The industry’s burden of regulation is explained to investors in corporate annual reports filed with the U.S. Securities and Exchange Commission.  General Motors, the largest publicly traded domestic automaker, is explicit in detailing the “risk factors” created by government regulation, as it explains in its 2008 10-K report: “We are affected significantly by a substantial amount of governmental regulations that increase costs related to the production of our vehicles.  We anticipate that the number and extent of these regulations, and the costs to comply with them, will increase significantly in the future.”

In looking back at the record of several decades of government standards for the auto industry, one trend that emerges is the tendency of Democratic-controlled Congresses and Republican presidents to increase the industry’s regulatory burden.  Among these onerous constraints are the Corporate Average Fuel Economy (CAFE) standards.  CAFE was passed in 1975 by a Democratic Congress and signed into law by Republican President Gerald R. Ford.  GM’s report specifically mentions that “the CAFE requirements mandated by the U.S. government pose special concerns.”

CAFE requirements include mandates added in 2007 by another Democratic Congress and Republican President George W. Bush in the Energy Independence and Security Act (EISA):

In December 2007, the United States enacted the EISA, a new energy bill that will require significant increases in CAFE requirements applicable to cars and light trucks beginning in the 2011 model year in order to increase the combined U.S. fleet average for cars and light trucks to 35 mpg by 2020, a 40% increase.  The estimated cost to the automotive industry of complying with this new standard will likely exceed $100 billion, and our compliance cost could require us to alter our capital spending and research and development plans, curtail sales of our higher margin vehicles, cease production of certain models or even exit certain segments of the vehicle market.

GM’s report also describes burdensome regulation at the state level.  California has led regulatory assaults on the auto industry, a trend that has escalated under Republican Gov. Arnold Schwarzenegger:

In addition, a growing number of states are adopting regulations that establish CO2 emission standards that effectively impose similarly increased fuel economy standards for new vehicles sold in those states.  If stringent CO2 emission standards are imposed on us on a state-by-state basis, the result could be even more disruptive to our business than the higher CAFE standards discussed above.

Ford, the second-largest domestic automaker, notes in its 2008 10-K:

Many governmental standards and regulations relating to safety, fuel economy, emissions control, noise control, vehicle recycling, substances of concern, vehicle damage, and theft prevention are applicable to new motor vehicles, engines, and equipment manufactured for sale in the United States, Europe and elsewhere.

Annual reports filed by Chrysler while it was still a public company make the same point about government regulations.  The smallest of the Big Three, it was acquired in 2007 by Cerberus Capital Management LP, a private firm.
These regulations are also troublesome for foreign producers.  Toyota, the largest Japanese automaker, explains in its 2008 report that the company “has incurred, and expects to incur in the future, significant costs in complying with these regulations.  New legislation or changes in existing legislation may also subject Toyota to additional expenses in the future.”

Honda, the second-largest Japanese firm, notes:

The automobile, motorcycle and power product industries are subject to extensive environmental and other governmental regulation.  Regulations regarding vehicle emission levels, fuel economy, noise and safety and noxious substances, as well as levels of pollutants from production plants, are extensive within the automobile, motorcycle and power product industries.  These regulations are subject to change, and are often made more restrictive.  The costs to comply with these regulations can be significant to Honda’s operations.

One aim of this ever-growing list of government regulations is to force automakers to produce safer vehicles with fewer emissions.  Another policy goal, as expressed by CAFE, is to reduce the nation’s trade deficit by decreasing U.S. dependence on imported oil.

Ralph Nader’s Unsafe at Any Speed (1965), which strongly criticized GM’s Corvair and pollution in Southern California, is sometimes credited with launching the drive toward safer, cleaner cars.  But automotive pioneers had advocated safety measures for decades.  Joel W. Eastman’s 1984 book Styling Vs. Safety: The American Automobile Industry and the Development of Automotive Safety, 1900-1966 profiles Michigan plastic surgeon Dr. Claire L. Straith, an advocate for safety belts and padded dashboards.  Automotive entrepreneur Preston Tucker took Straith’s ideas seriously, although his vehicles never went into mass production.  Safety belts were optional in vehicles produced by the Big Three (GM, Ford, Chrysler) and American Motors by the mid-1950’s, and standard by the mid-1960’s.  Ford offered padded dashboards in a 1956 safety package.  Consumer response was tepid, but this feature was widely accepted by the 1970’s, and air bags followed.  Since 1975, U.S. motor-vehicle deaths have ranged from 39,250 (1992) to 51,093 (1979), according to National Highway Traffic Safety Administration (NHTSA) statistics.

The goal of lowering the U.S. trade deficit has not been achieved with CAFE’s smaller, fuel-efficient vehicles.  The U.S. goods and services deficit was $677.1 billion in 2008, according to the Census Bureau.

At present, two polar opposites define the parameters of the regulatory debate: the libertarian and socialist approaches.  In general, libertarians reject government regulation of industry, while socialists call for state or worker control of the means of production.  The libertarian approach was ascendant in the early decades of the 20th century when hundreds of U.S. automakers vied for consumers.  These hundreds were reduced to a mere dozen by mid-century.  Our fathers witnessed the industry’s transformation into the Big Three oligopoly, with Chrysler’s 1987 acquisition of American Motors as the final act.  Auto executives complain about government regulations (former Chrysler President and CEO Lee Iacocca once termed it “the relentless lash”), but in the current crisis few legislators, including Republicans, are advancing even a quasilibertarian approach: a temporary freeze on current or pending regulations.  Likewise, the socialist approach is merely a stopgap measure, not a credible, permanent solution in the eyes of most policymakers.  George W. Bush provided emergency funding to the auto industry, and Barack Obama may buy preferred shares for Uncle Sam, but Washington is not about to launch an automotive IPO.  European governments experimented with state ownership and ultimately rejected it.  Few, save socialists, wish to be identified with the embarrassment of another Trabant.

