American Financial Colony or Mercantilist Predator?

China and the Gold Standard 

By Lewis Lehrman

China is an important trading partner of America. But it may also be a mortal threat. And not for the conventional reasons usually cited in the press. Ironically, it is a threat because China is in fact a financial colony of the United States, a colony subsidized and sustained by the pegged, undervalued, yuan-dollar exchange rate. Neither the United States nor its economic colony seems to understand the long-term destructive consequences of the dollarization not only of the Chinese economy but also of the world monetary system. While the Chinese financial system has been corrupted primarily by tyranny, deceit, and reckless expansionism, it is also destabilized by the workings of the world dollar standard. Neither the United States nor China has come to grips with the perverse effects of the world dollar standard.

The social and economic pathology of 19th century colonialism is well studied, but the monetary pathology of its successor, the neo-colonial reserve currency system of the dollar, is less transparent. In order to remedy this pathological defect, the United States must rid itself of its enormous Chinese financial colony, whose exports are subsidized by the undervalued yuan in return for Chinese financing of the U.S. twin deficits. Both China and the United States must also free themselves from the increasing malignancy of the dollar reserve currency system, the primary cause of inflation in both China and the United States.

In the end, only monetary reform, including an end to the reserve currency system, can permanently separate the dollar host from its yuan colony. Without monetary reform, the perverse effects of the dollar reserve currency system will surely metastasize into one financial and political crisis after another—even on the scale of the 2007–2009 crisis.

It is, of course, a counter intuitive fact that China has been financially colonized by the United States. But why is this a fact? Simply because China has chained itself to the world dollar standard at a pegged undervalued exchange rate, choosing therefore to hold the exchange value of its trade surplus—that is, its official national savings—in U.S. dollar securities. It is true that the dollar-yuan strategy of America’s Chinese colony has helped to finance a generation of extraordinary Chinese growth. But China now holds more than 3 trillion dollars of official reserves and more than a trillion dollars in U.S. government securities. These Chinese dollar reserves directly finance the deficits of the American colonial center. This arrangement clearly resembles the imperial system of the late 19th century. The value of a British colony’s reserves were often held in the currency of the imperial center, then invested in the London money market. Thus, the colony’s reserves were entirely dependent on the stability of the currency of the colonial center. While China is America’s largest financial colony, most other developing countries are also bound to neo-colonial status within the reserve currency hegemony of the dollarized world trading system.

China’s dollarized monetary system reminds us of nothing so much as the historic colonial financial arrangements imposed by the later British Empire on India before World War I—India actually remaining a financial colony of England long after its independence in 1947. How did the sterling financial empire work? The imperial colony of India, beginning in the late 19th century, held its official Indian currency reserves (savings) in British pounds deposited in the English money market; independent developed nations at that time, like France and Germany, held their reserves in gold. That is, France, Germany, and the United States settled their international payment imbalances in gold—a non-national, common, monetary standard—holding their official reserves, too, in gold. But the London-based reserves of colonial India were held not primarily in gold, but in British currency, helping to finance not only the imperial economic system, but also the imperial banking system, imperial debts, imperial wars, and British welfare programs. Eventually, as we know, both the debt-burdened British Empire and its official reserve currency system collapsed.

For more than a generation now, a similar process has been at work in China. China is America’s chief colonial appendage. The Chinese work hard and produce goods. Subsidized by an undervalued yuan, they export much of their surplus production to America. But, like the Indians who were paid in sterling, the exports of Chinese colonials are substantially paid in dollars, not yuan—because bilateral and world trade, and the world commodities market, have been dollarized. And thus it may be said that the world financial system is today an unstable neocolonial appendage of the unstable dollar.

China, like its predecessor the British colony of India, has chosen to hold a significant fraction of what it is paid in the form of official dollar reserves (or savings). These dollars are promptly redeposited in the U.S. dollar market, where they are used to finance U.S. deficits. Every Thursday night, the Federal Reserve publishes its balance sheet, and there we now read that more than $2.5 trillion of U.S. government securities are held in custody for foreign monetary authorities, 40 percent of which is held for the account of America’s chief financial colony, Communist China. It is clear that without financial colonies to finance and sustain the immense U.S. balance of payments and budget deficits, the U.S. paper dollar standard and the growth of U.S. government spending would be unsustainable.

