To Set a Soul on Fire: Installment #8

Part 4: Capitalism

Jun 12, 2025

To Set a Soul on Fire: The Self-Actualization of Ayn Rand is the third biography in my Self-Actualizing People in History series. I’m currently releasing it piecemeal, in installments, right here on Substack before its official publication. (This is Installment #8.)

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Part 4: Capitalism

But Ayn Rand’s concern that the United States would be turned into a collectivist dictatorship was by no means confined to her fiction. In fact, in the autumn of 1940, she tore herself away from The Fountainhead—with only a third of the novel completed—to try and prevent what she thought might lead to precisely that: the reelection of the 32nd president of the United States, Franklin Delano Roosevelt (the man known affectionately as FDR).

The American Social System

Though her ideas on the subject weren’t yet part of her philosophical worldview by the autumn of 1940, Ayn Rand would become known—from the mid-1940s to the end of her life—as one of the fiercest defenders, and most zealous advocates, of the political system of capitalism.

“Since my purpose [in fiction writing] is the presentation of an ideal man,” she would say, “I had to define and present the conditions which make him possible and which his existence requires.”

Since man acts among and deals with other men, I had to present the kind of social system that makes it possible for ideal men to exist and to function.

That system was “laissez-faire capitalism.”[i]

“Today,” she would write in the 1960s, “few people know what capitalism is, how it works and what was its actual history”—“no other subject,” she clarified, “has ever been hidden by so many distortions, misconceptions and misrepresentations.”[ii]

As she explained in a nonfiction essay:

A social system is a set of moral-political-economic principles embodied in a society’s laws, institutions, and government, which determine the relationships, the terms of association, among the men living in a given geographical area.

And capitalism, she wrote, “[is] the [social] system born and established in the United States,” with the foundation of the United States: “a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.”[iii]

The Rights of Man

“The concept of individual rights,” she continued, “is so new in human history that most men have not grasped it fully to this day.”[iv]

“[The] one fundamental right [is] a man’s right to his own life;” and all other rights—to liberty, to property, to the pursuit of one’s happiness—are only the “consequences or corollaries” of what the life of that specific creature that is man requires. “In order to sustain its life,” she went on, “every living species has to follow a certain course of action required by its nature.”

The action required to sustain human life is primarily intellectual: everything man needs has to be discovered by his mind and produced by his effort.[v]
Animals obtain food by force guided by instinct. . . . [Man] must plant his food or hunt it. Planting requires a long, consistent process of thought—of observation and logical deduction. Hunting requires weapons; . . . and making weapons requires a process of thought. Man could not survive even as an herbivorous creature by picking fruit and berries at random. He has no instinct to tell him which plants are beneficial to him and which are a deadly poison.[vi]
Nature gives us only the raw materials, but it is man's mind that has to discover the knowledge of how to use them. It is men’s thinking and labor that transform the materials into food, clothing, shelter or television sets—into all the goods that men require for their survival, comfort and pleasure.

The economic goods that keep us alive are therefore “the product of man’s intellect, of his creative ability, fully as much as is art, science, [or] philosophy.”[vii] And just as for art, science, and philosophy to healthily thrive in a society, it is independent thought and its products that must be left free from censorship; so too does man’s right to life, and his healthy creation of the material products that enable him to preserve and improve his life, have one supreme political requirement: freedom.

In this lies the meaning of (1) man’s right to liberty: his right to the freedom to act on the judgment of his mind—(2) his right to property: the right to use and dispose of the products of his mind and actions—(3) his right to the pursuit of happiness: the right to do the preceding as a means to support, improve, and enjoy his own life.

But every right is only “a right to action,” it is never “the right to an object.” The same way the right to the pursuit of happiness doesn’t mean that others must provide a man with happiness, only “that [he] has the right to take the actions he deems necessary to achieve his happiness;” so does the right to property “not mean that others must provide him with property.” It only means that he’s free “to take the economic actions necessary to earn property,” and that if he earns it, it will be his by right.

Given that man must produce the material goods he needs to sustain and enjoy his life, “if he cannot dispose of the product of his effort, . . . he cannot dispose of his life.”

The man who produces while others dispose of his product, is a slave.

