Austerity and Empire

Economists really do seem to struggle with history – and sometimes geography, too. Brad DeLong needs to remember that the Financial Times is published in London. As far as most combatants were concerned, the second world war broke out in September 1939.

Niall Ferguson, FT, 20th July 2010.

Goodish point. On the other hand, Ferguson isn’t quite so solid when it comes to counting up the number of wars in which the U.S. is currently engaged:

People are nervous of world war-sized deficits when there isn’t a war to justify them.

Niall Ferguson, FT, 19th July 2010.

So he’s lousy at sums, or very fussy about what counts as a war, but good at geography. But what happens when Fergusonian neo-imperialist historical revisionism encounters Fergusonian austerity economics? Let us see.

My texts today are “Royal Navy strategy in the Far East, 1919-1939: preparing for war against Japan”, by Andrew Field, which, if you like that kind of thing, you can order from Amazon, and “The Economic Consequences of Mr Osborne”, subtitled “Fiscal consolidation: Lessons from a century of UK macroeconomic statistics” by Victoria Chick and Ann Pettifor, which is available online. With a dash of wikipedia, for quickness.

We’ll kick off with the demobilisation hit in the UK at the end of the First World War, raiding Chick and Pettifor for the numbers:










as share of

















1918 1850 5243 35.3 114 4.4 -­‐1.8 0.8 18.6
1919 968 6230 15.5 136 4.6 -­‐8.7 6 17.8
1920 591 5982 9.9 133 5.3 -­‐6.7 3.9 20.3

“After World War I, expenditure was cut sharply between 1918 and 1920” – Chick and Pettifor

There is always a demobilisation hit after a big war; but yes sirree, that is quite some cut. Despite the GDP contraction, there is still some vigorous inflation (this kicked off early in the war, just as it did in Germany, as the mutual blockade bit), and the debt/GDP ratio has got a lot worse.

In the mean time, British politicians are fretting about a resumption of the pre-war arms race in battleships; this time the expected competitor is none other than the United States of America. To digress: these today-unimaginable threat assessments are always rather quaint; my all-time favourite is the Thirties US Army study that took the main threat against the US to be an onslaught from the north by three million rampaging Canadians.

An enterprising British Admiral suggested the right answer – just explain to the Americans what ships we think we need to build, and why, and they’ll be fine with it. And it worked! Aren’t Americans nice? Incidentally this success prompts Ferguson to suggest in one of his books that the same diplomatic technique could have been deployed on the Kaiser, pre-war, averting the whole naval buildup 1904-1914. Huh. Anyhow, the whole deal is codified in the Washington Naval Treaty:

After the signing of the Washington Naval Treaty [1921], the Royal Navy achieved parity with the United States Navy, and superiority over the Imperial Japanese Navy, by slashing existing construction programmes (largely on paper in the British case, although many of the older British battleships also had to be scrapped) and limiting future construction, until after a ten-year ‘holiday’ on building.

– Field

The Brits got pretty much what they asked for out of this. They could stop worrying about annoying the Americans, and start to concentrate on what they new, even in the early 20s, was the real threat to British interests, Japan. That ten-year ‘holiday’ was not an Admiralty idea, though:

…The Admiralty continually represented its case for a navy sufficiently large to ensure the safety of British possessions and maintain sea lines of communications. Their reasoning though was often too imprecise to politicians keen to accept naval arms limitation and seeking cuts in expenditure, despite the erosion of the pool of specialist warship builders and the loss of skilled men from their yards that this would entail. The danger was that at the end of the ten-year building holiday, with an ageing British fleet needing to be modernized and replaced, the shipyard capacity and workforce to do the jobs would no longer be there.


And the treaty holiday – the abrupt cessation of a huge chunk of manufacturing activity – ripples straight back into the already demob-hit British economy – shipbuilding, steelmaking, armaments manufacture, what passed for high tech in those days. Back to Chick and Pettifor:










as share of

















1921 648 5134 12.6 150 5.2 -­‐5.8 16.9 -­‐10.5



















The post-­‐war macroeconomic outcomes were nasty. There was a very sharp rise in unemployment and fall in GDP – especially in nominal terms; a severe dose of inflation was followed by a severe deflation. Government bond yields remained virtually static in nominal terms, but in real terms yields turned extremely high (not shown, but derived by comparing interest rates with the GDP deflator growth).– Chick and Pettifor

And then there was the “Geddes axe” (the massive naval cuts of 1921), and then more axework in subsequent years, as politicians contemplated that ever worsening debt/GDP ratio, and cut, and cut, and cut:

Expenditure on the Royal Navy, and financing its plans at a time of economic depression continued to be a bone of contention, and in 1923, on the heels of the 1921 ‘Geddes Axe’, a committee, chaired by Sir Alan Anderson, reported on naval pay. The committee concluded that naval pay was too high relative to other workers and in 1925 an Admiralty Fleet Order established a lower rate of pay from men joining after 5 October, but seemingly guaranteeing the older, higher rate to those who had joined before this date.

