The Great War And Its Terrible Aftermath

Sarajevo Is The Fulcrum Of Modern History

By David Stockman

One hundred years ago today the world was shook loose of its moorings. Every school boy knows that the assassination of the archduke of Austria at Sarajevo was the trigger that incited the bloody, destructive conflagration of the world’s nations known as the Great War. But this senseless eruption of unprecedented industrial state violence did not end with the armistice four years later.

In fact, 1914 is the fulcrum of modern history. It is the year the Fed opened-up for business just as the carnage in northern France closed-down the prior magnificent half-century era of liberal internationalism and honest gold-backed money. So it was the Great War’s terrible aftermath—–a century of drift toward statism, militarism and fiat money—-that was actually triggered by the events at Sarajevo.

Unfortunately, modern historiography wants to keep the Great War sequestered in a four-year span of archival curiosities about battles, mustard gas and monuments to the fallen. But the opposite historiography is more nearly the truth. The assassins at Sarajevo triggered the very warp and woof of the hundred years which followed.

The Great War was self-evidently an epochal calamity, especially for the 20 million combatants and civilians who perished for no reason that is discernible in any fair reading of history, or even unfair one. Yet the far greater calamity is that  Europe’s senseless fratricide of 1914-1918 gave birth to all the great evils of the 20^th century— the Great Depression, totalitarian genocides, Keynesian economics,  permanent  warfare states, rampaging central banks and the exceptionalist-rooted follies of America’s global imperialism.

Indeed, in Old Testament fashion, one begat the next and the next and still the next. This chain of calamity originated in the Great War’s destruction of sound money, that is, in the post-war demise of the pound sterling which previously had not experienced a peacetime change in its gold content for nearly two hundred years.

Not unreasonably, the world’s financial system had become anchored on the London money markets where the other currencies traded at fixed exchange rates to the rock steady pound sterling—which, in turn, meant that prices and wages throughout Europe were expressed in common money and tended toward transparency and equilibrium.

This liberal international economic order—that is, honest money, relatively free trade, rising international capital flows and rapidly growing global economic integration—-resulted in  a 40-year span between 1870 and 1914 of rising living standards, stable prices, massive capital investment and prolific  technological progress that was never equaled—either before or since.

During intervals of war, of course, 19^th century governments had usually suspended gold convertibility and open trade in the heat of combat.  But when the cannons fell silent, they had also endured the trauma of post-war depression until wartime debts had been liquidated and inflationary currency expedients had been wrung out of the circulation. This was called “resumption” and restoring convertibility at the peacetime parities was the great challenge of post-war normalizations.

The Great War, however, involved a scale of total industrial mobilization and financial mayhem that was unlike any that had gone before.  In the case of Great Britain, for example, its national debt increased 14-fold, its price level doubled, its capital stock was depleted, most off-shore investments were liquidated and universal wartime conscription left it with a massive overhang of human and financial liabilities.

Yet England was the least devastated. In France, the price level inflated by 300 percent, its extensive Russian investments were confiscated by the Bolsheviks and its debts in New York and London catapulted to more than 100 percent of GDP.

Among the defeated powers, currencies emerged nearly worthless with the German mark at five cents on the pre-war dollar, while wartime debts—especially after the Carthaginian peace of Versailles—–soared to crushing, unrepayable heights.

In short, the bow-wave of debt, currency inflation and financial disorder from the Great War was so immense and unprecedented that the classical project of post-war liquidation and “resumption” of convertibility was destined to fail.  In fact, the 1920s were a grinding, sometimes inspired but eventually failed struggle to resume the international gold standard, fixed parities, open world trade and unrestricted international capital flows.

Only in the final demise of these efforts after 1929 did the Great Depression, which had been lurking all along in the post-war shadows, come bounding onto the stage of history.

Read more at : http://davidstockmanscontracorner.com/sarajevo-is-the-fulcrum-of-modern-history-the-great-war-and-its-terrible-aftermath/

This time is really, but really, different

These Fake Rallies Will End in Tears

By Detlev S Schlichter

Investors and speculators face some profound challenges today: How to deal with politicized markets, continuously “guided” by central bankers and regulators? To what extent do prices reflect support from policy, in particular super-easy monetary policy, and to what extent other, ‘fundamental’ factors? And how is all this market manipulation going to play out in the long run?

It is obvious that most markets would not be trading where they are trading today were it not for the longstanding combination of ultra-low policy rates and various programs of ‘quantitative easing’ around the world, some presently diminishing (US), others potentially increasing (Japan, eurozone). As major U.S. equity indices closed last week at another record high and overall market volatility remains low, some observers may say that the central banks have won. Their interventions have now established a nirvana in which asset markets seem to rise almost continuously but calmly, with carefully contained volatility and with their downside apparently fully insured by central bankers who are ready to ease again at any moment. Those who believe in Schumpeter’s model of “bureaucratic socialism”, a system that he expected ultimately to replace capitalism altogether, may rejoice: Increasingly the capitalist “jungle” gets replaced with a well-ordered, centrally managed system guided by the enlightened bureaucracy. Reading the minds of Yellen, Kuroda, Draghi and Carney is now the number one game in town. Investors, traders and economists seem to care about little else.

“The problem is that we’re not there [in a low volatility environment] because markets have decided this, but because central banks have told us…” Sir Michael Hintze, founder of hedge fund CQS, observed in conversation with the Financial Times (FT, June 14/15 2014) [1]. “The beauty of capital markets is that they are voting systems, people vote every day with their wallets. Now voting is finished. We’re being told what to do by central bankers – and you lose money if you don’t follow their lead.”

Liberty or Equality?