“Without property rights, no other rights can be practiced.”[viii]

The Evil of Force

In the 1936 edition of We the Living, Andrei says to Kira: “I know . . . you’re going to say, as many of our enemies do, that you admire our ideals, but loathe our methods.” To which Kira replies: “I loathe your ideals, I admire your methods. If one believes one's right, one shouldn't wait to convince millions of fools, one might just as well force them.”[ix] This second passage was cut from the second (1959) edition of We the Living (one of the few meaningful changes Ayn Rand made to the edited version), because—by the early 1940s—she had identified what she would name one of “the most important parts of my philosophy,” a definition she considered “original with me” (though it had many historical precedents): that “evil,” in politics, “consists of the initiation of force.”[x]

“Man’s rights,” she wrote, “can be violated only by the use of physical force” (including indirect uses of physical force, such as threats or fraud).

It is only by means of physical force that one man can deprive another of his life, or enslave him, or rob him, or prevent him from pursuing his own goals, or compel him to act against his own rational judgment.

Such violations of rights can come from just two sources: from “criminals and the government.” For most of mankind’s history, however, criminals were by far the lesser menace, “when compared to the horrors—the bloodshed, the wars, the persecutions, the confiscations, the famines, the enslavements, the wholesale destructions—perpetrated by mankind’s governments.”[xi]

It was with the establishing of the United States that government, for the first time in history, assumed its proper role “not [as] the ruler, but [as] the servant” of its citizens. Its founding document, the Declaration of Independence, “provided the only valid justification of a government and defined its only proper purpose: to protect man’s rights by protecting him from physical violence.” It reads, in part: “to secure these [individual] rights, governments are instituted among men.”[xii]

The Government’s Proper Functions

This leads, in its implementation, to what Ayn Rand called “the only proper functions of a government,” which “fall into three broad categories:”

[1] the police, to protect men from criminals; [2] the military forces, to protect men from foreign invaders; and [3] the law courts, to protect men’s property and contracts from breach by force or fraud, and to settle disputes among men according to objectively defined laws.

All these are based on the principle of each citizen “renouncing the use of physical force and delegating to the government his right of physical self-defense”—and the principle that, “in a civilized society, force may be used only in retaliation and only against those who initiate its use.”[xiii]

As Ayn Rand explained: “All the reasons which make the initiation of physical force an evil, make the retaliatory use of physical force a moral imperative.” If people renounced the use of force entirely, they’d simply be “helplessly at the mercy of the first thug who decided” to initiate force against them. They would thus be achieving the exact opposite of the peace they intended, by encouraging and rewarding evil instead of punishing it.[xiv]

But even the proper, retaliatory use of physical force must not “be left at the discretion of individual citizens.” It must be made subject to “an objective code of rules” (or laws) that define what is a crime, how to prove that a person committed it, what is the appropriate punishment, and how all of this should be enforced. “Men who attempt to prosecute crimes, without such rules, are a lynch mob.”

If a society left the retaliatory use of force in the hands of individual citizens, it would degenerate into mob rule, lynch law and an endless series of bloody private feuds or vendettas.

That is the reason “why men do need a government.”[xv]

“A government is the means of placing the retaliatory use of physical force under objective control”—“for the purpose of an orderly, objective, legally defined enforcement.” A government is therefore granted “a legal monopoly on the use of physical force” in a given geographical area; and, in this capacity, a proper government is a society’s “means of subordinating ‘might’ to ‘right.’”[xvi]

The Meaning of Laissez-Faire

This was the political system established in the United States of America, in the wake of the American Revolution—and it gave rise, “for the first time in history, [to] a new economic system, . . . a system of free trade on a free market: capitalism.”[xvii]

“It is obvious,” Ayn Rand would write, “that a political system affects a society’s economics, by protecting or impeding men’s productive activities.” And by restricting the government’s role to “that of a policeman who protects man’s individual rights,” it left men free to pursue any and all economic activities (any form of production and trade), as long as they didn’t violate the rights of others. This is the meaning of laissez-faire, which translates from French to “leave alone;” and it means that the government must leave alone all non-coercive forms of business activity.[xviii]

Although “a system of pure, unregulated laissez-faire capitalism has never yet existed anywhere” on earth, Ayn Rand hastened to add, not “even in America,” where “some government controls did remain [that were] contradictory to the rest of the system;” in the nineteenth century, the United States was the closest a country has ever come to full economic freedom. It was the nation that “set the terms, the example and the pattern for the nineteenth century” in general, on which “all the countries of the civilized world” proceeded to model their own political and economic systems.[xix] “Following America’s example,” they had to adopt freedom and capitalism from “economic necessity,” because none of them “could compete with America economically” without doing so.[xx]

This resulted in “the unprecedented prosperity-explosion of the nineteenth century.” And since “freedom,” Ayn Rand wrote, is “the paramount requirement of a nation’s productivity and prosperity,” it was “the extent to which certain countries were free [that] was the exact extent of their economic progress.”

