Mises Daily Articles
An Empire Built of Paper
Empire of Debt: The Rise of an Epic Financial Crisis, William Bonner and Addison Wiggin, John Wiley & Sons, 370 pages
Two hundred years ago, when the United States was a modest commercial republic, the president could take a walk down Pennsylvania Avenue—by himself—and talk to anyone who approached him. If he wasn’t on a walk outdoors, he was most likely at home, and you could speak to him by knocking on the door of the White House and presenting yourself.
The Hamiltonians and their agenda of mercantilism, paper money, and presidential exaltation had been humiliated in the election of 1800. Jeffersonianism had prevailed against them. And though Jefferson made some missteps during his presidency—not even Jefferson could be fully trusted with power—the policy bias was clear: frugality, free trade, peace, hard money, and decentralized government.
Today? The president moves about like Caesar Augustus, with a vast, graded court of civil and military aides, doctors, secretaries, valets, hairdressers, makeup artists, bodyguards, drivers, baggage handlers, cooks, food tasters, Praetorian guards, snipers, centurions, bulletproof limos, a portable hospital, and an armored rostrum. And that’s when he travels in the U.S.
When Bush visited Ottawa, members of Parliament were refused entry into their own legislature by the massed power of the Secret Service, in violation of Canadian law. When Bush visited London, 5,000 additional police were assigned to protect him. Parks and streets and neighborhoods were closed. Riflemen thronged the roofs. The queen was horrified by the trashed condition of the grounds and great rooms of Buckingham Palace, but that meant nothing relative to the security of the emperor.
He counts far more than any other human being on earth. So, of course, every event is staged to the extreme. The president is spoken to by no regular person. There are as many walls that separate us from him as between the supposed government of Iraq and its people or the old Soviet Politburo and the Russian people. These people live and breathe fear.
The paranoia of the Bush circle has infected the whole regime. The entire government—elected officials, appointed staff, permanent bureaucracy—has shifted in the last decade from pretending to be the people’s servants to admitting that they regard the people as a threat. Thus do we see the stream of legislation permitting ever more powers to spy, confiscate, and jail without trial.
Never has sociologist Franz Oppenheimer’s view of the state been more clearly on display: it is there to dominate, exploit, and protect itself against any challenges to its power. It clings to power like Gollum holding the ring. And that power is deployed not for the purpose of protecting people but for protecting the state and its interests. When Oppenheimer theorized in 1908 that this was the true nature of the state, he was shouted down and pilloried for denying the doctrine of government as a social compact. Now his claims read like a description of the day’s political news.
Most Americans are aware that something has gone very wrong, but they are at a loss to sort of out the causes, especially the ones that are most invisible. This is where the smashing book by William Bonner and Addison Wiggin, titled Empire of Debt, performs an extraordinary service. In addition to being accomplished financial analysts, Bonner and Wiggin are talented historical writers. And they put this talent to work in the cause of examining the political and economic effects of empire.
The authors not only provide a frightening picture of the mess that the U.S. government has made at home and abroad, they also understand the crucial role that the monetary regime has played in this debacle. They show how the legal right to counterfeit—that’s what the Federal Reserve grants the government—has changed the structure of the government and led to the loss of liberty and the rise of an imperial power unlike any in history.
In the commercial republic of Jefferson, money was gold and silver. Government had no power to print currency. It was not even allowed to tax directly. What money it had came from tariff revenue, and pressure from exporters and importers kept it low. Even if Jefferson had wanted to establish a tyranny, there was no means to do so. If the wall of separation between money and the state was not as high as it might have been, there was still a barrier that put a curb on power-mongering.
Today, however, all the money government could ever want is easily available via a monetary policy that depends critically on the capacity of the Fed to create currency out of thin air. The Fed’s printing presses back every debt note issued by the Fed, and the new currency is sopped up by foreign central banks and private holdings around the world, particularly among Asian nations. The dollar is, for now, the world reserve currency, which permits the U.S. to sustain a world empire without paying the price—again, for now.