The regulatory center oversaw our fathers’ auto industry.  Democrats proposed new regulations, and Republicans generally agreed (when they weren’t expanding government on their own initiative).  The Department of Transportation was created under Lyndon B. Johnson, signer of the National Traffic and Motor Vehicle Safety Act (1966).  NHTSA, part of the Department of Transportation, was established as a separate unit under Richard M. Nixon.  A December 1969 address at the Harvard Business School by Henry Ford II illustrates the industry’s pragmatic acceptance of this centrist regulatory regime:

The most effective way to encourage business to serve new public needs is to rely, when possible, on market incentives.  The reduction of motor vehicle emissions is an excellent example of what I have in mind.  Prior to the establishment of government emission standards, there was no market for emission control features.  Although many people wanted cleaner air, individual customers would not have been willing to pay the extra cost of a low emission car because the benefits would have been imperceptible unless all customers were required to pay this cost.  When the need for abatement of air pollution was recognized, the government established realistic emission standards.  By doing so, the government created a market and the auto industry has moved quickly to supply it.

The auto industry is aware that “market changes [are] caused by shifts in consumer preferences,” Ford explained.  “Now we face a new phenomenon—market changes caused by legislation and regulation.”  Today, President Obama is proposing that the government stimulate a new “green” demand for the auto industry.  This is a call from the same centrist playbook referenced by Ford.

Both the libertarian and the socialist extremes still influence regulatory policy in one key area: the realm of mergers and acquisitions, overseen by federal antitrust regulators.  Any serious student of the business cycle and the Motor City understands that recessions catalyze consolidation within the industry.  In the two years surrounding a single recession (July 1953 to August 1954) the following mergers and acquisitions occurred: Hudson and Nash-Kelvinator, creating American Motors; Kaiser and Willys-Overland; and Packard and Studebaker.  This was the auto industry our fathers understood—a reality expressed by an old Chrysler annual report in a single sentence: “[T]he automotive industry historically has been highly cyclical and the duration of these cycles has been difficult to predict.”  That sentence is still misinterpreted by Wall Street MBAs, though it was comprehended by factory workers with high-school diplomas.

Our fathers who toiled for decades in auto plants knew these names: Auburn, Cord, Duesenberg, H.H. Franklin, Marmon, Pierce-Arrow, Ruxton, Stearns-Knight, Stutz—all casualties of the Great Depression (August 1929 to March 1933) and the Roosevelt Recession (May 1937 to June 1938).  More recently, the Chrysler loan-guarantee drama occurred against the backdrop of two recessions (January to July 1980, and July 1981 to November 1982), and the firm’s 1987 purchase of American Motors (“Little Four”) helped Chrysler survive the recession that followed (July 1990 to March 1991).  The auto industry’s business model often proves terminal in recession.  “The executives at GM, Ford and Chrysler have never been overly interested in long-range planning,” Lee Iacocca explained in Iacocca: An Autobiography (1984).  “They’ve been too concerned about expediency, improving the profits for the next quarter—and earning a good bonus.”  Men like Iacocca understood the cycle, and planned accordingly, which is how they survived recessions that occurred, on average, every four years between 1945 and 1982.  I learned more about the cycle from my father, a 43-year Chrysler veteran, than I did from my graduate-school professors—save one, Harry C. Veryser (University of Detroit).  Dad started as a skilled tradesman and ended his career as a production foreman, while Harry worked for his family’s stampings business.  Much knowledge has passed from the industry in the last quarter-century, a period marked by two brief eight-month recessions.  The Big Three entered this recession with weak balance sheets, unrealistic sales forecasts, and bloated inventories.  Detroit would be faring better if the Big Three had pooled their resources to hire a lone historian steeped in the business cycle’s destructive nuances.  Instead, management hires teams of economists who are forced to cut their estimates at the first hint of real trouble.

The historian can improve the incomplete portrait sketched by economists.  Economists use four basic models to illustrate market competition: pure competition, monopolistic competition, oligopoly, and monopoly.  All four were applicable to the automotive industry in the 20th century.  One characteristic of pure competition is “ease of entry.”  Entry was so easy early in the century that thousands of small entrepreneurs, like Henry Ford, were building motor vehicles in garages.  “Before 1905, 445 different makes of cars were being produced in 175 separate locations from New York to California,” Walter Hayes wrote in his 1990 biography, Henry: A Life of Henry Ford II.  “Yet by 1914,” Hayes continued, “three-quarters of all vehicle production in America was based in Detroit, and Ford accounted for more than half.”

In the 1920’s, the automotive industry was characterized by monopolistic competition, a market with many producers without the power to control price.  Dozens of firms produced automobiles in the Roaring Twenties, the decade in which General Motors overtook Ford in domestic market share.  The brutal recessions of the 1930’s narrowed the field in a Schumpeterian process of “creative destruction,” and by decade’s end the U.S. automotive industry was evolving into an oligopoly, characterized by “fewness.”  Historical analysis was central to Schumpeter’s work, which explains why he is scorned by econometricians, who place their faith in mathematical models.

The industry resembled an oligopsony during World War II, with the Big Three selling materiel to various government entities—a fact that has been obscured in recent hearings.  GM was the postwar price leader with a market share exceeding 40 percent in the 1950’s, and 50 percent in the 1960’s.  Price leadership, another characteristic of oligopoly, means one firm is so strong that it influences the pricing decisions of others.  GM was so strong in the 1960’s that economists seriously debated whether its divisions (Buick, Cadillac, Chevrolet, Oldsmobile, and Pontiac) should be broken up in an antitrust action.  The argument seems quaint today.  GM’s domestic market share is less than half its postwar peak, and the combined Big Three domestic share is lower than 50 percent.

Since the mid-1960’s, government regulation of the auto industry has stayed in the center between the poles of libertarianism and socialism.  If the center’s recent actions fail to produce the desired results, an opportunity will be created for movement toward the poles.  Noncentrist options would include a temporary freeze on some regulations and relaxed enforcement of antitrust law, which would allow the Big Three to merge into two smaller domestic firms, or one giant one.  Democrats would favor an Employee Stock Ownership Plan and a federal-government stake in the new firm or firms, while Republicans would prefer bankruptcy (an unattractive option) or private equity.

Some economists will object to these measures, but historians can point to European examples in which both were employed around another recession (November 1973 to March 1975), one of the longest since the Depression.  A Labor government nationalized British Leyland (Austin-Morris, Jaguar, and Leyland).  French Conservatives brokered a merger between Citroen (which was in bankruptcy) and Peugeot.  The Conservative Thatcher government later privatized Jaguar, while PSA Peugeot-Citroen is Europe’s second-largest automaker.  The models are less important than an historical understanding of the cycle.

