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By Dr Tim Evans, on 16 August 11
We are pleased to announce a special discount for Cobden Centre readers on The Letters of Richard Cobden from Oxford University Press:
In four volumes, The Letters of Richard Cobden, edited by Anthony Howe, provide a unique insight into the career of one of Britain’s leading nineteenth-century politicians. Oxford University Press is pleased to offer a special 20% discount on the series.
“Anthony Howe’s comprehensive, erudite and superbly annotated edition… [is] an indispensable resource for understanding the Victorians.” – Miles Taylor, London Review of Books.
Please see this page for details.
By Sean Corrigan, on 9 May 11
The conduct of the Bank, in inflating the currency, produces a rise of prices. The prices of all commodities gradually rise; that begets what is thought prosperity; it is in fact unhealthy excitement; this causes an extension of our commerce and manufactures; it causes an advance of prices abroad, in consequence of the advance in this market, which is the regulator of the prices abroad, and that begets a general system of overtrading. This overtrading inevitably leads in the end to discredit, and panic to a greater or less degree.
— Richard Cobden, Parliamentary Committee of Inquiry into Banking, 1840
However firmly we hold to the view that the hypertrophic, state-coddled, fractionally-based financial markets in which we must operate are not exactly the embodiment of dispassionate rationalism in their workings, it is nonetheless true that, over time, commodity prices can be shown to trace out a path not wholly divorced from that followed by the real-world processes which utilise them—especially industrial production and the internationally-dispersed network of outputs best reflected by global trade flows.
In making a claim for the influence of what might be broadly termed ’fundamentals’, this is not to assert the patently indefensible proposition that commodities—much like stocks, bonds, houses, classic cars, vintage wines, or antique furniture—are not also subject to alternating waves of avarice and abhorrence—the ‘temperamentals’, if you will—which may occasionally swamp the underlying pull of such mundanities as supply, demand, and inventory.
In fact, given our global system of unanchored (and frequently unhinged) money and credit, even this ostensible distinction between price movements supposedly soundly based on metal in the warehouse, or barrels at the refinery and those caused by the wilder, speculative herding founded on chart patterns, leveraged groupthink or blind computer algorithms is much less definitive than it appears.
If hot money and overabundant finance can sometimes be shown not to be pouring directly into purchases of cotton or copper or crude oil as mere gaming counters in the global casino, these evil twins will, nonetheless, be feverishly driving economic activity into channels of commodity-consuming activity which, both in their form and scale would not otherwise be taking place.
This logically implies that the commodity ‘fundamentals’ – as well as the equity, the currency, and the bond ‘fundamentals’ – still rest, albeit at one remove on this occasion, upon the very same malign effects of monetary laxity, budgetary overstretch, and misdirected enthusiasm as before.
That said, we cannot stand on the sidelines in a huff of purism. Since we must always be aware that the field of battle is not the pristine sandbox of the officer training school, but rather a dead ground-riven labyrinth of swamps, ravines, and gullies, this implies that if we are to contend at all, we must trade, invest, and practice our entrepreneurship amid the far from perfect conditions we have been given, sticking to our principles but being pragmatic enough to tailor them to the circumstances which confront us.
So, let us not here debate the merits or the long-term sustainability of what we might here term the ‘Globalised Asia’ model, let us just accept that it is, for better or for ill, the dominant feature of our world.
Whether their leaders’ coy mercantilism or the cynical machinery of exploitation which funnels their vast pools of captive savings into the blind service of the great, native industrial combines will ultimately squander the admirable energy and technical prowess of these most assiduous of peoples, only time will tell but, until the wax melts on the wings of these oriental Icaruses, theirs has irrefutably become the main voice in the fundamental pricing of commodities.
Indeed—to the extent that we trust an aggregate of aggregates to paint an accurate picture of the world—not only are growth rates of industrial output and 2-way trade volumes rising faster in Asia than in the Euro-American West, but, having fallen less far in the Bust and having recovered better in the meanwhile, their absolute magnitude also appears to be greater.
Thus, if we can argue that commodities tend to follow global developments in these two key metrics, we must also take cognisance of the fact that, at the margin, these latter are being dominated by events taking place on the eastern edge of the Pacific.
In fact, for those more traditional asset managers who have come to favour emerging market equities over the more traditional kind (a switch which has paid an annual 13.5% total return premium over the last decade), this is hardly the most stunning of news since the ratio between the two groups of stocks has been a facsimile of the output and trade ratios between the two regions over this same period, though whether this is an accurate guide to the creation of genuine shareholder value or simply an artefact of market perceptions is a question upon which it is not our purpose here to comment.
Furthermore, this has brought about a pronounced shift in the relative pricing of raw inputs and finished manufactures, reversing the previous two decade decline of the former vis-à-vis the latter into a steep, sustained rise in the ratio between them.
If we consider that much capital investment and technological know-how has been transferred to the Asian export hubs in the past ten years, there to be mixed with cheaper labour, arguably underpriced currencies (especially after the mid-90s devaluation in China and the Asian Contagion which shortly succeeded it), and a range of overt and covert financial and fiscal—as well as material—subsidies and couple this with the fact that such centres have been the nuclei upon which a much more wide-ranging local development of industry and infrastructure has crystallised, then the re-ordering becomes fairly self-explanatory.
A glut of cheap, finished goods on Western markets (still their biggest exhaustive consumers if no longer, alas, the Lords Paramount of their creation) has therefore had as its counterpoint a greater degree of scarcity of the commodities which both go into their fabrication and upon which the incomes generated along the way have been later spent.
The Raw and the Cooked
While this situation persists, it implies that commodities should continue to enjoy robust demand and advantageous pricing power, amid a struggle to maintain an adequate supply—fully incentivised though this may be—and with a level of inventory cover which becomes rapidly depleted when the engine is firing upon most (if not all) of its cylinders.
In the case of industrial metals, the trends in demand are clear and if stock:use ratios are still markedly cyclical (as well as subject to the vicissitudes of the individual metal), the general pattern toward lower and lower cover is also fairly apparent. As the example of steel also shows—not only the world’s second most traded commodity after oil, but also one of the least subject to signal pollution from financial markets—the effect on price is also evident.
In energy, matters are even less equivocal. Here, Asian usage is fast approaching 40% of the world total and its share is growing at such a pace that, if nothing interrupts the trend between now and then, the region will account for a majority of global uptake as early as 2020.
Put another way, over the ten years to 2009, BP estimates that world energy use increased by roughly a quarter. Asia-Pacific accounted for four-fifths of that increment, with China alone responsible for three-quarters of the region’s contribution.
For all those in the West about to ruin both their finances and the view from their windows by littering the landscape with banks of appallingly inefficient windmills and uneconomical solar farms, in pursuit of the hysterical Gaian cult of carbophobia, it should be a chastening realisation that almost half the total rise in demand was satisfied by burning coal—85% of that addition emanating from China—a surge which took the fuel’s share to a 40-year high of 29% of all use, largely at the expense of oil.
Given the inevitable, post-Fukushima backlash against nuclear energy (a revulsion, again, felt most keenly among those countries fortunate enough to have largely forgotten what it is like to be without a reliable supply of electricity), the call on hydrocarbons can only be the greater and, should China become serious about cleaning up its own environment (a desire richer nations progressively have the luxury to accommodate), it would seem that natural gas—conventionally-sourced, coal-bed, shale, or liquefied—might be called upon to advance its contribution from the vicinity of 23%, at which point it has been stuck for over a decade past.
Of course, what is true for energy is also these days partly true for agriculture, not just because Asian populations are both growing and moving up the protein chain away from a bland, but relatively efficient diet heavily dependent on staple crops, but because the combined effect of governmental mandates to burn what could otherwise serve as food and fodder in fuel-thirsty vehicles have reached the point where nigh on 40% of the US corn crop is misused in this manner, an amount fully 2 1/2 times the country’s exports (which themselves make up around 55% of the global total) and approximately equal to shipments from the two next biggest sellers, Argentina and Brazil, combined.
With yields per acre for wheat, barley, and oats showing signs of stagnation this past 10-15 years, across several key growing regions, and with rice yields in China growing at far less than half their previous trend rate, the easy pickings from the Green Revolution may already have been harvested meaning that, barring a sea change in attitudes to both GMO technology and biofuel boondoggles, the so-called ’war for acres’ looks set to remain intense.
As a consequence, here, too, does pressure on stock:use ratios seem bound to persist, reducing the cushion we all need to protect us from the capricious buffeting of meteorology and man-made malfeasance, a feature which not only tends to keep prices elevated, but also makes them far more subject to sudden spikes and the optionality of sharp backwardations.
What we have already argued for emerging market stock markets and their co-movement with commodities has also become increasingly relevant to developed world stock markets, too, as surges of growth optimism—or, more crudely, waves of ‘Risk On’ activity push commodity prices higher in concert with equities. This has been true in spades ever since the collapse of AIG/LEH when r-squared between the two has amounted to no less than 0.93.
At the same time—continuing a pattern which has held ever since the twin Russian/LTCM panic of autumn 1998 first sold the great asset market put/moral hazard call to the world’s largest financial players and their swarms of leveraged pilot fish—bond yields (for example, those on 10-year US T-Notes) have tended to follow equity markets (e.g., the S&P500) up and down, as can be seen in the diagram opposite.
Now, it may not seem that significant, but what we have here is a veritable revolution for, over a much broader sweep of modern financial history, bond yields have tended to move contrary to equities (and, hence, bond prices in concert with them) while commodities—’real’ assets, if you will—have tended to move in opposition to this financial Tweedledum and Tweedledee.
Intuitively, what this implies is that investors have long been happy to assume that growth—for so long as inflationary pressures are not intruding too insistently—means greater wealth, a more abundant capital stock, hence lower nominal discount rates and so lower capitalization rates and, ergo, higher financial asset prices.
But, as Hayek once said, if labour competes with capital in the productive structure, then commodities compete with both (though, strictly, what he meant by this was end-consumer goods). Let commodity prices rise too sharply in this era, therefore, and the whole virtuous circle would be unwound, whether because of a voluntary repricing of future earnings streams to take account of their shrinking real value or because of actual or anticipated tightening of liquidity, either as the result of a likely drain of metallic or foreign exchange reserves, or thanks to central bank action taken to forestall these and/or cool the economy down.
However, after the so-called ‘Great Moderation’ of the 1990s and early 2000’s when many pundits, gurus, and soi-disant futurologists were happy to declare not just the ‘end of history’ but the ‘death of inflation’, this paradigm was slowly abandoned.
The exquisite technical prowess of our pecuniary masters at the central banks had seemingly allowed them to fine-tune the vast, unknowably complex, organic interaction of the free market, while—in a kind of perversely back-to-front re-interpretation of the phenomena we have already discussed—the outsourcing of so much effort to the emerging markets meant that commodity prices had largely lost their bogey-man status since their rise was merely the obverse of the subdued trend in the far more closely-scrutinised price of manufactured goods being delivered in all their 560 million TEU-a-year profusion to the ports and railheads of grateful, Occidental instalment buyers.
Thus, commodities were increasingly not seen as harbingers of inflation (strictly, as we shall discuss, the tangible vectors of what is only ever a strictly monetary pestilence), since inflation had been utterly vanquished, but as co-participants with equities in the growth of this Brave New Era of effortless prosperity founded on ever-increasing debt levels among the chronically underproductive. As for the ostensibly ‘risk-free’ bonds, well, who really needed them when there were so many gains to be made moving out the credit spectrum into not just the blues and purples, but the far ultra-violet and even beyond?
Such instruments were no longer part of a proper investment portfolio—they were merely a convenient parking space whenever the market hit a speed bump—for, in a world where central bankers were deliberately turning themselves into easily-predictable, 25 bps-a-time up and 250bps-a-time down facilitators of ‘the search for yield’, only ’men without chests’ could hew to the merits of a relatively certain, (if secularly-depressed) stream of income on boring, old AAA governments when there was so much more fun to be had using incalculably arcane (and often decidedly deceitful) derivative structures to fund incontinent welfare dispensers, greater-fool housing bubbles, value-destroying LBO merchants, and asset-stripping private-equity vultures.
If only things were truly that simple for, as people are only now dimly beginning to rediscover, the Credit Cycle IS the Business Cycle and the Business Cycle is nothing if not an Inflation Cycle.
Here be Dragons
If easy money starts by stimulating growth, it also starts the insidious process of distorting prices in such a manner as to mislead both entrepreneurs and those who invest in them, bringing about a capital misallocation which is no less widespread for all that each specific cycle tends to see the worst excesses concentrated in its own, individual sector.
