters at least have the good sense to know that something is awry with the political-economic system we labor under. Protesters carried a variety of signs, one of which stated, “End corporate welfare.” The Associated Press reported, “Demonstrators said Saturday they were protesting against bank bailouts and the mortgage crisis.” One 21-year-old man told the AP, “The enemy is the big business leaders of Wall Street, the big oil company leaders, the coal company leaders, the big military industrial leaders.”

Considering the housing and financial debacle that began in 2008, the continuing hardship it unleashed, the fortunes made in the run-up to the bust, and the tax-financed bailouts that followed, what’s wrong with feeling that “the system” has done a number on most Americans? It’s perfectly reasonable to think that some radical changes are needed. Our lives and well-being are subject to the moves of large organizations over which we have no control. But to know what should change, one has to understand what happened.

Note that in the young man’s statement above, one word is glaringly absent: government. (He does use the word “military,” but many people across the political spectrum seem to think the Pentagon is not part of the government.) Unfortunately, the protesters most likely fail to appreciate that everything associated with the Great Recession is a product of a longstanding and deep-seated partnership between big influential business/financial interests and government—the corporate state. Through most of American history, banks and other financial institutions have operated in league with government, especially since the Federal Reserve opened its doors nearly a century ago, and this money-manipulating cartel has facilitated war, cheap credit to favored interests, and bailouts.

So why aren’t the protesters also outside the Fed, the Treasury, and the Capitol?

Most if not all of them likely favor a big expansion of government, but in light of our political-economic history, that would be precisely the wrong way to go because it would further empower the same coercive bureaucracy that gave us this crisis. Putting new people in charge won’t alter that fact that the bureaucracy wields powers that should not exist.

What the protesters miss is that corporate power is derived from government power—it’s the most dangerous derivative. Without State power no bank (or collection of them) could set the economy on a balsawood platform of inflated currency and cheap credit, creating the conditions for recession and long-term unemployment, nor could it stick taxpayers with the cost of bad investments. Such mischief requires a central bank and congressional power to compel the taxpayers. Washington and Wall Street need each other. They don’t agree on everything, but their public feuds should not mislead anyone into thinking they are adversaries. They are in cahoots, dependent on a system that constrains regular people’s honest economic activities and benefits an exploitative elite.

I will not rehearse here how corporate-state policies created the housing and financial bubble that burst and plunged the country into the Great Recession. Instead, I want to indicate that the corporate state is not new in America. It has been more the rule than the exception.

There’s no better illustration than the New Deal, particularly the National Industrial Recovery Act (NRA), which cartelized business through industry-generated and -enforced codes that suppressed competition, restricted production, and kept prices high during the Great Depression. John T. Flynn, the muckraking reporter who despised government-business collusion, bureaucratic control, and militarism, told the story in “Whose Child Is the NRA?,” which appeared in Harper’s Magazine, September 1934.

Flynn notes that the NRA is commonly regarded as the “Charter of Labor” or the product of President Roosevelt’s Brain Trust, the collection of Progressive academics who informally advised FDR. In fact the NRA’s roots lie elsewhere:

The actual business of putting together the NRA began in March, 1933, after Roosevelt took office. But one must look far beyond the throb and pother of those feverish days to understand the swift succession of moves and the cast of characters behind them. . . . Regimentation of business means, in the minds of those who use the term, forming businessmen into regiments, bringing business under regulation, controlling production, prices, trade practices, the rules of the game. For seventy years at least business men have been, in varying degrees, in favor of this. . . . Later on the Chamber of Commerce of the United States raised the slogan of “Self-Rule in Industry.” This was not a struggle to shift the control of industry from the government to industry itself. Industry wanted not freedom from regulation but the right to enjoy regulation.

Self-rule meant the power to penalize code violators who wished to compete freely. (Without enforcement, cartels fall apart as members “cheat.”) As the Chamber and prominent businessmen such as General Electric president Gerard Swope, along with Wall Street lawyers, pushed for government-backed industry cartels, members of the House and Senate were advancing bills, which Roosevelt opposed, to set maximum hours for workers. An alternative bill emerged from discussions that included Hugh S. Johnson, who had worked for Bernard Baruch on Wall Street; John Dickinson, a Wall Street lawyer; and Chicago labor lawyer Donald Richberg.

“When, therefore, the NRA act was brought forward, it was to defeat the [Sen. Hugo] Black and [Rep. William] Connery bills, to turn the subject over to employers and to give them, besides, something they had wanted for years but dared not now insist on—the modification of the antitrust laws and the privilege of self-rule in industry,” Flynn wrote. (Note: The freed market was not among the alternatives.) He concluded that big business made out well with the NRA:

If now we keep all this in mind it will be easy to understand all that has happened since NRA became a law. I am reliably informed that [Chamber President H. I.] Harriman told his directors that it was a complete victory for the Chamber. They got more than they hoped—modification of the antitrust laws, self-rule in industry, defeat of the Black and Connery bills, the right to regulate hours and minimum wages transferred to the trade associations under NRA supervision instead of by statute. In short, with the exception of the collective bargaining provision—which as we have seen was subsequently robbed of much of its original strength—the NRA plan represented almost entirely the influence and ideal of Big Business Men. The share of the Brain Trust in its paternity was microscopic; the share of the Chamber of Commerce and other business interests was predominant. [Emphasis added.]

This was no anomaly. Government power ultimately will be influenced and controlled by those whom the occupiers despise. So, protesters, rail against Wall Street. But rail, too, against its indispensable partner—government, with its unique legal power to wield aggressive force—and realize that the genuine antipode of the system you oppose is the freed market.

 Read more and respond at The Freeman