The Federal Reserve, Roaring Twenties, Stock Market Crash, Banking Crises, Great Depression and John Maynard Keynes

Posted by PITHOCRATES - September 25th, 2012

History 101

The Federal Reserve increased the Money Supply to Lower Interest Rates during the Roaring Twenties

Benjamin Franklin said, “Industry, perseverance, & frugality, make fortune yield.”  He said that because he believed that.  And he proved the validity of his maxim with a personal example.  His life.  He worked hard.  He never gave up.  And he was what some would say cheap.  He saved his money and spent it sparingly.  Because of these personally held beliefs Franklin was a successful businessman.  So successful that he became wealthy enough to retire and start a second life.  Renowned scientist.  Who gave us things like the Franklin stove and the lightning rod.  Then he entered his third life.  Statesman.  And America’s greatest diplomat.  He was the only Founder who signed the Declaration of Independence, Treaty of Amity and Commerce with France (bringing the French in on the American side during the Revolutionary War), Treaty of Paris (ending the Revolutionary War very favorably to the U.S.) and the U.S. Constitution.  Making the United States not only a possibility but a reality.  Three extraordinary lives lived by one extraordinary man.

Franklin was such a great success because of industry, perseverance and frugality.  A philosophy the Founding Fathers all shared.  A philosophy that had guided the United States for about 150 years until the Great Depression.  When FDR changed America.  By building on the work of Woodrow Wilson.  Men who expanded the role of the federal government.  Prior to this change America was well on its way to becoming the world’s number one economy.   By following Franklin-like policies.  Such as the virtue of thrift.  Favoring long-term savings over short-term consumption.  Free trade.  Balanced budgets.  Laissez-faire capitalism.  And the gold standard.  Which provided sound money.  And an international system of trade.  Until the Federal Reserve came along.

The Federal Reserve (the Fed) is America’s central bank.  In response to some financial crises Congress passed the Federal Reserve Act (1913) to make financial crises a thing of the past.  The Fed would end bank panics, bank runs and bank failures.  By being the lender of last resort.  While also tweaking monetary policy to maintain full employment and stable prices.  By increasing and decreasing the money supply.  Which, in turn, lowers and raises interest rates.  But most of the time the Fed increased the money supply to lower interest rates to encourage people and businesses to borrow money.  To buy things.  And to expand businesses and hire people.  Maintaining that full employment.  Which they did during the Roaring Twenties.  For awhile.

The Roaring Twenties would have gone on if Herbert Hoover had continued the Harding/Mellon/Coolidge Policies

The Great Depression started with the Stock Market Crash of 1929.  And to this date people still argue over the causes of the Great Depression.  Some blame capitalism.  These people are, of course, wrong.  Others blamed the expansionary policies of the Fed.  They are partially correct.  For artificially low interest rates during the Twenties would eventually have to be corrected with a recession.  But the recession did not have to turn into a depression.  The Great Depression and the banking crises are all the fault of the government.  Bad monetary and fiscal policies followed by bad governmental actions threw an economy in recession into depression.

A lot of people talk about stock market speculation in the Twenties running up stock prices.  Normally something that happens with cheap credit as people borrow and invest in speculative ventures.  Like the dot-com companies in the Nineties.  Where people poured money into these companies that never produced a product or a dime of revenue.  And when that investment capital ran out these companies went belly up causing the severe recession in the early 2000s.  That’s speculation on a grand scale.  This is not what happened during the Twenties.  When the world was changing.  And electrifying.  The United States was modernizing.  Electric utilities, electric motors, electric appliances, telephones, airplanes, radio, movies, etc.  So, yes, there were inflationary monetary policies in place.  But their effects were mitigated by this real economic activity.  And something else.