The critical turning point is one I remember well. Richard Nixon enacted, by imperial decree, a purely fiat dollar, repudiating solemn promises to redeem in gold. After that, with the printing presses running 24/7, the Pax Americana could be "financed." To understand the connection requires that we understand two fields of study that are usually kept separate: foreign-policy analytics and monetary economics. It is in understanding this relationship that our authors excel.
Alan Greenspan had pretended to be against it all, but given the chance for power, he happily repudiated his restrictionist gold-standard views and supplied the credit for the expensive wars, the expensive bread, and the expensive circuses that have wrecked empires from Rome to London. His successor promises even more of the same.
With the end of the last remnants of the gold standard, "all the restraints, inhibitions, and modesty of the Old Republic [were] blown away," note Bonner and Wiggin. "In their place has emerged a vainglorious system of conceit, deceit, debt, and delusion," with special financial significance for the country and individuals. The authors note in passing that, for example, the U.S. military could be cut 75 percent and still give the government the biggest, most technologically advanced army in the world.
While the loss of gold money was a turning point, the imperial urge has much deeper roots. It all started, say the authors, when the balmy Teddy Roosevelt began riding rough over small, poor nations. They might have gone back further in time. Robert E. Lee, writing Lord Acton, feared that the federal victory over the South would mean despotism at home and empire abroad. It wasn’t too many years later when the religious maniac McKinley launched an attack on Spain, seizing colonies in grand fashion and murdering any natives who objected. Or we might even look back further. The hardcore might even see the United States’ imperial career beginning with its conquest and colonization of northern Mexico. Maybe its roots are in the Colonial era with New England’s religio-cultural drive to improve and perfect the world through coercion and belligerence.
Regardless of the roots, the modern history is undeniably disgraceful. In the midst of my favorite chapter, "Woodrow Crosses the Rubicon," the authors pause to repudiate the great killer-presidents and to praise instead men like Warren G. Harding. He was pro-peace, and he pardoned the antiwar hero Eugene Debs, who had been jailed and his health destroyed by Wilson for criticizing conscription. Further, they note that there is no Harding Law, no Harding Building in D.C., no war he started, and no government program he launched.
"Remember," Wilson had proclaimed, "that God ordained that I should be the next president of the United States." How many Americans know that Wilson invaded Mexico before Europe, raising the federal war banner over Veracruz, and set off a reign of terror at home in which Germans, or those thought to be German, were lynched and those who dissented from his national socialism were jailed?
Wilson also established the Federal Reserve, the income-tax police, and the direct election of senators. The latter wiped out an original buttress to states’ rights and led to more and more centralization, as senators saw themselves as representatives of D.C. to their states rather than of the state legislatures to the central government. Frank Chodorov called it "The Revolution of 1913."
The Federal Reserve’s monetary manipulations to finance World War I, and then the boom of the 1920s, led to the Great Depression and then the Roosevelt revolution towards massive statism. After it and Trumanism and Modern Republicanism, Americans live, said John T. Flynn, "in the war-torn, debt-ridden, tax-harried wreckage of a once imposing edifice of the free society which rose out of the American Revolution on the foundation of the U.S. Constitution."
The impulse to empire helps make sense out of our huge deficits and debts or such costly and obvious blunders as the invasion of Iraq or the war on terror. It is as if America were committing suicide, our authors say, first by bankrupting the economy and then by creating endless enemies all over the world.
With this comes a belligerent and blind nationalism that has affected the whole culture in one degree or another. But then, in an empire, the people must become "hollow dummies," said Orwell. They must believe they are superior to others, and have a right to tell others what to do. Americans seem to go beyond even this. They believe that other countries actually want to be invaded and occupied and shaped into mini-Americas by the United States. All we have to do is "get their dictators off their backs, and the men will start building shopping malls and the women dressing like Britney Spears."
Did the Swiss puzzle and plot over what kind of government the Iraqis should have? Did they set out to make the rest of the world more like Switzerland and think that other peoples secretly yearned to be Swiss themselves? No, these are imperial inanities.
Paying tribute to As We Go Marching, John T. Flynn’s great analysis of New Deal fascism, our authors understand the glorification of militarism and war that lies at the heart of right-wing statism. As Flynn quoted an Italian fascist, today’s red-state fascists also see the mass death and destruction of war as "the great anvil of fire and blood on which strong peoples are hammered."
