Review – Citizens

Citizens: A Chronicle of the French Revolution

by Simon Schama, published 1990

An attempt at an analytical reading

I’ve been reading as many books as ever lately, but I haven’t had the time or the interest to review much of what I have read perhaps in part because my reading has felt rather “aimless”. It isn’t that I am reading a random assortment of books willy-nilly with no unifying logic to why I take them off the shelf, it is more about not having a particular purpose as I read, failing to annotate and highlight and thus make the book my own and therefore ending up with the feeling of “What did I take away from this?”

Luckily for me, I read a book several years ago called “How To Read A Book” and posted what I think was a rather excellent summary of its main ideas. I went back to this post a few days ago as I became acutely aware of my perception of my recent reading experiences and looked it over and in so doing gained resolve.

As I work through this review, I aim to discuss the following:

1. Classification of the book according to kind and subject matter
2. State the “unity” of the book with utmost brevity
3. Enumerate its major parts in their order and relation
4. Define the problem the author is trying to solve
5. Grasp the author’s leading propositions by dealing with its most important sentences
6. Know the author’s arguments by a sequence of sentences
7. Determine which problems were solved and which were not
8. Do not criticize until you can say “I understand”
9. Do not disagree disputatiously (arguing to argue) or contentiously (being controversial for the sake of controversy)
10. Demonstrate the difference between knowledge and opinion by presenting reasons for criticism
11. If criticizing, demonstrate where the author is misinformed, uninformed, illogical or incomplete

Now, #5 is going to be tough because as I mentioned, I didn’t bother annotating or underlining anything in this book. I really don’t have an easy way to reference key ideas or moments where the author built his argument. Similarly, #6 is a challenge. Instead, I am working with my general impression of the text having completed it.

I also want to avoid criticism of the author and his treatment and focus on my own understanding of the subject as gleaned from the book. Although I’ve studied the events in detail at other times in my academic history and through other books (The Days of the French Revolution) I am by no means an expert on the period and I certainly haven’t read or investigated it enough to spot errors in the author’s knowledge or specific arguments. Instead, my desire is to explore what I took away from the reading and what about my own cognitive abilities or knowledge hindered me from getting more.

In that vein, one of the things HTRAB recommends is to read with the following question in mind: “What problem was the author trying to solve in writing this book?”

Related to this is the personal question: “Why am I reading this book? What question do I hope to answer by reading it?”

Origins

So why did I read “Citizens”? I’ve been exploring the cause of political revolutions for several years and over time my perspective is coalescing around the idea that there is no such thing as a popular revolution– that all political change occurs at the top and is pushed down rather than occurring at the bottom and destabilizing the top. My view is that a political system always has a set of elites at the top who control it (the “in elites”) and a set of elites who can be grouped as those without power but aiming to influence power or agitating to get it themselves (the “out elites”). These two groups are always in conflict with one another and while they may use non-elite social groups as a tool in the struggle, these non-elite groups never act autonomously or without the express authority and direction of one of the elite groups.

In ancient monarchic regimes, this view can be clearly exemplified by “intrigues of court” in which the monarch, his friends and his family are constantly fighting to maintain power against antagonized aristocratic groups and other claimants to the throne (internally) and foreign powers seeking domination or control (externally), with the frequent circumstance that foreign intrigues come to dominate internal politics and vice versa.

The two major countervailing examples of this theory are the American and French Revolutions, both of which were supposed to be popular uprisings against corrupt central authorities which results in a wholesale transformation of the political landscape. The more I studied the American Revolution, the more it became obvious that, for example, the Continental Congress was a group of colonial elites claiming representation of “the people” who were conspiring not for more liberty but to have and to create the power of the colonial government themselves in opposition to the British king and parliament. The French Revolution, then, seemed to stand alone as a popular affair.

The question: “Was the French Revolution an example of a spontaneous popular uprising or does it conform to the theory of elite conflict?”

I chose “Citizens” to explore this question because Simon Schama’s thesis is an explicit answer to that question: the French Revolution was not a popular uprising but an example of an elite-driven reform movement getting out of hand, and the end result of the event was not to put in place an entirely new governing structure but rather to exchange captains and confederates from one regime to another, with the means of governance and central social problems largely unchanged.

Structure

Schama divides “Citizens” into three parts:

1. Alterations
2. Expectations
3. Choices

Although the text largely moves chronologically, there is some jumping ahead (often in the form of acknowledgements of a particular person’s eventual fate, or the irony of their present behavior given a later position they adopt) and back. Each chapter attempts to explore a specific theme from multiple angles and people’s perspectives. The three parts of the book chronologically explore the ancien regime of Louis XVI, the events of the French Revolution leading up to the end of the monarchy and the formation of the revolutionary Republic and finally the implosion of the Republic into the Directory and the Terror.

As the title of the book suggests, another way to think of these parts is the changing conception of the French public (elites and commoners) from the subjects of a monarchy, to the citizens of a republic and finally, to un-personhood during the paranoia of the Terror in which everyone was suspect and might be tried and executed as a threat at any time. A final thematic overlay are the ideas and periods of reform, revolution and repression and retrogression.

The argument, outlined

In the first part, Schama explores the idea that rather than being a squalid, repressive and backward political entity, the French Monarchy of the late 1700’s was progressive-minded (even for its time) and was already engaged in various reforms up to the eve of the events which came to be known as the French Revolution. While the French state consisted of a large and growing bureaucracy and a complicated and at times oppressive tax authority, the monarch and his ministers were civic-minded and future-oriented and saw themselves as having a duty to improving the lives and welfare of the common public. From supporting internal trade freedoms to celebrating technological achievements (hot air balloons were an exciting development of the times), the French monarchy was engaged in a process of self-criticism and analysis and attempting to implement the “state of the art” in a variety of fields.

One major challenge to this effort was the financial overhang of the Seven Years’ War and French sponsorship of the American War of Independence which resulted in repeated strains and logjams as the monarchy tried to fund current expenditures. Another was the sense amongst many out elites, including a rising professional class of bureaucrats who had purchased or gained their office through personal qualification, that the reform movement wasn’t going fast enough and left too many undue privileges in the hands of hereditary nobles and entitled clergy.

This reform movement occurred against a backdrop of philosophical debate. While some elites held on to ancient notions of nobility, gentility and class, and new class of professional elites were held in thrall to the naturalism and humanism of Rousseau, who “Citizens” portrays as a peerless thought-leader amongst the aggrieved counter-elite. Rousseau held up a notion of primitive equality, simplicity and “sensibilite” as the hallmarks of an enlightened society in contrast to the ranks and obligations, splendor and sentimentality of the monarchy and aristocratic society.

Transitions

The Revolution itself began as series of largely disconnected challenges to the power of the king and his ministers which initially aimed at testing their resolve and forcing their hand with regards to particular reforms. Over a short period of time, however, the various agitators united around a common theme– first, opposition to the monarchy itself and promotion of the establishment of competing institutions of social power (the Legislative Assembly) and later, the wholesale destruction of the monarchy and nobility as a threat to the revolutionary movement.

What is fascinating about this period is observing who the revolutionaries were. Not the members of the lynch mobs and other mass movements, but the members of the Legislative Assembly and other successive political bodies. These people were mostly current minor and major nobility, clergy, and many legal professionals and provincial politicians. The king’s own cousin, the Duc d’Orleans, was one of the leading revolutionaries (until he was guillotined in the ensuing hysteria of the Revolution) whose residence in Paris was a hotbed of anti-monarchic intellectualism and activity.

Although Paris fishwives drove the cannon to Versaille, none sat in the Legislative Assembly. Though artisans and other manual laborers helped tear down the Bastille, none spoke in the National Convention. And while peasants were recruited for the revolutionary militias to fight counter-revolutionaries foreign and domestic, no peasant’s son was a member of the Directory.

The revolution lost

The murder of Louis XVI, his wife and many of his ministers marked the physical end of the monarchy and the dawn of an elite civil war which culminated in the submission of the Republic at the feet of an even more powerful central authority, the military dictator and self-styled emperor, Napoleon Bonaparte. With the legitimacy of power itself questioned by the revolution, it seems only natural that the logical outcome would be a series of murderous battles for power ending in the dominance of a military figure.

As I read the book and watched one “patriot” after another turn on each other and seek the shedding of blood as a solution to all crises and recriminations I wondered how much of the paranoia was sincere versus concocted to serve a short-term political purpose. Although launched by out elites originally, the Revolution created no stable platform for the in elites to control and thus the political competition intensified dramatically. The constant accusations of foreign plots and emigres counter-revolutionary schemes at times seemed constructed and artificial, yet the universalist tone of the French Revolution and the intermarriage of European political elites across national boundaries meant there were good reasons why foreign outsides wanted “in”, too.

Closing remarks

One of my biggest challenges with this book is my inability to pronounce French words and names, and my limited understanding of many of the French terms and locations introduced, many of which I was unsure if they were properly defined before being relied upon in the narrative. For example, the term “ci-devant” was used in nearly every chapter, sometimes multiple times, but when I looked it up in the index for its first instance I saw no way to define the term other than a better reading of context than I had. I realize I should’ve looked it up right away, it refers to a “reactionary” political person and in the context of the French Revolution connoted an elite who resisted the changes brought about. This is a good example of the value of HTRAB’s suggestions of focusing on key language an author uses to make his arguments and studying the usage itself!

Relatedly, I struggled to keep track of all the major figures of the period, and there were many in part because this period convulsed much of French society but also partly because so many met grisly ends and had their responsibilities taken up by another who in turn became prominent in the proceedings.