President Warren Harding nominated Andrew Mellon to be his treasury secretary.  Probably the second smartest person to ever hold that post.  The first being our first.  Alexander Hamilton.  Harding and Mellon were laissez-faire capitalists.  They cut tax rates and regulations.  Their administration was a government-hands-off administration.  And the economy responded with some of the greatest economic growth ever.  This is why they called the 1920s the Roaring Twenties.  Yes, there were inflationary monetary policies.  But the economic growth was so great that when you subtracted the inflationary damage from it there was still great economic growth.  The Roaring Twenties could have gone on indefinitely if Herbert Hoover had continued the Harding and Mellon policies (continued by Calvin Coolidge after Harding’s death).  There was even a rural electrification program under FDR’s New Deal.  But Herbert Hoover was a progressive.  Having far more in common with the Democrat Woodrow Wilson than Harding or Coolidge.  Even though Harding, Coolidge and Hoover were all Republicans.

Activist Intervention into Market Forces turned a Recession into the Great Depression

One of the things that happened in the Twenties was a huge jump in farming mechanization.  The tractor allowed fewer people to farm more land.  Producing a boom in agriculture.  Good for the people.  Because it brought the price of food down.  But bad for the farmers.  Especially those heavily in debt from mechanizing their farms.  And it was the farmers that Hoover wanted to help.  With an especially bad policy of introducing parity between farm goods and industrial goods.  And introduced policies to raise the cost of farm goods.  Which didn’t help.  Many farmers were unable to service their loans with the fall in prices.  When farmers began to default en masse banks in farming communities failed.  And the contagion spread to the city banks.  Setting the stage for a nation-wide banking crisis.  And the Great Depression.

One of the leading economists of the time was John Maynard Keynes.  He even came to the White House during the Great Depression to advise FDR.  Keynes rejected the Franklin/Harding/Mellon/Coolidge policies.  And the policies favored by the Austrian school of economics (the only people, by the way, who actually predicted the Great Depression).  Which were similar to the Franklin/Harding/Mellon/Coolidge policies.  The Austrians also said to let prices and wages fall.  To undo all of that inflationary damage.  Which would help cause a return to full employment.  Keynes disagreed.  For he didn’t believe in the virtue of thrift.  He wanted to abandon the gold standard completely and replace it with fiat money.  That they could expand more freely.  And he believed in demand-side solutions.  Meaning to end the Great Depression you needed higher wages not lower wages so workers had more money to spend.  And to have higher wages you needed higher prices.  So the employers could pay their workers these higher wages.  And he also encouraged continued deficit spending.  No matter the long-term costs.

Well, the Keynesians got their way.  And it was they who gave us the Great Depression.  For they influenced government policy.  The stock market crashed in part due to the Smoot Hawley Tariff then in committee.  But investors saw the tariffs coming and knew what that would mean.  An end to the economic boom.  So they sold their stocks before it became law.  Causing the Stock Market Crash of 1929.  Then those tariffs hit (an increase of some 50%).  Then they doubled income tax rates.  And Hoover even demanded that business leaders NOT cut wages.  All of this activist intervention into market forces just sucked the wind out of the economy.  Turning a recession into the Great Depression.

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Sixteenth Amendment, Revenue Act of 1913, Progressive Tax, Marginal Tax Rate, Tax Shelter, Tax Cuts and Decade of Greed

Posted by PITHOCRATES - July 10th, 2012

History 101

Americans find Taxes Repugnant and have a Long History of Making this Repugnance Known

American independence began with a tax revolt.  The ratification of the U.S. Constitution happened only with safeguards against the new federal government from growing too powerful.  And great efforts went to limiting the amount of money it could spend.  For a long time all federal tax revenue came from import tariffs.  Then from sales of federal lands as the population moved west.  It took a civil war for us to impose an income tax.  Our first income tax was 3% on incomes over $800 (or about $20,000 today).  The first income tax was a flat tax.  They passed this income tax to pay for the war.  They repealed the income tax following the war.  Americans wouldn’t see another federal income tax until 1913 when we ratified the Sixteenth Amendment.  And President Woodrow Wilson signed into law the Revenue Act of 1913.