America, [being] the freest [country], achieved the most.[xxi]

Industrial Revolution

The historical result of that freedom was the Industrial Revolution.

Contrary to Marxist doctrine that under capitalism the accumulation of wealth (capital) is made by the rich off the backs of the exploited poor; the fact is that “wealth does not exist as a fixed, static quantity,” which must be divided among men, and is earned by some men at the expense of others. Wealth is created by human intelligence. And its amount is potentially unlimited.[xxii]

It was the invention of new techniques and technologies, the fruits of the independent mind that enabled men to produce more goods, of a higher quality, in less time, that led to a massive increase of wealth during the Industrial Revolution. “The machine, the frozen form of a living intelligence,” Ayn Rand wrote, “is the power that expands the potential of your life by raising the productivity of your time.”

“Material [goods] . . . belong to some ultimate consumer; it is only the value of an idea that can be shared with unlimited numbers of men, making all sharers richer at no one’s sacrifice or loss.”

“The man who invents a [new] motor” does not do so “at the expense of those who did not invent it.”[xxiii]

Contrary to the critics of capitalism, who blamed it for the low wages, the long hours, and the harsh living conditions of factory workers at the start of the Industrial Revolution (which began in mid-eighteenth-century England, with the partial implementation in its government of the political ideas of John Locke, on which the American Founding Fathers went on to explicitly build the United States system of government), the truth is, Ayn Rand would explain, that “capitalism did not create poverty—it inherited it.” It came into being after centuries of the most dismal poverty and semi-starvation, when wealth was largely produced by the muscular labor of slaves and serfs, and there was barely enough to support a meager 3% population growth every century.[xxiv] Thanks to the Industrial Revolution, the population of England skyrocketed from six million in 1750, to nearly nine million in 1800, to almost twelve million by 1820.[xxv]

Nobody was forced to work in those early factories, but they gave the poor who would otherwise die without enough food, their very first chance to survive. “The conditions of general poverty in the starting years of capitalism,” says Nathaniel Branden in a lecture on Ayn Rand’s philosophy, “were harsh. But they were life, life made possible” to millions of men and women “for the first time.”[xxvi]

The Profit Motive

But it wasn’t just “the invention of machines,” explains Nathaniel Branden, that led to the prosperity boom of the Industrial Revolution. What’s not widely known is that machines had “existed centuries earlier.”

“A primitive kind of steam engine was designed in ancient Greece,” as were numerous other contraptions in the Greco-Roman era.

But these machines remained as mere curiosities or toys. They were not put to any practical use, . . . because under the political systems of that time, . . . there was no rational incentive for anyone to devote his time and effort to material production.[xxvii]

It is only a system that guarantees the protection of property—from confiscation by criminals and by the government—that supplies the incentive to produce more of the goods you can now expect to keep, to produce more than you need for your personal consumption, and to trade those excess goods for the products of others to the fullest extent of your willingness and ability.

Under such a system, “no man may obtain [something of value] from others by resorting to physical force;” he may acquire it only by offering them something of value in exchange, by trading them his own goods, money, or services on the principle of “mutual consent to mutual advantage.”[xxviii] By thus dealing with one another on a strictly voluntary basis, “according to [each man’s] independent, uncoerced judgment,” both parties profit at neither’s expense. “A man can grow rich only if he is able to offer . . . better products or services, at a lower price,” than his competitors.[xxix] And the fortune he makes by these means is a direct measure of how much he’s benefited his fellow men.

In this way, capitalism raises the standard of living in a country higher and still higher “for every [segment] of the population.”[xxx] By creating labor- and time-saving devices, increasing the productiveness of people’s time (and thereby the wages they earn for the same effort), increasing the quality and quantity of goods they can buy for the same wages, and giving them access to new products that never existed before then, capitalists made the poorest laborer in mid-twentieth-century America—with access to electricity, telephones, indoor plumbing, and motorized vehicles—incomparably wealthier than the richest kings in eighteenth-century Europe.

