This extremely important study by Butler Shaffer–professor of law and economist–will change the way you think of the relationship between the state and business. It makes a deep inquiry into the attitudes of business leaders toward competition during the years 1918 through 1938 to see how those attitudes were translated into proposals for controlling competition, through political machinery under the direction of trade associations.
What he finds is a business sector not only hostile to free markets but aggressively in favor of restrictions that would protect their interests. This, he finds, is the very source of the origins and development of the regulatory state.
The author chooses this period because it was a time when the entire relationship between American business and the federal government underwent dramatic upheaval. It was in this time that business forged a consensus about the scope and intensity of competition behavior that they would tolerate. This began to exhibit a disposition favoring collectivist authority over one another via government-backed enforcement agencies.
Free and unrestrained competition required more of them than they were willing to tolerate. It required constant innovation, a fight against falling prices, a continued effort to seek out new markets, and the willingness to subject their bottom line to consumer preferences for lower prices and better products. They saw the vibrancy of free enterprise as a threat to their firms and well being, so they used anti-business sentiment in politics to hamper the market in ways that would benefit them.
Shaffer’s analysis goes much farther and much more sound than any yet published, partly because he has done such detailed research but also because he speaks with deep understanding of market principles. He covers the change in ideology that took place. He examines all the trade associations and their codes of ethics as foreshadowing government regulatory efforts. His analysis of the New Deal confirms what John Flynn wrote, that the New Deal was not so much anti-business as pro-established business. His detail is especially impressive in dealing with the steel cartel and the natural-resource monopolies.
If you ever thought that the struggle for free enterprise was about business versus government, this study, which is written in exciting prose and beautiful English, will change the way you understand the essential struggle. The evidence is vast that big business cooperated closely with big government in building the essential architecture of the mixed economy.
What Schaffer has uncovered represents a serious challenge to both left-wing perceptions and right-wing caricatures. It also underscores the extent to which the true spirit of free enterprise must insist on a principled attachment to liberty and not merely promote one sector or interest group over another.
This book should enter into the canon of required economic history.
Free Banking: Theory, History and a Laissez-Faire Model by Larry Sechrest is a magnificent work, now rescued from undeserved obscurity with this new edition. Published in 1993, it is a formalization and extension of literature in the free banking area, with important correctives and clarifications.
He argues that the debate over central banking and free banking is the most important economic issue of the day. Central banking accepts all the methodological precepts of socialist central planning. It is constructivist. The planners pretend to know more than they can know. They presume that their knowledge is better than the market. They use their power to override market signals of prices and interest. And the results are about as successful as socialism, and he proves this point with the first formal model of central vs. free banking, one that combines Hayek, Selgin, and Garrison to show that a competitive system would be self correcting where a centralized one is not.
He goes further to analyze banking institutions in light of Say’s Law which argues for the stability of macroeconomic phenomena in the absence of intervention. He further distinguishes the Austrian position from the monetarist one.
Sechrest’s attack on countercyclical policy is especially poignant today. He argues that even the most well-executed plan has no hope for success. Such policies fail because they are swimming against a market tide, and, moreover, monetary officials have no incentive to pursue socially optimal results; rather, their every institutional bias tends toward protecting the banking industry and the government before anything else.
Sechrest contrasts this centralized model with looking at the detailed history, however, he finds serious problems in the case of free banking in Scotland, as described by Larry White. Sechrest goes beyond Rothbard and Sechrest’s own journal articles on this topic to provide a full overview of the Scottish case. In contrast, he believes there is more to learn about the American case than has been previously known. Here he accumulates and presents vast data to show that free banking performed better than central banking by every standard that matters.
The author then turns to the varieties of free banking theories, and contrast his own views with those of White/Selgin, Yeager, and Rothbard. He concludes with a wonderful theoretical round up of criticism of free banking. He shows that money is not a public good, that banking is not a natural monopoly, that central banking does not constitute a case of spontaneous evolution, and that we do not need a lender of last resort.
He concludes “As long as money remains a tool of the state, that tool will continue to serve the state as a well-spring of income redistribution, social engineering, and military adventurism. A laissez-faire approach to money and banking is more than merely conductive to efficiency and stability. It is likely to prove to be the necessary precondition for prosperity, justice, and peace.”
This edition contains a new foreword by the author.