The automotive enterprise that entered this recession is not our fathers’ auto industry.  The cycle, with its recurring pattern of death and rebirth, has always altered motor vehicles and those who build them.  History and tradition help us understand and conserve the industry that three million American workers depend on, which is a better option than bankrupting it.

This article first appeared in the April 2009 issue of Chronicles: A Magazine of American Culture.

It’s happened again.  Sixteen illegals, represented by the Mexican-American Legal Defense Fund, sued rancher Roger Barnett in federal court for $32 million.  In 2004, he collared the border jumpers and held them at gunpoint on his Cross Rail Ranch near Douglas, Arizona, until the Border Patrol arrived.  One of them was a previously deported dope dealer.  Since 1998, he has detained 12,000 for the Border Patrol.  Illegals have trashed his property, killed livestock, stolen trucks, and even broken into his home.  Because they kept wrecking an 8,000-gallon water tank, he installed a faucet so they could get something to drink.

Still, in February, the jury in the case awarded four of the plaintiffs a total of $78,000: $7,500 apiece for two of them because Barnett inflicted “emotional distress,” $1,400 each for two more because of his “assault,” and $60,000 in punitive damages.  Barnett considers this an “80 percent victory” because he was not held liable on the most serious and ridiculous charges.  His lawyers will appeal.

Barnett isn’t the first victim of the leftist litigation lobby.  In 2005, the Southern Poverty Law Center used the courts to steal Casey Nethercott’s ranch because he, too, made the mistake of opposing the Reconquista.

As justly outraged as Americans are when they hear about these cases, what they don’t seem to get is that MALDEF, the SPLC, and their army of plaintiffs are waging war against them.  Lawyers for illegals are waging war to undermine immigration control and even the property rights of Americans who live along the border.  The plaintiffs are waging war in the streets by driving drunk and murdering cops, husbands, wives, and even children.  Turn on the History Channel’s Gangland on any given night, and you’re likely to see the gory, violent stories of illegal-immigrant gangs.  And those gangs don’t merely operate in major cities.  MS-13, the Salvadoran gang, reached into Virginia’s Shenandoah Valley, near the sleepy town of Woodstock, to murder a former member turned state’s witness.

But back to the border.  In 1999, Pat Buchanan visited 82-year-old rancher Theresa Murray in Douglas, Arizona, and described his visit this way: “Her ranch house was surrounded by a seven-foot chain-link fence that was topped with coils of razor wire.  Every door and window had bars on it and was wired to an alarm.  Mrs. Murray sleeps with a .32 caliber pistol on her head table, because she has been burglarized thirty times.  Her guard dogs are dead; they bled to death when someone tossed meat containing chopped glass over her fence.”

“Theresa Murray is living out her life inside a maximum security prison in her own home, in her own country,” Buchanan wrote in The Death of the West, “because her government lacks the moral courage to do its duty and defend the borders of the United States of America.”

Another rancher in Douglas, Richard Kozak, was forced to defend his home from illegal-alien drug smugglers.  As the Arizona Star reported in 2004, Kozak finally fought back after watching them traverse his property for two years.  They attacked his home, hitting it with more than 30 rounds of AK-47 and pistol fire, and then burned a trailer on his property.

These are not the stories MALDEF and the SPLC want Americans to hear.  They tell the story differently.  The illegals (or “undocumented immigrants,” as they insist) are merely oppressed and beleaguered campesinos just passing through, hoping for a drink of water and perhaps a small meal in return for a ready smile.  They are here, after all, to do the jobs Americans won’t do.

Everyone with half a brain knows this isn’t true.  The judges know it.  The juries know it.  Even the SPLC and MALDEF know it.  The question is, why do the judges and juries keep surrendering to the legalized theft these anti-American revolutionaries perpetrate?  The answer is clear: white guilt created by the complete loss of loyalty to country, kith, and kin.

The “antiracist” meme running through liberal American Christianity tells us that we must not object to teaching children in foreign languages, must not oppose welfare and other public subsidies for illegals, and, ultimately, must not resist the invasion from the South.  Until we realize that what we have is worth defending, we will continue to fall prey to the lie that being an American and a Christian means we must surrender our country to foreigners.

Even if a rancher “wins” in court, every lawsuit that he is forced to fight is a victory for our enemies.  One day, Americans will awaken to a country in which the last battle is over.  And they will have lost the war.

This article first appeared in the April 2009 issue of Chronicles: A Magazine of American Culture.

Granted, the banks holding these derivatives diligently “cover” their positions with offsetting derivatives, which are determined by complex econometric software on powerful computers designed to “assure” such coverage.  This is the same sort of “assurance” that Long-Term Capital Management, Bear Stearns, and Lehman Brothers relied on.  But the models failed to prevent unanticipated misbalances, and those companies, like AIG, went insolvent.  How many possible mismatches could strike these four banks?  And how could the Federal Reserve come to the rescue with $2.1 trillion of assets to be the backstop for $177.1 trillion in possible miscues?

Given the complex use of credit default swaps as insurance on credit, the current amount of assets could serve as a reasonable backup for the $7.8 trillion of loans held by commercial banks, and perhaps even for two or three times that value in derivatives, but not for $23 of derivatives for each dollar of loans.  At best, our banks are running a dangerous investment casino, and, at worst, they are engaged in pure speculation and insuring speculators, creating a bubble that eventually must burst.

In America today, the commercial banking system is every bit as vital as the electric or water utilities.  It can be catastrophic to have to shut down the banks, as it was in 1933.  Scores of companies were put out of business, and millions of workers were jobless by the time the banks were back in business.  Recently, the threat of a speculation bubble lurked as the clearing and lending of the banking system nearly came to a stop.

