Authors

Economics

Text of “The Death of French Savings, the Russian Bonds Story 1880-1996″

The following text is from the notes I made of a talk that I gave to the “End of The World Club” at the Institute of Economic Affairs on 18 April 2014.

If there is one feature of human society that makes it successful, it is the capacity that human beings have of choosing to satisfy short-term appetites or to defer gratification. This ability to distinguish between short term and long term interests is at the heart of economics.
Russian-bond-certificate-fr
But why defer consumption? Why save at all?

One reason is the transmission of wealth from one generation to the next. Another is to ensure security in hard times.

A complaint of American academics about French savings in the 19th century is that they were too conservative. Easy for them to say.

The population of France grew more slowly than any other industrialising nation in the 19th century (0.2% per year from 1870 to 1913, compared with 1.1% for Germany and 0.9% for Great Britain). The figures would be even worse if emigration from the British Isles were added to the headcount.

This slower rate of population growth would tend to mean a slower rate of economic growth: smaller local markets, fewer opportunities for mass production. This was well known to be a problem in France. In fact Jean-Baptiste Say was sent to England in 1815 to study the growth of English cities such as Birmingham and its effect on the economy (here in French).

The causes of low investment must surely include political and social instability.

Here are the changes of regime in France during the 19th century:
1800-1804: The Consulate
1804-1814: The Empire
1814: The First Restoration
1814-1815: The Return of Napoleon
1815-1830: The Return of the Restoration
1830-1848: The British Experiment
1848-1851: The Second Republic
1851-1852: The military coup-d’état
1852-1859: The Empire Strikes Back
1860-1870: The Free Trade Experiment (supported by Richard Cobden)
1870-1871: Three sieges of Paris, two civil wars, one foreign occupation
1870-1879: The State Which Dare Not Speak Its Name (retrospectively declared to be a republic)
1879-1914: La Belle Epoque (including the anarchist bombings 1892-1894 and the Dreyfus Affair 1894-1906)

If instability discourages savings, it is remarkable how much there actually was.

Five billion francs in gold, raised by public subscription to pay for the German army of occupation to leave France after the Franco-Prussian War. The amount was supposed to be impossible to pay and designed to provide an excuse for a prolonged German occupation. It was paid in full in two years. 80% of the money (equivalent to over two and half times the national government’s total annual spending, was raised in one day).

What the modern academics decried was that these sorts of sums weren’t invested in industry or agricultural technology. In 1880, French private investments amounted to 7.3 billion Francs, but this was less than half of all investments (48%), versus 52% for government bonds.

You can’t pick up your factory machines and run away from the Uhlans, or the Communards.
Gold was one preferred wealth storage option. It still is in France.

Government bonds were generally considered a good deal: backed by the power of taxation, and, unlike gold, they earned interest.

One constant concern of French governments in the 19th century was the diplomatic isolation enforced by the 1815 Congress of Vienna. Various attempts were made to break this, some successful like the split of Belgium from the Netherlands in 1830, the Crimean War (co-operation with the British), others failed (Napoleon III’s Mexican adventure, the Franco-Prussian War).

By 1882, Germany looked like getting economic and military supremacy in Europe, with an Triple Alliance with Austria-Hungary and Italy. With the British playing neutral, the best bet was to build up Russia.

The first Russian bonds sold in France were in 1867 to finance a railroad. Others followed, notably in 1888. At this point the French government decided on a policy of alliance with Russia and the encouragement of French savers to invest in Russian infrastructure. From 1887 to 1913, 3.5% of the French Gross National Product is invested in Russia alone. This amounted to a quarter of all foreign investment by French private citizens. That’s a savings ratio (14% in external investment alone) we wouldn’t mind seeing in the UK today!

A massive media campaign promoting Russia as a future economic giant (a bit like China in recent years) was pushed by politicians. Meanwhile French banks found they could make enormous amounts of commission from Russian bonds: in this period, the Credit Lyonnais makes 30% of its profits from it’s commission for selling the bonds.

In 1897, the ruble is linked to gold. The French government guarantees its citizens against any default. The Paris Stock Exchange takes listings for, among others: Banque russo-asiatique, la Banque de commerce de Sibérie, les usines Stoll, les Wagons de Petrograd.