“The giants of American industry,” Ayn Rand wrote, “such as James Jerome Hill or Commodore Vanderbilt or Andrew Carnegie or J. P. Morgan [,] were self-made men who earned their fortunes by personal ability, by free trade on a free market.” Mainly owing to them and other businessmen like them, she wrote, “America’s industrial progress, in the short span of a century and a half, has acquired the character of a legend: it has never been equaled anywhere on earth,” achieving “a level . . . of progress, of prosperity, of human happiness, unmatched in all the other [political] systems and centuries combined.”[xxxi]

The History of Capitalism

It was the presence of slavery, of course, that was the one blatantly “shameful contradiction” in the founding of the United States.[xxxii] But “it was the agrarian, feudal South that maintained slavery,” Ayn Rand wrote. “It was the industrial, capitalist North that wiped it out.”[xxxiii]

In fact, through new technologies that eliminated the economic incentive of forced labor, “capitalism wiped out slavery and serfdom in the whole civilized world of the nineteenth century,” paving the way for its political abolition, after it rendered it obsolete as a means of production.[xxxiv]

[But] Europe’s thinkers did not notice the fact that during the nineteenth century, the galley slaves had been replaced by the inventors of steamboats, and the village blacksmiths by the owners of blast furnaces, and they went on thinking in such terms ([in] such contradictions in terms) as “wage slavery” or “the antisocial selfishness of industrialists who take so much from society without giving anything in return.”[xxxv]
They did not inquire into the source of wealth or ever ask what made it possible. . . . They took it [for granted] that wealth can be acquired only by force—and that a fortune as such is the proof of plunder, with no further distinctions or inquiries necessary.[xxxvi]

The nature of capitalism couldn’t “penetrate the mentalities that regarded the privilege of ruling material producers by physical force as a badge of nobility.”[xxxvii]

The newly generated “abundance, the wealth, the rising standard of living for every level of the population,” Ayn Rand wrote, “were such that the nineteenth century looks like a fiction-Utopia, like a blinding burst of sunlight, in the drab progression of most of human history.” But men failed to understand it or its causes, while capitalism aroused in them “nothing but resentment, denunciations and hatred, then and now.”[xxxviii]

This soon became something that Ayn Rand would make her life-mission (or at least a key part of her life-mission) to remedy.

Government Controls

“In a free market,” Ayn Rand explained, “all prices, wages, and profits are determined— . . . not by anyone’s ‘greed’ or by anyone’s need—but by the law of supply and demand.”[xxxix]

And “the law of supply and demand has an implicit subclause,” she added, “that it involves the same people in both capacities.”[xl] A market, after all, is people trading their products and services for the products and services of other people (with money as a medium of exchange). Demand is not merely people’s desire for a commodity, it is their desire plus their ability to pay for it. The goods and services you supply, as a producer, are your only demand, as a consumer, on the goods and services offered by others.[xli] (A person may come to possess goods—or the money that represents them—without trading anything in exchange; but somebody had to produce those goods, before they could find their way into his hands.)

If “in the context of his own life,” a product or service is worth more to a person than the money he has to pay for it, it’s in his self-interest to buy it.[xlii] If that money is worth more to the seller than the product or service he must provide for it, it’s in his self-interest to sell it. An exchange is made, and both persons leave richer than they were before. The sum of all such decisions, by all the participants in a free market, determines the market supply and demand, and—from these—the price of every commodity.[xliii]

If the demand for a certain commodity exceeds its supply, its price rises, as customers engage in a virtual bidding war over the scarce item. The profits of the existing producers of that commodity are thus increased, incentivizing them to ramp up production, as well as attracting new businesses to enter the industry, to gain larger profits from this unmet demand. If the supply of a certain commodity exceeds the demand for it, its price (and therefore the profits from making it) fall, as businesses hurry to sell off their excess goods for whatever they are able to get for them. This prompts its existing producers to curtail production of that commodity, and some to switch industries or go out of business, thus freeing the “factors of production” that go into making that item (the raw materials, labor, and capital invested) for alternate uses in greater demand. In this way, on a free market, all prices gravitate to an “equilibrium” level at which supply perfectly equals demand; and when one of these exceeds the other, the prices themselves set off the very process by which they return to their equilibrium level.[xliv] Under this system, the most urgent needs and wants of the consumers are thereby satisfied as best and efficiently as possible.[xlv]

But if the government undertakes to pass laws that control the supply, the demand, or the price of particular items—whether the price of some products or services, wages (the price of labor), or interest rates (the price of borrowing money)—it interferes with this efficient, free-market process, and always ends up reducing total production below what it otherwise would’ve been.[xlvi] It can interfere with the production or the consumption of something directly, by simply prohibiting that product or service (fully or partially); or it can do so indirectly, by forcing its price above or below the market level. In the latter case, if it lowers the price below the market level, it reduces supply, by making certain producers unable to sell the product profitably. If it raises the price above the market level, it reduces demand (and, as a later result, the supply), by making certain consumers unable to purchase the product affordably.[xlvii]

The government cannot increase total production by decree. It can only do so for some groups of producers at the expense of others, by giving those privileged businesses resources it forcibly takes from its citizens, or simply by confiscating the resources (or the freedom) of those groups’ competitors. The government can increase total consumption by decree: either by banning some non-consumptive uses of wealth, or by giving some group of its citizens wealth forcibly taken from others. Only this means increasing consumption at the expense of production—and it will, after some time, also decrease the goods available for consumption.

