Byzantine Empire, Bosporus, Silk Road, Dutch East India Company, English East India Company, Tea Act and Opium Wars

Posted by PITHOCRATES - March 11th, 2014

History 101

(Originally published May 15th, 2012)

To encourage Risk Takers to Travel Halfway around the World Mercantile States granted Monopoly Charters

The modern world began because Europeans had a penchant for silk and spices.  Something they enjoyed during Roman times.  When the Romans ruled the world.  And the Mediterranean Sea was nothing more than a Roman lake.  But when the empire stopped conquering new lands and sending the spoils of war home they had to turn to other means to pay for the cost of empire.  Taxes.  To pay for the Roman government and their public spending.  And the Roman legions.  This excessive government spending led to the fall of the western half of the empire.  But the eastern half lived on for another 1,000 years or so.  Why?  Because the capital of the Byzantine Empire was Constantinople.  On the Bosporus.  Trade crossroads of the world.

This city was so rich everybody wanted to conquer it.  So they could have all those riches.  For everything that came along the Silk Road from China crossed into Europe at the Bosporus.  Soon Muslims fought Christians in the Holy lands.  Then more Christians came.  The Crusaders.  Those who didn’t die went back to Europe with some of those Chinese luxuries.  Spices.  Silk.  Porcelain.  Etc.  Sparking a renewed interest in these finer things in Europe.  Especially the spices.  For European cooking was horribly bland at the time.  The Ottoman Turks eventually took Constantinople.  Renamed it Istanbul.  And controlled that lucrative trade.  Making those much sought after Asian goods rather expensive in Europe.  Which they had no choice but to pay.  Because if you wanted those luxuries you had to go through Istanbul.  Until the Portuguese sailed around Africa and found a direct route to those cherished goods, that is.

It was the Commercial Revolution.  A new age of international trade.  A trade even more profitable than what the Ottoman Turks controlled.  Because big ocean-going vessels can carry more cargo than anything coming over land on the Silk Road.  And these new European maritime powers wanted that wealth.  And the power it would provide.  To encourage risk takers to get into those wooden ships and travel halfway around the world they granted monopoly charters.  The Dutch East India Company (VOC) was one of the largest.  And one of the wealthiest.  But this was not your typical company.  The VOC established overseas colonies.  It waged war.  Established treaties.  Even coined its own money.  Because of this thousands of VOC ships stuffed full of valuable cargoes sailed to Antwerp and Amsterdam, making the Dutch very wealthy.  And powerful.

The Tea Act allowed the Company to Ship their Tea Directly to America and exempted them from any Duties

Of course the Dutch weren’t the only ones doing this.  They had competition.  Portugal.  Spain.  France.  And England.  Who would bump into each other numerous times fighting for control of this trade.  And those colonies.  The English and the Dutch would fight 4 wars.  Which is how Dutch-founded Manhattan became part of the British Empire and, subsequently, one of America’s greatest cities.  The English East India Company gave the VOC a run for its money.  Parliament even passed legislation to give the English a monopoly on all trade with their American colonies.  The Navigation Acts.  Which stated that all trade to and from America had to be on English ships.  And all trade had to go through an English port.  Where the ships were unloaded and the cargoes inspected.  And taxed.  Then they could reload their cargoes and continue on their journey.  All tenets of mercantilism.  This kept the lower-priced Dutch goods out of America.  And prevented the Americans from selling to the Dutch directly for higher prices.  So it shut down the Dutch from all American trade (except for a prosperous black market). And brought in some lucrative tax revenue for England.  While extending shipping times and increasing prices for the Americans.  Which they were not happy about in the least.

The English East India Company (the Company) was similar in structure to the VOC.  And soon made the Indian subcontinent a wholly owned subsidiary of the Company.  But it wasn’t cheap.  Waging war was costly.  As was managing those conquered territories (something the Romans had also learned).  Then a famine in Bengal in 1770 claimed about one-third of the local population.  Making laborers more scarce.  And more expensive.  All at a time when the sales of their imported goods were falling in Europe.  There were warehouses full of unsold Chinese tea that they couldn’t sell.  Making for a bad time for the Company.

Higher costs and lower sales spelled trouble.  And that’s what the Company had a lot of.  Trouble.  So the Company turned to Parliament for help.  And Parliament helped.  By allowing the Company to ship their tea directly to America without having to unload it in a British port.  Or pay a duty on that tea.  Which would greatly reduce their costs.  And allow them to sell it in America cheaper than they did before.  So Parliament passed the Tea Act in 1773.  Making life better for all involved.  But the Tea Act left in place another tax in the previous Townshend Acts.  Which was a bigger problem than getting cheaper tea (which they could get on the black market from the Dutch).  These taxes on the British subjects in America were unconstitutional.  Because there were no Americans sitting in Parliament.  This was taxation without representation.  A much bigger issue than cheap tea.  So they threw that first ‘cheap’ tea into Boston Harbor.  The Boston Tea Party being a major step towards war with the mother country.  And American independence.

Britain became the Lone Superpower after Abandoning their Protectionist Mercantile Policies and Adopting Free Trade

The American Revolutionary War was not the only headache the British got from their mercantile policies.  Part of those policies required maintaining a positive balance of trade.  So there was always a net inflow of bullion into the mother country.  That’s why raw materials shipped into Britain from America.  And finished goods shipped out to America.  Finished goods are more valuable than raw materials.  So the Americans had to make up for this balance of trade in bullion.  Resulting in a net inflow of bullion into the mother country.  Very simple.  As long as you can manufacture higher valued goods that other people want to buy.

And this is the problem they ran into with the Chinese.  For though the British wanted those Chinese spices, silk and porcelain the Chinese didn’t want anything the British manufactured.  Which meant Britain had to pay for those luxuries with bullion.  Including all that Chinese tea they craved.  Which resulted in a net outflow of bullion to the Chinese.  The British fixed this problem by finding the one thing that the Chinese people wanted.  Indian opium.  Grown in Bengal.  Of course, this turned a lot of Chinese into opium addicts.  The addiction problem was so bad that the Chinese banned opium.  But the British were able to smuggle it in.  They sold so much of it that they used the proceeds to buy their tea.  Thus reversing the bullion flow.

Not the finest hour in the British Empire.  The Chinese and the British would go on to fight a couple of wars over this opium trade.  The Opium Wars.  Which the British did all right in.  Even gaining Hong Kong in the bargain.  They didn’t build any long-lasting love with the Chinese people.  But Hong Kong turned out pretty nice under the British.  Especially after they abandoned their protectionist mercantile policies and adopted free trade.  Which made the British the lone superpower for about a century as they modernized the world by leading the way in the Industrial Revolution.  And the Chinese in Hong Kong were very happy indeed to be there when the communists took over the mainland.  And caused a famine or two.  For they lived comfortably.  In a state founded on mercantilism.  That achieved its greatest prosperity during the free trade of capitalism that followed Britain’s mercantile ways.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

A Weak Currency may Boost Exports but it will Raise all Prices Businesses and Consumers Pay

Posted by PITHOCRATES - February 24th, 2013

Week in Review

China created a booming economy thanks to a healthy export market.  In part because of their cheap labor.  An in part by keeping their currency weak.  For when you buy goods from China you first have to exchange your currency for theirs.  If your currency is stronger than theirs is you will get a lot more of theirs in exchange for yours.  Allowing you to buy a lot more Chinese goods with your stronger currency.  This is why China likes to have a weak currency.  And takes actions to keep it artificially weak.  Something her trading partners don’t like.  For their weaker currency tends to make the net flow of goods in international trade with China flowing from China to everyone else.  Thus giving China a healthy export market.  At the expense of everyone else’s export market.

But China is a developing economy.  Things change when you become an advanced economy.  Because you don’t have impoverished masses filling your factories manufacturing goods for export.  You have a thriving middle class.  With a high standard of living.  With good jobs giving them disposable income.  And few of them work in the export economy.  So despite all the talk about unfair trade practices of China most people in an advanced economy don’t worry that much about trade deficits.  For they’re buying a lot of imported goods.  From smartphones to coffee beans.  And a weak currency makes these items more expensive.

So there are two sides to the value of your currency.  If you have impoverished masses filling factories to build export goods a weak currency is good.  It lets the state sell more of those export goods.  In an export-dominated economy.  And provides a lot of low-paid factory jobs.  If you have a thriving middle class a strong currency is good.  For it lets the people buy a lot of stuff.  Creating a lot of better paying non-factory jobs.  In a non-export-dominated economy.  Basically the difference between free market capitalism.  And mercantilism (see Is the World on the Brink of a Currency War? by Michael Sivy posted 2/21/2013 on Time).

Currency wars – and trade wars generally – have their origins in a 17th and 18th century economic theory known as mercantilism. The idea was that a country’s wealth comes from selling more than it buys. A colonial empire could achieve this positive balance of trade by acquiring cheap raw materials from its colonies and then ensuring that it exported more finished goods than it imported. This was usually accomplished with tariffs that made imports very expensive.