The Federal Reserve is handing out money to banks deemed “too large to fail” without knowing how much funding will be required and how long it will take for them to be restored (or to fail).  The regulators would be wise to consider the experience of the state of Texas, which went through a very severe recession, accompanied by a collapse of banking, in the 1980’s.  First oil and gas, then real estate, went through a “boom and bust.”  Central Texas alone went from 70 to 14 solvent banks.  Most of our banks—from the three largest with multiple branches to small independents—went through a process of “revival of solvency.”  The regulators sought private “negative” bids for failing banks, based on an estimation of the franchise’s current real value of assets (principally loans and fixed assets) and retainable deposits, as well as “goodwill” value.  The lowest “negative bid” from an investor who was deemed capable of managing it, and who held the required amount of equity, bought the bank.  The day the investor closed on the purchase, the bank was taken over, and, in most cases, operations continued seamlessly.  When an insolvent bank required capital from the FDIC, whether to continue operations or because it found itself in a condition of “negative capital” at its sale, it had to terminate its principal executives, directors, and shareholders as if it were in bankruptcy, and void all indebtedness or claims other than deposits.  Seized collateral went into a “bad bank,” to be sold as markets recovered.  Solvent banks were only subjected to the normal oversight of the regulators, and weak ones were put on notice that they must clean up their operations and balance sheets.

When it comes to the reorganization of banking, our goals should determine the means by which we attempt to attain them.  Amar Bhidé proposes simple goals in a BusinessWeek article, “How Banking Diversification Steered Us Wrong”:

Here is my modest, quasi-libertarian proposal: To prevent future meltdowns, let’s revive the radical idea of narrow commercial banking.  Let’s tightly limit bank activity to taking deposits and making loans—loans that bankers and regulators who aren’t theoretical mathematicians can monitor.  (Simple hedging to reduce the risks of making long-term loans with short-term deposits would be allowed.)

Anyone else—investment banks, hedge funds, trusts—would be allowed to innovate and speculate, free of additional oversight.  But they wouldn’t be permitted to trade with or secure credit from regulated banks, except through prudent, well-secured loans.  None of this would require new agencies or more regulators.

The simplicity of Mr. Bhidé’s proposals is a breath of fresh air.  Limit the role of commercial banks to accepting deposits and providing loans for personal and commercial needs.  Use derivatives only if they are limited to hedging the bank’s investments and loans.  Regulators would serve as auditors of risk and the appropriate limits of risk and as custodians of deposits and prudence in loans and investments, seeing to it that banks exhibit transparency in proving their solvency.  The history of financial institutions clearly demonstrates the necessity of this kind of regulation to assure citizens that their banking system is safe and sound.

If these are the goals, what are the means necessary to achieve them?  We could start by eliminating holding companies, because there would be no “off balance sheet” investments allowed for banks, which means that the Federal Reserve would no longer have any reason to regulate banks.  The Office of the Comptroller of the Currency should continue to be the auditor ensuring compliance with regulations regarding security, legality, and liquidity for banks’ deposits, loans, investments, and capital.  The FDIC should continue to issue “call reports” that provide detailed individual and group financial statements for all national and state banks, send warnings, and conduct changes of management and closure as necessary.  Any investment bank, hedge fund, leasing company, REIT, or mutual fund listed on the stock exchanges would be answerable to the Security and Exchange Commission (SEC); others would be held accountable under blue-sky state laws.  Fannie Mae and Freddie Mac should be refinanced and made solvent, then auctioned along with the FHA to private investment bankers under the regulation of the SEC.  Commercial banking should be allowed to deal with derivatives only as hedges for loans or investments held in-house.  This simplification of commercial banking would reduce the number of “problem banks.”  The SEC should organize a “derivatives exchange” for public rating and transparency.

A recent Cato Policy Report features an article by David R. Henderson entitled “Are We Ailing From Too Much Deregulation?”  His answer is no, and in support he cites the public savings that have resulted from “deregulation” of the airline and trucking industries.  But neither industry has really been deregulated; in both cases, regulations have simply been reduced.  Air- and highway-safety standards, which serve the public interest, are still enforced rigorously.  Similarly, the banking regulations proposed here are necessary to ensure public safety; and while they, too, must be enforced rigorously, they amount to an overall reduction in government involvement in the U.S. banking system.

In light of the complex problems faced by investors today, the public needs a more vigorous SEC regulator.  Fraud, conflicts of interest, and unbridled greed can only be restrained by transparent audits, attorneys who provide a check on privateers, and the enforcement of current law.  The “bear raiders” of the early 20th century and the Great Depression were the predecessors of the hedge funds and private equity firms.  Our laws need to be strengthened in order to protect the public against the disproportionate and excessive removal of capital; exorbitant salaries, bonuses, and “perks” provided to executives as “compensation” for no real value added; and hidden conflicts of interest.  Stronger laws should demand that violators return all the capital they have stolen and face serious jail time.

At present, there is no telling just how serious the financial crisis will become.  In a fleeting attempt to get us out of the crisis, the federal government is now spending trillions of dollars that it is confiscating from the American people—either directly, though onerous taxation, or indirectly, by inflating the currency, which robs today’s citizens as well as their children and grandchildren.  The only way out of the crisis is to get at its roots—as quickly and frugally as possible.

President Obama’s budget seeks to “stimulate” the economy by handing out ill-considered welfare and the equivalents of earmarks—all financed by the world’s worst federal deficit.  This will only endanger the currency and hinder us from retaining and creating jobs.  Similar handouts under George W. Bush did nothing to thwart the financial crisis.  An effective increase in liquidity is only possible by making credit available to solvent companies, through the assistance of solvent banks.  An argument could be made for federal funding for economically justifiable improvements to our infrastructure, but political handouts will only exacerbate our financial dilemma.  The most important thing Washington could do to stimulate an economic recovery would be helping to restore frugal, solvent, old-fashioned commercial banking.  If it did so, the markets would rise to the opportunity.

This article first appeared in the April 2009 issue of Chronicles: A Magazine of American Culture.

Alas, these speculations, so comforting to our Anglo-Saxon vanity, are dashed on the hard rock of linguistic reality.  Libero (from the Latin liber) means “free” in the sense of unrestricted or open, not “free” in the sense of no payment required (for which the Italians still use the Latin gratis).  French preserves the distinction between liber (French libre) and gratuitus (gratuity).  In Spanish, de gastos (“of charge”) is added to libre for things that cost no money; otherwise one might try to walk out of a bar without paying for a Cuba libre.

