The Act contains two important provisions. Section 1 outlaws contracts and conspiracies in restraint of trade. Section 2 prohibits monopolization and attempts to monopolize.

Most people have a knee-jerk response to monopoly and collusive agreements and condemn such behavior out of hand. Before making a broad condemnation, we might consider the behavior more generally. The Bible’s book of Exodus gives us the Ten Commandments. The first two, and presumably most important, are: “Thou shalt have no other gods before me,” and “Thou shalt not make unto thee any graven image, or any likeness of anything that is in heaven above, or that is in the earth beneath, or that is in the water under the earth. Thou shalt not bow down thyself to them, nor serve them: for I the LORD thy God am a jealous God.” These two commandments establish God as a monopoly and to reinforce the monopoly, there shall be no God-substitutes. I do not think that many would condemn Christianity on the basis of its monotheism.

Another area of monopoly and collusion is marriage. The marriage license is in fact a collusive monopoly contract between two persons that closes—or at least is supposed to close—further competition.

The monopolistic and collusive characteristics of religion and marriage emerge naturally and benefit society. Therefore, we are faced with the question of what kinds of monopoly and collusion we would wish to restrain. I would venture to suggest that government-coerced and -encouraged monopoly and collusion should be restrained. Moreover, if the Department of Justice were really serious about Sherman antitrust provisions, it would focus on Washington as the main source of collusion in restraint of trade.

One of the most egregious examples of conspiracy and monopoly in the restraint of competition are Private Express Statutes. These are a set of civil and criminal federal laws that outlaw the delivery of first-class mail by all entities other than the U.S. Postal Service. As such they represent government coercion that bans peaceable, voluntary exchange in the delivery of first-class mail. Aside from the well-documented inefficiencies of the Postal Service, the postal monopoly should be condemned on that basis.

The U.S. Department of Agriculture (USDA) establishes fruit and vegetable marketing orders and milk marketing orders with the stated purpose of balancing the products’ availability with an adequate return to producers and the needs of consumers. Federal marketing orders are locally administered by committees of producers. Initiated by industry and enforced by the USDA, they bind an entire industry in a geographical area.

For example, there’s the Navel Orange Administration, in which growers get together and establish citrus production quotas in California and Arizona. Any citrus grower exceeding his market quota by bringing too much to market and threatening to lower prices faces fines and imprisonment. This collusion applies to nearly all commercially produced fruits and vegetables. The effect of market quotas is to generate prices that are higher than they would be without the government-backed collusion.

Mandated maximum quantities and/or minimum prices are surefire indicators of seller collusion in restraint of trade. An example of the latter is minimum wage law. The effect of a minimum wage is discriminating against low-skilled workers. What employer would find it profitable to pay the mandated wage of $7.25 to a worker capable of producing only $4 or $5 an hour?

The minimum wage can be used as a tool of collusion. For some activities low-skilled workers are a substitute for higher-skilled workers. Imagine that 100 yards of fencing could be produced per day either by employing three low-skilled workers at $13 each or one high-skilled worker at $38. A profit-motivated employer would hire the high-skilled worker because it’s cheaper. If the high-skilled worker demanded $50 a day, the employer would replace him with the three low-skilled workers. But suppose the high-skilled worker could lobby Congress to enact a $20-a-day minimum wage in the fencing industry. Now using the three low-skilled workers would cost $60. Thus the probability of the high-skilled worker getting $50 would be greater because he has been able to use government to price his competition out of the market.

The Davis-Bacon Act is a 1931 federal law that mandates that “prevailing wages” be paid on all federally financed or assisted construction projects. As such it is a union-supported super-minimum wage law. Its stated intention—as seen in the 1931 congressional testimony supporting the Act—was to price black workers out of the market. Representative Clayton Allgood of Alabama said, “Reference has been made to a contractor from Alabama who went to New York with bootleg labor. This is a fact. That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country. This bill has merit, and with the extensive building program now being entered into, it is very important that we enact this measure.”

Representative John J. Cochran of Missouri voiced similar sentiments, saying he had “received numerous complaints in recent months about southern contractors employing low-paid colored mechanics getting work and bringing the employees from the South.” AFL President William Green made clear the unions’ interests: “Colored labor is being sought to demoralize wage rates [in Tennessee].”

The Davis-Bacon Act remains on the books today. The political rhetoric in support of the Act has changed but its effects have not. It remains an ongoing collusion against lower-skilled, non-union construction workers.

Just about every cabinet-level federal agency enforces some kind of collusive restraint on competition. Without government support, collusion has a tendency to break down primarily because what is in the best interests of an individual colluding member is not necessarily in the best interests of other members. For example, it pays a member to cheat on the agreement by, say, shading his price a bit to get more business. The members who abide by the agreement will find themselves losing business, and before long they will start cheating. The cheating becomes infectious, and the collusion breaks down. But if a federal law fixes the terms of the collusion, then to violate the terms is not simply a violation of a gentlemen’s agreement; it’s also a violation of the law, with the possibility of fines and imprisonment. In other words, effective collusion needs some kind of enforcement technique. Most often it is the threat of sanctions for noncompliance.

The bottom-line reality is that collusive monopolistic restraints on competition are deemed illegal and hence prosecutable only if the seller does not first secure Washington’s permission to rip off his fellow man.

The bank failure rate then dropped dramatically and never again rose anywhere close to the level of the 1930s. And such bank failures that have occurred have cost insured depositors nothing; many uninsured depositors were made whole as well. Bank runs are a distant memory, revived occasionally by reruns of It’s a Wonderful Life.

Yet it may be premature to pronounce deposit insurance a success. It can take a long time for an unsustainable program to unravel: Witness Social Security and Medicare. Seventy-five years after the start of Social Security and 45 years into Medicare, it’s common knowledge that both programs are headed for a financial cliff. A closer look at deposit insurance will show cracks in its edifice, raising questions about its sustainability as well as the distortions that it has introduced into the economy.

Before we take that closer look we might ask whether, as is widely assumed, the bank failures of the 1930s were an example of unregulated free markets run amok. During that time, as Milton Friedman and Anna Schwarz pointed out in their classic, A Monetary History of the U.S., the number of bank failures in Canada was exactly zero. Canada is closely linked to the United States economically and culturally, making this episode as near to a controlled experiment as any macroeconomist could wish for.

The difference? Canada had just ten nationwide banks with about 3,000 branches, while branch banking across state lines, and often within states, was prohibited by U.S. law. Thus smaller communities could only be served by relatively weak, poorly capitalized banks. A hailstorm might be enough to topple the local bank in a small farming community as surely as if it were built from straw.

The banking system was also caught in the downdraft of a plummeting money supply. When banks hold only a fraction of their liabilities as reserves, deposit inflows cause the money supply to multiply, but the reverse happened during the Depression as worried depositors began to cash out their accounts. The economy could have adjusted to a declining money supply in one of two ways: either by lowering prices and wages or by Federal Reserve injection of new money. Hoover’s jawboning and Roosevelt’s New Deal legislation precluded the first solution, while the Fed, out of ignorance or confusion, failed to inject new money. With economic adjustment prevented by government policies, a vicious cycle of souring bank loans, liquidation of deposits, further declines in the money supply, and more business failures took hold.

Interestingly, Milton Friedman and Murray Rothbard, both free-market economists, reached opposite conclusions about the declining money supply. While Friedman blamed the Fed, Rothbard celebrated what he saw as the people’s attempt to overturn fractional-reserve banking, which he believed is inherently fraudulent. Either way, the fingerprints of government were all over the bank failures of the 1930s and the Great Depression generally.

With the failure of so many banks, U.S. Representative Henry Steagall vigorously pushed deposit insurance legislation. Franklin Roosevelt was among his opponents. Indeed, when asked about guaranteeing bank deposits four days after his inauguration in March 1933, Roosevelt said he agreed with Herbert Hoover: “I can tell you as to guaranteeing bank deposits my own views, and I think those of the old Administration. The general underlying thought behind the use of the word ‘guarantee’ with respect to bank deposits is that you guarantee bad banks as well as good banks. The minute the Government starts to do that the Government runs into a probable loss. . . . We do not wish to make the United States Government liable for the mistakes and errors of individual banks, and put a premium on unsound banking in the future.”

FDR was right. Deposit insurance generates moral hazard: an incentive to engage in more reckless behavior when one’s misdeeds are covered by someone else. Bank managers tend to make riskier loans than they would without insurance, and depositors don’t worry about the lending practices of the banks they patronize. Currently many people, including me, buy bank certificates of deposit through online brokers, perhaps not even learning the name of the bank that got our money. The magic letters FDIC are all we look for.

Savings & Loan and Moral Hazard

The savings and loan crisis of the late 1980s saw a catastrophic explosion of moral hazard. Deregulation had lifted interest rate caps for S&Ls and allowed them to expand from residential mortgages into commercial and consumer lending. Competitive pressures sent managers scrambling into these markets, which were mostly unfamiliar to them, while at the same time they had to compete vigorously for deposits. With deposit insurance offered to all chartered institutions regardless of risk, S&Ls made many preposterous loans. When the dust settled, roughly half had failed. A massive taxpayer bailout followed and, as very rarely happens to failing government agencies, the Federal Savings and Loan Insurance Corporation was abolished in 1989—though its responsibilities were shifted to the FDIC.

Moral hazard is an aspect of all insurance, public or private. But private insurance companies, if they wish to survive and prosper, must find ways to limit policyholders’ risky behavior. Deductibles, copays, threats of cancellation, and rewards for prudent behavior return some monetary incentive to policyholders. In addition, insurance companies try to educate policyholders about prudent behavior. Crucially, in a free market private insurance companies’ profit-and-loss statements tell whether they’re getting it right. Government agencies lack profit-and-loss discipline and are inevitably subject to political pressure. The FDIC’s legally mandated requirement to hold reserves to back its liabilities may resemble market discipline, but as we shall see, when the mandate was violated, no one lost his job and no investors lost any capital.

