Recessions and depressions cause citizens to demand action from the government, providing the spark and the fuel to drive bigger government. Take for instance the Great Depression, which started in October 1929 and lasted through most of the 1930s.
In June 1928 the Federal Reserve thought that the booming stock market would cause inflation, so it took steps to slow the risk of inflation by raising its discount rate (the rate they charge member banks), in order to raise consumer interest rates. This was an effort to slow the stock market. The resulting contraction caused the end of the stock market boom and caused the crash in October 1929.
As the tide began to change the government panicked and reduced the discount rate, but their intervention could not bring about the desired change. While it was governmental action that was the spark that created the Great Depression, when the government lost control, American citizens demanded answers and safeguards from the government to prevent future depressions. The panic of 1837 was also caused by government intervention. Banks grew rapidly in the 1830s and funds for expansion and speculation were readily available.
In an effort to halt the rapid expansion and speculation, the government enacted various measures. Coupled with large government debt at the time incurred by its own over-expansion in canals and railroads, and magnified by on an unfavorable balance of trade where imports exceeded exports, government action was again the cause of the panic of 1837.
In both cases, the government channeled the nation’s economic frustration into calls for yet more control and bigger government, yet it was the implementation of additional controls and bigger government that caused the problem in the first place.
Calls for a larger government and greater government oversight of markets and businesses often occur in the wake of a recession or depression caused by the government’s own hand, as was the case most recently in the 2007 crash. This message comes with a few lessons for the entrepreneur:
First, keep a close eye on the government reaction to markets, as it can be a leading indicator of an impending crisis where fast action may avoid personal financial ruin.
Second, don’t give into the common belief that more government is better since is it is self-serving for the government to create a crisis and then claim to be the only entity that can save us.
Do we really need more government? Isn’t it already too big and clumsy for our own good?