It is often overlooked that these enormous official dollar reserves held by China are a massive mortgage on the work and income of present and future American private citizens. This Chinese mortgage on the American economy has grown rapidly since the suspension of dollar convertibility to gold in 1971. China—poor and undeveloped in 1971—was at that time very jealous of its sovereign independence, sufficiently so to reject its alliance with the Soviet Union—even earlier to attack U.S. armies on the Chinese border during the Korean War. In an ironic twist of fate, China surrendered its former independence and, as a U.S. financial colony, joined the dollar-dominated world financial system. China’s monetary policy is anything but independent. It is determined primarily by the Federal Reserve Board in America, the pegged yuan-dollar exchange rate serving as the transmission mechanism of Fed-created excess dollars pouring into the Chinese economic system. Perennial U.S. balance of payments deficits send the dollar flood not only into China but also into all emerging countries. The Chinese central bank buys up these excess dollars by issuing new yuan, thereby holding up the overvalued dollar, and holding down the undervalued yuan. Much of these Chinese official dollar purchases are then invested in U.S. government debt securities. So even though America exports excess dollars to China, China sends them back to finance the U.S. budget deficit—much like marionettes walking off one side of the stage, merely to reappear unchanged on the other side.

Beware of crony "investors" carrying higher taxes on others

Lucky Warren Buffett

by Robert Wenzel

When he bought his Goldman Sachs stake, within 

days the government rushed in with more money. Just days after Buffet puts $5 billion into Bank of America, B of A has announced it will raise an additional $8 billion by selling its stake in China Construction Bank. B of A is up nearly 4% on the news.

If I didn't know better, I would say Buffett trades on inside information.

Do as i say and not as i do

Obama's Race-Based Spoils System

by Patrick J. Buchanan

Chester Arthur was a most unlikely reformer.

A crucial cog in the political machine of the Empire State's Sen. Roscoe Conkling, he was named by President Grant to the powerful and lucrative post of collector of customs for the Port of New York.

Arthur was removed in 1878 by President Rutherford B. Hayes, who wanted to clean up the federal patronage system. But when James Garfield of Ohio was nominated to succeed Hayes, he sought to unite his party by picking the Stalwart Arthur as running mate.

Six months into the new administration, a deranged office-seeker shot Garfield. Arthur was president. And in a dramatic turnabout, he became the president forever associated with civil service reform, converting the U.S. government into a meritocracy where individuals were hired based upon examinations and advanced based upon merit.

In our time, however, Arthur's achievement has been undone, as a racial spoils system in federal hiring and promotions has been imposed by Democratic presidents, unresisted by Republicans who rarely exhibit the courage to stand up for their principles when the subject is race.

A week ago, an item buried in The Washington Post reported that Obama had "issued an executive order requiring government agencies to develop plans for improving federal workforce diversity."

Obama, wrote Isaac Arnsdorf, is targeting "a problem that has been on the administration's radar. Whites still hold more than 81 percent of senior pay-level positions."

Now, as white folks are two-thirds of the U.S. population, and perhaps three-fourths of those in the 45 to 65 age group who would normally be at senior federal positions, why is this "a problem"?

As no one has contended otherwise, we have to assume that the men and women who hold these top positions got there because of the longevity of their service and the superiority of their skills.

Why is the color of their skin a "problem" for Barack Obama?

As reported here previously, African-Americans are hardly underrepresented in the U.S. government.

Though only 12 percent to 13 percent of the U.S. population, blacks hold 18 percent of all federal jobs. African-Americans are 25 percent of the employees at Treasury and Veterans Affairs, 31 percent of State Department employees, 37 percent of the Department of Education, 38 percent of Housing and Urban Development. They are 42 percent of the Equal Employment Opportunity Commission and Pension Benefit Guaranty Corp., 55 percent of the Government Printing Office, 82 percent of the Court Services and Offender Supervision Agency.

According to The Washington Post, blacks hold 44 percent of the jobs at Fannie Mae and 50 percent of the jobs at Freddie Mac.

The EEOC, where African-Americans are overrepresented by 300 percent, has been asked to oversee the new "government-wide initiative to promote diversity and inclusion in the federal workforce."

I'm not making this up.

Perhaps, while he is battling for a greater diversity of sacrifice and rewards up there on Martha's Vineyard, our president might reflect on another example of the overrepresentation of white males – in the caskets coming home to Dover.