Private insurance companies invest most of their reserves in productive activities such as corporate securities or real estate. They count on earnings from these investments to balance low or even negative returns on their pure underwriting activities. The FDIC, by law, holds its reserves in the form of Treasury securities. Any alternative would certainly be riskier and more politically charged. Yet we must recognize that this arrangement, as with the Social Security Trust Fund, is merely a pass-through of the FDIC’s liabilities to U.S. taxpayers.

The FDIC reserve fund is called the Deposit Insurance Fund (DIF). For most of its history, the DIF was kept within its statutory limit, which has varied over time but is currently a range of 1.15 to 1.25 percent of insured deposits. At least, that’s the statutory range. It’s actually essentially zero. But are the statutory numbers the right ones? No one can be sure, but again, the FDIC lacks a profit motive to help get it right.

A spate of bank failures in 2008 and 2009, while far less severe in number and magnitude than in the 1930s, left the DIF with no unencumbered assets at all. The pace of bank failures continued during the first three months of 2010, while the number of problem banks on the FDIC’s secret list jumped 27 percent in the fourth quarter of 2009, to 702. In short, the FDIC is in trouble.

A restoration plan has been proposed to get the DIF back to 1.15 percent of insured deposits by about 2017, a date that has been pushed back more than once. The plan relies heavily on an assumption that the economy will soon resume robust growth and that “only” about $100 billion in failure costs will be incurred between 2009 and 2013, with most of those costs coming in 2010. For the shorter term, the proposal calls on commercial banks to prepay their deposit insurance premiums through 2011. When they do so, a new asset will appear on their balance sheets: a prepaid expense. To gain their acceptance and cooperation, the FDIC proposes that this prepaid expense be counted as an asset that is just as safe as U.S. government securities and therefore does not require additional capital backing. This shuffle will be pretty much a wash for the commercial banks, and the upshot is that the FDIC will indirectly borrow its own future premium income, hoping that income will materialize in amounts sufficient not only to cover future bank failures but also to rebuild the DIF. We shall see.

The DIF is not the FDIC’s only problem. When closing a failed bank, the agency tries to sell as many of the bank’s assets as possible, including branches, loans, and securities holdings. The FDIC’s goal is usually to make all depositors whole, not just insured depositors. It sometimes takes possession of assets for which it can’t get an acceptable bid. In doing so it acquires assets that are difficult to evaluate and thus greatly complicate estimates of future liabilities.

Disguised Risk

Now let’s take a longer look at the business of banking. The very words we use, like “bank” and “deposit,” can distort our thinking. The word “bank” comes from the bench or counter where medieval money changers did business. The word “deposit” suggests something like an ore deposit in the ground: the minerals are there and can be gotten out. We think of banks as custodians of our money, keeping it safe for us and making it available whenever we need it. But present-day banks are not deposit banks, locking our money away in a vault as the term would suggest, but rather loan banks. Most of our deposits are loaned out and not all of them could be redeemed on short notice. This works fine as long as there is no large and sudden short-term demand for withdrawals. But we have come to believe, in part due to misleading terminology, that we can have rewards without risk. Interest paid on bank deposits is now essentially zero but as depositors, we still reap benefits such as ATMs and online banking with no fee and no apparent risk. In short, as in so many areas of contemporary life, we have been led to expect something for nothing.

Thus proper labeling could help rationalize banking. Those who want utmost safety in the form of true deposit banking should be free to pay for it with fees for storage of their currency or gold. Liability insurance for true custodial service should be very cheap. Those who wish to entrust their money to loan banking should accept the risk, and if they want insured accounts, they—not taxpayers—should be prepared to pay for the insurance, at least indirectly.

While there is nothing inherently wrong with loan banking, we get too much of it when it is disguised as deposit banking and backed by mispriced and politically motivated government insurance. The result is a banking system that is more highly leveraged than it otherwise would be. This in turn increases the severity of business cycles—booms and busts.

FDIC Incentives

Back to the FDIC. As we have seen, banks pay for its service in the form of insurance premiums. Coverage is not mandatory, so the organization looks somewhat like a private business. But in fact it is a monopoly supplier to banks (with a parallel institution serving credit unions). Private competitors are locked out, perhaps not by statute, but by the FDIC’s implicit and explicit backing by the Treasury (explicit in the form of a line of credit). Without a profit motive, the FDIC lacks the incentive to serve its bank customers and its indirect depositor customers by offering innovative services with effective moral-hazard controls.

Though the FDIC lacks market incentives, it is awash in political incentives. Thus in 2008 Congress voted for an increase in deposit coverage from $100,000 to $250,000 with little or no discussion of the costs of this move. This “temporary” increase has been extended once and will likely become permanent. Members of Congress are of course motivated by the campaign contributions of bankers and others, and may not know or care about the long-term consequences of such actions.

Private Options

How might private firms handle bank deposit insurance? Before the government takeover of the banking system, private clearinghouses sometimes provided mutual aid among member banks. The Suffolk Bank in Boston was a notable example in the early 1800s. It supported country banks in New England for many years by clearing their transactions and accepting their currency at par. It earned a profit doing so.

But could private firms ever be big enough to provide bank deposit insurance in today’s multitrillion dollar economy? Reinsurance firms offer evidence that they could. As their name indicates, General Re and other such firms insure insurance companies. Who insures the reinsurance companies? No one. Absent government intervention, these firms would experience diseconomies of scale when they grow too large, provided it is clear that they would not be in line for a government bailout should they get into difficulty.

Failure is an important aspect of the free market. Economist Joseph Schumpeter’s pithy phrase “creative destruction” captures this notion and reminds us that failures, which will always be with us, should be liquidated so that others can pick up the remains and apply them to more promising enterprises. Shouldn’t this idea apply to banks as well? Rothbard actually celebrated occasional bank runs as a way of putting the fear of God into bank managers and depositors alike. Amazingly, Roosevelt’s initial response to the deposit insurance proposal echoed Rothbard’s: “There are undoubtedly some banks that are not going to pay one hundred cents on the dollar. We all know it is better to have that loss taken than to jeopardize the credit of the United States Government. . . .”

Washington-Wall Street Banking Cartel

Make no mistake, our current banking system is, and has long been, a cartel run for the mutual benefit of Wall Street financiers and their regulator friends in Washington. Case in point: Goldman Sachs and Morgan Stanley were allowed to convert to bank holding companies so that they could receive federal bailout money. The $180 billion AIG bailout provided Goldman with 100 cents on the dollar for its holdings of AIG credit default swaps.

Let us not be so naive as to believe that government deposit insurance is any different. Any benefit this system provides to small depositors is incidental to its real objective: to serve the cartel.

The banking system is in need of real reform. More regulation? More virtuous regulators? Only the naive, the ignorant, or the disingenuous can believe these answers in the face of regulation’s long history of failure, the practical impossibility of detailed oversight, and the perverse political incentives that always operate. The solution lies not in wiping out risk—there can be no real economic growth without risk. Instead, we need rational incentives: Let risks be borne by those best able and willing to take them.

In an earlier comment on the fracturing of the U.S. Climate Action Partnership (USCAP), an industry-environmentalist coalition pushing for cap-and-trade carbon emission controls, Environmental Defense Fund president Fred Krupp repeated a commonly held misconception about government regulation when he said: “It’s very unusual for big corporations to raise their hands and say, ‘We want to be regulated for something that we’re not regulated for now.’” Exelon, PG&E, and PNM apparently make his point.

But as a matter of fact, industry support of regulation is not rare at all; indeed, it is the norm. And in the United States it is as American as apple pie.

Historical Examples

A somewhat casual investigation of business history reveals that it was the U.S. Chamber of Commerce, with the special assistance of General Electric president Gerard Swope, that supported passage of President Roosevelt’s 1933 National Industrial Recovery Act. The Act, with its Blue Eagle codes affecting 2.3 million employers, attempted to place all American industry in a price-fixing cartel. But while the Chamber and many large firms supported FDR’s cartel, many other firms, including Ford Motor Company, did not.

Going back further, we are reminded by Howard Marvel, writing in the 1977 Journal of Law and Economics, that it was the owners of the newly built water-powered textile plants that supported the English Factory Acts (1802 and on), not the owners of older mills that used far more labor per unit of output. The legislation limited child labor and hours and conditions of work, which raised the costs of labor-intensive producers. The industrialists who joined with other crusaders to support the legislation are remembered as philanthropists.

In 1907 it was the electric utility industry, led by Samuel Insull, that lobbied for state regulation in the hopes of escaping less predictable and intractable municipal control. In 1910 American Telephone and Telegraph Company chairman Theodore Vail successfully called for federal regulation of long-distance telephone calling just when the Bell patents were expiring and new competition was, as he put it, “skimming the cream” from the market. Even the Magna Carta (line 35) specifies a standard width for all cloth sold in the kingdom—all in the name of consumer protection, scholars tell us. The standard happened to be the width of looms operated by the London weavers. The less fortunate Bristol weavers had to break and modify their looms to compete.