Something I really enjoyed about Schama’s writing was its referencing of artistic works of the period which illustrated the events. It’s not so much that I am a simpleton who prefers words to pictures but rather, I felt the selection and abundance of imagery served to capture the mood and subtleties of various moments that are hard to appreciate in just reading about them. Especially interesting from this standpoint are the various “ideal imagery” commissioned by the revolutionary government to celebrate fallen heroes. The way these people are depicted, the details emphasized, the details left out and the obvious attempt to actively control the moral tone of events demonstrated the important role forms of propaganda played in elevating one faction and lowering another as the civil war raged on. The fetishism of the Roman Republic and its heroes and martyrs was also telling and very Rousseauian in the sense of idealizing noble savagery.

Is it not obvious that a revolution is betrayed by obsessing about the establishment of norms and structures which belong to the past?

I believe Simon Schama wanted to demonstrate that the Revolution was not spontaneous and grassroots, but an elite phenomenon, thus satisfying my curiosity. I think he also was concerned with highlighting the violence of the Revolution as a necessary part and logically-connected to its ideals, rather than something that was a minor theme or an unsightly outlier aspect. In both of these efforts, I believe he succeeded. I think I would’ve gotten much more out of this book if I had done more to “make it my own” as I read it. That being said, I enjoyed the read overall and found it truly terrifying contemplating how violent things can become when the out elites give up on working within the system. This was a strange observation for me to make because I don’t think of myself as a defender of the status quo or anxious to see a measured pace for reform and political change– just the opposite. I found myself wondering “which side” I would’ve taken, and what I might have done to ensure I survived to the end!

Review – The Panic Of 1819

The Panic of 1819: Reactions and Policies

by Murray Rothbard, published 1962, 2007

Please note, this book is also available as a free PDF on the Mises.org website, which is how I read it [PDF]

Introduction

Rothbard’s “The Panic of 1819” is a lot of things, but the thing it is most is yet another reminder of the old dictum “Plus ca change, plus c’est la meme chose”. Contained in this approximately 250-page reporting of the causes, consequences and social responses to the Panic of 1819 are the same behaviors and political programs that could be found in today’s headlines about corrupt Chinese banking practices, Chicago-school monetarism and Keynesian pump priming, including early recognition that attempts to kickstart “idle resources” logically implies a totalitarian command economy where the government manages all resources (and all people) at all times.

It’s all here, and more. There is nothing new under the sun.

How the business cycle gets started

Early on page 16 the reader is entreated to an excerpt from private correspondence between Pennsylvania politician Condy Raguet and European economist Richard Cantillon in which Raguet tries to clear Cantillon’s confusion as to how fractional reserve banking manages to operate to the point of a catastrophic bubble instead of wobbling and crashing under its own confusing weight:

You state in your letter that you find it difficult to comprehend, why person who had a right to demand coin from the Banks in payment of their notes, so long forebore to exercise it. This no doubt appears paradoxical to one who resides in a country where an act of parliament was necessary to protect a bank, but the difficulty is easily solved. The whole of our population are either stockholders of banks or in debt to them. It is not the interest of the first to press the banks and the rest are afraid. This is the whole secret. An independent man, who was neither a stockholder or debtor, who would have ventured to compel the banks to do justice, would have been persecuted as an enemy of society.

Today’s full reserve Austrian economists, caught between clueless and complacent bank executives, a massively indebted “ownership society” public, Keynesian and monetarist adherents and “free banking” friends who are anything but, simply has no place to turn for safety. He defaults to “enemy of society” status in the ensuing confusion though he seeks only to point out the folly of these fractional reserve systems which inevitably injure all in tying their fates by one string.

The Panic of 1819 followed the War of 1812. During the war, imports and exports came to a halt due to the sea being a battleground and many products which would’ve been imported were kept in their home (overseas) markets to furnish the war effort. As a result, the young States United of America saw the development and growth of domestic manufactures and exportable industries. However, when the war ended and international trade resumed, many domestic manufacturers found they weren’t actually competitive facing world markets (this makes sense because if they had been they probably would’ve developed before the war, not during it in a period of “isolationism”). This created a nascent strain of “protectionist” thinking and monied interests who saw a benefit to adding tariffs on imported products.

The end of the war and the resumption of trade saw a banking boom (fractional reserve) which finally ended in 1819 with the panic. From about 1819-1823 the country was in and out of what could be termed depressed economic conditions. In many ways the early country’s experience mirrored the present day experience from 2008-2009 onward, especially the contentious economic and political debates about how to respond.

Something I found fascinating was what happened to various “macro” economic metrics during the Panic (what we’d call a crash):

The credit contraction also caused public land sales to drop sharply, falling from $13.6 million in 1818 to $1.7 million in 1820, and to $1.3 million in 1821. Added to a quickened general desire for a cash position, it also led to high interest rates and common complaint about the scarcity of loanable funds.

That last bit is especially fascinating to me. I don’t know what the state of federal funded debt was in this time period as Rothbard doesn’t really go into the concept or existence of a “risk free rate” but it is interesting to see “deflation” leading to HIGHER rather than LOWER interest rates. In today’s topsy turvy world, low rates are supposed to be the result of the flight to safety during a depression while high rates are supposed to herald an economic recovery. However, it seems it was just the opposite in 1819.

I found myself charmed by the ability of so many in 1819 to see what was the cause of the bubble and the collapse, even politicians. For example, in an address supporting a “relief bill”, Illinois Senator Ninian Edwards observed:

The debtors, like the rest of the country, had been infatuated by the short-lived, “artificial and fictitious prosperity.” They thought that the prosperity would be permanent. Lured by the cheap money of the banks, people were tempted to engage in a “multitude of the wildest projects and most visionary speculations,” as in the case of the Mississippi and South Sea bubbles of previous centuries.

I enjoyed learning that even medical analogies to describe the cause and effect of monetary expansion and collapse were popular in 1819. One government committee, the Hopkinson Committee, arguing against “debt relief” legislation, noted:

palliatives which may suspend the pain for a season, but do not remove the disease, are not restoratives of health; it is worse than useless to lessen the present pressure by means which will finally plunge us deeper into distress.

I thought that pain pill and hangover analogies were something recent and peculiar to adherents of the Austrian school but critics knew of these rhetorical flourishes even two hundred years ago, at least!

On the topic of “flight to safety”, I did make note of one paragraph which seemed to suggest that while interest rates on bank debt and other commercial lending may have risen, interest rates fell dramatically on tax-backed (ie, “guaranteed”) government issues, for example:

“A Pennsylvanian” pointed to United States and City of Philadelphia 6 percent bonds being currently at 3 percent about par– indicating a great deal of idle capital waiting for return of public confidence before being applied to the relief of commerce and manufacturing. Thus, in the process of criticizing debtors’ relief legislation, the “Pennsylvanian” was led beyond a general reference to the importance “confidence” to an unusually extensive analysis of the problems of investment, idle capital, and the rate of interest.

This theme of “idle capital” was remarked on more than once in the text and by various parties with differing viewpoints. This is a particular fetish of Keynesians and monetarists who cite the existence of “idle capital” as an excuse for government to raise public spending to “put it to work.” It is fascinating to see these early Americans predicted Keynesianism by almost 150 years!

Another thing I found remarkable was the prevalence of either state-owned banks (federal, with the Bank of the United States, or individual states) or strong political pushes to establish these banks in response to the ensuing depression and the stress this created on the banking system. In other words, nationalization of the banking industry as a political prop to collapsing FRB institutions is nothing new:

The Alabama experience highlights the two basic measures for monetary expansion advocated or effected in the states: (1) measures to bolster the acceptance of private bank notes, where the banks had suspended specie payment and where the notes were tending to depreciate; and (2) creation of state-owned banks to issue inconvertible paper notes on a large scale. Of course, the very fact of permitting non-specie paying banks to continue in operation, was a tremendous aid to the banks.

People refer to the United States economy and monetary system at various points in time being “free market”, and while it’s true that tax rates and business regulations were generally less cumbersome near the nation’s founding than today, it is also true that there has been a virulent strain(s) of interventionist thinking and policy-making from very early on. It wasn’t until 1971 with Richard Nixon’s closing of the gold window that the US currency finally went fully inconvertible, and yet already in 1820 (if not earlier), people were calling for inconvertible paper currencies issued by state-owned banks. Some free market!

The whole episode seems to beg a question that, sadly, Rothbard did not explicitly address or explore, namely, Why did banks need to be chartered by the government in the first place? Although there were calls during the response to the economic crisis for various forms of occupational licensing and business regulation (aimed at stemming the flood of superior imports damaging local industries), the reality is that any other business but banking, such as butchering, baking, sawmilling, leather tanning, import/export, etc., did not require special permission granted by a session of the local legislature, state or federal. Why was banking different, requiring an act of congress to get the enterprise going?

Besides the fact that many such banks seemed to be public-private partnerships which included state “capital” injected into them, the only answer I have managed to come up with so far that makes any sense is that the banks were all set up on a fractional reserve basis, and a blessing by the government served to either 1.) grant legitimacy to an illegitimate institution or 2.) create the pretense and wishful thinking of providing some kind of “legal oversight” to what everyone at the outset understood to be an essentially criminal organization operating with a special legal privilege or 3.) both.

Because every bank had to be chartered, when the FRB system inevitably hit a bump in the road as it did in 1819 and many banks wished to suspend redeemability of their bank notes to stem outflows of specie, their status as creatures of the public legal mechanism meant they could run to the legislature for permission to violate their own contracts– and they almost always got the permission granted. Now, for example, if angry pitchfork-wielding townsfolk show up to break into the vault, take their gold and lynch the bankers, the Sheriff might step in with his posse to make sure everyone remembered their role.

Keynesians and monetarists and Chinese bankers

Continuing the theme of “everything new is old”, I was struck by commentary from a Pennsylvanian congressman named Henry Jarrett suggesting that government relief money might serve to prime the pump of the economy:

An inconsiderable sum of money, for which the most ample security could be given, being loaned to a single individual in a neighborhood, by passing in quick succession, would pay perhaps a hundred debts.