Whatever it does, it always will—in the long run—result in less total wealth coming into existence than there otherwise would’ve, since it diverts the resources, restricts the freedom of action, and drains the incentives of profit and competition of those producing it. (Even though, in the short run, it might temporarily improve the lot of some select groups.)[xlviii]

The Common Good

“The only thing that a capitalist system requires of” a person, Ayn Rand wrote, “is the [same] thing that nature requires:” that each person act in his best interest, to the best of his own judgment, and adheres to the facts of reality. As a consumer, it’s in his best interest to seek out the best products or services to satisfy his needs and desires for the lowest price possible, within the reality of all things for sale on the market. As a producer, it’s in his best interest to make the greatest possible profit from the products or services he is selling, within the reality of all “those who are willing to trade him their work or products in return.”

If a man’s judgment is right, the rewards are his; if it is wrong, he is his only victim.[xlix]

And he has every incentive to correct his mistaken judgment, and improve his decision-making in the future, with the free market serving as his best teacher.

But when the government interferes in the free market, it makes the reality one must adhere to, not the voluntary choices and resources of free individuals, but the arbitrary edicts of an armed ruler. And it forces a person to follow, not his own judgment for his best interests, but the unaccountable judgment of some politician. “A businessman cannot force you to buy his product,” Ayn pointed out, “if he makes a mistake, he suffers the consequences.”

A bureaucrat forces you to obey his decisions, whether you agree with him or not. . . . [And] if he makes a mistake, you suffer the consequences.[l]

Such government “planning” of the economy is always done, not in the name of individual rights, but in the name of “the common good,” or “the public interest,” or “the good of society.” Yet, as Ayn Rand observed, “there is no such entity as ‘society,’” and “there is no such entity as ‘the public.’” Society, or the public, are “[merely] a number of individual men;” while the common good “is an undefined and undefinable concept,” which is utterly meaningless “unless taken literally, in which case its only possible meaning is: the sum of the good of all the individual men involved.”

It is not, however, in its literal meaning that that concept [of the common good] is generally used. It is accepted precisely for its elastic, undefinable, mystical character which serves . . . [as] a moral blank check for those [politicians] who attempt to embody it.[li]

That floating abstraction of the common good, or the public interest, or the good of society, “has served as the moral justification,” and the rationalization, put forth by the rulers of “all tyrannies [in] history.”

[After all,] the idea that “the public interest” supersedes private interests and rights can have but one meaning: that the interests and rights of some individuals take precedence over the interests and rights of others.

But the good of some men at the expense of others is the best that such “planning” can ever achieve, when it doesn’t instead harm the interests of everyone. That is how one gets, Ayn later wrote, “such a gruesome absurdity as Soviet Russia, a country professedly dedicated to ‘the common good,’ where, with the exception of a minuscule clique of rulers, the entire population has existed in subhuman misery for over two generations.”[lii]

The Poison that Made Them Sick in the First Place

Thus, Ayn Rand claimed, “when government controls are introduced into a free economy, they create economic dislocations, hardships and problems, which—if the controls are not repealed—necessitate still further controls” through which “the victimized groups seek redress [from] the profiteering groups,” which in turn “necessitate still further controls, . . . on an ever widening scale.”[liii]

This was a concept that she absorbed from the great Austrian School economist, Ludwig von Mises, who she would meet and learn much from in the mid-1940s, and whose lucid analyses of the free market system (and the effects of government intervention upon it) would come to inform most of her understanding of economics.[liv] She would further state, likewise in echo of Ludwig von Mises, that all of “the evils and abuses popularly ascribed to capitalism,” and used “as an argument in favor of a government-controlled economy,” were in fact “not the result of an unregulated industry, but of government power over industry.” They were not the result of unfettered business, but “were caused, necessitated, and made possible only by government intervention in business.”[lv]

What people rebelled against, when they rebelled against business and capitalism, wasn’t “the private businessmen who made [their] fortunes by productive ability and free trade.” It was, invariably, “another kind of businessmen,” who possessed “special privileges granted to them by the government” and who made their fortunes (at least in part) through government force at the expense of others.