In the first five years of the Iraq war, Asian-Americans were 1 percent of our fallen heroes, Latinos 11 percent, African-Americans 10 percent. White Americans were 75 percent of the dead, and from photos of the fallen in newspapers since, the ratios appear to hold.

Does this overrepresentation of white men in the body bags and caskets coming home bother our commander in chief, who wants fewer white men at the top level of his executive branch?

"Why beholdest thou the mote that is in thy brother's eye, but considerest not the beam that is in thine own eye?" says the Lord in Matthew's Gospel.

Has Obama taken a close look at his hypocritical party on Capitol Hill? Though African-Americans are fully 25 percent of all Democratic voters, in a Senate Democratic Caucus of 53 members, there is not a single black man or black woman.

Well, regretfully, we are told, none was elected

But if liberals believe in affirmative action, why don't Democratic senators practice as well as preach it? Why don't they lead by example rather than by exhortation?

Sens. Dianne Feinstein and Barbara Boxer have been around for decades. Why do they not agree to flip a coin, have one resign, and have Gov. Jerry Brown appoint Rep. Barbara Lee, head of the Black Caucus, to the U.S. Senate?

Why does not Barbara Mikulski, who has been there forever, not stand down and let Maryland Gov. Martin O'Malley appoint Rep. Elijah Cummings of Baltimore to the Senate? Let Chuck Schumer go forth and do likewise, show us what a heroic liberal is, and let Gov. Andrew Cuomo name an African-American to replace him in the Senate.

Senate liberals applaud affirmative action programs that deny white students and white federal workers admissions and promotions they have earned by their labors. But when, ever, has one of these liberals voluntarily made the sacrifice that he demands be imposed upon others?

People who ought to know better

You Know Harry

 

By Joe Sobran

For my money, the greatest movie ever made is “The Third Man”, first released 50 years ago and now re-released with restored footage (11 minutes had been cut from the U.S. version). Usually praised as a "classic thriller," it's much more than that: it's a study of evil that bears repeated viewings.

Rarely has a film been blessed by such a perfect combination of direction (Carol Reed), script (Graham Greene), cinematography (Robert Krasker), music (Anton Karas), and excellent casting, right down to the creepy minor characters.

An American pulp-fiction writer named Holly Martins (Joseph Cotten) comes to occupied Vienna just after World War II to take a job writing for an old pal's "medical charity." But upon arrival, he learns that his pal, Harry Lime, has just been run over by his own chauffeur. Holly attends Harry's funeral and talks to witnesses, whose conflicting accounts of a "third man" at the death scene lead him to believe that Harry was murdered. When a cynical British military policeman, a Major Calloway (Trevor Howard), tells him that Harry was "about the worst racketeer who ever made a dirty living in this city," Holly angrily resolves to find "the third man," solve the murder, and shame Calloway by clearing Harry's name.

It turns out that "the third man" was Harry himself – still alive and in hiding after faking his own death. Moreover, Calloway was right: Harry is getting rich in the black-market penicillin trade, watering the stuff down and causing death and suffering to the innocent. After falling in love with Harry's lover, Anna Schmidt (Alida Valli), Holly finds Harry, confronts him, and eventually agrees to help Calloway capture him.

Harry Lime is one of the great villains of film. He's played by Orson Welles in a brief but unforgettable performance, which is well served by Welles's hammy style: Harry is a charming rascal who, as Anna says, never grew up. Holly's old schoolmate, who could fake illnesses and report cards, has developed naturally into a ruthless criminal who will sacrifice anyone, including Anna, to his own profit.

In his confrontation with Holly in a ferris wheel, Harry jauntily explains his philosophy. Looking down at the tiny people milling about below, he asks Holly what he'd say if Harry offered him $20,000 – tax-free – "for every one of those dots that stopped moving." "Would you really, old man, tell me to keep my money? Or would you calculate how many of those dots you could afford to spare?"

In a telling analogy, Harry likens himself to governments. "They talk about 'the people' and 'the proletariat.' I talk about the suckers and the mugs. It's the same thing. They have their five-year plans, and I have mine." All this is said with a conspiratorial smile; Harry knows how seductive he is, even when proposing murder.

Holly won't bite. He accuses Harry of throwing Anna to the wolves by allowing the Russians to repatriate her to Czechoslovakia. Harry deflects the charge: "What can I do, old man? I'm dead, aren't I?"