– Field

The General Strike (1926) seems to have achieved a temporary halt to the cutting frenzy. Note the identity of the axe-wielding Chancellor whose fondness for the Gold Standard precipitated the General Strike:

Churchill was appointed Chancellor of the Exchequer in 1924 under Stanley Baldwin and oversaw Britain’s disastrous return to the Gold Standard, which resulted in deflation, unemployment, and the miners’ strike that led to the General Strike of 1926.[80] His decision, announced in the 1924 Budget, came after long consultation with various economists including John Maynard Keynes, the Permanent Secretary to the Treasury, Sir Otto Niemeyer and the board of the Bank of England. This decision prompted Keynes to write The Economic Consequences of Mr. Churchill, arguing that the return to the gold standard at the pre-war parity in 1925 (£1=$4.86) would lead to a world depression. However, the decision was generally popular and seen as ‘sound economics’ although it was opposed by Lord Beaverbrook and the Federation of British Industries.

Churchill later regarded this as the greatest mistake of his life. However in discussions at the time with former Chancellor McKenna, Churchill acknowledged that the return to the gold standard and the resulting ‘dear money’ policy was economically bad. In those discussions he maintained the policy as fundamentally political – a return to the pre-war conditions in which he believed. In his speech on the Bill he said “I will tell you what it [the return to the Gold Standard] will shackle us to. It will shackle us to reality.”

– wikipedia

The axes came out again after the Wall Street Crash:

After the 1929 Wall Street Crash and the start of the Great Depression in Britain in 1931, and with the country in a grave financial state, another committee was set up, chaired by Sir George May, to determine how to cut public expenditure even further and retain the Gold Standard. His Committee decided that cuts in naval pay would be necessary and that no guarantees regarding the higher rate of pay had been made. Despite the First Sea Lord’s protests, the First Lord, Alexander, had little alternative but to announce that the Royal Navy would accept the May Committee’s recommendations.

Most of the Royal Navy’s personnel found this out from the press and not from their officers. The result was…the Invergordon mutiny”

– Field

British labour relations were not at their best that day. The Invergordon mutiny was quite a small mutiny, 1,000 sailors for a couple of days, but RN sailors aren’t supposed to do that, and the effect was convulsive. The mutiny took place on the 15th-16th September 1931; by the 20th, there had been a stock market crash, a run on sterling, and the UK was off the Gold Standard, for good this time:

…This was a low point for morale in the Royal Navy and great damage was done, not just to the prestige and image of the Royal Navy, but also to the nation as a whole; confidence in Britain slumped, inflation rose and the government had to abandon the Gold Standard. For the rest of the decade the Royal Navy would struggle, not just to build up the battle fleet at a time of economic constraint, but also to rebuild its self-confidence.

– Field

So that’s the shipbuilding capacity impaired, the technology investment chopped off, the design expertise and design teams dispersed, a massive morale hit, the economy more or less growth-free for a decade, and we are still short of the deepest point of the Great Depression. The Royal Navy’s preparations for war with Japan do not appear to be going well, do they? They never did get the ships they needed to implement their policy; here’s how it ended:

On 10 December 1941, three days after the attack on Pearl Harbor disabled the US Pacific Fleet, Force Z, the Royal Navy’s battleship Prince of Wales and the battlecruiser Repulse, were sunk by Japanese aircraft. On 25 December the colony of Hong Kong fell to Japanese forces and on 15 February 1942, Singapore, with its extensive naval facilities, surrendered. Twelve days later, at the battle of the Java Sea, Allied naval forces were annihilated by Japanese forces.

…British Far Eastern naval strategy, carefully crafted and developed in the years following the First World War, was shattered by these disasters…it would be 1945 before a Royal Navy fleet was again active in the Pacific. By then the United States Navy reigned supreme, the largest and most powerful naval force in the world, and the end of Britain’s imperial presence in the region was inevitable.

– Field

Now I am not such a big fan of Empire as Ferguson, though I do quite like the story of the Navy. But I do find it hugely ironic that it is so easy to argue that the very economic measures that he espouses destroyed the British Empire.

Different times now: not much manufacturing sector left to chip away at, and no empire to lose, and no really big war just behind us.

One thing though: here in the UK, we are now constructing our biggest naval ships since the end of World War One; perhaps this is some sort of leading indicator of crashes for us, like the height of skyscrapers in the US. The general debt set-up does seem unnervingly similar; this time a small war, a bank bailout and a hefty public sector commitment stand in for the big war. And the mindset is the same. So we are about to see how Mr Osborne compares with Mr Churchill.