A focus on environmental regulation reveals a host of Bootleggers and Baptists who have coalesced, sometimes quietly, to support output restrictions. In hearings before passage of the 1972 federal Water Pollution Control Act, industrialists located along the Ohio River argued for the law. They faced pollution controls imposed by the Ohio River Sanitation Commission and wanted a national level playing field. Only federal regulation would solve their problem, and they supported it. It was the coal interests in Ohio and West Virginia, along with environmentalists, that lobbied for the 1990 Clean Air Act amendments requiring scrubbers on newly built and modified coal-fired electric utilities. As Bruce Ackerman and William Hassler famously noted in their 1981 book, Clean Coal/Dirty Air, the scrubber requirements eliminated the clean-burn advantage of western coal and kept the eastern coal producers happily burning their higher-sulphur coal.

Yes, industry support of legislation that imposes restrictions on output is commonplace, but one begins to understand this more fully after careful scrutiny of the lobbying process. It is seldom the case that every firm in an industry supports restrictions. When John Deere petitioned the EPA (Environmental Protection Agency) to increase the stringency of the air-emission standard on small gasoline engines, it was because Deere had a patent on cleaner engines. When the Chicago meat packers lobbied Congress to pass the 1906 Meat Inspection Act, it was because of markets lost to consumer fear over Upton Sinclair’s The Jungle and Argentine beef producers who were invading the U.S. market with lower-priced food.

And when nuclear-power producers Exelon, PG&E, PNM, and others lobby for a federal statute that would impose high costs on coal-fired competitors, there should be no question why.

Despite ample lip-service for “hope” and “change,” the Obama administration’s cynical response to the escalating drug prohibition-related violence around the Mexican border epitomizes Einstein’s oft-quoted observation.

Since 2008 more than 7,000 people—over 1,000 last January alone, including Mexican civilians, journalists, police, and public officials—have been killed in clashes with warring drug traffickers. Wire-service reports estimate that Mexico’s drug lords employ over 100,000 soldiers—approximately as many as the Mexican army—and that the cartels’ wealth, intimidation, and influence extend to the highest echelons of law enforcement and government. Where do the cartels get their unprecedented wealth and power? By trafficking in illicit drugs—primarily marijuana—over the border into the United States.

The U.S. Office of Drug Control Policy (more commonly known as the drug czar’s office) says more than 60 percent of the profits reaped by Mexican drug lords are derived from the exportation and sale of cannabis to the American market. To anyone who has studied the marijuana issue, this figure should come as no surprise. An estimated 100 million Americans age 12 or older—or about 43 percent of the country—admit to having tried pot, a higher percentage, according to the World Health Organization, than any other country on the planet. Twenty-five million Americans admit (on government surveys, no less) to smoking marijuana during the past year, and 15 million say that they indulge regularly. This high demand, combined with the drug’s artificially inflated black-market value (pot possession has been illegal under federal law since 1937), now makes cannabis America’s top cash crop.

In fact, according to a 2007 analysis by George Mason University professor Jon Gettman, the annual retail value of the U.S. marijuana market is some $113 billion.

How much of this goes directly to Mexican cartels is difficult to quantify, but no doubt the percentage is significant. Government officials estimate that approximately half the marijuana consumed in the United States originates from outside its borders, and they have identified Mexico as far and away America’s largest pot provider. Because Mexican-grown marijuana tends to fetch lower prices on the black market than domestically grown weed (a result attributed largely to lower production costs—the Mexican variety tends to be grown outdoors, while an increasing percentage of American-grown pot is produced hydroponically indoors), it remains consistently popular among U.S. consumers, particularly in a down economy. As a result, U.S. law officials now report that some Mexican cartels are moving to the United States to set up shop permanently. A Congressional Research Service report says low-level cartel members are now establishing clandestine growing operations inside the United States (thus eliminating the need to cross the border), as well as partnering with domestic gangs and other criminal enterprises. A March 23 New York Times story speculated that Mexican drug gangs or their affiliates are now active in some 230 U.S. cities, extending from Tucson, Arizona, to Anchorage, Alaska.

In short, America’s multibillion-dollar demand for pot is fueling the Mexican drug trade and much of the turf battles and carnage associated with it.

Same Old “Solutions”

So what are the administration’s plans to quell the cartels’ growing influence and surging violence? Troublingly, the White House appears intent on recycling the very strategies that gave rise to Mexico’s infamous drug lords in the first place.

In March the administration requested $700 million from Congress to “bolster existing efforts by Washington and Mexican President Felipe Calderón’s administration to fight violent trafficking in drugs . . . into the United States.” These efforts, as described by the Los Angeles Times, include: “vowing to send U.S. money, manpower, and technology to the southwestern border” and “reducing illegal flows (of drugs) in both directions across the border.” The administration also announced that it intends to clamp down on the U.S. demand for illicit drugs by increasing funding for drug treatment and drug courts.

There are three primary problems with this strategy.

First, marijuana production is a lucrative business that attracts criminal entrepreneurs precisely because it is a black-market (and highly sought after) commodity. As long as pot remains federally prohibited its retail price to the consumer will remain artificially high, and its production and distribution will attract criminal enterprises willing to turn to violence (rather than the judicial system) to maintain their slice of the multi-billion-dollar pie.

Second, the United States is already spending more money on illicit-drug law enforcement, drug treatment, and drug courts than at any time in our history. FBI data show that domestic marijuana arrests have increased from under 300,000 annually in 1991 to over 800,000 today. Police seizures of marijuana have also risen dramatically in recent years, as has the amount of taxpayer dollars federal officials have spent on so-called “educational efforts” to discourage the drug’s use. (For example, since the late 1990s Congress has appropriated well over a billion dollars in anti-pot public service announcements alone.) Yet despite these combined efforts to discourage demand, Americans use more pot than anyone else in the world.

Third, law enforcement’s recent attempts to crack down on the cartels’ marijuana distribution rings, particularly new efforts launched by the Calderón administration in Mexico, are driving the unprecedented wave in Mexican violence—not abating it. The New York Times states: “A crackdown begun more than two years ago by President Felipe Calderón, coupled with feuds over turf and control of the organizations, has set off an unprecedented wave of killings in Mexico. . . . Many of the victims were tortured. Beheadings have become common.” Because of this escalating violence, Mexico now ranks behind only Pakistan and Iran as the administration’s top international security concern.

Despite the rising death toll, drug war hawks at the U.S. Drug Enforcement Administration (DEA) remain adamant that the United States’ and Mexico’s “supply side” strategies are in fact successful. “Our view is that the violence we have been seeing is a signpost of the success our very courageous Mexican counterparts are having,” acting DEA administrator Michele Lionhart said recently. “The cartels are acting out like caged animals, because they are caged animals.” President Obama also appears to share this view. After visiting with the Calderón government in April, he told CNN he intended to “beef up” security on the border. When asked whether the administration would consider alternative strategies, such as potentially liberalizing pot’s criminal classification, Homeland Security Secretary Janet Napolitano replied that such an option “is not on the table.”

A New Remedy

By contrast the Calderón administration appears open to the idea of legalizing marijuana—or at least reducing criminal sanctions on the possession of small quantities of drugs—as a way to stem the tide of violence. Last spring Mexican lawmakers made the possession of personal-use quantities of cannabis and other illicit substances a noncriminal offense. And in April Mexico’s ambassador to the United States, Arturo Sarukhan, told CBS’s Face the Nation that legalizing the marijuana trade was a legitimate option for both the Mexican and U.S. governments. “[T]hose who would suggest that some of these measures [legalization] be looked at understand the dynamics of the drug trade,” Sarukhan said.

Former Mexican President Vicente Fox recently echoed Sarukhan’s remarks, as did a commission of former Latin American presidents. “I believe it’s time to open the debate over legalizing drugs,” Fox told CNN in May. “It can’t be that the only way [to try to control illicit drug use] is for the state to use force.”

Writing recently on CNN.com, Harvard economist and Freeman contributor Jeffrey Miron said that ending drug prohibition—on both sides of the border—is the only realistic and viable way to put a permanent stop to the rising power and violence associated with Mexico’s drug traffickers. “Prohibition creates violence because it drives the drug market underground,” he wrote. “This means buyers and sellers cannot resolve their disputes with lawsuits, arbitration or advertising, so they resort to violence instead. . . . The only way to reduce violence, therefore, is to legalize drugs.”

Growing Support

Americans’ support for legalizing the regulated production and sale of cannabis—an option that would not likely rid the world of cartels, but would arguably reduce their primary source of income—is at all an all-time high. In May a national Zogby telephone poll of 3,937 voters by the Republican-leaning O’Leary Report discovered, for the first time ever, that a slight majority (52 percent) of Americans “favor the legalization of marijuana.” A separate Zogby poll reported even stronger support (58 percent) among west-coast voters.

Predictably, critics of marijuana legalization claim that such a strategy would do little to undermine drug traffickers’ profit margins because cartels would simply supplement their revenues by selling greater quantities of other illicit drugs. Although this scenario sounds plausible in theory, it appears to be far less likely in practice.

As noted, Mexican drug lords derive an estimated 60 to 70 percent of their illicit income from pot sales. (By comparison, only about 28 percent of their profits are derived from the distribution of cocaine, and less than 1 percent comes from trafficking methamphetamine.) It is unrealistic to think that cartels could feasibly replace this void by stepping up their sales of cocaine, methamphetamine or heroin—all of which remain far less popular among U.S. drug consumers anyway. Just how much less? U.S. Department of Health and Human Services survey data show that roughly two million Americans use cocaine, compared to 15 million for pot. Fewer than 600,000 use methamphetamine, and fewer than 155,000 use heroin. In short, this is hardly the sort of demand that would keep Mexico’s drug barons in the lucrative lifestyle to which they’ve become accustomed.

Of course, it’s unrealistic to think that pot legalization would wipe out prohibition-inspired violence altogether. After all, ending alcohol prohibition in America didn’t single-handedly put the Mafia out of business (though it greatly reduced its power and influence). And it’s always possible that Mexico’s drug cartels would continue to engage in violent acts toward one another as competing factions fought over the crumbs of America’s drastically shrunken illicit-drug market.

