“If Free Enterprise Really Works, Why the Great Depression?”

By Paul L. Poirot

To enumerate the blessings and advantages of competitive private enterprise before most any audience in this day and age is to evoke the protest: “Well, if the free enterprise system is so wonderful how do you account for the unemployment, bank failures, and prolonged business depression of the early 1930′s? Are periodic depressions an inevitable cost of freedom?”

Free enterprise, of course, does not prohibit or preclude human or business failure. Freedom to choose, to exercise one’s own judgment in the conduct of his life and his business, permits mistakes as well as growth, progress, and success. Among fallible human beings, it is to be expected that some of us will fail in some of our ventures. Human failure cannot be eliminated entirely, but the harm can be localized. It is one of the advantages of competitive private enterprise that the penalties for failure are levied against those who fail — the damage is not assessed against the whole society — and that the greatest rewards go to those whom their fellows deem most worthy of success. This is self-responsibility, the other side of the coin of personal freedom to choose. To be held accountable for one’s errors is to assure the optimum of responsible human action in society. This is the primary reason why the free enterprise system is so much to be preferred over the only possible alternative: a system of central planning, authoritarian control, dictatorship, where one man makes all the mistakes, always on the grand scale, and always at the expense of everyone else. The great weakness of socialism is that no one, neither the leader nor any of the followers, assumes any sense of accountability or responsibility; someone else is always to blame.

This is why the advocates of central planning and government control are prone to cast the blame for the Great Depression onto someone else— to make free enterprise the goat. But there is nothing in either the theory or the practice of responsible individualism, with individuals held accountable for their inevitable errors, that will explain a major depression such as the one following the boom and crash of 1929. Such massive social upheavals require some other explanation.

If one looks back upon the events and causes of World War I, he discovers that our own government had long been inhibiting free enterprise in numerous major ways. Since 1913, we have had a politically controlled fractional-reserve central banking system capable of irresponsible and uncontrollable expansion of the supply of money and credit— the engine of inflation. And this engine has been used with monotonous regularity in an attempt to finance, implement, camouflage, nullify, or offset the many other costly programs of government intervention.

We have had a steeply graduated income tax to penalize the thrifty and successful. We have had government regulation and control of transportation, public utilities, and many other business enterprises. Much of the more recent legislation giving special coercive powers to the leaders of organized labor had its origin during World War I. Especially in the 1920′s, we began experimenting on a major scale with farm support programs. We have had wage and hour legislation, tariffs, and many other forms of protectionism and government control. But, most and worst of all was the inflation growing out of the deficit spending of World War I and the Federal Reserve Board’s artificially depressed interest rates of the 1920′s.

This government promotion of cheap money during and after World War I led at that time to private speculation and investment of resources in unsound business ventures, just as similar policies are doing now. During such a boom period there always is a great deal of malinvestment of economic resources under the illusion that the government can and will keep on promoting easy money — inflation. The continuing inflation temporarily hides many of the mistaken judgments of businessmen, tempting others to make similar mistakes instead of taking sound corrective actions. With government pumping forth the money, all businessmen are inclined to be borrowers, until bankers eventually find themselves over-loaned on bad risks.

The crash of 1929 was strictly a crash of confidence in the soundness of the government’s monetary policy — the government’s dollar — the shocking discovery, accompanied by great despair, that government interventionism or socialism doesn’t work as promised.

Free enterprise can accomplish miracles of productivity, but it is wholly incapable of causing a major boom of speculative malinvestment which inevitably ends in a crisis of readjustment called depression.

The opening question should be restated: “If government control (socialism) is so wonderful, why the Great Depression?” What happened in 1929, what happens whenever political intervention prices the various factors of production out of the market and leaves idle plants and idle men, must be attributed to socialism— not to free enterprise.