Powerful stuff, this austerity economics. Perhaps the subversive fringe should actually be more in favour of it; it seems to be good for ushering in new world orders. A new world order might be the result this time, too, making due allowance for the different politics and economy of the US.

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  1. attempter

    The difference that leaps out is how the spending cuts of the 20s and 30s extended at least to that extent (military budgets) to elitist spending, while today’s “austerity” proposes to literally reduce the crumbs available to the hungry while elite bingeing continues and accelerates everywhere. (E.g. the US weapons budget keep rising, keeps bloating exactly like the fiscal and social cancer it is.)

    (Needless to say, there is no real war today. There’s a private corporate war whose purpose is looting public money and providing a pretext to build up the police state. The “Global War on Terror” is simply an extension of corrupt, larcenous Pentagon budgets (and the corresponding British budgets). It’s a theater of the Bailout, not a legitimate or necessary war.

    By definition a fiscally responsible person would demand its immediate and complete end.)

    So that’s more proof that “austerity” has absolutely nothing to do with allegedly necessary fiscal retrenchments and everything to do with simple robbery and power.

    We do need real austerity. This of course must be imposed upon the rich and only the rich. The non-rich have “sacrificed”, i.e. had stolen from them, infinitely more than enough. Simple fiscal responsibility and moral integrity demand that it’s time to equalize the sacrifice. That means the austerity of restitution. It means severe austerity for all parasites. It means the great austerity of justice for all criminals.

    1. i on the ball patriot

      Good post! Additional thoughts on the difference …

      The difference is in methodology and the inertial power of the wealthy ruling elite. The old method was a relatively unsophisticated nation state against nation state with slugfest, struggle to the death, contests. The wealthy ruling elite had a tenuous grip on global power.

      The methodology shifted after W.W.II with the greater consolidation of the wealthy ruling elite global power. Intentional deception through propaganda then became the new rule, and promotion of the cold war, so as to justify an ‘arms race’, and continued military spending to develop the military and industrial complex (wealthy ruling elite muscle), was the new theme. Concurrently, and ever developing the sophistication of the new methodologies, the same deceptive propaganda was employed to justify cia infiltration and ‘hot wars’ all over the planet, all under the guise of expanding ‘capitalism’ and ‘democracy’ (they actually wiped out many democracies and replaced them with friendly dictators).

      With greater control and inertia, the wealthy ruling elite, using the propaganda, infiltration methodologies, and technologies developed, began the ‘war on terror’, which is in reality a war on domestic populations designed to decimate and enslave the global middle and under class. Spending for the war on domestic populations (war on terror) is well into its second trillion dollars.

      Nation state alliances are now controlled through gang style turf divisions with the wealthy ruling elite transferring the technologies of oppression to pliable puppet regimes around the globe. Control of governments and global media is through the central banks and its peripheral institutions. The technologies of oppression; propaganda, surveillance systems, drones, crowd control weapons, etc., are all supplemented with the new, far more powerful, deceptive economic weapons of oppression; rolling debt trap bubbles and bunker busting counterfeit derivative financial products. Gangsters in compliant nation states get to play the game with fee provided tools.

      If you are mouthy you get tasered, ear blasted with piercing sound, or droned. If you are a model citizen you get debt trapped and thrown into perpetual conflict with your more prudent neighbor in an intentionally created ‘austerity’ struggle.

      I agree, we need “severe austerity for all parasites.”

      At some point all must recognize that this is a war of the few global gangster rich against the masses, the old rules of the game are meaningless (and in fact are used as energy dissipating decoy schemes), and the global nature of the similarities in oppression must be recognized so as to further a global response.

      We are all Gazans now.

      Deception is the strongest political force on the planet.

      1. attempter

        We now know that globalization was always this gangster conspiracy. If any of its advocates was ever “innocently” mistaken or duped, the time for him to renounce it was long ago. We’re now completely in the realm of criminal culpability.

    2. Sufferin' Succotash

      I believe that 18% was the highest level of unemployment in the UK during the Depression,compared with 25% in the US (1932). OTOH, Britain suffered a great deal more from long-term unemployment during the entire interwar period, partly a consequence of losing markets for export-oriented industries during WW1.

  2. M.InTheCity

    Richard – that was a great piece of work. I hadn’t known about the austerity measures in the 20’s in the UK and it all makes a bit more sense now.

    From everything I’ve read (rather limited as it goes) on post 1931 Britain, it seems that going off the gold standard early and having the Imperial preference system (sorry if my terms are wrong) where trade was kept afloat within the Empire meant the Depression in the UK was not as dire as in the US. But perhaps that has to do with being a debtor nation with captive markets? Or is the whole premise of the UK not suffering much during the Depression wrong?

  3. renting_in_hell

    ‘to argue that the very economic measures that he espouses destroyed the British Empire.’