That said, it’s equally unrealistic, if not more so, to think that continuing our same failed drug war policies will do anything but exponentially increase the catastrophe they’ve spawned, both in Mexico and at home. It’s time to engage in a different strategy. It’s time to seriously consider legalizing marijuana and other drugs.

Does anyone still think the “war on drugs” is a good idea?

That may strike some people as an odd question under the circumstances, so let’s take it from another direction. Have you seen the news stories about the violence on the border being perpetrated by the Mexican whiskey and cigarette cartels?

No? That’s probably because there was no such violence and are no such cartels.

So why are there violent cartels in marijuana, cocaine, and heroin but not in whiskey and cigarettes?

All together now: prohibition.

“Our” Fault?

Of course the politicians blame everything and everyone but themselves for this spreading violence. “Our insatiable demand for illegal drugs fuels the drug trade,” Secretary of State Hillary Clinton said. “Our demand”? Including hers? “Our inability to prevent weapons from being illegally smuggled across the border to arm these criminals causes the deaths of police officers, soldiers and civilians.” Her answer, in addition to sending the Mexican government taxpayer money, is to go after consumers of drugs and manufacturers and dealers of guns she doesn’t like.

Drug users and gun dealers are to blame for drug-cartel violence? That makes no sense. If it did, then drinkers and smokers would be creating violence, too. What’s missing?

Once again in unison: prohibition. Who brought us prohibition? Politicians. Every politician, bureaucrat, and agent who facilitates or enforces prohibition is an accomplice in the violence because he or she helps to create the conditions in which thugs have a comparative advantage in dealing drugs.

For years advocates of free trade in drugs—that is, basic rights to life, liberty, and property for drug consumers, producers, and merchants—have pointed out that prohibition, besides being an immoral invasion of liberty by the state, sets in motion a variety of concrete evils that harm innocent people. (No one has been more consistent and rigorous in this than Thomas Szasz). These evils include the corruption of law enforcement, violent crime, and the expansion of intrusive government. Besides these domestic evils, the U.S. government has alienated farmers in foreign lands by helping to destroy their crops and livelihoods. If that’s not terrorism, nothing is. Crop destruction has been a recruiting tool for guerilla organizations, while black-market profits finance them and others with malign intent.

Few listened to these Cassandras against the anti-drug crusade. Maybe people will listen now.

Government Impotence

While violent gangs that make their money selling drugs in the black market are murdering and kidnapping people, invading homes, and committing other atrocities, the politicians have nothing to say but the same bromides they’ve been repeating for years. Thinking we’re either simpletons or amnesiacs, they expect us to be comforted by their words. (Will they be right?) They promise to defeat the cartels, crack down on drug use, and disrupt the gun trade. It won’t work. It’s never worked. It can’t work. Black-market operators are always steps ahead of the plodding bureaucrats. Break up one gang and another emerges. The drugs keep flowing (there’s plenty of bribe money), and consumers will have what they want when they want it. The profits made possible by the black market are powerful incentives to keep the industry going. Government is impotent. (They can’t even keep drugs out of prisons!)

Yet the gangs could be put out of business overnight. How? By removing the criminal penalties for the production, trade, and consumption of all drugs; by bringing the black market into the open, so disagreements can be resolved through civil channels and a talent for violence is no longer an advantage; by dissolving the extraordinary profits that illegal industries always reap.

Yes, it is that easy.

People will recoil. We can’t do that! No? Then accept as normal the unspeakable violence that is starting to spread from city to city, because that is the alternative to the stubborn refusal to end the “war on drugs,” which is really a war on people. Even full police-state tactics will not be able to control it, though that won’t stop demagogic politicians from giving them a try.

The Drug War Finances Government Careers

I don’t expect the multitude of officials who depend on the drug war for their livelihoods and power to endorse an end to prohibition. They have shown themselves more than willing to accept the violence (against others) as the price of their ambition. The new threat to us is an opportunity for them to amass more power, bigger budgets, and higher salaries.

But the rest of us have no reason to support the complex of government and “private” tax-financed agencies that grow fat prosecuting this war. The worn-out rationalizations can’t stand examination. Prohibition keeps no one from getting any drug he wants at an affordable price. On the contrary, it encourages the creation of cheaper, more potent drugs, just as alcohol prohibition replaced wine and beer with hard liquor. (More bang in a more compact form.) Prohibition doesn’t keep our children safe. It makes drugs into enticing forbidden fruits and pushes the trade into less-visible channels. Drugs aren’t “dangerous,” though people are capable of doing harmful things with them—and many other things. (Jacob Sullum’s Saying Yes is an eye-opening book that I highly recommend.) Addiction is not a disease; it’s a choice.

Everything the drug warriors have said is wrong—and often a conscious lie.

Drugs are to our society what Eurasia and East Asia were to Oceania in Orwell’s 1984: a convenient conjured-up demon to justify expansion of power and the usurping of liberty—in the name of keeping us safe.

What will it take, if not the current violence from Mexico, to make people see through the scam?

Look around. It’s our self-proclaimed protectors from whom need we protection most.

No one can honestly believe that Louisiana’s flower cartel is necessary to protect consumers from renegade flower sellers. Rather, it is a classic case of protecting favored groups at the expense of consumers and entry-level entrepreneurs.

Such is the state of economic liberty in America today. Across the nation, the basic right to earn an honest living is under attack. Legislators and bureaucrats are teaming up with entrenched special interests to create needless obstacles to countless entrepreneurs’ pursuit of the American Dream. In the past few decades there has been a nationwide explosion of protectionist regulations—while there were about 80 occupations with such barriers to entry in 1981, today there are over 1,000.

An Institute for Justice (IJ) case that recently attracted international media attention vividly illustrates the uncontrolled growth of occupational licensing and the outrageous lengths that a cartel will go to protect all facets of its business from the most harmless of trades.

Mercedes Clemens was threatened with thousands of dollars in fines and criminal prosecution unless she stopped . . . massaging horses. In Maryland two powerful groups decided to monopolize the growing field of animal massage by requiring all practitioners to spend four years in veterinary school—where massage is not even taught.

Suggesting that only people with veterinary degrees are capable of massaging animals is like suggesting that only people with medical degrees are capable of massaging humans. Preventing Clemens—who is a licensed human-massage therapist and certified in equine massage—from working in her chosen trade has absolutely nothing to do with consumer or animal safety and everything to do with the financial interests of the veterinary cartel.

In 2004 the Tenth U.S. Circuit Court of Appeals wrote in Powers v. Harris, “[W]hile baseball may be the national pastime of the citizenry, dishing out special economic benefits to certain in-state industries remains the favored pastime of state and local governments.” And for decades, following the instructions of the U.S. Supreme Court, federal and state courts have stood by while legislators engage in this “favored pastime” at the expense of consumers and entrepreneurs.

Government Protects Special Interests

In the absence of meaningful judicial supervision, politicians have gone to almost any imaginable length to protect special interests. When a powerful lobby demands protection from competitors, governments have been all too willing to invent—and courts all too willing to accept—patently ludicrous excuses for shutting down entrepreneurs. A court upheld Louisiana’s florist-licensing scheme, for example, because requiring florists to take a test, which would be graded largely on the subjective beauty of their floral arrangements, might help protect the public from “infected dirt.”

The true victims of this new “favored pastime” are people like Clemens and countless other Americans, honest individuals whose lives have been turned upside down solely to protect the politically powerful. Such examples are seemingly endless.

In Texas, all computer-repair technicians must now become private investigators. “If you’re investigating or analyzing data, then you should need a little more credentials than someone who just repairs computers,” the legislative sponsor said. The PI license requires a criminal-justice degree—or a three-year apprenticeship under a licensed private investigator. If a consumer knowingly takes his computer to get repaired by an unlicensed specialist, he faces thousands of dollars in fines and a year in jail. This law no doubt benefits special interests, but those benefits come directly at the expense of ordinary repair technicians and their customers.

A new law in Philadelphia will make it a crime in the coming weeks to talk about the Liberty Bell for money without the government’s permission. Unlicensed tour guides will be subject to hundreds of dollars in fines for talking about the place where the Declaration of Independence was written. Perhaps the most well-organized cartelization effort underway in the United States today is in the interior-design industry. A powerful faction of insiders has already put thousands of its competitors, mainly middle-aged and elderly women, out of work.

The American Society of Interior Designers (ASID) represents less than 3 percent of all designers, but its members have designated themselves as spokespeople for the entire industry. In over 30 years of lobbying, ASID has never presented a single shred of evidence to support its extraordinary claim that literally “every decision an interior designer makes affects life safety and quality of life.”

ASID has been relentless in teaming up with legislatures coast to coast in its strategy for total cartelization. IJ has documented these efforts in a study titled “Designing Cartels.”

Such laws exist today for one reason: Our nation’s judicial system fails to protect the right to earn a living. Courts have decided that this fundamental right—economic liberty—is simply not as important as other rights, and less-important rights are thus not subject to meaningful judicial scrutiny and rarely are afforded protection under the law. If the government can simply dream up a conceivable reason for violating economic liberties, even if that reason is based on no facts, the regulations are generally upheld. Amazingly, courts will even help by inventing their own hypothetical rationales for economic protectionism. This system does not just stack the deck—it gives the politically powerful a hand full of jokers.

Thankfully, entrepreneurs are fighting back. Taxicab drivers, African hair-braiders, sign-hangers, waste haulers, casket sellers, and others have battled the odds (with help from IJ) to strike down occupational-licensing schemes.