Anna learns that Harry is alive and that he has betrayed her to the Russians. But she loves him anyway and won't forgive Holly for helping Calloway trap him. The film ends with a stunning snub: Anna walks coldly past the waiting Holly without even giving him a glance. Even when destroyed, Harry Lime still exerts a sinister power over the living.

There really are people like Harry in this world. He may remind you of a certain politician of similar personality: charming, cunning, ruthless, knowing all the angles, profoundly self-centered and treacherous, yet somehow able to retain the loyalty even of people he has deceived and betrayed.

Evil doesn't usually appear with horns and cleft hooves. Often it comes with a winning smile, an exaggerated warmth, an offhand joke, and an offer that's hard to refuse. It may flatter the suckers and the mugs as "the American people," but it regards them as so many dots, to be measured by opinion polls and focus groups, with calculation where its conscience should be. And it gets a lot of help from people who ought to know better.

Political noise

Less QE and more radio silence please Mr. Bernanke

by Steen Jakobsen

When talking about the impact from Quantitative Easing (QE) one has to realise that most academic studies show that the biggest “impact” from QE on markets comes from the actual announcement of it rather than the execution of it. An analysis of the two prior QE introductions point to a 50 to 100 basis point reduction on bond yields and subsequent inflation of equities via “a feel good” factor – the so-called wealth effect.


But realistically, what has been the net impact of QE1 and QE2? Chairman Bernanke has used 3,000 billion US Dollars to create what? Nothing! Unemployment is still above 9.0 per cent, the housing market is still in a slump, and now the only successful thing going for the Fed is the stock market's rise from the floor at 666.00 in March 2009. But now there's talk of an interbank funding crisis and unrealised losses. It certainly smells like 2008, doesn't it? Or what about August 2010? – Yes!  It is almost a 100 per cent analogy to last year. It’s actually like watching the movie Groundhog Day.

The impact from another round of QE on the wider capital markets this time around is likely to be more limited than following  previous announcements.  At best I foresee two to eight weeks of relief risk-on trading, but with the market no longer willing to remain idle while policy makers buy even more time. Thus the positive tone could change sooner rather than later.  Putting numbers on the upside potential on the stock market it is important to note that the start of QE1 created a 78 percent rally in stocks, while QE2 saw a 29 percent rally, so the impact is clearly smaller from one QE to another. The most likely scenario from here on would be an upwards move to the tune of 7-15 percent (Target: 1250-1350 in S&P cash.)


QE3 could also signal the final leg of a weak USD. I anticipate the U.S. as being two or three years away from being fully competitive again as a production hub, competing with Asia. With a real unemployment rate of 17 percent and the US Dollar at historic lows the U.S.  seems to have come full circle in terms of unit labour costs meaning it can soon compete more efficiently in the global marketplace. I believe that post the next presidential election we will see labour market policies which are very beneficial to production in the U.S.  This is also a theme which Boston Consulting Group has touched on in its May report called: “Made in the USA, Again .” Due to this QE3 could present an opportunity to scale into long USD, after the grace period. The US Dollar will first weaken and (then ultimately strengthen). This in itself would be a sign of the economic world healing itself.
Looking at how precious metals will react to a new QE, the answer is simple. I think we will see USD 3,000 if not USD 4,000 for gold, and other metals should follow suit. That said, as with the USD, if this is the “end game” then the spike will be followed by risk aversion which could overall curtail the highs. At all times one has to realise this is close to the end of the trend, and for every USD 100 gold rises, the risk increases disproportionately as there is more and more speculative hangover involved.

There will be monetary stimulus – the question is in what form and shape. The U.S. is fast approaching a zero growth environment. Going into actual recession for more than one or two quarters is statistically very difficult for the U.S. as its population is relatively young, innovative and mobile. If we don’t get QE3 we will be faced with some version of Operation Twist in the form of support for the bond market’s longer dated maturities. This should be directed specifically to the segments which are relevant for housing and long-term funding. Effectively the Fed would then buy bonds in the 10 to 30 year sector of the yield curve with a pre-announced target rate below a certain number like 1.50 percent (currently it is trading at 2.25 percent). To finance this, the Fed would turn around and simultaneously sell shorter maturity T-bills making the exercise relatively balance neutral.

The real question however is:  is there anything the Fed can do to stimulate growth beyond keeping rates lower for longer? The answer is probably a resounding “No!” The Fed’s impact on the market is limited to psychology and monetary easing. When looking for growth an old economic rule states that when in a debt trap, only fiscal policies work, which means that when in a debt trap you need to increase the stimulus through tax cuts, public sector jobs and the like. (Note: This is not my medicine, but the Keynesian standard approach to it.)
Pre-election fiscal policy measures are in the hands of Congress with huge political opposition, but post election the story will be very different.


