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Philip Pilkington: The 19th Century Long Depression: How it Fostered Oligopolistic Capitalism and Serves as a Model for Austerity

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By Philip Pilkington, a writer and journalist who is in the process of moving to London. You can follow him on Twitter at @pilkingtonphil

You can live in this illusion
You can choose to believe
You keep looking but you can’t find the woods
While you’re hiding in the trees

– Nine Inch Nails ‘Right Where it Belongs”

Many people that I meet who are vaguely interested in economics – usually people in academia outside of the economics departments or working in lower tier sectors of banking and finance – are enamoured with libertarianism and its economic doctrines. Meanwhile the Republican Vice Presidential nominee – an Ayn Rand obsessive – has channelled such ideas into a truly otherworldly budget proposal.

Libertarianism-lite has become the last refuge for the ideological conservative. The ideals of mainstream conservativism appear absurd in light of the 2008 crisis. It then became clear that the entire economic system was far from the meritocracy structured according to free entry and competition that many supposed, but instead one dominated by incestuous ties between quasi-government institutions and big corporations. And the ugly part was those collusive relationships arose as a direct result of deregulation. Less regulation allowed for large companies to exercise unbridled market power, and they channeled those profits into the political process, to further skew regulations in their favor.

However, rather than recognize that “free market” doctrines lead to concentrations of power, many responded to the aggressive promotion by business and economists of this ideology, leading them to move further to the right in the wake of the crisis, become antagonistic and even a little extremist toward the system as it actually exists and embrace radical aspects of the libertarian doctrine. Mainstream politicians then cherry-pick certain aspects of these doctrines and feed them back to their base.

This is, in a very real way, where we are today. No, libertarianism has not gone mainstream. But aspects of it have permeated the mainstream. And this makes some of its purer arguments interesting to consider.

Deflation and Nostalgia

The most popular aspect of the libertarian doctrine today is probably the idea that deflation is not such a bad thing – indeed, it may even be a morally purifying cure. Uncomfortable – like a cold shower – but necessary to rid a gluttonous populace of its worst excesses.

The economic argument among actual libertarians for this view runs broadly that prices in a competitive economy should generally be tending downwards rather than upwards. The rational argument – as is typical of extremist ideologies – for the most part masks a more deeply embedded emotional appeal. Simply put, the argument plays to the hoarding impulse so prevalent among gold-bugs, who appear to overlap strongly with libertarians.

While it would be too much of a distraction to go into the origin of the compulsive hoarding impulse here, it should simply be noted that among right-wing libertarians it is often mixed up with saving. Not only are these two distinct concepts within the sphere of economics – hoarding being a removal of wealth from circulation and saving being the deployment of present wealth to procure future wealth – but they are generally recognised as distinct concepts in psychology, both popular and medical. Even children can distinguish between Scrooge and true capitalists.

The argument for deflation appeals to the idea that the saver – who is seen as the origin of wealth and production by the libertarian – benefits because the money that they have saved becomes worth more. But, of course, this is not true of the productive capitalist whose fixed capital investments depreciate rapidly as they lie unemployed. It is only true of the hoarder, the gold bug and the miser who removes wealth from circulation or transfers it into useless fetish-objects and sits upon it until he acquires more purchasing power.

In order to get around this inconvenient fact the libertarian supplements their argument by saying that all investments that fall as the deflation tears the economy apart were merely “malinvestments” made at a time when money was too cheap. It is thus that the wanton destruction of societal wealth is justified as a sort of Judgement Day. Those who go bankrupt are simply sinners. Thus the fact that deflationary conditions wreak havoc on all those in the economy that are not unproductive hoarders is veneered over through a moral appeal to the supposed quality of outstanding investments.

Tied to this is the idea that production that does take place in a deflationary environment is morally pure. It is seen as “lean and mean” in that it requires real effort on behalf of the investor to accomplish, this in contrast to the “profligate” investment decisions that might be made when money is easy to come by. In a deflationary environment the men, as it were, are sorted from the boys. This crass notion ignores many aspects of how modern economies actually operate; for example, the fact that monopolies, oligopolies and giant corporations will find it far easier to weather a serious recession or depression than a smaller firm simply due to size and outstanding credit relations. But it is an argument that is made nevertheless because it appeals to a sense of moral righteousness and rewards the libertarian’s anti-social hoarding tendencies.