    Strange – I always thought that between the (very non-economic) policies of Gandhi and Hitler, the British Empire was fatally wounded as the result of what those two men wrought in the world. Of course, whether WWI had already mortally wounded the very framework of a traditional European empire is another discussion, though both the Soviet Union and the U.S. were able to cobble together post-classical imperial structures after WWII.

    1. Richard Smith Post author

      Yes I am just looking back a bit further. Gandhi certainly took full advantage of the complete obliteration of British imperial prestige after the fall of Singapore. But the Japanese were also hard at work in India putting forward the idea of a ‘co-prosperity sphere’. *Someone* would have removed ‘the jewel in the crown’. Just as well for India that it was Gandhi, not Tojo.

      Hitler seems to have thought that the UK was so much a maritime power, and so weakened, that he could do what he liked in continental Europe without a great risk of British interference, in which he was pretty much right.

      German naval rivalry with the UK was to come later, with the immense and ludicrous “Plan Z” rebuilding plan slated for the late 1940s.

    2. DownSouth

      Although I would agree that there was more involved in the destruction of the English Empire than “economic measures,” I very much disagree with your assertion that Gandhi’s and Hitler’s policies were “very non-economic.” That statement could only be made by someone who has drunk generously from the cup of the liberal imperialists, who believes that state and military power can somehow be separated from economic power, and is belied by statements such as this one:

      They came to our country originally for the purposes of trade. Recall the Company Bahadur. Who made it Bahadur? They had not the slightest intention at the time of establishing a kingdom. Who assisted the Company’s officers? Who was tempted at the sight of their silver? Who bought their goods? History testifies that we all did this. In order to become rich all at once we welcomed the Company’s officers with open arms. We assisted them.
      –Mohandas Karamchand Gandhi, Hind Swaraj

      And the post-WWII American empire was one of economic conquest, not territorial conquest, as described here by Carlos Fuentes:

      …they employed the same instruments of economic power, namely favorable agreements for their merchants, loans and credits, investment, and the handling of the export economy in minerals, agricultural produce, and natural products required by Anglo-American expansion. A highly privileged local minority served as intermediaries, both for these exports and for the imports of manufactured European and North American goods…
      –Carlos Fuentes, The Buried Mirror

      I suspect the Indians had a lot more to do with India’s eventual achievement of self-determination than what either you or Smith give them credit for.

      The post-WWII Soviet empire was the first to bite the dust, and the American one is in its death throes. The natives were getting uppity, and so to maintain control the U.S. had to deploy ground troops, first to Afghanistan and later to Iraq. Neither of these imperial enterprises, however, seems to be faring well.

      1. Richard Smith Post author

        I certainly didn’t mean to be grudging with credit for Gandhi.

        Establishing a humane independent India was one of the spectacular political feats of the 20th century. Obviously there was a lot more to what Gandhi did than timing.

        And it needed doing. There is a persistent British obliviousness to the not-civilizing aspect of Empire. A curious book called “The Great Hedge of India” shows how one particularly nasty extortion worked.

  4. dearieme

    Another difference that leaps out is that advice was available from a Keynes, an economist who was widely seen as (i) well immersed in practical financial matters, (ii) honest, and (iii) astonishingly clever. No one fits that bill today, do they?

    1. Jim

      Keynes? Honest? I doubt Keynes said three honest things about the “classical economists” that he lumped together and thoroughly caricatured and misrepresented. One of the most blatant misrepresentations was his quoting of John Stuart Mill in his attempt to refute Say’s Law, where Keynes cut-off Mill’s quote right before it would have contradicted what Keynes alleged Mill said.

      Maybe better words to describe Keynes would be: iconoclastic, egotistical, superficial (i.e., non-profound), and intemperate.

      1. Anonymous Jones

        It continues to stun me how intelligent people with similar backgrounds can read the same text and come to such diametrically opposed takes on the subject.

        What no longer astounds me is the hubris of my fellow beings in concluding that any opinion of a subject that conflicts with their own must be…dishonest, facile, conjured by a nefarious mind, simultaneously stupid and cunningly duplicitous.

        I’d love to sit with you sometime and have you regale me with all your first-hand knowledge and interactions with the unjustly praised Keynes. I’m sure there can be no other interpretation than yours. It’s so obvious through your wisdom and thorough debunking that you should be considered the expert in the matter.

        1. Jim

          So you’re dismissive of my imaginary hubris, even as you demonstrate that which you accuse me of? That’s a real exhibition of impudence on your part.

          How about instead of having me regale you with first-hand accounts, you consider some of Keynes’s contemporaries and biographers? Roy Harrod (one of Keynes’s biographers) himself confessed that it seemed to him that Keynes was “in some confusion about what the classical position really was; that he had not really thought it through”. The descriptive words I used to describe Keynes have been used by Thomas Wilson, Frank Knight, and a number of others long before me. You give me way too much credit.