Such an approach couldn’t work in the modern world. Countries don’t get cheap raw materials from colonies anymore. They have to buy them – especially oil – on the open market. So while currency devaluation makes exports cheaper for foreign buyers, it also makes essential imports more expensive. For Europe in particular, which imports so much of its energy, devaluation isn’t necessarily a plus…

The Federal Reserve’s quantitative easing – buying bonds to swell the money supply – is aimed principally at stimulating domestic demand. European advocates of a cheaper euro currency, meanwhile, are hoping to make national debt easier to finance, not trying to pump up exports. In fact, the continent’s greatest exporter, Germany, is the country least amenable to currency devaluation…

So forget all the talk of a currency war. What’s going on has nothing to do with trade and everything to do with debt and growth and inflation. If the global economy is in danger of reliving the past, it will not be a repeat of the 1930s. Rather, it will be a repeat of the 1970s, when the Federal Reserve expanded the money supply to offset the economic slowdown caused by the oil crisis – and ended up encouraging double-digit inflation.

The double-digit inflation of the Seventies really devalued the currency.  Raised prices.  Greatly limiting the amount of stuff people could buy.  Even though printing money then didn’t work these nations believe it will work now.  Because it will make their exports cheaper for foreigners to buy.  Despite making everything more expensive inside their own country.

But there is another reason they love to print money.  It lets them spend more.  And it makes old debt easier to pay off.  We call it monetizing the debt.  For example, if a nation has a GDP of $1 million and a debt of $500,000 that debt is huge.  It’s 50% of GDP.  But if we turn on the printing presses and devalue the currency to one tenth of its original value that GDP is now $10 million ($1 million divided by 1/10).  Making that outstanding debt only 5% of GDP.  And a whole lot easier to repay.  But what is one person’s debt is another person’s retirement savings.  So not only does inflation increase prices it destroys our retirement savings.  And all this just so we can boost the small sliver of our economy we call exports.

If this is so bad on so many levels why do governments print money then?  For one simple reason.  To get people to vote for them.  Because all the people see is the free stuff the politicians are giving them.  The damage it causes comes later.  And they can always blame that on Republicans.  Who refuse to raise tax rates on rich people to make them pay their fair share.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , ,

Byzantine Empire, Bosporus, Silk Road, Dutch East India Company, English East India Company, Tea Act and Opium Wars

Posted by PITHOCRATES - May 15th, 2012

History 101

To encourage Risk Takers to Travel Halfway around the World Mercantile States granted Monopoly Charters

The modern world began because Europeans had a penchant for silk and spices.  Something they enjoyed during Roman times.  When the Romans ruled the world.  And the Mediterranean Sea was nothing more than a Roman lake.  But when the empire stopped conquering new lands and sending the spoils of war home they had to turn to other means to pay for the cost of empire.  Taxes.  To pay for the Roman government and their public spending.  And the Roman legions.  This excessive government spending led to the fall of the western half of the empire.  But the eastern half lived on for another 1,000 years or so.  Why?  Because the capital of the Byzantine Empire was Constantinople.  On the Bosporus.  Trade crossroads of the world.

This city was so rich everybody wanted to conquer it.  So they could have all those riches.  For everything that came along the Silk Road from China crossed into Europe at the Bosporus.  Soon Muslims fought Christians in the Holy lands.  Then more Christians came.  The Crusaders.  Those who didn’t die went back to Europe with some of those Chinese luxuries.  Spices.  Silk.  Porcelain.  Etc.  Sparking a renewed interest in these finer things in Europe.  Especially the spices.  For European cooking was horribly bland at the time.  The Ottoman Turks eventually took Constantinople.  Renamed it Istanbul.  And controlled that lucrative trade.  Making those much sought after Asian goods rather expensive in Europe.  Which they had no choice but to pay.  Because if you wanted those luxuries you had to go through Istanbul.  Until the Portuguese sailed around Africa and found a direct route to those cherished goods, that is.

It was the Commercial Revolution.  A new age of international trade.  A trade even more profitable than what the Ottoman Turks controlled.  Because big ocean-going vessels can carry more cargo than anything coming over land on the Silk Road.  And these new European maritime powers wanted that wealth.  And the power it would provide.  To encourage risk takers to get into those wooden ships and travel halfway around the world they granted monopoly charters.  The Dutch East India Company (VOC) was one of the largest.  And one of the wealthiest.  But this was not your typical company.  The VOC established overseas colonies.  It waged war.  Established treaties.  Even coined its own money.  Because of this thousands of VOC ships stuffed full of valuable cargoes sailed to Antwerp and Amsterdam, making the Dutch very wealthy.  And powerful.

The Tea Act allowed the Company to Ship their Tea Directly to America and exempted them from any Duties

Of course the Dutch weren’t the only ones doing this.  They had competition.  Portugal.  Spain.  France.  And England.  Who would bump into each other numerous times fighting for control of this trade.  And those colonies.  The English and the Dutch would fight 4 wars.  Which is how Dutch-founded Manhattan became part of the British Empire and, subsequently, one of America’s greatest cities.  The English East India Company gave the VOC a run for its money.  Parliament even passed legislation to give the English a monopoly on all trade with their American colonies.  The Navigation Acts.  Which stated that all trade to and from America had to be on English ships.  And all trade had to go through an English port.  Where the ships were unloaded and the cargoes inspected.  And taxed.  Then they could reload their cargoes and continue on their journey.  All tenets of mercantilism.  This kept the lower-priced Dutch goods out of America.  And prevented the Americans from selling to the Dutch directly for higher prices.  So it shut down the Dutch from all American trade (except for a prosperous black market). And brought in some lucrative tax revenue for England.  While extending shipping times and increasing prices for the Americans.  Which they were not happy about in the least.

The English East India Company (the Company) was similar in structure to the VOC.  And soon made the Indian subcontinent a wholly owned subsidiary of the Company.  But it wasn’t cheap.  Waging war was costly.  As was managing those conquered territories (something the Romans had also learned).  Then a famine in Bengal in 1770 claimed about one-third of the local population.  Making laborers more scarce.  And more expensive.  All at a time when the sales of their imported goods were falling in Europe.  There were warehouses full of unsold Chinese tea that they couldn’t sell.  Making for a bad time for the Company.

Higher costs and lower sales spelled trouble.  And that’s what the Company had a lot of.  Trouble.  So the Company turned to Parliament for help.  And Parliament helped.  By allowing the Company to ship their tea directly to America without having to unload it in a British port.  Or pay a duty on that tea.  Which would greatly reduce their costs.  And allow them to sell it in America cheaper than they did before.  So Parliament passed the Tea Act in 1773.  Making life better for all involved.  But the Tea Act left in place another tax in the previous Townshend Acts.  Which was a bigger problem than getting cheaper tea (which they could get on the black market from the Dutch).  These taxes on the British subjects in America were unconstitutional.  Because there were no Americans sitting in Parliament.  This was taxation without representation.  A much bigger issue than cheap tea.  So they threw that first ‘cheap’ tea into Boston Harbor.  The Boston Tea Party being a major step towards war with the mother country.  And American independence.

Britain became the Lone Superpower after Abandoning their Protectionist Mercantile Policies and Adopting Free Trade

The American Revolutionary War was not the only headache the British got from their mercantile policies.  Part of those policies required maintaining a positive balance of trade.  So there was always a net inflow of bullion into the mother country.  That’s why raw materials shipped into Britain from America.  And finished goods shipped out to America.  Finished goods are more valuable than raw materials.  So the Americans had to make up for this balance of trade in bullion.  Resulting in a net inflow of bullion into the mother country.  Very simple.  As long as you can manufacture higher valued goods that other people want to buy.

And this is the problem they ran into with the Chinese.  For though the British wanted those Chinese spices, silk and porcelain the Chinese didn’t want anything the British manufactured.  Which meant Britain had to pay for those luxuries with bullion.  Including all that Chinese tea they craved.  Which resulted in a net outflow of bullion to the Chinese.  The British fixed this problem by finding the one thing that the Chinese people wanted.  Indian opium.  Grown in Bengal.  Of course, this turned a lot of Chinese into opium addicts.  The addiction problem was so bad that the Chinese banned opium.  But the British were able to smuggle it in.  They sold so much of it that they used the proceeds to buy their tea.  Thus reversing the bullion flow.