As we never cease to underline, it is NOW that we lose our money and squander our wealth, by making mistakes here, during the Boom: we merely recognise these errors—and, ideally, realise them and rectify them – during the travails of the Bust.
By attempting to subvert this cleansing process through the inflation of a new bubble of false asset pricing on the ruins of the old—a development the Fed has explicitly been trying to engineer—is not to break the cycle, but to intensify it, as each intervention becomes more radical, less well thought-out, more plagued with unwonted side-effects, and more rapidly self-defeating than the last, the whole bringing about an increasingly costly and accelerating hysteresis of ‘Stop-Go’ capital destruction.
Thus, if the Ghost of 1933 got us into this mess—i.e., the mainstream’s fervent adherence to a largely mythical narrative of the Great Depression, centred on Roosevelt as Messiah—the Spectre of 1937—an alarmist rendering of the dire consequences of a ’premature’ interruption of gross market interference—has guaranteed that the Fed will only make matters worse.
But where can an inflation arise when we have unsold homes, partly-idled assembly lines, and large numbers of men and women still without work? Are we not confronted with an ‘output gap’? And does the persistence of such underemployed resources not testify to the fact that monetary policy is ultimately ineffective—that we face a ‘liquidity trap’—and that its implementation has been too timid, rather than too intemperate?
No, no, and thrice no! For the lack of a bidder for such capital assets and human resources (at least, the lack of a bidder willing to pay the price acceptable to their owners or to pay one sufficient to discharge the obligations incurred during their acquisition or production) is the starkest possible testimony to the mass miscalculation induced by easy money during the Boom.
If we all borrowed money to construct a profusion of neo-gothic follies, borrowed more in the course of buying and selling such monuments of inutility back and forth to one another, and borrowed yet more to be able to spend some of the resultant illusory and thoroughly notional gains on the trappings of an affluent lifestyle, it is little wonder that—once the madness passes—these edifices sell for little more than the cost of materials salvageable from their otherwise useless bulk.
To argue now that, should we flood the land with newly-printed money and that this will restore these monumental vanities to their previous price, before it has first driven up all the prices of things people actually still want to buy, is to practice self-delusion on the grandest scale.
Somewhat more subtle, but equally decisive, is the fact that the happenstance of stonemasons and scaffolders being out of work in the Bust (and angle-grinders and construction cranes being found everywhere in profusion) does nothing to alleviate the scarcity of dairy herdsman or car mechanics, each of whom may find a much greater monetary demand for their highly-specific efforts as a result of the policy of inflation, even as the skills and equipment of their less fortunate neighbours go largely unwanted.
Egalitarian socialists and aggregate–loving macroeconomists may both deny this, but the capital stock is not homogeneous—and so is not costlessly interchangeable. Neither are innate human abilities, nor their overlaid training and experience, a matter of indifference to their hopes of securing work. Inflation may therefore swirl straight past such glaring, post-Boom ’output gaps’ as attract so much intervention, while furiously funnelling into a spate where entrepreneurs have not adequately prepared to meet such a cash-engorged upwelling of expressed demand.
Finally, the idea that to destroy the allocative ability of markets for capital means by suppressing interest rates, subsidising asset prices, and condoning false accounting is in some way a panacea (because it will delude people into making the very same misapprehension of their means as was the initial cause of their woes while allowing the marooned owners of over-indebted property to offset their very real legacy of losses with new, fictional gains) is also to risk burning down the entire house lest the embers in the grate of an unoccupied room flicker and go out, untended.
Burning Down the House
So where has the inflation come from? From the usual place, of course—central and commercial bank creation of demand deposits though one difference since the Crash has been the degree to which this has been accomplished not as a counterpart to lending to a booming private sector, but by financing (monetizing) the vast Keynesian deficits which are piling a Pelion of corporate welfare upon the Ossa of the Provider State, in terms of debt levels.
To be clear, central banks do not always lead the expansion, but they (and the other regulatory authorities) must always accede to it, if only by refusing to set binding reserve and capital requirements upon the commercial banks who are then responsible.
Conversely—and this is a point which seems to have escaped most of the ‘pushing on a string crowd’—they can easily compensate for any lack of vigour by those same commercial banks during the Bust by creating base money through the act of drawing cheques upon themselves in order to purchase whatever assets they please. This is particularly simple when those ‘assets’ are issued in abundance by a Treasury doling out monies in a measure wildly beyond the sum of its tax receipts.
Where the common herd has gone badly wrong (again) is in forgetting the truth that Leland Yeager long ago encapsulated , viz., money does not have to be borrowed into existence, since it can be spent into existence right up to the point where the malign effects of all that unbacked spending lead people to distrust it sufficiently to refuse to accept it as a medium of exchange, a final repudiation which sounds the death knell for what has by now become a hyperinflation.
In fact, a glance at what the central banks and their favoured coterie of TBTF clients have been up to these past 2 1/2 years shows that – yes, Mr. Chairman – the blame rests squarely with them and with them alone.
Easy money at home thus all too readily becomes easy money abroad, whether via the willing acceptance of FX risk in the ‘carry trade’ or via the move to absorb trade surpluses by issuing the home currency against export (as well as FDI and portfolio) receipts. If you really wanted to be perverse about it, you could even think of this as somehow comprising a ’saving glut’, or in one infamous, pre-Crash reductio ad absurdum, a ’global asset shortage’.
One often overlooked reason why inflation proves to be so damaging is the change in prices it brings about (an effect which today is confused with its cause) is never the same for all goods and services. Thus, inflation is not simply a matter of all boats being gently lifted, allowing a painless continuation of government aggrandisement, smoothly bilking the savers who are the bane of the Underconsumptionist world view, fattening up stock brokers and investment managers rich on the fatty flesh of beta, and keeping the workforce contentedly at their lathes and laptops as the soothing breeze of money illusion lulls the Lumpenproletariat into temporarily abandoning the historical pre-ordination of the class struggle.
Rather, the higher any generalized index of prices rises in a given period, the more variable do its components become. Prices—relative prices—become more erratic in their behaviour leading to wide and often unhedgeable disparities between input costs and realized selling prices. Plotting the spread around the overall index of changes in 72 sub-components of the Personal Consumption Deflator offers an insight into just how violent this arbitrary election of economic winners and losers under inflation can become.
Indeed, this contention was borne out last month by a Duke University-CFO Magazine poll of American executives in which they posed the topical question what would be the projected outcome if US CPI were to accelerate from its current level to a ‘surprise’ 4% (in truth, not such a diabolus ex machina given that, over the past ten months, the measure has already been running at that pace on an annualised basis and has even quickened further, to an equivalent of 6%, over the last four). The answer should be a sobering one: profits would be cut in half.
As price rises grow larger and come faster, margins become more uncertain and, the empirical record shows in our chart of prices paid and received in the Philadelphia Fed survey, less attainable on average. As entrepreneurial judgement becomes more and more sorely tested, as our other charts show, both real free cash flow and real returns to capital also shrink (it may come as a chastening truth to learn that, over the last six decades, the aggregate, median, real return to the universe of US non-financial corporations which appear in the Flow of Funds data is, in any case, not significantly different from zero).
At the same time, the degraded informational content of money (a crucial property of the medium of which the mechanical macromancers have absolutely no concept)—not just between goods, but across the choice-filled time which stretches between present and future goods—begins the savage process of reducing investment horizons, raising societal time preference and with it the discount rate. The upshot of this is that the multiple attached to those less certain earnings also starts to contract and, as any equity analyst will tell you, multiple expansion is what drives the greater part of stock market returns in good times and bad.
Granted, inflation may at first boost nominal revenues, some of which increment will be converted into higher nominal – and sometimes even real – earnings. Granted, too, that it may initially price people back to work in those industries temporarily favoured by its caprices – most notably those in exporting or import-competing branches, on the not always certain assumption that the currency translates the growing domestic surfeit of money into an internationally-perceived one, too.
However, inflation also greatly hampers economic co-ordination (of the bottom-up, wealth-creating, spontaneous kind, not stultifying, top-down, state dirigisme) and confounds entrepreneurial calculation: it is nothing less than an engine of immiseration.
Inflationists are typically ignorant of the fact that the complex, multi-stage, labour-divided, task-specific, dynamic whole which is a modern economy intimately relies on much more spending than is captured in the flawed totem of GDP. They are further unaware that much of that spending is highly discretionary—that the bulk of it, in fact, represents gross capital formation via saving—if we define saving as making an outlay not to consume what is acquired finally and exhaustively today, but with the aim of giving rise to a greater income tomorrow, most routinely done by adding value in the course of a productive/entrepreneurial process.
It may be so much a part of the routine of economic life as to seem unexceptionable, but every time a businessman devotes some part of his cash revenues (usually the great majority, in fact) to merely continuing the cycle of production which he oversees and not only to expanding it or changing it, he—every bit as much as the figurative widow prudently putting aside her hard-spared mite—is making a highly individual, non-predestinate, inherently revocable choice to forgo the personal enjoyment of that revenue now in the hope that his immediate sacrifice will bring him greater deferred rewards in the days to come.
Let anything interfere with either his ability or his incentive to do that and the consequences are not only profound but, given the intricacy of the networks of decision-making and mutual interdependence which link the material interests of parties who, on the whole, are entirely ignorant of each others’ existence, their ramifications can spread far and wide—and in a non-linear fashion—to boot.
The key feature of this dense, reticular system of mutually-beneficial interaction is that it in no way relies upon any centralised control function—indeed, for all the weasel words of the rag-bag of anti-market intellectuals, from Krugman and Kaletsky to Stiglitz and Soros, every time the attempt has been made to impose one, the result has been to unleash at least three of the four horsemen of the Apocalypse upon the unfortunate victims of the Planners.
But what is essential is that the results of one individual’s actions are faithfully transmitted to all the others who in some way overlap with his expressed combination of means chosen in the attempt to realise his own unique and subjectively-ordered menu of ends, for then they can adapt to the change in a fitting, lowest-cost manner. For this we need nothing more or less than an effective price system so that each man’s ‘votes’ can be fairly counted and the material goods being offered can best be matched up to the bids being made for them. That pivotal property, in turn, is critically bound up with maintaining—insofar as is possible—the integrity and stability of the medium which transmits the prices, i.e., the money in which they are denominated.
To the extent that, in their primitive adherence to the toilet-flush hydraulics of their facile, consumer-demand model of the economy, the Bernankes of this world adulterate that money and deliberately contribute to its inconstancy, they—more than Robert Oppenheimer, even—are the modern-day Krishnas, the Shatterers of Worlds before whom we should tremble.
Changing of the Guard
From a practical perspective, what we have argued above is that while commodities have traditionally moved in antiphase to financial assets—i.e., to both bonds and stocks—which have themselves largely moved in step with one another, the last decade or so has seen a switch to the rough coherence of commodities and equities and their joint opposition to bonds, either as part of a ‘growth’ enthusiasm or as a mark of a more general appetite for ‘risk’ in an environment of artificially low interest rates.
If we are correct in the assumption that today’s horribly misguided economic dogma and the deep-rooted nature of the rickety collectivism, whose triumph over rugged individualism it has served to finance, will not be abandoned this side of a complete economic and social breakdown, then it seems likely that, as the spiral of growing indebtedness and state-dependence leads to progressive productive enfeeblement, commodities will eventually come to function as the mercury in that thermometer by which we will be able to check the progress of the monetary malaria we are in imminent danger of contracting.
Just as the medical disease is characterised by alternating bouts of fever and chills, interspersed with periods of remission, so too will be the dire economic reality we can envisage becoming our lot. Though commodities will be anything but a one-way bet in such a world—particularly during the painful transition away from the current regime in which they have been acting as quasi-equities—they are, however, likely to re-assume the part of antithesis to equities and hence to perform the dual-role of being both heralds of, and partial protectors from, the increasingly abrupt inflationary outbursts which seem set to define the next few cycles of Boom and Bust.
In this possibility lies perhaps the principal rationale for continued investment in them in the years to come.
This article was extracted from Sean Corrigan’s ‘Tangible Ideas’ report for Diapason Commodities Management, May-June 2011. For the full set of graphs supporting his analysis, please download the original PDF.
By Dr Richard M. Ebeling, on 18 March 11
One of the great aspects of Richard Cobden’s defence of freedom of trade was his emphasis on its relationship to peace.
Minimal intercourse between governments, as he said, and the greatest possible intercourse among nations (i.e., people themselves through trade and commerce).
In my history of economic thought class recently I was explaining to my students how the ideas of Adam Smith had inspired the free trade movement in Great Britain in the years after the wars with France. And how the motto of the Anti-Corn Law League became “Free Trade, Peace, and Good-Will Among Nations“.