It is here that nostalgia rears its head. Libertarians often hold the 19th century up as a sort of model for what the present should be. Unlike extremist left-wing ideologies, like Communism, libertarianism is backward rather than forward-looking. Where Communism projects into the future a mythic ideal, libertarianism mourns over an ideal past that has supposedly been lost. (Would it surprise the reader to learn that the hoarding impulse is thought to be tied to fantasies of the womb?)

For the right-wing libertarian the 19th century is the era of a true capitalism with little or no government intervention. Indeed, even warfare was limited and required little government meddling. Yes, this era was unstable – even the libertarian would not deny that – but this instability gave rise to a dynamism and a freedom that was crushed in the “statist” 20th century.

But it is not the inflationary era of high liberalism that is often looked back upon through rose-tinted glasses, but the deflationary era of the third quarter of the 19th century. This would be unusual if we did not already understand the motivations for the libertarian argument for deflation. The right-wing libertarian needs an era that was both non-inflationary and at the same time one of “free” competition as a screen on which to project their utopian fantasies. But, as we shall see, in this they are trying to have their cake and eat it.

The Contradictions of Deflation

The era that is often focused on is known to historians as the “Long Depression”. It is variously dated from between 1873 and 1879 to between 1873 and 1896. The former dates are more accurate insofar as how long the true deflationary period actually lasted, but the latter dating highlights that the forces unleashed dragged on much longer.

The depression was set off, as so many are, by a financial crisis that took place in 1873. The causes of the crisis are hard to determine, but it would appear that a great deal of the reason for it was an asset price bubble inflated by speculation in US railroads. This, in turn, was partly due to the government subsidising land.

It is here that we begin to understand more fully why it is the depression years that are often focused on by the libertarians rather than the boom years that preceded them. The boom years – also known as the era of high liberalism which ran from roughly 1848 to 1873 – were characterised by cheap money. This was in spite of the fact that the gold standard was to a large extent in place during these years – although the US dropped it in 1861 due to the Civil War. The reason that the gold standard did little to restrain money and credit expansion was because of the enormous discovery of gold deposits in these years. Whereas between 1831 and 1840 about 20,300kg of gold were mined worldwide, between 1851 and 1860 this had risen to an enormous 206,100kg. With these huge inflows of gold banks were able to massively extend the money supply in the form of loans and this allowed for not just rapid economic growth but also massive speculation.

Since the boom years were, by all measures, inflationary and unsustainable, it is instead the deflationary years that are focused on by the right-wing ideologues. Usually they zoom in on economic growth which, according to the best figures we have, was not as poor as one might assume. The fact that unemployment was high – by the standards of the time – is usually ignored and is simply chalked up as part of the pain that had to be borne in order to usher in a new era of prosperity. This line of argument also excuses the swathes of bankruptcies during these years.

However, the most peculiar aspect of the argument favouring this deflationary period is that it completely ignores the broader historical picture. The libertarians, hiding as they are in the trees, completely fail to take notice of the woods all around them. For it is widely recognised by historians that this was the era when laissez faire capitalism fell and the ground was cleared for a new era characterised by government intervention, monopoly men and imperial conquest. As the great British historian Eric Hobsbawm put it in his ‘The Age of Capital’:

The new era which follows the age of liberal triumph was to be very different. Economically it was to move away rapidly from unrestrained competitive private enterprise, government abstention from interference and what the Germans called ‘Manchesterismus’ (the free trade orthodoxy of Victorian Britain), to large industrial corporations (cartels, trusts, monopolies), to very considerable government interference, to very different orthodoxies of policy, though not necessarily of economic theory. The age of individualism ended in 1870, complained British lawyer A.V. Dicey, the age of ‘collectivism’ began. (P. 354)

Or again:

A new era of history, political as well as economic, opens with the depression of the 1870s. [This era] undermined or destroyed the foundations of mid-nineteenth-century liberalism which appeared to have been so firmly established. The period from the late 1840s to the mid-1970s proved not so much, as the conventional wisdom of the time held, the model of economic growth, political development, intellectual progress and cultural achievement, which would persist, no doubt with suitable improvements, into the indefinite future, but rather a special kind of interlude. (P. 63)

This new era was to be one in which trade unions grew to become a serious force while the first true wave of corporate mergers would establish a new monopoly or oligopoly structure for the capitalist system. It was also an era in which the government would begin to play an increasingly large role in economic affairs. The foundations would thus be laid for the state capitalist systems of the 20th century – the very systems that the libertarians decry – not to mention for the rise of socialism.

