5000 Year Leap
Page 15
Property Rights the Foundation of All Civilizations
One of the world's foremost economists, Dr. Ludwig von Mises, pointed out that the preservation of private property has tremendous social implications as well as legal ramifications. He wrote:
"If history could prove and teach us anything, it would be the private ownership of the means of production as a necessary requisite of civilization and material well-being. All civilizations have up to now been based on private property. Only nations committed to the principle of private property have risen above penury and produced science, art, and literature. There is no experience to show that any other social system could provide mankind with any of the achievements of civilization." 176
Caring for the Poor Without Violating Property Rights
But, of course, the nagging question still remains. If it corrupts a society for the government to take care of the poor by violating the principle of property rights, who will take care of the poor? The answer of those who built America seems to be: "Anybody but the federal government."
Americans have never tolerated the suffering and starvation which have plagued the rest of the world, but until the present generation help was given almost exclusively by the private sector or on the community or state level. President Grover Cleveland vetoed legislation in his day designed to spend federal taxes for private welfare problems. He wrote:
"I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the General Government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit. A prevalent tendency to disregard the limited mission of this power and duty should, I think, be steadfastly resisted, to the end that the lesson should be constantly enforced that though the people support the Government the Government should not support the people.
"The friendliness and charity of our countrymen can always be relied upon to relieve their fellow-citizens in misfortune. This has been repeatedly and quite lately demonstrated. Federal aid in such cases encourages the expectation of paternal care on the part of the Government and weakens the sturdiness of our national character, while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthens the bonds of a common brotherhood." 177
Fifteenth Principle: The highest level of prosperity occurs when there
is a free-market economy and a minimum of government regulations.
The Founders were fascinated with the possibility of setting up a political and social structure based on natural law, but what about economics? Were there natural laws for the marketplace?
A tome of five books on the subject was published just in the nick of time which gave them the answer. It came out in 1776 and was called The Wealth of Nations. It was written by a college professor in Scotland named Adam Smith.
This brilliant work is not easy reading, but it became the watershed between mercantilism and the doctrines of freemarket economics. It fit into the thinking and experiences of the Founders like a hand in a glove. Thomas Jefferson wrote: "In political economy, I think Smith's Wealth of Nations [page 180] the best book extant." 178
Adam Smith's Free-enterprise Economics Tried First in America
The Four Laws of Economic Freedom
The Role of Government in Economics
After 1900 Adam Smith Got Lost in the Shuffle
John Chamberlain Describes What Happened to Adam Smith
Adam Smith Out, Karl Marx In
The Rediscovery of Adam Smith
One Responsibility of Government Never Completely Fulfilled
What Went Wrong?
Fractional Banking
An Economy of Debt Instead of Wealth
A Pressing Opportunity
Adam Smith's Free-enterprise Economics Tried First in America
Other writers in Europe, such as the Physiocrats in France, were advocating a free-market economy, but nowhere on earth were these principles being practiced by any nation of size or consequence. Therefore, the United States was the first people to undertake the structuring of a whole national economy on the basis of natural law and the free-market concept described by Adam Smith. Among other things, this formula called for the following:
1. Specialized production -- let each person or corporation persons do what they do best.
2. Exchange of goods takes place in a free-market environment without governmental interference in production, prices, or wages.
3. The free market provides the needs of the people on the basis of supply and demand, with no government imposed monopolies.
4. Prices are regulated by competition on the basis of supply and demand.
5. Profits are looked upon as the means by which production of goods and services is made worthwhile.
6. Competition is looked upon as the means by which quality is improved, quantity is increased, and prices are reduced.
The Four Laws of Economic Freedom
Prosperity also depends on a climate of wholesome stimulation protected by law. Reduced to its simplest formula, there are four laws of economic freedom which a nation must maintain if its people are to prosper at the maximum level. These are:
1. The Freedom to try.
2. The Freedom to buy.
3. The Freedom to sell.
4. The Freedom to fail.
By 1905 the United States had become the richest industrial nation in the world. With only 5 percent of the earth's continental land area and merely 6 percent of the world's population, the American people were producing over half of almost everything -- clothes, food, houses, transportation, communications, even luxuries. It was a great tribute to Adam Smith.
The Role of Government in Economics
The Founding Fathers agreed with Adam Smith that the greatest threat to economic prosperity is the arbitrary intervention of the government into the economic affairs of private business and the buying public. Historically, this has usually involved fixing prices, fixing wages, controlling production, controlling distribution, granting monopolies, or subsidizing certain products.
Nevertheless, there are four areas of legitimate responsibility which properly belong to government. These involve the policing responsibilities of government to prevent:
1. Illegal Force in the market place to compel purchase or sale of products.
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
After 1900 Adam Smith Got Lost in the Shuffle
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.
John Chamberlain Describes What Happened to Adam Smith
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
Adam Smith Out, Karl Marx In
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
The Rediscovery of Adam Smith
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.
One Responsibility of Government Never Completely Fulfilled
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
What Went Wrong?
Her
e 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