Woodrow Wilson was a progressive.  The precursor to today’s liberals.  Who thought beyond the limited government of our Founding Fathers.  They wanted to expand government.  To make it a part of our everyday life.  Where the brilliant progressive politicians would make better decisions for us than we ever could.  And their changing of society included the funding of the federal government.  For their income tax was a progressive tax.  Everyone paid a flat tax of 1% on income of $3,000 or more.  About $66,100 today.  Then the progressive taxes came into play.   Adding another percentage to the income tax rate for increasing amounts of income.  The thresholds for these increases were as follows: $20,000 (roughly $440,400 today), $50,000 ($1,101,000 today), $75,000 ($1,651,600), $100,000 ($2,202,100), $250,000 ($5,505,300) and $500,000 ($11,010,700).  The top marginal tax rate on the super rich (earning $11,010,700) was 7%.

Our second income tax was quite controversial.  A lot of people hated it.  For Americans find taxes repugnant.  And have a long history of making this repugnance well known.  But thanks to the American Civil War a generation of men was lost.  And a generation of boys grew up without fathers.  Tended on by doting mothers.  Smothering them with love and affection.  And these boys grew up without knowing the manly hardships of life.  And they entered politics.  Becoming those early progressives.  Who wanted to change the government into a great doting mother.  And now they could.  For they had their income tax.

Few paid the Confiscatory Tax Rates of the Seventies by Hiding their Income in Tax Shelters

The rich paid our first federal income taxes after the Revenue Act of 1913.  And these were very small percentages we had them pay.  Back then the top marginal tax rate was lower than our lowest income tax rate today.  Think about that.  The richest of the rich paid only 7% of their income ($11,010,700 or more today) in federal income taxes.  While today single people earning the lowest bracket of taxable income (from $0 to $8,700) pay 10% of their income in federal income taxes.  Clearly the growth of government exploded thanks to the Sixteenth Amendment.  Much as our Founding Fathers feared it would if they had too much money to spend.

Of course, this is ancient history.  Few know about this today.  For few could even tell you why we fought for our independence.  Or even who we fought for our independence from.  (We fought for our independence from Great Britain because of their policies to tax us despite our having no representation in Parliament.  That’s where the phrase taxation without representation came from).  Today high taxes are sadly just an accepted part of life.  In fact, we have referred to our paychecks as take-home pay.  Our net pay.  Because gross pay is a myth.  No one sees their gross pay.  About a third or more of that disappears in withholding taxes.  So gross pay is a meaningless expression for us today.  (It wasn’t before the Sixteenth Amendment or before the progressives came to power).  Something that we sadly accept.  And we now fund our lives on the take-home pay the government allows us to keep.  All the while accepting these high tax rates.

Government spending took off in the Sixties and the Seventies.  As did our taxes.  If we had once thought that a 7% tax on incomes of $11,010,700 or more was an outrage, we didn’t see anything yet.  In 1978 the top marginal tax rate was 70% on incomes of $351,712 or more.  And there were 25 marginal tax rates.  As shown here adjusted for inflation (sources: Tax Rates, Tax Receipts, and Celebrity Incomes).

 In this example we calculated the average of some top celebrities.  And the top celebrities on average earned about $30,000,000 in 2010.  Using the 1978 tax brackets they would have owed $20,936,506 in federal income taxes.  Or approximately 69.8% of their total income.  Which is pretty much equal to the top marginal tax rate.  Of course, few paid these confiscatory tax rates.  They hid their income as best as they could in the Seventies.  In tax shelters.  And you know they did because despite these confiscatory tax rates the federal government still ran budget deficits.  Having to print money to pay for their explosion in government spending. 

The Low Tax Rates of the Eighties created so much Economic Activity the Opposition called it the Decade of Greed

The heyday of Keynesian economics was in the Seventies.  After Richard Nixon decoupled the dollar from gold the Keynesians were free to print money to stimulate the economy.  Which was their answer to ending a recession.  Stimulus spending.  Have the government print money to create economic activity that wasn’t happening in the private sector.  Their policy tool to end a recession was inflation.  By pouring money into the economy people would borrow it and buy cars and houses and furniture.  And everything else under the sun.  Creating a surge of economic activity.  And creating jobs in the process as businesses must hire new workers to meet that government stimulated demand.  With the dollar decoupled from the ‘cross of gold’ the Keynesians were finally able to prove their mettle.  And solve all the country’s economic problems.  It was the dawn of a brave new world.