Not the finest hour in the British Empire.  The Chinese and the British would go on to fight a couple of wars over this opium trade.  The Opium Wars.  Which the British did all right in.  Even gaining Hong Kong in the bargain.  They didn’t build any long-lasting love with the Chinese people.  But Hong Kong turned out pretty nice under the British.  Especially after they abandoned their protectionist mercantile policies and adopted free trade.  Which made the British the lone superpower for about a century as they modernized the world by leading the way in the Industrial Revolution.  And the Chinese in Hong Kong were very happy indeed to be there when the communists took over the mainland.  And caused a famine or two.  For they lived comfortably.  In a state founded on mercantilism.  That achieved its greatest prosperity during the free trade of capitalism that followed Britain’s mercantile ways.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Mercantilism

Posted by PITHOCRATES - May 14th, 2012

Economics 101

Wealth is the Stuff we use our Talent and Ability to Make

Mercantilism gave us the United States.  For it was because of these policies that the British established colonies in North America.  And it was those same policies that led to American Independence.  Because those polices pissed off the Americans. 

The mercantile system came into being as nation states arose from feudal estates.  Kings arose and consolidated these estates into larger kingdoms.  Then one king arose to consolidate the kingdoms into a nation.  Creating Spain, France, the Netherlands, England, etc.  Enlightened thinking and better technology created food surpluses.  With food surpluses a middle class of artisans arose.  And manufactured goods.  People met in markets to trade their food and goods.   These markets grew into cities.  All of this economic activity created wealth.  Food.  And manufactured goods.  That we bought with money.  Often silver and gold. 

There was wealth.  And there was money.  Two different things.  Wealth is the stuff we use our talent and ability to make.  Food and manufactured goods, for example.  And the more food and manufactured goods a nation has the wealthier that nation is.  This is a critical point.  And the mercantile policies ultimately failed because those policies mistook money for wealth.  But money is not wealth.  It’s a temporary storage of wealth.  To make our trading of food and manufactured goods easier.  By reducing the search costs to find people to trade with.  Which is why the barter system failed in a complex economy.  It just took too long to find people to trade with.  Money solved that problem.  Because you could trade what you had for money.  Then trade your money for what you wanted.

England used the Positive Flow of Bullion to Finance the Building of the Royal Navy

Mercantilism focused on the money.  And used wealth to accumulate it.  Instead of the other way around.  The way most advanced nations do today.  These European nations accumulated money with international trade.  Beginning in the 15th century they started looking at the balance of trade between nations.  And did everything they could to maintain a positive balance of trade.  Meaning they tried to export more than they imported.  Why?  Well, nations often did trade with each other.  So they owed each other money.  And when you settled your account if other nations owed you more than you owed them there was a net flow of money to you.  Bullion.  Silver and gold.  Which is what they wanted.

To maintain a positive balance of trade the government actively intervened into the economy.  It set up monopolies.  It provided subsidies for manufacturers who exported their goods for bullion.  It placed tariffs on imports.  Or simply blocked the importation of any goods that they produced domestically.  They set up colonies to harvest raw materials to ship back to the mother country.  Which would use those raw materials in their factories to produced higher valued finished goods.  That they would export.  Especially to their colonies.  Which were convenient captive markets for their finished goods.  On the mother country’s ships.  Through the mother country’s ports.  Where they, of course taxed it.  Guaranteeing that at every step of the way they added to the positive bullion flow back to the mother country.

And it worked.  To a certain extent.  England used that positive flow of bullion to finance the building of the Royal Navy.  Which proved invaluable in the wars that followed in the mercantile world.  For mercantilism is a zero-sum game.  For every winner there had to be a loser.  Which is why this era was an era of world war.  To wrest control of those colonies.  And those sea lanes.  Great Britain came out the victor.  Thanks to their Royal Navy.  But it wasn’t all good.  For Spain found gold in the New World.  And they took it.  Shipped it back to the Old World.  Just like a good mercantilist would.  Which caused problems in the Old World.  Because money is not wealth.  It’s a temporary storage of wealth.  And when they inflated their money supply it took more of it to hold the same amount of value it once did.  Because there was so much of it in circulation.  And what happens during inflation?  Prices rise.  Because the money is worth less it takes more of it to buy the same things as it did before.  So by hording bullion to create wealth they actually destroyed wealth.  With wealth-destroying inflation.

With the Boston Tea Party the Americans Renounced Mercantilism and Demanded Free Trade

Spain was one of the greatest mercantile nations of the era.  But they quickly became a shadow of their former self.  Even though they had more bullion than their European neighbors.  For it turned out that those mercantile policies hindered economic growth.  Which is the true source of wealth.  Economic growth.  Where people use their talent and ability to create things.  That’s where the true value lay.  Not the money that held that value temporarily.  All those mercantilist policies did was raise domestic prices.  And allocated scarce resources poorly. 

It turned out free trade was the secret to wealth.  For free trade can increase wealth.  For both nations.  Thanks to something we call comparative advantage.  Instead of both nations manufacturing all of their goods they should only manufacture those goods that they can manufacture best.  And trade for the goods they can’t manufacture best.  This more efficiently allocates those scarce resources.  And produces a greater total amount of wealth.  By allowing people to buy lower cost imports they have more money left over to buy other stuff.  Increasing the overall amount of economic activity.  Which is why when Great Britain adopted free trade in the 19th century the British Empire went on to rule the world for a century or so.  And led the Industrial Revolution.  By creating wealth.  Goods and services people created with their talent and ability.  That changed the world.  And ushered in the modern era.  Something no amount of bullion could do.

But before Britain adopted free trade they were struggling with one of their belligerent colonies.  Their British American colonies.  Who were unhappy over taxation without representation in Parliament.  And the mother country forcing them to buy only British tea shipped on British ships at higher prices than they could get from the Dutch.  The British thought they found a solution to their problem.  By permitting their British East India Company monopoly to ship their tea directly to America without passing through an English port.  The tea was cheaper because of this.  But it also would set a precedent for taxation without representation.  Something the Americans weren’t about to accept.  So they threw that tea into Boston Harbor.  What we affectionately call the Boston Tea Party.  Renouncing mercantilism.  And demanding the right to engage in free trade.  Which they got after winning their independence.  And the mother country would follow suit in a few decades.  Because they, too, would learn that free trade was better than mercantilism.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

World War I, Gold Standard, German Reparations, Hyperinflation, Credit-Anstalt, Keynesian Policies and the Great Depression

Posted by PITHOCRATES - March 13th, 2012

History 101

Nations abandoned the Gold Standard to Borrow and Print Money freely to pay for World War I 

Banks loan to each other.  They participate in a banking system that moves capital from those who have it to those who need it.  It’s a good system.  And a system that works.  Providing businesses and entrepreneurs with the capital to expand their businesses.  And create jobs.  As long as all the banks in the system go about their business responsibly.  And their governments go about their business responsibly.  Sadly, neither always does.

World War I changed the world in so many ways for the worse.  It killed a generation of Europeans.  Bankrupted nations.  Redrew the borders in Europe as the victors divvied up the spoils of war.  Setting the stage for future political unrest.  Gave us Keynesian economics.  Saw the beginning of the decline of the gold standard.  A deterioration of international trade.  A rise of protectionism and nationalism.  Punishing German reparations.  To pay for a war that they didn’t necessarily start.  Nor did they necessarily lose.  Which created a lot of anger in Germany.  And provided the seed for the Great Depression.

A set of entangling treaties brought nations eagerly into World War I.  There was great patriotic fervor.  And a belief that this war would be Napoleonic.  Some glorious battles.  With the victors negotiating a favorable peace.  Sadly, no one learned the lessons of the Crimean War (1853-1856).  Which killed approximately 600,000 (about 35% of those in uniform).  Or the American Civil War (1861-1865).  Which killed approximately 600,000 (about 20% of those in uniform).  The first modern wars.  Where the technology was ahead of the Napoleonic tactics of the day.  Modern rifled weapons made accurate killing weapons.  And the telegraph and the railroads allowed the combatants to rush ever more men into the fire of those accurate killing weapons.  These are the lessons they didn’t learn.  Which was a pity.  Because the weapons were much more lethal in World War I (1914-1918).  And far more advanced than the tactics of the day.  Which were still largely Napoleonic.  Mass men on the field of battle.  Fire and advance.  And close with the bayonet.  Which they did in World War I.  And these soldiers advanced into the withering fire of the new machine gun.  While artillery rounds fell around them.  Making big holes and throwing shredded shrapnel through flesh and bone.  WWI killed approximately 10,000,000 (about 15% of those in uniform).  And wounded another 20 million.  To do that kind of damage costs a lot of money.  Big money.  For bullets, shells, rifles, artillery, machine guns, warships, planes, etc., don’t grow on trees.  Which is why all nations (except the U.S.) went off of the gold standard to pay for this war.  To shake off any constraints to their ability to raise the money to wage war.  To let them borrow and print as much as they wanted.  Despite the effect that would have on their currency.  Or on foreign exchange rates.