Romance languages have inherited something of Latin’s precision.  It is in English (and German) where the notions of liberty and costlessness are confused.  I wonder how many of us, when we hear the terms free market and free trade, think initially of cost-free access to markets?  When, as I have frequently done, I make the joke that there is no such thing as a free market, because there are always fees to be paid, I hardly ever get a response—neither a flicker of recognition nor a snicker of contempt.  In fact, a free market is a market into which anyone can enter, and free trade is a trade between nations that cannot be forbidden or limited by national governments.  The latter phrase is somewhat ambiguous, since governments often limit international trade by imposing tariffs.  However, this ambiguity does not alter the fundamental fact that free markets and free trade are not, by definition, free of cost but (supposedly) free from coercion.

“Well, what difference does it make?  This quibbling over the meaning of words is not going to help us out of the current economic crisis.”

Possibly not, but it is hard to see that any useful set of solutions can be proposed if we deceive ourselves, and, in the world we live in, there is hardly a more pernicious form of deception than the misuse—deliberate or unintentional—of language.  We have lived so long on the bad ideas that lie behind bad words that our minds have been poisoned and our very wills corrupted to the marrow of our being.  Freedom for us is no longer viewed as a positive good, a moral and spiritual way of living that has been shaped by centuries of experience; it is now only the right to be perverse—to take drugs that make us stupid, to read nasty books that make us crazy, and to molest other people’s children and kill our own.  Kris Kristofferson probably intended no harm by his oft-quoted line, “Freedom’s just another word for nothing left to lose,” but he did succeed in encapsulating the servility of modern men and women for whom freedom means dependency, whether on a drug, a guru, or a social worker.

In every economic crisis, two sets of explanations—and solutions—are proposed.  Republican “conservatives” (who used to be known as liberals) say that rogues in and out of government have distorted the market and robbed the nation, while Democratic “liberals” (who are basically Marxists) blame the Republican conservatives (who are really liberals) for refusing to regulate the marketplace, by which they mean the state should control and probably own the major industries and business sectors.  For the liberals who are really Marxists, the answer is a second FDR—more regulation and a Newer Deal—while, for the conservatives who are really liberals, the solution is a second Reagan (lower taxes and deregulation).  Unfortunately, too few of them are willing to balance tax cuts with budget cuts, without which our children and our children’s children will be crippled by the debts run up by the Bush and Obama administrations.

The debate, in other words, is the same debate Americans have been having for nearly 150 years, an acrimonious dialogue between two sets of radicals: on the one hand, the philosophes and classical liberals who undermined society in the 18th and 19th centuries; on the other, the Marxists who used government to fill the void left by the liberal demolition of the traditional social institutions of family, class, and religion.  Anyone who stands outside of the charmed circle of the Revolution is excluded from the conversation.

If we could dig up some old reactionary or prerevolutionary—a Samuel Johnson, or Walter Scott, or even, reaching back still further, a Cicero—what would such a man, supposing he had a comprehensive knowledge of what we have done in the past two centuries, say to us?  Since we are dealing with practical affairs, let us summon the Roman statesman Cicero from his place in the pleasant suburb of Hell where he is forever chatting with Roman heroes and Greek philosophers.

After the initial “Salve, Marce Tulli.  Quid agis?” I asked Cicero how he would have handled the U.S. economy.

“Economy?  That is the art of managing a household, and, as I understand, you people apply it to theories of buying and selling.  Your first mistake, it seems to me, lay in turning ideas into things.  A good Roman would not do this; his language would not permit it.  But you people are forever talking about history, as if it meant the events of the past (instead of the study of the past) or the geography of Europe as if it meant the actual places rather than a description of places.  You even, I am told, worship an almighty dollar made out of mere paper.  I wish we had thought of that one when we were raising money to fight against Mark Antony, but we knew even then that only a tyrant would degrade the currency.”

“Excuse me, Marcus Tullius, but could we return to the question?  I know you’d like to get back to your conversation with Scipio Africanus—”

“As I was saying, you people are always mistaking words and ideas for things and then, by treating what is unreal as if it were real, you cannot see the real.  I heard what you were saying earlier, and you are perfectly correct, if a bit shallow, in questioning the meaning of that misleading phrase, the ‘free market.’  You people seem to think that there is some ultimate principle or universal law of nature you call The Market, when in fact there is no such thing.  There is no Market, only markets.  Markets are not ideas or mechanisms of exchange: They are places where people buy and sell things, and it hardly makes any difference whether the market in question is the forum holitorium in Rome, where vegetables were sold (you can find the ruins in several nearly derelict churches), or something like your New York Stock Exchange, where most of the orders are now placed through these computers you seem so proud of, though to me they seem like nothing more interesting than a gigantic abacus that enslaves the very people who pretend to be masters.

“Now the first thing to know about any market is that buyers and sellers almost always try to cheat each other.  The sellers try to rig the weights and exaggerate the value of their product, while the buyers denigrate the product and spread ugly rumors in an effort to lower the price.  What is more, the sellers tend to form combinations to keep the prices high, while the buyers make every effort to buy on credit or with degraded coinage.  Cyrus the Persian despised the Greeks for their ‘free-market’ dishonesty, telling the Spartan herald, on the eve of the invasion, that he did not fear men who gathered together in a market to swear false oaths and cheat one another.  He was wrong not to fear them, but not wrong about the cheating.  If you people had read any history—as I know you have not—you would understand.

“The crooks you will always have with you.  In my day I argued against crooked merchants who took advantage of shortages, famine, or public ignorance and charged exorbitant prices.  You people, citing the proverb ‘A fool and his money are soon parted,’ celebrate the huckster who gets a corner on the market or exploits human suffering.  That these things happen is inevitable, and it would probably do more harm than good to try to eliminate them, but to make a virtue out of vice is the sign of a diseased character.

“You people, not so long ago, entrusted your currency to the care of someone named Alan Greenspan, a convinced amoralist who might have stood in for Plato’s Thrasymachus, if he were not so completely incoherent.  Here is a guardian of your money supply and a watchdog over your markets, and yet he says that those who had ‘looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief.’  I can only conclude the man is a liar or a fool.  What sort of ruler could ever have been unwise enough to trust such a man?  Does your country lack prisons and executioners for officials who cheat the republic and line the pockets of their friends and allies?