There is another political theory stating that the best environment to create growth in is one in which politicians have no power to pass legislation (similar to the U.S. situation for now until the U.S. elections). Think about Clinton: he had a major “programme” coming in as President, yet failed to get anything whatsoever done in his eight years in the White House which then led to the biggest growth period in U.S. history. What does this tell us? Total radio silence works as the micro-economy - investors, consumers and companies - adjust their behaviour and consumption to the new reality and then start moving forward. The last thing that we need is “political noise” and promises of better days ahead with nothing to back them up.

Science as fiction

Wormholes Possible? Yes, And Using String Theory, I Am Also The Pope

By Hank

Science 2.0 fave Dan Vergano at USA Today wrote an article based on the arXiv preprint written by Panagiota Kanti, Burkhard Kleihaus and Jutta Kunz called "Wormholes in Dilatonic Einstein-Gauss-Bonnet Theory".

They get right to it, writing "We construct traversable wormholes in dilatonic Einstein-Gauss-Bonnet theory in four spacetime dimensions, without needing any form of exotic matter" - magic stuff being what Caltech's Kip Thorne said would be needed to prevent collapse of these holes in space if, you know, wormholes were science.

It's a relief they were able to fix that pesky issue.  Except it's become increasingly obvious that far too many theorists don't know what a prediction is, and maybe an experiment too.  The more we learn from the LHC, and it is revealing a lot, as HEP experimentalist Dr. Tommaso Dorigo showed recently (chilling as it may be, since that ol' Higgs demon is getting chased into a smaller corner with less and less chance of being seen), the more disbelief it leaves for multiple dimensions and...well...wormholes.

Vergano seems to be having fun with it, he always does, and lets pass sentences of theirs like "When the first wormhole, the ‘Einstein-Rosen bridge’, was discovered in 1935"(1) without wondering if the writers of the arXiv paper are as confused about what a 'discovery' is as they are 'prediction' and 'theory' and 'testability' but he passes muster with his editors by appearing to give their paper a fair shake, writing

Introduce the cosmological possibilities opened by this description of reality, add in a few equations, and the study finds that wormholes suddenly acquire stability, even if constructed of normal matter. 

Which is his nice way of saying that as long as you buy that a universe of strings makes anything possible, anything is possible.   I always like to invoke Bertrand Russell at times like this, namely his assertion of the related proposition that once a contradiction is allowed into a closed system anything can be proven. In discussing this one time, supposedly someone in the audience yelled out a challenge: "If 2 plus 2 equals 5, prove that I am the Pope."

Russell replied, "If 2 plus 2 is 5, then 4 is 5; if 4 is 5, then (subtracting three from each side) 1 is 2; you and the Pope are two, therefore you and the Pope are one."

In a world of string theory, I can be the Pope, and I can fight vampires across the multiverse using wormholes to get places.  I just need to modify dilatonic Einstein-Gauss-Bonnet theory with low-energy heterotic string theory and it's all quite easy.

NOTE:

(1) Though because it has the name Einstein in it, people just believe it, and it made Thor come from Asgard to movie theaters of Earth this Summer, so we thank them for that.  Sean Carroll says he takes the blame.

Confucius vs socialism

Indigenous African Free-Market Liberalism

by     George B. N. Ayittey

Africa remains an enigmatic paradox: a continent rich in mineral resources yet so desperately poor. But the paradox is only superficial: Africa is poor because she is not free.

Only 10 of the 54 African countries can be labeled economic success stories: Angola, Benin, Botswana, Ghana, Madagascar, Malawi, Mali, Mauritius, Uganda, and South Africa. This hardly comes as a surprise as Africa is the most economically unfree continent. No African country is classified by the Heritage Foundation/Wall Street Journal’s 2011 Index of Economic Freedom [1] as “free.” Mauritius is classified as “mostly free,” and listed as “moderately free” are Botswana, Cape Verde Islands, South Africa, Rwanda, Madagascar, Uganda, and Burkina Faso. (Some of the countries labeled economic success stories have undemocratic political systems: Angola, Burkina Faso, Madagascar, Rwanda, and Uganda.)

