Robert Higgs
The Independent Institute
September 18, 2008

My idea of the ratchet effect in the growth of government, which I first described in detail in an article published in 1985 and employed extensively in my 1987 book Crisis and Leviathan, has received a degree of acceptance among scholars. One aspect of my model, however, has received relatively little notice, although I have always regarded it as especially important. That is the notion that episodes of crisis and abrupt growth of government leave legacies after the crisis has passed, and these legacies, which may be institutional or ideological, sometimes lie dormant for long periods before they exert effects on the course of events.

I thought immediately of this idea today as I read the Washington Post’s report of the Fed’s loan/takeover of the insurance giant AIG. Having heard preliminary discussions of the possibility of such a takeover, I had wondered about the government’s authority for such an action. The Post’s report answered my question as follows: “The Fed is using the emergency authority it was granted during the Great Depression. By law, the Fed can lend money to any individual, partnership or corporation in unusual and exigent circumstances, when the borrower cannot access funds in other ways. The power had not been exercised until March, when the Fed used it to rescue Bear Stearns.” I confess that I had not known about this particular Fed authority until today.

So, here we are in the year 2008, witnessing the use of a power that had lain dormant in the government’s arsenal for more than 70 years, a power whose existence, I am confident, few people were aware of. Beware, all ye who would endow the state with amplified powers. It may refrain from using those powers for a very long time. Yet, there they lie, sleeping peacefully, but capable of being awakened and used with highly consequential (and, as in this case, extremely unfortunate) effect.

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