“If markets are neither ideas nor laws of nature, but playing fields on which every team is likely to cheat, they obviously need to be supervised.  One thing I learned from my many years of working with the Roman knights [editor’s note: The equites or knights were the business class], they always expected to take their biggest profits from cozy deals arranged by politicians: farming the taxes, mismanaging and looting the conquered provinces, taking contracts on building projects.  I do not say they were bad men or that Rome could have dispensed with their services, but if you assumed they were lying, cheating, and stealing, you would usually be correct.

“Naturally, the knights had many senators in their pockets, though the worst of the lot was probably Marcus Crassus, a patrician senator who found every imaginable way of making money.  He formed a fire brigade, for example, and when a house was burning, he would buy it from the owner at a ridiculously low price and then call in his brigade to put the fire out.  Who would prosecute a Crassus, when he had the jurymen in his pocket?  But Crassus, at least, was a soldier and statesman descended from a line of orators and generals.  How could you people allow yourselves to be fleeced by such obvious hucksters as Bernie Madoff and Ben Bernanke?

“The market can only be free where it is subjected to strict discipline.  But how is that different from any other form of liberty?  You people seem to think that liberty is a given and accept Epicurus’ absurd argument—borrowed by your shallow imitators, Locke and Rousseau—that man once lived free in a state of nature.  Has any of you ever met a ‘natural’ man?  The more savage they are, the more they are enslaved to their appetites, to superstitious terror, and to the stronger men who lord it over them.  No primitive man is free in the sense that a Roman or Spartan was free.  My old friend Caesar, of course, said all men by nature are eager for freedom, but that was when he was conquering the poor barbarians and plotting to enslave Rome.  Liberty is something you have to be willing to die for.  No one can give it to you: It must be earned, day by day, by hard work and self-discipline.

“I have been reading over some of your liberal books and occasionally discuss the arguments with my old friend Cato and with some of the Greeks—though they are sometimes too clever for my poor head, made out of the hard oak of Arpinum.  A Roman who came after me—decent fellow named Pliny, who served his prince well, though he was a bit hard on you Christians—pointed out that the kind of liberty described by people like Lord Acton and the Mills and Fitzjames Stephen has much in common with the ideals of a Roman or Athenian gentleman.  It may be the worthiest idea you people—who have rejected your religion and your traditions—can entertain.  But what you do not seem to understand is that liberty is an ideal that has to be striven for.  It can never be taken for granted or given to the masses, because only the man who is morally free can ever enjoy political freedom.  And, unless he is a Christian saint or a true Stoic, no one can be morally free unless he is possessed of sufficient wealth that he fears not the loss of a job or a plunge in the value of his investments.  Yes, it is true, I am setting the bar a bit too high, but that is the only way I have of explaining to you barbarians—please forgive the slip—what we meant by liberty.

“You Americans, who boast so much of being free, what do you do the first time your pension funds take a tumble or your neighbor is thrown out of work?  You elect an inexperienced numbskull and put your faith in him as a god, much as the Roman rabble were to put their faith in Caesar, though small good it did them.  At least Caesar was a real Roman from ancient stock, a man of the highest intellect with a cultivated prose style, to say nothing of being a master politician and military genius, while your president . . . I will say no more.  You have your god-emperor, and you had all better be praying that he be an Augustus, though I fear he will turn out to be more a Romulus Augustulus, the pawn of ruthless and unscrupulous foreigners.

“Advice?  No, I have no advice for you, except perhaps this one thing.  Do not deceive yourselves, as many Roman conservatives were wont to do in my day and in the early empire.  You do not live in your old republic, and neither you nor your descendants ever will.  If you are hardheaded and pragmatic, like my old pupil—Caesar’s adopted son, Augustus—and his advisors, you may be able to preserve and even strengthen some of the institutions that shaped the republic.  You might even rebuild a decent public-spirited aristocracy of men who put their country’s interest almost on a level with their own—a type of man that has almost disappeared from your country.  But do not throw your lives away on futile crusades against the tyranny you and your fathers have long since accepted.  Helvidius Priscus came after my time, but what did he accomplish by attacking a decent emperor like Vespasian?  Nothing but his own destruction.  What I said of my friend Cato, I would also say of many of you conservatives.  He acted as if he lived in Plato’s Republic and not among the dregs of Romulus or should I say of Barry Obama.  Please do not take this the wrong way, but you people make me happy to be a dead Roman and not a live American.”

This article first appeared in the April 2009 issue of Chronicles: A Magazine of American Culture.

Thomas Jefferson has left us an account of a supper-table conversation in the very earliest days of the U.S. government.  Vice President John Adams (who was intended by nature for a preacher) declaimed at length about the virtues of the British government, which, he said, if purged of its corruption, would be perfection.  Secretary of the Treasury Alexander Hamilton (a canny immigrant bastard with a Napoleon complex) differed sharply.  It was its corruption, he avowed, that gave the British government its great stability and power.  Add in Jefferson’s views, which agreed with neither, and you anticipate almost the whole history of American political economy.

Adams and Hamilton were Federalists.  They believed that in America the people could not be denied a role in government, however unwise that might be.  The people, fortunately, were usually an inert mass, but they could become dangerous.  They might discover that they could vote themselves the wealth of their betters.  So things had to be arranged properly.  The people could have their say in a Commons, but the government needed a powerful executive above the people to give it initiative and force.  (With some justice Jefferson referred to the Federalists as “monarchy men.”  President Adams was obsessed with extravagant titles and ceremonies.)  As Adams saw it, good government also required an upper house of senators (republican Lords), which had two essential benefits.  It would give status and authority to the wealthy and powerful whose ambitions, as history showed, might otherwise undermine the republic.  And it would provide a check on the expected rash actions of the people.

As the Jeffersonian philosopher John Taylor of Caroline pointed out, Adams, in a chimerical pursuit of checks and balances, was trying to create artificial orders where they did not exist.

Further, his vision, typical of his kind, mistook New England for the world, and he seemed ignorant of economics—the circulation of elites that would occur with a growing population settling a vast and nearly empty continent.  Hamilton was right on the mark.  If you wanted the wealth and power of society behind a strong government, you had to make it worth their while.  You had to have a British-style public debt—in which wealth and power had an interest-bearing claim on government revenue.  When Jefferson heard Hamilton declare that “a public debt is a public blessing,” he knew he had spotted the serpent in Eden.

