The Government Was Always Involved

Truth 1: You are not self-made.

Truth 2: You are the only one responsible for getting you ahead.

These twin facts are the central dilemma of getting rich in American history. Not being self-made may bruise the egos of those on the political right. That you, and only you, determine where you end up offends the left.

Your job is to negotiate life in capitalism. Capitalism is not one thing, but a set of values adapted to culture. German capitalism, Dutch capitalism, Chinese capitalism, and American capitalism all apply the same concepts differently. Those boil down to four principles: people can own assets, innovation and competition are okay, prices should come from supply and demand, and profit is morally fine. The traditional story is that governments also stayed out of the market. Hogwash. Throughout history, every government (especially the United States) was not only present, but necessary for capitalism to thrive. If you doubt this, check the balance of your FDIC-insured, government issued, digital greenback dollars. The government was always involved.¹

It still is. At a base level, the government’s role is twofold. First, it protects the principles of capitalism. At any moment, any government in the world could declare getting ahead evil, innovation too disruptive, prices controlled, and your wealth its own (just Google “kulaks”). They could do that, but since governments that tried have largely flopped, ours mostly protects the principles.

The second way is setting rules by which everyone applies the principles. Who determines, for instance, whether the Mississippi River Basin belongs to the free people of Chicago to poop in, or the free people of St. Louis to drink from? In 1901, the U.S. Supreme Court did. They ruled Chicagoans were welcome to put all their sewage into the Show Me State’s drinking water. Cardinals and Cubs fans never broke bread again because the other team literally shat in their cup.

Each government sets its rules, and at any moment could change them. Change is the point of this chapter. Whatever you believe politically, the government is involved, and you’d best figure out how. The themes that emerge are simple, but important to your financial journey: 1) The government will open and close opportunities in the market. When they do, it is wise to use them. 2) The government sets the rules of the game. It is best to follow them. 3) Never wait for salvation through politics. 4) Some savvy players will manipulate the rules of the game. Be careful building your financial strategy this way. It can work in Slow Time, but makes you fragile in Fast Time.

Who gets to poop in whose water, who grabs what land at what price, where the roads to opportunity will literally be built, how innovation gets applied, and which investments will have what guardrails are all part of this story. A powerful state can shape your investments. Tragically, a powerful state can also destroy a lifetime of work in an instant. Caveat Emptor Civis.

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Our classic story of rugged Americans forging ahead to the west and making something of themselves is true. Also true is that the government did a lot of the forging ahead with them. There was no shortage of land in the early republic, and no shortage of people willing to trek there. What the trekkers lacked was money. So, President Jefferson, who won office arguing for less government, promptly made that government the single most potent force in the economy. No—not the Louisiana Purchase of 1803—the Land Act of 1800. The federal government loaned money to citizens to buy land back from itself, like me lending you the money to buy my house from me. When the first land office opened in Chillicothe, Ohio, crowds had been waiting for three weeks to take the deal. Overnight, the United States government became the largest bank in the world.²

Infrastructure shaped opportunity, too. The United States may have been a free market, but no one could get to it. Less than 100 miles of paved roads existed in the new nation. So, governments started spending money like it was a YouTube challenge. After New York built the Erie Canal, turnpike and canal fever swept through politics. Governments contributed three-fourths of all infrastructure dollars in early America.

Disasters, all. Of 200 projects in New England, 194 were unprofitable. Half of the turnpikes were abandoned in the middle of the woods, where the money ran out. The same thing happened decades later, except with railroads. Arkansas, Mississippi, and Michigan defaulted on their debts. Fun fact: Arkansas is the only U.S. state that’s defaulted twice.

Was this terrible government waste? Yes, and it worked great. The cost of transportation dropped³ from 20 cents/ton-mile to less than 1 cent. Without reckless government spending, crops planted for markets couldn’t reach consumers. The people of Kentucky can only drink so much bourbon before they must sell it to someone outside the state, and for that it must get there cheaply.

It happened again. In 1917 the United States had 30,000 miles of paved roads (versus 4 million today), nearly all of them east of the Mississippi River. It took a military convoy sixty-two days moving at six miles per hour to cross the country. An officer in that convoy, Dwight Eisenhower, became president and authorized $25 billion for the Interstate Highway System. By the 1980s you could drive from the East Coast to the West Coast without stopping for anything but gas, food, and selfies in Kansas by the World’s Largest Ball of Twine.

Again, federal investments paid off. Productivity rose 30 percent in the 1950s, 25 percent in the 1960s, and came back to earth in the 1970s just as the last major arteries connected. Owners of gas stations, food franchises, vacation resorts, factories, and distribution centers thrived because a big country got smaller on the government’s dime.

Land-grant colleges, the public research universities dotting America, arrived after the Morrill Acts (1862 and 1890) founded research institutions. These universities’ scientists got water into the desert (Arizona), saved herds from disease (Texas A&M), developed radar (MIT), created nuclear power (Cal–Berkeley), invented synthetic rubber (Ohio State), and drastically increased milk production (Wisconsin–Madison). In comic books, government scientists are always trying to make a super-human-cat-warrior. In the real world, they’re trying to improve everyday life. You can drive to steak dinner, fly to see the grandkids, use cheap power, and eat Honey Bunches of Oats for breakfast—all while living in Surprise, Arizona—because of this vast web of not-so-secret government labs.