Reading through that older literature from the late 19th and early 20th centuries, virtually all of the British liberals, inspired by and loyal to the spirit of Cobden and the free trade movement, were strongly and vocally anti-imperialism, anti-arms race, and anti-war.
Today, following a UN resolution, British and French forces are preparing to enforce a “ban on all flights in Libyan airspace”.
This essay, first published in 1995, sets out the case for non-intervention.
Personal Freedom and the Principle of Non-Intervention at Home
As an advocate of individual liberty, I consider all forms of government interference in people’s lives, other than those minimally essential for the protection of life, liberty, and property, to be morally wrong, politically harmful, and economically counterproductive. As part of that political philosophy, I believe that the government of the United States should no more intervene into the internal affairs of other countries than in the personal, peaceful, and voluntary affairs of its own citizens at home.
Many of my fellow countrymen follow courses of action in their own lives that I consider stupid, immoral, and harmful. But I also feel strongly that it would be morally wrong and pragmatically counterproductive to force my fellow countrymen to follow the courses of action I consider to be wiser and better for them.
Either every man must be respected and protected as a free agent in his own affairs, or we run the risk of degenerating into a society of coercing meddlers, each with his own banner of “right living,” each trying to use the political power of the state to make our fellow citizens bend to our vision of the good, proper, and virtuous life. Society becomes a war of all-against-all, as individuals sharing similar conceptions of that “right living” form coalitions for strength in the struggle for votes, influence, and control of the state’s authority to use force.
Personal Choice, Not Political Coercion, Makes for Moral People and a Good Society
But men being what they are, even when they begin as pure-at-heart “true believers,” only wishing to use the state for the good of others (as they conceive that good), soon are taken over by the “dark side of the force.” The welding of power over others becomes an aphrodisiac, a “high” stronger than any narcotic; and, besides, having political power also has its use for material gain, both for oneself and for those with whom one is in coalitions for power. Few have been able to resist these temptations over the ages. Even when the first generation of coercing meddlers coming to power remained fairly uncorrupted by the opportunities for personal gain, their heirs in acquiring the reins of political authority have tended to have fewer inhibitions for resisting these temptations.
Furthermore, coercion can never, ultimately, be a means for making men good or virtuous. Force can control men’s behaviour — it can prohibit them from doing certain things and command them to do others — under the threat and use of various physical or psychological punishments. But this does not make those actions moral or virtuous. An act is moral or virtuous only by virtue of it being the free choice of a human being who, in principle, could have done the opposite. Morality and virtue are in the minds and hearts of men, not in the control of their external conduct.
Imposed conformity does not result in moral conduct; it is the denial of morality. By narrowing or abrogating the field in which a man in his actions must make up his own mind as to what is “the right thing to do,” the state removes the necessity to more conscientiously think and decide about what he should do as a self-responsible human being.
By denying him the freedom to choose in various corners of his life, the state frees the individual from being more fully responsible for his actions. When men are freed from responsibility for their actions, the conditions are created for the growth of a climate of amorality: “It’s not my responsibility, I paid my taxes” or “I’m not accountable, I just obeyed orders.”
In the free society, the only appropriate means for trying to change other people’s conduct is through reason, persuasion, and example. The coerced man often harbours resentment and anger in his heart, both against the coercer and at himself because he had not the courage to resist being made to do what he did not want. The free man, when he changes the things he does due to the persuasion or example of others, feels gratitude and joy for having been shown a better purpose in life or how to more successfully pursue his ends.
When other men freely choose to change their behaviour due to our arguments or example, it is more likely, therefore, to represent an actual change of heart or of mind. And that is how the world is, ultimately, really changed — one person at a time, for good or evil.
The Dangers and Unintended Consequences from Foreign Intervention
Men and governments in other countries have done and are doing many evil things. They have killed, brutalized, tortured, and destroyed; and especially in the century that has recently ended, it was done on a scale that goes beyond our mind’s ability to fully comprehend. They have shocked our conscience and made us doubt the existence of any humanity in the human being. In a world of such conduct by others in other lands, it has been natural that many in America have wanted to “do something” — to come to the aid of those victimized by evil and to stop evil from doing it anymore.
But similar to the pattern too often at home, people disturbed by the immoral acts of others abroad have turned to the state to right the wrongs occurring in foreign lands. They have wanted their government to intervene in the affairs of people in other countries, to oppose bad governments and evil men and, in their place, foster good government and support better men.
Rarely has this been successful in achieving the end desired; and even when the result in the short-run has seemed better than what had been before, the intervention has often had longer-run, usually unintended, consequences that have made new outcomes often similar to, and sometimes worse than, the ones the intervention was meant to cure.
Even when people oppressed by a tyrant have been liberated from their torment, the people freed frequently turn against their liberators. It begins to play on their pride that they were not able to free themselves. Also, the liberating government is often not satisfied with merely eliminating the evil government; to justify the sacrifice made by its own people, in lives and money, to free those who had been living under foreign oppression, the liberating government tries to establish a “new order” of good government and honest politics in that foreign land.
But, alas, good government and honest politics often have different meanings for the people in that foreign country. Customs, traditions, and other societal practices call for political structures and methods of authority frequently quite different from what the liberating government’s “advisors” view as the good or the better. Irritated and angry at the appearance of being told by the liberators how to live their lives and run their affairs in their own country, the people in that foreign land soon start wishing that the meddling Yankee (or the Limey Brit, or the French Frog, or the Russian Bear) would go home.
And too often, the emotional reaction of being dictated to by the foreign power (who only yesterday was hailed as the great liberator), plays into the hands of the demagogue and would-be new tyrant hoping to ride to power on the wave of anti-foreign sentiment. The military forces and civilian advisers of the liberating government soon find themselves the new targeted enemy of the very people whom they wanted to free from the evils and injustices of the past.
At home, the interventionist government often finds itself — sooner or later — governing a “house divided” over the justification for the intervention and its continuance. Sometimes there is no consensus from the start that the foreign intervention is justified. People in the society, to the extent they take any interest in international events, take different sides concerning who is in the right and who has been wronged in that foreign country — who is the oppressor and who needs to be freed. If the foreign intervention is undertaken, then from the start, there will be many in the country who oppose and resent their wealth being taxed and the lives of their loved ones in the military being put in harm’s way to fight for “the wrong side.” If the foreign intervention has broad support among many in the society, then dissent is muted at first.
But if the intervention is not short and clearly successful, then second thoughts begin to emerge among a growing number of people: Was the intervention the right thing to do from the start? Are we becoming the enemy of the very people we wished to befriend? Are we making the situation in that country worse than it was before? Is it worth the sacrifice in men and money — ours and theirs — to continue the intervention?
Even if the foreign intervention seems to have been successful — with the goals appearing to have been achieved quickly, with minimal sacrifice in lives and money, and with “our boys” already having come home — the intervening government often leaves behind a situation in that foreign country that soon becomes not much different from what existed before.
Why? Because merely overthrowing the existing political order and imposing a new political order does not change the ideas, beliefs, customs, and traditions of the people. Such impositions may temporarily affect the external behaviour of those people, but it does not transform what guides their sense of right and wrong, good and bad, just or unjust; these are matters of their hearts and minds, and these cannot be coerced into change. The only alternative is for the intervening government to stay on in that foreign country as a permanent, coercing meddler, and that usually only leads to more problems, not solutions.
Practising the Principle of Freedom Abroad: Private Solutions to Foreign Problems
What, then, is to be done in the face of evil in other lands? For the advocate of freedom, the answer is the de-politicization, the privatization of foreign intervention. In our private life, we have many friends, neighbours, and family members whom we care about and desire to help; we desire to help them in getting through times of trouble and hardship, and we want to help them in trying to find better principles to guide their lives, so many of the problems that have been caused by their past choices do not happen again.
Sometimes these tasks are more than we, ourselves, can try to solve, so we form voluntary associations, organizations, and clubs to pool our efforts with those who share the same desire to help and see value in the same peaceful methods for attaining the end. Others “go it alone” in their endeavours to assist their fellow men, and still others form different associations because, though they believe in the same end, they think there are better means to achieve it than the ones we decide to try. And others in the society choose not to participate at all in these types of tasks, because they place a higher value on other things, in terms of an expenditure of their time, money, and efforts.
No one is compelled to care or to help, nor is any one forced to accept one way of doing things as the only correct method. Such voluntary associations and institutions are among the essential foundation stones of civil society. They are also the free society’s private solutions to what are called “social problems.”
The de-politicization or privatization of foreign intervention means an approach analogous to the private institutions of voluntary association for the handling of domestic “social problems.” Those who see distress and hardship among peoples in other lands, and who desire to assist them, should not be restricted in forming associations and charities to pool their resources to supply such help. But neither should others who do not share that same concern, or who consider there to be other answers to solve those foreign problems, be compelled to provide assistance if they choose not to.
If oppression reigns in a foreign land or if a peaceful people in another country are threatened or aggressed against by another state, any citizen in a free society should have the liberty to volunteer his help. This help can include financial contributions or personal service. He can offer to fight alongside the “freedom fighters” resisting their own government’s tyranny, or he can offer his services in the military of that foreign country to help repel the aggressor nation. He can choose to do so for free or for pay. He can form associations and societies to pool his own resources with those of others to buy military equipment, medical supplies, or emergency food and clothing. He can try to persuade others in his own country to see the rightness in the cause and join him in fighting the good fight to win freedom for others in those other lands.
The Importance of Principle, and Not Expediency – Even for Seemingly “Good Causes”
But what would be inconsistent with any person’s crusade in the cause of freedom in other lands would be to abrogate the freedom of his own fellow citizens in the pursuit of that cause. It is easy to say that all that is asked for is a small violation of the liberty of his fellow citizens in the good cause of the freedom of so many others. But is this any different from the appeal often heard, that it is only small violations of people’s liberty that is being asked for to feed the hungry, to house the homeless, to assist the poor, to support the handicapped, to. . .?
Once the principle of liberty is breached, no matter how deserving the cause may sound, all other such abridgements soon become matters of pragmatic judgement. Well, if it seemed reasonable or meritorious to abridge some people’s liberties for this cause, then surely to extend that abridgement just a little longer, or a little more, for this other good cause cannot be objected to, can it? If we sacrificed some people’s liberty to intervene in country X for a good cause, then surely to do it again or more forcefully for the noble endeavour of helping these other unfortunate people in country Y cannot be objected to, can it? Where does it stop? And whose judgement shall prevail in making this decision?
The fundamental duty of the state is the protection of the life, liberty and property of the citizenry within its own territorial jurisdiction. If the state goes beyond this, it can only do so by taking the wealth, income, and resources of some to improve the circumstances of others, i.e., by means of coercive meddling. Either we have the protection of equal individual rights for all before the law or we have unequal privileges for some at the expense of others. This is the choice concerning the role of the state, whether in domestic or foreign affairs. There is no third alternative.
By Toby Baxendale, on 21 December 10
Bankers’ Magazine Vol I April-October 1844 – H/T Sean Corrigan
The author of an interesting work published a short time since, entitled “Sir Robert Peel and his Era,” in which a lively sketch is given of the chief peculiarities, external and intellectual, of the leading members of the Houses of Parliament; refers to the assertion sometimes made, that Mr. Cobden is a man of only one idea, in the following terms,—” It is a mistake; Cobden is really a man of great talent, energy, and tact, though, of course, it has been by means of his one idea at the critical time, that he has become in the compass of a year and a half, a noted public character.” Most persons know little of Mr. Cobden, except in connection with the Anti-Corn Law League, and may, therefore, feel some surprise at recognizing him in the character of a financier. But long before the Corn Law League commenced its operations, his very clever pamphlets, “England, Ireland, and America,” and “Russia, by a Manchester Manufacturer,” had shewn him fully capable of appreciating and discussing with ability, any of the intricate questions connected with our monetary system. We purpose in this paper to lay before the reader, his views on the currency, because we think it by no means improbable, that they may have considerable influence, when the subject comes under consideration in Parliament; and, further, because they are the opinions of a practical man of business who speaks to facts. We must beg to be understood as expressing no opinion ourselves, either for or against the views he advocates, by thus drawing attention to them. He gave his evidence before a select committee of the House of Commons in 1840, and it is not a little singular that he only once, and then incidentally, spoke of the Corn Laws, as interfering injuriously with our monetary system.
In order to present, in a concise form, the subjects connected with the theory and practice of Banking, which were referred to in the course of his evidence, we shall arrange them under separate headings, commencing with his own statement of the character of the evidence he proposed to give.
His Opinions—those of a Practical Man.
