recent failures in American financial markets occurred despite stringent
economic regulation. Ignoring this, elected officials have loudly called for
economic stimulus packages backed by stringent economic regulation in order to
protect consumers, create new jobs, and strengthen and stabilize the economy.
The Bank of Canada recently dropped its interest rate to 1% and may further
lower that rate to a projected 0.5% by the summer of 2009 in the hopes of
stimulating the economy. The US Federal Reserve is running its printing presses
overtime, churning out new currency at a breakneck pace and grossly inflating
the amount of paper money in circulation.
Those Who Do Not Remember the Past…
Inflating the volume of currency in circulation is nothing new.
Neither are the public works projects that are intended to create new economic
activity and provide new jobs. It has all been tried before. During the 1930s,
the Roosevelt administration's New Deal increased public spending by some 45%
with such plans. The American economy nonetheless remained in a state of
depression with over 14% unemployment until the onset of World War II.
The onset of war certainly created a flurry of what appeared to be
economic activity as American industry engaged in wartime production. This
flurry of wartime economic activity, however, was accompanied by rationing in
America and in the UK, with most families having to subsist on the barest of
essentials. The population paid a high price for wartime production as workers
essentially earned minimum wage to support the war effort. The real recovery of
the American economy only began after World War II, when the Truman
administration cut government spending from just under US$99-billion in 1946 to
some US$33-billion by 1948.
This drastic reduction in government spending, combined with the
relative economic freedom that existed in the American economy at that time,
greatly reduced the potential for malinvestment. Private initiative by
individuals created sound business plans in an economy that was relatively free
from distorted economic signals. Only the soundest of business plans that could
be funded frugally and efficiency proceeded courtesy of real savings and private
capital. Despite the Marshall plan, Chancellor Ludwig Erhard allowed free market
principles to prevail in Germany, too, as that country rebuilt its shattered
economy following World War II.
The techniques by which to lift an economy out of a deep recession
or depression are well-documented and well-proven. Shutting off printing presses
at the central bank, repealing minimum wage laws, cutting government spending,
reducing taxes, and suspending economic regulation over a period of several
years could dissipate distorted market signals. Market forces could then re-adjust
interest rates to accurately reflect developments in the economic system and
provide reliable signals to entrepreneurs. Accurate and reliable market
information is essential if entrepreneurs and businesses are to formulate sound
plans capable of succeeding over the long term.