Both kinds of [businessmen] existed in this country from the beginning. But the crucial point is that all the evils popularly ascribed to [free enterprise] in the nineteenth century were actually . . . committed by those businessmen who were not free-enterprisers, who did not function by competition on a free market [,] and who rose not by merit but predominantly by government favors.

“It was the political power behind their activities,” Ayn Rand wrote, “that caused dislocations in the country’s economy, hardships, depressions, and mounting public protests.” But having failed to untangle the issue, it was all businessmen and the very nature of capitalism itself that people condemned to be evil.

“The villain,” Ayn Rand continued, “was not the businessman, but the legislator, not free enterprise, but government controls.” Yet every time an economic catastrophe occurred, it was used “as an argument for the extension of [government] power, for wider and wider opportunities to commit the same crime on a greater and greater scale”—so that “as a cure for the country’s problems,” the citizens were given “more and more of the poison which made them sick in the first place.”[lvi]

Franklin Delano Roosevelt—elected president in 1932, in the wake of the Great Depression—fit this description perfectly.

The Real Cause of the Great Depression

Of Ayn Rand’s tight-knit circle of followers in the 1950s and 60s, the one who would rise to the greatest power and prominence, by far, was the economist Alan Greenspan. And in 1966, Ayn Rand, in collaboration with Alan Greenspan and Nathaniel Branden, would publish a non-fiction collection of essays titled Capitalism: The Unknown Ideal, which Ayn Rand described as “a nonfiction footnote to Atlas Shrugged.”[lvii] In it, they laid out the then controversial, but now academically accepted view (initially formulated by Ludwig von Mises), that the primary cause of the Great Depression was not the free-market, but government intervention in the free market by way of the Federal Reserve.[lviii]

“Just prior to World War I,” Alan Greenspan declared in a 1964 lecture he gave on Ayn Rand’s philosophy, “emerged one of the historic disasters in American history, the creation of the Federal Reserve System”—the central (government) banking system of the United States. That statement, writes Greenspan’s official biographer, “must surely rank as one of the twentieth century’s great ironies,” for Greenspan went on to become—for eighteen straight years between 1987 and 2006—the presidentially appointed head of that very same Federal Reserve.[lix]

The “Fed” was established in 1913 as a system of twelve massive, government-controlled banks intended to guide and stabilize the U.S. economy and thereby prevent large economic downturns, contractions of business activity, and banking panics (precisely what happened a decade and a half later during the Great Depression). These twelve banks would do this by serving as lenders to smaller private banks all over the country, which could borrow money from them at an interest rate set by the Fed. And for this purpose, the Fed was given the power to supplement the gold reserves of its twelve member banks with a new form of “paper reserves”—backed not by gold, but by government bonds, which the Fed was now able to print whenever it wished to make credit available.^[lx]

Normally, a private bank was limited in the amount it could lend to individuals and businesses by the supply of gold in its vaults: its reserves. And the law of supply and demand applies to money as much as to anything else. The supply comes from a bank’s depositors, for which they receive interest payments on their deposits. The demand comes from borrowers seeking a loan, for which the bank charges them interest rates higher than those it pays its depositors.^[lxi]

When the demand greatly exceeds the supply (as during a business bubble or boom, with many customers demanding loans to invest in speculative ventures; or during a general “banking panic,” when depositors rush to withdraw their savings in fear that their bank will lose them through malinvestment), banks raise their interest rates sharply, and lending is highly limited or comes to a standstill. This can, it is true, cause the country’s economy to enter a “short-lived” recession (where many sound businesses have to delay plans for expansion, and many new businesses can’t get the funds necessary to get started), as happened in the financial crises of 1907, 1895, and many times throughout U.S. history.

But this process is “beneficial,” rather than “harmful,” explain Alan Greenspan and Nathaniel Branden in Capitalism: The Unknown Ideal. It puts a halt to runaway speculation, and deprives unjustified business ventures of further funding. “It represents an economic system in the process of correcting its errors, of curtailing disease and returning to health.” (And the recessions it generates are “mild indeed” compared to the Great Depression that was to come.)