As Countries abandoned the Gold Standard they depreciated their Currencies and wiped out People’s Life Savings

Well, the war had all but bankrupted the combatants.  They had huge debts and inflated currencies.  Large trade deficits.  And surpluses.  A great imbalance of trade.  And it was in this environment that they restored some measure of a gold standard.  Which wasn’t quite standard.  As the different nations adopted different exchange rates.  But they moved to get their financial houses back in order.  And the first order of business was to address those large debts.  And the ‘victors’ decided to squeeze Germany to pay some of that debt off.  Hence those punishing reparations.  Which the victors wanted in gold.  Or foreign currency.  Which made it difficult for Germany to return to the gold standard.  As the victors had taken most of her gold.  And so began the hyperinflation.  As the Germans printed Marks to trade for foreign currency.  Of course we know what happened next.  They devalued the Mark so much that it took wheelbarrows full of them to buy their groceries.  And to exchange for foreign currency.

Elsewhere, in the new Europe that emerged from WWI, there was a growth in regional banking.  Savvy bankers who were pretty good at risk evaluation.  Who were close to the borrowers.  And informed.  Allowing them to write good loans.  Meanwhile, the old institutions were carrying on as if it was still 1914.  Not quite as savvy.  And making bad loans.  The ones the more savvy bankers refused to write.  Weak banking regulation helped facilitate these bad lending practices.  Leaving a lot of banks with weak balance sheets.  Add in the hyperinflation.  Heavy debts.  Higher taxes (to reduce those debts).  Trade imbalances.  And you get a bad economy.  Where businesses were struggling to service their debt.  With many defaulting.  As a smaller bank failed a bigger bank would absorb it.  Bad loans and all.  Including an Austrian bank.  A pretty big one at that.  The largest in Austria.  Credit-Anstalt.  Which was ‘too big to fail’.  But failed anyway.  And when it did the collapse was heard around the world. 

As banks failed the money supply contracted.  Causing a liquidity crisis.  And deflation (less money chasing the same amount of goods).  Currency appreciation (further hurting a country’s balance of trade).  And low prices.  Which made it harder for borrowers to service their debt with the lower revenue they earned on those lower prices.  So there were more loan defaults.  Bank runs.  And bank failures.  Spreading the contagion to Amsterdam.  To Warsaw.  Germany.  Latvia.  Turkey.  Egypt.  Britain.  Even the U.S.  Soon countries abandoned the gold standard.  So they could print money to save the banks.  Lower interest rates.  Depreciate their currencies.  And wipe out large swathes of wealth denominated in that now depreciated currency.  What we call Keynesian policies.  People’s life savings became a fraction of what they were.  Making for a longer working life.  And a more Spartan retirement. 

Abandoning the Gold Standard didn’t fix the U.S. Economy in 1971

Meanwhile in the U.S. the government was destroying the U.S. economy.  Trying to protect domestic prices they passed the Smoot-Hawley Tariff.  Raising the price for businesses and consumers alike.  And kicking off a trade war.  Both of which greatly reduced U.S. exports.  New labor legislation keeping wages above market prices while all other prices were falling.  And higher taxes to pay for New Deal social programs.  Wiping out business profits and causing massive unemployment.  Then came the fall in farm prices due to increased farm productivity.  Thanks to farmers mechanizing their farms and greatly increasing their harvests.  Thus lowering prices.  Making it hard to service the bank loans they got to pay for that mechanization.  Thus leading to bank failures in the farming regions.  That spread to the cities.  Causing a liquidity crisis.  And deflation.

Then came Credit-Anstalt.  And all the woe that followed.  Which caused a speculative run in Britain.  Which made the British decide to leave the gold standard.  To stem the flow of gold out of their country.  Which destroyed whatever confidence was still remaining in their banking system.  People thought that the U.S. would be next.  But the Americans defended the dollar.  And instead raised interest rates (by reducing the money supply).  To keep the dollar valuable.  And to protect the exchange rate.  Making it less attractive to exchange cash for gold.  And to restore confidence in the banking system.  Of course, this didn’t help the liquidity crisis.  Which Keynesians blame for the length and the severity of the Great Depression.

Of course, it wasn’t the gold standard that caused the fall of Credit-Anstalt.  It was poor lending practices.  A weak banking regulation that allowed those poor lending practices.  And a lot of bad government policy throughout Europe.  Especially those punishing German reparations.  And the gold standard didn’t cause the economic collapse in the United States.  For it worked well the previous decade.  Providing all the capital required to produce the Roaring Twenties that modernized the world.  It was government and their intrusive policies into the free market that caused the economic collapse.  And abandoning the gold standard wouldn’t have changed that.  Or made the economy better.  And we know this because leaving the gold standard didn’t solve all of the countries woes in 1971.  Because the government was still implementing bad Keynesian policies.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Monetarism, Laissez-Faire Capitalism, Augusto Pinochet, Chile, Hyperinflation, El Ladrillo, Chicago Boys, Milton Friedman and Miracle of Chile

Posted by PITHOCRATES - March 6th, 2012

History 101

During the 19th Century Mercantilism gave way to Laissez-Faire Capitalism and Free Trade

Portugal and Spain were superpowers around the 16th and 17th centuries.  Great monarchies with mercantilist economic policies.  Which was all about trade.  Maximize exports.  Minimize imports.  Settle colonies to mine/harvest raw material.  To ship back to the mother country.  Where they manufactured goods from the raw materials.  And exported them to other countries.  Selling them for gold and silver.  Which was key.  Maximizing the trade surplus in the balance of trade.  Finished goods going out.  Gold and silver coming in.  For the nation that gathered the most gold and silver won in the zero-sum game of mercantilism.  Where the monarchy works with business.  Picking winners and losers.  And rewarding the winners who help enrich the monarchy.

Of course, these policies force a kingdom’s subjects to pay higher prices.  By keeping out lower-priced imports.  And with special deals favoring some domestic industries so they can sell at monopoly prices.  They nationalized their Industries.  Creating an aristocratic class.  Composed of government officials.  And their partners in the nationalized industries.  Living the good life on the backs of the poor.  Who paid high taxes.  And high prices.  To support those mercantilist policies.  And it was these policies that settled South America.  Taking all of their gold and silver (bullion).  Shipping it back to the mother country.  The surge in bullion in Europe made it less scarce.  And less valuable.  Meaning it took more of it to buy the same things it once did before this surge.  Resulting in higher prices.  And inflation.  Hurting the consumer more.  And leading to the development of the quantity theory of money.  And monetarism.  Which held that the amount of money in circulation had a direct impact on prices.  The more money the higher the prices.

With the rise of Parliament in Britain power shifted from the king to the people.  Via their representatives in Parliament.  Instead of rule by dictate there was rule by consent.  Which made the business of choosing winners and losers more difficult.  Parliament had the power.  But Parliament was more than one person.  It was full of special interests.  Which made it more and more difficult to choose any one special interest over another.  Unable to curry favor for one’s own interest one didn’t support another’s interest.  At least not when that support came at the expense of your interests.  So there was another power shift in addition from the king to parliament.  There was also one from the king to the markets.  So during the 19th century mercantilism gave way to laissez-faire capitalism.  And free trade.  An economic system that let the British Empire dominate the world during the 19th century.  Making it rich.  And powerful.  Thanks to that vigorous economic activity that could build the world’s most powerful navy.  And pay for an army to garrison an empire.  Meanwhile the old school mercantilist empires fell from superpower status.  And became shadows of their former selves.  Soon the Spanish and Portuguese colonies would gain their independence from these dying empires.

Milton Friedman’s Monetarism turned the Chilean Economy Around

The South American nations may have hated their European masters but they liked one thing about them.  Their mercantilist policies.  Which survived into the 20th century.  Where government partnered with business.  In the worst of crony capitalism.  Where special interests that favored the ruling powers received government favors in return.  Usually protected markets.  And favorable legislation.  That allowed them monopoly prices.  Giving them great profits.  Generous union wages and benefits.  And generous health care and pensions.  At least, for those politically connected.  So the government rigged the game for them.  And they made it worth the government’s while to rig the game.  All of this paid for on the backs of the poor.  Who paid high taxes.  As well as high prices.  And suffered abject poverty.  Which made for an unhappy people.  And a large amount of government turnover through revolution as dictatorships and military juntas overthrew other dictatorships and military juntas.

In 1973 it was Augusto Pinochet’s turn in Chile.  Who came to power in a military coup.  At the time the country wasn’t doing so well.  And in full mercantilism.  The economy was in the toilet.  There was abject poverty.  And hyperinflation (peaking at 1000% or so) as the government printed money to pay for its out of control spending.  To try and bribe the angry mob and keep them from overthrowing the latest dictatorship.  Pinochet was the guy to fix that.  Like everybody that came before him.  And after his military junta failed as the previous military juntas failed, he tried something new.  Thanks to something called El Ladrillo.  And economic plan so thick and heavy they called it ‘the brick’.  A plan prepared by the Chicago Boys.  Chilean economists schooled in the Chicago school of economics.  Pinochet even met with Milton Friedman.  Prominent economist of the Chicago school.  And monetarist.  Who came down to give a speech.  (Interestingly, for the American left roundly criticized Friedman for giving a speech in a right-wing dictatorship.  Though he received no such criticism for giving the same speech in a left-wing dictatorship – communist China.  Showing that the political left was okay with human rights violations as long as they were committed in the left-wing dictatorships they so admired). 