Mercedes Clemens’s lawsuit has already caused one of the licensing boards to backpedal. The Philadelphia tour guides, now represented by IJ, had a hearing in federal court on October 6. In Texas, computer-repair technicians and interior designers are standing up for their constitutional rights.

F. A. Hayek famously wrote that “the great aim of the struggle for liberty has been equality before the law.” That is precisely what the fight for economic liberty is all about.

F. A. Hayek, in “The Use of Knowledge in Society,” used distributed, or idiosyncratic, knowledge—the unique situational knowledge possessed by each individual—as an argument against state central planning.

Milton Friedman’s dictum about “other people’s money” is well known. People are more careful and efficient in spending their own than other people’s money, and likewise in spending money on themselves more so than in spending money on other people.

A third insight is that people act most efficiently when they completely internalize the positive and negative results of their actions.

The corporate hierarchy violates all of these principles in a manner quite similar to the bureaucracy of a socialist state. Those at the top make decisions concerning a production process about which they likely know as little as did, say, the chief of an old Soviet industrial ministry.

The employees of a corporation, from the CEO down to the worker on the shop floor, are spending other people’s money, or using other people’s resources, for other people. Its managers, as Adam Smith observed 200 years ago, are “managers rather of other people’s money than of their own.”

By its nature, the corporation substitutes administrative incentives for what Oliver Williamson called the “high powered incentives” of the market: effort and productivity are separated from reward. As Ronald Coase observed some 70 years ago,

If a workman moves from department Y to department X, he does not go because of a change in relative prices, but because he is ordered to do so. . . .

It can, I think, be assumed that the distinguishing mark of the firm is the supersession of the price mechanism.

So why is all this the case? Why does the corporation systematically abandon the basic knowledge and agency benefits of a free market, and rely on the same kinds of central planning and bureaucratic incentives that free-market advocates rightly attack on the part of the state? Why does the corporation function, internally, as an island of nonmarket operations?

A classic essay by C. L. Dickinson, “Free Men for Better Job Performance,” was reprinted in the same issue as my article. Dickinson described the harmful effects of the managerial revolution and the bureaucratic style of corporate governance. He quoted Douglas McGregor (The Human Side of Enterprise): “Many managers agree that the effectiveness of their organizations would be at least doubled if they could discover how to tap the unrealized potential present in their human resources.”

Unfortunately, the structural preconditions of the present system rule out, from the start, an organization which can tap that potential. The system starts from the legacy of a historical process (called “primitive accumulation” by radical historians of various stripes) by which the land was stolen on a large scale from the peasantry in the early modern period. The process included the enclosure of open fields, the legal nullification of copyhold and other traditional tenure rights, and the Parliamentary Enclosures of common land.

As Murray Rothbard observed, whenever we witness a majority of peasants paying rent to a small class of “owners” for access to the land they cultivate, it’s a safe guess the cultivators are the rightful owners and the landlords’ “property rights” are some sort of feudal legal fiction stemming from conquest or privilege. The effect of the assorted “land reforms” of the early modern era was to transform the landed oligarchy’s “property” in feudal legal fiction into a modern freehold right and reduce the rightful owners to at-will tenancy. The result of these expropriations was to drive the majority of peasants off the land, deprive them of independent access to the means of production and subsistence, and force them into the wage-labor market—at the same time as their former property was consolidated into the hands of the plutocracy.

As the industrial revolution developed in England, further accumulation of wealth by the owning classes was fostered by state-enforced unequal exchange, the result of coercive state restrictions on the free movement, free association, and freedom to bargain of the laboring classes. These included the Laws of Settlement (a sort of internal passport system restricting the movement of labor in search of better wages) and the Combination Laws.

Subsidizing Centralization

The state’s entry barriers, like licensing and capitalization requirements for banks, reduce competition in the supply of credit and drive up its price; enforcement of artificial titles to vacant and unimproved land has a similar effect. As a result, labor’s independent access to capital is limited; workers must sell their labor in a buyer’s market; and workers tend to compete for jobs rather than jobs for workers.

State subsidies to economic centralization and capital accumulation also artificially increase the capital-intensiveness of production and thereby the capitalization of the dominant firm. The effect of such entry barriers is to reduce the number of employers competing for labor, while increasing the difficulty for small property owners to pool their capital and create competing enterprise.

The cumulative legacy of these past acts of state-assisted robbery, and ongoing state-enforced unequal exchange, determines the basic structural foundations of the present-day economy. These include enormous concentrations of wealth in a few hands, the absentee ownership of capital by large-scale investors, and a hired labor force with no property in the means of production it works.

Necessarily, therefore, the absentee owners must resort to the expedients of hierarchy and top-down authority to elicit effort from a workforce with no rational interest in maximizing its own productivity. Oliver Williamson’s concept of “satisficing” is relevant here. Workers have an interest in maintaining just enough productivity to keep their jobs and increasing it enough to earn whatever limited administrative rewards are available, but no rational interest in maximizing it per se, because any additional increase in productivity beyond the minimum will likely be appropriated by management.

Hierarchy necessarily results in the divorce of effort from reward, and of productive knowledge from authority. Each rung of authority interferes in the efforts of those who know more about what they’re doing; each rung of authority receives only information filtered from below based on what it wants to hear; and each rung of authority is accountable only to those higher up the chain of command who are even more unaccountable and out of touch with reality. The hierarchy, in short, is a textbook illustration of the zero-sum situation that results from substituting power for market relations.

The obvious solution, the worker cooperative, would—by uniting knowledge with authority and reward with effort—slice through the overwhelming majority of the hierarchical corporation’s knowledge and agency problems, like a sword through the Gordian knot. The distributed knowledge of those engaged in production would be applied directly to the production process on their own authority, without the intervention of suggestion boxes and “quality improvement committees.” The problem of socially engineering the wages and benefits system so as to “encourage people to work” would disappear; the elimination of privilege and unearned income, and the receipt by labor of its full product, would tie reward directly to effort.

But this solution is ruled out by the system’s structural starting assumptions: concentrated wealth and absentee ownership. So the hierarchical corporation is adopted as a sort of Rube Goldberg expedient, the most rational means available given fundamentally irrational presuppositions.

Market Outside, Planning Inside

The corporate hierarchy also interferes with efficiency in another way: by substituting planning for market relations. Internally the corporation replaces market exchange with central planning. The simulated prices used by its internal accounting system, necessarily, are largely fictitious. Even when they use outside market prices as a proxy, the conditions under which those outside prices are set do not match the relations of supply and demand within the corporation. But more often, internal transfer prices are assigned to goods for which there is no outside market, like intermediate goods unique to a firm; in that case, the prices are based on cost-plus markup. As Seymour Melman has observed in the case of Pentagon contractors (The Permanent War Economy), cost-plus pricing creates perverse incentives to maximize, rather than minimize, costs.

The ideal, in terms of efficiency, is the allocation of goods entirely by a genuine price mechanism, with a minimum of vertical integration. Insofar as the production process involves a series of discrete, severable steps, the best way of avoiding information and incentive problems may be to relate the separate steps to one another by contract—especially if each step, organized under a separate firm, takes the internal form of a worker cooperative.

Each step, although a black box to those outside, is from an inside perspective ideally suited to aggregating all relevant information for consideration by a single group of decision-makers. In a self-managed enterprise, the same elected management that considers the relative prices of different productive inputs, and the price of the finished product, is also experienced in the actual production process in which the inputs are used. They are most qualified, of all people, to decide both the relative priority by which productive inputs ought to be economized, and the most effective technical methods of organizing production in order to economize those inputs (that is, combining Mises’s “entrepreneurial” and “technical” functions without the intermediation of several layers of pointy-haired bosses).

Just as important, unlike a production unit within a corporate hierarchy, the production workers within an independent producers’ co-op fully internalize all the costs and benefits of their production decisions. Unlike the case within a corporate hierarchy, there is no conflict of interests resulting from the decision-making by managers who stand to reap the benefits of increased productivity while workers suffer only the increased burden of speedups and downsizing. For a self-managed production unit, any decision concerning production methods will be a tradeoff of costs and benefits, all of which are fully internalized by the decision-makers.

From an outside perspective, on the other hand, contracting firms are able to make a virtue of necessity in treating a particular stage of production—organized as a separate firm—as a black box. The outside contractor and the internal corporate hierarchy, equally, are ignorant of goings-on inside the black box. The difference is that an outside contractor, unlike the apparatchiks in a corporate hierarchy, has no need to know what’s happening in the internal production process, and no power to interfere with what he doesn’t understand. So long as the inputs (likely in money terms) are specified by contract and the outputs are verifiable and enforceable, what goes on inside the box isn’t the contractor’s problem.

If the ideal contract is Ian R. MacNeil’s “sharp ins by clear agreement, sharp outs by clear performance,” then it is far simpler and less costly to simply monitor the contractually specified “ins” and “outs” going across firm boundaries than to monitor the internal use of inputs within the production process. The contracting party has no need to worry about the internal efficiency of the production process because it has effectively outsourced the responsibility for decisions on how best to organize production to those engaged in production. And the other firm, if cooperatively owned by self-managed workers, is uniquely qualified to organize production most efficiently given the specified ins and outs. Both the authority to organize production, and the productivity benefits from doing so in the most efficient manner, have been internalized by those who have the most direct knowledge of the production process.