Ironically, traditional Africa, in contrast to modern Africa, was characterized by much economic freedom for centuries before the arrival of the European colonists. There the basic economic and social unit was the extended family, the lineage, or the clan. The means of production were owned by the lineage—a private entity separate from the tribal government—and thus privately owned, although individual ownership was common. Land, for example, was lineage-controlled, giving rise to the myth of communal ownership, while hunting gear, spears, and fishing canoes were individually owned. Nevertheless the extended family acted as a corporate unit, marshaled family labor, and decided what crops to cultivate on the family land. There was sexual division of labor, and the cultivation of food crops was always a female occupation in traditional Africa, which explains why over 70 percent of Africa’s peasant farmers today are women. Produce harvested from the farms was used to feed the family; any surplus was sold in free village markets.

Ubiquitous Markets

Markets were ubiquitous in precolonial Africa. Two types were distinguishable: the periodic (weekly) rural markets and the large regional markets. Some of these regional markets grew into large towns such as Timbuktu, Kano, Salaga, Sofala, and Mombasa. They served as exchange points for long-distance trade. Timbuktu and Kano, for example, served the long-distance caravan trade over the Sahara and the long distance trade from the coastal areas. Free-trade routes crisscrossed the continent. Goods and people moved freely along them. Men dominated the long-distance trade while women held sway over the rural markets, which largely involved trade in agricultural produce.

Prices on Africa’s markets were not controlled or fixed by chiefs or tribal governments. They have always been determined by bargaining in accordance with the laws of demand and supply. For example, when corn is scarce, its price rises, and the price of fish generally tends to be higher in the morning than in the evening, when fishmongers are anxious to return home.

Besides primary activities such as agriculture, hunting, and fishing, Africans engaged in a variety of industrial activities in the precolonial era—such as cloth-weaving, pottery, brass works, and the mining and smelting of iron, gold, silver, copper, and tin. In Benin, “the glass industry made extraordinary strides,” Cheikh Anta Diop writes in Pre-colonial Black Africa. In Nigeria, “the cloth industry was an ancient craft,” adds Richard Olaniyan in Nigerian History and Culture. Kano attained historical prominence in the fourteenth century with its fine indigo-dyed cloth, which was traded for goods from North Africa. Even before the discovery of cotton, other materials had been used for cloth. The Igbo, for example, made cloth from the fibrous bark of trees. The Asante also were famous for their cotton and bark cloth (kente and adwumfo).

Startup Capital

To secure initial startup capital for commercial operations, African natives turned to two traditional sources of finance. One was the “family pot.” Each extended family had a fund into which members made contributions according to their means. Among the Ewe seine fishermen of Ghana, the family pot was called agbadoho. Members borrowed from this pot to purchase their fishing nets and paid back the loans.

The second source of finance was a revolving credit scheme that was widespread across Africa. It was called susu in Ghana, esusu in Yoruba, tontines or chilembe in Cameroon, and stokfel in South Africa. Typically, a group of, say, ten people would contribute perhaps $100 each to a fund. When the fund reached a certain amount—say, $1,000—it was handed over to the members in turn, who invested the cash in an endeavor. The Grameen Bank in Bangladesh was built on this concept of a revolving rural credit scheme.

Profit made from these economic activities was private property; it was for the traders to keep, not for the chiefs or rulers to expropriate. The traditional practice was to share the profit. Under the abusa scheme devised by the cocoa farmers of Ghana at the beginning of the twentieth century, net proceeds were divided into three parts: A third went to the owner of the farm, another third went to hired laborers, and the remaining third was set aside for farm maintenance and expansion. Under the less common abunu system, profits were shared equally between the owner and the workers. Variants of this profit-sharing scheme were extended beyond agriculture to commerce and fishing.

Chiefs and kings played little or no role in economic production. Their traditional role was to create a peaceful environment for trade and economic activity to flourish. No tribal government enterprises existed. In most cases across Africa, Peter Wickins writes in An Economic History of Africa, “there was no direct interference with production.” In fact State intervention in the economy was the exception rather than the rule in precolonial Africa. As Robert H. Bates observed in Essays on the Political Economy of Rural Africa, “In precolonial Africa, the states underpinned specialization and trade; they terminated feuds; they provided peace and stability and the conditions for private investment; they formed public works. . . . In these ways, the states secured prosperity for their citizens.”