Pinochet asked for some economic advice.  Friedman gave it.  And Pinochet followed it.  He ditched the mercantilist policies.  Embraced laissez-faire capitalism.  Privatized the state industries.  Established free trade.  Cut government spending.  And stopped printing money.  Ending the hyperinflation.  Replacing it with a strict monetary policy.  This didn’t please the politically connected as they lost their privilege.  But Friedman’s monetarism turned the Chilean economy around.  Creating a prosperous market economy.  With a growing middle class.  The strong economic growth led to some healthy tax revenue.  Which in later years funded antipoverty programs.  The Miracle of Chile even replaced the military junta with a democratic government.  Chile now has one of the healthiest and freest economies in the world.  An economy better and stronger than their former colonial master.  Spain.  Who maintained enough of their mercantilist policies to pull them into the Eurozone debt crisis.  And probably could learn a thing or two from their one-time colony.  Who is doing very well these days.  Thanks to the Miracle of Chile.  Milton Friedman.  And the Chicago Boys.  Those great Chilean economists given a chance by of all people a military dictator.

Everyone does Better under Free Market Capitalism, not just the Politically Connected

In 2010 a 7.0 earthquake hit Haiti.  A country rife with political corruption.  With little, if any, free market capitalism.  And even less rule of law.  Where most people live in abject poverty.  In ramshackle housing.  This earthquake claimed 230,000 lives.  A heart-wrenching loss of life.  Especially sad because the impoverished masses suffered the most.  As is often the case in countries with poor economic and political institutions. 

Later that same year, an 8.8 earthquake hit Chile.  Thanks to the economic reforms that rebuilt Chile into a healthy and prosperous democracy, Chileans did not live in ramshackle housing.  The higher standard of living created by the Chicago Boys’ economic reforms created better housing.  And safer cities.  Because of this the far stronger earthquake in Chile killed far fewer people than the lesser earthquake in Haiti.  The death toll in Chile was less than 1,000.  Which is impressive considering that was one of the most powerful earthquakes in recorded history.

Economics matter.  Say what you want about free market capitalism.  Malign it all you will.  But you can’t change some facts.  In particular, everyone does better under free market capitalism.  Including the poor.  For if this wasn’t the case Chile would have seen the loss of life Haiti saw.  But they didn’t.  Because there were no impoverished masses living in ramshackle housing in Chile.  Because those economic reforms improved the standard of living for all Chileans.  Not just the politically connected. 

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

A Limping U.S. Economy gets no help from WTO Ruling, Inflation or Entitlement Spending

Posted by PITHOCRATES - May 18th, 2011

The WTO Rules against the US/Boeing in favor of EU/Airbus

Government subsidies are costly.  In more ways than one (see WTO Airbus ruling leaves both sides claiming victory by the BBC posted 5/18/2011 on the BBC News Business).

“This report confirms for decades the European Union… [has] provided massive amounts of market-distorting launch aid and other subsidies that are inconsistent with WTO rules.”

However, Airbus’ Mr Enders claimed the decision meant Germany, France, the UK and Spain could continue providing funding for Airbus via public-private partnership arrangements…

Earlier this month in a separate case, Boeing was found guilty of receiving over $5bn of unlawful subsidies from Washington.

Ever price a Boeing 747?  If you’re looking to buy one today it’ll set you back some $300 million.  Each.  It’s a big plane with a big price tag.  But it’s a money maker.  Once upon a time she ruled the skies.  It was every airline’s long-haul choice.  Because it could carry more people than anything else out there.  And the more people you pack into an airplane the more money you make.  Economies of scale.  That’s why the Concorde is no longer in service.  It didn’t make money.  Seating only 100 people it couldn’t charge enough in ticket prices to offset the great costs of flying it and make a profit.  So it was only a prestige thing for British Air and Air France.  And a toy for the super rich.

The 747 soon faced competition from Airbus.  First the A330 and A340.  Then the double-decker A380Boeing lost sales to Airbus.  And not always fairly.  According to them.  The consortia that made up Airbus (Germany, France, the UK and Spain) subsidized Airbus.  Thus making Airbus planes more cost competitive than those from rival Boeing.  Why does this matter?  Look again at the price of a 747.  It’s the biggest U.S. export product.  And in a nation with a declining manufacturing base and an increasing trade deficit, anything that reduces sales of Boeing planes hits their balance of trade hard.  So much so that even the U.S. government tries to subsidize Boeing to help them compete against Airbus.

With the WTO ruling, Airbus subsidies will continue.  Cutting more into U.S. manufacturing.  And increasing the trade deficit.  Not good economic news for the Americans.  Among other bad news.

Unemployment and now Inflation

Ben Bernanke has been trying to resuscitate a flat-lining U.S. economy with free money.  Hasn’t improved the numbers much.  The unemployment rate just went up.  The economy isn’t looking good.  And now this (see Inflation concerns dominate April Fed meeting by the Associated Press posted 5/18/2011 on the Los Angeles Times).

The Federal Reserve last month began debating how it should start reversing policies that pumped billions of dollars into the economy during the recession. Some members said the Fed might need to start boosting interest rates this year to guard against inflation…

Some members thought the Fed would need to start signaling that record-low interest rates would need to rise. A few members believed the Fed might need to boost its key interest rate or start to sell some of the assets in its portfolio later this year. Both moves would lead to tighter credit and higher rates on consumer loans.

Inflation.  Like the Americans didn’t have enough to worry about with a declining manufacturing base, a growing trade deficit, high unemployment and a recession that doesn’t end.  And if that wasn’t bad enough, entitlement spending just keeps piling on the woe in large deficits.  That adds to the debt.  Forcing the Americans to borrow ever more.  So much so that Standard and Poor’s took notice and lowered their outlook for the U.S. economy.  Not a good thing when you’re trying to sell treasury bonds.  Things are getting a little difficult in the United States.

Entitlement Spending Heralding the end of the Republic?

Thankfully, America has a representative republic.  Where there are responsible, disinterested wise people between the people and the treasury.  Because the masses don’t understand public finance as well as these wise people, the wise can step in and protect the people from themselves.  For as Benjamin Franklin warned, once the people learn they can vote themselves the treasury it will herald the end of the republic.  So they, the wise, will step in and address the entitlement spending problem.  Per the responsible, disinterested Founding Fathers‘ design (see Healthcare ills infect 2012-bound Republicans by Patricia Zengerle posted 5/18/2011 on Reuters).

The Republican budget plan passed by the House of Representatives last month would repeal the Obama healthcare law, scale back spending on the state/federal Medicaid healthcare program for the poor and implement the plan from Ryan, chairman of the House Budget Committee.

With polls showing two-thirds of Americans prefer to keep Medicare in its current form, Democrats have been rushing to take political advantage…

“Candidates already are capitalizing on this issue and using it to say Republicans are outside the mainstream,” said Darrell West of the Brookings Institution think tank.

Or not.  Some will take the low road.  And politicize the crisis for personal gain.  Even knowing full well that today’s gains could very well destroy Social Security, Medicare and Medicaid for future recipients.  This would be the polar opposite of the selfless Founding Fathers.  Who tried to build a nation that would stand the test of time.  Unlike the selfish of today who are just looking out for themselves.

The Here and Now versus Tomorrow

Everyone knows there is an entitlement spending problem.  And some are more than willing to trade a hard future for an easier today (see FEULNER: Saving the American dream by Ed Feulner posted 5/16/2011 on The Washington Times).

America is on the verge of becoming a country in decline – economically stagnant and permanently debt-bound, heavily regulated and bureaucratic, less self-governing and less free…

To get our fiscal house in order, we must address Social Security, Medicare and Medicaid, the three so-called “entitlement” programs that together account for 43 percent of federal spending…

Almost half of the federal budget is entitlement spending.  And it’s growing.  Baby boomers are now retiring.  Living far longer into retirement than anyone guessed.  And because they’re living longer into retirement they’ve consuming far more health care than anyone guessed.  They cannot sustain this spending.  It’s why GM went bankrupt.  It was those generous union contracts that did her in.  Pensions and health care.  Spent on people no longer working.  Now America is GM writ large.  And anyone who thinks it can end differently is in denial.

Edmund Burke reminds us to think of our time on this earth not as an individual and temporary event, but rather as a partnership “between those who are living, those who are dead and those who are yet to be born.”