And that world sucked.  For the implementation of Keynesian economic policy proved those policies did not work.  Instead of replacing high unemployment with inflation they just added high inflation to the high unemployment.  Something that was impossible to happen in Keynesian textbooks.  But it happened.  Stagnant economic activity.  And inflation.  What we called stagflation.  We added the unemployment rate to the inflation rate to come up with a new economic indicator.  The misery index.  The economy was so miserable during Jimmy Carter’s 4 years in office that he lost in a landslide to Ronald Reagan.  Who was a proponent not of Keynesian economics but of the Austrian school.  Or supply side economics.   And the Austrians believed in low tax rates.  For low tax rates would stimulate economic activity.  And the greater amount of economic activity would generate a greater amount of tax revenue even at lower tax rates.  Let’s look at that same celebrity paying taxes a decade later under Ronald Reagan.

 Much simpler.  And more in keeping with the Founding Fathers.  Instead of paying 70% of their earnings in federal income taxes they will only pay 28% (again, equal to the top marginal tax rate.  Which is pretty much the only tax rate the rich pay).  That’s still a lot of money to give to the federal government.  But it’s so much smaller that in many cases it was cheaper and easier to pay Uncle Sam than trying to hide that income.  So economic activity took off in the Eighties.  It was so great that the opposition called it the Decade of Greed.  Out of sour grapes because their policies could never produce anything like it.  But what about tax revenue?  Those on the Left say this economic activity came at a price.  Exploding deficits.  Well, the deficits did grow.  But it wasn’t because of the cuts in the tax rates.

Higher Tax Rates do not Necessarily Increase Tax Revenue 

In 1978 total tax revenue was $1,113.6 billion.  In 1988 total tax revenue was $1,421.1 billion.  So Reagan’s cuts in the tax rates produced $307.5 billion more in tax revenue.  An increase of about 27.6%.  Dropping the top marginal tax rate from 70% to 28% actually increased tax revenue.  So the cut in tax rates did not cause the deficits.  It wasn’t a revenue problem.  Revenue went up.  Spending just increased more.  And it was this excessive government spending that caused the deficits.  Not the tax cuts. 

The lesson here is that higher tax rates do not necessarily increase tax revenue.  Because changes in tax rates changes behavior.  Higher tax rates discourage people from investing in businesses.  They discourage businesses from expanding.  Or hiring new workers.  Higher tax rates may decrease the opportunity costs for hiding income.  The cost and inconvenience of hiding income in tax shelters and offshore accounts may become less that the cost of paying higher taxes.  Like it was during the Seventies.  Where despite confiscatory tax rates the government could not generate enough tax revenue to meet their spending obligations.

Income tax rates grew from a very small percentage on only the largest of incomes to high tax rates on very modest incomes.  And yet our deficits have never been larger.  Proving that our tax rates are either too high and dampen economic activity (as well as encouraging people to avoid paying their taxes).  Or that government spending has just grown too large.  More than likely it’s a combination of the two.  A fact that would shock and dismay the Founding Fathers were they alive to see what we did with the republic they gave us.

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FT122: “Japan’s Lost Decade helped the Clinton economy by reducing imports while the global slowdown does nothing for the Obama economy.” -Old Pithy

Posted by PITHOCRATES - June 15th, 2012

Fundamental Truth

The Japanese Government made Money Cheap and Plentiful to Borrow creating a Keynesian Dream but an Austrian Nightmare

Once upon a time Americans feared the Japanese.  Their awesome might.  And their relentless advances.  One by one the Japanese added new properties to their international portfolio.  They appeared unstoppable.  Throughout the Eighties everything was made in Japan.  Government partnered with business and formed Japan Inc.  And they dominated the world economy in the Eighties.  A U.S. Democrat nominee for president held up Japan Inc. as the model to follow.  For they had clearly shown how government can make the free market better.  Or so this candidate said.