Indeed, when the lifeblood of cheap money had run out the era of high liberalism ground to a halt and economic forces began to become increasingly concentrated. This is no coincidence. But nevertheless right-wingers today continue to fool themselves into believing that austerity and deflation rather than easy money and credit are the path back to some sort of purified capitalism. They are no such thing. For the libertarian right-wingers are chasing an historical ghost – a ghost that never existed in corporeal form and so one that they have no chance of resurrecting. In clinging to these crude ideological notions and historical myths it is their own ability to engage in practical politics that they bury – and those politicians who embrace their creed will not last long.

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60 comments

  1. middle seaman

    The financial system closeness to government and its control of political power has absolutely nothing to do with deregulation. The finanncial became all powerful in countries with strong regulation as well. It is the huge money they make in modern economy. This the root of the monster.

    1. ambrit

      Dear middle seaman;
      A bit of a circular argument I believe. I think he meant that deregulation unleashed the potential corrupting influences of concentrated wealth. It’s more of a balancing act than an either or relationship. I always liked the Arete concept Pirsig elucidated in “Zen and the Art of Motorcycle Maintenance.” Striving is all.

    2. Yves Smith Post author

      Huh?

      You really need to bone up. There has been considerable deregulation of all sorts of markets in all advanced economies (ex, ironically, Japan, but they use regulation as as form of trade barrier, so they don’t really count). For instance, even Germany has considerably loosened its labor regulations and its retail store laws (limiting hours when they could be open). The ones that were reluctant to deregulate banks as fully as the US and the UK (most notably Canada) did markedly better in the crisis, but given that Canada is blowing a monster housing bubble, their failure to toughen lending standards looks awfully likely to come back and bite them hard.

  2. Fiesty

    Master says congress needs 300 “tax and spend” democrats with 9 inch nails. But then he said pork is not growth, and I’m not sure what he meant by that.

  3. ambrit

    Ahah! One of my comments entered into Moderation. The only distinction I can think of with the moderated comment is an oblique reference to Hebraism. Very interesting. Someone receive a late night visit from the JDL?

      1. ambrit

        Dear Mz. Smith;
        That’s ok; some of my snarkier comments deserve oblivion. Thank you for all the work you do here.

  4. bob goodwin

    I heard a lot of family lore about my great grandfather who built a large 19th century business. There were serious shortages of money throughout the economy due to massive migration, technology shifts and displacements. There were hundreds of local currencies, and a lot of barter trade.

    The population was one tenth of what it is today, and 90% of that population worked on farms. And there was this nasty little war that killed 20% of the working age male population.

    So I am not sure that I would draw too many conclusions about that era. But there seems to be a thread of reasoning that once JP morgan saved wall street in 1909, and set the stage for the federal reserve in the 1930′s that the 19th century depressions came to an end.

    There may be some truth to this, but to us Libertarians, the myth seems dangerous. The effectiveness of modern economies may be due to the fact that money is no longer transmitted in gold by horses.

    The Fed today is entirely a political organization, and is helping encumbents far more than the unwashed masses. Capitalism may have caused an accumulation of power in companies, but this is minor compared with what can happen if the government collusion with business expands.

    1. reason

      “Capitalism may have caused an accumulation of power in companies, but this is minor compared with what can happen if the government collusion with business expands.”

      There is some truth in that, but then why do you think the answer is to throw out the only available potential countervailing force, instead of wanting to renew democracy. What you are saying is simply “corruption is a bad thing”. Then fight corruption.

      You seem to take from the existance of corruption, government is a bad thing – I take from that excessive power is a bad thing. Corruption is not the same everywhere – there must be some institutions that counteract it.

      1. j

        Why do you look for reason in the libertarian?
        The whole deregulation and ‘government is bad’ argument can be summed up with an example like this: if we deregulate murder, we won’t have convicted killers any more!

        Libertarianism is a political agenda by the corporate to further the interests of the corporate. There is no truth to be found in it, only means to their personal ends.
        It is sad that some of these means have been made to be about filling the void in the masses’ need to articulate and find meaning in their dissent with the status quo. But hey, it works! – everywhere you look you can find someone rooting for the libertarian cause. The technical term, applied from above to any such a person, is an ‘useful idiot’.
        I can never understand the disconnect from reality evident in people believing that things will be better off if there were no government. Any such country will be a lawless one, as seen in Somalia, Columbia, and increasingly Mexico and the US of A.

