Thursday, July 9, 2015

Solving the Greek Debt Crisis, V: Presenting the Solution

So now we have the solution to the Greek (or any other) debt crisis: if you want to pay down debt, have enough to meet your current consumption needs, and set aside enough for a rainy day, you have to produce enough to cover what you have consumed on tick (i.e., on credit), are consuming on a daily basis, and a store on which to draw if you suddenly become unable to produce.

"Greece is forever floored, Copperfield...or is it?"
That means getting to work producing something that you can either consume yourself, or trade to somebody else to repay what you consumed in the past or want or need to consume now, and hopefully have a bit over to ensure you’re on solid financial ground.  As Mr. Micawber told David Copperfield,

“My other piece of advice, Copperfield,” said Mr. Micawber, “you know. Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and — and in short you are for ever floored. As I am!”

Now, it’s pretty obvious to virtually everyone that Greece is (as Mr. Micawber would say) “floored.”  It should also be obvious that to get up off the floor, the country must produce its head off.  And make no mistake — it can be done, because it has been done.

Napoleon III surrendering after Sedan
In 1871, the French surrendered to Prussia after the disaster at the Battle of Sedan.  The French economy was in ruins.  To destroy France economically forever, Bismarck imposed an indemnity of Fr.5 billion, approximately U.S. $1 billion, back when the dollar was actually worth something, which he figured France could never repay, justifying a Prussian (or, by this time, Imperial German) takeover of France, with La Belle France becoming a constituent state of the new Second Reich.

Much to Bismarck’s chagrin and the world’s surprise, France paid off the indemnity in full in less than three years.  There were three main contributing factors to this financial and economic miracle:

"You can't cheat an honest man. A crook's another matter."
1.     Bismarck didn’t understand money — and thus didn’t define it properly.  He thought gold and silver were money instead of commodities that were useful as a more or less stable standard of value.  He allowed the French to pay the indemnity in their choice of gold Fr.20 pieces (“Napoleons” containing .1867 ounce of gold each) or silver Fr.5 pieces (“Écu” containing .7234 ounce of silver each; the name “Écu” was discontinued after the 1880s, if you care), instead of bills of exchange or mortgages representing real assets.  Fortunately for France, the price of silver in terms of gold at this time was dropping like a stone due to massive world production combined with the demonetization of silver in many countries, falling about 50% by mid-decade.  That meant France could sell its products for gold, buy silver with the gold, mint the silver into Écus, and pay Prussia Fr.5 in silver that cost them as little as Fr.2.50 in gold, instead of having to fork over real wealth in the form of contracts for marketable goods and services.  The Germans melted the Écus and sold the silver for the gold they needed to facilitate the shift from the silver standard to the gold standard (sometimes back to the French), who bought it at a reduced rate in terms of gold, minted it back into silver Fr.5 pieces at full face value at par with gold to pay the Germans, who melted the silver to sell for gold at a loss. . . .

Louis Pasteur saving France
2.     The market for French products expanded rapidly in the latter half of the nineteenth century, thanks in large measure to rising living standards in the U.S. and Great Britain.  Fortunately for France, Louis Pasteur had saved those industries producing the products that were most in demand, and with tremendous repeat sales: wine, cheese, silk, and wool.  Some authorities estimate that the value of Pasteur’s discoveries was, in and of itself, sufficient to pay the entire indemnity and then some.

3.     Key industries were small, usually family-owned enterprises, with most workers being relatives having some kind of ownership stake in the business.  As recent studies have shown, worker ownership combined with participatory management and profit sharing can enhance productivity, and thus profitability, by 150% on the average.  There is also the phenomenon of “binary growth” noted by Dr. Robert H.A. Ashford of Syracuse University, that an economy in which capital is broadly owned experiences faster growth — and thus productivity and profits — than an economy in which capital is not broadly owned.

This last — broad-based capital ownership — was the single most important economic factor in France’s economic miracle (Pasteur’s work was “technological,” as it made production possible, but did not result directly in production).  And, as Jean-Baptiste Say pointed out to Thomas Malthus, you don’t pay debts with “money.”  Money is only a symbol of what you’re really paying your debts with: what you produce in the way of marketable goods and services.

If Greece wants to get out of debt and put the economy on a sound footing, it must institute immediate reforms to enable as many people as possible to be as productive as possible in the shortest time possible.  That is what we will start to look at on Monday.


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