The first signs of trouble come in 1905, with the post-Russo-Japanese War revolution. A provisional government announced a default of foreign bonds, but this isn’t reported in the French mainstream media or the French banks that continue to sell (mis-sell?).

During the First World War, the French government issued zero interest bonds to cover the Russian government’s loan repayment, with an agreement to sort out the problem after the war. However, in December 1917, Lenin announced the repudiation of Tsarist debts.

The gold standard was abolished, allowing the debasement of the currency, private citizens were required to turn over their gold for government bonds.

Income tax was introduced (with a top rate of 2%) after the assassination in Sarajevo of the Archduke Ferdinand and his wife.

In 1923, a French parliamentary commission established that 9 billion Francs had effectively been stolen from French savers in the Russian bonds affair. Bribes had been paid to bankers and news outlets to promote the impression of massive economic growth in Russia. Many of the later bonds were merely issued to repay the interest on earlier debt.
Russian-Bond-terms-English
For the next 70 years, protest groups attempted to obtain compensation, either from the Russian government or from the French government that had provided “guarantees”. You won’t be surprised to know that some banks managed to sell their bonds to private investors after 1917, having spread false rumours that the Soviets would honour the bonds.

Successive French governments found themselves caught between the requirements of “normal” relations with the USSR and the clamour of dispossessed savers and their relatives.

In November 1996, the post-Soviet Yelstin government agreed a deal to settle the Russian bonds for $400 million. The deal covered less than 10% of the families demanding compensation. Despite this, 316,000 people are thought to have received some compensation, suggesting that over 3 million families were affected by the Russian bonds scandal.

There are similarities with the present day but also significant differences.

First, the role of government guarantees and links with favoured banks, ensuring savers were complacent.

Second the manipulation of economic data by the Russian government, which looks a lot like what’s been happening in China.

Third the fragility of the situation: war can break out. All sorts of assumptions we can make about safe investments go out of the window.

One specifically French response to all this is something I would like to see an academic study of. What changes to consumption and savings would follow from growing up in a family where savings have been wiped out by government action (Russian or one’s own)? If three million people were directly involved, most French people would have known someone who had deferred consumption and been robbed. To what extent does the post-1945 explosion in mass consumption in France reflect a view that deferring consumption is foolish when savings can be stolen with the connivance or lack of concern of one’s own government?

Book Reviews

Paper Money Collapse 2nd edition teaser

One of the interesting things that happened at the End of the World Club on Monday evening, was a teaser of what’s new about Detlev Schlichter‘s Paper Money Collapse (2nd edition). We are promised some discussion about Bitcoin (which really got going about the time PMC first appeared on bookshelves).

Also promised is an update of Detlev’s views and he hopes to include discussions that have taken place in various forums (such as on his blog).

Further updates as we get them.
9781118877326.pdf

 

 

Events

The Death of French Savings, the Russian Bonds Story 1880-1996

I shall be giving a talk at the Institute of Economic Affairs in Westminster this evening, 6.30pm, to the End of The World Club. The topic is The Death of French Savings, the Russian Bonds Story 1880-1996.

Among the issues covered are collusion between governments, favoured banks, and a compliant media to fleece savers by mis-selling investments. Nothing we should worry about in the present day?

One thing I learnt while researching this talk was the scale of capital flows: about 3.5% of France’s gross national product was exported to Russia for over 25 years (1887-1913) in the form of private purchases of bonds.

I aim to speak for about 15 minutes with a discussion afterwards. Formal proceedings end at 8pm.

Events

Bitcoin entrepreneurs meet in Paris this week

I’m open-minded about Bitcoin and digital currencies in general. Which is to say I want 10 million people to use it for 10 years before I consider it a store of value.

Events like Paris Bitcoin Startups On Wednesday 16th April reinforce my attentisme or ‘wait-and-see’ policy.

On the one hand, if the digital currency can overcome French bureaucratic hostility and prosper there, that speeds up my adoption date.

On the other hand, it looks a lot like venture capitalists playing with ‘out-of-the-box’ business ideas. Exciting, but not safe. For now, gold wins.