But it didn’t last.  Why?  Because in the end the Japanese just interfered too much with market forces.  Businesses invested in each other.  Insulating themselves from the capital markets.  Allowing them to make bad investments to sustain bad business planning.  All facilitated with cheap credit.  Government made money cheap and plentiful to borrow.  And they borrowed.  A Keynesian dream.  But an Austrian nightmare.  Because they used that money to make even more bad investments (or ‘malinvestments’ in the vernacular of the Austrian school of economics).  Creating a real estate bubble.  And a stock market bubble.  Bubbles are never good, though.  Because they can’t last.  They must pop.  And when they do it isn’t pretty.

The U.S. just went through real estate bubble that peaked in 2006.  Money was so cheap to borrow that people were buying $300,000+ McMansions.  Anyone could walk in and get a no-documentation loan with nothing down.  People were buying houses and flipping them.  And people who couldn’t qualify for a mortgage could get a subprime mortgage.  Further pushing house prices higher.  Not because of real demand.  But because of this artificial tweaking of the free market by the government.  Making that money so cheap to borrow.  And when all that cheap credit caused inflation elsewhere in the economy the Fed finally tapped the brakes.  And increased interest rates.  Raising monthly payments on all those subprime mortgages.  Leading to a wave of defaults.  The subprime mortgage crisis.  And the Great Recession.

Japan’s Deflationary Spiral gave American Domestic Manufacturers a Huge Advantage

This is basically what happened in Japan during the Nineties.  The government had juiced the economy so much that they grew great big bubbles.  Ran up asset prices to incredible heights.  But then the bubble burst.  And those prices all fell.  They fell for so long and so far that Japan suffered a deflationary spiral.  Throughout the Nineties (and counting).  The Nineties were a painful economic time.  After a decade or so of inflation the market corrected that with a decade of recession.  And deflation.  A decade of economic activity the Japanese just lost.  The Lost Decade.  But it wasn’t all bad.

At least, in America.  There was still some Reaganomics in the American economy.  Producing real economic growth.  But there was also a bubble.  In the stock market.  The dot-com bubble.  The Internet was brand new and everybody was hoping to be in on the next big thing.  The next Microsoft.  Or the next Apple.  Also, unable (or unwilling) to learn from the mistakes of the Japanese real estate bubble the Clinton administration was making it very uncomfortable for banks to NOT approve mortgage applications for people who were unqualified.  Putting more people into houses who couldn’t afford them.

So while the Clinton administration was trying to change America (during the first 2 years they tried to nationalize health care against the will of the people) the economy did well.  For awhile.  Irrational exuberance was pushing the stock market to new heights as investors poured money into companies that didn’t have a dime of revenue yet.  And never would.  Clinton had to renege on his promise on the middle class tax cut because things were worse than he thought when he promised to make that middle class tax cut.  (Isn’t it always the way that when it comes to tax cuts some politicians can’t keep their promise because they were too stupid to know how bad things really were?)  Added into this mix was Japan’s Lost Decade.  Their deflationary spiral increased the value of the Yen.  And made their exports more expensive.  Giving the American domestic manufacturers a huge advantage.  The economy boomed during the Nineties.  For a mix of reasons.  They even projected a budget surplus thanks to the economic woe of the Japanese.  But then the dot-com bubble burst.  Giving Bill Clinton’s successor a nasty recession.

When a Recession ails you the Best Medicine has been and always will be Reaganomics

The Left always talks about fair trade.  And about the unfair practice of foreign manufacturers giving Americans inexpensive goods that they want to buy.  So their answer to make these unfair trade practices fair is to slap an import tariff on those inexpensive foreign goods.  To protect the domestic manufacturers.  For they believe it’s that simple.  And plug their ears and sing “la la la” when you discuss David Ricardo’s Comparative Advantage.  Ricardo says countries should specialize in the things they’re good at.  And import the things others are better at.  When everyone does this we use our resources most efficiently.  And the overall wealth in the international economy increases.  Making the world a better place.  And increases our standard of living.  But the rent-seekers disagree with this.  They want high tariffs.  And obstacles for foreign imports.  To protect the domestic businesses that can’t sell as inexpensively or at such high levels of quality.