The Founding Fathers knew that you can’t have both

by Myron Magnet

With the fulminating on the left about inequality—“Fighting inequality is the mission of our times,” as New York’s new mayor, Bill de Blasio, summed up the theme of his postelection powwow with President Barack Obama—it’s worth pausing to admire anew the very different, and very realistic, modesty underlying Thomas Jefferson’s deathless declaration that all men are created equal. We are equal, he went on to explain, in having the same God-given rights that no one can legitimately take away from us. But Jefferson well knew that one of those rights—to pursue our own happiness in our own way—would yield wildly different outcomes for individuals. Even this most radical of the Founding Fathers knew that the equality of rights on which American independence rests would necessarily lead to inequality of condition. Indeed, he believed that something like an aristocracy would arise—springing from talent and virtue, he ardently hoped, not from inherited wealth or status.

In the greatest of the Federalist Papers, Number 10, James Madison explicitly pointed out the connection between liberty and inequality, and he explained why you can’t have the first without the second. Men formed governments, Madison believed (as did all the Founding Fathers), to safeguard rights that come from nature, not from government—rights to life, to liberty, and to the acquisition and ownership of property. Before we joined forces in society and chose an official cloaked with the authority to wield our collective power to restrain or punish violators of our natural rights, those rights were at constant risk of being trampled by someone stronger than we. Over time, though, those officials’ successors grew autocratic, and their governments overturned the very rights they were supposed to protect, creating a world as arbitrary as the inequality of the state of nature, in which the strongest took whatever he wanted, until someone still stronger came along.

In response, Americans—understanding that “kings are the servants, not the proprietors of the people,” as Jefferson snarled—fired their king and created a democratic republic. Under its safeguard of our equal right to liberty, each of us, Madison saw, will employ his different talents, drive, and energy, to follow his own individual dream of happiness, with a wide variety of successes and failures. Most notably, Federalist 10 pointed out, “From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results.” That inequality would be a sign of the new nation’s success, not failure. It would mean that people were really free.

The democratic republic that the American Revolution brought into being, however, contained the seeds of a new threat to natural rights, Madison fretted. Yes, the new nation will operate by majority rule, but even democratic majorities can’t legitimately overturn the fundamental rights that it is government’s purpose to safeguard, no matter how overwhelming the vote. To do so would be just as grievous a tyranny as the despotism of any sultan in his divan. It would be, in Madison’s famous phrase, a “tyranny of the majority.” As Continental Congressman Richard Henry Lee put it, an “elective despotism” is no less a despotism, for all its democratic trappings.

How would such a tyranny occur? Almost certainly, Madison thought, it would center on “the apportionment of taxes.” Levying taxes “is an act which seems to require the most exact impartiality, yet there is perhaps no legislative act in which greater opportunity and temptation are given to a predominant party, to trample on the rules of justice. Every shilling with which they overburden the inferior number is a shilling saved to their own pockets.” How easy for the unpropertied many to expropriate the wealth of the propertied few by slow erosion, decreeing that they should pay more than a proportionate share of the public expenses. How seductive for the multitudinous farmers to levy taxes on the much smaller number of merchants or bankers or manufacturers, while exempting themselves. How tempting for the majority who have debts to transfer money secretly and silently away from the minority who are their creditors by debasing the currency, so that the real value of what they owe steadily shrinks, as Madison well remembered from the ruinous inflation of the Revolutionary War years. And a year before the Constitutional Convention, Madison recalled, the debt-swamped farmers of western Massachusetts had cooked up, in Shays’s Rebellion, still more “wicked and improper” schemes for expropriating the property of others: trying to close the courts at gunpoint to prevent foreclosures on their defaulted mortgages and even demanding the equal division of property.

So as chief architect of the Constitution, designed to give the federal government sufficient power to protect citizens’ basic rights—above all, the power to tax, whose lack under the Articles of Confederation had made the Revolutionary War longer and grimmer than it would have been if Congress had had sufficient means to buy arms and pay soldiers—Madison proceeded with his heart in his mouth, fearful that such augmented power made a tyranny of the majority all the more possible. His main challenge at the Convention, as he saw it, was to guard against precisely that outcome. So while four of the 18 specific powers that Article I, Section 8 of the Constitution gives Congress concern the levying of taxes and the borrowing and coining of money to “provide for the common Defence and general Welfare of the United States”—taxes that “shall be uniform throughout the United States”—eight of the rest deal with spending only for military and naval purposes, while the “general welfare” powers extend only to building post offices and post roads; establishing federal courts; protecting intellectual property by copyrights and patents; and regulating bankruptcies, naturalization, and interstate and foreign commerce. Not content merely to limit and define explicitly the federal government’s power, Madison made sure that the Constitution divided it up among several branches, limiting the power that any single individual or official body could wield and putting each jealously on guard against any other’s attempt to seize a disproportionate share. Moreover, all these officials (except the judges) were elected representatives of the people: they were the agents through whom Americans, who had no rulers, governed themselves.

But why was the liberty that Madison so mightily struggled to protect so precious? Americans knew how grievous its opposite was, both from the enslaved blacks they saw all around them as well as from their knowledge that their own forebears had fled British persecution of non-Anglican Protestants or European persecution of all Protestants, denied even freedom to express their own beliefs. They knew what man could inflict on man. But of all the Founders, Treasury secretary Alexander Hamilton gave the most positive, eloquent, and inspiring answer to that question—though, in fact, he thought that he was answering a question about economics. Illegitimate, orphaned, and poor, Hamilton dreamed big dreams as a teenage clerk, sitting on his countinghouse stool on a small West Indian island whose only business was sugar and slaves. Ambition burned within him, along with a keen but unformed sense of his own talent. He knew he could be something other than he was. But what or how, he didn’t foresee. Maybe a war would come, he daydreamed, and give him his chance.

Read more at : http://www.city-journal.org/2014/24_2_liberty-or-equality.html