          To cite one more example of Keynes caricaturing and misrepresenting his opponents, Keynes completely misrepresented Arthur Pigou’s position on unemployment and the “veil of money” (the notion that money is merely nominal and affects no real variables in the economy). Keynes accused Pigou of assuming full employment, even though Pigou specifically repudiates this point (and does so in his 1933 book, The Theory of Unemployment, which presumably covers the phenomenon that he was accused of not believing in). This flagrant misrepresentation and belittling of Pigou caused the long-term falling out between himself and Dennis Robertson.

          Apparently even Keynes himself can come up with diametrically opposed opinions. When he reviewed Ludwig von Mises Theorie des Geldes (Theory of Money and Credit) in its original German in 1914, Keynes dismissed it as neither “constructive” nor “original”. This is quite an astonishing statement — but it becomes galling when we read Keynes admit in 1930 in his Treatise on Money that “in German, I can only clearly understand what I already know -—so that new ideas are apt to be veiled from me by the difficulties of the language”. So Mises was neither constructive nor original, but Keynes can’t understand anything new or original in a language in which he’s barely literate? Galling and arrogant, to say the least, especially when von Mises’s Theorie des Geldes was constructive *and* original, unlike Keynes’s rambling Treatise on Money, which unfortunately gets some praise for profundity (by those who confuse obscurantism for profundity).

  5. russell1200


    How do you propose that England was to repay its wartime debt to the US without austerity measures? The US insistence on this repayment was an ongoing problem and ties into some elements of the collapse that lead to the Great Depression.

    Britain had already been forced to reduce its relative presence in the Far East and make an alliance with Japan prior to WW1 because of the increased threat of Germany.

    WW1 in one form or another crippled all the combatants. Some came out of it better than others. Germany went from having an enormous dreadnought fleet in WW1 to 2 battle cruisers and 2 battleships in WW2. So they did not recover either in naval power.

    Historically the US viewed the Japanese and the Germans as their two largest threats. The Germans because they were so bellicose and often were messing around in the Caribbean. The Japanese for the obvious well known reasons. But Britain and the US had had a number of tense moments that in retrospect turned out to be nothing. So a Canadian Army intervention (the British Queen is still their Queen) in a dispute with Britain was probably taken seriously because of the historical precedence than because of any real-moment politics of the day.

    1. Richard Smith Post author

      Should have said something about that in the piece.

      The UK never did repay its WW1 debt to the US, in fact!

      It was (and is, I suppose) about $4,3Bn; at 1920 exchange rates, 3.5 USD/GBP or so, that is around £1.3Bn. If you index link it, you come up with a current value of around $40Bn.

      The US debt repayments are nicely tangled up with the potential UK/US naval rivalry. The US waited until the naval issue was settled before figuring out a repayment schedule for the debts (1922, World War Foreign Debts Commission). So 1920-22 you have the British government worrying about provoking the US on two fronts – not only naval building, but also re this debt repayment. This is a first sighting of Appeasement, if you will.

      To round it off nicely the Germans defaulted on their war reparations, which, for the Brits, *should* have been back to back with the payments to the US. That was in early 1923; the hyperinflation followed. A nice instance of sovereign counterparty risk.

      I suppose, in perfect hindsight, the really hardball solution would have been to offer the US a choice of either a) a “cramdown” or b) a write-off of most of all of the the debt vs an assignment of rights to the UK’s share of the German reparations. But you’d want a naval agreement in place first…

      What actually happened is that the UK chased a balanced budget, all the way to oblivion, and the US never got their money back.

    2. Richard Smith Post author

      I should add – Ferguson has an interesting non-Keynesian take on this in “The Pity of War” – that the French had it *right* all along on the level of reparations that the Germans were good for, and that the increasingly frequent defaults, followed by hyperinflation, were a way of offloading the costs of the war straight back onto the victors.

  6. Bruce

    I read a lot about “austerity”. I see very few examples of it, and the ones I do see are rounding errors on the budget (eg denying 30 billion of unemployment in a 4trillion budget). Is anyone actually practicing austerity, or is everyone just talking about it?

    1. attempter

      Is anyone actually practicing austerity?

      Um, yes, that would be the victims: the unemployed, pensioners, the sick, the hungry, anyone who uses the public services that were supposed to be the whole point of civilization. Anyone who’s not rich, in almost every aspect of his economic life.

      Rounding errors all, yes, but when a looter’s really on a role he wants to steal it all, right?

  7. dearieme

    Your interest in India here may be a red herring. India was on the road to a promised independence long before the war with Japan. The rush with which it was arranged, and the two-nation form that it took, was no doubt due to Hirohito, Gandhi, and Jinnah, but the inevitability of it had long been accepted by Britain, Churchill excepted.

    They are bloody expensive things, empires.

    1. Richard Smith Post author

      Well you are right that it was being prepared; to some extent, in recognition of the feebleness of British power projection.