        When your government sucks, you need to get a better one. That’s all there is to it. (How to, that’s another rant.) But trying to get rid of corruption or whatnot by deregulation?
        Let me remind you, regulation is government calling something either good or bad. It is imposing values and ethics on top of the chaos. Deregulation is reversing it, saying that some piece of reality does not need values to shape and guide it.
        Deregulating based on the libertarian agenda then of course means saying that ‘if we forget the values on this issue, there is profit to be made’. This kind of behavior, of course, is called corruption.

        1. Colin K

          You’re profoundly confused about the origins of libertarianism. Corporations don’t need another front group. They’ve already got the state.

          1. Lloyd Madoff

            Actually corporations do need front groups to further their agenda. Lobbyists for the State and pseudo grass-root movements like the “Ayn Rand” libertarians for the populace. It makes the masses feel like they’re going to get power back in their hands once the government is gone, thus the typical libertarian comment, “Corporations are using the government to get what they want, so lets get rid of the government.”
            Think of the libertarian movement as a protection for the corporation. If the public anger become too great and heads are going to roll, the target will become something other than the real people behind the curtain. And if the people succeed in “abolishing” the government, power will still remain in the hands of the corporations.

    2. Philip Pilkington

      It would be very naive to think that you can seperate the role government came to play in the economy from the oligopoly structure that began in 1873. The two, as all historians that I’m aware of argue, are intricately intertwined. The concentration of business power leads necessarily to a symbiotic relationship between business and government — just like we see with the contemporary big banks.

      The libertarian mythology is just that: a mythology. Capitalism LEADS TO big government and cartels; to think that the latter are a deviation is a very immature way of looking at history.

      1. Goin' South

        Absolutely right, Philip.

        Anyone concerned about government power needs to look to the cause, corporate power and Capitalism.

        Treat causes rather than symptoms.

        Excellent essay, BTW. I love your tying in psychological and even religious aspects into the argument. This worship of Capitalism found in Propertarians has complex roots.

        1. slyke

          Actually government existed long before corporatism did. It used to collude with religion, yet you probably wouldn’t argue that in the middle ages, peasants should best resist their feudal lords by burning churches, would you?

          1. ambrit

            Which is exactly what they did do, often. Just because they were peasants doesn’t mean they were stupid. To them, the Upper Clergy was part of the Aristocracy.

          2. pws (@pws4)

            The King didn’t get decaptated until after the power of the Holy Catholic Church was broken in England.

            That’s an important reality.

        2. William Neil

          Yes, good observation Goin’ South.

          Some day, someone is going to write a long essay about the religious, psychological and economic roots of austerity, maybe even call it “Sinners in the Hands of an Angry Market,” utilizing the works of Max Weber, Perry Miller, Karl Polanyi, Karen Ho, and Mark C. Taylor, who was head of the religion department at Columbia University when he published “Confidence Games: Money and Markets in a World Without Redemption,” to cite just a few of the sources that might go into an essay like this. Oh yes, almost forgot James A. Morone’s “Hellfire Nation: The Politics of Sin in America History.”

          I can’t wait to read it, it might even be followed up by one entitled “Austerity: Courtesy of the ‘Best Men.’”

      2. RBHoughton

        Not completely persuaded there.

        Throughout the 19th century, the merchants claimed commercial secrecy – our profits are made cleverly and no-one else may know otherwise foreigners will take a share. Successive governments right up to today bought this nonsense.

        On the other hand, whilst the administration had to act in a broadly democratic way, the companies were all hierarchies, able to focus on profit.

  5. Woody in Florida

    “While it would be too much of a distraction to go into the origin of the compulsive hoarding impulse here…”
    “(Would it surprise the reader to learn that the hoarding impulse is thought to be tied to fantasies of the womb?”
    Interesting take on things Philip, but gold hoarding might just be a response to the lose of purchasing power of your beloved fiat currency. Savers are losers if they play your game, unless they save something of value, and while other things might work besides gold, gold is fairly liquid unlike real estate. Would you rather we put our money into the game with Goldman Sachs, who somehow “got it right” 46 days in a row? No thanks, not when all is desired is the preservation of ones purchasing power.

  6. David Lentini

    A very interesting article. I would add that much of the moral dimension to the libertarian argument reflects the doctrines of many of the various protestant sects that settled across American during the First and Second Great Awakenings. The idea that God would favor the productive and punish the sinner is reflected in the need for a hands-off government and the cleansing of a millenarian market crash.

