There is a system called capitalism, and it is simple – increase capital from constant reinvestment of capital, invest profits to regenerate more profits. An outgrowth of the industrial revolution, a form of capitalism promoted industrial progress and greatly increased the material wants of much of the world. Too ideological and subject to criticisms due to its association, real or exaggerated, with greed, financial manipulation, and tendency to war, the term capitalism has been replaced by the more clever sounding “free enterprise,” and identified closely with free markets. The latter is an error. Free markets are driven by market dictates and allow competitive pricing and labor rates. Market determination can be done in government owned (U.S. Post office) and privately owned enterprises and by either socialized, fascist, statist (China), or capitalist systems.
Who will argue with a system represented by the words “free” and “enterprise?” Who? Those who understand the changes made to the words “free” and “enterprise.” In the expression free enterprise, “free” meant freedom for movement of capital and freedom to invest. “Enterprise” signified resourcefulness and clever business management. In practice, the words often followed their definitions, but with a 1/2 life of only a few years. “Free” usually became free wheeling and “enterprise” became a route to domination and corruption. Lately, “free” is identified with “free money,” and “enterprise” is identified with speculation and gathering assets by using money from others.
This is not semantics. Periodic recessions and panics, which gripped the United States since its beginnings, substantiate the modified definitions, and these definitions are important. Free enterprise has exhibited constant difficulties and government attempts to repair the defects and readjust the failures have proceeded from a false concept, which is that pure free enterprise can permanently exist. A plethora of laws, regulations, agencies, government deficits and other ameliorations have provided stitches, transplants, band aids, and surgical operations to patch up and rescue a constantly ailing patient — temporarily reviving the collapsed after each subsequent fall. The history of free enterprise reveals a system that ignored the nation and a nation that did its utmost to maintain free enterprise, each step resulting in ultimate failure. The last rescue plan for free enterprise has been initiated and it is already doomed to fall short.
Although financial panics and recessions occurred frequently after inauguration of the U.S. nation, they were not allied to a fully developed industrial system until manufacturing became significant after the Civil War. Industry and financial crises increased more rapidly after the close of the frontier in about 1890, when the U.S. shifted from an agricultural nation to a growing industrialized nation. From 1867 to 1929, the U.S. economy exhibited a mild or grave shock every two to three years. Seven severe depressions or financial panics occurred during the 62 year period. One of these, which occurred in 1873, is considered to be the start of the Long Depression, and had the longest continuous period of economic contraction (5 years and 5 months). Some observers define the Long Depression as the entire period from 1873-1896.
The constant perturbations and lack of substantial growth prompted lawmakers to “correct” the excesses of “rugged individualism capitalism,” in which a few financiers exercised control of the economic system and used it for their private gain — essentially robbing banks by owning them. Establishment of the Interstate Commercial Commission in 1887 for regulating the Railroads, passage of the Sherman Antitrust Act of 1890, which “declared illegal all combinations in restraint of trade,” creation of the Federal Reserve System to regulate the money supply, stabilize the financial system and prevent inflation, passage of the Clayton Act in 1914 in order to further restrict anti-competitive practices and enforce the earlier Sherman Antitrust act, and establishment of the Federal Trade Commission in 1914, an agency with powers to “prevent business practices that are anti-competitive or deceptive or unfair to consumers” did not prove effective – “boom” and “bust” persisted, speculation remained rampant, mergers tending to monopolies continued, banks went bankrupt and inflation was never contained.
The call for regulatory legislation proved that the capitalist system, which had its moments of genuine success, was, as constituted, insufficiently effective or efficient — it could not exist without government interference. Legislators, in their ardor to preserve the system, neglected to realize that the capitalist system had survived with special advantages and had built-in failures. How far would the capitalist system in the United States have advanced without:
- a century of slave labor,
- land and resource appropriation from the Native Americans,
- constant wars to seize territory and defend by Manifest Destiny its international corporations, especially in the Americas,
- independent development of the west by individual households, and
- a century of cheap immigration labor.
As for built-in failures, the most significant had individuals, corporate and personal entities operating without coordination and in a selfish manner. Add the inability of entrepreneurs to satisfactorily reinvest profits, extensive speculation, which removed purchasing power from the system, and the need for credit to match production with purchasing power. By not realizing the special advantages, which had enabled growth, and not directly confronting the built-in lapses, government attempts to stabilize the erratic free enterprise system with regulatory capitalism served as temporary palliative, which eventually became co-opted and could not prevent the Great Depression.
Hunger and unemployment in the land of plenty drove the New Deal toward the rescue plan of welfare capitalism – government sponsored programs and legislation that fostered institutions (labor, public works, farm, rural, National Recovery Administration) to counterbalance those of finance and capital and distribute wealth in order to enable all citizens to escape poverty and gain equal opportunity. Soon more rescue was need and subsequent policies, such as government construction of transportation, communication and power infrastructure — interstate highways, airports, hydroelectric and nuclear power plants, and ARPANET (the first wide-area packet switching network) — equal opportunity laws, subsidized mortgage loans, and direct coordination in research and development between the defense department and private industry tended to drive free enterprise toward a mixed economy.