      There is a steady evolution from “increasing association of Indians in every branch of the administration and the gradual development of self-governing institutions with a view to the progressive realization of responsible government in India as an integral part of the British Empire” (Montague in 1917), to the mid-30s, where a federal state was envisaged (and by which time the RN’s Eastern strategy was getting seriously difficult to implement). It was supposed to take until the 60s!

  8. alex

    Richard Smith: “my all-time favourite is the Thirties US Army study that took the main threat against the US to be an onslaught from the north by three million rampaging Canadians”

    I’ve never heard this, do you have a reference?

    What I have heard is that the US military had paper exercises regarding war with Canada. That doesn’t necessarily mean much as these sorts of paper exercises are done all the time as just exercises rather than even half-serious plans.

    1. Dikaios Logos

      Richard, I second what alex says. You REALLY need to provide a citation for that Canadian threat report, it sounds too ‘wonderful’ to be believed!

    2. Richard Smith Post author

      I’ll try to dig it out. It’s the sort of thing that would stick in your mind, isn’t it?

      Yes, not to be taken a serious threat assessment. Perhaps, rather, an indication of the US’s relative good fortune with respect to its land neighbours.

    3. i on the ball patriot



      Our first step is to deploy our submarine to Portland, Maine. This has been identifed as a strategic port because that’s as far as our submarine will go from Halifax before it would have to turn around and come back anyway.

      We will simultaneously send our legendary RCMP through our drug tunnel from British Columbia into Washington state, seizing the farm on the U.S. side.

      Once these key positions have been taken, we will deploy our helicopter filled with jelly-filled Tim Hortons donuts to the eastern base of U.S. power, Madison Avenue. The jelly filling will cause the advertisers to produce mind-numbing television commercials. Trials to this point have been very successful. Of course, this stage in the operation can only be performed on the exact day when our helicopter is working, so this must be timed carefully.

      At the same time, our secret, undercover agents will take control of the western base of U.S. power, Hollywood. Our “Made It Big” Canadian comedians will reveal their true allegiance, producing mind-numbing comedy that will lull the American populace into believing Canada is a benign, somewhat jolly, neighbour to the north. Again, trials to this point have been very successful.”

      More here …

      Deception is the strongest political force on the planet.

    1. Richard Smith Post author

      Now *that* is as concise a formulation of the “austerity” debate as I have seen.

  9. Bates

    Churchill had it right when he said, in refering to a return to the gold standard…“I will tell you what it [the return to the Gold Standard] will shackle us to. It will shackle us to reality.”

    Keynes had it right when he said “that the return to the gold standard at the pre-war parity in 1925 (£1=$4.86) would lead to a world depression.”

    This is a case where the mind must hold two contradictory, and somewhat abstract, ideas at the same time. Both these men were right, but at different times.

    For example, there are long periods of US History where US Government expenditures were stable and the gold standard worked remarkably well, prices remained stable or declined a small amount. At times inflation in the gold supply surged a little if new ore deposits were found. The US Economy was ‘shackled to reality’. A dollar really was ‘sound as a dollar’ and was respected the world over.

    Since there was little if any inflation a return of 1 – 3% interest on a loan was excellent. But bankers cast their gaze across the waters and saw 6% was possible on investments in foreign countries with low cost labor…if only those pesky locals that owned the banana trees were out of the way. The US Marines took care of the local banana tree owners and sent the bill to Joe 6pack (taxes)…good deal for the bankers.

    Keynes ideas make sense when a country becomes embroiled in wars, or decides becoming an empire is a good idea, and said country needs to raise a lot of money quickly to fund those wars or expansion…and i’m talking a LOT of money…much more than taxpayers would be willing to bear and more than gov bond purchers would be willing to purchase at relatively low rates. But Keynes ideas are NOT what we have seen being implemented by the US and other soverigns for the last 50 years. Keynes ideas were little different from the smartest of Egyptian Pharaohs; during the seven years of fat the storehouses are filled with grain against the seven years of lean that will follow. Keynes said governments should set aside reserves during surplus years to be spent into the economy during economic down turns. Obviously, the problem is whatever the government collects it finds something to spend it on plus it runs deficits even in the ‘fat’ years. The result is creeping socialism until the government runs out of ‘other people’s money’ to spend.

    Here is a comment I often read on NC… ‘we have to tax the rich’…but that is not a solution for several reasons. I will simply point out the most obvious one; the rich will take their money and go elsewhere. Ask the Maryland Treasurer what just happened in his state when Maryland jacked up marginal income taxes on the rich…the rich left…in droves. The result of the Maryland income tax increase is that Maryland is now collecting less income taxes than they would have had they done nothing! The Miami Herald recently ran an article pointing out how the influx of rich people from Maryland are helping the economies of Venice and Naples Florida by purchasing and moving into upscale homes. BTW, I don’t know what is considered ‘rich’…nebulous word at best…someone help me out here.