Governments also create trust. Free marketers don’t love guardrails, but they benefit from them. Mutual and index funds currently make up around 50 percent of all stock ownership. Yet the original version, investment trusts, were equally popular and lost gobs of money. By 1929 there were nearly 800.⁴

They were ticking bombs. More diversification for less risk “sounds a good deal more reasonable than it actually is,” remembered a broker. It slowed their rise in the bull market, then crashed with everything else in the Great Depression. Investment trusts managed to perform worse than the stocks they held.⁵

Proclaimed dead and in the grave then, they became the most popular investments in the world. How? Congress resurrected them in 1936 and 1940. The first law ended double taxation, the second required tight regulation. Faith restored, American investors flocked back. By the 1950s, Better Homes & Gardens gushed “there is virtually no possibility that you’ll lose your shirt” in mutual funds. Another excited cover story—for Playboy—fawned over them, too,⁶ though that model did indeed lose her shirt.

Consumer protections are not, as it turns out, biological laws, but human ones. Have you ever reversed a fraudulent charge on a credit card? If you told the bank “thank you,” you shouldn’t. They had to. The 1970s saw a flurry of activism on consumer protection: the Consumer Credit Protection Act (1968), Fair Credit Reporting Act (1970), Equal Credit Opportunity Act (1974), and Fair Debt Collection Practices Act (1977). These created a web of red tape for banks, but for consumers the benefits have been clear: clarity on interest rates, fees, and payment terms, limits on fraudulent credit-card charges, and the legal right to correct billing errors. Is this government interference? Of course it is, in the same way that setting the rules of the road annoys BMW drivers.

Half of my friends are free-market conservatives, and they’ve stopped inviting me to parties because I can do this all day. Thirty-year mortgages, the GI Bill, the internet, and GPS all had government funding behind them. The real reason everything costs less at Target is the Consumer Goods Pricing Act (1975). The government has been in the free market capitalism business for a very long time.

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Well, that settles it. Big government for the win, right?

No. A government strong enough to pull you up is also mighty enough to push you down.

Countless families who “did the right thing” and became American homeowners learned that harsh lesson. The state legislature of Washington passed laws in 1921–23 restricting land ownership for Asians. Fully twenty years before Pearl Harbor, Yakima Valley Japanese families had their land confiscated by the state. In Miami, not once but twice, entire districts of black-owned homes were condemned and bulldozed to make way for interstates. Decades of hard work and home equity vanished in flashes of Fast Time. Real estate proved to be anything but a sure store of wealth. The government can create opportunity. It can destroy it, too.⁷

Those issues involved race. Crying evil is easy. Yet the officials who approved these policies thought they were being progressive, and their policies were favored by voters. Oftentimes, the worst government hazards are the most popular.

Take price controls, ever seductive during inflation. In 1946, former first lady Eleanor Roosevelt published an essay in nearly 100 newspapers demanding Congress keep emergency ceilings for prices because of “the high cost of living and the difficulty of finding inexpensive clothes.” The war against the Nazis was over, but the “long fight to put the control of our economic system in the hands of the government” had just begun. Mrs. Roosevelt fervently believed that without a strong central government’s control, Americans could not afford new clothes.⁸

She was wrong. The price controls themselves drove the prices up because manufacturers, who couldn’t raise prices but absorbed increased costs, either reduced quality (leading to early wearing out) or quantity, further exacerbating shortages or moving goods to black markets. Suppliers unwilling to engage in illegal sales stopped shipping products altogether, since they sold at a loss. Once restrictions lifted, the price of American clothes steadily declined. Not long before, the typical American had owned just one and a half shirts. Today, over 100 pieces of clothing is average. Your messy drawers of sweatpants surpass the wardrobe of six early American families. Eleanor Roosevelt, and the cultural historians who have valorized the topic, seemed oblivious that controls created scarcity. In the words of a World Bank research paper in 2020, “Price Controls: Good Intentions, Bad Outcomes.”⁹

In fact, the worst financial advice in American history, other than scams, has been to wait for government to solve your problems.

After World War II, GIs returned to a housing shortage twice as bad as today’s. Experts testified that the nation was 5 million units behind. Today’s shortfall is half that for a population twice the size. No worries. New Dealers knew what not to do: home ownership. America’s leading political thinkers,¹⁰ some of the most popular of their day, swamped airwaves and magazines with talks and titles like Home Ownership: Is It Sound? Their answer: absolutely not. Private builders were slow. New houses were flimsy. Another Depression was certain. Home buying was too risky. Citizens should wait for the government to build massive rental housing projects instead.

Every one of these predictions was wrong. Builders developed faster methods. Homes got more, not less, safe. We’re still waiting on that Second Depression. People who took their advice missed out on the greatest wealth creation moment in human history to that point. Between when Paw Paw returned from WWII and his first grandchild, me, was born, housing wealth went up more than 1,000 percent.

“Let the government save you” is, and always was, monumentally bad advice. Student-loan borrowers learned this lesson painfully when they stopped paying balances assuming all would be forgiven. Political salvation is rooted in hope, and hope is a poor financial strategy.