The role of the defense department in providing sustenance to the free enterprise system is not well presented. Entire industries — defense, armaments, electronics, ship building, aviation, space exploration – and parts of some industries — airlines, plastics, chemical, metallurgical, Internet — owe their existence and prosperity to developments, funds and contracts from the defense department. As the leading arms exporter, an outgrowth of defense procurements, the U.S. lowers its trade deficit and brings purchasing power into the nation. Without the arguments and preparations for war, the free enterprise economy would have been shaky decades ago.
Another powerful government directed mechanism, which saved the western economies and prevented stagnation of the U.S. economy, was the post World War II Marshall Plan. Conceived by Secretary of State General George C. Marshall during the Truman administration, the Marshall plan distributed massive funds to the prostate European nations, invigorating their economies and allowing them to purchase American exports. As one result, many U.S. products became brand names in Europe and assured their future purchases.
Despite the policies of regulation, welfare and mixed economy, the free enterprise system hit a wall during the 1970s. Two events provoked the challenge to the free enterprise system — unraveling of the 1944 Bretton Woods Agreement and an Arab oil embargo.
Government regulation of the free enterprise system extended to international regulation of individual currencies, with agreements to maintain fixed exchange rates between nations. Time magazine summarized this agreement:
Established in 1944 and named after the New Hampshire town where the agreements were drawn up, the Bretton Woods system created an international basis for exchanging one currency for another.
In an effort to free international trade and fund postwar reconstruction, the member states agreed to fix their exchange rates by tying their currencies to the U.S. dollar. American politicians, meanwhile, assured the rest of the world that its currency was dependable by linking the U.S. dollar to gold; $1 equaled 35 oz. of bullion. Nations also agreed to buy and sell U.S. dollars to keep their currencies within 1% of the fixed rate. And thus the golden age of the U.S. dollar began.
Central banks of countries, other than the United States, would intervene in foreign exchange markets and maintain fixed exchange rates between their currencies and the dollar.
Increased inflation and a slowly growing trade deficit in the United States questioned the value of the dollar, resulting in abandoning the fixed relationship and allowing the dollar to float against other currencies. The final denouement of the currency agreement occurred when President Nixon, on a August 15, 1971 evening, and without consulting the members of the Bretton Woods agreement, suddenly issued Executive Order 11615 pursuant to the Economic Stabilization Act of 1970. The Order imposed a 90-day wage and price freeze, a 10 percent import surcharge, and ended convertibility between the US dollar and gold. Within less than ten years, speculation eventually increased the price of gold from $35/oz to more than $800/oz. Massive currency fluctuations, financial bubbles, regional crises and rapid expansion of international debt succeeded the unraveling of the Bretton Woods agreements.
Decline of Bretton Woods came at an unfortunate time; perception that the United States saved Israel from defeat during the 1973 Arab/Israel conflict provoked the Arab oil producing nations to embargo oil deliveries to America. Huge inflation, economic stagnation, and trade deficits that the United States has not been able to overcome, followed the embargo. One of the most important and decisive events in American history has been interpreted as only another of several Middle East conflagrations rather than one of America’s major conflagrations. OPEC matured and became a leading controller of the world’s economy and the challenge to a troubled capitalism of inflation, ultra-high interest rates and a 1981 recession invoked the final rescue plan — pump the economy with government deficits and easy credit — the final attempt to rescue the system and doomed to failure.
As shown in the graph, since the beginning of Reagan administration in 1981, the Gross Domestic Product (GDP) has closely followed an almost continually increasing public and private debt. However, these debts were unsustainable and with their saturation, ultimate decline by inflationary dollars and bankruptcies, the economy stalled and the GDP declined — the free enterprise system absorbed its last rescue plan, which met the fate of previous rescue plans, a great recession. The free money and free wheeling enterprise system cascaded out of control and hit an impenetrable barrier. Government spending efforts averted a greater decline — more of the last rescue plan, which, after it finalizes its course, will lead to the usual fate, another great recession.
It will be difficult for those who have been nourished on grandiose benefits of a free enterprise system to accept that the system did not exist from its own volition and that all possible relief measures for assuring its continuance have been exhausted. Structural modifications in the economic order are the next step to stability, with a review of the pattern of the present successful economies, such as Germany, serving as a guide for restructuring the free enterprise system. Transition to workplace democracy, where workers share ownership of industries, state ownership of vital enterprises and nationalized banking are possible choices. Frankly, these more radical extensions of existing government interference in the economy will be unacceptable to the master architects of America’s future. More likely, their course of action will be directed to preserving the system by forcibly controlling its international arrangements — capturing resources and markets by conflict — save the system by destroying the world. The death wish for Armageddon will be fulfilled.