The same title cheered in the new
years of 2011 and 2012 ("Markets
Vanish - "In a Flash"," January 4, 2011 and January
8, 2012). These warnings described how quickly, and with no foresight by
participants, markets evaporated in 1914. In 2013, markets have never been more
susceptible to such a bolt of recognition. This is a consequence of such
imperturbable faith in the prices set by besotted bureaucrats. What follows is
a quick look at the nasty, brutish, and short results from government
manipulations after such policy failures.
There are few failures that compete with World War I. Having failed, the same
bumblers garnered fame by subjecting their own populations to conquest. Whether
it was the patriotic call to the trenches or confiscation of securities, there
is no question those who had failed worst made out best.
The British and the French governments were short of money to pay for supplies
by 1915. Note: this was still a world in which non-redeemable, government,
money-printing operations would not pass muster. If a hard-up, food- and
munitions-famished government attempted to print pounds or francs for goods,
the boat from London to New York would have made a round-trip after the
counterfeit fodder had been sequestered and burned at the Customs House on
Bowling Green. The customs officials would no doubt have been acting in good
faith, an attempt to suppress the embarrassment due the British or French
governments in the belief that some lunatic, war criminal had attempted to pass
bad notes.
Instead, force majeure was employed. The
following description by Harold Nicholson goes beyond the specific point
addressed here (underlined) since the nearly insurmountable problem of those
governments is unfamiliar in an age of quantitative easing. Yet we are
approaching the point (yep, any day now baby, just you wait) when worthless
Bernankes, Draghis, and Abes will call for just such a calculus: "[W]hereas American exports to Great Britain alone had
in 1914 been $594,271,863, they increased in 1917 to $2,046,812,678. This
enormous expansion in the American trade export trade was due, of course, to
the European demand for more war material and food. Such purchases could no
longer be paid for in goods and services; only a small proportion could be
liquidated in gold; the purchases for 1915 alone were some $700,000,000 in
excess of gold capacity; the balance had to be financed by credit. How could
such vast credits be obtained? Three separate systems were adopted. The first
was the export of gold; a billion dollars of gold were transferred to the
United States between 1914 and 1917. The second method was to commandeer the
American securities held by British and French nationals. This method was first
put into operation in January 1916, and in the end provided the British
government with the collateral of $2,425,000,000 and the French government with
the collateral of $51,000,000. The third method was just confidence."
J.P. Morgan acted as agent to the British and French governments.
To imagine governments would take such
action demanded the mind of a Houdini in 1914, even after markets had vanished
in late-July. In the United States, a country without an income tax in 1912,
and a continent away from the fighting, a 77% surtax on incomes was imposed
after Americans embarked on its holy mission to save European from itself.
President Wilson told the leaders of the Federal Council on Churches:
"[Y]ou have got to save society in this world, not in the next.... We have
got to save society, so far as it is saved, by the instrumentality of
Christianity in this world." Wilson went on to compare Christianity to the
highest form of patriotism since they were both "the devotion of the
spirit to something greater and nobler than itself."
This was in December 1915. In 1916,
Woodrow Wilson was reelected to a second term as president with an appealing
campaign slogan: "We didn't go to war." During the presidential
campaign, he wrote to his Secretary of the Navy: "I can't keep the
country out of the war." Nor, did he.
Having abused trust with the American
people under the banner of a holy crusade, the Wilson administration took
measures inconceivable before 1914. This is the lesson to be contemplated in
2013. We have two Holy Crusaders, one at the Fed and one in the White House,
both of whom (this is where it gets very dangerous) view humanity in the
abstract and who preach in the dreadful certainty of the former Princeton
College president (that would be Wilson).
After the U.S. declared war on European
Sin (May 6, 1917), Wilson refined his
impersonation of American Gothic: "Woe be the man that seeks
to stand in our way in this day of high resolution when every principle we hold
dearest is to be vindicated and made secure." A Rip Van Winkle who had
been asleep since 1914 may have wondered if the "we" included a mouse
in the parson's pocket. George Santayana expressed doubts about such blending
of the material with the spiritual. Wilson and his fellow travelers were
"fanatics, who redoubled their efforts after losing all sense of
aim." Santayana had left his teaching position at Harvard in 1912, sailed
to Europe, never to return, but bequeathed a compelling indictment of American
letters, especially the poisonous, pious, and inert influence of Harvard upon
American consciousness, as true today as a century ago, and just as stubbornly
ignored.
One sample of World War I financial mischief was the
Liberty Bond. The first of these offerings (in 1917) was a $2 billion issue,
over ten times the size of any previous effort. Given the scale, was a 3-1/2%
coupon inadequate compensation? Not by any means. Americans would buy them whether
they wanted to or not, (and who would?) Charles G. Dawes, chairman of the
Liberty Loan Drive, declared: "Anybody who declines to subscribe for that
reason, knock him down."
This captures the spirit of U.S. economic policy ever
since. In the Holy Quest for GDP Growth, post-millennial economic policy has
unerringly chosen to "knock him down." The Greenspan Fed sustained an
overextended economy with the Internet bubble. Those who played it to the end
got knocked down. Greenspan fanned the housing bubble, handed the baton to
Bernanke, who battered credulous mortgage-buying Americans back to the stone
age.
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