Kind of sounds like George W. Bush urging Americans to go shopping after 9/11, in order to get confidence in the economy back. It’s a crass Keynesian tactic inspired by a confused understanding of the relationship between production, consumption and the role of money in the economy.

It was also interesting to see how many people back then could sense there was a problem with the way the banking system operated, but were confused into thinking banking in and of itself was illegitimate, rather than simply the practice of issuing a greater supply of banknotes than the amount of specie held in reserve. Consider a campaign circular for a candidate for Congress from mid-Tennessee, who said:

banking in all its forms, in every disguise is a rank fraud upon the laboring and industrious part of society; it is in truth a scheme, whereby in a silent and secret manner, to make idleness productive and filch from industry, the hard produce of its earnings

If you substitute “banking in all its forms” with “fractional reserve banking”, you’ve got a pretty accurate description of the nature of the problem.

It’s also worth quoting at length the argument of “An Anti-Bullionist”, who thought that the economic crisis of 1819 was caused by specie money specifically, rather than abuse of specie money via fractional reserves. In its place he sought to create a fully inconvertible paper currency issued by the government which would of course be “well regulated” and serve to protect the economy from the inevitable deflationary death spiral of the specie system he believed he was witnessing. Shades of later monetarist thinking abound:

His goal was stability in the value of money; he pointed out that specie currency was subject to fluctuation, just as was paper. Moreover, fluctuations in the value of specie could not be regulated; they were dependent on export, real wages, product of mines, and world demand. An inconvertible paper, however, could be efficiently regulated by the government to maintain its uniformity. “Anti-Bullionist” proceeded to argue that the value of money should be constant and provide a stable standard for contracts. It is questionable, however, how much he wished to avoid excessive issue, since he also specifically called a depreciating currency a stimulus to industry, while identifying an appreciating currency with scarcity of money and stagnation of industry. One of the particularly desired effects of an increased money supply was to lower the rate of interest, estimated by the writer as currently 10 percent. A lowering would greatly increase wealth and prosperity. If his plan were not adopted, the writer could only see a future of ever-greater contractions by the banking system and ever-deeper distress.

Even chartalists will be happy to see that early proponents of the “American System” of nationalist public-private industry were representing their views in the debates of the early 1820s, for example:

Law pointed to the great amount of internal improvements that could be effected with the new money. He decried the slow process of accumulating money for investment out of profits. After all, the benefit was derived simply from the money, so what difference would the origin of the money make? And it would be easy for the government to provide the money, because the government “gives internal exchangeable value to anything it prefers.”

Why even have a private industry? Or money, for that matter?

Luckily, advocates of laissez-faire existed in this time period, too, and they were not silent. Commenting on one proposal to deal with “idle capital” by Matthew Carey, the “Friends of Natural Rights” wrote:

The people of the United States being in a very unenlightened condition, very indolent and much disposed to waste their labor and their capital… the welfare of the community requires that all goods, wares, merchandise and estates… should be granted to the government in fee simple, forever… and should be placed under the management of the Board of Trustees, to be styled the Patrons of Industry. The said Board should thereupon guarantee to the people of the United States that thenceforth neither the capital nor labor of this nation should remain for a moment idle.

[…]

It is a vulgar notion that the property which a citizen possesses, actually belongs to him; for he is a mere tenant, laborer or agent of the government, to whom all the property in the nation legitimately belongs. The government may therefore manage this property according to its own fancy, and shift capitalists and laborers from one employment to another.

Finally, I don’t seem to have made a good note of the specific passage that caught my attention in this regard but I chuckled when reading the description of the operations of the average bank before collapse. These bankers would set up a new bank and pay only a fraction of capital with specie, the rest would be constituted by additional promissory notes from other banking institutions (which were themselves fractional). The bankers would pay themselves dividends, in specie, while the bank operated, and issue themselves and their friends enormous loans with which they’d purchase real goods and services, all while the real specie capital of their bank depleted. When crisis hit and they could not redeem their depositors’ money, they’d get legal permission to suspend redemption, ask for infusions of new capital from state authorities and/or set up a brand new bank whose purpose was to steady the previous institution. Ultimately, the bank would collapse and this too would work in their interest because they’d already hauled off the specie via dividends to themselves, and many of them were debtors of the bank who now had loans due in a worthless currency that was easy to obtain.

It reminded me a lot of the present Chinese state capitalist model.

Conclusion

“The Panic of 1819” is not light reading and for some readers it may not even be interesting reading. It depends a lot on how fascinating you find in depth examinations of “minor” historical economic events.

But that doesn’t mean it isn’t surprising, well-written (for all the facts and data, Rothbard still manages to weave together a narrative that helps the reader appreciate the nuances of the various factions and viewpoints of the time) and at times, depressingly relevant. People who care about economic and financial history and unique, formative episodes in the early history of this country, will find a lot of insights and curiosities in this work. I strongly recommend it.

The Rape of Russia

During the 1990s, the countries of the former Soviet Union had a unique historical opportunity to move toward a competitive market economy based on private property rights. After decades of “experimenting” with various degrees of totalitarian socialism, this privatization moment would allow hundreds of millions of people to leap ahead in their standards of living and personal well being while fundamentally transforming their political and social relationships. Instead of an economic “miracle”, the privatization era was characterized by a new structure of cronyism wherein the formerly nationalized wealth of the Soviet Union came to be controlled by a small group of “oligarchs” and the people of the various countries were essentially politically repressed. The worst part is that this economic and political travesty took place with direct involvement by various Western and US-backed institutions and individuals, such as members of an elite advisory team from Harvard University. Below are several resources exploring the theory and experience of privatization in Russia and other former communist nations.

How Harvard Lost Russia [PDF]

We learn about the exploitation of the Russian privatization by members of the Harvard Institute for International Development. We learn a couple of interesting facts about the period: the HIID advisors were not doling out pure, fundamental free market theory about how to create a competitive market economy but instead helped to build a “managed” system directly modeled on the US and other crony systems; and, many of the advisors involved in the HIID project made direct investments in industries they were advising, for personal benefit, in direct contradiction to their employment contracts and the laws of the US and Russia at the time (ie, corruption). Deeply involved in the scandal and a close friend of many of the advisors directly involved, the infamous Larry Summers does not come out looking so good.

Two money quotes:

Judge Woodlock found that, while running the Harvard Institute for International Development’s advisory program in Russia in the early 1990s, Harvard economics professor Shleifer and attorney Ha had conspired to defraud the US government, engaged in self-dealing and violated conflict-of-interest regulations.

and,

Harvard University was in a unique position to exert a powerful influence. Post-Soviet Russia turned to the West for help in rebuilding its economy and filling the vacuum left by communism’s fall. In running Harvard’s Russia Project, Andrei Shleifer and Jonathan Hay had an opportunity to preach the importance of integrity, transparency and fairness in shaping a business culture, to work to enshrine those values in the country’s legal and financial infrastructure. Instead, their personal dealings sent a very different message.

This is a horrible tragedy for post-communist European societies, US and Russian foreign relations and for governance and culture in our own society as Shleifer paid a settlement but received no formal judicial sanction and maintained his tenure and social standing at Harvard and in the wider American economic community after playing the role of a miscreant carpetbagger.

Testimony of Anne Williamson Before the Committee on Banking and Financial Services of the United States House of Representatives, September 21, 1999

Anne Williamson explores “the question of the many billions in capital that fled Russia to Western shores via the Bank of New York and other Western banks.” Claiming that “property is the poor man’s ticket into the game of wealth creation” (a sentiment echoed in Hernando de Soto’s The Mystery of Capital) because “the rich… have their money and their friends to protect their holdings, while the poor must rely upon the law alone,” Williamson observes that Russian economist Larisa Piasheva, building on the theory of Austrian school economist Wilhelm Ropke, had designed a “cold turkey” privatization policy which would’ve invited direct foreign investment in Russia; instead, the Harvard cabal and other Western reformers created a weak, US taxpayer-supported voucher system that relied on Western bank lending and led to widescale corruption.

She makes the further claim that “Communism had evaporated by late 1987, the year in which the Russian people were allowed to hold convertible foreign currencies.” She condemns the entire, Western-organized privatization program as a sham and part of a known political formula:

Sell assistance programs on an alleged “free market” and “humanitarian” basis by awarding government grants to those academics who can be relied upon to supply the intellectual camouflage politicians and journalists then repeat ad nauseum to a distracted public, move the IMF and the World Bank to target, induce target to raise taxes, fine tune target’s central banking operations, encourage borrowing and debt creation through the target’s government and its national banks, allowing IMF lending to pay yields if necessary; induce target to privatize national property while building a flimsy, artificial “infrastructure” for an equities market good enough to attract high risk foreign investors. Once the target nation’s government flounders, step back and watch speculators assert discipline through a run on the target’s currency. The subsequent devaluation delivers, in turn, a flood of cheap imports to American manufacturers and producers.

The finishing touch on the swindle is to confiscate more money from G-7 citizens (the lion’s share from Americans) to pay for what is said to be an “essential” IMF bailout; thereby allowing Uncle Sam’s IMF minions to entrench themselves more deeply in the target government’s. Taxes are raised, the population struggles beneath indebtedness, government funding demands and the inevitable domestic inflation and devaluation delivers. Western neo-colonialists then bully the target over its rapidly compounding debt in order to extract yet more property. Once successful, the world’s insiders then turn around and deliver cheap shares from privatizations and initial public offerings into the maw of U.S. mutual funds and portfolio investors. US taxpayers get hit coming (foreign aid) and going (bailouts) and innocent foreigners’ property is finagled away either from, or on account of, inattentive and corrupt leaderships. The big winners are the world’s increasingly corrupt and cozy governing class, international bureaucracies and global banks.

We would be wise to remember her coronation of currency speculators as “the last disciplinarians in the world’s financial system.