Once upon a time France had a great empire. Frenchmen thought they had the best language, the best culture, the best government, the best economy, the best schools, the best builders, the best army. And it was their duty to civilize the globe. Now, after French imperial bankruptcy and the destruction of the franc, we have the mission civilisatrice to spread freedom and democracy. Or so the president informs us.
But then, no one’s business is too small or too remote to be of no interest to the U.S. state. From its globe-girdling military bases and its world-circling spy satellites, the U.S. watches everything, everywhere, always. Not a sparrow falls without "triggering a monitoring device in the Pentagon."
Yet citizens of the empire exult, just as in Rome:
The average American reacted just as the average Roman had reacted. When the purple was hoisted, he stood up and saluted. It made him feel like a big shot. If Americans were bossing people around in Asia or the Middle East, it made him feel more important. His homeland team was winning all over the world. And if it did not always seem to be on the winning side, he knew he must support his troops and stand behind their commander-in-chief. No one wants to carp and criticize when soldiers take the field. It is unpatriotic. So, keep the soldiers in the field all the time.
American business is still heroically capitalistic, entrepreneurs brilliant and brave at creatively serving the needs of the people, though hogtied by the vastest government in history. On top of that, every aspect of the economy is distorted by the expansionary policies of the Federal Reserve, resulting—in just one instance—in a huge housing bubble.
Thanks to the incentives created by the welfare state and the Fed, Americans tend to consume more than they earn. Stocks today trade for about 20 times earnings, whereas the norm is 12-15 times. House prices usually increase at the rate of inflation, not 10 times as fast. A global power monopoly is also abnormal. At some point, all the myths cherished by the imperial people, say our authors, must go to "humbug heaven."
After all, the long-term mean value of paper currency is zero. Is the dollar magic, so that it is permanently immune from the norm? For the last 100 years, it has lost value more quickly than the Roman denarius after Nero. No surprise, since it is much easier to create unlimited numbers of dollars than to mint coins with at least some silver or gold in them. On the other hand, by the time of the last emperor, the denarius—which started as pure silver—had .02 percent precious metal content. That is, the denarius had lost, over hundreds of years, 99.98 percent of its value. Since the founding of the Fed in 1913, the dollar has lost 95 percent.
Something else that will revert to the norm: wages. There is no inherent reason that a plumber with a U.S. flag pin should earn more than one with a crescent moon. In India, real incomes have doubled in the last 10 years. In the U.S. they have been stagnant or worse. The inequitable draining of the world’s resources into America, made possible by the military empire and its financial structure since Bretton Woods, is also coming to an end.
The authors call themselves conservatives, but they quote Confessions of an Economic Hitman approvingly and see through the Cold War humbug about the Communist Conspiracy, the terrorism of the previous scam. Nor do they fall for the mythology that surrounds the big-spender Reagan nor celebrate the murderous Vietnam War, with 57,000 dead Americans and between 2 and 3 million dead Vietnamese. Those names aren’t on a wall, of course.
The book is chock-full of great monetary and financial charts, though my favorite is a list of all the known empires and their duration. Not that they believe that charts tell the future. Indeed, our authors are contrarians. When most people, they think, are convinced that stocks will never go up, chances are they will. When most people think stocks can never fall, chances are they will. If most people couldn’t be brought to the view that houses will never decline in value, a rip-roaring housing bubble would be impossible.
Since the days of the Great Khan, and the barbaric clarity of his claim that the gods had given him the earth and everyone and everything in it, empires have resorted to rosier delusions, if no less fatal to victims—and sometimes citizens—than the Khan model. From the Romans to the Fourth Crusade (and their Venetian and French aggressors) to Genghis Khan to the Spaniards and Napoleon and the British, Bonner and Wiggin teach us the lessons of empire, with learning, wisdom, and irony.
"A great empire," they note," is to the world of geopolitics what a great bubble is to the world of economics. It’s attractive at the outset but a catastrophe eventually. We know of no exceptions."