Cronyism

CONCLUSION

By the close of the 1920s business elites in all sectors of the economy, led by the Wall Street bankers, had successfully lobbied the government to privilege and enforce their cartels and other anticompetitive restrictions. New York City banks used the Federal Reserve Bank of New York to protect their bankers’ balances and promote dollar hegemony, corporations controlled the Federal Trade Commission and the Department of Commerce to enforce anticompetitive trade agreements and promote export cartels, the railroads secured rate minima and favorable Interstate Commerce Commission rules in the Transportation Act, and health interests acquired their own privileges from the Food and Drug Administration, the Department of Agriculture, and the National Institute of Health. In each case politicians, lobbyists, bankers, industrialists, bureaucrats, and intellectuals always advocated policies in the name of the public interest. But the real intent was to promote private interests. This regulatory capture represented the success of decades-long efforts to reduce competitive pressures in the marketplace.

If there was one group that lost out from the corporatist state, it was the broader public, the men and women who consumed and worked and belonged to no special-interest group. Free enterprise tends to satisfy consumer desires. Consumers learn from experimentation, networks, reputations, advertising, and other sources about the goods and services that best suit their ends. Businesses, big or small, that produce what consumers value earn profits, while those that fail to do so suffer losses. Increased savings and technological innovation grow the supplies and types of capital goods, which in turn raise the quality of consumer goods, workers’ real wages, and living standards. These free-market forces were responsible for the increases in growth that occurred from 1849 to 1929.

The network of corporatist regulations, on the contrary, inhibited, delayed, and distorted progress. Inflationary bank credit from the Federal Reserve redistributed income to the government’s favorites and misallocated resources through artificially low interest rates. In other sectors of the economy, barriers to entry and compliance costs burdened small- and mediumsized firms and their workers. This hurt young upstart companies and their ability to innovate and compete. Consequently, the supply of products and laborers was restricted or outright decreased, leading to higher prices and less variety and innovation. The increasing prohibition of price and wage competition resulted in growing rigidities, making markets less responsive and adaptive to changes in supply and demand. Dynamic competition gave way to ossification.

The public did not fully feel the long-term effects of corporatism until the Great Depression. The Federal Reserve’s credit expansion contributed to a worldwide boom that ended when the money supply stopped increasing. As the economy entered a slump in late 1929, price and wage rigidity, created by the corporatist apparatus, hampered recovery. In contrast to the situation during the Depression of 1920–1921, wages remained rigid downward, a phenomenon exacerbated by the labor policies of the new president, Herbert Hoover. Firms’ profits turned into losses, affecting their ability to pay back loans to banks. Failures of financial institutions mounted, deflating the money supply. Prices and especially wages were sluggish to adjust. As the Fed bought securities and made loans to banks, confidence decreased because domestic citizens and people abroad rightfully worried that not all the dollars would be redeemable in gold.

Fed expansion, therefore, produced monetary contraction and a collapse in trustworthiness of the banking sector and of the dollar. Unemployment mounted, output tanked, and businessmen turned to ever-more-radical solutions, including the frank imposition of a full-fledged corporatist state. The economy-wide cartelization reached its full potential during the New Deal. Then came the next evolution in cronyism, the United States’ unstoppable welfare-warfare empire across the globe. In the name of boosting economic growth through Keynesian mercantilist fallacies, in the post–World War II years the American empire provided generous subsidies to the military sector and spent lavishly on entitlements, infrastructure boondoggles, and other programs. But that is the stuff of another book.