OCALA, Fla., March 27, 2014 — The American economic school is a viable alternative to the Keynesian School economists, who call for the government to more or less control the economy with massive infusions of money, and the opposing Austrian Schoolers, who want unfettered free market capitalism; meaning no minimum wage or labor rights.
Over the last few days, this column has featured three articles about the American School and how it came to be. Now, in this final piece, we trace the School’s downfall. The story picks up around the turn-of-the-century.
Succumbing to a severe infection days after being shot by a crazed assassin, McKinley left Teddy Roosevelt as his successor. Roosevelt continued McKinley’s high tariffs, but turned his attention away from matters of national infrastructure to expand the United States’ sphere of influence abroad.
Roosevelt did not, however, forget about the folks back home; he vigorously promoted environmental conservation, antitrust legislation, and consumer protection. These all meshed well with the American system, which prevailed throughout the 1910s.
In 1912, however, the ship went off course. A nasty intrapartisan split divided Roosevelt and William Howard Taft, the man who followed him into the White House. This allowed Woodrow Wilson, an unapologetic economic globalist, to defeat them both and institute radical new reforms, including disbanding the National Bank in favor of the Federal Reserve and depleting tariffs to revenue-only levels.
In order to finance these structural changes, he signed legislation which called for the formation of the federal income tax.
None of this boded particularly well for the economy, and Wilson only won reelection thanks to the continuing feud between progressive Roosevelt supporters and conservative Taft backers. By the end of his second term, he was so unpopular, not to mention sickly, that Warren G. Harding won the presidency in a rout.
A career ladies’ man and newspaper publisher, Harding displayed an astounding amount of immaturity while in the Oval Office. Many of his policies were designed by throughly corrupt grifters posing as political allies, wehich likely explains why he only revived the American System in part, by hiking tariffs, but neglecting to invest in key public works projects.
Instead, Harding, or more likely his handlers, allowed the Federal Reserve to spend unseemly sums on speculative measures.
The man who would pay the price for this, unsurprisingly, was not Harding or even his immediate successor, Calvin Coolidge. The 1920s cruised along at breakneck speed, introducing uncharted financial prosperity and sociological progress to the United States. The replenished tariff rates continued, providing for industrial protection and a booming middle class, while seemingly pointing the way to a future in which the streets would be paved not merely with gold, but platinum.
However, the speculation that gained steam under the Harding Administration, and soared through Coolidge’s, came to a halt shortly after Herbert Hoover became president. The date on which this happened is infamous unlike any other: Black Tuesday, October 29, 1929.
Black Tuesday proved to be the beginning of the potholed and dreary road eventually called the Great Depression. Hoover tried almost everything to remedy the economy, but the country remained mired in the morass. Eventually, he was convinced that the country needed a radical return to the American system, so he signed the Smoot-Hawley Tariff Act and import tariffs, in some cases, reached almost 60 percent.
The increasingly pro-free trade international community was appalled and quickly legislated retaliatory tariffs, launching a first-world trade war of sorts. Initially, Smoot-Hawley resulted in a strong, though temporary, economic bounce. After a short while, the Depression was again steaming full speed ahead.
As a result, Hoover did not get a second term. Handily defeated by Franklin Delano Roosevelt, of distant relation and political orientation to Teddy, the American system was summarily all but abolished.
Roosevelt drastically lowered tariff rates and in compensation raised income taxes. Using the augmented tax revenue, he did retain the American system principle of public investment by creating a number of government programs designed to employ the unemployed and industrialize the country.
Dubbed the New Deal, collectively, FDR’s programs achieved many great feats, including the building of magnificent public parks and other infrastructure, and creating Social Security for retirees. However, The national deficit skyrocketed unrelieved until World War II.
By then, the Supreme Court had ruled most of the New Deal unconstitutional, effectively demolishing the final cluster of pillars separating the American and Keynesian Schools.
The rest, as the saying goes, is history.
Much of this article was first published as Amerinomics, Part Four: The Fall of the American System in Blogcritics Magazine.