Stanley Fischer’s role in piratizing Russia’s wealth

Reminding us of the dictum that “bad men need nothing more to compass their ends, than that good men should look on and do nothing”, Steve Sailer observes that during the Russian privatization,

Fischer was there at the creation. He had numerous chances to speak out publicly about what was going horribly wrong in a Russia that looked to him and his friends for advice.

When a person observes evil and does not speak out, particularly when he shares proximity to it, we have to question whether he is competent to recognize what he is looking at and whether he might be compromised in being a participant in it in some way.

Stanley Fischer is now the vice chairman of the US Federal Reserve System. He wields incredible power and influence over the US monetary system and economy, not to mention the world’s. The Sailer article explores his questionable judgment of the facts-on-the-ground in Russia, which he had a hand in, and his ethics in seeming to overlook the blatant corruption. The article helps us to remember that politicians of the present have a past, and that past is rarely flattering and seems to be easily forgotten. It also reiterates the theme that a golden opportunity to move Russia and other post-communist countries toward true free market thinking was squandered.

George Reisman’s Capitalism (PDF), pg. 290, “From Socialism to Capitalism: How to Privatize Communist Countries”

So, if corrupt self-dealing and crony managed economies are not the solution for privatizing former socialist regimes, how could it or should it be done? Luckily, there are real free market thinkers who have thought of possible solutions for reform. An extended section from George Reisman’s Capitalism lays out one such approach in detail. I have decided to quote it at length:

The advantages of private ownership of the means of production are so overwhelming that it is actually of secondary importance precisely who the initial private owners are and how their ownership is established. Whatever the specific method or methods of establishing private ownership of the means of production, the institution will function to the benefit of everyone—owners of the means of production and nonowners of the means of production alike. It will do so, however, only to the degree that the individual private owners possess full and secure rights of ownership.

The security of property rights means that the owners must be secure both against the possibility of any form of new confiscation by the state and against successful challenge to their ownership by other private individuals claiming to be the rightful owners. To understand the necessity of the security of property rights, the reader should imagine how his behavior would be affected if he were contemplating buying a home that he could not be certain would be his for very long. He would not be prepared to pay very much for it, and, after he bought it, he would not be prepared to put very much into it. Indeed, his incentive would probably be to let the house run down and even to sell off such things as the appliances for the sake of obtaining cash or other assets that would be more securely his. Without the security of property rights, the situation of all would-be owners of factories, farms, mines, and stores in the present-day socialist countries must be exactly the same. Such owners would be in essentially the same position as the state employees described earlier who were supposed to act as capitalists under “market socialism.” The absolute security of the owners’ property rights is essential if people are to be willing to pay proper prices for the various properties and then to stay on and improve them rather than milk them for whatever they can.

An essential aspect of the rights of ownership is the right freely to buy and sell property. This aspect of property rights is especially important in the transition from socialism to capitalism. The combinations of assets of the various enterprises of socialism and thus the combinations of assets of the enterprises that will initially exist under capitalism will almost certainly need radical change. It will be essential for the market to have the freedom literally to redefine all enterprises by changing the combinations of their assets. This means, there must be the freedom both to break up existing enterprises by selling off their assets in the manner of “corporate raiders” and to combine their assets through such devices as mergers and acquisitions.

As I say, these freedoms are essential. For a major foundation of the efficiency of capitalism—ironically, increasingly overlooked in the supposedly capitalist United States—is the ability to create business firms that possess the right combinations of assets. This ability is essential if firms are to be able to produce the right products by the most efficient methods. It must be present at all times, if the economic system is to be able to adjust to changing conditions. It is acutely necessary in the context of putting right the combinations of assets that a socialist government is likely to have thought appropriate for the various enterprises. It would be essential not only for such things as combining manufacturers with the right parts makers, and retail outlets with the appropriate warehouse facilities, but also for changing the uses made of all kinds of existing factories and land sites.

Nothing less than a radical overhaul of the entire apparatus of production inherited from socialism will be necessary if the economic system is to become efficient. Many factories will have to be closed and such of their assets as are still useable, devoted to production in different locations. Most other factories will have to undergo major changes in what they produce and the methods by which they produce. The output of innumerable factories will have to go to different users. The use that is made of innumerable land sites will have to change. All of this requires the freedom to buy and sell and to breakup and combine the assets of firms.

Along the same lines, the market would need the absolute freedom to hire and fire the managers of enterprises. This freedom too is necessary at all times and acutely necessary in the conditions of a transition from socialism to capitalism. Any managers inherited from socialism are likely to need replacement. Many of the initial managers under capitalism will also need replacement. To be effective, the transition from socialism to capitalism will need to be followed by a fall into obscurity of numerous former top managers and rise from obscurity of numerous new managers. Nothing must be allowed to impede the business takeovers and buyouts that are an essential part of this process.

In addition, of course, there must be the absolute freedom to hire and fire ordinary workers. Socialism is characterized by a massive misallocation of labor, just as it is characterized by massive misallocation of capital. This too must be put right if production is to become efficient.

A vital aspect of the transition from socialism to capitalism, that is implicit in all that has just been said and is clearly called for by the nature of capitalism, is the freedom of every enterprise to enter into the industry of every other enterprise, and, of course, the freedom of everybody to form new enterprises. In other words, the full freedom of competition must exist.

In the light of these requirements, the specific methods of establishing private ownership of the means of production can now be considered.

The simplest and most obvious method is that wherever former owners of property or their descendants are still alive, the properties should be returned to those from whom they were stolen, or to their descendants.

In Eastern Europe, this method is somewhat complicated by the fact that many of the private property owners who were dispossessed by the Communists were themselves beneficiaries of expropriations carried out not long before by the Nazis. Here the solution clearly is to return the properties to the earlier owners dispossessed by the Nazis, or to the descendants of those owners.

To the difficulty of settling claims as between two or more private claimants is added the fact that the method of returning property to former owners becomes less and less adequate, the longer is the period of time during which socialism has existed and the more ruthless were the means employed to establish socialism in the first place. This is because it becomes correspondingly more difficult to locate specific individuals with valid claims to ownership. (In many cases, everyone with a valid claim may simply have been murdered.) The major part of the problem, however, is the fact that as time has passed, numerous new plants and machines have been constructed, which no one can now claim on the basis of property rights existing before the establishment of socialism. These observations are particularly applicable to the former Soviet Union, where socialism existed for over seventy years and where over twenty million people were murdered by the Communist regime. The mass murders committed by the Nazis may pose a similar problem to the location of heirs.

In view of these facts, I propose three methods of privatization. First, as far as possible, property should be returned to those from whom it was stolen, or to their descendants. Second, in the case of agricultural land where it is not possible to locate former owners or their descendants, the land should be made the individual private property of those who now work it. That is, all the collective farms and state farms should be broken up into separate, individual private farms. Formulas could be devised allowing for differences in the amount of land individuals received based on differences in the time they had been compelled to work the land. Those who had suffered such forced labor for a longer period, would receive more of the land than those who had suffered it for a shorter period. Individuals who would otherwise receive parcels of land too small to farm might simply receive cash.

Third, in the case of all other property—factories, mines, shops, and so forth—the appropriate principle would be to place the assets on the open market for competitive bidding. Foreigners should be actively encouraged to participate in this bidding and, indeed, the bidding should be carried on in Western currencies and in gold. Foreigners should have the same full rights of ownership as citizens: they should be allowed to buy and sell property of all kinds, to form companies, and to remit dividend and interest payments to their own countries to whatever extent they wish.

Active foreign participation in the bidding creates the possibility of the average citizen of the socialist countries deriving an important immediate benefit from privatization. Namely, as the proceeds from the sale of assets came in, each individual citizen could receive his individual share of the proceeds—that is, the proceeds of the government’s sales could be divided up among the citizens. Thus, during the period of liquidation of state assets, the average citizen could receive one or more checks payable in Western currencies. He could use the proceeds to buy essential consumers’ goods that could be imported from the outside world because the means would be present to pay for those imports. This would help to tide him over during the difficult period of transition during which his country’s economic system was being reorganized and he was unemployed or not in a position to earn a significant amount by working. In this way, for the first and only time—in the process of its liquidation—collective ownership of the means of production would turn out to provide some actual benefit to the citizens: in the moment of its being liquidated for Western cash, it would enable them to obtain something of value to their lives.

It should be observed, incidentally, that the benefit to the average citizen would be the greater, the greater was the prospective security of property. Because to the extent that newly acquired property rights were expected to be upheld, the higher would be the prices that foreigners would be prepared to pay for the assets being offered for sale, and thus the greater would be the proceeds accruing to the average citizen of the formerly socialist country. Economic morality would be rewarded. (The ability of foreigners freely to remit dividends and interest payments is an important aspect of this morality and also an important foundation of the foreigners’ willingness to bid up the prices of the assets offered for sale, and thus of the ability of the average citizen of the formerly socialist country immediately to benefit from privatization.)

[…] Once the transition to capitalism was accomplished and the average citizen of the formerly socialist country was in a position to begin saving and investing on a significant scale, not only would he begin to accumulate capital within his own country, but the capital market of the entire world would be open to him, and he could invest abroad just as others had invested in his country. This is an aspect of what can be called capitalist internationalism.

In order to secure the best prices for assets being sold off, a corps of professional auctioneers and brokers should be employed, who would receive a commission based on a percentage of the sales proceeds.

The principle of distributing the proceeds from the sale of assets equally among the citizens could be modified to give greater compensation to victims of labor camps and survivors of those who have been murdered by the Communist regime. However, the primary compensation for such crimes should probably be left until after the transition to capitalism has been completed and it is thus possible to provide more substantial compensation.

There are, of course, other possible methods of establishing private property. One would be simply to make the various existing enterprises the private property of their present managements. Another would be to turn the various enterprises over to their present employees. Obviously, the two methods could be combined, with the present managers receiving a certain percentage of the ownership and the present employees a further percentage. To some extent, these methods are actually in use.