“But the process of cure was misdiagnosed as the disease.” After the Fed was established, when demand for bank loans exceeded supply, the Fed could simply provide that supply by printing more and more of its “paper reserves,” and thus—many politicians and economists argued—it could eliminate recessions, diffuse banking panics, and “keep the [country’s] economy in a state of unending boom.”

The Fed indeed followed that course of action through most of the 1920s. Guided by a “cheap money” policy, it made an excess of credit available at artificially low interest rates. And this did indeed lead to a business boom.^[lxii] The question to ask is: which businesses were booming? Certainly, many sound businesses continued to flourish, used loans to expand operations, and the price of their stocks rose. But so, too, did many marginal and unhealthy businesses, which could only remain profitable or stay afloat as long as they had access to these artificially cheap loans. And so, too, did many businesses solely devoted to buying and selling the (constantly rising) stocks of all of these other businesses.^[lxiii]

Although the Fed was creating new money, it wasn’t creating any new wealth (meaning actual, material goods). But people now had this new money all the same, with which they could buy stocks. (And by 1929, nearly 40% of all private bank loans—their supply stemming from Federal credit—went to the purchase of stocks.^[lxiv]) Share prices soared to delirious levels, and the people who bought them, wrote Branden, “ma[de] fortunes overnight—on paper.”^[lxv]

But the Fed couldn’t just go on printing money indefinitely, or it would demolish the value of the dollar and the market itself through runaway hyperinflation.^[lxvi] Yet when it finally acted to curtail lending and raise interest rates, it was already too late. Under a free banking system, wrote Branden, if a private banker makes an error of judgment, only he—and perhaps those who deal with him—suffer the consequences. But “the Federal Reserve undertook to free individual banks . . . from the laws of the market,” from the law of supply and demand, “and to arrogate to government officials the right to decide how much credit they wished to make available at what times,” on a national scale. And when they make an error of judgment, “the whole country suffers the consequences.”^[lxvii]

The long-delayed process of readjustment, exacerbated by years of the artificial boom, finally swung into effect. A panic ensued on the New York stock exchange. People began selling their stocks in a frenzy. And in a single week in October 1929, the stock market experienced its largest crash in United States history—wiping out fortunes and throwing millions into poverty.

Over the following three years, the process of growth of the prior decade went into reverse, in a chain reaction and downward spiral that rippled through the entire economy. As stock prices collapsed, and savings were wiped out, and bank credit was made less available, small banks and businesses started to fail—individuals lost their jobs and limited their spending on consumer goods, triggering further business decline, more unemployment, and less spending—the bank failures started a domino effect, with a huge series of bank runs sweeping the country—depositors ran on the banks, the earliest of them withdrawing their money, and leaving the banks bankrupt. Finally, in response to its own dropping revenues, the government under Herbert Hoover decided to raise taxes and tariffs, further suffocating whatever chance the economy had for recovery. And, by the end of 1932, the country was deep in the longest and worst depression in its history.[lxviii]^[1]

The Passion of FDR

But Franklin Delano Roosevelt, elected president in 1932 on a platform of economic recovery from the “national crisis,” declared upon taking office that capitalism had failed, and to correct this failing, embarked on a massive program of government expansion and state regulation of the economy, which he called the “New Deal.”[lxix]

Having started out as a highly charismatic though personally superficial politician, Roosevelt had himself undergone a profound personality transformation. Born into wealth, physiologically handsome, athletic, and tall, and a distant cousin of the 26^th president of the United States, Theodore Roosevelt, Franklin had led an immensely privileged life, with few firmly held principles besides an ambitious desire to become president. Modeling himself on his illustrious cousin Theodore, who he had come to know personally thanks to their family ties, Franklin had seen the path to the presidency very concretely before him. Years before he entered politics at age twenty-eight, a friend recalled Franklin laying out the steps to this goal in precise detail: “first, a seat in the [New York] State Assembly, then an appointment as Assistant Secretary of the Navy . . . and finally the governorship of New York.” “Anyone who is governor of New York,” he recalled Franklin saying, “has a good chance to be President with any luck.”[lxx] Those were, in fact, the exact steps Theodore Roosevelt took to become president, and precisely the ones Franklin would follow (almost to the letter) in his own career.

