Globalist Analysis

America: Populist Before It Was Capitalist

Do free-market principles often face a tougher battle in the United States than in supposedly socialist Europe?


  • To the extent that the U.S. political tradition allows a free market, it facilitates a bastardized version of the market.
  • In the U.S. economy, the global warming problem has not been used to produce market-friendly solutions.
  • The tendency for populism to trump market principle is difficult to eradicate. It is both embedded in the national culture and exacerbated by the peculiar U.S. political system.
  • It is in the area of housing policy that U.S. populism has most clearly trumped any reasonable version of the free market.
  • The American Revolution was not instituted by a group of dedicated capitalists.

To the extent that the United States backslides on free-market principles, there is thought to be little hope for such principles in other countries. That backsliding, however, began with the American Revolution.

This event was not instituted by a group of dedicated capitalists. In particular, to get sufficient support among the working folk who were needed to man the Continental Army, the governing ethos of the revolution was heavily populist and anti-aristocratic.

George Washington may have been as rich as Lord Fairfax, if not richer, but politics demanded that he exploit the impoverished masses' resentment of his Lordship. As for Thomas Jefferson, he was a classic upper class radical.

Tellingly, property rights with regard to slaves were questioned by America's Founding Fathers far less than they were in England. After all, Lord Mansfield's decision prohibiting slavery within metropolitan Britain had already been issued in 1772.

However, feeding popular prejudice required that the property rights of landowners in general must be sharply restricted compared with their position in England.

Whereas in England landowners owned both the game on their land and the fish in the streams running through their land, in the United States rights of landowners were much more restrictive. As a result, hunting and fishing by the populace at large were allowed without restrictions.

The result was a classic "tragedy of the commons," wiping out buffalo herds and East Coast salmon alike. Capitalism defines and protects property rights. Populism allows unrestricted access, thereby destroying the amenity concerned.

The priority of populism over property rights continued throughout the 19th century, with Abraham Lincoln being a major exemplar and the much reviled James Buchanan a feeble resister of the tendency.

All along, the U.S. political system was more prone to rent seeking and violation of property rights than its British equivalent. To be fair, property rights themselves were often disputed in the wilderness.

The Yazoo land scandal of the 1790s created property rights in a vast area of land, regardless of prior occupation by Indians or others, simply by the action of the corrupt Georgia legislature. This decision was upheld by the Supreme Court in the 1810 "Fletcher v. Peck" judgment.

In Mark Twain's 1873 "The Gilded Age," the Hawkins family's 75,000 acres of Tennessee land only acquires value when a corrupt senator agrees to sponsor legislation founding a federal college on the land.

Even in 1810 or 1873, when free market capitalism was theoretically unchallenged, political favors were able to trump property rights, which had value only when some legislative body smiled on them.

When the Progressives took over U.S. economic policy after 1900, property rights had an even harder time. Theodore Roosevelt, nominally a Republican, indulged in class warfare rhetoric against Wall Street and business interests more ferociously than any successor except his cousin.

He also forcibly nationalized in the name of environmentalism vast acreages of the west with scant regard for the property rights of existing landowners.

Since the retirement of the “Four Horsemen” — the Supreme Court judges who thwarted much of the early New Deal meddling — the U.S. Supreme Court has also been an unreliable supporter of property rights.

However, it is in the area of housing policy that U.S. populism has most clearly trumped any reasonable version of the free market.

Herbert Hoover, no great respecter of property rights or the free market himself, as Secretary of Commerce devised an "own your own home" campaign that contributed markedly to the excess housing investment of the late 1920s and the subsequent downturn.

Once the Great Depression hit, he formed the Federal Home Loan Banks in 1932, government agencies set up to make housing loans, to which Franklin Roosevelt added the Federal Housing Administration in 1934. Fannie Mae itself, guaranteeing home loans, was created by Roosevelt in 1938, while Freddie Mac was a creation of the Lyndon Johnson administration.

The entry of the federal government into the business of guaranteeing home loans was thus mostly a child of the Great Depression and of the pathological market conditions (with 50% delinquency rates) of that unhappy period.

However, the downturn had been exacerbated by Hoover's artificial encouragement of the housing market in the 1920s. In any case, the popularity of housing finance and home ownership in general was such that there was no great constituency for returning to a system without government guarantees, even in the 1950s when such a return would have been easy.

Even after the disaster of 2008, and the $149 billion (and counting) taxpayer contributions to Fannie Mae and Freddie Mac, it is by no means certain that housing finance will revert to a private sector solution.

Needless to say, U.S. housing finance over the last couple of decades has been a prime example of what goes wrong when free market principles are subverted — and the price mechanism is made to serve statist ends.

The previous direct system of housing finance, exemplified by Jimmy Stewart in the 1946 movie "It's a Wonderful Life," was superseded by a system of guarantees and securitization, which was nevertheless more expensive for the customer — albeit highly profitable both for Wall Street and for the shadowy nether-world of mortgage origination.

In summary, the U.S. political tradition is not particularly friendly to the free market. To the extent it allows a free market, it facilitates a bastardized version of the market in which, as in Twain's "Gilded Age," political pull is far more profitable than ownership.

Thus, among the most profitable companies in the last few years have been producers of corn and manufacturers of ethanol by a process that is neither economical nor useful to the objective of slowing global warming — its supposed goal.

Indeed, the global warming problem has been used not to produce market-friendly solutions to the modest but probably real problem of man-caused carbon dioxide emissions. Rather, it has been used to construct ever-more Byzantine schemes for government control over large parts of the economy, with massive rents extracted therefrom.

As suggested above, the tendency for populism to trump market principle is difficult to eradicate. It is both embedded in the national culture and exacerbated by the peculiar U.S. political system. It turns individual representatives and senators into political entrepreneurs, financed by campaign donations from vested interests.

All societies have their disadvantages, and the U.S. economy has survived pretty well even with its excessive populism.

But Americans who sneer at continental Europe's big government and high taxes should remember: Germany, for example, has a more sensible housing finance system, with less of its capital diverted to housing investment — and a healthcare system that provides high quality care while tying up far fewer resources than the U.S. system.

It is thus not surprising that some of the time, as at present, Germany's economic performance surpasses that of the United States.

Editor's note: This feature has been adapted from an article that first appeared on “The Bear's Lair,” published on the website Prudent Bear.

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About Martin Hutchinson

Martin Hutchinson is the co-author of Alchemists of Loss: How modern finance and government intervention crashed the financial system (Wiley, 2010) and a Contributing Editor at The Globalist. [New York, United States]

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