In the previous posting on this subject, we saw that with the way the British financed the war against Napoléon, combined with the Financial and Industrial Revolutions, set up a surreal situation. People who owned capital were able to produce far more than they could consume, while the government, which produces nothing, could consume by manipulating money.
And everybody else? Small owners found themselves being forced out of business by the competitive advantages enjoyed by owners of capital, while wage workers found that their labor was worth less and less relative to capital that could out-produce them. People were forced in many cases into near-destitution as private charity and public welfare simply couldn’t handle the problem. This gave credence to the theories of Thomas Malthus who claimed that the problem was the poor were breeding far beyond the productive capacity of the economy and must necessarily starve.
The problem was not, however, “surplus population,” as Scrooge callously put it a few hours before Marley’s ghost and the three Spirits paid him a visit. Rather, it was because people were being shut out of the production process. More than enough was being produced to feed everyone, with the capacity to produce much more. As Jean-Baptiste Say pointed out, the only way to consume without recourse to theft, redistribution or charity is to produce it yourself, or produce something to trade to someone who is producing what you want or need to consume.
Consequently, because most people could not afford to purchase the machinery that was replacing them, they could not produce, and therefore were unable to consume — unless the system was corrected to open up access to the opportunity and means to be productive. What happened instead was that some people assumed that since many people could not consume and others were producing far more than they could consume, producers should be required to give up what they produced for the benefit of others.
But as we were saying, with governments consuming far beyond their ability (or in some cases, desire) to tax, a large proportion of the money supply shifted from being backed by private sector hard assets, to government debt — a promise to pay backed by another promise to pay. As a result, a market was created for something that had no real existence, something the world would not see again for almost two centuries when the “crypto-currency” phenomenon took hold and currency was issued that had nothing behind, not even a government’s promise to pay out of tax revenues it might never collect. People began speculating and investing in government debt.
|Richard III stopped forced loans|
Historically, government debt has not been a very good investment. During the Middle Ages, for example, it was generally understood that a loan to government was frequently a bribe, and not very much disguised, either. When a ruler needed money, he would either borrow from people who expected to be repaid (i.e., who had men and arms or commercial power to enforce a collection effort, and even that was risky, as it could mean having to overthrow a ruler in an effort to be repaid) or who knew with virtual certainty they wouldn’t see a penny of the money ever again, such as Jews. The reason some rulers tried to protect Jews (up to a point) was not usually humanitarian, but because they couldn’t afford to have a source of revenue dry up.
Of course, this often put Jews between the upper and nether millstones, so to speak. People would see Jews getting “favored treatment” (i.e., not being killed or run out of town) and having money when others didn’t and thus able to bribe the powers that be to be left semi-alone, and conclude there must be some conspiracy afoot . . . and start going after the Jews. Depending on how angry people were balanced against how much the ruler might need money, the Jews usually ended up with the short end of the stick, no matter what. No, lending to government was not a good investment by any means, as today’s world is finding out to its cost.
Unfortunately, the world in the wake of the Napoleonic Wars faced some serious money issues. The Spanish Empire had lost a huge amount of territory in the space of a decade or so. When Napoléon had marched into Spain and put his brother Joseph on the throne, an uprising followed to restore Ferdinand VII. Napoléon counterattacked, the Spanish effort fragmented into quarrelling factions, and the country dissolved into a bloody shambles with everybody fighting everyone else.
At that point virtually all of the Spanish possessions in Central and South America rose in rebellion against Napoléon . . . and, ultimately, against each other as the various factions couldn’t seem to unify. The risings in support of the Spanish crown soon morphed into revolutions for independence, but — despite the efforts of people like Bolivar and San Martin — were never to realize the vision of a United States of South America.
|Augustin de Iturbide|
They did, however, establish new national governments, usually republics (although the Empire of Iturbide in Mexico that existed briefly was an exception to this general trend). All of them, however, and whatever their form of government, had the problem of no tax bases and new governments that had no sources of revenue. So, they issued massive amounts of debt.
These sovereign debt issues entered the European financial markets and were speculated and invested in along with the issues of established European governments, especially in the City of London, which was the financial center of the western world. In the space of a generation, government debt had gone from the most risky investment to blue chip . . . with some dire consequences, not the least of which was the power that debt financing gave to governments that now realized they didn’t have to rely on the citizens for money, and could start expanding their power exponentially and start taking over every aspect of life.
We’ll address this new vision of the role of the State in a future posting, but in the next posting we’ll take a look at the sort of thing that can happen when you confuse counterfeit money with real money and imagination with reality.