But—again—the state’s intervention in the market raises almost insurmountable barriers to this form of organization. The state artificially promotes hierarchy at the expense of markets by subsidizing the input costs of large-scale enterprise and by protecting large corporations against the competitive ill effects of inefficiency. It subsidizes long-distance transportation and thus artificially inflates market and firm size. Its differential tax advantages for corporate debt and capital depreciation (or more accurately, its differential tax penalties on those not engaged in such activities) encourage mergers, acquisitions, and excessively capital-intensive forms of production with high entry costs. Its cartelizing regulations, in addition, limit competition in product features and quality. Thus the boundary between hierarchy and market is artificially shifted so that the dominant firms are far larger, more hierarchical, and more vertically integrated than they would be in a free market.

The state’s so-called “intellectual property” laws, especially, are a powerful force for cartelization. Many oligopoly industries were created by controlling patents (for example, AT&T was based on the Bell patent system) or exchanging them (GE and Westinghouse). Patents also enable corporations to restrict the supply of replacement parts for their goods and thus render artificially expensive the choice to repair an old car or appliance as an alternative to buying a new one. This facilitates a business model based on planned obsolescence, large production runs, and “push” distribution.

“Intellectual property” also artificially promotes hierarchy even in industries where the minimum level of capitalization has ceased to be an effective barrier to self-employment. One of the original justifications for corporate hierarchy was that the enormous scale of even the minimum capitalization, in entertainment and information, was an entry barrier: To start a newspaper, radio station, movie studio, publishing house, or record company required, at minimum, an outlay of several hundred thousand dollars. As a necessary result, media and entertainment were concentrated in the control of a few gatekeeper corporations.

Revolutionary Change

But as Yochai Benker observed in The Wealth of Networks, the digital revolution has reduced the cost of the basic item of capital equipment—the personal computer—to under a thousand dollars. And supplemental equipment and software for very high-quality desktop publishing, sound editing, podcasting, and so on can be had for a few thousand more. The ability to replicate digital information on the Internet, at zero marginal cost, renders the corporate dinosaurs’ marketing operations obsolete.

The gatekeepers’ only remaining basis for power is the state’s “intellectual property” monopolies—which explains why Microsoft, the RIAA, and MPAA have pursued such draconian copyright legislation to protect themselves from market competition. The intrusive DRM (digital rights management) used by Microsoft and the entertainment companies, and the legal penalties for circumventing it, in effect outlaw precisely what computers are made for: the replication and exchange of digital information. Without copyright and patent monopolies, peer production by self-employed information and entertainment workers would likely be the norm in software, music, and publishing. (It’s probably no coincidence, by the way, that industries dependent on such “intellectual property” monopolies are the main profitable sectors in the global economy. It’s a case of artificial “comparative advantage,” created by state-erected barriers to the diffusion of knowledge and technique. The most profitable industries are those whose profits amount to rents or tolls for access to artificial property.)

The problem is not hierarchy in itself, but government policies that make it artificially prevalent. No doubt some large-scale production would exist in a free market, and likewise some wage employment and absentee ownership. But in a free market the predominant scale of production would likely be far smaller, and self-employment and cooperative ownership more widespread, than at present. Entrepreneurial profit would replace permanent rents from artificial property and other forms of privilege. Had the industrial revolution taken place in a genuine free market rather than a society characterized by state-backed robbery and privilege, our economy today would probably be far closer to the vision of Lewis Mumford than that of Joseph Schumpeter and Alfred Chandler.

In a unanimous decision the nine members of the Supreme Court said there were constitutional limits beyond which the federal government could not go in claiming the right to regulate the economic affairs of the citizenry. It was a glorious day in American judicial history, and is worth remembering.

When Franklin Roosevelt ran for president in the autumn of 1932 he did so on a Democratic Party platform that many a classical liberal might have gladly supported and even voted for. The platform said that the federal government was far too big, taxed and spent far too much, and intruded in the affairs of the states to too great an extent. It said government spending had to be cut, taxes reduced, and the federal budget balanced. It called for free trade and a solid gold-backed currency.

But as soon as Roosevelt took office in March 1933 he instituted a series of programs and policies that turned all those promises upside down. In the first four years of FDR’s New Deal, taxes were increased, government spending reached heights never seen before in U.S. history, and the federal budget bled red with deficits.The bureaucracy ballooned; public-works projects increasingly dotted the land; and the heavy hand of government was all over industry and agriculture. The United States was taken off the gold standard, with the American people compelled to turn in their gold com and built lion to the government for paper money under the threat of confiscation and imprisonment.

In June 1933 Congress passed the National Industrial Recovery Act (NIRA), after which FDR created the National Recovery Administration (NRA). Modeled on Mussolini’s fascist economic system, it forced virtually all American industry, manufacturing, and retail business into cartels possessing the power to set prices and wages, and to dictate the levels of production. Within a few months over 200 separate pricing and production codes were imposed on the various branches of American business. The symbol of the NRA was a Blue Eagle that had lightning bolts in one claw and an industrial gear in the other. Every business in the country was asked to have a Blue Eagle sign in its window that declared, “We Do Our Part,” meaning it followed the pricing and production codes. Citizen committees were formed to spy on local merchants and report if they dared to sell at lower prices.

Propaganda rallies in support of the NRA were held across the country. During halftime at football games cheerleaders would form the shape of the Blue Eagle. Government-sponsored parades featured Hollywood stars supporting the NRA. At one of these parades the famous singer Al Jolson was filmed being asked what he thought of the NRA; he replied, “NRA? NRA? Why it’s better than my wedding night!” Film shorts produced by Hollywood in support of the NRA were shown in theaters around the country; in one of them child star Shirley Temple danced and sang the praises of big-government regulation of the American economy.

The NRA codes were soon joined by similar controls over farming with the passage of the Agricultural Adjustment Act (AAA). Farmers were given subsidies and government-guaranteed price supports, with Washington determining what crops could be grown and what livestock could be raised. Government ordered some crops to be plowed under and some livestock slaughtered, all in the name of centrally planned farm production and pricing.

Much of the urban youth of America were rounded up and sent off to national forests for regimentation and mock military-style drilling as part of the Civilian Conservation Corps (CCC). The Works Progress Administration (WPA) created make-work projects for thousands of able-bodied men, all at taxpayers’ expense. Since unemployed artists were “workers” too, they were set to work in government buildings across the land. Even today, in some o f the post offices dating from the 1930s, one can see murals depicting happy factory workers and farm hands in a style similar to those produced in Stalin’s Russia and Hitler’s Germany.

This headlong march into economic fascism was brought to a halt by the Supreme Court. The catalyst was a legal case known as the Schechter Poultry Corp. v. United States. Schechter, a slaughterhouse that sold chickens to kosher markets in New York City, was accused of violating the “fair competition” codes under the NRA. The case made its way up to the Supreme Court, with the nine justices laying down their unanimous decision on May 27, 1935.

Three hundred people packed the court that day to hear the decision, with prominent members of Congress and the executive branch in the audience. The justices declared that the federal government had exceeded its authority under the interstate-commerce clause of the Constitution, since the defendant purchased and sold all the chickens it marketed within the boundaries of the State of New York. Therefore, the federal government lacked the power to regulate the company’s production and prices. In addition, the justices stated that the NRA’s power to impose codes constituted arbitrary and discretionary control inconsistent with the limited and enumerated powers delegated by the Constitution.

AAA Rejected

This was soon followed by the Supreme Court’s rejection of the AAA in January 1936, when the justices insisted that the federal government lacked the authority to tax food processors to pay for the farmers’ subsidies and price supports. Furthermore, since farming was generally a local and state activity, the federal government did not have the power to regulate it under the interstate-commerce clause.

Franklin Roosevelt was furious that what he called those “nine old men” should attempt to keep America in the “horse and buggy era” when this great nation needed a more powerful central government to manage economic affairs in the “modern age.” FDR’s response was his famous “court packing” scheme, in which he asked Congress to give him the power to add more justices to the Supreme Court in order to tilt the balance in favor of the “enlightened” and “progressive” policies o f the New Deal. But this blatant power grab by the executive branch ended up being too much even for many of the Democrats in Congress, and Roosevelt failed in this attempt to assert naked presidential authority over another branch o f the federal government.

Shortly after the Supreme Court declared both the NRA and AAA unconstitutional, David Lawrence, founder and long-time editor of U.S. News and World Report, published a book titled Nine Honest Men (1936). He praised the justices for their devotion to the bedrock principles of the Constitution, and their defense of the traditional American ideals of individual liberty, private property, and the rule of law — even in the face of the emotional appeal of government to “do something” during an economic crisis.

Since that landmark decision 70 years ago against the imposition of economic fascism in America, the U.S. government has continued to grow in power over the American citizenry. But it should be remembered that men of courage, integrity, and principle can stand up to Big Brother and resist the headlong march into economic tyranny.

From its origin as a distinct secular scientific discipline with the French Physiocratic school in the middle of the eighteenth century, and the British classical school that followed, economics had a pro-market, limited-government orientation. Indeed, intellectual historians and political philosophers often refer to it as “economic liberalism,” in contrast with the classical liberal political philosophy of natural rights, human equality, and constitutionally limited government, which emerged somewhat earlier. Complementing that political philosophy, the teachings of the economists are known to have helped institutionalize liberal regimes and policies based on private property and voluntary exchange.

The effects of such regimes and policies were startling, first in Britain and then in America. Centuries of medieval stagnation gave way, and for the first time in recorded history, continuing economic growth with rising real incomes for ordinary persons became the norm. In the eighteenth century, real income had stagnated in the American colonies under British mercantile policy. Over the nineteenth century, however, closely following ratification of the Constitution in 1788, real incomes in America grew at an average annual rate 50 times above that experienced in the Old World during the sixteenth and seventeenth centuries. Average life spans rose rapidly, and life-changing inventions and innovations of all kinds emerged at a dazzling pace.