    But I think it’s also worth pointing out that as the industrial base became more concentrated, with the larger businesses devouring the smaller businesses, usually J.D. Rockefeller-style, eventually even the business elites came to need a stronger federal role. As businesses sought a national maarket, they needed reliable laws for interstate shipping, rail traffic, contract enforcement, and, yes, even banking. Polya points out the same thing for the British in his book “The Great Transformation”. Of course, the robber barons wanted one-side deals, with someone else paying the bill. Nevertheless, the rise of the progressives at the end of the 19th century largely reflects the acceptance of a greater role for national government by business.

    Of course, as you point out, this ruins the moral story for the libertarians. If even businesses recognize the need for government, then the morality play of laissez-faire is ruined and the truly righteous have no way to demonstrate their superiority. No “Superior Dance” for them!

    1. pws (@pws4)

      The modern Robber Baron doesn’t make things, most of the time. He is a corporate raider, and he makes his fotune the way the Vandals and the Visigoths of old did, by sacking cities (or coporations, which are richer targets these days, although they are still sacking cities: http://www.rollingstone.com/politics/blogs/taibblog/wall-street-rolling-back-another-key-piece-of-financial-reform-20120920 ) and making off with their movables.

      Because of this, the modern Robber Baron has no need of the cops, except to corrupt them and turn them to his service. Sure, eventually these termites might destroy too much… but not yet.

  7. HaraldK

    “(Would it surprise the reader to learn that the hoarding impulse is thought to be tied to fantasies of the womb?)”

    Why do you spoil an otherwise interesting article with stuff like this? If I should tease you, I could say that you wouldn’t write it unless you had issues with your mother (and if you deny it, that just proves it).

    But it’s better to say that it’s tied to the discredited fantasies of Freudian psychoanalysis.

    1. Philip Pilkington

      Don’t think Freud said it — think it might come from Fromm or someone. Compulsive hoarding involves burying yourself alive with various objects. It is also often linked to extreme cases of agoraphobia. I don’t know what the desire to bury oneself alive leads you to associate, but it seems to me that a womb fantasy is not at all far flung. And if you’ve ever seen certain fetishes that involve engulfing oneself in artificial womb-like objects you might not be so quick to say that such theories have been “discerdited”.

  8. Geojos

    Believe Philip hit the nail on the head when he said Capitalism leads to big government, and one may add saves it or rearranges it in some manner. It seems we are in one of those periods where the state and capitalism are in the process of transiitoning to something else, whatever that may be.

    1. Nell

      “It seems we are in one of those periods where the state and capitalism are in the process of transiitoning to something else, whatever that may be.”
      Feels like regressing would be a better word than transitioning. Transitioning sounds hopeful. My fear is that Michael Hudson’s analysis is correct and we are regressing into feudalism. Maybe I wouldn’t feel so bad about this if I didn’t know for sure that I (and those I care about) would be serfs.

      1. David Lentini

        I wouldn’t call it feudalism, which has no history in American, and required both a strong connection between church and government as well as a committment by the royalty and aristorcary to care for the peaseants.

        No, I believe we’re heading for what Warrent Buffet called the “sharecropper society” that reflects the brutal power hierarchy of the Old South. No religion. No noblesse oblige arising from one’s place on the great chain of being. Just economic exploitation to the point of slavery. If you poor, that’s becuase God hates you.

        1. Ms G

          Keen insight DL, thanks. It jibes with the vibe that Mayor Bloomberg has been aggressively sowing in New York City since his miserable 12 year term began. It is cold, heartless, philistine and nasty. Certainly no noblesse oblige or even the breeding to attempt it. Just how you describe the “sharecropper society.”

    2. J.

      Any form of government seems to lead to big government. Everyone wants to get their friends and family on the gravy train – it’s human nature.

      I haven’t seen a form of government resistant to this process, but I’d be interested to hear of one if it exists.

      1. ebear

        Nailed it. As for as the various “isms”, I see only two. Idealism and realism. The Idealist says “if only people would do X, then we could have Y.” The realist says, “good luck ever getting people to willingly do X.”