Those in Washington are not looking to the past or the future.  Apparently, all they care about is the here and now.  And as long as they get theirs they don’t care about tomorrow.  If you listen closely, that sound you hear is the tears of the Founding Fathers.  Or the cursing.  For I understand that George Washington had quite the temper.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , ,

FUNDAMENTAL TRUTH #61: “The political elite has always exploited blacks.” -Old Pithy

Posted by PITHOCRATES - April 12th, 2011

Mercantilism brought Slaves to the New World

Slaves were useful in more ways than one.  As a source of labor.  And a political pawn.  The political elite has oppressed and exploited them for a couple of centuries in the New World.  Though the oppression has stopped, the exploitation continues today with their descendants.

Colonization isn’t easy.  It takes a long time.  Longer in a hostile land.  You start out by establishing colonies.  The colonists first figure out how to survive.  Then they sow the seeds of future generations.  But there was a problem with this in the New World.  A hostile environment.  And the long time it took to raise a generation or two.  And this was a big problem.  For the European monarchies that were supporting these colonists did so for economic reasons.  And time was money.  They were to exploit the New World’s resources and ship these raw materials back to Europe.  That’s how mercantilism worked.  You raced around the world to find sources of raw material, establish colonies and then ship the raw material back to Europe.  Where the Europeans processed them into finished goods.  These goods were then sold back to the colonists.  Or other export markets.  To establish a positive balance of trade.  Finished goods out.  Gold, bullion, silver, etc., in.

That was the European model then in use.  So unskilled labor was in great demand in these new colonies.  Enslaving the local indigenous populations didn’t prove too successful.  They could escape and disappear into a familiar environment that was friendly to them.  So that’s why they imported Africans into the New World.  They were a long way from home.  And the local environment was just as hostile to them as it was to their white slave owners.  With these Africans, the colonists were able to exploit their resources far quicker than they could have had they waited for their own numbers to multiply sufficiently to do the same work.  Of course, this lead to a skewed population.  Where a white minority ruled over a black majority.  Worse still, slavery was only growing in the South.  And that created a problem in the distribution of political power in the new federal government.  Slaves didn’t vote or pay taxes.  But there were a lot of them.  If they were not counted to determine congressional representation, the non-slave holding North would dominate the new federal government.

The Planter Elite gets the 3/5 Compromise and an Unfair Advantage

First the African slaves were used as pawns by European monarchs to enrich their mercantile empires.  Then they were used by politicians in a fledgling new nation to obtain an unfair advantage in political power.  These Africans just couldn’t catch a break.  Slavery was concentrated in the Deep South.  In the hands of the planter elite.  Though few in numbers they dominated political power in their states.  And they planned on doing the same in the new federal government.  To protect their interests.  Wealth.  And power.

But to do that there was that pesky problem getting in their way.  The fact that the planter elite was a small minority of the population.  It was different in the north.  Political power was representative of the population.  Where most of the population paid taxes and voted.  And they were going to extend this theory of representative government to the new federal government.  The North wanted to count all people (including slaves) in determining the states’ tax obligations.  The South didn’t.  The South wanted to count all people (including slaves) in determining representation in the House of Representatives and the Electoral College (that elected the president).  The North didn’t.  So they compromised.  They would count slaves as three-fifths of a person.  This compromise favored the North on the tax obligation issue.  But it favored the South on the political representation issue.  As a result of the compromise, the South would dominate the House of Representatives and the presidency until the Civil War.

So you see why slavery was so important to the South.  It gave them an unfair advantage in the new federal government.  Thus empowering them to protect their peculiar institution of slavery.  Their interests.  Wealth.  And power.

The Founding Fathers had to Accept Slavery to Establish a Nation based on Liberty

The Founding Fathers saw the inconsistency of slavery and their founding ideal.  Liberty.  Benjamin Franklin, John Adams, John Jay and Alexander Hamilton were northerners.  Some were already abolitionists.  Some would eventually join that movement.  George Washington, Thomas Jefferson and James Madison were southerners.  They owned plantations.  Worked with slave-labor.  Washington actually looked into converting to paid-labor but the realities of the day made the continuation of slave-labor the humane thing to do on his plantation (changing to paid-laborers would have broken up the slave families).  He is the only Founding Father that freed his slaves (after the death of his wife Martha).  And his will stipulated that his heirs help the newly freed people integrate into free society.

Jefferson and Madison clearly prospered on the institution of slavery.  (Well, the Jefferson family had.  Jefferson was a genius in so many ways.  Except in the way of making money.)  Their wealth came from the plantations.  And their political power rested with their brethren planter elite.  Should they move against them they would fall from power.  And should these ‘moderates’ fall from power, southern extremists would replace them.  Who wished to see no restrictions on slave owning or on the slave trade.  They were expansionists.  They wanted to see their way of life, and their slavery, expanded into the new territories.  They would never have gone to the Constitutional Convention in Philadelphia in 1787.  They would never have ceded any power to the northern interests.  There would have been no compromise between North and South.  And the new nation might never have been born.   

Jefferson and Madison were tainted by America’s original sin.  There’s no disputing that.  But there would have been no America without them.  They were the bridge to the Deep South.  So to make this new nation based on liberty possible, the Founding Fathers had to accept that keeping some of the people in bondage was necessary.  For awhile, at least.  The North promised the South they wouldn’t talk about the issue again for twenty years.  And Jefferson and Madison reassured the planter elite that their way of life would not change.  In more private conversations, they assured them that the new federal government would forever speak with a Southern accent.  In 20 years time, the North hoped the southerners would have fixed this southern problem.  Or that the institution itself would just fade away.  While the Deep South hoped it would become so entrenched that it would be impossible to have these discussions again.

The Cotton Gin, the Fugitive Slave Act and Civil War

As it turned out, events would favor the South.  Thanks to an ingenious invention called the cotton ginEli Whitney unwittingly gave the Deep South what they needed.  For slavery was on the decline.  The big slave crops were not very profitable crops (rice, tobacco, indigo and cotton).  Planters were diversifying.  Requiring farm workers with multiple skills.  Which favored the paid-laborer.  But the cotton gin took one of those unprofitable crops and made it profitable.  By turning a labor-intensive chore (separating the seed from the cotton) into an automated process.  And King Cotton was born.

This fanned new life into a dying institution.  The Southern economy became a cotton economy.  And the decline in slave-labor did an abrupt reversal.  Fortunes were built on cotton.  As was political power.  And thanks to the unfair advantage given to the Deep South by the Three-Fifths Compromise, the Southern way flourished.  Until immigration flooded into the industrialized north, that is.  Even their unfair advantage could not stop the inevitable.  The political power in the House of Representatives shifted to the North.  And this spelled the beginning of the end for the planter elite.   Compromise no longer favored the Deep South.  And there was a lot of secession talk down there.  A series of compromises followed in an attempt to keep the Union together.  Such as the Fugitive Slave Act that forced the federal government to interfere with states’ rights.  In the North.  Forcing these states to return runaway slaves to the plantations from whence they came.  The 1850s saw a march towards Civil War.  And in April of 1861, General P.G.T. Beauregard ordered his cannon to commence firing on Fort Sumter in Charlestown’s harbor.  Some four bloody years later with over 600,000 dead, the South lost.  The slaves were free.  And the Southern economy collapsed.

The great Republican, Abraham Lincoln, saved the Union.  And freed the slaves.  A fact not lost on the slaves.  The planter elite were Southern Democrats.  The party of slavery.  So you can guess how the newly freed slaves voted.  That’s right, the freed slaves voted Republican.  Because Republicans ended slavery.  Despite the Democrats best efforts to maintain their peculiar institution.  Which makes one scratch his head today.  Today, blacks vote predominantly Democrat.  This same party that oppressed and exploited them throughout American history.  So what changed?  Well, the truth is, not much.  Liberal Democrats continue to exploit the blacks.  But with a little political sleight of hand, the exploiter becomes the protector.  Champion of civil rights.  And the corrector of past wrongs.

Liberal Generosity Destroys the Black Family

You see, liberal Democrats have the same problem the planter elite had.  They’re a minority of the population.  Yet they covet political power.  So how do you get political power in a land with free elections?  Without slavery and the unfair advantage of the Three Fifths Compromise?  Simple.  You have to figure out some other way to exploit these slave descendants.  Their answer?  Enslave them to government. 

Government has the power to tax.  Which gives them a lot of money.  And power.  So the liberal Democrat solution is to tax and spend and bestow government benefits in exchange for votes.  And the liberal welfare state was born.  Gave so much to the black family that they soon become dependent on this liberal generosity.  And the black family who survived slavery.  Reconstruction.  Rampant and systemic discrimination.  Was destroyed.  A helping hand (welfare) became a way of life.  Aid to Families with Dependent Children encouraged single women to have children.  And men to abandon these children.  For the state would step in and be father.  Turns out the state was a horrible father, though.  Kids grew up lacking fatherly discipline and guidance.  And they drifted into trouble.  Public housing grouped these fatherless children together.  And sent them to school together.  Spreading that trouble and bad behavior to the schools.  So both the schools and public housing suffered from the new inner city disease.  Blight.  Spawned by the liberal welfare state.  Leaving no escape for these inner city kids. 