Fairly early in the twentieth century, however, most economists in America succumbed to the interventionist perspective of political progressivism and welfare liberalism. In this “public interest” perspective, the regime of private property and voluntary exchange was and is believed to be subject to massive and frequent market failures—externalities, monopolies, corporate exploitation of workers, and so on—which are assumed to require interventions by public-spirited government officials in the form of taxation, subsidies, or administrative regulation.¹ For decades economic analysis focused strongly on the nature of market failures and on regulatory prescriptions. Government intervention expanded apace, progressively restricting economic freedom.

However, a reversion of opinion by many economists back toward the classical-liberal roots of the profession began in the 1960s and accelerated in the 1970s due to three developments. The first was the increased professional influence of Milton Friedman and the Chicago school of economics, which had a strong free-market orientation. The second factor was that economists had, by that time (the 1960s), several decades of regulatory practice to observe and analyze. The picture emerging from careful studies was not one of social problems being cured by beneficent regulators. The third factor was the resurgence of the Austrian school, which had always defended free markets and opposed statist interventionism, but which had almost disappeared in the 1940s.

Oddly (or perhaps not so oddly), this resurgence of skepticism among economists about the political motivations for and beneficial character of government intervention overlapped a new burst of regulatory activity in the late 1960s and early 1970s. In that period the Johnson and Nixon administrations established the EPA, OSHA, NHTSA, CPSC, and many additional regulatory agencies with enormous budgets and vast powers. Since then, evidence has continued to accumulate that regulation normally does more harm than good. If regulatory activities were in fact solving social problems and overcoming market failures by acting to end racial discrimination, business monopoly, labor exploitation, externalities, unsafe working conditions, and the like, they should have increased productivity and economic growth.² Instead, after 1972, productivity growth fell below its historic 2 percent long-run annual average, and stayed below it for over 20 years, in an episode economists termed the Great Productivity Slowdown. Richard K. Vedder has shown empirically that increasing regulation was a primary cause of the slowdown and that we suffered staggering losses in real income as a result.³

Politics of Intervention

Suspicion among economists over the motives for regulatory intervention emerged not only because the forms and effects of regulation diverged from economists’ models and predictions, but also because firms were often observed seeking regulation, rather than opposing it. Major firms in the trucking industry, for example, had lobbied for passage of the National Motor Carrier Act of 1935, bringing the industry under regulatory control of the Interstate Commerce Commission, which had been created in 1877 to regulate the railroads. And in 1938 the airlines lobbied Congress to pass the Civil Aeronautics Act, establishing a government-enforced cartel over the air-passenger industry.⁴

George Stigler was among the first economists to wonder whether, given that economic agents often demand regulation, something like market exchange was occurring between those parties and legislators. He was a pioneer in attempting to model supply and demand in such a market.⁵ A student of industrial organization and cartels, Stigler was aware that private cartels are unstable: The fixing of a price above the competitive level motivates members of the cartel to undercut the fixed price for personal gain. Also, the high price attracts outside competitors into the market, adding to supply and making it impossible to maintain the cartel price. He also knew that entry can be prevented, and cartel arrangements enforced, if the cartel can persuade the government to use its coercive legislative and police powers in those efforts.

Political officials will not grant and enforce such a legal cartel arrangement for nothing, however. Private interests seeking monopoly or cartel gains at the expense of their competitors and the public will have to pay the politicians for granting them. The payments assume diverse forms, such as campaign contributions, wining and dining by lobbyists, literal bribes, speaking fees, and the promise of jobs after their political careers end. In essence, the politicians operate an auction market where various interests bid for redistributive legislation. Obviously, this may take many forms beyond the literal regulatory cartelization legislation stressed by Stigler. Examples include efforts by firms and other private interests to obtain such things as targeted income transfers, farm price supports, tariffs on imports competing with domestic products, and so on.

The key social problem associated with private efforts to obtain redistributive legislation (termed “political rent-seeking”) was made clear by Gordon Tullock, in another breakthrough paper.⁶ Scarce resources (money and lawyers’ and lobbyists’ time, among other things) that are used in such efforts are diverted from more productive uses, and the real output they would have otherwise generated is lost. Indeed, Tullock demonstrated that when rent-seeking is competitive, the entire discounted present value of the prospective future gains being sought through redistributive legislation will be expended as rent-seeking costs. Redistributive politics is thus a negative-sum game. There are winners and there are losers, but the sum of the losses exceeds the sum of the gains, and the members of society as a whole are made poorer than they otherwise would be.⁷

Recently there has been another breakthrough in describing the interaction between political authorities and private interests. Economist Fred S. McChesney of Northwestern University noticed that many payments by private parties to legislators could not be explained as efforts to obtain economic rents at public expense through legislation. Instead, the parties making the payments were simply attempting to protect wealth and income they already possessed from being reduced or eliminated by costly legislation targeted at them. The basic insight here seems obvious: Politicians who have the power to grant special benefits, and can generate payments from private interests seeking to be the beneficiaries, will also have the power to impose legislative harms and can generate payments from private parties by threatening to do so.⁸ McChesney calls this process “rent extraction,” or legislative extortion.

This can take many forms, including threats to impose excise taxes or costly regulation (including price controls), or even threats to deregulate industries previously cartelized through regulation. Officials in federal, state, and local regulatory agencies can also engage in rent-extraction by such practices as threatening to withhold licenses required to do business or to initiate antitrust prosecutions. It is notable, for example, that Bill Gates gave little in political contributions before the Microsoft prosecution and has given very much since it began.

McChesney stresses that, just as with political rent-seeking, there are real costs associated with rent extraction. First, the risk that government officials will use their legislative or administrative power to reduce private returns on invested capital diminishes the incentive private entrepreneurs have to invest in the first place. In addition, there are transactions costs (including bargaining and information gathering) incurred in the process. Also, risks of rent-extraction motivate some economic agents to hide their resources to avoid political extortion, and there are deadweight costs associated with doing so.

Public Choice economists have long argued that minimizing rent-seeking behavior and its associated costs requires constitutional reforms restricting the power of legislators to grant special favors. Few people will waste time or money trying to influence a legislator who has no power to grant them a subsidy or protected position in the market. McChesney likewise recognizes that limiting government authority to its minimum legitimate functions would minimize rent-extraction. Who would make extortion payments to politicians lacking power to carry out their threats?

A Look Back

The immediate question becomes whether such constitutional reforms are feasible. History provides a fairly unambiguous answer, because such reforms have been applied, and have worked, in the past. The fact that the U.S. Constitution placed so many prescriptive (Article I, section eight) and proscriptive (including Article I, section 9, and the Bill of Rights) limits on the legislative power of Congress is a primary reason so little interventionist activity was engaged in at the federal level before the Civil War. State officials, in contrast, were under much less constraint and engaged in a great deal of rent-seeking and rent-extracting economic intervention. When the effects of such activities became clear to the public, however, constitutional reforms were applied at that level of government also. Oddly, this history is little known.

One of the first political parties in the United States, the Federalists, was a mercantilist party advocating central banking, internal excise taxes, and federal funding of the building of canals and turnpikes.⁹ Its Jeffersonian opponents in Congress, citing a lack of constitutional authority, predicting that fraud and collusion would result, and stressing the regional redistributions likely to be generated by any particular transportation subsidy, largely frustrated the Federalist program of “internal improvements.” At the state level, however, constitutional provisions were less restrictive and the case for canal and turnpike subsidies seemed initially more compelling.¹⁰

State officials wanted to subsidize grandiose canal and turnpike projects precisely in such instances where market entrepreneurs were unwilling to venture because of likely unprofitability. The officials easily assumed—usually falsely—that subsidies would make those projects profitable. In some cases, such as the Erie Canal, built by New York state with borrowed money and revenue from an excise tax on salt between 1817 and 1825, that appeared to be true. The Erie made money, though its profitability was mostly due to the state’s suppressing of competition from other canals and railroads built along segments of its route.

The apparent success of the Erie, however, motivated New York and other states to subsidize many other projects. These subsidies, often in the form of state stock or bond purchases to capitalize franchised private builders, were associated with massive and repeated rent-seeking corruption, generating political scandals that outraged the public in state after state. Worse, most of the projects lost money, and the financial conditions of the states heavily involved in such projects consequently deteriorated, putting many of them in serious trouble.

Problem Exacerbated

The development of the steam railroad engine and rapid expansion of the railroad industry after 1830, though an enormous stimulus to economic growth through reduced transport cost between locales not capable of being connected by waterways, in some ways exacerbated the problems of the state governments. For one thing, the railroads, like the turnpike and canal corporations before them, had to obtain incorporation charters or permits from the governments. In return, state authorities frequently extracted rents. Canal and turnpike companies lobbied state legislators to prevent competing railroads from being built. This motivated counter-lobbying from the railroads, further enriching the legislators, but wasting scarce resources.¹¹ In many cases, the legislators offered subsidies to the railroad bidding highest for the legislative franchise to build a particular route. Consequently, many railroads were built to obtain the subsidies not to profit from operations. Such roads were often not completed, or otherwise lost money, leaving the states further in debt.

By the early 1840s the citizens in many states had had enough of scandals and financial crises generated by “internal improvement” subsidies. Around 1842, under pressure from angry citizens led by Jacksonian reformers, Indiana, Illinois, and Michigan all amended their constitutions to forbid or restrict their legislatures from providing subsidies to private corporations. They were followed in 1845 by Louisiana, in 1846 by New York, in 1850 by Kentucky, in 1851 by Maryland and Ohio, and in 1857 by Missouri and Pennsylvania. On top of this, under the same public pressures, many states had begun passing general incorporation laws, allowing virtually any group of aspiring business associates to incorporate. This removed state power to extract rents from private parties to obtain or retain incorporation, and also made corporations truly private, rather than quasi-public, business entities.¹²

These events significantly contracted the boundaries of the public sector relative to the private sector, providing crucial conditions for rapid economic growth to occur in the remainder of the nineteenth century.