      2. Michael W

        You must have missed the Wall Street wallow over the last 10-20 years. If you think the gravy train is in government employ you have an incredibly tiny understanding of what comprises a gravy train. The only ones who promote this notion are the Wall Street wallowers who use their captive media to point fingers at government so called largesse as a distraction from them absconding with 99% of the wealth and leaving 1% of the wealth for the other 99%. A recent published calculation of the current total wealth in the world translated into USD is one million four hundred thousand trillion dollars which looks like this when expressed as a figure: 1,400,000,000,000,000!!!! The reason you see so little of it is because almost all of it has been swallowed up by the bank accounts and safety deposit boxes of the hyper wealthy. Now that’s a gravy train!!!!
        The hyper wealthy like the Knox brothers chip off small little pieces to pervert democratic government and buy off or threaten politicians. Actually they can “get” politicians to dance without even spending a penny – the Wall Street paid for political corruption has hit hypersonic speeds – b y simply threatening to give their opponent millions of dollars in the next election unless they vote this way or that, depending on what most benefits the Knox zombies (corporations).
        Morality has three positions: moral, one knows what it is and does it; immoral, one knows what it is and doesn’t do it; and amoral, one never considers morality in the first place!
        Morality is comprised of human, social and spiritual values – none of which can be measured in terms of dollars.
        Therefore, all corporations and the wealthy elites who control them are amoral – the only value they consider before decision and action is dollars.
        When voters go to vote they do so on the basis of human, social and spiritual values – morals. And they expect their elected representatives and the government to reflect those morals.
        Corporations have been and are making money fist over paw by being amoral.
        National and state democratic governments have the grip of death on corporations because corporations are all chartered and owe their existence to national or state governments. This means that democratic national and/or state governments not only have the capability and voter expectation to be moral but they have the power to force corporations to be moral!!! For this reason and this reason only top elites and their corporate fronts HATE democratic government and are 24/7 using their wealth as a cudgel against or a reward for politicians who either oppose their oligopolistic kleptomania or facilitate their rigging the political system to their advantage and the disadvantage of the vast majority of non-elites.
        Corrupted democratic government is the real problem, but who is it that corrupts democratic governments? Is it workers? Is it the poor and socially displaced? NO! It is the oligopolistic kleptomaniacs who own the media and use it to tell the majority how bad, bloated and corrupt the government is – well they should know because it is them that corrupted government and their political hacks who bloated government with their genuflecting minions who proceed to prevent effective democratic government and facilitate even greater levels of kleptomania.
        As recently as 2010 the average take home for the CEO’s of the top ten ‘hedge funds’ was three billion dollars, that’s $3,000,000,000 – most of it with either extremely little or no taxes paid. Now tell me about the largesse you think government employees enjoy that constitutes a ‘gravy train’??!! What you are actually talking about are potatoes which are so small one needs a powerful microscope to see them at all!! The real gravy train resides on Wall Street with the economy sucking kleptomaniacs who run the joint.

    1. jib

      According to Glasner, it was 10%. However, the industrial economy took a much heavier hit, durable goods down 30%, iron and steel down 45% but since agriculture was still a large part of the economy and it’s production is determined by weather, the overall economy was ‘only’ down 10%.

      Of course a 10% decline is NOT what defines a depression. A depression is defined by deflation and deleveraging brought on by a excessive debt and triggered by a financial panic. It is different from a recession which is a biz cycle reset. Depression are usually more severe than recession hence the laymans ’10% definition’ but it is the nature of the event, not the size that determines if it is a depression or recession.

  9. Mista B

    As a libertarian and “Randist”, I would very much like to see restrictions on credit creation. Based on years of reading and research, it’s my contention that every bust can be traced back to a preceding boom financed via excessive credit. My belief is that most bankers behave prudently. Unfortunately, in every boom there have been bankers who’ve run around granting loans to anything with a pulse. This goes unchecked for a long enough period of time (usually just a few years) for the exposure to become huge. The exposure in turn pushes up asset prices (inflation), which will eventually and necessarily result in a decrease in asset prices literally as soon as the rate of credit creation stops increasing. Then the collapse occurs. The bankers never go to jail for excessive lending. It’s only when they’ve engaged in outright fraud that there’s even a chance they’ll see bars. Meanwhile they’ve collected huge paychecks. And they’ll be not only free but fully incentivized to do it again in five to seven years once the taxpayers have bailed out the banks. This is the cycle that keeps occurring.

    1. pebird

      What does it mean to be a libertarian but want to control the banks from excess credit creation? Who exactly is the agent to do the controlling?

      If it is something called the government, then how does that reconcile with libertarian principles? If not, then what kind of non-coercive methods are going to work?

      I am not trying to be snarky, I really want to understand the thought process justifying a libertarian perspective and regulation.