Economics

Goodbye Detlev – for now

Writing on his website, Detlev Schlichter has announced his exit from the sphere of ideas and writing:

This is the final blog entry in the ‘Schlichter Files’. Pretty soon, this website will be taken offline. I would like to take this opportunity to thank all my readers for following my commentaries, essays and occasional rants over the past two-and-a-half years. Thank you.

Read the rest of the article here.

In the past few years, Detlev has made a spectacular contribution to Austrian School economics in the UK. When I first found his book Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown, I knew I had found the contemporary Austrian analysis I was looking for. I was delighted to endorse it.

That giant intellectual contribution to our economic circumstances has been complemented by Detlev’s unique ability to explain his ideas with a compelling charm from the perspective of experience. I will never forget his astonishing appearance on Radio 4′s Start the Week.

We wish Detlev all the best as he moves on to new enterprises, just as we wonder how to fill the vacuum he will leave. We’re delighted to host his articles and we hope one day to welcome him back to the sphere of ideas.

Economics

Confessions of a central bank official (two in fact and one to come)

City A.M. reports today Dovish Carney stuns markets:

EQUITY markets jumped yesterday after the Bank of England shocked investors by indicating that rates would stay at historic lows in the near future, despite recent signs that the British economy is starting to strengthen.

That investors are shocked by the news that Mark Carney plans a further extended period of easy money is more surprising than the news itself. But it turns out markets are good at responding to superficial data over the clearly stated intent of big players in the market, like central bank officials.

Consider the evidence of Lord George, former Bank of England Governor, to the Treasury Select Committee in 2007, in which he confesses his role in seeding economic disruption in an attempt to avoid recession:

Tuesday 20 March 2007 – Treasury – Minutes of Evidence

Q117 Ms Keeble: What makes it worse is that the one tool that the MPC has is interest rates and that filters through to our constituents in the form of higher mortgages. That makes them complain even more; it becomes cyclical.

Lord George: Yes, if house prices are going up. But one has to step back and recognise—I referred to it earlier—that when we were in an environment of global economic weakness at the beginning of the decade it meant that external demand was declining. Related to that, business investment was declining. One had only two alternatives in sustaining demand and keeping the economy moving forward: one was public spending and the other was consumption. It is true that taxation and public spending can influence the demand climate and consumer spending, but confronted with what we saw we knew that we had to stimulate consumer spending. We knew that we had pushed it up to levels that could not possibly be sustained in the medium and longer term, but for the time being if we had not done that the UK economy would have gone into recession, just like the economies of the United States, Germany and other major industrial countries. That pushed up house prices and increased household debt. That problem has been a legacy to my successors; they have to sort it out, but we really did not have much of a choice about what we did unless we accepted that we would yank it back or give up stability altogether. That is the point I am trying to make in answer to Mr Newmark. There are some people—maybe lots—who say that house prices is the biggest problem, that the mortgage rate is going up, housing is not affordable and so on.

And a few weeks ago, the Bank’s Andy Haldane confessed that they “have intentionally blown the biggest government bond bubble in history” (I abridge a little):

Wednesday 12 June 2013 – TRANSCRIPT OF ORAL EVIDENCE

Q41 Mark Garnier: … If you thought that QE was creating financial instability, would you try to warn the MPC and, if so, how would you do it?

Andrew Haldane: I absolutely see it as my one of jobs as an FPC member to alert not just the MPC but this Committee and the wider world if I thought that QE, or monetary policy actions more broadly, was posing significant risks to UK financial system stability. …

To the substance, this is a risk that I feel very acutely right now. If I were to single out what for me would be the biggest risk to global financial stability right now it would be a disorderly reversion in the yields of government bonds globally, for any one of a variety of reasons. We have seen shades of that over the last two or three weeks. Let’s be clear, we have intentionally blown the biggest government bond bubble in history. That is where we are, so we need to be vigilant to the consequences of that bubble deflating more quickly than we might otherwise have wanted. That is a risk. It is one we as FPC need to be very vigilant to.

So, by officials’ own admission, the Bank under Eddie George created levels of debt-fuelled consumption which they knew could not last in the hope of avoiding recession and, following that bubble bursting, they have now deliberately inflated the biggest bond market bubble in history. When I see markets herding in response to the pronouncements of these big players, I think “What could possibly go wrong?”

As I set out in my speech on the Budget (video), Mark Carney has clearly explained his intention to use the Bank of England to manipulate economic expectations to manufacture recovery. This will not work.