Approaching the 1932 presidential campaign, a leading political analyst astutely described FDR as a wily equivocator “without very strong convictions,” merely “a pleasant man who, without any important qualifications for the office, would very much like to be president.”[lxxi] But that assessment was already obsolete, or at least obsolescent—for by that time FDR had become a changed man, a man with a sacred purpose: to lead his country out of the Great Depression, and to deliver its poor and downtrodden citizens from the starvation and suffering it wrought upon them. Though himself one of the privileged elite, he came to empathize with the suffering of the less fortunate when he went to recuperate from an attack of polio (which left him permanently paralyzed from the waist down at age thirty-nine) in a destitute part of the American South, where he also found he derived great satisfaction from helping his fellow polio victims and the impoverished folk in the area. For his later antagonism toward the rich that came alongside his sympathy for the poor, he would be branded a “traitor to his class.”[lxxii]

Through his political activity over the preceding two decades, having indeed served in the New York State Assembly, been the Assistant Secretary of the Navy, and won election to the governorship of New York one year prior to the great stock market crash that initiated the Depression (where he was still Governor in his second term), Roosevelt set himself up to be in the perfect position to become president in 1932—well before he acquired his purpose for doing so. He had a “very simple religion,” his wife once said: “He believed in God and in His guidance. He felt that human beings were given tasks to perform and with those tasks the ability and strength to put them through.”[lxxiii] Now, with the nation facing an unprecedented crisis, and him being poised to become its next president, he felt that providence selected him for the task of becoming the country’s savior. And with it, he was given the strength and ability to put it through—in the form of mania![2]

After he was swept into office in a landslide victory, his former colleagues visiting him at the White House remarked on his staggering transformation. “There’s been a miracle here,” one of them said, “that fellow in there is not the fellow we used to know.” A second agreed that “there had been a miracle, an intellectual and spiritual metamorphosis induced by adversity and triumph.” During the early days of his administration, “none of us close to FDR lived normal lives,” recalled one of his top advisors: “Confusion, haste, the dread of making mistakes, the consciousness of responsibility for the economic well-being of millions of people made mortal inroads on the health of some of us . . ., and left the rest of us ready to snap at our own images in the mirror.” But Franklin Delano Roosevelt, at age fifty-one, appeared indefatigable. He “preserved the air of a man who’d found a happy way of life.” He practically radiated the self-confidence, calm, and exuberant energy of the manic person. He could switch effortlessly from work to play and back again, at one moment splashing about aimlessly in the White House pool, the next moment interrogating his poolside advisor on vital matters of national legislation. His tirelessness “began to take on the appearance of the miraculous. I had, fleetingly, the illusion that Roosevelt had no nerves at all,” recalled the advisor. “He had the faculty of emerging from three hours of fifteen-minute interviews exhilarated, where another man would be done in.”

His emotional state, however, was fortified by “those lonely years of struggle” against polio (which left him paralyzed from the waist down), when “his sole, determined purpose was to move his big toe,” as he once told a friend, and which did “something to his character—something fine and strong which brought him courage and bold confidence, a depth of penetration and a new self-control. From [then] on he feared nothing.”[lxxiv][3]

But, as Ayn Rand would point out, even the noblest political aims (or almost anything else for that matter) “cannot be achieved by random means, by mere wishing or by the leaders’ good intentions,” but only by means of the proper “knowledge . . . of how to implement [them] in practice.”[lxxv]

[Thus,] in 1917, the Russian peasants were demanding: “Land and Freedom!” But Lenin and Stalin is what they got.
In 1933, the Germans were demanding: “Room to live!” But what they got was Hitler.
In 1793, the French were shouting: “Liberty, Equality, Fraternity!” What they got was Napoleon.[lxxvi]

In 1932, we may add, Americans wanted an end to the Great Depression. What they got was Franklin Roosevelt.[4]

Roosevelt, of course, was no Hitler or Stalin. He certainly didn’t have the same motives. But he employed somewhat similar methods, and had a somewhat analogous effect. Convinced that he was the county’s savior, he was determined to lead it to economic recovery. But to the question of “How?”—as Ayn Rand later wrote in Atlas Shrugged—his answer was that magic means of all unprepared power-seekers: “Somehow.”[lxxvii] Roosevelt’s somehow was by direct government planning of the economy. And in his first hundred days after taking office, he pushed through a deluge of new legislation achieving exactly that—a lot of which later took sinister fictional form in Ayn Rand’s Atlas Shrugged.

“You realize,” one presidential advisor told FDR as he was preparing to give a speech explaining his New Deal policies to the nation, “that you’re taking an enormous step away from the philosophy of . . . laissez-faire.” He wouldn’t have had to, answered Roosevelt, “if that philosophy hadn’t proved to be bankrupt.” And then he added with grave solemnity, “I never felt surer of anything in my life.”[lxxviii]

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