      1. Mista B

        Not snarky at all. I consider myself a libertarian, not a card-carrying Libertarian (or Republican or Democrat). As a libertarian, I do believe in limited government, not no government. Throughout history (not just U.S. history but world history) banks have been able to extend massive amounts of credit in short periods of time due to fractional reserve lending (which started as a scam, incidentally). Most of the time, it appears to work, since most of the time depositor don’t all show up at the bank demanding their money. The longer this goes on, the more stable the system appears, which eventually attracts hubristic bank lenders. It only takes a relatively small number to wreck the system. As such, the only way to prevent it is to mandate much higher capital raios. (Some even suggest a 1:1 ratio, so that only capital can be lent out.) Bankers will of course not like this at all, as it would restrict their ability to make money for themselves. It would also put a damper on the economy. But, in theory, it would prevent bubbles. I say in theory, because as soon as we implement controls, foreign banks would see opportunity. Glass-Steagall was repealed because U.S. banks “couldn’t compete” according to our bankers. Less than ten years later, we have the biggest financial crisis since the Great Depression. So this notion that competition is somehow good when it comes to credit creation has been proven instead to be the cause of asset bubbles–and their subsequent destruction. This then causes chaos, despair, and the rise of despotism. One need only look at the rising political divide in the U.S. (not to mention the far left and far right factions in places like Greece). This is a serious threat to freedom, and libertarianism is first and foremost about freedom for individuals–not about letting businesses do whatever they want, regardless of the consequences. Just my $0.02.

  10. pebird

    I believe the long depression was triggered in part by the deliberate reduction in money supply, associated with extinguishing the Lincoln greenbacks. Which in essence was removing the government from the money creation business.

    The gold discoveries allowed an expansion of private credit, and at the same time a long political struggle, with the banking interests winning resulted in the greenbacks being taken out of circulation. Once the bubble burst, banks had the upper hand in controlling the money supply.

    The long depression was also the “golden” years of the US gold standard and the start of the silver vs. gold hard currency controversies.

    Very interesting times.

  11. richard in norway

    Where is the rest of this article, it just got started and then stopped dead. Where is the other 10,000 words. I still know next to nothing about the long depression.

    1. Stratos

      I’m with Richard in Norway. This article is a cliffhanger. It needs at least two more parts.

      Just discussing deflation and tight credit in the 1890′s would constitute another part to this article. American citizens in the 1890′s also had to contend with artificial scarcity and imposed austerity. I think P. Pilkington could easily connect proto-liberterians and their hoarding impulse with the events of the Gilded Era — and the subsequent reforms of the Progressive Era.

  12. Christer Kamb

    I would not call myself a libertarian. Still I hoard cash and gold. Why? Because the system is rigged today. Those who are benefiting the most are not punished the capitalist way. Why are not banks restructured, bankfinanciers not getting their investments(misallocated capital) equity-swapped from bonds to shares (BofA, City etc)? Because our leaders lack the curage to restart the system. That´s why I am hoarding cash and gold. Because I know the system is rigged and the centralbanks are just postponing the inevitable. 10-15 years of misery. And savers and pensioners are suffering in a double way. The centralbanks are not really behind the people(dual mandate! :-). They are as always behind their banks first. FED 1913 started with elastic money and sound collateral. Today it is more about cheap money with bad collateral. They do not even follow the law. Inflation is the primary goal. To inflate their debt away. Such a lousy scheme.

  13. ForReal?

    Why are not banks restructured, bankfinanciers not getting their investments(misallocated capital) equity-swapped from bonds to shares (BofA, City etc)?

    Short answer. Because that’s how the system was designed to work in the first place, and our “dear leaders” were in on the scam all along. Shock Doctrine indeed!

  14. Fiesty

    Master just said all the Chartalists, Neo-Chartalists and Institutional Economics “Really Big Guys” must be busy posting over at New Economic Perspectives today.

    Master really confuses me sometimes.

  15. chris

    I thought libertarianism was just a trick to get the working class tax donkeys making 50-250k/year to salivate at the thought of no taxes without thinking who they were really voting for?

  16. steve from virginia

    Saving vs. hoarding; the ‘enlightened capitalists’ vs. Ebenezer Scrooge …

    Saving represents unsecured loans to banks (by depositors). Where is the enlightenment? Bankers leverage these loans to their ‘friends’ and fellow-racketeers, the loans turn out to be bad. Additional (bad) loans are required to bail out the bankers.

    The depositors are getting wise and redeeming their funds (bank runs).

    Hoarding denies the loans to the banks: it recongnies they are rackets. This starves the finance system of circulating money which the tycoons require as they are generally massively indebted. This is what a ‘depression’ is: a contest (class war) between financiers and finance’s putative customers. Enough hoarding and finance/industry collapses … b/c the enterprise is a Ponzi scheme.

    Where is the enlightenment? Compared to the bankers/industrialists — who deserved to be hanged — Scrooge is a saint.