The strongest element in the push for a new and stronger federal government with a revenue not dependent on the states had come from the holders of the debts from the War of Independence.  By 1789 this debt was not owned by those who had provided goods and services to the cause but by monied men, chiefly in New York and Philadelphia, who had bought it up at cents on the dollar while it was “not worth a Continental.”  The debt, of course, had to be paid.  The centerpiece of Hamilton’s initiative was to pay off the debt to its current holders, a number of them members of Congress, at face value in interest-bearing government bonds.  Only in this manner could the “good faith and credit” of the government, which was said to be essential, be established.  Thus would the wealthy and powerful be embraced in alliance with the government.

Jeffersonians were often quite intelligent and sophisticated men, but they did not seem to grasp the arcane mysteries of finance.  In fact, to them it looked like a bit of a swindle.  A public debt could at best be an onerous necessity in wartime.  Who was going to pay that interest to the privileged minority who owned those government bonds?  Where else could it come from but the pockets of good folks who actually produced something?  It was no spur to prosperity.  It merely created what Taylor called a “paper aristocracy,” a class endowed by government with special privilege for which it contributed nothing in return.  It reinstated the abuses that the American states had fought a war to be free of.

After all, most of the people were farmers—they produced something real out of the earth with their capital and labor, and supplied the overwhelming bulk of American exports that allowed trade with the world.  The worthy merchant saw that the farmer’s produce was sold and transported and that those things the farmer could not produce for himself were acquired in exchange.  The professional man and artisan gave necessary services for which a just compensation was due.  Even the manufacturer, when he asked no government bounty and provided goods that could not be found more cheaply elsewhere, played a useful role (though no free society could survive when dependent industrial workers became too numerous).  But what exactly did the speculator do for his profits?  Nothing except enjoy politically dictated privilege.

Taylor made a clear moral distinction between the producer and the speculator, whose occupation was to manipulate paper for the acquisition of wealth produced by other men.  Economists will doubtless find this a naive idea, and libertarians will avow that the speculator is a legitimate contributor to the smooth workings of the free market.  But it is a very basic question getting toward the proper nature of a good regime.  Mr. David Hartman has pointed out in these pages that the “financial sector” has of late enjoyed a third of all corporate profits, and speculation is generally held responsible for our current perils.  Could we learn anything useful for our present troubles by applying the distinction between producer and speculator?

Taylor argued at great length and in great depth that the whole Federalist case was based on a false understanding of society.  The masses preying on the wealth of the classes was fairly infrequent in history.  The masses were generally content merely to enjoy their modest own.  The norm of history was that the classes preyed on the earnings of the masses.  This was done either by force or by fraud—and the British/Hamiltonian public debt was the latest fad in frauds, covering up extortion by the mysteries of finance.  The law bearing the names of Senator Glass of Virginia and Representative Steagall of Alabama—the repeal of which is said to have brought on the present debacle—was a faint echo of Jeffersonian perception.

The Jeffersonians asked some very fundamental questions that have had no hearing since Lincoln, about things that have long now been taken for granted as normal.  Why should the government, which has an immense income of its own, have to borrow money and pay interest to private persons at all?  (Of course, deficits were not expected to become ordinary.)  The government might pay its expenses by issuing notes—redeemable promises to pay.  These would not need to be made arbitrary legal tender because they rested on the government’s credit.  Furthermore, since they were sound, they could circulate as money, providing a convenience and fulfilling the constitutional requirement to regulate the currency.  What did borrowing money from the rich in the form of interest-bearing bonds amount to except a guaranteed risk-free profit to certain well-connected interests?  Throughout the 19th century, when Treasury notes were proposed, the bankers, with the customary Whig-Republican dishonest demagoguery, raised the cry that the people would be forced to use the government’s money instead of the people’s (i.e., bankers’) money.  It was an unthinkable invasion of the people’s rights!

The public debt was thus bound up with the question of banking and currency, as Hamilton well knew when he pushed for a “national” bank—actually a private corporation in which the government invested and to which the government delegated certain privileges.  Until Lincoln, politicians argued ad nauseam about bank or no-bank, seldom touching the real question—that is, who would control the money supply.  Secretary of the Treasury Hamilton quietly did something far more significant than establishing the national bank: He issued an executive order by which the government would accept as if they were gold the paper notes issued by private banks controlled by his friends and supporters.

The love of it is the root of all evil, and yet the desire for it is nearly universal.  More, money is a mystery.  What is it?  Where does it come from?  Why does it increase or decrease in value?  Banks, it seems, and government are somehow involved in the answers to these questions.  I have been studying this subject as closely as I can for more than 20 years.  I know enough to know that I do not understand it.  I know enough to know that politicians and journalists haven’t a clue, and enough to doubt that most economists understand it.  It is possible that some financiers understand it, but why should they let us in on their immensely profitable knowledge?

And economic historians are the worst of all, since they generally repeat the deceptive party polemics of the past and don’t have any idea what was really going on.  For example, it is said that Andrew Jackson fought the national bank because he hated paper money and wanted a sound specie currency.  Yes, that is what he thought he was doing.  The Philadelphia national bank, though unconstitutional and a dangerous grant of power to private interests, actually kept the circulating paper of the country sound, an action which Martin Van Buren’s bankers in New York and elsewhere felt cramped their style.  Once the national bank was out of the way, they started loaning out paper notes with gay abandon.  The original issuers of unbacked paper make a profit out of the air.  As they circulate, the notes lose value.  Why, then, don’t depositors present their bad paper to the banks and demand specie, a puzzled Frédéric Bastiat asked the great pioneer American economist Condy Raguet?  Because the depositors know that the banks will retaliate by cutting off their credit and calling in their loans.  So, Jackson’s ill-advised (and illegal and arbitrary) actions against the national bank resulted not in a hard-money economy but in destructive inflation.

The trouble with judging economic policies is that sequences are not always consequences.  And the variables are many and large.  The air is full of the claims of politicians that their virtues have caused prosperity or the errors of their rivals have harmed the people.  And the claims of “experts” that their wisdom is responsible for good outcomes.  Most of what passes for the public discussion of economic policy are irresponsibly ignorant assertions or self-serving lies.  One might call the debate juvenile, if “childish” were not a more accurate label.  Remember, we are talking here about that mysterious thing the love of which is universal and the root of all evil.  As the old saying goes, “It takes brass to get gold.”  If you are good at it, swindling is a lot more profitable and fun than work.