It is certainly true that the central banks can alter economic expectations but the idea that they can do so helpfully is fanciful. It is founded on the same errors as socialism and like socialism, it cannot work because the information necessary is not available and because it relies on aggregating away much that makes us human.

We’ve had two confessions from central bank officials. I feel I can predict confidently that Mark Carney will one day confess, more or less, “We thought we could manage the economy by steering the expectations of tens of millions of people using monetary policy to blow various bubbles while making pronouncements about policy. We were wrong.”

One of the great tragedies of our circumstances is that so many people will label this central planning “capitalism”. Eventually, the state will have to get out of money and banking. Mark Carney’s coming failure should accelerate the day.

Economics

Are you ready for EuroCrash the musical?

I am not joking. It has finally happened. And I want to see it. As reported by Bloomberg, ‘Euro Crash! The Musical’ is coming to town. According to this report this spectacular and timely production “transposes the single-currency story to a deep dark forest. Mark and Gilda can’t find their way out. They are lured into the gingerbread Euroland house, where Papa Kohl and Madame Mitterrand run a school of fiscal discipline attended by some wayward pupils – personified nation states like Callum of Ireland and Stavros of Greece”. The show’s numbers include “a chorus praising the virtues of the Bundesbank and former U.K. Chancellor of the Exchequer Norman Lamont singing “Our currency’s gone down the plughole” in the shower”.

“EuroCrash!” is showing in at the Cockpit Theatre in London from 8 to 11 February 2012 and I am definitely going to see it. For more information and to book your ticket(s) just click here.

Economics

How the clash between Keynes and Hayek continues to define the difference between left and right

I’m pleased to promote another Hayek vs Keynes event at the London School of Economics:

Date: Monday 13 February 2012
Time: 6.30-8pm
Venue: Sheikh Zayed Theatre, New Academic Building
Speaker: Nicholas Wapshott
Chair: Professor Danny Quah

Eighty years ago at the LSE, Friedrich Hayek launched an assault upon the new economic thinking of John Maynard Keynes. The clash was so bitter and vituperative that it scandalized the cloistered world of academia. Eighty years on, the differences between the two men have still not been finally resolved and their conflicting approaches to the economy continue to define the profound chasm between politicians of left and right.

Nicholas Wapshott is a columnist for Reuters and regular contributor to Newsweek and The Daily Beast. He is the author of Keynes Hayek: The Clash That Defined Modern Economics and Ronald Reagan and Margaret Thatcher: A Political Marriage. He is a former senior editor for The Times and the New York Sun and editorial consultant to Oprah Winfrey.

Suggested hashtag for this event for Twitter users: #lsehvk

Ticket Information

This event is free and open to all however a ticket is required. One ticket per person can be requested on Tuesday 7 February.

See the LSE site for further details.

Events

Is the global economy heading for monetary breakdown?

A very exciting upcoming event:

The All Party Parliamentary Group on Economics, Money and Banking and Steve Baker MP in association with The Cobden Centre, the Institute of Economic Affairs, the Adam Smith Institute and the Institute for Public Policy Research cordially invite you to a discussion on:

Is the Global Economy Heading for Monetary Breakdown?

The Threat Posed by Elastic Paper Money

Tuesday 11 October 2011

Committee Room 6

Palace of Westminster

4.00pm

Steve Baker MP, Chairman and Conservative MP for Wycombe

Dr. Tim Evans, Chief Executive of The Cobden Centre

Detlev Schlichter, author, Paper Money Collapse:

The Folly of Elastic Money and the Coming Monetary Breakdown

Detlev Schlichter’s analysis might be controversial but it is logical and rigorous. Explaining in detail what he believes to be the real causes behind the world’s current economic woes, he paints a frightening picture of the global monetary breakdown he now believes is underway. The event is a must for anyone concerned with the future of the world economy and our society.

All Cobden Centre readers are invited to attend.

Events

Cobdenites will want to attend this Liberty League Conference

I am sure that many TCC supporters will want to attend this forthcoming conference organised by the Liberty League.

Not only will it be good for Cobdenites to add their insights but my understanding is that the organisers still have a few non-student places available. But hurry, tickets are going quickly.