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Archive for October, 2010

Alexander Hamilton’s markets, bubble, and fear realized

by on Oct.18, 2010, under History

I am often struck by the parallels in the issues faced and foresight displayed by the founders as they attempted to build the new system of government and provide guards for the safety and liberty of its people as well as their prosperity. One might be forgiven mistaking the date by a few hundred years when reading about this particular market bubble bursting; in the lead-up and the fallout.

Ron Chernow, Alexander Hamilton’s biographer, defends his subject from charges frequently levied upon him: “He was never a hireling of monied interests; rather, he wanted to attach them to the new country’s interests. Like many thinkers of his day, he thought that property conferred independent judgment on people and hoped that creditors would bring an enlightened, disinterest point of view to government. But what if they succumbed to speculation and disrupted the system they were supposed to stabilize? What if they engaged in destructive short-term behavior instead of being long-term custodians of the nation’s interest? If that happened, it might undermine his whole political program.”

Well, lets see how that turned out… (my primary source is Ron Chernow’s book linked above)

On July 4, 1791, during George Washington’s first term as the new nation’s first president, stock in Hamilton’s Bank of the United States, a kind of precursor to the Federal Reserve, went on sale. Interestingly, the shares where sold in the form of a scrip. As Chernow describes it; an investor would make a down-payment of $25 to receive a contract which entitled them to buy some number of shares at par and then pay off the balance due over the next eighteen months. So the activity centered around the buying of something that wasn’t actually a security… not a direct line to the crash of 2007, but surely an echo.

Some might argue that what happened next should have set off bi-partisan alarms and been the source for productive work by the new Congress. Instead, it just played a part in the bitter partisan divide that was forming in the young nation.

What we would term today, irrational exuberance, took hold as the price doubled and tripled sometimes on the same day. People newly turned speculator rushed in to the cities with carts full of gold in the hopes of getting in on the easy money. Through the following month the price of the scrip would grow to over $300. There was frenzy in the major cities of the north. Chernow quotes Benjamin Rush, John Adams personal physician and major medical mind of his time, as writing “The city of Philadelphia for several days has exhibited the marks of a great gaming house… Never did I see so universal a frenzy. Nothing else was spoken of but scrip in all companies, even by those who were not interested in it.” He then quotes Senator Rufus King as telling Hamilton; “The business was going on in a most alarming manner, mechanics deserting their shops, shopkeepers sending their goods to auction, and not a few of our merchants neglecting the regular and profitable commerce of the city”.

This might sound a bit familiar to those who just experienced the real estate market crash in the United States. But also those who experienced on in Florida in the 1920s. Andrew Bettie writing on Investopedia reports that prices in the Florida real estate market in the 20’s doubled and tripled… “soon everyone in Florida was either a real estate investor or a real estate agent”. This sentiment could be said to apply to the entire U.S. in the years leading up to the recent crash.

During the rise in bank scrip in 1791, Jefferson commented on the impact on the moral character of the nation; Chernow quotes him: “The spirit of gaming, once it has seized a subject, is incurable. The tailor who has made thousands in one day, though he has lost them the next, can never again be content with the slow and moderate earnings of his needle”. Also, Jefferson wrote to Washington, “It remains in a country whose capital is too small to carry its own commerce, to establish manufactures, erect buildings, etc., such sums should have been withdrawn from these useful pursuits to be employed in gambling”.

It seems that Hamilton’s fears of people “engaged in destructive short-term behavior” were realized on the very first event of his building of a market economy in the country. The interesting note here is Hamilton’s foresight, but also his lack of action. Today, the real estate rooted crash which almost took down the world economy was the result of the same “destructive short-term behavior”.

In the end, to this particular chapter anyway, the bubble burst. Just one month after the initial offering. What happened in the aftermath borders on eerie in the parallels to today. The first event, according to Chernow, almost made me drop my ebook reader when I read it; “The bubble was pricked when bankers refused to extend more credit to leading speculators”. In 2008, Bear Stearns and Lehman Brothers essentially collapsed because they ran on credit and banks refused to lend to them. Here are two “leading speculators” which bankers refused to lend to. Further, in September 2008, the Telegraph (UK) reported “A lack of lending in the bank market has led to governments in the US and Europe rescuing five financial institutions in the past two days. Yesterday the US Federal Reserve sought to avoid further banking failures by doubling the amount of dollars available to foreign central banks through swap lines to $620 [billion]”.

Chernow then writes “As a rule, he [Hamilton] tried not to interfere with markets… But he also believed he had an obligation to protect the financial systems”. So he decided to “‘talk down’ the market to avert a worse tumble later on”, and he then proceeded to “buy up $150,000 in government securities”. Although there were further fluctuations, the strategy worked, setting a precedent for market regulation through government action, including the very first bailout.

In another parallel, Jefferson wrote a letter to Edward Rutledge in which he complained “Ships are lying idle in the wharfs buildings are stopped, capitals withdrawn from commerce, manufactures, arts, and agricultures, to be employed in gambling”. Bill Gates, in 2010, gave a lecture to MIT students on the problem of many bright students going into less impactful areas and the financial sectors in the hopes of big earnings rather than into the sciences where they can make positive impacts on human lives.

So why didn’t the founders act?

In 1791, the nation was young and very vulnerable. Fighting between France and England was threatening U.S. commerce on the high seas and possibly the nation itself. Native American attacks, political infighting, and a popular uprising or two were just some of the issues threatening it on land. Still, perhaps they could have acted to stop the cracks before the dam broke.