I am here as a practical man, a merchant and manufacturer, and with a view to the scientific definitions of the terms to be used by bankers, I do not pretend to come here as an authority. It would very much prevent that confusion into which I fell at the close of my last examination, if I should clearly understand the practical bearing of every question, and it is only on practical subjects that I can afford any information. I make this explanation, because I find that in the attempt which I thought due to this Committee, to answer every question put to me on the last occasion, I have given some answers at the close of my examination which have been, by permission of the Committee, struck out, which are so unintelligible to me on reading them, that I think they must be incomprehensible to every living being. I do not understand the questions any more than I understand the answers at this moment, and I wish my examination to be of that practical nature, on which alone I can afford the Committee any information.
Evils produced by Fluctuations in the Currency.
My opinion is, that great evils have arisen to the trade and manufactures of the country from fluctuations in the currency; I believe great evils have been occasioned to the trade and manufactures of the country in 1836 and 1837, and the subsequent period, by fluctuations in the currency; greater evils, pecuniary, social, and moral, than by the direct failures of all the banks of issue since they were first established in this country.
I could adduce a fact derived from my own experience that would illustrate the heavy losses to which manufactures were exposed in their operations, by those fluctuations in the value of money. I am a calico printer; I purchase the cloth, which is my raw material, in the market, and have usually in warehouses three or four months supply of material. I must necessarily proceed in my operations, whatever change there may be, whether a rise or a fall in the market. I employ 600 hands, and those hands must be employed. I have fixed machinery and capital, which must also be kept going, and therefore whatever the prospects of a rise or fall of prices may be, I am constantly obliged to be purchasing the material, and contracting for the material on which I operate. In 1837, I lost by my stock in hand 20,000/., as compared with the stock-taking in 1835, 1836, and 1838; the average of those three years when compared with 1837, shews that I lost 20,000/. by my business in 1837, and what I wish to add is, that the whole of this loss arose from the depreciation in the value of my stock. My business was as prosperous; we stood as high as printers as we did previously; our business since that has been as good, and there was no other cause for the losses I then sustained, but the depreciation of the value of the articles in warehouse in my hands. What I wish particularly to shew is, the defenceless condition in which we manufacturers are placed, and how completely we are at the mercy of these unnatural fluctuations. Although I was aware that the losses were coming, it was impossible I could do otherwise than proceed onward, with the certainty of suffering a loss on the stock; to stop the work of 600 hands, and to fail to supply our customers would have been altogether ruinous; that is a fact drawn from my own experience. I wish to point to another example of a most striking kind, shewing the effect of those fluctuations on merchants. I hold in my hand a list of thirty-six articles which were imported in 1837, by the house of Butterworth and Brookes, of Manchester, a house very well known; Mr. Brookes is now boroughreeve of Manchester. Here is a list of thirty-six articles imported in the year 1837, in the regular way of business, and opposite to each article there is the rate of loss upon it as it arrived, and as it was sold. The average loss is 37 1/2 per cent, on those thirty-six articles, and they were imported from Canton, Trieste, Bombay, Bahia, Alexandria, Lima, and, in fact, all the intermediate places almost. This, I presume, is a fair guide to shew the losses which other merchants incurred on similar articles.
Conduct of the Bank of England.
The great instrument in the hands of the Bank, for effecting its changes in the value of commodities, is by creating a panic; it is a process the most disastrous to the trading community; it is the most profitable to the Bank proprietors; that process was resorted to at the end of 1836, in striking a blow at the American houses, in advancing the rate of interest, and by all those means which are resorted to in the London papers, through its organ’s of the press, for exciting apprehensions in the minds of merchants and traders, that a curtailment of its securities and credit generally was to take place. The Bank ought to have contracted its issues long before, at the commencement of the drain in 1836; there was a previous drain, which was but slightly interrupted, which began as early as 1834; in fact, the Bank appears to have departed from its principle, immediately it had obtained the renewal of its charter, of keeping one-third of its liabilities in gold. If the Bank had kept its securities at an even amount, and retained one-third of its liabilities in bullion, or about that (I do not complain of a million), I feel assured there would have been no panic; there could have been no panic if that had been the policy from the time of its obtaining its charter.
I consider the cause and effect in the contractions and expansions of the currency, and their influences on prices, are not to be measured in periods of six months, or even twelve months; the expansions of the Bank of England in 1835, and indeed its previous course of expansion (for I am of opinion that mischief was generating long before that), had given rise to an immense amount of speculation; and amongst other things, it had set in motion seventy or eighty joint-stock banks; forty-seven joint stock banks were established in 1836; those were in the course of formation at the very time when the Bank of England was, as it appears here, in the course of contraction, but it necessarily must have taken a considerable time to have checked the spirit which had been generated by the previous course of expansion on the part of the Bank of England.
Effects of an over Issue of Paper Money.
The conduct of the Bank, in inflating the currency, produces a rise of prices. The prices of all commodities gradually rise; that begets what is thought prosperity; it is in fact unhealthy excitement; this causes an extension of our commerce and manufactures; it causes an advance of prices abroad, in consequence of the advance in this market, which is the regulator of the prices abroad, and that begets a general system of over-trading. This overtrading inevitably leads in the end to discredit, and panic to a greater or less degree; it was through promoting this train of consequences by originally departing from its rule of keeping steadily to the amount of its securities, and keeping one-third of its liabilities in bullion, that the Bank, in my opinion, caused the over-trading; and the panic of 1836-7, which, I repeat, could not have happened had the Bank been true to its own principle of remaining passive, with the amount of one-third of its liabilities in bullion.
Bank of England can control Issues of Joint Stock Banks.
I believe it to be impossible for private and joint-stock Banks to expand the circulation, provided the Bank of England remained true to the principle it had laid down. We have had no instance of its having been so; even the Scotch Banks cannot inflate the currency, unless the Bank of England have previously set the example; that was the case from 1823 to 1825; the Scotch Banks increased their circulation from, I believe, 3,400,000/. to upwards of four millions and a half, up to the panic of 1825; I think that was about the increase of the circulation in Scotland; but the moment the screw (to use the common term) was placed upon the currency in London, that moment the Scotch Banks were compelled to restrict their issues, and the same operation went on with all the private banks of the kingdom. I have a pretty clear recollection of having seen that statement in Sir Henry Parnell’s work upon Banks. It is impossible to doubt that the Bank, having the entire circulation of the metropolis, having the privilege of a legal tender, its notes being alone receivable by the Government in payment of the revenue, and possessing altogether the prestige which the Bank of England possesses in the public estimation, and backed by the Government, it is impossible that an institution so circumstanced should be otherwise than in a position of absolute power over all other banks in the kingdom. I should not say that the country Banks contract their circulation instantaneously, on finding that the Bank of England is doing so; but the country Banks do what is of as much importance in the way of effecting a correction of the evils of expansion; they curtail their credits, they allow fewer facilities, they call up old debts, and take warning by the example of the Bank of England, to put a general restriction upon the operations of trade; I think it must be known to every one that the slightest movement on the part of the Bank of England, is watched with intense interest by every banker as well as merchant in the kingdom.
What Causes should regulate the Currency.
I hold all idea of regulating the currency to be an absurdity; the very terms of regulating the currency, and managing the currency, I look upon to be an absurdity; the currency should regulate itself; it must be regulated by the trade and commerce of the world; I would neither allow the Bank of England nor any private banks, to have what is called the management of the currency.—Have you not stated that the Bank of England ought to regulate its circulation according to the amount of its bullion? I have stated that that is the principle laid down by the Bank of England, and that that principle has not been conformed to; I have no faith in any man or any body of men ever conforming to any such principles, and, therefore, I remarked I should never contemplate any remedial measure, which left it to the discretion of individuals to regulate the amount of the currency by any principle or standard whatever; but the Bank having laid down that principle, and having obtained its charter in consequence of Mr. Horsley Palmer’s evidence, as to the views and intentions of the Bank Directors, they have departed from that principle, and I make the complaint and charge against them of having violated a principle laid down by themselves.
Upon what principle, in your opinion, ought the circulation of this country to be regulated? If we are to have paper money at all—but in the abstract I should be sorry to commit myself to the principle that there should be any paper money at all—but if we are to have paper money, it must be restricted to that amount which the precious metals would be if they circulated alone. I would not put it into the power of individuals to depart from the principle, as the Bank Directors have done, which they have once laid down; and, therefore, my idea is, that if there be a circulation of paper, the maximum amount of that paper should be settled, and that there should be such an amount as to leave still such an amount of the precious metals circulating, as would allow the operations of the exchanges to work tranquilly upon the precious metals, without ever occasioning any shock to trade or commerce.— The object you would propose is, that the paper currency should vary exactly as the metallic currency would do? I have stated that the maximum of the paper should be settled; and it should be of such amount as would require gold and silver, in addition to such an extent as would meet all the demands for exportation in case of adverse exchanges, which I maintain would never amount, in the course of trade, to any thing at all of magnitude, unless, through the operation of bad laws, such as the present corn law. I wish to be understood that the whole of the currency in circulation should vary precisely as if it were all gold and silver, and that the exchanges should operate upon the bullion,—upon the specie.
Do you mean, by the maximum of the paper, a certain fixed amount to be issued on security, the remainder to be issued against gold, and vary with it? Precisely; I think there would be no harm done, if you issued a certain amount on securities beyond the amount required on bullion.—You do not mean by a maximum that a limit should be fixed, beyond which paper should not go, whatever gold might come in? By a maximum I mean, a maximum amount to be issued on securities, and any thing beyond that, issued on gold, would be represented by the gold.—Do you conceive that that object can be obtained by any regulations of the Banks as now constituted in this country? No, decidedly not.—How would you propose to attain that object? I think the details might be worked out with great ease, so far as the alteration of such a bank goes, inasmuch as it would require only a few men of probity to see that the principles laid down were not violated, and that the bullion of of the Bank was secure.—Would that not, so far as the Bank of England is concerned, be attained, by a strict adherence on their part to the rule of making their paper vary according to their bullion? I should be sorry to trust the Bank of England again, having violated their principle; for I never trust the same parties twice on an affair of such magnitude.—Suppose they were to adhere strictly to their principle, would not the object be obtained? The Committee must excuse my taking a hypothetical case, to give a favourable opinion. I object, moreover, to a national Bank being managed by merchants, those engaged in extensive mercantile transactions. It would be impossible, looking to the Directors of the Bank of England, to impute a want of probity; for we have had abundant proofs that the Bank of England has been conducted by men of strict personal honour; but it is quite clear that such a thing may arise as for such a bank to be under the direction of individuals as merchants, whose personal interests may be in direct hostility to their public duty. I would take, for instance, such a case as merchants having a large amount of produce coming home, previous to a glut, and previous to a panic, when it might become exceedingly important to those gentlemen that they should delay an action of the Bank, which produced a fall in prices, until they had realized on certain shipments. Such a thing is quite possible; but at the same time I should wish to be understood as not imputing any thing of the kind to such a body of men.
Advantages of One Bank of Issue.
Is it your opinion that nothing short of putting down all existing establishments, and establishing a Bank administered by Commissioners, will regulate the currency of the country? I repeat what I stated before, that the affairs of private banks cannot be so far wrong as to effect prices abroad, provided a bank having the power the Bank of England has had hitherto, remains steady to its principle, and, therefore, of course I must also think that a national bank having such a monopoly as the Bank of England has, if conducted on that principle, would prevent any mass of serious evils arising either from our country banks in England, or banks in Ireland and Scotland. All the evils we feel as merchants and manufacturers, arising from the fluctuations in the prices of commodities, originate, I believe, in London, with the Bank of England.—Would it answer the purpose, so far as the Bank of England is concerned, if a separation were made into two parts, the one to manage the currency, on the principle you have laid down, the other to manage the banking department in the same manner as the private Banks, not of issue, are managed? Mr. Loyd’s plan, to which reference is made, would have many advantages over the present system; but it is not a plan I should approve.—What are your objections to it? Mr. Loyd uses the term managing the currency, and regulating the currency, which I consider to be just as possible as the management of the tides, or the regulation of stars, or the winds. I have seen no plan which places the thing wholly beyond the power of a body of men to increase or diminish the quantity of money, which power is as intolerable, as that a body of men should have the power of regulating the length of the yard periodically; and it is as reasonable in the case of merchants who may manage a bank like the Bank of England, as if they should be privileged to sell by the short yard, and buy by the long one. I object entirely to such a bank being in the hands of a body of merchants; I object to any body of men having the power to increase or decrease the quantity’ of money.—Is not that power possessed to a small extent, and for perhaps short periods, by any bank of issue in the country? Not to an extent to influence the prices of commodities throughout the kingdom . I am not prepared to say whether slight perturbations might not arise in particular localities, owing to the indiscretions of individual banks; but no general derangement to the commerce of the country could arise from any such cause, in my opinion, provided an institution, possessing the important privileges of the Bank of England, were administered upon the principle I have pointed out.—Are not those derangements, to whatever extent they go, in direct contradiction to the principle on which, in your opinion, the currency ought to vary? I should consider them so trivial that they could not have any effect beyond the mere moment.—Not even if a great many banks pursued the same course at the same time? No; from the circumstance that I have already referred to, that if prices are raised generally in any particular quarter, commodities, stocks, railway shares, and other securities would flow to that quarter for sale; if they would fetch a higher price there than they would in London, they would be sold there, and a bill demanded on London, or gold demanded to be transmitted to London, and so the thing would be almost instantly corrected.—Do you find the contraction of the Bank of England, even when made, produces so speedy an effect on the circulation of private banks? No, not when made under the circumstances, to which I nave alluded in 1837; but under ordinary circumstances, it would have the power to correct, such as Mr. Samuel Jones Loyd has alluded to; but time must be taken, as a necessary ingredient, in all its operations; a time for expansion must be considered as having been necessary, and time for contraction must be given.