Some would point to Japan’s Lost Decade as proof.  Where their deflationary spiral removed a lot of foreign competition to American manufacturing.  Allowing them to sell at higher prices and lower quality.  All the while protecting American jobs.  And, yes, Japan’s woes did help the American domestic manufacturers during the Nineties.  But it wasn’t because they could raise prices and lower quality in the face of low foreign competition.  It was because there was still enough Reaganomics in the country to produce some vibrant economic activity.  That encouraged entrepreneurs to take chances and bring new things to market.  Which is a huge difference from the current economic picture.

The Eurozone sovereign debt crisis has plunged Europe into a recessionary freefall.  Much like the Japanese suffered in the Nineties.  Yet the American domestic manufacturers aren’t benefiting from this huge decline in foreign competition.  Why?  Because the Obama administration has excised any remaining vestiges of Reaganomics out of the economy.  Everything the rent-seekers could ever hope for they have.  Only without tariffs.  And yet the Obama economy still lingers in recession.  Because irrational exuberance and barriers to free trade don’t create real economic growth.  And an administration hostile to capitalism doesn’t inspire entrepreneurs to take chances.  No.  What encourages them to take chances are low taxes.  And less costly and less punishing regulations.  For programs like Obamacare just scare businesses from hiring any new employees.  Because they have no idea the ultimate costs of those new employees. 

Now contrast that to the low taxation and relaxed regulatory climate of Reaganomics.  That produced solid economic growth.  And this growth was BEFORE Japan’s Lost Decade.  Which just goes to show you how solid that growth was.  And proved David Ricardo’s Comparative Advantage.  For both Japan and the United States did well during the Eighties.  Unlike Clinton’s economy in the Nineties that only did well because Japan did not.  But the good times only lasted until the irrational exuberance of the dot-com bubble brought on an American recession.  Which George W. Bush pulled us out of with a little Reaganomics.  Tax cuts.  Proving yet again that higher taxes and higher regulations don’t create economic activity. Tax cuts do.  And fewer regulations.  In other words, when a recession ails you the best medicine has been and always will be Reaganomics.

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War of the Spanish Succession, War of the Austrian Succession, Diplomatic Revolution , Seven Years’ War, Royal Proclamation and Quebec Act

Posted by PITHOCRATES - February 16th, 2012

Politics 101

The French lost most of their colonial possessions to Great Britain in the Seven Years’ War

The 18th century started off with a bang.  And it banged all the way through the century.  Starting with the War of the Spanish Succession from 1701-1714.  At issue was the Spanish throne.  The last Spanish Habsburg, Charles II of Spain, died in 1700.  Leaving the throne without an heir.  And France was very interested in occupying it.  But the British weren’t too keen on Catholic France controlling so much of Europe.  The rest of Europe that wasn’t Spanish or French wasn’t all that enthusiastic about the idea, either.  For France and Spain, both Catholic, at this time were the two European superpowers.  And a union between the French and the Spanish would alter the ‘balance of power’.  A term entering the political discourse at this time.  So there was war.  There’s a lot more details to this war as one would expect in a war that lasted over a decade.  But in the end there was no French and Spanish union.  The Spanish lost territory in Italy and the Netherlands to Austria.  And Spanish Gibraltar became British.  As did parts of French North America.  Also, when Queen Anne died in Great Britain with no male heir, the Brits plucked one from German Hanover.  Over on the continent.  George I.  For his mum was the daughter of James I.  Which gave her Stuart blood.  And she was a Protestant.  Making George a Protestant.  Very important and necessary for a British ruler.  George I ascended the throne of Great Britain in 1714.  Creating a personal union between the British and German states (two separate kingdoms ruled by the same king).

