Ledbetter: 'Henry Paulson, Socialist'

From James Ledbetter over at Slate's Big Money:

Just days after declaring that a bailout of Lehman Brothers would constitute an unacceptable moral hazard, a Republican administration has decided that the only way to keep the American economy alive is to have the federal government take the reins of some of the largest financial institutions in the world.

There is a term in political philosophy to describe a government takeover of a critical industry: That term is socialism.



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Two independent monetary systems have competed for dominance in the United States ever since we were a collection of colonies. In provincial America, paper money was issued by local governments. In England at the same time, paper banknotes were issued and lent privately by banks, headed by the Bank of England, the first private central bank. The major flaw in the private banking system was that the banks created the principal but not the interest necessary to pay back their loans, so more money was always owed back than was put into the money supply, requiring more loans to be taken out to cover the interest, spiraling the people into debt.The most effective and efficient of the American colonial systems was in Pennsylvania, where a publicly-owned bank issued paper money and lent it to farmers. The money returned to the government with interest, preventing inflation; and to keep enough money in the system to prevent the debt spiral of the private banking system, the government issued and spent a sum of money on public works as well. The Pennsylvania system worked so well that it completely funded the provincial government without taxes or inflation. Benjamin Franklin and others maintained that the chief reason for the American Revolution was that Parliament forbade the colonies from issuing their own money. Paper money issued by the Revolutionary government got the colonists through the war, but the British heavily counterfeited the Continental currency as a deliberate war tactic, and by the end of the war it had been inflated so much that it was nearly worthless. Fear of inflation led the Continental Congress to completely omit paper money from the Constitution, which does not say who can issue it or under what circumstances. The private banks filled the breach, and by 1913 the U.S. had the same private central banking system that England had. Ever since the dollar went off the gold standard in 1933, all of our money except coins and a few rare U.S. Notes has been created privately by banks (including the private Federal Reserve) and lent to the government and the people. Two centuries after the Revolution was fought, the pyramid scheme of lending 10 dollars and requiring 11 back has reached its mathematical limits.

Sent by John Merryman | 12:48 PM | 9-23-2008

Socialism is more accurately defined as a method of governance where the state has the equality or well-being of its citizens as the engine of its policies.

The ethics which drive policy are key.

I would argue that the government takeover of a critical industry is not socialism. The takeover continues to have capitalism as the driving force of the bailout, thus this is more accurately described at state capitalism, or bureaucratic capitalism.

Perhaps we should honestly revisit that state capitalism was the U.S.S.R. model. The killing of the tens of millions of farmers for the restructuring of industry had profit and growth as its engine -- characteristics of capitalism found in no other economic model.

Of course, the Soviet's justifications rested under the guises of socialism and those who pointed out the enormous lie -- those of the Trotsky strain -- were expelled from the Communist Party (which the Soviets had a monolopy over) and/or killed.

As an additional note: What we are witnessing (and what the U.S.S.R. practiced) is also not communism. Communism is similar to a model of socialism -- without the state.

Sent by Linda Quiquivix | 12:51 PM | 9-23-2008

@John- Nice comment. It's not easy to comprehend unless you are trained in the field. I still don't understand how a gold standard brings stability while allowing for growth in economies.

You define the role of Government in Socialism but not with Capitalism. How would you define the moral justification for pure Capitalism? And does government fit into that definition at all for the 'pure' model.

Sent by robert | 3:22 PM | 9-23-2008

Isn't a mixed private and public sector where the private industrial concerns are promoted as "national champions" that are propped up by the state the economic policy of Fascism? The AIG bailout and the government bailout fund seem to resemble Fascist economic policies more closely than anything else.

Yeah, I know, Fascism is a term that is overused to the point of meaninglessness. But if we just look at the economic policies, the Treasury and the Fed have acted as neither liberal free market advocates (they would have allowed mass bankruptcies), nor a socialist way (AIG and the investment banks have not been nationalized, instead a bailout fund has been given to the banks). Instead we have private corporations that do what the government tells them to do (you will buy Merrill Lynch now) and are supported by the government. e.g. Fascist economic policy.

Sent by Richard Cross | 11:02 PM | 9-23-2008