In 1890, the Silver Purchase Act threatened to cause inflation – to the benefit of farmers and miners, at the expense of business interests and banks. As the Great Depression of the 1930s raged, real wages of labourers continued to climb.
The most recent financial crisis was characterised by defaulting sub-prime borrowers, who were lent more money than they could afford. It is no coincidence that in each case, depression was invited or prolonged by politics championing a reallocation of society’s resources.
The Silver Purchase Act of 1890 no doubt fell short of the desires of the ‘Free Silver’ movement, political groups that werelobbying in favour of silver coinage. Miners wished to increase demand for the over-production of silver, while indebted farmers and workers wanted inflation to reduce the real burden of debt.
The Panic of 1893 was the direct result of this policy. Everyone took their new money and exchanged it for gold, thus depleting both national gold reserves and bank reserves – causing bank failures. The economy went into a tail-spin, and credit markets froze.
After the Great Crash of 1929, labour unions maintained that the best way to get out of the economic depression was to continue increasing real wages. Even as unemployment climbed beyond 24.9% and deflation reigned, there were no nominal wage cuts.
Indeed, real wages continued to climb at a faster rate than trend throughout the 1930s. The economy could not get back to full production and full employment in light of these circumstances.
This was compounded by the New Deal, which menaced investors from 1935. As a result of these measures, private investment plummeted as investors were not confident that the free market would survive the depression. This was supposed to benefit society.
The most recent financial crisis was indeed primarily caused by poor risk management and lending practices by banks and other financial institutions (some which were woefully unregulated and unsupervised).
Although the glut of savings from Asia was a necessary condition for the easy credit, no doubt that the government would have been quicker to object to the practices if they were not also fulfilling important political objectives. Fannie Mae and Freddie Mac were the pinnacle of government-sponsored politicised lending practices.
Taken together, this phenomenon represented a massive reallocation of financial power from business and other interests, to the poor. It is not just a failure of free market finance, but also of government supervision.
Just as with the Panic of 1893 and the Great Depression of the 1930s, the financial crisis is inextricably linked to the transfer of wealth to the poor and working classes. In each case, the policy went beyond all reasonable interpretations and crippled the economy.
When business interests lose out, unfortunately the economy is doomed – until business confidence and the solvency of the banking industry can be restored. It remains to be seen how long that will take.
© The Free Marketeer 2009