But the peace didn’t last.  Because another Habsburg died.  The last male Austrian Hapsburg.  Charles VI.  Before he died, fearing he may have no sons to inherit his throne, he issued an edict.  The Pragmatic Sanction of 1713.  Which said in the absence of a Habsburg son a Habsburg daughter, his daughter, could inherit the throne.  Most of the German states accepted the edict.  Problem solved.  Until Charles died.  And his daughter, Maria Theresa, ascended the throne.  Then the European states went to war.  The War of the Austrian Succession from 1740-1748.  Because some said that Maria Theresa was ineligible to inherit the Hapsburg throne.  But what they really wanted was a chance to alter the balance of power now that the Habsburg line was extinct.  For the Austrian Habsburgs were a major power.  And whoever succeeded to that throne would control a large part of Europe.  Something Prussia (a rising German state) was interested in.  As were the French.  And the Spanish (primarily to win back what it lost in the War of Spanish Succession).   Who joined together.  With the threat of a French/Spanish super state again the British jumped in to prevent that.  And joined in on the Habsburg side.  Who at the time was stronger than the rising Prussian state.  And a better balance to French power and ambition.  Especially with Hanover being so close to the French border.  After 8 years of war not a whole lot changed in the balance of power.  Except that Prussia appeared to be now a more formidable threat than Austria.  Which the Diplomatic Revolution of 1756 addressed.  By a changing of sides.  The France-Prussia alliance versus the Great Britain-Austria alliance became the France-Austria alliance versus the Great Britain-Prussia alliance.  Which made for a long and lasting peace.

Until hostilities flared up again later that year.  In the Seven Years’ War from 1756 – 1763.  This was a big one.  A world war.  Over the balance of power.  In Europe.  And other parts of the world.  Especially where colonial interests clashed.  Where they were generating lucrative trade.  And the British were bumping into the French almost everywhere they went.  In North America.  As the British expanded their colonies west from the Atlantic into the river valleys the French claimed.  In the Caribbean.  In coastal Africa.  In the Philippines.  In India.  In the end Britain’s Royal Navy and their alliance with Prussia led them to victory.  The Prussian armies of Frederick the Great held their own in Europe and freed the British Army for service elsewhere.  The Royal Navy ruled the seas.  And moved the British Army at will.  Where they prosecuted and won the colonial battles.  At the close of hostilities the French lost most of their colonial possessions to Great Britain.  And Spain lost Florida.  The British extended their control in North America to all lands east of the Mississippi River.  Spain ended up with the Louisiana Territory west of the Mississippi River.  But the mighty Spanish empire was now in decline.  France wasn’t looking that much better.  France and Spain also lost most of their naval power.  Which elevated Great Britain to true empire status.

To Help bring the Catholic in the Province of Quebec under British Rule the British passed the Quebec Act

The British did well in the Seven Years’ War.  They won large parts of the world.  And paid a pretty price to do it.  Almost bankrupted them.  This despite the previous efforts of William Pitt the Elder.  The British Secretary of State who built a great and prosperous colonial empire.  The British Empire.  Before the war.  And added greatly to it during the war.  But conquering is one thing.  Governing is another.  And, as it turns out, governing is as expensive as conquering.

British North America required a little political finesse.  For the Protestant British now governed Catholic French Quebec.  And they had to step lightly with the Indian Nations.  Who were allied with the French.  Agreeing to halt further westward expansion.  Via the Royal Proclamation of 1763.  To avoid hostilities on the frontier. 

To help bring the Catholic in the Province of Quebec under British rule the British passed the Quebec Act of 1774.  This act extended Quebec territory to include most of the Midwest states bordering the Great lakes.   The oath of allegiance to the British Crown no longer included a reference to Protestantism.  It protected Catholicism in the Province of Quebec.  And it allowed the use of French civil law in some instances over English common law. 

Great Britain would fight a Civil War in British North America before the Century was Out

None of this went over well with the British North Americans.  After defeating the French all eyes looked west.  And they did not like this Royal Proclamation interfering with their business.  And these fiercely loyal and proud Britons were also devoutly Protestant.  Many fought in the war to get the Catholic French out of their country.  And this protection of Catholicism in their Protestant backyard was nothing short of an insult.  But worse of all were the taxes.  To pay for a century of war against the French that only some of which was fought in North America. 

Great Britain’s money woes would continue.  For they would be fighting another war before the century was out.  This one a civil war in British North America.  Another costly 8 years of war.  That would not end as well for them as the previous war.  Worse, it would cause a Revolution in France.  Brought about in part due to the near bankruptcy of France from all of her wars.  And alliances.  Bringing about yet another war with the French for the British before the century was out.