Or so says conservative economist Thomas Sowell.  Born in 1930, he lived through much of that rampant and systemic discrimination.  And the creation of the liberal welfare state and its affect on the black family.  He has firsthand experience as a black man.  And a lifetime of academic research and published works on the subject.  The liberals reject him and accuse him of racism.  Because he dares to say the liberal welfare state has done more harm than good.  Worse, he backs that up with some compelling research.  Unable to attack the message, they attack the messenger.  Which is what people usually do when they have lost the argument.

Though their programs proved a failure, all was not lost.  Sure, they destroyed the black family, but they destroyed them with an addiction.  Addiction to the welfare state.  And one thing addicts can’t do is walk away from their addiction.  So they keep voting to maintain their fix of government benefits.  They keep voting Democrat.  Which was the goal all along.  Not to alleviate any of their suffering.  And unlike the planter elite, the liberal Democrat is not getting only three-fifths of a vote from their black population.  They’re getting the whole thing. 

The planter elite would no doubt be impressed by this political sleight of hand.  And kicking themselves for not thinking of it themselves.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

LESSONS LEARNED #37: “The Decriminalization of Drugs. Damned if you do. Damned if you don’t.” -Old Pithy

Posted by PITHOCRATES - October 28th, 2010

Drugs are Killing Some of our Kids’ Cool Celebrity Role Models…and Some of Our Kids

Kids going through adolescence look up to role models.  Celebrity role models who look cool.  So they can aspire to that level of cool.  To have more friends.  Be popular.  To be popular with kids of the opposite sex.  And nothing does that like behaving like a celebrity.  Dressing like them.  Smoking like them (Joe Camel didn’t make kids smoke; movie stars and musicians did).  Having sex like them (in public like Alanis Morissette sings about in You Oughta Know).  And getting high like them.

Black Sabbath fired their front man Ozzy Osborne for his excessive drug use.  Steven Adler was fired from Guns n’ Roses for his excessive drug use.  Adler used the same drug cocktail that killed John Belushi, Chris Farley, River Phoenix and Jean-Michel Basquiat, to name a few.  One of Adler’s speedballs, though, gave him a stroke and left him with a speech impediment.  Osborne?  It’s hard to see or hear him and not think ‘drugs’.  Keith Richards, too.  (Some claim that it’s a miracle that either has lived so long.)  Amy Winehouse’ irregular heart beat resulted from a long use of cocaine.  John Entwistle died from a cocaine-induced heart attack.  Ol’ Dirty Bastard died from a cocaine & prescription drug induced heart attack.  Heath Ledger died from an accidental overdose of a prescription drug cocktail (oxycodone, hydrocodone, diazepam, temazepam, alprazolam and doxylamine).  Bradley Nowell died from a heroin overdose just before Sublime’s major label album debut (which included three hits).  Danella Westbrooke lost the cartilage in her nose (and her profile) due to the massive amounts of cocaine she sniffed.  And there are a host of other celebrities whose past drug use is catching up to them in their old age.  Such as David Crosby’s liver disease.  His liver transplant resulted from his many years of drug abuse.

These are some expensive black market drugs.  But this isn’t a problem if you have a lot of money.  If these drugs were decriminalized, they would be cheaper.  And much more plentiful.  Meaning that they wouldn’t be limited to the rich and famous.  If they were less expensive, kids starting their drug exploration wouldn’t have to limit their exploration to the less expensive stuff (stealing from their parents’ medicine cabinet, sniffing butane, smoking marijuana, etc.).  They could broaden their horizon.  And why not?  They’re going to do it anyway.  And not everyone becomes an addict.  Or dies.

The British East Indian Company Used Indian Opium to Fix Their Balance of Trade with China

In the 19th century, mercantilism ruled.  It was all about balance of trade.  Nations wanted to export their goods.  And import gold and silver that paid for those goods.  Both Great Britain and China pursued these policies.  This became a problem for Great Britain whose people grew very fond of Chinese silk and porcelain and other Chinese exotic goods.  But the Chinese weren’t buying anything British.  Great Britain was importing more than she was exporting to China.  This meant there was a net silver flow from Great Britain to China.  And this wasn’t good mercantilism.  For the British.  It was very good mercantilism for the Chinese.  The British needed something to sell to the Chinese.  Something that only they could sell so the Chinese would have no choice but to buy from Great Britain.  And the British East India Company had just the thing.  Indian opium.

And it worked.  It reversed the balance of trade.  Silver was leaving China at an alarming rate.  But it was also turning the majority of Chinese males near the coastal cities into junkies.  Business suffered.  The civil service suffered.  With less available to buy the standard of living fell.  A dysfunctional civil service compounded that problem.  Rampant opium use was undermining Confucian values.  The Chinese begged the British to destroy the Indian poppy fields.  The British replied that, with the huge Chinese demand for opium, if they didn’t sell it, someone else would.  It would only cost the British their lucrative trade.  It wouldn’t solve the Chinese opium addiction problem.

Well, that led to war.  Two of them.  The Opium Wars.  Neither of which ended well for the Chinese.  They lost a lot.  Chinese coastal cities became virtually British.  Hong Kong became British.  Trade favored the British and other foreign nationals.  It led to much bitterness and resentment.  And to the Boxer Rebellion in 1898 to throw the imperialists out of China.  Which didn’t work all that well either.  But the British did help the Chinese to break their opium addiction.  If the Chinese worked from within to reduce consumption, the British would cut back on their opium importations.  Opium use declined in China.  As did opium imports.  With the decline in consumption, no new sources of opium rushed to fill an unmet demand.

The Americans and the Russians to Collaborate over Afghanistan’s Poppy Fields, The Netherlands Making their Legalized Marijuana less Legal

Well, there are still poppy fields in Southwest Asia.  And a high demand for heroin not too far away.  In Russia.  And it’s killing them.  Literally.   Some tens of thousands die each year from overdoses.  The collateral damage (broken families, lost jobs, the spread of AIDS from shared needles, neglected children, etc.) from drug addiction probably touches 10 times that number.  And the drug trade crime kills who knows how many more.  From the poppy fields in Afghanistan through the Central Asian states into Russia herself, there is an explosion of violence for this lucrative drug trade.  How bad is it?  Russia may return to Afghanistan to help the Americans in eradicating these poppy fields and shutting down the drug laboratories.  (For those who do not know, the Russian/Soviet war in Afghanistan was Russia’s Vietnam War.  And, let us not forget that both of these wars became proxy wars between America and the former Soviet Union.  So America and Russia working together in Afghanistan is a big thing).

Russia is even advising America against the ballot initiative in California to legalize marijuana.  Viktor Ivanov, Russia’s top drug official, went to Los Angeles to campaign against the ballot proposal.  He warned that legalizing marijuana will start a downward spiral into drug addiction.  We can understand heroin.  But marijuana?  A soft drug?  The Netherlands have long had legalized marijuana there.  It works there.  Why not in California?

Well, Netherland has had its problems with its marijuana coffee shops and cafes.  There’s been trouble in their border areas.  Tourists coming in just to get high.  And a lot of people have been going there.  Business is booming.  High demand.  Which have brought in crime as people vie to supply that demand.  There have been problems with school kids so they’ve banned these coffee shops/cafes within certain distances of schools.  And they’ve been selling a more potent cannabis, which is knocking the casual user on their ass.  Or impairing their motor skills.  And, with the rising amount of trouble from the drug tourists, they’re restricting sale to Dutch citizens only.  One other note.  Drug enforcement has been stepped up at Schiphol airport.  Why?  To counter a rising cocaine traffic coming in from the Caribbean. 

Drugs, Drug Wars and the War on Drugs Take their Toll as they Kill and Destroy

Kids are experimenting with drugs.  They’ll start with the softer stuff.  Like in the Netherlands.  But they’ll probably move on to something more potent.  Like in the Netherlands.  There appears to be a progression.  From less dangerous drugs to more dangerous drugs.  You can bet that John Belushi, Chris Farley, River Phoenix and Jean-Michel Basquiat, et al, started their drug use with something less dangerous than cocaine-heroin speedballs.  And look at them now.  Of course you can’t because their dead and buried.  But you get the point.

Epidemic use in China destroyed a millennium-old culture.  Ended a dynasty.  Caused multiple wars.  They finally kicked the habit.  With the help of the British (who helped give them the problem in the first place).  But the poppy fields just found new users.  In Russia.  And elsewhere.  It’s so bad that former enemies are joining forces on a former battleground to fight a new common enemy.  And the Russians are warning Californians not to legalize marijuana.  We’ve certainly come a long way from the days of the Cold War where the Soviets would have helped that initiative pass to help bring down their one-time enemy.