From the prescient mind of the man who said “If Tyranny and Oppression come to this land, it will be in the guise of fighting a foreign enemy “, we get “The stock-jobbers will become the praetorian head of the Government, at once its tool and its tyrant, bribed by its largesse and overawing it by clamors and combinations.”, from a letter he wrote to Jefferson during in August 1791. Perhaps it was, and still is, the realization of this prediction that was responsible for the lack of meaningful action.

What if Jefferson and Hamilton sat down, put aside their anger, and worked together for the good of the nation as Washington pleaded with them to do in letters sent as the bedlam in the papers was intensifying. What if we all sit down together today as the bedlam in the media is now doing the same?

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Thoughts on the Founders, their times and Lessons lost: Jefferson and Statues

by on Oct.08, 2010, under History

About a year ago I decided to dive into a study of the  people, events, and ideas that were responsible for the creation of the United State of America.   After reading American Creation by Joseph Ellis and seeing all the fervor in the political climate today drawing upon the founders and their intent, I took to my default course; learning.

I started with Jefferson as he tended to be my favorite of the group and the one, I later concluded who best embodied what I see as the spirit of the nation.  From a few disjoint discussions and quotes I had read I had very high hopes when I picked up a recommended biography and began reading.  Soon my reading expanded to include his letters and autobiography as well a few not so flattering views on the man.

What I found was contradiction; and near the end of my reading, I wasn’t sure how I felt about Jefferson.   During his political career in the fledgling U.S. government he saw himself as a man of the people.  According to several sources, as president, he often answered the White House door and greeted visitors in bedroom slippers.  In direct contrast to Washington and Adams before him, he walked rather than riding in drawn carriages essentially reversing the hints of royal privilege one might see in the acts of his predecessors.   However, he lived on a large estate on the top of a mountain tended to by hundreds of slaves; very much out of reach of “the people”.

He tried several times to introduce legislature to abolish the slave trade and even wrote passionately against slavery in a passage that was struck from his rough draft of the Declaration of Independence by the Continental Congress:  “[King George] He has waged cruel war against human nature itself, violating it’s most sacred rights of life and liberty in the persons of a distant people who never offended him, captivating and carrying them into slavery in another hemisphere, or to incur miserable death in their transportation thither. This piratical warfare, the opprobrium of infidels powers, is the warfare of the Christian king of Great Britain. He has prostituted his negative for suppressing every legislative attempt to prohibit or to restrain this execrable commerce determining to keep open a market where MEN should be bought and sold…”  Yet, he “owned” several hundred people himself.

Several historians claim his was disingenuous.  A genius no doubt, but a brilliant schemer with political aspiration disguised with the mask of champion of the people.  I was becoming inclined to agree;  then I realized, he was a human being.  He was necessarily prone to mistakes, influenced by strong emotion, and, most important, not to be written off nor his achievements and wisdom diminished because of his inescapable condition in which we all share.

He “inherited” the people and the plantation and records suggest that those people were born in Virginia.  Records also show that he paid some for more difficult tasks and that some members of his family educated the children despite the popular condemnation of the practice.  So, perhaps he saw them more as members of his community.  Perhaps he didn’t live isolated on a hilltop.  Perhaps, given the apparent economic modalities in the south and the resultant political implications of immediate emancipation he chose his course of driving the phasing out of the practice.  To my mind, this was not the conclusion of a revolutionary for liberty who was for me the soul of the new nation, and there were other courses available which were far more favorable.  However, it is logical that it was the pragmatic compromise of a man torn between Enlightenment thinking and the political ramifications thereof.

This shocking, and yet blatantly obvious, realization led me to reevaluate how I thought about the founders and the documents that formed this nation.  Jefferson did his best.  The apparent contradictions are, to my mind, the expected results of fallible human, engaged in a monumental task, in a very trying time.

I think there is value in statues and buildings named in their honor.  I think there is a place in remembering the greatness of the accomplishments.  However, there is also value in understanding that they were people with flaws just like us.

Today, I would wager, Jefferson wouldn’t stand a chance.  From my reading, in his day, political attacks in the media were seen as just that; political.  Today they are either accepted blindly in an ideological rage, or ignored out of hand in an ideological rage.  The nation’s founding, people searched texts for precedent and practiced arguments to prepare for debate, today marketing firms are hired to package and present positions with little if any substance conveyed.

So, yes, the founders were people.  Humans like the rest of us, however, unlike many today, they were people of substance.  Jefferson may have been big on French wine and dinner parties, but one of his defining legacies was his considerable library.  After the British burned Washington in the War of 1812, Jefferson, in 1814 offered to donate his library to replace the volumes destroyed.   Washington studied the sociology of his day, Madison and Adams dove at length into the ancient republics and the political philosophy of contemporary European and British authors.  In fact, if one was inclined to read the works of the French philosopher Montesquieu, one would find some very familiar ideas including the separation of powers.

Today, instead of thriving in the fruition of the works they accomplished, we are suffering from the retention and inflation of what I see as their failings.  The inefficiency and danger of an ideologically based two-party system.  The barbed and pointless tabloid-like attacks done through party owned news sources now completely unbridled.

Among many other things, it seems we’ve lost the sense of respect for the responsibility resting on the shoulders of an elected representative, possibly because representation and the people are not necessarily on the mind of those elected.  Jefferson said in his first inaugural address ” to declare a sincere consciousness that the task is above my talents, and that I approach it with those anxious and awful presentiments which the greatness of the charge, and the weakness of my powers so justly inspire. ” 

In conclusion…..   The founders of the United States while not perfect and not free from personal ambition, acted largely out of a desire to create something great.  To create something larger than themselves where all people’s lives were respected.  They made no permanent rule other than the establishment of inalienable rights for everyone (eventually).  They made mistakes, but left a way to correct for them

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