If from any causes a disposition to speculate arose, might not considerable facilities for it be given by the issues of country banks, and considerable derangement in consequence be produced? No; I consider that no great over-trading can take place unless the prices of foreign articles are influenced; that would not be the case under the circumstances to which reference is made; at present, the Bank of England, in its variations, not only effects this market, but it effects all the markets in the world. I happened to be travelling in Turkey and Greece in the spring of 1837, and I saw in the little island of Syra, the Greek merchants there, with their telescopes in their hands, looking out as anxiously for the arrival of a vessel from Trieste, giving an account of the proceedings of the Bank of England, as a merchant on the Exchange at Manchester, would watch for the arrival of the mail, to know what the next step to be taken by the Bank Directors would be; and we know, that in the message of the President of the United States in 1837, and in the Addresses of some of the Governors of the States, New York in particular, the Bank of England was not only mentioned by name, but a considerable space given to the discussion of its policy. The operations of the Bank of England, therefore, can never be compared with the operations of a small country bank, such as have been supposed to effect the changes in the value of commodities; the country bank forms a little instrument for raising up a few more houses in a town, or giving an impulse to a small line of railroad, but it could never influence the prices on staple manufactures, provided the great Central Bank was governed by a principle precisely the same as if we had a metallic currency.
In the case of a central bank administered on the principle you have mentioned, on what footing do you think country banks ought to be placed? I am as much opposed on principle to country banks of issue, as to the Bank of England; I know, in talking of remedial measures such as we wish in Manchester, such as men of business wish, in order to be saved from losses such as we have experienced, we must be practical, and rather look to what is expedient than what is wholly desirable; and, therefore, I confine myself chiefly to the removal of the great grievance, the power of influencing the prices in the hands of the Bank of England; but I should be as glad to see the power withdrawn from every other bank in England, and I believe that is a rapidly increasing opinion on the part of the trading community among whom I am accustomed to mix in Manchester.
Do you conceive it to be an increasing opinion that all power of issue should be confined to one bank, under the management of Commissioners? I believe it is.
Do you contemplate that a bank so constituted should perform any other functions than those of the issue of money? None whatever; to remain wholly passive, and not to dream of regulating the currency.
You do not contemplate its making advances to Government or other parties? Oh no, not at all; there is an end to its usefulness if that illicit intercourse is kept up; there is money raised without the advances of bank notes in America, by means of post notes; and if the Government were in great distress they might borrow, perhaps, upon post notes from merchants, without going to the Bank of England for advances.
Exchequer Bilk.
I have been extensively engaged in business for twenty years, and I never saw an Exchequer Bill in my life; it is a singular fact, that I once mentioned the same thing at our Chamber of Commerce, in the presence of a dozen individuals, all very largely engaged in business, and not one of them had ever seen an Exchequer Bill; there is an immense amount of this paper afloat, but they do not enter into commercial transactions; and the reason they do not enter into commercial transactions is, that they pay interest, and, therefore, it is profitable to the holders to keep them, instead of passing them away.
Bankers’ Magazine Vol I April-October 1844
By Toby Baxendale, on 7 October 10
I gave the following presentation at a fringe event during the Conservative conference in Birmingham.
Human Co-operation and the Universal Division of Labour
Adam Smith showed us, and it is not disputed internally within the nation, that specialisation in tasks has led to the explosion of the population and material prosperity. One person the farmer, one the hunter, one the gatherer, one the home maker, etc., with the specialisation always geared to who is best at doing the task.
This is accepted by all rational people.
Ricardo showed us that what applies to the individuals in the nation should also apply to the free trade between the nations of the world. It is always advantageous for each nation to concentrate all its efforts to produce things it is best at, even if it could produce some other lesser goods better than the next best producer.
So why does this idea meet such resistance? Why do we allow crony capitalists and other vested interests to get a privileged, protected position — such as the European Union farmers when they argue for the Common Agriculture Policy (CAP) — that allows them to push up the prices of their goods and services at the expense of you and me, the consumer?
The Irrefutable Case for Free Trade
David Beckham is a super star football player, who also learned the skills of his father the gas fitter.
His father, Beckham senior is a gas fitter who wanted to be a superstar football player
Let’s say that David can hire a gas fitter for £20 per hour. With a little practice, he could be twice as efficient as his father. We will imagine that he could market his own gas fitting services for £40 per hour.
By playing football, we will suppose that Beckham can earn £10,000 per hour. Meanwhile, his father the gas fitter couldn’t make more than £1 an hour playing football.
Beckham Jnr has a 2-to-1 advantage as a gas fitter, but a 10,000-to-1 advantage football star.
If he divides his time equally between gas fitting his own house and playing football, his total output for the week can be valued at:
10 hours gas fitting x £40 per hour = £400
10 hours football x £10,000 per hour = £100,000
Total output: £100,400
If David’s father divides his time the same way we could value his production as follows:
10 hours gas fitting x £20 per hour = £200
10 hours football x £1 per hour = £10
Total output: £210
Between them, David and father have produced £100,610 worth of output.
The Law of Association (Mises) or the Law of Comparative Advantage (Ricardo)
Now let’s examine the situation if, as we expect, David hires his father. David’s production can now be valued at:
20 hours football x £10,000 per hour = £200,000
Total output: £200,000
And his father’s at:
20 hours gas fitting x £20 per hour = £400
Total output: £400
Their total output has risen to £200,400.
The Greatest Protectionist Block in European History: The European Union
With this case proven, our politicians should use the irrefutable law of association to call for the dismantling of fortress Europe as it price gouges its hapless taxpayers.
The Taxpayers Alliance report “Food for Thought” by Dr Lee Rotherham shows us that the EU protectionist food policies costs the UK £10.3 bn per year or £400 of net disposable income per household.
CAP is one aspect of the protectionism sponsored by the EU depriving us of a higher living standard; the real cost of all their interventions is many thousands of pounds per year for the EU taxpayer.
Cobden and Peel
For those interested in free trade, one of Cobden’s finest orations was delivered in the House of Commons on March 13, 1845, and described by John Morley as “probably the most powerful speech he ever made:
Men on the Tory benches whispered to one another, “Peel must answer this.” But Peel crushed in his hand the notes he had made and remarked, “Those may answer him who can.”
The Corn Laws were abolished by persuasive, clear, rational and logical argument. I hope some of the politicians here today will be able to do the same with the protectionist EU, and have that abolished.
By Andy Duncan, on 24 August 10
[This article, by Thomas E. Woods, Jr., appeared on Mises.org on Friday, the 20th of August, 2010, under the Creative Commons.]
Every student of political economy knows that Adam Smith dealt mercantilist economic ideas a profound intellectual defeat in The Wealth of Nations (1776). The mercantilist had viewed economic interaction as a zero-sum game — that is, the benefit of one party had to come at the expense of the other. Sound economic policy, therefore, involved encouraging a favorable balance of trade (an excess of exports over imports), the acquisition of colonies, and the construction of a powerful navy to secure and maintain access to far-flung markets.
Once Adam Smith and the classical economists had overthrown the mercantilist worldview in the 18th century, it was entirely natural that classical liberals would have expected peace to triumph to the extent that the new teaching became accepted. A philosophy that had viewed economic affairs as characterized by inherent conflict was increasingly giving way to one that emphasized mutual gain and the large-scale social cooperation of the international division of labor. As the various peoples and places of the world concentrated on producing those goods for which they enjoyed some advantage — or, as David Ricardo observed, even simply where they enjoyed the least disadvantage — the result would be greater wealth and a higher standard of living for everyone, as the entire world reaped the benefits of the particular advantages of a multiplicity of locales.
In the 19th century, the great classical liberal Richard Cobden, the textile manufacturer and British politician who became famous through his campaign against the oppressive Corn Laws, developed this idea still further. The state’s role in the spread of peace and freedom throughout the world was, in his judgment, very minimal. “The progress of freedom,” he once said, “depends more upon the maintenance of peace and the spread of commerce and the diffusion of education than upon the labor of Cabinets or Foreign Offices.”
Cobden’s philosophy had its roots in the previous century of European intellectual history. During the Enlightenment, thinkers impressed by the elegant regularity of phenomena and the beautiful order that Isaac Newton had described in the physical world looked in the social world for similar law-like relationships. And indeed, as Ludwig von Mises explains, the founders of political economy perceived “regularity in the operation of the market.” People came to realize “with astonishment that human actions were open to investigation from other points of view than that of moral judgment. They were compelled to recognize a regularity which they compared to that with which they were already familiar in the field of the natural sciences.”[1]
The analogies to the natural sciences were readily drawn. As Josiah Tucker put it, “The Circulation of Commerce may be conceived to proceed from the Impulse of two distinct Principles of Action in Society, analogous to the Centrifugal and centripetal Powers in the Planetary System.” Adam Smith appealed to this very model, describing prices as “continually gravitating, if one may say so, toward the natural price.”[2]
Although the rise of what might be called economic thought had long preceded the Enlightenment, the attempt to systematize observations of economic activity into a coherent discipline reflected the intellectual life of the 18th and 19th centuries at its best. What economic thinkers found was that prosperity was maximized when the free interaction of individuals was hampered as little as possible, and that ill-considered efforts to improve the economic wellbeing of certain groups were bound to have deleterious consequences, often exactly contrary to the stated wishes of their proponents.
As Mises points out, many of these thinkers found the hand of divine providence in the beautiful order and harmony created by the free market and the division of labor. Enlightenment thinkers viewed the regularity of natural phenomena as “an emanation of the decrees of Providence,” and when these same figures discovered a like regularity in human action and the economic sphere, they “were prepared to interpret it likewise as evidence of the paternal care of the Creator of the universe.” “Observe the functioning of the market system,” some classical liberals put it, “and you will discover in it the finger of God.”[3]
The 19th-century classical-liberal economist and writer Frédéric Bastiat described the consequences of this insight in his posthumously published Economic Harmonies:
For if there are general laws that act independently of written laws, and whose action needs merely to be regularized by the latter, we must study these general laws; they can be the object of scientific investigation, and therefore there is such a thing as the science of political economy. If, on the contrary, society is a human invention, if men are only inert matter to which a great genius, as Rousseau says, must impart feeling and will, movement and life, then there is no such science as political economy: there is only an indefinite number of possible and contingent arrangements, and the fate of nations depends on the founding father to whom chance has entrusted their destiny.[4]
It was this crucial discovery of natural harmonies in the social world, thought to be analogous to those of the physical universe, that led so many thinkers to the conclusion that the economy could run itself, and that forcible intervention into this elegant order would produce more harm than good.
At least in the economic realm, therefore, the state came to be seen as something artificial, a human contrivance whose activity threatened to interfere with the beneficent workings of the market order. When Cobden plays down its significance in the spread of peace and freedom, therefore, and looks instead to the mutually beneficial and self-regulating activity of ordinary people, he is partaking in a profoundly significant chapter in European intellectual history.
To be sure, there was some exaggeration in Cobden’s sweeping claim that free trade would ultimately lead to world peace. He spoke of free trade as “drawing men together, thrusting aside the antagonisms of race, and creeds and language, and uniting us in the bonds of eternal peace.” It would “change the face of the world, so as to introduce a system of government entirely distinct from that which now prevails.” Cobden ultimately believed that the desire for mighty empires, as well as for great armies and navies, would “die away … when man becomes one family, and freely exchanges the fruits of his labor with his brother man.”[5]
If he was claiming that free commerce among nations could prevent the outbreak of war, World War I would provide sufficient refutation, since prior to that conflict the belligerents had indeed enjoyed a considerable volume of trade with each other. Moreover, Cobden certainly underestimated the influence of religion, ideology, and like factors in the outbreak of international conflict. It is not clear what an appreciation of the benefits of the international division of labor could have contributed to preventing, say, the Iran–Iraq War of the 1980s, in which the Iranians threatened to export their Islamic revolution to Iraq and the Iraqi government resolved to resist.
