by Mitch Kokai
Senior Political Analyst, John Locke Foundation
A few years before World War I, … Germany wanted to expand its army in response to the growing forces of rivals France and Russia. Although, on paper, Germany had universal conscription, fewer than half its young men actually served in its peacetime army. However, Germany felt constrained in how much it could do by the unwritten restraints of the gold standard.
The exigencies of the Great War blew away these fiscal inhibitions. After the war politicians never fully lost their taste for the intoxicating and enormous powers the war had given them, nor did they forget how easily the government could seize a nation’s financial assets through taxation, inflation and capital controls. The Depression broke away any remaining restraints, as Keynes and others successfully propagated a new mercantilism–a medieval ideology that had governments playing a suffocating role, regulating economic life in the name of increasing a nation’s wealth. Mercantilism was a failure, as the contrast between nations such as Holland, Britain and then the newly minted U.S. that had shed its stifling strictures and those that continued to adhere to them avidly demonstrated. But as happens in monster movies, the beast slithered back from the swamps. Neomercantilists enticingly promised that economies could achieve smooth, balanced and perpetual growth, with full employment, by scientifically manipulating government spending and money creation. Free markets were inherently unstable, they warned, pointing to the Depression. The fact that governments have caused every major economic disaster–including the Depression–was ignored. Spending stimulates growth, said these new conjurers, rather than wastefully taking away resources from the private sector, thereby hurting investment and economic expansion. Politicians loved that message. Their instinctive bad habit of shoveling out money to buy votes and power was now a virtue, an engine of progress.