What passes for the generally accepted history of American banking and currency, I am convinced, is as off-base as the account of Jackson and the Monster Bank.  Greenbacks, legal tender, the gold/silver ratio, the Federal Reserve—these are all described in terms of deceptive party rhetoric, when the real question is, which set of scoundrels gets to work the game?  True, the Federal Reserve is an atrocity, giving a private banking cartel the power to expand and contract the money supply, which means potential control of everything.  But the Federal Reserve, truly conspiratorial and outrageous, is only a concentrated version of Lincoln’s more dispersed national banking cartel.  The essential issue is deeper.  Who has the right to control the money supply and credit of our immense economy, and what should they rightly do with that power?

I agree with those folks who are eager to abolish the Federal Reserve.  It is not going to happen.  But if it did, what then?  Do you think the bankers and speculators wouldn’t have some other trick up their sleeves?  My friends, you’d better give this some more thought.  Jefferson and John Taylor will help.

With the third part of his program, direct subsidy of business and “protective” tariffs on imports to guarantee manufacturers a captive domestic market, Hamilton had less immediate success than with public debt and banking.  But by the 1820’s, agents of the Massachusetts and Pennsylvania industrialists were haunting the lobbies of the Capitol (hence lobbyists) to buy congressmen to vote “protection” (i.e., import taxes to exclude their foreign competition and allow them to sell at the highest possible prices) for their “infant industries.”  Even Hamilton would have been shocked by the near 50-percent blanket tariffs of the Abomination Act of 1828 and the Morrill Act of 1861.  A curious feature of tariff legislation was that, while “protection” was declared to be a great boon to all, certain items needed by the manufacturers that were not produced domestically were, by special provisions, exempted from import tax.  It is estimated that iron and steel tariffs added $6,000 per mile to the cost of railroad construction in the 19th century.  Is it any wonder that Rep. Thaddeus Stevens of Pennsylvania, who happened also to be an iron magnate, wanted a permanent Reconstruction that would keep the South forever without political power?

The case for tariff “protection” for American industry was and is based on the claim that it makes for national independence and self-sufficiency, and that it was responsible for American prosperity and high wages.  The libertarians are right about this.  How can forcing everyone to pay higher prices than necessary for what they buy be a cause of prosperity?  Tariffs do not create wealth; they shift it around to make some people more prosperous.  The great advance in wealth and industry in the United States during the 19th and early 20th centuries was a result of a hard-working, innovative population turned loose on a vast cornucopia of natural resources, not a product of tariff legislation cunningly crafted to benefit some at the expense of others.  Indeed, the tariff probably slowed development.

Does that mean that we should give up on protecting American industry and labor and sing hosannas to what now is praised or blamed as “free trade”?  No, because what we have now is as phony a version of free trade as Jackson’s version of sound money.  Adam Smith pointed out the general truth that free trade in goods between individuals of different countries, taking the benefit of comparative advantage, was good for his country and, indeed, for mankind in general.  His country was a given, and free trade could be of more use to it than government meddling.  Exchanging goods without interference was one thing.  Selling off the country is something else.  Neither Smith nor the antitariff Americans of the 19th century saw free trade as the international manipulation of money and labor-arbitrage that sacrifices citizens to foreigners for private profit (a modern version of the international slave trade).  The speculators have taken their game into realms remote from the benefit of their country and her producers.  They trade not in goods but in people, while they gamble on pieces of paper (or, rather, cyber entries).

Do real Americans have the right to protect our industry and our labor from an unprecedented type of predator in whatever way is best?  Of course we do.  But remember, when tariff protection was profitable to Northern capitalists and a loss to everyone else, the United States was a bastion of tariff protection.  Now that so-called free trade is profitable to Northern capitalists and a burden to everyone else, the United States has “free trade.”  The question is not free trade or no free trade—it is who deals the cards and collects the pot.  John Taylor, if he were here, could tell us, in his loquacious, humorous, colloquial veranda talk, that in arguing about surface issues put forward to disguise the depredations of the paper aristocracy, we are missing the point.

This article first appeared in the April 2009 issue of Chronicles: A Magazine of American Culture.

Dead Romans and Live Americans
by Thomas Fleming

VIEWS

"It Takes Brass to Get Gold”
by Clyde Wilson
Politics and economics in America.

Regulation for Financial Sanity
by David A. Hartman
Government’s important (and reduced) role.

Not Our Fathers’ Auto Industry
by Greg Kaza
History versus economic models.

Ask an Entrepreneur
by William Lutz
Where to turn for sound economic advice.

NEWS

NATO at 60
by Ted Galen Carpenter
A hollow shell.

REVIEWS

Scholarly Pornography
by Irving Louis Horowitz

Colin McGinn: Mindf--king: A Critique of Mental Manipulation
Harry G. Frankfurt: On Bullsh-t

plus

Michael J. Ard on Roger Crowley’s Empires of the Sea: The Siege of Malta, the Battle of Lepanto, and the Contest for the Center of the World

Fr. Michael P. Orsi on Russell Shorto’s Descartes’ Bones: A Skeletal History of the Conflict Between Faith
 and Reason

H.A. Scott Trask on Paul Theroux’s Ghost Train
 to the Eastern Star: On the Tracks of the Great Railway Bazaar

CORRESPONDENCE

Letter From Chile: Thoughts on Pinochet and Castro
by Christie Davies

VITAL SIGNS

Anarchotyranny: Policing the Opposition
by Thomas McMahon

COLUMNS

The Bare Bodkin
by Joseph Sobran

Under the Black Flag
by Taki Theodoracopulos

Heresies
by Aaron D. Wolf

The Rockford Files
by Scott P. Richert

European Diary
by Andrei Navrozov

In the Dark   
The Reader
by George McCartney

The Hundredth Meridian
by Chilton Williamson, Jr.

DEPARTMENTS

POLEMICS & EXCHANGES
AMERICAN PROSCENIUM
CULTURAL REVOLUTIONS
—R. Cort Kirkwood: "Su Rancho Es Mi Rancho"

POETRY

Two Chapters From a
History of the Mind and
The Catalogue of Moons
by David Middleton

ON THE COVER

Cover art by George McCartney, Jr.
Inside illustrations by Melanie Anderson.