If, following the establishment of private property in these ways, there really was security of property and full rights to buy and sell assets and shares, to hire and fire managers and workers, and to compete in all branches of industry, these methods would ultimately be effective in establishing private ownership of the means of production. As time went on, all the necessary changes could take place, including changes in ownership, which would be effected by the market, and an efficient economic system would emerge. However, the appropriation of enterprises by their Communist-appointed managers will necessarily carry with it the taint of the old regime and all of its injustices, and is likely also to be accompanied by a continued large-scale ability to use political pull, based on previously established relationships with government officials. Thus, private ownership of the means of production begun in this way will be tainted by injustice, past and present, and by corresponding inefficiency. This would be a legitimate source of resentment and would constitute a potential threat to the continuation of such ownership.

Turning the ownership of each establishment over to the workers of that establishment would at best arbitrarily favor some workers over others. Those workers who happened to work in highly capital-intensive industries, such as electric-power production or steel making, would obtain ownership of far more capital than workers who happened to work in less capital-intensive industries, such as clothing factories and restaurants. The same point would apply within each industry, insofar as some plants were more modern and efficient than others. It is very pertinent, of course, that as the result of socialism’s protracted gross inefficiencies, the value of many factories and other productive establishments would turn out to be altogether nonexistent.

The problem of workers benefitting or failing to benefit by virtue of the accidental circumstances of where they worked would also exist in agriculture. The workers of collective farms with abundant, rich soil would receive more than the workers of collective farms with relatively meager, poor soil. In agriculture, however, apart from the return of former owners or their descendants, there does not appear to be an alternative to the workers’ coming to own the land. Of course, the workers on the relatively poorer lands could be given the option of sharing in the proceeds of the sale of other assets rather than accept land they had been forced to work.

To the extent that workplaces do become the property of the workers employed in them, it must be stressed that it is vital that the workers of each plant be free both to sell their ownership shares while keeping their jobs and to leave their jobs while keeping their shares. In this case, ownership and employment would eventually become almost entirely separate, as under capitalism. The ability to hold ownership and employment separately is essential for the free movement of capital and labor between industries. In its absence, workers would be reluctant to leave their employment, because they would then lose their capital, and they would be afraid to admit new workers into their firm or industry, because they would then have to correspondingly dilute their ownership. There would be no possibility of transferring capital from one industry to another, since the workers of the industry from which the capital came would simply lose it. Furthermore, the rapid separation of ownership and employment is necessary to overcome a bias that might otherwise exist against improvements in efficiency if workers as owners were in a position to reject improvements that might cost them their jobs.

Thus, at its worst, turning ownership over to the workers could mean a state of affairs in which the movement of labor and capital between the various branches of industry was made impossible. In addition, it could mean a situation in which the workers of each industry, by virtue of their possession of a monopoly on employment in their industry, were in a position to practice extortion on the rest of the economic system as the price of providing their services. Obviously, these are conditions which should be avoided at all costs.49

Provided that the essential requirements of security of property, the separation of employment and ownership, and the unrestricted freedoms to buy and sell, hire and fire, and compete, are observed, what remains is to accomplish the transition to private ownership as quickly as possible. Reasonable but strict time limits must be set for the location of former owners or their heirs, and it must be firmly established that thereafter no new claims will be heard on their account. This is an essential part of establishing the security of property. All of the assets in the hands of the state must likewise be disposed of within a strict time limit, so that no one in the market need labor under any uncertainty about what properties will be available and when and thus what plans he can and cannot make. This is essential to making the economic system as efficient as possible as soon as possible.

In the absence of the establishment of private ownership of the means of production, all other reform is meaningless. [emphasis added] For example, decontrolling prices without first establishing private ownership of the means of production and its corollary the freedom of competition, simply means giving arbitrary, monopolistic power to lesser government officials in charge of individual industries and enterprises. It is comparable to giving the postmaster general or the local postmaster the right to set postal rates. Without private ownership of the means of production, there can be no market economy or free market. Divorced from private ownership of the means of production, such notions are a contradiction in terms. Nor, of course, can there be lasting or meaningful reform in the political realm.

Conclusion

These articles are shared as evidence of several ideas:

• Free markets haven’t been tried, not in Russia, not in the US
• “Free markets” are a convenient and distracting cover term for what is actually corrupt crony systems because it confuses people who understand the value of free markets and it distracts those who hate them
• “Economists” are often not economists but political agents, and many of them have flawed ethical frameworks
• Harvard as an institution, specifically, has a record of questionable ethics with regards to the HIID’s involvement in the privatization of Russia
• Modern US-Russian relations are a lot more complicated than Good, Liberty-Loving America vs. the Former Red Menace
• Larry Summers is corrupt
• Stanley Fischer is corrupt
• The truth is complicated and unpopular and those who are scandalized by it have a strong incentive to cover it up, ignore it or forget about it

Review – The Enterprise Of Law: Justice Without The State

Bruce Benson’s The Enterprise of Law: Justice Without The State is almost guaranteed to shock and upbraid the ear of a mainstream political thinker, but for those considering alternatives or who are already familiar with or sympathetic to the kind of argument Benson puts forth, the work proves musical.

As Benson states in the introduction,

Anyone who would even question the “fact” that law and order are necessary functions of government is likely to be considered a ridiculous, uninformed radical by most observers… But even though most academics do not question the logic of government domination of law and the maintenance of order, large segments of the population do… Privately produced crime detection and prevention, arbitration, and mediation are growth industries in the United States.

Benson’s study is an example of applied economic theory. Rather than attempting to develop a new body of economic theory which explores the logic of market-supplied legal and security services which are currently provisioned (poorly) by the State, Benson is instead taking that theory as developed by earlier thinkers and applying it in a variety of ways to historical and imagined human experience. He first sets out to survey the history of law through this lens to show the way in which the State encroached on privately-provided law to further its other social agendas. He then moves on to an examination of various econo-historical studies performed by academics to show the current extent to which private citizens in the US have already turned to market-supplied legal and security services. Following this, Benson turns to similar studies to demonstrate empirically the failure and corruption of government law. Finally, he explores the logic of how market-supplied law might come to totally supersede government law in the future and why this would not be an epic social disaster.

Customary Law and Restitution

Benson’s arguments about the failures of the modern legal system as administered by the State seem obvious when one learns of two legal concepts which have since been lost to history, the origination of law through custom and social practice, and the focus of law on providing restitution to victims rather than punishment to aggressors. Benson defines law as,

both rules of conduct and the mechanisms or processes for applying those rules.

Under customary law, which is prevalent in all “primitive” societies without developed State institutions (and which undergirds modern American statutory law as the much heralded “Common Law” tradition), rules of conduct emerge from the values, beliefs and interactions of communities of people. When a conflict arises, the aggrieved parties take their case before a mutually-trusted third party, a judge, who hears the concerns of each party and attempts to place their disagreement into the context of previous decisions and existing cultural practices while also considering any novelty to the present circumstances. He then provides a ruling and a judgment of the restitution the aggrieved party might seek from his aggressor to make him whole.

Although customary law develops on a case-by-case basis,

collective action can be achieved through individual agreements, with useful rules spreading to other members of a group.

Under customary law, incentives matter and

good rules that facilitate interaction tend to be selected over time, while bad decisions are ignored.

The end result is that customary law is characterized by:

1. being socially and culturally aligned with the population in question, which increases the likelihood it is respected and considered valuable by all social participants
2. responsiveness and continual “improvement” and updating as social norms change through practice and experience
3. simplicity, because rules are only developed as needed due to novel circumstances, and often disagreements are settled by referring to existent custom or prior precedent
4. fairness, because the emphasis is making a wronged party whole, thereby permitting the guilty party to return to civil society after “repaying their debt”

Compare this to the legislative law of the State, which is characterized by:

1. a professed goal of molding or shaping the target population to behave in novel ways according to the new law, without regard to previous cultural practice
2. both stagnation and hyper-novelty; stagnation in that a law once on the books rarely comes off and may continue to remain “in force” even when the circumstances it addressed are no longer relevant, and hyper-novel in that the law might be changed and added to more quickly than local cultural practice changes
3. complexity, because rules are developed and adopted as quickly as special interest groups can lobby for them, and no existing dispute or claim of harm need come before a law can be passed
4. lack of fairness, because restitution is rarely made to actual victims under the law and many laws promote cases which have no empirically-identifiable victim other than “the State” whose laws have been violated

An important corollary idea here is that true law is discovered through practice and experimentation, whereas statutory law is created and imposed by special interest group pressure and a desire to redistribute social resources.

The Rise of Authoritarian Law

There’s a bit more to it than that, but for a general outline to support the argument this will suffice for now. If customary law is superior to legislative law in providing responsive, fair (ie, “just”) legal structure for society, how is it that legislative law has come to dominate in the modern era? Could customary law not keep up with the rapid pace of change in society marking the modern era, or was there some other flaw or shortcoming of the approach that made State-administered law more “practical” and thus dominant?

Two facts of social history help explain the rise of legislated law. The first is that the philosophy of freedom is a recent phenomenon as a coherent and consistent body of thought. It was incredibly difficult for groups of people even a few hundred years ago to articulate resistance to encroaching State power in terms of abstract personal liberties that were being conceded now or in the future as a necessary consequence of some new rule being imposed. Philosophically, no true, long-term oriented resistance to the principle of State law was being advanced or could be advanced. The second is that history (especially early Western history and, relevant to the experience of Americans, early British and Anglo-Saxon history) is marked by continuous warfare amongst social groups, and warfare promotes the centralization of power in the hands of a dictator (read: a king) who is tasked with leading the group to victory over its enemies. This warfare not only increases the king’s prestige and makes it easier for him to make new claims on power as necessary to protect the population from outside aggression, it also creates the conditions which necessitate his continually raising finance to prosecute his wars which make mulcting via the legal system a logical course of action.