    1. OTAY

      Too bad they had not simply balaced mal-investment and corruption, er… I mean private sector investment with public deficit spending. Silly Prussians, linear algebra can solve all problems.

  17. Another Gordon

    Several years ago I came across an article on the background to the ‘Panic of 1873′ by the historian Scott Reynolds Nelson. As far as I know the original is no longer available but I kept this part of it.

    The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.

    But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America’s heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region’s assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.

    As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.

    Debt deflation in Europe, corrupt finance in the US. It all sounds terrible modern.

  18. Jim

    What if it is also true that the progressive community, like the libertarian community, is chasing an historical ghost?

    What if the historical ghost of the progressive community is that the American state has merely been the pawn of Big Capital?

    For Example:

    What if the American state, as it actually evolved historically, also developed as an autonomous force as did Big Capital, able to maneuver a then emerging finance capital to serve its interests (i.e. winning a Civil War)

    In the 1861-1862 period did the Union both entice and coerce a then weak finance capital group into becoming agents of Union fiscal and monetary policy?

    In a more general sense, did the Union finance the Civil War effort by floating an enormous national debt which was instrumental in creating a dependent financial class to manage the debt servicing?

    Could it then be argued that at the end of the Civil War the interest of an emerging finance capital and the American state were more closely linked than at any point in the 19th century with the foundation for this linkage being the autonomous interest of the Union in winning the Civil War?

  19. RBHoughton

    Good article but overlooks the flow of history, one damned thing after another.

    The more probable cause of the 1870s problem was the 1860s collapse of Overend Gurney Bank in UK, then the second largest bond trader in London (after BoE). As that loss of capital got apportioned around the planet, US money supply halved in 1870s and halved again in 1880s.

    But that does not detract from the author’s thesis which is a valuable insight into how we started to get into this mess.

  20. enouf

    I made it through all of phil’s post and atleast half the comments, and i need to reply now, because there are too many things to respond to so far (even);

    [Allow me to preface that i don't even agree with the way libertarianism is being falsely bandied about many times, and i cannot agree with the mainstream definition used *here* in the comments by others, nor the original post, but I'll do my best to work around the pseudo-definition]

    Ok, so (and forgive me as i just pound on the keys like a monkey, and let it flow)

    a) the State is mythology, not libertarianism
    b) the State is an ideology, not libertarianism
    c) the State cannot make Law, nor can man/men/humans
    d) Law comes from Nature, i.e., Natural Law[1] – whatever created us, our world, our cosmos.
    e) Corporations *need* the State to exist, and to become powerful {plutocracies,oligarchs,monopolies}.
    f) the State does *not* need Corporations, though today they are one and the same, all the State needs to exist if for the Populace to “belive” in it, and its legitimacy.
    g) the State is hierarchical, and so are Corporations, hence *Class* systems are born and thrive – both are mythologically and religiously considered legitimate, when neither are.
    h) the State cannot mete out Justice, and only knows force, coercion, and aggression to enforce/harm sovereign peaceful individuals.
    i) Corporations use the State to (attempt to) carry out all listed in (h)
    j) No amount of force can be used to accomplish peace and freedom
    k) attempting to use the myth of the State to alter the populace into compliance, you are no better than a violent/aggressive individual.
    l) the State cannot be used to alter the State, since it can only exist through force, and therefore use force in denying individual liberty.
    m) if the State goes away, then the Corporations go away (that’s not to say all our ills will go, and not to say that there are those with what we call *wealth* who will always attempt to be Aggressive and attempt to Control most of us, even if psychologically, that’s still coercion).

    [1] just a good definition of Natural Law is all ;
    http://whatonearthishappening.com/images/stories/woeih/podcast/076/01.jpg (sorry it’s an image, but best i can find in defining it)

    Love

    p.s. I suspect if i post this next link, i’ll hit a tripwire, but i’ll try;
    http://www.badquaker.com/archives/1974
    Give it a listen, at least — I don’t agree with everything *anyone* says/mentions etc.. so take it with an open mind and a grain of salt. That episode goes a long way to rebutting a good many comments that it’d take me years (ok…hours atleast) to respond to.

    p.s.s. I wish phil too would atleast give a listen, if not, (or, as a supplement) take into consideration my alphabetized list above, and how i think it shows how phil might be a little off the mark, in the sense of preconceptions – especially of macroeconomics, though i appreciate his sincerity, and the realist part of him when he writes and post.

    Love, once again

  21. chothuegiare

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