The great Austrian economist Ludwig von Mises was convinced that more than merely institutional change was necessary in order for war to be prevented in the future; ideas and philosophies had to change.
Only one thing can conquer war — the liberal attitude of mind which can see nothing in war but destruction and annihilation, and which can never wish to bring about a war, because it regards war as injurious even to the victors. Where Liberalism prevails, there will never be war. But where there are other opinions concerning the profitability and injuriousness of war, no rules or regulations, however cunningly devised, can make war impossible.[6]
Professor Richard Ebeling of Hillsdale College agrees with Mises. “Free trade cannot prevent war when men no longer believe in peace,” he writes.
Free trade is premised on the idea that human relationships should be voluntary and based on mutual consent. It is grounded on the understanding that the material, cultural, and spiritual improvements in the circumstances and conditions of man are best served when the members of the global community of mankind specialize their activities in a world-encompassing social system of division of labor. It requires the conviction that the moral condition of individual men and mankind as a whole is fostered the most when people acquire the things of the world that they desire by peaceful exchange rather than by theft and plunder; and when men attempt to change the way their fellow human beings think and live and act by using the methods of reason, persuasion, and example instead of through the use of compulsion, power, terror, and death.[7]
But even if later classical liberals became skeptical of the more extreme claims that had been made on behalf of free trade, there was a great deal of truth to Cobden’s contention. Consider, for instance, the year leading up to the recent conflict with Iraq. Some experts contend that it was precisely this mutually beneficial trade that contributed to the reluctance of Iraq’s neighbors to endorse war. Between 2000 and 2002, Iraq signed some eleven free-trade agreements, most with other Middle Eastern countries. “Most of the Middle Eastern countries who are opposed to the war on Iraq are motivated by the fear that such a war will harm them economically,” observed Nimrod Raphaeli of the Middle East Media Research Institute in Washington.[8]
Paul Sullivan, who specializes in Middle Eastern issues at the National Defense University in Washington, noted in September 2002 that in addition to popular opposition to a US-led war on Iraq, the economic ties that Iraq had carefully cultivated in the region are “bringing many of these countries closer to Iraq.”[9]
An appreciation of the international division of labor and the mutual gains from trade can indeed contribute to a more peaceful world, as people and nations come to understand that prosperity does not depend on aggression and military might. Moreover, as more people realize that the economic rationale behind imperialism — namely, an alleged need to secure “markets” to dispose of surplus goods that cannot be absorbed by the domestic market — is fundamentally fallacious, such adventures must lose some of their luster as well.
A nation may still engage in imperialism after the alleged economic benefits are shown to be chimerical, however, and even as it becomes clear that the acquisition of a far-flung empire may in fact prove to be a net economic liability. If a nation believes that the extension of its influence over other peoples is a matter of national prestige, merely economic arguments will not dissuade it from its aggressive course. If statism or a belligerent nationalism rules men’s minds, the appeal to reason may well be in vain. But it is ultimately only through reason that such destructive philosophies can be successfully defeated.
The truth of Cobden’s statement that the spread of freedom owes more to other factors than to the work of cabinets and foreign offices is also supported by a study of the rise of freedom in the Western world. That rise of freedom occurred not as a result of the positive action of governments, but precisely because of the absence of a strong central authority in Europe. Following the dissolution of the Roman Empire, no continent-wide empire took its place. (The relatively short-lived empire of Charlemagne was far less expansive in scope than the Roman Empire had been.) “Instead of experiencing the hegemony of a universal empire,” writes historian Ralph Raico, “Europe evolved into a mosaic of kingdoms, principalities, city-states, ecclesiastical domains, and other entities.”[10]
Jean Baechler has argued that it was the decentralized nature of European political life, beginning in the Middle Ages, that contributed to the development of liberty. The multiplicity of jurisdictions meant that the prince risked losing population (and his tax base) if he engaged in excessive taxation or interference in his people’s economic lives.[11] “The constant expansion of the market,” Baechler writes, “both in extensiveness and in intensity, was the result of an absence of a political order extending over the whole of Western Europe.” The expansion of capitalism “owes its origin and raison d’être to political anarchy.”[12]
Moreover, the very idea of sovereignty, according to which there must exist a single, sovereign voice, competent and forceful enough to make its will felt throughout society, was essentially alien to medieval political thought and practice. In his classic study of Cardinal Wolsey, Alfred Pollard described the decentralization of power that characterized medieval England — and, by extension, western Europe at large:
There were the liberties of the church, based on law superior to that of the King; there was the law of nature, graven in the hearts of men and not to be erased by royal writs; and there was the prescription of immemorial local and feudal custom stereotyping a variety of jurisdictions and impeding the operation of a single will. There was no sovereignty capable of eradicating bondage by royal edict or act of parliament, regulating borough franchises, reducing to uniformity the various uses of the church, or enacting a principle of succession to the throne. The laws which ruled men’s lives were the customs of their trade, locality, or estate and not the positive law of a legislator; and the whole sum of English parliamentary legislation for the whole Middle Ages is less in bulk than that of the single reign of Henry VIII.[13]
The great sociologist Robert Nisbet described medieval society as “one of the most loosely organized societies in history.”[14] Political leaders who desired centralization found themselves up against the historic liberties of towns, guilds, universities, the Church, and similar corporate bodies, all of whom guarded their (often hard-won) liberties with great vigilance, and all of whom would have been baffled at the modern idea that a single sovereign voice, whether of a king or of “the people,” could on its own authority have redefined or overturned those rights.[15]
In such a society, where competing legal jurisdictions abounded and no single sovereign voice could be found, the king did not make the law but was himself bound by it. Law was something to be discovered, not made, as with the absolute monarchs and parliaments of the modern age.[16]
Today, however, we have reached the point at which an institution called the state essentially defines its own powers. This is a far cry from the medieval model, in which the king possessed certain customary rights, but could not define his own powers at will, or overturn the customary rights of the people or of the various subsidiary bodies of society. “Almost everywhere in Latin Christendom,” writes A.R. Myers, “the principle was, at one time or another, accepted by the rulers that, apart from the normal revenues of the prince, no taxes could be imposed without the consent of parliament.”[17] This point reflects the broader principle that the king could not arbitrarily step beyond the bounds of his customary rights.
How different is the situation today. As Bertrand de Jouvenel observes,
A landlord no longer feels surprised at being compelled to keep a tenant; an employer is no less used to having to raise the wages of his employees in virtue of the decrees of Power. Nowadays it is understood that our subjective rights are precarious and at the good pleasure of authority. But this was an idea which was still new and surprising to the men of the seventeenth century. What they witnessed were the first decisive steps of a revolutionary conception of Power; they saw before their eyes the successful assertion of the right of sovereignty as one which breaks other rights and will soon be regarded as the one foundation of all rights.[18]
The development of Western liberty, therefore, owes a great deal to the decentralized nature of political life in medieval Europe and to the multiplicity of jurisdictions in which people lived and worked. Indeed the development of Western liberty occurred within a context in which the very idea of sovereignty had not yet fully developed. In the absence of a single sovereign voice whose ever-changing word was law, a great civilization was able to develop.
Further confirmation of Cobden’s observation that trade, commerce, and education are likely to do more for the spread of peace and freedom than the labor of cabinets and foreign offices can be found well beyond the confines of the West. The interference of Western governments and aid agencies with the economies of the developing world has formed an unfortunate and destructive chapter in the history of the postwar world. Peace and freedom, said the experts, required massive state intervention in the work of economic development, and considerable transfers of wealth from the West to the Third World. The result, however, was not peace but increasing discord, ill will, and even violence in recipient nations. And far from encouraging human freedom, moreover, Western aid and development strategies all too often trapped their unfortunate victims in the mires of statism and regimentation.
The conventional wisdom during the first few decades following World War II held that without significant infusions of Western aid, the world’s less-developed countries (LDCs) would remain forever mired in poverty. Economic development could not be achieved without outside assistance in the form of government-to-government grants. These countries were said to be trapped in a “vicious circle of poverty” — their low income made impossible the substantial savings necessary to fund the investment and capital accumulation that would ultimately raise incomes.
The great development economist Peter Bauer argued that institutional arrangements and cultural attitudes have played a far more decisive role in determining the economic fates of the various nations than any lack (or otherwise) of physical assets. He pointed to the West as a prime example — its development had occurred not because of an aggressive state presence, but thanks to the institutional factors to which we have already alluded: private property, limited government, and the rule of law.
Hernando de Soto lent overwhelming support to this thesis in his investigation of the poor economic performance of his native Peru. In his celebrated study The Other Path, he concluded that insecure and poorly defined property rights were at the root of much of what ailed his country. Moreover, he also showed the suffocating effects of regulation, a factor almost entirely neglected in this literature. He found, for instance, that it took “the equivalent of 289 work days, 81 meters of forms, and eight overt bribes to legally establish a small clothing factory.”[19]
By the 1980s, the conventional view was in clear retreat. A 1983 study by the World Bank found that rates of economic growth in developing countries fell as market distortions increased, and eleven years later the World Bank drew the same conclusion in a special report on conditions in Africa. Economists E. Dwight Phaup and Bradley Lewis noted what more and more scholars were beginning to concede: “Resource endowment, lucky circumstances, former colonial status, and other similar factors make little difference in the speed with which countries grow economically. But the results of domestic policy choices pervade every economic area.”[20]
Alan Woods, who was appointed to head USAID (United States Agency for International Development) in 1987, echoed these sentiments. In a 1989 report, USAID acknowledged that “only a handful of countries that started receiving U.S. assistance in the 1950s and 1960s has ever graduated from dependent status.” The following year, a draft paper of the Center for Institutional Reform and the Informal Sector at the University of Maryland conceded that USAID had consistently neglected the role of economic “institutions and legal infrastructures.”
Economist Mancur Olson stated the matter directly, pointing out in 1993 that all economically successful countries possessed relatively secure property and contract rights, while all the unsuccessful ones did not.[21] Even a task force during the Clinton administration was forced to concede that “despite decades of foreign assistance, most of Africa and parts of Latin America, Asia and the Middle East are economically worse off today than they were 20 years ago.”[22]
By the end of the Cold War, over $2 trillion in inflation-adjusted dollars had been given to the Third World. Tom Bethell rightly notes that this immense fortune may actually have served to retard economic development, since it inevitably functioned as an emollient that masked the destructive consequences of these governments’ statist policies. It is revealing that South Korea, Taiwan, and Chile, faced with a cutoff in US aid and therefore having little choice, ultimately embraced the free market. Naturally, they prospered.[23]
For decades, Bauer denied that billions in foreign aid were necessary for Third World development, pointing out that there is not “a single instance in history when external donations were required for the economic development of a country.” This only stands to reason. Economic achievement depends on
people’s attributes, attitudes, motivations, mores and political arrangements…. If the conditions for development other than capital are present, the capital required will either be generated locally or be available commercially from abroad to governments or to businesses. If the required conditions are not present, then aid will be ineffective and wasted.[24]
One of the difficulties of the old argument that LDCs could not enjoy economic progress without foreign aid is that it cannot explain how any country ever developed. Where was the external aid for the first developing countries? In fact, of course, LDCs today are in a far more enviable position from the point of view of development than were Western societies, since they can benefit from the external capital markets and enormous technological knowledge that were unavailable during the West’s rise to economic prosperity. Why had Western societies not been caught in a “vicious circle of poverty”?[25]
Since foreign aid inevitably amounts to a government-to-government transfer, ethnic and other tensions are likely to rise as competition for control of the increasingly lucrative coffers of the state apparatus grows correspondingly more intense. The results can be violent — Bauer cites such substantial Western aid recipients as Burundi, Kampuchea, Ethiopia, Indonesia, Iraq, Nigeria, Pakistan, Tanzania, Uganda, Vietnam, and Zaire. Indeed the tensions thus introduced into political life can become positively frightful, including “large-scale expulsion and even massacre, tolerated, encouraged or perpetrated by the rulers. By helping to politicize life, aid has contributed to such policies and results.” Even when violence does not result, the consequences of the politicization of life are nevertheless all too real, as more and more people devote their energies to efforts to gain political favor (whether through bribery or other means) and less and less time to productive effort in satisfaction of consumer needs.[26]
Moreover, it is often the policies of recipient governments themselves that are to blame for the poverty of their people. For instance, they “expel the most productive groups from their countries, or restrict the inflow and the deployment of private capital or the expansion of certain types of enterprise, both domestic and foreign.” This self-inflicted poverty, in turn, is used to justify aid payments from the West. “Redistribution from rich to poor countries as an objective of policy brings it about that lower incomes resulting from the policies of Third World governments serve as grounds for taxing Western citizens for the direct benefit of those who brought about these lower incomes.”[27]
This is certainly true in the cases of Taiwan and South Korea, where “import-substitution” policies were instituted to protect high-cost domestic industries from foreign competition. It was only when, in anticipation of the end of American aid in 1965, the Taiwanese government began to move away from these policies that Taiwan’s “economic miracle” would begin to develop. The same is true for South Korea, which also began to encourage an inflow of foreign capital and technology.[28]
Indeed, it is theoretically unavoidable that import-substitution policies must do considerable damage to a country’s export sector. Since domestic markets are inevitably limited in the LDCs, any hope of economic progress there depends on a healthy export sector. At least three reasons can be cited in support of the claim that import substitution must harm exports. First, the protected good may be an important input in the production process of export-oriented industries. The higher prices that protectionism makes possible, therefore, put export industries at an artificial disadvantage vis-à-vis their competitors in countries that do not engage in such policies. Tariffs on steel may “protect” some steelworkers’ jobs, but at the expense of destroying jobs in all industries in which steel — artificially overpriced as a result of the tariff — is an input. Those industries are now less competitive in international trade. Such policies are all the more insidious because their negative consequences go essentially unnoticed, while their “benefits” are visible for all to see — everyone sees the jobs in the steel industry that the tariff has protected, but hardly anyone is even aware that the job losses in industries throughout the economy that use steel are attributable to the tariff.