Benson demonstrates these ideas through reference to the rise of “king’s courts” alongside common law or customary courts in medieval England. Over time these king’s courts not only claimed sole jurisdiction on settling specific disputes (ie, monopoly over competitive private solutions), but they also invented an entire body of offenses (felony crime) with no victim other than “the king’s peace” which allowed the king to extract rents from the population in the form of trial and court fees, fines and punishments, jail bonds, etc. In time, the king’s courts came to dominate legal practice just as the power and prestige of the English king and his state rose accordingly. One social consequence, of many, was a worsening effectiveness of “the law” as a social mechanism and a lowering of the status of the individual and his rights in society, primarily because

The attributes of customary legal systems include an emphasis on individual rights because recognition of legal duty requires voluntary cooperation of individuals through reciprocal arrangements.

In other words, individual rights and customary legal systems go hand in hand, whereas collectivism and legislative legal systems are partners in crime. This is an important and often overlooked point for advocates of greater personal liberty!

Conclusion

What I have summarized above is only the first fifth of the book, and even then it is missing all manner of interesting detail and further argumentation that paint a truly rich philosophical picture for those interested in the role law plays in civil society. While the book is not without its faults, they’re relatively minor overall and Benson’s focus on empirical studies will prove especially valuable for those who prefer concrete evidence of principles in action. This is a title that is not only excellent for returning to as a reference when formulating arguments but whose implications for reorganizing society are profound and worth pondering at length.

 

The “Ideal” Ethnic Type

In philosophy there exists something of a mind puzzle or dilemma surrounding the identification and definition of an ideal type or the “normal” for a concept, that is, what is the “essence” of something like a chair? When we think of a chair, we almost always have in our mind the mental image of a chair, a certain, distinct iteration of the categorical concept “chair”, yet there are other chairs that are variously dissimilar to this image which nonetheless we can easily identify as a member of the “chair” category as well.

Not only is it hard to identify precisely what qualities make something a chair, it is hard to identify what attributes a thing could possess that would make it decidedly not a chair but instead something else. Is a chair without a seat, still a chair? (And by the way, what does the ideal type of the category “seat” look like?) Is a chair with a wavy back still a chair? We might decide that this is a chair, yet hardly anyone would imagine such a chair when they think of the conceptual ideal in their mind.

A friend shared with me the following today: “World of Averages”

If I understand what I am looking at correctly, the composer of the set of images contained in the link took a number of photographs of women of various ethnicity from all around the world and overlaid similar national/ethnic portraits with various transparency levels until he arrived at an average assimilated, symmetric image for each nation/ethnicity. The result is a series of portraits of (spectacularly beautiful!) women from all around the world that may be said to approximate something of a categorical ideal type for their ethnicity, ie, when we think of a “Serbian woman” perhaps that portrait is what comes into our mind as capturing the essence of “Serbian womanness”.

Now, what I think would be extremely fascinating is to take this idea to its logical extreme– overlay each of these resultant portraits over one another and create the “human woman” archetype. What does SHE look like? And do we all think of her when we think of “woman”?

I find this particular piece of art absolutely brilliant. It is not only a philosophical experiment but a biological, historical and genetic one. The pictures we are looking at represent thousands upon millions of years of human migration, habit and variance all frozen at a particular moment in time. Aside from many of these ethnicities/nationalities not existing in years prior (and likely in years hence), they undoubtedly looked different then and will continue to change in the future.

There appear to be many more fascinating “average” portraits at the original source blog.

Diversity And Sameness

Walking into a small Florentine osteria like Cinghiale Bianco — there don’t appear to be any large eateries, and even after spending a whole semester in Florence and now revisiting, I still can’t figure out what the difference is between osterie, ristoranti, tratorrie and the like — I am immediately struck by the diversity and efficiency of these spaces.

In the United States at least there is a seeming obsession with uniform geometry. Every place, fancy or hole in the wall alike, is cubic and utilized in cubic form. All I have to do to clarify what I mean by this is to paint a picture for you of Cinghiale.

This little restaurant has three galleries for diners. The first is rectangular in the front and seats two rows of 4 seat tables and two rows of six seat tables. The second gallery is another rectangle behind it but attached at one of the corners and perpendicular to it. It has three tables of four and a table of two as well as a “nook” buried in the street side wall (bordering the first gallery) which seats 4 or 5. This nook has an arch and the whole thing is constructed of gloss painted brick. Above it is the third gallery, seating 2 or 3, which is accessed by a small ladder step way as if it belongs in a library bookshelf. The ladder is in the second gallery but the third gallery looks out on the first. Its claustrophobic, romantic and dangerous– a sign warns you in Italian to watch your head as you climb up because a support arch of the wall leaps out and cuts across about three feet from the top of the ladder.

I can’t even imagine how many OSHA and fire code regulations such a design would garner in the US. In Italy I’m sure this place is legally protected from ever being renovated!! The law is a singularly irrational and subjective institution wherever in the world it is crafted.

The interior of the restaurant is white washed plaster over occasionally exposed brick and dark painted timber support beams. The walls are lined with shelves covered in wine bottles and carrafe pottery. The tiny hallway segueing the first two galleries has an indent about five feet up that serves as the coat hang.

Cubic architecture should be more economical and efficient both to construct and maintain and utilize for a variety of functions, which is why I assume it is so prevalent in the US. And yet, its hard to not be charmed by the efficiency of this humanistic design in little Italy.

To a traveler, this is diversity. But the shocking truth of Italy is that all these little towns are like this. All the restaurants are ancient and cute and cozy. All the towns you ride the trains through up and down the coast are painted in a variety of dark pastel tones such as red, pink, and yellow with green window shutters. Everywhere they offer the “cucina tipica.”

Every city and village has a copy of the Garibaldi statue.

They serve the same food at every restaurant. The pasta is always good even when the meat dishes are second rate at the tourist traps. Its actually hard to find anything that isn’t Italian. Its a country that has failed by successfully and faithfully embracing mercantilist self-sufficiency, even though the osterie sometimes serve Tunisian olive oil, a blasphemy of ever there was one.

And in these ancient places nothing ever changes. It will all be here, the statues and paintings and museums and history and restaurants and hotels, next time.

Is that a good thing or a bad thing? I suppose it depends who you are and what you’re after. Its hard to imagine businesses shutting down, even in a recession — more economic thoughts in a coming post — and I’ve yet to see entire city blocks with For Lease or for Sale signs as there would be in the US. But I also don’t see how you could avoid being a 60 year old waiter one day. Or how you’d ever get to live a “modern” life of new things if you were just an average Joe. Or Jiacomo as it were.

Many of the portraits in the Uffizi, it turns out, were the likenesses of various condottieri of Florence under the Medicis. They were celebrating these military contractors who helped them crush their neighbors and enemies.

Today there are no more contractors in Italy. But the US government employs thousands. Do things ever change? Are we all that different? Which is modern, and which is not?

Notes – Dying Of Money

Dying of Money

by Jens O. Parsson, published 1974, 2011

The collapse of a monetary regime

The following note outline was rescued from my personal document archive. The outline consists of a summary of Jen O. Parsson’s classic tale of monetary woe, Dying Of Money. Parrson catalogued two mass inflation events in modern Western history– the German post-war hyperinflation and the US monetary boom of the 1960s and 70s which culminated in the abrogation of the gold-exchange mechanism by Nixon in 1971; both are instructive for different reasons.