Peasant Capitalism

The system described above may be called “peasant capitalism.” It differs from Western capitalism in two respects. First, as noted, the operating unit was the clan, not the individual. Second, profit was shared. Regardless, the clan was free to engage in whatever economic activity it chose. It did not line up before the chief’s palace for permission to engage in trade, fishing, or cloth-weaving. If an occupation or a line of trade was unprofitable, African natives switched to more profitable ones and always enjoyed the economic freedom to do so. In modern parlance, those who go about their economic activities on their own free will are called “free-enterprisers.” By this definition, the kente weavers of Ghana; the Yoruba sculptors; the gold-, silver-, and blacksmiths; as well as the various indigenous craftsmen, traders, and farmers were free-enterprisers. The natives have been so for centuries. The Masai, Somali, Fulani, and other pastoralists who herded cattle over long distances in search of water and pasture also were free-enterprisers. So were the African traders who traveled great distances to buy and sell commodities—a risk-taking economic venture. The extended family system offered them the security and the springboard they needed to launch and take the risks associated with entrepreneurial activity. If they failed, the extended family system was available to support them. By the same token, if they were successful, they had some obligation to the same system.

Indigenous Africa under Colonial Rule

When Africa was colonized, the Western powers sought to control indigenous economic activities. For the most part, however, the natives were free to go about their business. In West Africa, European settlement was confined to the urban enclaves and the rural areas were left almost intact. In central and southern Africa the story was a little different. The plunder and barbarous atrocities against the natives in King Leopold’s Congo need no belaboring. In southern Africa, where the climate was more congenial to European settlement, there were widespread land seizures, massive dislocation of the natives, and restrictions on their movements and places of residence. Nonetheless, despite the formidable odds, the natives could open shops and compete with European firms. Many did and were successful. There were rich African shopkeepers as well as timber merchants, transport owners, and farmers during the colonial period. Given the opportunities and access to capital, African natives showed themselves capable of competing with the foreigners.

The Golden Age of Peasant Prosperity

The period 1880–1950 may be described as the golden age of peasant prosperity in Africa. Though colonialism was invidious, one of its little-acknowledged benefits was the peace it brought Africa. The slave trade and competition over resources had fueled many of the tribal wars in precolonial Africa. The abolition of the slave trade in the 1840s eliminated a major cause of war, and the introduction of cash crops to service Europe’s Industrial Revolution provided new economic opportunities. In addition, skeletal forms of infrastructure (roads, railways, bridges, schools, post offices, and so on) were laid down during this period. This greatly facilitated the movement of goods and people and gave economic expansion a tremendous boost. For example, A. A. Boahen writes in Topics in West African History,

The volume of cotton exports from French West Africa rose from an average of 189 tons in 1910–14 to 495,000 tons in 1935–39, while that of coffee soared from 5,300 tons in 1905 to 495,000 tons in 1936. The volume of groundnuts (peanuts) exported from Senegal alone increased from 500,000 in the 1890s to 723,000 tons in 1937. However, the greatest success story was that of cocoa production in Ghana, whose volume of exports rose from only 80 lbs in 1881 to 2 million lbs in 1901 and 88.9 million lbs in 1911. This made Ghana the leading producer of cocoa in the world, and the quantity continued to rise until it reached a record figure of 305,000 tons in 1936.

The economic system used by African natives to engineer that prosperity was their own indigenous system. Except for a few places in Africa, notably in the Portuguese colonies, plantation agriculture was unknown. Cash crops—cocoa, coffee, tea, cotton—were grown by peasant farmers on their own individual plots using traditional farming methods and practices.

Hayek Unsung

Conventional Fed Wisdom, Defied

By GRETCHEN MORGENSON

NEWS last week that the Federal Reserve would keep interest rates near zero until mid-2013 was welcomed by many investors, but the bleak message about the economy still came through loud and clear.

The Fed has spent several years trying to kick-start the economy with low rates and other policies, with little success. Which raises this question: Will more of the same help now?

Among the doubters is Thomas M. Hoenig, the soon-to-be former president of the Federal Reserve Bank of Kansas City. Mr. Hoenig, at the helm of the Kansas City Fed for the last 20 years, has thought long and seriously about the problems facing the central bank, and he spoke with me about them last week after attending his final meeting of the policy-making Federal Open Market Committee. He will turn 65 next month, the mandatory retirement age for a Fed bank president.

Mr. Hoenig has been pretty much alone among Fed presidents in publicly calling to break up large banks that are too big to succeed.