The century started out with a war to contain French expansion and Catholicism.  And the century would end with great successes in that endeavor.  With the decline of the French and Spanish empires the world was safe from Catholicism.  But France and Great Britain would fight on.  Into the next century.

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A Keynesian has an Austrian Moment

Posted by PITHOCRATES - January 15th, 2012

Week in Review

There are a few schools of economics.  The Keynesian school gain prominence following World War I.  Governments like it because it justifies big government.  And government interventions into the free market to ‘fix’ market failures.  Using the power of central banking and monetary policy.  And fiscal tax and spend polices.  With such interventions they believe they can eliminate or at least lessen the impact of recessions.  Because the architects of these policies believe they are smarter than market forces.

Another prominent economic school is the Austrian school.  Which favors limited government.  Low taxes.  A sound currency.  And where the government doesn’t use the central bank and monetary policy to manipulate currency and interest rates to interfere with market forces.  For they believe, as history shows, such interventions into market forces results in worse and prolonged recessions.

So that’s just a very brief overview of these two schools.  John Maynard Keynes was a Brit.  And very influential in Europe.  Where his policies are still embraced in these social democracies.  But even these devout Keynesians can have a moment of doubt and waiver in their beliefs.  Even chief correspondents in the most esteemed newspapers (see ‘Strangely Austrian’ posted 1/10/2012 on the Ney York Sun).

In any event, Mr. Rachman notes that Dr. Paul has recalled dining with Hayek and being inspired by Ludwig von Mises, “another economist of the Austrian school.” He writes that this explains Dr. Paul’s “otherwise baffling remark” after the Iowa caucus, in which the Texan said: “I’m waiting for the day when we can say we’re all Austrians now.” He calls Dr. Paul the “purest advocate of a powerful conviction on the American right that the US is afflicted by an over-mighty state.” He notes that “Paulite suspicion of central banks that threaten to debase the currency is powerfully echoed in Germany — where the Hayekian right is horrified by the operation of the European Central Bank . . .”

Mr. Rachman doesn’t predict which trend will set the tone for the new age. But he offers this confession: “Under normal conditions I would probably sign up with the social democratic tendency. The Tea Party is not my cup of tea.* [* His erstwhile king, George III, wasn’t all that crazy about it either.]  But I spent the weekend reading newspaper accounts of the ever more incredible figures that may have to be poured into the bail-outs for banks and countries in Europe. Then I turned the page to read of demands for more protectionism and regulation in the EU. For light relief, I then went to see ‘The Iron Lady’ — the new film about Margaret Thatcher. The whole thing has left me feeling strangely Austrian.”

Strangely, indeed. The importance of the column lies in the fact that Mr. Rachman is not just any scrivener. He is the chief foreign affairs commentator for the leading Keynesian newspaper in England. Here he is kvelling over Ron Paul and the Austrians.

The “we’re all Austrians now” line is a play on what Richard Nixon reportedly said when he decoupled the U.S. dollar from gold in 1971, unleashing double-digit interest rates and inflation.  He said, “I am now a Keynesian in economics.”  Which was a play on what Milton Friedman wrote in 1965, “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.”  Dr. Paul is waiting for the day when those in government abandon the failed policies of Keynesian economics and adopt the policies of the Austrian school.

Margaret Thatcher was British prime minister during the Eighties when Ronald Reagan was the U.S. president.  Who were both adherents to the Austrian school of economics.  And who both saw incredible economic growth when they were in office.  By following those Austrian policies.

After listening to Dr. Paul in the U.S. Republican primary race, reading some articles on the financial problems of Europe and the cost of their bailouts, the European Union’s demand for protectionism and regulation to protect their markets and then seeing the film about the Great Margaret Thatcher Mr. Rachman was given pause for thought.  Which often happens when you actually learn Austrian economics.  Because it makes sense.  And there is a lot of economic history proving the success of these policies.  But will it last?  Probably not.  Because Keynesians just like Keynesian economics so much.  Like a religion.  They accept it on faith.  And want to believe.

www.PITHOCRATES.com

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