Dying Of Money

1. Prologue: The German Inflation of 1914-1923
   1. The Ascent
      1. “Disastrous prosperity”
         1. old mark had been worth 23 US cents; written off at 1T old marks to one new mark at end of inflation
         2. all the marks in the world in summer of 1922 (190 billion) were not enough to buy a newspaper or tram ticket in November 1923
         3. first 90% of Reichsmark’s real value had been lost before the middle of 1922
         4. inflation cycle: gestation of 8 years, collapse of 1 year
      2. The beginning
         1. summer of 1914, Germany leaves gold standard, runs up debt, prints money in anticipation of WWI
         2. war financed through issuance of new debt (war loans) paid for with newly printed currency
         3. domestic prices slightly more than doubled by the end of the war in 1918, even though money supply increased more than 9x
         4. 1919, Germany sees violent price increases of 17x prewar level
         5. other nations, including WWI victors, stop spending and suffer recession 1920-1921; Germany continues printing and experiences a boom while prices stabilize for fifteen months between 1920 and 1921, money supply doubles again
      3. Benefits of the inflationary boom
         1. Exports thriving
         2. Hordes of foreign tourists
         3. New fortunes minted overnight
         4. Berlin becomes one of the brightest capitals in the world
         5. Great mansions of the new rich in abundance
         6. City life took on a wanton, careless manner
         7. Frugality absent as no one took time to search for real value
      4. Losers of the inflationary boom
         1. Crime rate soared
         2. Unionized workers kept up with inflation while non-unionized fell behind
         3. Salaried and white-color workers lose purchasing power even as unemployment virtually disappears
         4. Total production rose
      5. Paradoxical wealth and poverty
         1. much employment in “spurious and unproductive” pursuits
         2. paperwork and paperworkers abounded
         3. government employment grew, heavy restraints against layoffs and discharges kept redundant employees on payroll
         4. incessant labor disputes and collective bargaining consumed time and effort
         5. business failures and bankruptcies were few
         6. almost any kind of business could make money
      6. Speculative fever
         1. speculation became one of the largest activities
         2. fever to buy and sell paper titles to wealth was enormous
         3. volumes on Berlin Bourse were so high that, even with bloated back-office staff, Bourse was closed several days a week to work off the backlog
         4. capital goods and industrial construction industry experience a boom, many new factories built all while neighboring countries continued using old equipment
         5. M&A, takeovers and proxy fights in vogue
         6. massive conglomerations of non-integrated businesses took place; these businesses and the “kings of inflation” disappeared after the collapse
   2. The Descent
      1. Price increases catch-up with money printing
         1. From July 1921, prices double in next four months and increase 10x through summer of 1922
         2. consumers put on “buyer’s strikes” that are fruitless
         3. interest rates soar as lenders attempt to anticipate inflation
         4. businessmen transact in gold or constant-value clauses or foreign currency
         5. government’s budget deficits close to balance; nonetheless, government is only able to refinance existing debt through money printing
      2. Final moments
         1. July 1922, prices rise 10x in four months, 200x in 11 months
         2. near end in 1923, prices nearly quadrupling each week
         3. prices raced so far ahead of printing that the total real value of all Reichsmarks in the world was smaller than ever
      3. The end of the inflation
         1. August 1923, government of Wilhelm Cuno falls; October 1923, Gustav Streseman made chancellor, given dictatorial powers, hires Dr. Hjalmar Schacht as commissioner of new Rentenmark (“investment mark”)
         2. Rentenmark placed in circulation beside mark with the avowal that Rentenmark’s would not be inflated
         3. Germans believed it, and Rentenmarks supply was held constant
         4. November 15, 1923: final exchange rate, 1T mark: 1 Rentenmark
         5. Government budget balanced by finance minister Dr. Hans Luther
      4. The fallout of the collapse
         1. Schacht orders end of credit from Reichsbank April 7, 1924; credit squeeze ensues; price increases halt
         2. Savings destroyed
         3. Inflationary boom businesses go bankrupt
         4. Credit nearly impossible to get
         5. Unemployment temporarily skyrockets
         6. Govt spending slashed, govt workers dismissed, taxes raised
         7. Working hours increase, wages cut
         8. Millions of voters join Communist and Nazi parties in the “inflation Reichstag” of May 1924
      5. Economic recovery
         1. New elections in December 1924 erase extremist party gains
         2. business recovery based upon foreign loans due to German credit tightening; world depression of 1929 knocks debtor Germany down
   3. Gains and Losses
      1. Debtors: winners
         1. every contract or debt fixed in marks was paid off in worthless marks
         2. Germany’s total prewar mortgage indebtedness, equal to 40 billion marks or 1/6th of total German wealth, worth less than one American cent after the inflation
         3. Savers and owners of mark wealth (bank accounts, savings, insurance, bonds, notes) lose out big
         4. those who borrowed up until the last minute to buy assets turned out to be winners
      2. German Govt: winner
         1. Largest debtor
         2. Entirely relieved of crushing war debt, representing cost of war, reconstruction, reparations and deficit-financed boom
         3. beware being a creditor when the government is a huge debtor
      3. Farmers: winners
         1. always had food
         2. farms were constant values
         3. mortgages were forgiven outright
      4. Foreign owners of marks and other losers
         1. Germany made a profit of 15 billion gold marks, or 40% of annual national product, on sale of paper marks to foreigners, after deduction of reparation payments
         2. Trustees, forced by law to own fixed obligations, lost
         3. Wealthy Germans invested in marks lost
         4. Great charitable institutions wiped out
         5. Banks and insurance companies were weakened but not destroyed (they are both lenders and borrowers)
         6. Sound business survived, but in a weakened state, boom businesses wiped out
      5. Industrial stocks
         1. height of the boom, astronomical P/E ratios
         2. dividends cancelled
         3. stock prices increase 4x from February 1920-November 1921
         4. Stock market crash of December 1, 1921, in the middle of inflation
            1. prices fell by 25% and hovered for 6 mos while other prices were soaring
         5. real value of stocks decline because their prices lagged behind the price of tangible goods
            1. Entire stock of Mercedes-Benz valued at price of 327 cars
         6. near end of 1923, stocks skyrocket again as investors realize that stocks have value even when bonds do not and have a claim to underlying real value
   4. Roots of the inflation
      1. Prices contained by faith
         1. Germans and foreign investors, until 1922 and the brink of collapse, absorbed the Reichsmark
         2. faith was in the idea that an economic giant like Germany could not fail
         3. willingness to save marks kept them from being dumped immediately back into the markets
         4. realization that Germany would not back the money was the moment the dam let loose
      2. Balance of payments
         1. More cheap Reichs flowed out than hard money came in
         2. This despite constantly rising exports and constantly falling imports
         3. payment deficit actually muted price increases by keeping Reichs outside of German markets
         4. Reversal of payments deficits marked the proximity of the end
         5. in collapsing stages, Germany ran a huge payments surplus
      3. Foreign exchange rate
         1. unlike era after WWII, free and uncontrolled “float” of forex
         2. German mark almost always falling and almost always had a lower forex value than its purchasing power within Germany
         3. Thus, forex rate proved a quicker and more sensitive measure of inflation than internal prices
         4. German exports were abnormally competitive on world markets due to forex vs. internal purchasing power discrepancies
         5. Germany lost 10 billion gold marks, or 25% of a year’s national product, on underpriced exports due to inflation
   5. The Great Prosperity of 1920-1921
      1. March 1920-December 1921
         1. prices stable
         2. businesses and stock market booming
         3. exchange rate of mark against $ and other currencies rose for a time, was momentarily strongest in the world
         4. ROW enduring severe recession; Germany envy of the world
      2. Reign of finance minister Matthias Erzberger, June 1919
         1. Raised taxes on capital; real tax yield of 1920 highest of any year from beginning of war to end of inflation
         2. tight money induced for an extended period in late 1919; only time money supply stopped rising for more than a month or so
         3. March 1920, price level was 17x prices of 1914, roughly equal to increases in money supply, new equilibrium reached
         4. Price increases halted for nearly a year, real burden of war debt had been cut by 5/6ths as a result of price increases of 1919
         5. March 12, 1920, Erzeberger exits govt, disgraced after a libel suit, and his pro-inflationary rivals take over
         6. March 1920 is the month prices stop rising, but with Erzeberger’s exit, the boom prosperity begins
            1. prices remain passive
            2. exchange value of Reichsmark rises
            3. stock market rises 3x before crashing in December 1921
            4. Reichsbank doubles over next year into summer of 1921 when price increases catch up
   6. The Lessons
      1. Unrealized depreciation
         1. built upon faith in the German economy to recover
         2. built upon faith in German government to make good on debts
      2. Booms
         1. built upon increasing rates of inflation
      3. Hitler and extremists thrive in wild, inflationary conditions
         1. Hitler’s putsch was in the last and worst month of the inflation
         2. totally eclipsed when economic conditions improved
         3. took power through elections during another economic period of trouble
         4. middle class voters wiped out in the inflation moved to the extremes in polling, bolstering Hitler and others
2. ACT ONE: The Rise of the great American Inflation
   1. The War
      1. Dollar lost 70% of its value from 1939-1973, prices rose 3.5x
      2. Seven years of WWII, Federal debt increased to $269B
         1. 1/4th greater than the annual gross product of the country at that time
         2. money supply grew by 3.5x between 1939 and 1947
         3. June of 1946, prices had increased by less than half from 1939
            1. price controls
            2. new money was absorbed by the issuance of war debt rather than bidding for consumer goods
            3. many saved money during the war for “safety” rather than spent it
            4. low money velocity resulted
         4. real value of dollar at the end of the war was 2/3rd what it had been at start of war
         5. government stopped inflating, allowed price increases to reach new equilibrium
      3. Prices controls end 1946
         1. prices double from levels in 1939 in two years
      4. Money supply held stable 1947-1950; prices remain stable as well
         1. economic recession 1949
      5. Comparisons: German war inflation vs. US war inflation
         1. American war debt of $269B, about 1.25x annual national product; Germany 153B marks, about 1.5x annual national product
         2. American monetary inflation, 3.5x; German 25x
         3. American price inflation 2x; German 17x
         4. Ratio of monetary to price increases about the same, 60%
   2. Grappling with Stability
      1. Korean War, 1950
         1. Federal budget did not run a deficit fighting the war
         2. money supply increases by 16%; prices increased 13%
      2. Eisenhower administration
         1. money supply increased 1% per year on average from 1953-1962; wholesale prices never varied +/-1% from 1958-1964
         2. “monetary oscillations”
            1. 1953-1954, money growth <1%, recession
            2. 1954-1956, money growth 3.9%pa, boom and price inflation
            3. 1957, money supply contracts, followed by recession
            4. 1958-1959, inflation
            5. 1959-1960, contraction
            6. 1961, inflation
            7. 1962, contraction
   3. The Great Prosperity of 1962-1968
      1. intense monetary inflation beginning 1962
         1. 4.6% per annum for 43 months (through April 1966)
         2. 7.2% per annum for 27 months (January 1967-April 1969)
         3. total inflation over seven years was 38%, interrupted only by the 9month period of no expansion in 1966, accompanied by stock market collapse and economic recession by no effect on prices
         4. combined with an investment tax credit of 7% for businesses to spend on new capital assets, leading to exaggerated investment boom
         5. prices did not keep up, leading to “unrealized price inflation”, despite rising at nearly 5% per annum for the seven year period
   4. The Inflationary Syndrome
      1. economic effects from 1962-1968
         1. gross national product increased $360B, or 7% per annum, compared to 4.8% per annum during Eisenhower years of 1955-1960
         2. unemployment continually decreased
         3. stock market was almost constantly rising for more than 6 years
      2. speculative effects
         1. high stock market volumes, huge capital gains appreciation, large paper profit generation
         2. conglomeration and merger of big business
         3. most wage growth in the speculative class of paper-pushers
         4. overinvestment in capital goods
         5. IBM, Xerox (back-office service/goods companies) were the investment darlings of the era
         6. overproduction and stimulation of the growth of educational and legal industries
      3. foreign exchange and the balance of international payments
         1. current account deficits are a symptom of inflation
            1. when there is excess money in one country it flows out to other countries
            2. the currency in the inflationary country is overpriced relative to world markets, so it goes out and buys imports
         2. current account deficits reduce price inflation in the inflationary country because the currency bids up prices in foreign rather than domestic markets
         3. dollars held by foreigners returning to the US at the point that the current account turns to a surplus, would result in price inflation in the US
3. INTERLUDE: The General Theory of Inflation
   1. Prices
      1. prices in aggregate are determined by total amount of money availble for spending in a given period of time, in relation to total supply of all values available for purchase with money in that period of time
      2. money supply defined as that which people use to buy things of value with, but which is not a thing of value itself (dollars, coins, checking account deposits)
      3. money available per unit of time, aka money velocity, also a factor, but it is hard to measure or determine
      4. price level = money quantity x money velocity / supply of all real values
      5. this is the quantity theory of money
   2. Real Values
      1. in an inflation, there are many “spurious values” which disguise and conceal the inflation of prices of real values
      2. real wealth consists of land, resources, productive plant, durable goods and people
      3. paper wealth is not real wealth; money wealth is debt, including money contracts such as bonds, mortgages, debentures, notes, loans, deposits, life insurance and pension obligations
      4. debt does not represent the direct ownership of any real assets but rather subdivision of interests in real assets with the direct owners of the assets
         1. for ex, a man is not part of the total supply of real capital as he can not be bought and sold
         2. however, if this man borrows money, he subdivides ownership of his future productive power and adds himself to the supply of capital assets
         3. if he borrowed from a bank which borrowed from a depositor, further subdivision has occurred
         4. government debt represents a “lien” on the part of the productivity of all citizens
      5. this multiplication and stratification of paper wealth can be increased to many times the size of the real existing wealth
      6. paper wealth structure is all built on faith– issuance of new paper wealth does not result in an increase in real values by itself
   3. Government Debt
      1. issuance of government debt increases supply of paper wealth, meaning it is price deflationary
      2. when Fed wants to tighten money, sells govt debt into market, reducing prices
      3. large issues of government debt could not be marketed without a large increase in the supply of money because they’d drive interest rates upward– precisely what govts don’t want; therefore, they’re almost always accompanied by money printing
      4. government surplus is price inflationary; if it is used to pay down debt, it reduces the supply of outstanding values and raises prices
      5. when faith in government debt fails, price inflationary effects will be amplified
   4. Interest
      1. lenders accepted negative real rates only because they didn’t realize what they were doing
      2. “the announced intention of Keynesian economics was to effect [the holder of money’s] extinction”
      3. the rich tend to be net debtors in an inflation
      4. inflation is paid for by the lower classes and the creditors
      5. an attack on interest results in a flight from debt to equity, from money wealth to equity/real values
   5. The Economics of Disaster
      1. occurs when the holders of money wealth revolt
      2. duller the holders of money are, the longer price inflation can be kept at bay by govt, though the greater will be the eventual breaking of the price dam
      3. desertion of money resembles a panic, sudden and unexpected
      4. people’s ability to discern real and spurious values suddenly becomes acute
      5. people flee paper assets and goods and services for known value like food and land
      6. no government causes collapse, “when at least it sees the choice, it has no choice”
4. THE LAST ACTS: The American Prognosis
   1. Act Two, Scene One: President Nixon Begins