“Extremely powerful institutions, both financially and politically, undermine the long-term strength of our system and make us look like a financial oligarchy,” he told me. This view, of course, receives little applause in Washington and on Wall Street.

Mr. Hoenig has espoused this view for more than a decade, and he has grown accustomed to being ignored or criticized for it. Back in 1996, in a speech at the World Economic Forum in Davos, Switzerland, he presciently warned about the dangers of expanding the federal safety net to cover financial institutions trading complex derivatives and structured finance vehicles.

Pushing for a new regulatory regime that would deny a safety net to institutions engaged in risky activities, he told the attendees: “The threat of failure keeps a bank honest and inhibits it and the industry from trending toward excessive risks. Without this market discipline provided by creditors willing to withdraw their funds when they suspect a bank of being unsafe, banks have an incentive to take excessive risks.”

Mr. Hoenig’s prescription was to bar institutions that engage in risky business from offering government-backed deposits and to minimize their access to emergency Fed loans. Although he has been vindicated in this view, big bankers howled and regulators yawned at the time.

“I was trying to point out that these kinds of activities are beyond management’s control,” he recalled, “and that if you want to do this, you cannot have the taxpayers subsidizing it.”

He added: “It was controversial. It was not well received by some.”

In 1999, as Congress was finally doing in the Glass-Steagall rules that had separated investment banking from old-fashioned commercial banking, Mr. Hoenig made another public warning about big, interconnected financial companies. “In a world dominated by megafinancial institutions, governments could be reluctant to close those that become troubled for fear of systemic effects on the financial system,” he told an audience at the European Banking and Financial Forum in Prague. “To the extent these institutions become ‘too big to fail,’ and where uninsured depositors and other creditors are protected by implicit government guarantees, the consequences can be quite serious.”

We sure found that out.

More recently, in the aftermath of the 2008 crisis, Mr. Hoenig has continued to counter the conventional wisdom in Washington. “The Dodd-Frank legislation, for all its 2,300 pages, does not fix the fundamental problem of too-big-to-fail banks,” Mr. Hoenig said last week. “I think the post-Depression response was the answer — you break them up. If you are going to have access to the safety net, you are going to limit your activities.”

Last year, when he was a voting member of the open market committee, Mr. Hoenig dissented on monetary policy decisions at every meeting. Because he is no longer a voting member of that committee, his current views on the Fed’s most recent policy decision were not reflected in the dissents registered last week by three other regional Fed bank presidents, Richard W. Fisher of Dallas, Narayan Kocherlakota of Minneapolis and Charles I. Plosser of Philadelphia.

“My objections have been based on the fact that the central bank has to think about what its policies mean for the long term,” Mr. Hoenig said. “We as a nation have consumed more than we produced now for well over a decade. Having very low rates for an extended period of time encourages us to continue focusing on consumption, but to correct our imbalances, we have to focus on production.”

Creating jobs and finding ways to keep American businesses from fleeing abroad is not exactly the domain of the Fed, Mr. Hoenig conceded. But neither should the Fed’s actions work against the goals of generating a more productive economy, he said.

“The central bank has to be, in a way, a neutral player, and yet we find ourselves trying to stimulate, and the effect is further leveraging,” he said. “If I thought zero rates would bring jobs, I’d want it forever. But it distorts the economy.”

He continued, “In 2003, when we lowered rates and kept them there because unemployment was 6.5 percent — look at the consequences.” Those consequences included the nation’s mortgage feast, followed by its current economic famine.

Another important theme for Mr. Hoenig concerns the mistrust that has arisen as regulators provide favors to powerful institutions while asking other industries, and ordinary Americans, to accept less.

Ask farmers to accept fewer federal subsidies, or the housing industry to live without the mortgage tax deduction, or ordinary Americans to contemplate changes to Social Security, and they all push back, he says.

And many of these people say the same thing: “Why should I compromise when the largest institutions get bailed out and continue to get their bonuses?” he says.

POINT taken. If there were a sense that everyone, big and small, powerful and weak, would be asked to sacrifice, we might be able to agree on a way forward for the economy, Mr. Hoenig said.

“We have to bring a greater sense of equitable treatment,” he said. “When we do that Americans will say, ‘Yes, we are all in this together.’ ”

Mr. Hoenig does not yet know what he will do after leaving the Fed, but he aims to stay in public service. Let’s hope he lands in a job where some of his ideas can be put into action.