    1. sherparick

      “The words “long periods of” should join “once upon a time” should serve as signal that we are about to hear a story, little connected to facts, but will teach us some kind of”moral.” Actually, the economic history of the United States is not relatively inaccessible, unlike the events in Merovingian France in the 6th and 7th centuries. From the time the charter of the Second Bank of the United States expired in 1836, the U.S. suffer1873se panics in 1837, and ed severe financial panics in 1837, 1857, 1873, 1886, 1893, 1907, and 1920, and 1929. After 1837, 1873, 1893, and 1929, these panics were followed by a near decade long period of economic distress and deflation. In each of these last four events the Government made deliberate decisions for “hard money” based on gold. For example, after going off the Gold Standard during the Civil War, the Grant administration went back on it in 1873, with disasrous results.

      I could go on, but there is little evidence that “Gold” promotes stability or any sort of long term equilibrium in a modern indusrial or post-industrial capitalistic economy. I guess the siren of utopia is so strong, despite the “crooked timber of” men and women whether Marxist or Randian wants assert that with a few simple of rules we could create a world without problems. It is clear that combination of the scientific revolution and the ability to quickly utilize and promote innovations by self-starting entrepreneurs has materially improved the lot of the great mass of humanity. But they system is far from perfect, and has demonstrated a tendency to indulged in periods of “irrational exuberance, followed by panics, and then a Genearl glut where fiat money is the dearest of all objects, useful in paying all debts and not depreciating as other assets.

      1. Bates

        “I could go on, but there is little evidence that “Gold” promotes stability or any sort of long term equilibrium in a modern indusrial or post-industrial capitalistic economy.”

        Yes, you could go on and if you did you would no doubt continue to ignore that America is now suffering the third version of a ‘US Federal Bank’ and that they all have been disasters for the vast majority of Americans. And, at any rate, why should you ‘go on’ if you have nothing of consequence to add to the conversation?

        “It is clear that combination of the scientific revolution and the ability to quickly utilize and promote innovations by self-starting entrepreneurs has materially improved the lot of the great mass of humanity.”

        It is certainly not clear that fiat currencies have promoted the welfare of people the world over. One in five entrepreneurs succeed, the remainder fail. For every Bill Gates there are untold millions of failures but it is the siren song of the lotto, the big prise, that the capital is misallocated to.

        As far as the ‘great mass of humanity’ they continue to live on about two bucks a day…and, the industrial revolution was well under way and continued to make great strides under the gold standard. Fiat currency and low interest rates do nothing but blow bubble after bubble because cheap money will always be misallocated, whether by governments or by fraudulent bankers or by plain grifters or, as we have now, a combination of all. But I will grant you that fiat does allow bigger and much more disasterous collapses than was possible under hard money. The Fed cannot print gold nor silver nor can the treasury conjure it from some genie in a bottle.

        You have not a clue how real capitalism is supposed to work. It is a natural boom bust cycle. During the bust phase the weaker banks and businessmen are destroyed. When government or central banks attempt to prevent this natural cycle they might have some limited success, until government credit issues fail to attract buyers, but Mr Market will always win. You apparently are related to Cheney and believe that ‘deficits don’t matter’. Maybe they do not to a man Cheney’s age but they will matter a great deal to the youth of America.

        America has built an empire with fiat currency and now we will see how long that empire can stand while running 1 1/2 Trillion $ deficits…while American wars and social programs are financed by the savings of citizens of other soverigns. Get some popcorn and enjoy the fireworks.

  10. rtah100

    I’m not sure where to begin. So much of the geopolitical discussion rests on poopular myth about US and Japanese history.

    If you go back to the beginning:

    1) 19th C. America was interested in China. European powers had established trading zones. America wanted one, and lobbied for the Open Door policy in Asia with the European powers, which was the modern WTO write large – you open your Chinese zones’ doors to us and, er, nothing in return. Simultaneously, the USA indulged in the Yellow Peril hysteria, and a few massacres in Western mine towns.

    It didn’t help that large parts of the US political class subscribe to Pacific expansion as the next step in America’s western destiny after the West was won. There was a pseudo-science of Aryan superiority and a full-circle westering which would reunite white men with the Asia cradle of civilisation.

    2) Meanwhile, in India and Iran, Britain was worried about the advance of Russia across the steppe to Vladivostok an dher ability to control Asia from the north.

    3) The US invaded Japan and imposed trade on her. The Meiji “restoration” found willing sponsors in the US, who wanted to see an Asiatic “Western” power. The US demanded coaling stations in Japan and took Guam to establish routes to China. A cabal of white panters also seized power in a coup in Hawaii to obtain it for US power projection.