1. Treasury reduces expenditures and attempts to balance budget, July 1969- June 1970
2. Fed drops inflation rate in May of 1969 from 8%, 1yr later approx 3.8%
3. Stock market prices fall by 14% within two months of May 1969, another year later down 31 percent; interest rates rise into spring 1970 credit crunch
4. Approaching two year mark to next election, government begins pumping money again
   1. August 1970, budget deficit plunges to new peacetime lows
   2. money inflation of 6.5%
   3. interest rates plunge, stock market soars

• Act Two, Scene Two: Price Controls and Other Follies
  1. worst inflation since the end of WW2 and before 1967
  2. economic boom into Nixon’s re-election in 1972
  3. boom quickly wears off
     1. stock market falls
     2. interest rates rise to surpass peaks of 1970
     3. price inflation worse than ever, around 4%
     4. cheap dollar floods world markets
  4. Nixon announces Phase I of price controls, August 15, 1971
     1. detaches dollar from gold
     2. 10% import surcharge
     3. excise taxes on automobiles removed
     4. wage and price controls
• Self-Defense
  1. No sure safety, safety will change fluidly through an inflation
  2. Best hope is to lose as little as possible
  3. fixed money wealth/debt is the absolute worst investment in an inflation
  4. foreign money can be safe refuge only if the foreign government inflates less wildly than the domestic government
  5. the author shits on gold, but with no reason other than an arbitrary one because he is a Keynesian– gold may be overvalued during and even before and inflation but so long as people continue to think it is money, it can hold some value
  6. real estate provides a shelter for REAL value (usability/livability/productivity of land) but could be harmed in terms of investment value in an inflation
     1. real estate held in high esteem by inflationary prosperity (luxury dwellings, overblown commercial developments) may lose more real value than other investments as they started out overpriced in the inflation
  7. farmland is a special category of real estate
     1. produces what people must have, inflation or no
     2. farmers thrive and farmland excels in dying throes of every inflation
     3. less prosperous in early stages of an inflation
  8. hoarding of useful goods is a possibility, but has large storage, distribution and opportunity costs prior to an inflation
• Self-Defense Continued: The Stock Market
  1. stock shares are pieces of paper, but they are claims on real assets and real wealth
  2. stock market is incredibly liquid
  3. common stocks provide returns in first madness of an inflation, then fall into disrepute in middle stages of an inflation
  4. a booming stock market is not necessarily part of an economically healthy nation
     1. the opposite is truer: booming stock market is a signal of inflation
     2. falling stock market is a sign of returning to reality
  5. the stock market as a whole rises due to inflation and nothing more
  6. the stock market declines on a weakening of inflation
  7. general business conditions and price inflation operate on a lag; when money is first printed it has nowhere to “work” and goes into investment markets
     1. markets rise while business is still bad
     2. later, as money moves out of the market and into businesses, the market falls
     3. when business is worst, stock markets rise; when business is best, stock markets fall
     4. rising stock market signals nothing but fresh money inflation– it is the earliest and most sensitive signal
  8. stocks bought at any price above their real-value bottom are not a hedge against loss but a guaranteed loss
  9. conversely, stocks bought at real-value bottoms have a good chance of holding their values through an inflation
  10. American stock market’s deflated bottom in 1970 was 43% higher than deflated bottom in 1962, just as money supply in 1970 was about 43% higher than in 1962
  11. as other prices outpace stock market rises (or even stock market decreases), fear can take over that the businesses will not be worth anything; but faith will pay off with real value nearly the same at the end of an inflation
  12. stock markets can enjoy inflated gains if there are laws in place forbidding the inflationary money to bid up prices elsewhere or in foreign markets
  13. the stock market represents real value, but not every stock does
  14. inflationary times tend to reward the most valueless stocks; use a “post-inflationary eye” to have a look around at what might actually survive the inflation in terms of real value
  15. “Attempting to make profits from the stock market, or even to make sense of it, without completely understanding the universal determinant of inflation was like being at sea among uncharted rocks and shoals without so much as a tide table.”
• A World of Nations
  1. Virtually all of the entire growth of Federal debt after 1967, $55B, was involuntarily financed and acquired by foreigners
  2. by 1973, foreigners’ holdings of liquid dollar debt had risen to $90B from $31B in 1966
  3. America exported inflation; other nations imported it– this is the balance of payments deficit
  4. natural consequence of an inflation, surplus money must flow outward looking for “cheap” items to buy abroad
  5. 100% beneficial to the deficit country
     1. import real value from abroad while exporting worthless paper
     2. price inflation domestically is partially contained
  6. central bankers began a game of printing up new local currency to exchange with the inflowing dollars, sending the dollars back to the US where they would be recycled and re-exported
  7. exchange rates operate on a time lag
     1. first, the internal price level is too low, so the new currency flows out to the rest of the world
     2. then, the internal price level rises, drawing in currency from the rest of the world
  8. the best defense against another country’s inflation, is inflation

Gary North: If You Wouldn’t Buy A Company With Multiple Bankruptcies In Its Past, Don’t Buy Government Bonds

Having a historical perspective can open your eyes to risks and trends. According to Gary North on government bonds:

Today, governments issue bonds. They have been doing this in the West for three centuries. They have been defaulting on these bonds ever since, just as they have been doing on all other forms of debt since at least the fourth century B.C. The rate of defaults has escalated over the last two centuries.

Have you ever stopped to think about that? That the formal issuance of government bonds in the “West” is a practice which is only 300 years old? And that over that entire period, the rate of default has been rising?

In the grand scheme of things, government bonds are equivalent to a recent IPO with a pro-forma operating history of consistent unprofitability.

Why do governments issue bonds?

The ability of the government to extract wealth from rich people through taxation has always been limited. Rich people know how to hide their money. They know how to get it out of the country, and they know how to get it into markets that are less easily taxed.

So, politicians learned half a millennium ago to get their hands on rich people’s money before rich people started hiding their money. They did this by promising to pay a rate of interest on the money. Government bonds are ways of extracting money in advance, especially from rich people, which politicians would have preferred to tax directly, but which they did not tax directly because they knew that rich people would hide the money.

The whole point of the bond market is to enable the government to expand its operations beyond what would be possible by collecting taxes today. Politicians are able to get more money to expand operations today, because they promise to repay lenders a specific rate of interest. But, of course, this does not promise that the government will not repay with debased money.

The specific risk of government defaulting on debt while you own it changes over time.

The risk of government defaulting on debt is constant throughout time and is always guaranteed.

It’s worth reading the whole thing.