Keynes vs. Hayek – The Final Battle Royale.

American capitalism was kickstarted on day one of our independence from Great Britain.  

What we had before then was a livable condition under a monarchy.  But we had no say in how the government was run (and we’d decided we wanted that).

Our only recourse was warfare.  Much like the U.S. citizen today, grappling with the pitiless IRS.  You either take it, or you pick up your rifle and get the country back on track.

So, once we’d won our independence, capitalism remained mostly pure, with some exceptions.  When capitalism remains pure, corruption can’t spread through its veins.  There is a downside though.  A bad financial decision, or a bad financial investment, and you’re going to feel some pain.  If you over-leverage, you’ll likely feel a lot of pain.  In cases like this, your children may even go without food.

Americans don’t like seeing children starve, so they put their fingers on the scale.  This alters the form of capitalism that the country is living in, forever.

In the 20th century, we can see just how far Americans were willing to damage capitalism in exchange for short-term, feel-good maneuvers that were all ultimately meaningless.

In 1929, the stock market crashes.  Markets can, and do crash.  In 1933, FDR closes the banks and launches The New Deal, which is billed with a lot of upsides.  Americans, desperate, jump onboard.  Meanwhile, the Federal Reserve switches from hands-off to actively managing liquidity.  The gold standard is abandoned in domestic transactions.  The depression ends and in exchange, the government seizes control over money, with controls they never had before, and were never supposed to have.  This is where the death of American capitalism begins.  In 1944, the International Monetary Fund and the World Bank are born at the Bretton Woods conference.

From 1945 to the 1970s, the American government uses their new powers to spend like they were never able to before.  The GI Bill, the highway system, government subsidies for housing and education came from this.  The Fed and the Treasury coordinate to keep rates low in 1951.  Social Security and Medicare expand.  They called it the golden age of growth, but every expansion contained more policy engineering, and launched more programs that carried endless price tags.  Capitalism switches from pure, to running on stabilizers right here.  Automatic spending, credit and rescue.

From the 70s to the early 80s we get wage and price controls (Nixon, ’71).  Nixon also decouples the American dollar from gold exchange, switching the dollar over from partially fiat to a full-blown AIDS currency. ’73 the G-10 floats the dollar and ends Bretton Woods.  Speculative investment will never be the same.  The American investor shoulders risk to gain wealth.  Now they must also guess what political decisions are coming, and how their investments will be affected.  Some prosper.  Some are ruined forever.  Neither outcome is because of capitalism.  It’s because of interference in capitalism.

The Reagan/Thatcher era shows the world what a bull economy will do following F.A. Hayek’s lead (or Friedman, in this case).  Unchecked expansion, wealth on significant upturn, deregulation.  Capitalism is allowed to heal itself.  Pain?  Yes.  But capitalism remains pure (as pure as it was) for the nation and future generations.  It’s hard to watch humans suffer in favor of preserving a faceless economic system, but if you don’t do it, the economic system rots from the inside, and the suffering lies in wait while growing in size.

1989 George Bush Sr. Bails out the savings & loans, with the American taxpayer footing the bill.  A new president has his hands on the controls, and he is no Ronald Reagan.  It’s free markets for all on the way up, socialism for financiers on their way down.  Corruption spreads deeper into the tissue.

1990s-2007.  Tech boom, cheap Chinese imports, easy credit.  Greenspan “puts”, cutting rates when markets wobble.  1998 Long Term Capital Management bail-out (Fed).  Dot-com bust.  Even easier credit.  Moral hazards are now institutionalized, risk priced out of market.  Capitalism without consequence becomes the new normal.

2008 financial collapse.  TARP, QE1, QE2, ad infinitum.  Bernanke swears he understands how money works.  Zero interest rate policy.  “Whatever it takes.”  The Fed becomes the largest single asset holder on the planet right here.  So maybe Bernanke does know how money works, but who is he working for?  2020 economic bailouts, helicopter money, corporate bailouts.  “Prevent collapse at all costs.”  Trillions in new liquidity.  Asset bubbles form everywhere.  Zombie firms sustained indefinitely.  Inflation reawakens.  Real productivity stagnates even in the face of massive tech leaps.  Economic stimulus as a standard tool of governance becomes the new normal.  Every downturn gets liquidity, every risk is socialized.

Today in 2025: A growing share of the economy now depends on artificial credit conditions.  “Free markets” are controlled by Fed policy.  The line between monetary authority and fiscal politics is gone.  The populace is conditioned to believe that pain = failure, and that the government should remove it.  The real result is an economy, once beautiful, that can no longer reset itself, or maybe even heal itself in short term.  We can’t even listen to Hayek’s ideas anymore, as the cancers have metastasized to the point where any attempted reform would be absolutely catastrophic.  So we wait for the end.  The final answer to 20th century’s folly, knowing that most of us won’t even know why the collapse occurred.  This is why it will.

“The more the state plans,’ the more difficult planning becomes for the individual.”  -Friedrich Hayek

Every intervention solves one short-term problem and seeds the next.  Each rescue enlarges the next collapse.  Rome did this with grain subsidies and debased silver.  We do it with debt and digital liquidity.  Ancient Rome lasted over 1400 years and we’re already seeing the cracks they didn’t see in their first thousand years.