    4) The US also seized the Philippines, in the deluded belief it was necessary as a final bridgehead to China (even Teddy Roosevelt eventually admitted this had been a poor bargain). More Filippinos dies in the first day of the main attack than US soldiers dies on D-Day. Several *million* Filippino’s were killed in the fighting over the years and US never succeeded in establishing control beyond the urban centres, despite a compaign of concentration camps and denial of territory to civilians. Oh yes, and they also instituted torture and routine waterboarding. A history of the colony reads like Afghanistan.

    5) Teddy Roosevelt dealt with the Japanese in secret, by-passing Congress, and encouraged them in their territorial ambitions on Taiwan. He also entered into a secret gentleman’s agreement alongside Britain in the Anglo-Japanese alliance pre WWI. Despite a US treaty of Amity with Korea, Roosevelt gave the Japanese a free hand to seize Korea in private talks.

    6) Britain and the US enouraged Japan against Russia when Russia invaded the Liaoning peninsula to establish Port Arthur in Japan and a warm-water Pacific port. They were delighted with the Japanese naval victory at Tsushima – and they celebrated Japan’s surprise attack on Port Arthur (later to be repeated at Pearl Harbor). The Japanese however were overstretched in their land campaign. They asked Roosevelt to broker a peace and to obtain an indemenity from Russia; Teddy told them an indemenity was dishonourable and didn’t deliver. His daughter has visited Japan shortly before the treaty of Portsmouth, and had been Banzai’ed wherever she went; she visited shortly afterwards and Americans were in hiding and the legation had been besieged. The Japanese later formed an alliance with Russia, to divide Manchuria, in reaction to their betrayal by the US and Britain.

    7) The Japanese Asian Co-prosperity Sphere was not aimed at India but East and South-east Asia. Japan had been encouraged in this deliverately by Roosevelt in a direct parallel to the US Monroe Doctrine. The poem “White Man’s Burden” by Kipling was an exhortation to the Japanese to take up the Imperial responsibility in East Asia.

    So, the Royal Navy’s Asian strategy was broken to begin with, when the US and Britain made Japan in their own mould and then turned her against them.

    Demobilisation was a demand shock to the UK economy but the biggest problem was that Britain was shut out of the markets in France and Germany (but the US was allowed in because she provided vendor financing).

    As for Ghandi, his economic campaign in India (everything about Gandhi was economic, from the salt tax protests to the weaving) made matters worse but the biggest danger to the British balance of trade came from the insurgency in the tin and rubber trade in Malaya.

    1. Bernard

      thanks for that short glimpse of economic history. now we have corporations that run countries instead of men. and how the men of yesterday got us here to where we are.

      shame we are entering an age of decline due to the theft of these modern day Robber Barons.

      “irrational exuberance” will forever remain one of my favorite phrases.

      to have the King or his cadre of black guards admit to “irrational exuberance’ was quite unexpected. any kind of truth out of these “so-called” people is always a shock.

      living here in the American South, the effects of the Civil War have molded the society into what we see today. it really is fascinating to see how a few men at the “helm” can direct most everything that comes later.

      i do wish we had some agreement for the existence of a social “civilization” left, but empires consume the host country and the focus is turned away from the locals to the “empire.”

    2. skippy

      Thank you! The facts back light the game we support, are a part of, and nothing has changed.

  11. Adam's Myth

    Did you just call America’s current wars justifiable expenditures? I thought only neocons still thought so.

    Ferguson clearly states in “Empire” that the Empire delivered negative return on investment after the late 19th century; Britain was economically (not to mention morally) better served without it. So cutting naval expenditure actually benefited Britons twice: first by freeing resources for other use, and second by accelerating the end of an unprofitable venture.

    You don’t like Ferguson because he’s a deficit hawk. I agree with you. He’s mistaken on that, given current conditions. But that doesn’t mean cutting defense wasn’t (and isn’t) a good idea. Yes, you can always just print more, but it’s less distorting to redeploy the worst, most wasteful excesses into into productive, long-lived domestic assets.

    Here in the US, better education is an easy opportunity, but there are plenty more, e.g. a national natural gas vehicle refueling network. This would employ lots of people, yet also create a long-lived asset that reduces our strategic need for global military reach. Far more valuable than blowing money on sitting-duck aircraft carriers we never use (or, worse, use on someone we shouldn’t).

    Of course, once all the cars run on natural gas, we’re at the mercy of those empire-building Canadians again…

  12. michel

    The argument, if one understands it, seems to be that if Britain had continued spending on armaments in the twenties at a high rate, borrowing to do so, and devaluing Sterling, it would then have grown economically and had a stronger naval presence and have resisted the Japanese and held on to its empire.

    Of course, if only they had known about MMT they could have done all this without even selling any debt.

    Does anyone who knows the history of the early 20C find this remotely plausible? And why on earth anyone would find this very unplausible counter-factual conjecture has any relevance at all to today’s situation is equally mysterious. Ah well, its MMT, the Prozac of economics.

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