Second, even if the good in question is a final consumption good and not a potential input in the production process of an export-oriented industry, the fact remains that in its artificially privileged position its production is able to bid scarce resources away from export industries, and therefore make inputs that much more expensive for the export sector.
And finally, there is the very real possibility of retaliation by other countries against the trade restrictions imposed by the LDC. Such retaliation, naturally, means that the export sector’s foreign markets are severely circumscribed or cut off altogether. No wonder exports grew so dramatically in Taiwan and South Korea (between 1962 and 1970, from 13.2 percent of GNP to 31.1 percent and from 5.2 percent to 15 percent, respectively) when import substitution was ended.[29]
Policy analyst Doug Bandow describes this policy of import substitution — that is, the use of tariffs and other government action to support domestic industry — as “one of the most harmful strategies” offered to developing countries. “Today,” he writes, “most development economists admit that this policy stifles growth. The world’s most rapidly growing economies, the East Asian states, have eschewed import substitution and have instead concentrated on producing inexpensive exports.”[30]
Import substitution has profoundly distorted the economies of LDCs. “The economic landscape in some developing countries,” writes the great economist Gottfried von Haberler, “is littered and disfigured by white elephants, modern factories unsuited to their productive resources, which either stand idle or operate inefficiently at exorbitant costs, with protection from imports or direct subsidies at the expense of the taxpayer and the traditional export sector — mainly agriculture.”[31] That this is not a path to prosperity is about the least one can say about it.
The case of Hong Kong, which ignored the terrible advice of the development mainstream, is especially instructive. With no local power sources (such as coal or oil), shortages of land and water, and few raw materials, Hong Kong appeared to be the classic example of a Third World locale that needed substantial injections of foreign assistance from Western governments. Yet without such aid, Hong Kong nevertheless became the envy of the world thanks to the explosion in economic progress and living standards made possible by its largely free economy.
At the very time some moralists were urging struggling families in the Western world to pay higher prices for goods from developing countries as a matter of moral obligation, Hong Kong was busily ignoring the implied suggestion that developing countries could get nowhere without special favors and condescension, and eventually created such a successful export sector that Britain and the United States actually began asking that small private-property regime to implement voluntary export restrictions![32] A better example of Richard Cobden’s point about the beneficial nature of trade would be difficult to find.
As Cobden might well have predicted, foreign aid, far from promoting freedom, has only entrenched statism and impoverishment. Those countries that have escaped less-developed status have, by and large, spurned state-led development and embraced free trade and the market order.
Cobden’s skepticism of the pretensions of the state, which would doubtless have made him a skeptic of the kind of foreign aid programs that have been pursued since World War II, helps to account for his aversion to military interventionism as well. Cobden was no pacifist, and like virtually all classical liberals he believed in defensive wars against invaders. But a foreign policy more ambitious than providing for legitimate defense threatened to bankrupt one’s own country — and, it might be added, had the potential to stir up potentially dangerous resentment and ill will elsewhere in the world.
In the United States, George Washington wrote in his Farewell Address the words that formed the backbone of early American foreign relations: “The great rule of conduct for us in regard to foreign nations is — in extending our commercial relations — to have with them as little political connection as possible.” It is not without significance that it was these words that Cobden used as the motto of his first book.[33]
Recall Frédéric Bastiat’s famous essay, “What Is Seen and What Is Not Seen.” There Bastiat had reminded readers to consider a particular economic policy not in terms of its short-run effects on one particular group, but rather in terms of its long-run consequences for society as a whole. The boy who breaks a neighbor’s window does not stimulate the economy by giving work to the glassmaker. That is only what is seen. What is not seen is what the homeowner would have purchased — but now has to forego — with the money he now has to spend to repair his window. The testimony of common sense is absolutely correct — destruction leads to impoverishment.
Bastiat’s insight can be applied to the conduct of foreign policy as well. At the end of World War I, for instance, what was seen was that Germany’s constitutional monarchy had been destroyed. This outcome, it was assumed in some circles, would lead to a more peaceful world in the long run, as the expansionist Germany of the Kaiser gave way to the representative and moderate Weimar regime.
The destruction of the Kaiser, then, is what was seen. What was not seen was how the future of Europe might have progressed in the absence of US intervention in World War I. Shortly after the Second World War, no less an authority than George Kennan wondered aloud, “Today if one were offered the chance of having back again the Germany of 1913 — a Germany run by conservative but relatively moderate people, no Nazis and no Communists — a vigorous Germany, full of energy and confidence, able to play a part again in the balancing-off of Russian power in Europe, in many ways it would not sound so bad.” In other words, US intervention in World War I, done with the best of intentions, had been an exceedingly costly mistake — a mistake of historic proportions.
Not without reason have historians pointed to the punitive Treaty of Versailles, which established peace terms with Germany at the end of World War I, as a major contributing factor to the Second World War. Marshall Foch had said, “This is not peace. It is an armistice for twenty years.” Hitler appealed to the patriotism and honor of the German people, who detested the Versailles Treaty, in support of his foreign policy.
Some historians, therefore, have argued that without US involvement, Britain and France would never have been in a position to impose such peace terms, and that without a Treaty of Versailles, it is much less likely that Hitler could have attracted the support he did. Woodrow Wilson had genuinely wanted to make the world safe for democracy, but he unwittingly contributed to the outbreak of a far more terrible conflict two decades later. Such is the complexity and unpredictability of foreign affairs.
The Vietnam War is another example. It is certainly praiseworthy to want to defend a country in danger of a Communist takeover, as South Vietnam certainly was. Yet this cannot be a serious statesman’s only consideration when considering the proper course of action.
It is hard to see in this case how following Cobden’s noninterventionist advice could have produced an outcome worse than what actually happened. The cost in money and lives was staggering, and the United States forfeited much of its international prestige by the way the war was conducted. And in 1975, Saigon fell anyway. All of a sudden, Cobden’s claim that serving as an example to mankind is the best way to encourage the spread of freedom no longer seems so naïve. It is certainly the only way to win the hearts and minds, so to speak, of weaker countries that inevitably view superpower military intervention with suspicion.
It is necessary, therefore, for the same kind of humility that limits state interference into the domestic economy to be applied to international affairs as well. As Cobden put it,
Public opinion must undergo a change; our ministers must no longer be held responsible for the everyday political quarrels all over Europe; nor, when an opposition journalist wishes to assail a foreign secretary, must he be suffered to taunt him with the neglect of the honor of Great Britain, if he should prudently abstain from involving her in the dissensions that afflict distant communities.[34]
Nations possess finite resources, and if the stable and livable societies of the world should devote themselves to “nation-building” and wars of liberation, not only might they actually wind up making matters worse, but more importantly they risk exhausting or bankrupting themselves in the process — and then what would be the world’s fate? “Would not the consequences of such professions and promises,” asked Gladstone, “be either the premature exhaustion of [England's] means, or a collapse in the day of performance?”[35]
This is what Cobden warned could happen to his own country, which is why he was so anxious to recommend a policy of nonintervention in the affairs of other nations.
England, by calmly directing her undivided energies to the purifying of her own internal institutions, to the emancipation of her commerce … would, by thus serving as it were for the beacon of other nations, aid more effectually the cause of political progression all over the continent than she could possibly do by plunging herself into the strife of European wars.[36]
Cobden was speaking here of peoples who shared a common historical and cultural inheritance; how much more would he have objected to plunging his country into the conflicts of still more distant lands, where the people involved may in fact consider secular democracy as something alien and despicable.
Cobden’s suggested foreign policy is, at root, profoundly compatible with the advice of early American statesmen. Decades earlier, Henry Clay had offered his countrymen the same warning about reckless foreign intervention that Cobden would issue in Britain:
By the policy to which we have adhered since the days of Washington … we have done more for the cause of liberty than arms could effect; we have shown to other nations the way to greatness and happiness…. Far better is it for ourselves, for Hungary, and the cause of liberty, that, adhering to our pacific system and avoiding the distant wars of Europe, we should keep our lamp burning brightly on this western shore, as a light to all nations, than to hazard its utter extinction amid the ruins of fallen and falling republics in Europe.
Politicians, Cobden feared, had an interest in keeping the misfortunes of foreigners always before the eyes of their constituents, perhaps to distract attention from their own shortcomings as governors. Cobden warned that “our aristocratic politicians make political capital out of the Italians, Poles, Circassians, etc., for purposes of their own, and not with any intention of promoting liberty anywhere. And this game will go on so long as the English public allow them to parade their sympathies for the grievances of foreigners instead of doing the work of liberty at home.”[37]
If peace is to be the lot of mankind in the decades and centuries to come, it will have to be accomplished through the kind of internationalism advocated by Richard Cobden and his intellectual progeny. The pursuit of peace will have to be governed not by slogans and superficiality but by a profound humility that acknowledges the inevitable limitations on what military intervention can accomplish, and that, instead of taking on the fruitless task of eradicating evil everywhere, acknowledges with other statesmen of the past that evil can be limited and confined but never entirely eliminated.
Richard Weaver, in his description of the typical American Southerner, might have been speaking about the classical-liberal statesman when he said that he “accepts the irremediability of a certain amount of evil and tries to fence it around instead of trying to stamp it out and thereby spreading it. His is a classical acknowledgment of tragedy and of the limits of power.”
Cobden, too, recognized and appreciated these limits. “I think,” he said, “as a corporate body, as a political community, if we can manage to do what is right and true and just to each other — if we can manage to carry out that at home, it will be about as much as we can do.”[38] Over two centuries ago, Charles Pinckney had spoken in a similar vein of the modest goals for which republican governments should strive: “If they are sufficiently active and energetic to rescue us from contempt, and preserve our domestic happiness and security, it is all we can expect from them — it is more than almost any other government ensures to its citizens.”
Although Cobden’s program would doubtless be stigmatized in our day as “isolationism,” free economic intercourse and cultural exchange with the world can hardly be described as isolation. In his day, in fact, Cobden was appropriately dubbed the “International Man.” And that, indeed, is what he was. Peace, free trade, and nonintervention — these ideas, Cobden believed, were not simply the ideological commitments of one particular party, but rather the necessary ingredients for the progress and flourishing of civilization.
Notes
[1] Ludwig von Mises, “Social Science and Natural Science,” in Money, Method, and the Market Process: Essays by Ludwig von Mises, ed. Richard M. Ebeling (Boston: Kluwer, 1990).
[2] Roy Porter, The Creation of the Modern World: The Untold Story of the British Enlightenment (New York: W.W. Norton, 2000), p. 387.
[3] Ludwig von Mises, Human Action: A Treatise on Economics (New Haven: Yale University Press, 1949), p. 240.
[4] Frédéric Bastiat, Economic Harmonies, ed. George B. de Huszar (Irvington-on-Hudson, NY: Foundation for Economic Education, 1997). Emphasis in original.
[5] Quoted in John Chodes, “Richard Cobden: Creator of the Free Market,” in The Industrial Revolution and Free Trade, ed. Burton W. Folsom (Irvington-on-Hudson, NY: Foundation for Economic Education, 1996), pp. 41–42.