Drugs are a problem.  A big problem.  They kill and destroy.  Drug wars kill and destroy.  As does the war on drugs.  Damned if you do.  Damned if you don’t.  So what to do?  Well, imagine two worlds.  One where drugs are plentiful and cheap.  And one where no one uses drugs.  Which world you’d rather live in?  Which world do you want your children to live in?  I thought so.  And there’s your answer.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

FUNDAMENTAL TRUTH #32: “America is great but it can’t make bad ideology good.” -Old Pithy

Posted by PITHOCRATES - September 21st, 2010

We’ve Always Done Things This Way

The Old World was set in her ways.  Change didn’t come easy.  When it came it often spanned centuries.  But not always.  As the Roman Empire incorporated new territories into the empire, she modernized those new territories.  Roads.  Fresh water.  Sanitation.  Rule of law.  Markets.  The things that made cites better.  Civilizations better.  But as a civilization grows, so does its government.  And as government grows, taxes inevitably become more onerous.

A sprawling empire required a sprawling bureaucracy to control it.  And a huge standing army to protect it from without.  And to police it from within.  When you expand and conquer new territory, the spoils of conquest can fund your empire.  When your borders are relatively static, though, you have to use alternative sources of funding.  Taxation.  As the tax burden grew, dissatisfaction grew.  Fewer citizens volunteered to serve in Rome’s legions.  So Rome relied more and more on hired armies.  This increased the cost of empire.  And it increased taxation.  The tax burden grew so great that people gave up their small farms and worked for the bigger farms.  Worked for the rich landowners.  Some tried to quit farming all together.  This caused problems in trying to feed Rome’s legions.  And her bureaucracy.  The food supply became so critical that the Romans wrote new laws forbidding people to leave their farms.  Farmers were bound to the land.  They could never leave.  If you were born on the land you would farm the land.  Forever.

During the decline of the Western Roman Empire you saw the rise of the economic system that would dominate the Middle Ages.  Feudalism.  As the Western Empire declined, the power began to shift to the rich landowners.  As did loyalties.  As the empire further disintegrated, the power of Rome could no longer protect you.  Or feed you.  And thus food and protection became the foundation of feudalism.  Land owners, the nobles (i.e., lords), would let you work their lands.  The bulk of the proceeds went to the landlord.  But you also had a portion of the manor to farm for yourself.  In exchange for the use of a lord’s land you provided military service to the lord.  When needed to protect the lord and his lands.  Property rights allowed the lord’s sons to inherit the estate upon his death.  So property ownership became hereditary.  As did the nobility.   And so it would be for centuries.

England Leads the Way

From the nobles arose one.  A dominant one.  A ruler of nobles.  A king.  A king consolidated the many nobles’ estates into a kingdom.  A country.  And the king became sovereign.  The supreme authority.  The nobles pledged their loyalty to the king.  Provided for the king.  And fought for him when necessary.  Thus the few, the many and the one.  The masses (the many) served the lords and worked on their estates.  The lords (the few) were the wealthy land owners who served the king.  The king (the one) ruled the kingdom.

Thus the European monarchy was born.  In France it was absolute.  In England, in 1215, the nobles met King John on the meadow at Runnymede.  And the king reluctantly set his seal to the Magna Carta.  In England, there would be limits to the sovereign’s power.  The king may be king, but the nobles held the wealth.  And with it a lot of power.  Sometimes they saw things differently.  And the little people, the masses, often saw things differently than did the king and lords.  These different interests were reconciled, in time, by king and Parliament, a two-house or bicameral legislature (comprised of the House of Commons and the House of Lords). 

England was the place to be.  Rule of law.  Bill of rights.  Commerce.  Banking.  Capitalism.  Liberty.  Food.  Security.  Your common everyday Englishman had a better quality of life than your common everyday [insert any other European national here].  As transoceanic trade took off, the great European powers collided with each other.  Fought for that lucrative trade.  In the Old World.  And in the New World.  These wars became very expensive.  And some lasted for years.  Like the Seven Years War.  Which the British won.  And took many French possessions throughout the world.  But at a huge cost.  She incurred a great debt.  Especially in securing one of her colonies.  British North America.

Tea Anyone?

So England taxed her British American subjects.  Only problem was, these English subjects had no representation in Parliament.  And this was very un-English.  Taxation without representation.  This caused tension.  Also, Great Britain’s mercantilist policies were also rubbing the colonists the wrong way.  America was growing.  And she wanted free trade.  But that was impossible when the home country maintained a favorable balance of trade at your expense.  And had the Royal Navy to enforce it.  As a colony, everything had to ship to/from England ports on English ships so England could accumulate bullion.  The British protected their industries.  Her colonies fed raw materials to these industries.  And that’s all they did.

Trouble brewed for a while.  When Great Britain legislated what type of tea they could drink (only British East Indian tea), the American colonists had had enough.   There was a tea party in Boston, a revolution and formal independence.  And then a new nation.  With a bicameral legislation.  An executive.  And a judiciary.  It wasn’t quite Parliament, but was very similar in function.  The president was the one.  The Senate was the few.  And the House of Representatives were the many.  But there were key differences.  There was no king.  No hereditary nobility.  And there would be no mercantilism.  Despite Alexander Hamilton’s best efforts.

Let’s Just Agree to Disagree

Getting the colonies to come together to declare their independence was not easy.  It helped that there was already a shooting war going on.  Lexington and Concord.  Bunker Hill.  The coastal towns the British burnt and left in ruins.  They were already fighting a rebellion.  The declaration was almost a moot point.  But it was important.  And, after some arm twisting, they voted for independence and posted their Declaration of Independence.  But that was then.  After the Revolutionary War, there was no such unifying force.  Everyone was back to looking out for number one.  Well, most. 

Locked in a Philadelphia hall during a sweltering summer thick with horseflies, a collection of America’s finest worked to create a new government.  George Washington, Ben Franklin, Alexander Hamilton, James Madison, to name just a few, could hardly agree on anything.  The Constitution they created was not great in their eyes.  But it was probably the best that they could do.  So acknowledged, they sent it to the states for ratification.  The odds were against them.  It would take some persuading.  And persuading they did.  Hamilton and Madison (and John Jay) wrote a series of essays appearing in newspapers to make the case for ratification.  They addressed and answered all arguments against ratification.  (You can read these today in the Federalist Papers.)  And this effort was successful.  The states ratified the constitution.  There was now a nation known as the United States of America.

Our first Secretary of the Treasury was Alexander Hamilton.  A capitalist genius.  And a great admirer of the British Empire.  Being a recent transplant to the American Colonies, he had no deep-seated resentment of the former mother country.  In fact, he wanted to emulate her.  She was the greatest empire in the world.  She was obviously doing something right.  But he pushed too far.  His mercantilist plans were a bit much for some.  Especially the ‘simple’ farmers of the South.  The planter elite.  Led by Thomas Jefferson (covertly) and James Madison (overtly), they fought Hamilton tooth and nail and did everything to destroy him.  (After seeing his plans Madison switched to the opposition.)    And ultimately, did.  When Aaron Burr shot him in a duel on the field of honor at Weehawken, New Jersey, across the Hudson from New York City.  All because Hamilton tried everything within his power to keep him from becoming president of the United States and governor of New York.  Because he was on unprincipled man.  Burr took offense to that.  And, well, the scoundrel challenged him to a duel and killed him.  But I digress.

The American Ideology

The American ideology is simple.  It includes things that have been proven to work.  And excludes things that have been proven not to.  A large, diverse people make up America.  So at the heart of our ideology is that we agree to disagree. 

We don’t have kings or nobility.  We don’t have an entitled class.  No hereditary rights.  Here, it doesn’t matter who your father was.  Or what group you belong to (religious, societal, etc.).  No one person is better than another. 

We have property rights and live under the rule of law.  We honor legal contracts.  We built our nation on laissez faire capitalism.  Free markets.  With a minimum of government interference.  We do what we want and respect that others do what they want.  And we are free to do this as long as we play by the rule of law.

It was a long road getting here.  We took the best history had to offer.  And rejected the worst that history included.  Nations who did likewise went on to greatness, too (like the United Kingdom and Northern Ireland, Canada, Australia, etc.).  Those who didn’t have been repositories of great suffering and human bondage (North Korea, Cuba, The People’s Republic of China, the Soviet Union, etc.).  Of the latter nations, please note that life is getting much better in China and the former Soviet Union with the introduction of capitalism and free markets.  And it’s not in North Korea and Cuba where these governments stubbornly cling to failed policies to keep their governments in power.  Whatever the cost is to their people.

It’s the Ideology, Stupid

Good ideology makes good nations.  Bad ideology makes bad nations.  A good nation can NOT take bad ideology and make it good.  A good nation that implements bad ideology will only make that good nation bad.  All people have the capacity for greatness.  And that greatness will shine through if the government doesn’t suppress it.   To see this all we have to do is look to history.  It’s all there.  The good.  The bad.  And the ugly.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,