This massive public revulsion and wave of constitutional and legal reform had important national implications. Mercantilist interventionism had been dealt an enormous blow, and, with it, so had a major political party. Since 1834, the mercantilist party in the United States had been the Whigs, who favored public infrastructure subsidies, paper money, and high tariffs. Their opponents were the Jacksonian Democrats, who had a classical-liberal ideology favoring low tariffs, hard money, and opposition to government economic interventions. The rejection of mercantilism by the public was to no small extent a rejection of the Whigs. This and other factors caused the Whig party to break up and be replaced by the Republican party after 1854.¹³

What followed then, we all know: a civil war over tariffs and slavery that badly injured the South and, with the Southern Democrats out of Congress, a new wave of statist and mercantilist policy under the Republicans, including the corrupt and unnecessary federal subsidization of the first transcontinental railroads.¹⁴These traumatic events seem to have overshadowed and reversed an enormous victory for those who favored limited government and opposed corrupt rent-seeking and rent-extraction, which occurred over the two decades prior to the war.

Notes

1. See, for example, Leverett S. Lyon and Victor Abramson, Government and Economic Life: Development and Current Issues of American Public Policy (New York: Brookings Institution, 1940).
2. For the logic of this claim, see James Rolph Edwards, Regulation, the Constitution, and the Economy: The Regulatory Road to Serfdom (Lanham, Md.: University Press of America, 1998), pp. 166 and 169–70.
3. Richard K. Vedder, “Federal Regulation’s Impact on the Productivity Slowdown: A Trillion Dollar Drag,” CSAB Policy Study Number 131, July 1996.
4. See William A. Jordan, Airline Regulation in America: Effects and Imperfections (Westport, Conn.: Greenwood Press, 1979 [1970]).
5. George Stigler, “The Theory of Economic Regulation,” Bell Journal of Economics and Management Science, Spring 1971, pp. 3–21.
6. Gordon Tullock, “The Welfare Costs of Tariffs, Monopoly, and Theft,” Western Economic Journal, June 1967, pp. 224–32. For a description of rent-seeking see Sanford Ikeda, “Rent-Seeking: A Primer,” Ideas on Liberty, November 2003.
7. This is so not just because of the rent-seeking cost, however, but also because of the overhead costs of administering the transfers or regulating the cartel, the deadweight costs of taxation to finance such activities, and so on.
8. Fred S. McChesney, Money for Nothing: Politicians, Rent Extraction, and Legislative Extortion (Cambridge Mass.: Harvard University Press, 1997).
9. It is important to know that the late medieval European monarchies were mercantilist, rent-seeking societies, replete with franchised monopolies, cartels, and trade restrictions. Mercantile practices had to be largely eliminated for free societies with efficient market systems to emerge. The motives for mercantile policies never quite disappear, however.
10. The standard source here is Carter Goodrich, Government Promotion of Canals and Railroads (New York: Columbia University Press, 1960). Goodrich’s bias, however, is easily shown. Repeatedly implying that state and federal subsidies were beneficial on net, he never once even mentions James J. Hill, who built the Great Northern Transcontinental railroad in the 1890s without a cent of either federal or state subsidy, an achievement that dwarfs the building of the Erie Canal.
11. Stewart H. Holbrook, The Story of American Railroads (New York: Crown Publishers, 1947), p. 231, describes these conditions well.
12. Robert Hessen, In Defense of the Corporation (Stanford Cal.: Hoover Institution, 1979), pp. 29–30.
13. The failure to recognize the nature and importance of these events leads historians to vague and convoluted explanations for the demise of the Whig party. See, for example, Michael F. Holt, The Rise and Fall of the American Whig Party (New York: Oxford University Press, 1999), chapter 26.
14. See Burton W. Folsom, The Myth of the Robber Barons (Herndon, Va.: Young America’s Foundation, 1991), chapter 2.

Because many ships historically have been capable of serving both commercial and naval or military purposes, the government always has had an interest in the ocean-shipping business—between 1848 and 1858, for example, the federal government paid three shipping lines more than $11 million in subsidies¹ -but the government’s actions in relation to the building and operation of merchant vessels remained ad hoc and transitory prior to World War I. After enactment of the Shipping Act of 1916, however, the government became deeply and permanently involved.

The onset of war in 1914 created an immediate severe shortage of ocean-shipping services, which only grew worse with the passage of time and the sinking, diversion, or internment of ships. Shipping rates increased enormously. Treasury Secretary William Gibbs McAdoo, a leading Progressive with no fear of government intervention, proposed as early as August 1914 that to alleviate the crisis the U.S. government should be authorized to regulate shipping rates and to operate competing vessels on its own account. President Woodrow Wilson strongly supported this plan, writing in September 1914, “The idea in the proposal is not that the government should permanently embark in these things, but that it should do the immediate and necessary thing”—a classic example of diving into quicksand.²

The Wilson administration’s proposal met substantial opposition in Congress—Senator Elihu Root declared it to be “a measure of state socialism which, if established, will inevitably destroy individual liberty”—and both Wilson and McAdoo devoted much time and effort to gaining its approval.³ Proponents urged that the government’s merchant ships would serve also as naval auxiliaries and thus contribute to national security. In promoting the proposal McAdoo began to emphasize the national-security aspect, having learned from experience, he later wrote, that “people as a rule are far more interested in fighting, and in preparations for fighting, than they are in any constructive commercial or industrial effort.”⁴

Finally, whatever had restrained Congress from projecting the government into the shipping business gave way before the combined weight of the extraordinary shipping costs, the lure of lucrative trading opportunities, and the growing national insecurity. After two years of politicking, spearheaded by Wilson, McAdoo, and their fellow Democrats in Congress, a shipping bill was passed, and the President signed it into law on September 7, 1916.

This law created the U.S. Shipping Board and empowered it to regulate the rates and practices of waterborne common carriers in foreign and interstate commerce and, through a subsidiary, to acquire, construct, and operate merchant vessels. The subsidiary, known as the Emergency Fleet Corporation, was created on April 16, 1917. During the war, executive orders, amendments to the act, and related legislation greatly extended the government’s authority over the ocean-shipping industry. Government agencies gained the power to acquire vessels by requisition, commandeering, and seizure; to assign cargoes and routes; to regulate not only shipping and shipbuilding but also the wages, hours, and working conditions of laborers in those industries; and even to build residential housing, stores, and transport systems for them. By the autumn of 1918 “government control of merchant shipping in American service was absolute.”⁵

The Emergency Fleet Corporation’s shipyards had just begun to operate at a high rate when the war ended. Interested parties pressed the government to keep building, however, and it did so, in disregard of the long-term consequences, producing far more in 1919 than it had produced in 1918. Altogether, between 1917 and 1922, the government built more than 2,350 ships (hundreds of them nearly worthless wooden vessels) at a cost of more than $3 billion—approximately one-tenth of the entire financial cost of the war.⁶

Ship Sale

The government now found itself in possession of thousands of ships no longer needed for composing, in the words of a wartime slogan, “a bridge of ships” across the Atlantic. The Merchant Marine Act of 1920 authorized selling the ships to U.S. firms on easy terms and provided for subsidies to private operators. It also approved the operation of government shipping lines. The shipping business remained depressed during the interwar years, however, and the government’s ventures incurred chronic losses, which the taxpayers had to cover. Many of the ships rested at anchor—rusting monuments to government ineptitude and waste.

No salvation lay just beyond the horizon, however. In 1936 a new Merchant Marine Act authorized the U.S. Maritime Commission to assume the Shipping Board’s functions and set in motion another round of government subsidies, ship construction, and cartelization. When World War II began, the War Shipping Administration took complete control of all private shipping operations, while the Maritime Commission plunged into a massive ship-construction program that dwarfed its World War I antecedent, then left the government at the end of the war in possession of a gigantic fleet of unemployed and, for the most part, unemployable vessels, including thousands of poorly constructed, slow-moving Liberty ships.

Statutes enacted in 1950, 1961, and 1984 repositioned deck chairs on the government’s shipping Titanic. Nowadays an independent regulatory agency called the Federal Maritime Commission oversees the cartels, while the Maritime Administration (in the Department of Transportation) channels taxpayer money into the pockets of favored parties by means of subsidies to shipbuilders and shipping lines, loan guarantees for construction and repairs in U.S. shipyards, and maintenance of the National Defense Reserve Fleet, among other boondoggles.⁷

Notes

1. Burton W. Folsom, Jr., Entrepreneurs vs. The State (Reston, Va.: Young America’s Foundation, 1987), p. 14.
2. Wilson to O. G. Villard, September 4, 1914, quoted in Richard Sicotte, “Economic Crisis and Political Response: The Political Economy of the Shipping Act of 1916,” Journal of Economic History, December 1999, p. 871.
3. Root to C. W. Wilson, February 4, 1915, quoted in ibid., p. 862.
4. William Gibbs McAdoo, Crowded Years (Boston: Houghton Mifflin, 1931), pp. 311–12.
5. Edmund E. Day, “The American Merchant Fleet: A War Achievement, A Peace Problem,” Quarterly Journal of Economics, August 1920, p. 591.
6. Ibid., pp. 592–93; U.S. Shipping Board reports cited by Sicotte, p. 861.
7. See “Maritime Administration” and “Maritime Commission, Federal,” in A Historical Guide to the U.S. Government, ed. George Thomas Kurian (New York: Oxford University Press, 1998), pp. 379–83.