In most, if not all, states, pupils must pass a course in American history to receive a high-school diploma. Unfortunately, when it comes to our country’s economic history, most students are poorly taught, perhaps wrongly taught. Mythology and error prevail where facts and truth should reign.
Some economists and historians have made excellent contributions to correcting the historical record. Dominick Armentano’s Antitrust and Monopoly sets the record straight on the “monopoly” bogeyman. Burt Folsom’s The Myth of the Robber Barons and New Deal or Raw Deal? demolish numerous fairy tales. Much work, though, remains to be done.
Here are three of the most vitally important lessons from American economic history that are widely neglected today: 1) the history of our money, 2) the Constitution’s built-in bulwark against runaway government spending, and 3) government’s counterproductive responses to economic recessions.
1) Sound money.
Few contemporary students are familiar with the phrase “Not worth a continental.” The continental dollar was the paper currency issued by the Continental Congress from 1776 to 1780 to finance the War of Independence.
The continental currency met the fate of all paper currencies not backed by gold or silver. The Congress, desperate for more purchasing power, printed vast sums of continentals. The resulting hyperinflation rendered the bills nearly worthless; hence “not worth a continental.”
This fiasco wrought devastation. Soldiers, farmers, merchants, and even financiers, were wiped out, impoverished. Because of this ruinous experience, the founders drafted a Constitution designed to avoid the pitfalls of paper money. One of Congress’ enumerated responsibilities is to “coin money” (in contrast to “print currency”). The Constitution also stipulates that states settle all their financial obligations in gold or silver.
Having suffered the ravages of paper money, the founders sought to spare us from similar grief, but alas, subsequent generations of leaders have steered us away from constitutional money. Instead, we use unbacked Federal Reserve Notes, which are destined to suffer the same dismal fate as the continental currency and all fiat money.
2) Spending restraint.
There is an instructive incident told in a book about the famous frontiersman, Davy Crockett. Although it may be apocryphal or woven together from several different events, it nonetheless illustrates a political principle that was popular in the 19th century. According to the story, when running for re-election to Congress from his district in Tennessee, Crockett encountered one Horatio Bunce, a farmer who informed Crockett that he would not vote for him because he disregarded the Constitution. This led to a fruitful dialogue during which Bunce tutored Crockett on the Constitution, explaining that Congress had no authority to give economic charity, especially with other people’s money. Crockett henceforth was a born-again constitutionalist. (This account is available at www.fee.org. Search: “Not Yours to Give.”)
Another historical vignette of similar import was President Grover Cleveland’s frequent use of the presidential veto. Cleveland might have been the last true constitutionalist in the White House, repeatedly refusing to approve of congressional attempts to expand government spending beyond its constitutional limits.
“Big Government” cheerleaders today dismissively tell us that 18th and 19th century practices are passé and that the role of government must change. Yes, of course. George Washington and the other founders understood that change was inevitable, and they provided for change.
In his Farewell Address, Washington advised us to alter the Constitution “by an amendment in the way which the Constitution designates,” and later added, “But let there be no change by usurpation” (either by tortured constitutional reinterpretations or by simply ignoring the Constitution when it became inconvenient). The founders knew that a government that would slip the chains of the Constitution would begin to redistribute wealth and ultimately bankrupt the country. Now, having ignored Washington’s wise counsel, we face the prospect of bankruptcy that he and the other founders sought to spare us.
3) Government’s ineffectual response to recessions.
Americans deserve a historically accurate account of the ineffectiveness of government intervention during economic downturns. The current teaching about recessions, and particularly the Great Depression, is riddled with errors.
For example, Herbert Hoover was not a laissez-faire president; government “stimulus” spending does not cure recessions; the Federal Reserve can not restore prosperity by lowering interest rates and/or inflating the money supply.
In fact, Hoover scorned free markets. He engaged in so much government intervention that Roosevelt accused him of reckless over-spending and socialistic tendencies.
The most effective anti-recession policy of the 20th century was President Warren Harding’s anti-stimulus policy of slashing federal spending nearly in half.
More money is not the cure for depressions, as can be seen by contrasting the depression of 1920-21 with the early 1930s. The money supply contracted to a comparable degree both times, but in the ‘20s prices and wages were more flexible (that is, free of government intervention), so that they could adjust and bring supply and demand into balance. In short, markets work if government stays out of the way.
On economic issues, the founders had it right. We can spare ourselves a lot of pain if we heed the lessons of our own national history.