[6] Ludwig von Mises, The Theory of Money and Credit (New Haven, Conn: Yale University Press, [1924] 1953), p. 395.
[7] Richard M. Ebeling, “Can Free Trade Really Prevent War?” Paper presented at the Austrian Scholars Conference, March 2002, Auburn, Alabama.
[8] Evelyn Iritani, “Iraq Fights Back with Commerce,” Los Angeles Times, November 11, 2002.
[9] Anthony Shadid, “Baghdad Trade Deals Seen Hindrance to U.S.,” Boston Globe, September 19, 2002, p. A1.
[10] Ralph Raico, “The Theory of Economic Development and the ‘European Miracle’: The Vindication of P.T. Bauer,” manuscript in possession of the author; a shorter version appeared in The Collapse of Development Planning, ed. Peter J. Boettke (New York: New York University Press, 1993).
[11] Jean Baechler, The Origins of Capitalism (New York: St. Martin’s Press, 1976), ch. 7.
[12] Ibid., pp. 73, 77.
[13] Alfred F. Pollard, Wolsey: Church and State in Sixteenth-Century England (New York: Harper & Row, 1966 [1929]), p. 218.
[14] Robert Nisbet, The Quest for Community: A Study in the Ethics of Order and Freedom (San Francisco: Institute for Contemporary Studies, 1990 [1953]), p. 99.
[15] Bertrand de Jouvenel, Sovereignty: An Inquiry into the Political Good, trans. Daniel J. Mahoney and David DesRosiers (Indianapolis: Liberty Fund, 1997 [1957]), p. 208.
[16] On the many legal jurisdictions that existed during the Middle Ages, the classic study is Harold J. Berman, Law and Revolution: The Formation of the Western Legal Tradition (Cambridge: Harvard University Press, 1983); on the premodern notion of law as discovered rather than made, see de Jouvenel, Sovereignty, passim; Bruno Leoni, Freedom and the Law (Indianapolis: Liberty Fund, 1991 [1961]), esp. pp. 83ff.
[17] A.R. Myers, Parliaments and Estates in Europe to 1789 (New York: Harcourt, Brace, Jovanovich, 1975), p. 29.
[18] de Jouvenel, Sovereignty, p. 226.
[19] Alan Rufus Waters, “Economic Growth and the Property Rights Regime,” in The Revolution in Development Economics, eds. James A. Dorn, Steve H. Hanke, and Alan A. Waters (Washington, D.C.: Cato Institute, 1998), p. 123.
[20] Doug Bandow, “The First World’s Misbegotten Economic Legacy to the Third World,” in The Revolution in Development Economics, p. 208.
[21] Tom Bethell, The Noblest Triumph: Property and Prosperity through the Ages (New York: St. Martin’s, 1998), p. 201.
[22] Bandow, “The First World’s Misbegotten Economic Legacy,” p. 223.
[23] Bethell, The Noblest Triumph, pp. 190–91. On foreign aid as an emollient, see, for example, Waters, “Economic Growth and the Property Rights Regime,” p. 118.
[24] Peter T. Bauer, Equality, the Third World and Economic Delusion (Cambridge: Harvard University Press, 1983), p. 100.
[25] Ibid., p. 99.
[26] Ibid., p. 104; George B.N. Ayittey, “The Failure of Development Planning in Africa,” in The Collapse of Development Planning, ed. Peter J. Boettke (New York: New York University Press, 1993), p. 173.
[27] Bauer, Equality, the Third World and Economic Delusion, p. 118.
[28] Melvyn Krauss, Development Without Aid: Growth, Poverty and Government (New York: McGraw-Hill, 1983), p. 160.
[29] Ibid., pp. 52–56.
[30] Bandow, “The First World’s Misbegotten Economic Legacy.”
[31] Gottfried von Haberler, International Trade and Economic Development (San Francisco: International Center for Economic Growth, 1988), p. 77.
[32] Robert A. Peterson, “Lessons in Liberty: Hong Kong, ‘Crown Jewel’ of Capitalism,” in The Industrial Revolution and Free Trade, p. 109.
[33] Ralph Raico, “The Case for an America First Foreign Policy,” in The Failure of America’s Foreign Wars, eds. Richard M. Ebeling and Jacob G. Hornberger (Fairfax, VA: Future of Freedom Foundation, 1996), p. 22.
[34] Richard Cobden, “Commerce is the Great Panacea.”
[35] William Harbutt Dawson, Richard Cobden and Foreign Policy (London: George Allen & Unwin, 1926), p. 93.
[36] Cobden, “Commerce is the Great Panacea.”
[37] Dawson, Richard Cobden and Foreign Policy, p. 100.
[38] Ibid., p. 104. Emphasis added.
Thomas E. Woods, Jr. (visit his website) is a senior fellow at the Mises Institute, where he will be teaching “The New Deal: History, Economics, and Law” this fall at the Mises Academy. He is the author of the New York Times bestseller Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. His other recent books include 33 Questions About American History You’re Not Supposed to Ask, The Church and the Market: A Catholic Defense of the Free Economy, Nullification, and The Politically Incorrect Guide to American History (a New York Times bestseller). Send him mail. See Thomas E. Woods, Jr.’s article archives.
By Toby Baxendale, on 5 July 10
In his latest article for ConservativeHome, Steve Baker responds to comments by the departing Charlemagne columnist of The Economist.
If the outgoing Charlemagne defines nationalism, and it appears he does, as comprising trade and migration barriers, then the EU has merely elevated nationalism to the level of the European continent, has it not?
Although many people associate the EU with free trade, the reality is quite different:
Of course the EU has delivered free trade within its borders – it is a customs union after all – but anyone who thinks the EU genuinely promotes global free trade should look at the TARIC database. TARIC (Integrated Tariff of the European Communities) includes not just tariffs, but also tariff suspensions, tariff quotas and tariff preferences. You might enjoy searching the database for wheat for example. Do click through and survey the subdivisions of each tariff, noting provision for variations according to country of origin or destination.
Richard Cobden might well wonder why he bothered with the Anti-Corn Law League.
Steve puts these protectionist measures in context, with reference to Omnipotent Government, by Ludwig von Mises:
Mises’ thesis, in a nutshell, is that aggressive economic nationalism is the inevitable consequence of increasing government intervention in the economy. For reasons he explains, he calls this ultimate cause “etatism”:
The most important event in the history of the last hundred years is the displacement of liberalism by etatism.
Etatism appears in two forms: socialism and interventionism. Both have in common the goal of subordinating the individual unconditionally to the state, the social apparatus of compulsion and coercion.
Steve concludes:
The Brussels elite certainly have some historic achievements behind them, but I can’t help wondering whether they put their faith in the wrong god. Perhaps their folly has been to choose etatism plus the unification of European government when a better choice would have been a post-war return to unhampered social cooperation, that is, classical liberalism.
I recommend the whole article.
By Toby Baxendale, on 7 June 10
We are pleased to republish here an excellent article by Dr. Richard Ebeling, Professor of Economics at Northwood University. The article originally appeared in Freedom Daily (June 1996), published by the Future of Freedom Foundation, Fairfax, Virginia.
Adam Smith’s Wealth of Nations is justly considered one of the intellectual fountainheads of economic liberty. With a brilliant combination of logic and historical example, Smith demonstrated, like few others had up to his day, that governmental controls, regulations, and restrictions on economic freedom were the fundamental causes of extensive poverty, misuse of resources, and pervasive political corruption. He declared that what England — and indeed any country — needed, if it desired increased prosperity for all, wise use of its resources, and greater justice in human relationships, was a “system of natural liberty.”
Under such a system, Smith argued,
Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men . . . The sovereign is completely discharged from a duty . . . of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards employments most suitable to the interest of society.
In this system of natural liberty, the government, in Adam Smith’s view, would be limited to three functions: protection of the citizenry from foreign aggression; the protection of the citizenry from domestic robbery and murder, along with a judicial system to administer justice; and the provision of a number of limited public works that Smith believed might not be profitable for private citizens to provide but which might have a wider usefulness for the society.
In spite of the eloquence and rigor with which Adam Smith demonstrated the harm and futility of the mercantilist forms of planning and regulation in his day, he despaired that economic freedom would never be triumphant. “To expect, indeed, that the freedom of trade should ever be entirely restored to Great Britain,” he said, “is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals irresistibly oppose it.”
Wartime Regulations and the Emergence of the Free Trade Movement
The several decades following Adam Smith’s death in 1790 seemed to bear out his pessimism. While under the prime ministership of William Pitt in the 1780s, Great Britain moved in directions that were consistent with the types of trade policies advocated by Smith; they were reversed in the 1790s with the advent of the wars fought between Great Britain and France. New protectionist trade barriers were imposed in the name of the war effort. Britain and France both tried to enforce naval blockades against each other. Only a pervasive network of smuggling throughout Europe prevented many from going without food or clothing. As Francis W. Hirst explained in his book From Adam Smith to Philip Snowden: A History of Free Trade (1925), “When peace came in 1815 it found Great Britain exhausted by twenty-two years of war and Protection.”
However, instead of reversing the controls and regulations, the British Parliament passed the Corn Laws of 1815, which were meant to assure a protected market for British agricultural interests. No foreign wheat could be imported into the British Isles unless the domestic price reached an exorbitantly high level. This condemned the low-income industrial workers of British towns and cities to a meager and expensive diet. The trade barriers also acted as a restraint on the development of the emerging British manufacturing industries.
In 1820, a group of British industrialists issued a Merchant’s Petition declaring that they were “against every restrictive regulation of trade, not essential to the revenue, against all duties merely protective from foreign competition.” In 1830, Sir Henry Parnell, a longtime chairman of the finance committee of the House of Commons, published a book entitled, On Financial Reform. In it, he declared:
If once men were allowed to take their own way, they would very soon, to the great advantage of society, undeceive the world of the error of restricting trade, and show that the passage of merchandise from one state to another ought to be as free as air and water. Every country should be as a general and common fair for the sale of goods, and the individual and nation that makes the best commodity should find the greatest advantage.
In 1836, the Anti-Corn Law Association was formed in London, which in 1839 was renamed the Anti-Corn Law League in Manchester. For the next seven years, under the masterful and powerful leadership of Richard Cobden and John Bright, the league fought unstintingly for the repeal of the Corn Laws and for the establishment of total free trade in the British Empire.
Throughout the cities, towns, and villages of Great Britain, Anti-Corn Law League chapters were opened. Hundreds of thousands of dollars in voluntary donations were collected to fund rallies, meetings, public lectures, and debates. The league organized a vast publishing campaign of books, monographs, and pamphlets advocating the repeal of all protectionist restrictions and the freeing of all trade and commerce from government control.
The Case for Unilateral Free Trade and the Goal of Peace
From the beginning, in making his case for free trade, Richard Cobden saw the breaking down of trade barriers as a powerful avenue for depoliticizing human relationships. By privatizing all market transactions between individuals of different countries, he said, free trade would assist in removing many of the causes of war. “As little intercourse as possible between Governments,” Cobden declared, “as much connection as possible between the nations of the world.” To emphasize this, the slogan of the Anti-Corn Law League became “Free Trade, Peace and Good-Will Among Nations.”
Furthermore, Cobden and the Anti-Corn Law League made the case for unilateral free trade. “We came to the conclusion that the less we attempted to persuade foreigners to adopt our trade principles, the better,” Cobden explained in later years, “for we discovered so much suspicion of the motives of England, that it was lending an argument to the protectionists abroad to incite the popular feeling against the free-traders . . . To take away this pretense, we avowed our total indifference whether other nations became free-traders or not; but we should abolish Protection for our own selves, and leave other countries to take whatever course they liked best.”
In 1841, Sir Robert Peel became prime minister, determined to maintain the Corn Laws as a cornerstone of British foreign economic policy. But through one of those ironies of history, the man appointed to lead the defense of protectionism ended up advocating and overseeing the abolition of protectionism in Great Britain.
Over the next several years, Peel’s government lowered and, in some cases, eliminated many of the trade restrictions on manufacturing and industrial goods, but he would not reduce the trade barriers on agriculture. Under the unrelenting arguments of the free traders, Peel finally admitted, in 1843, during a debate in the House of Commons, “I am bound to say that it is our interest to buy cheap, whether other countries will buy cheap or no.” In 1845, of the 813 commodities on the import tariff restriction list, 430 were placed on the free-trade list. But, still, Peel was unwilling to give way on the Corn Laws.
The Rains Came and the Trade Barriers Finally Fell
In the fall of 1845, the worst rains in living memory hit the British Isles, and the domestic food crops were devastated. Food supplies declined, bread prices rose dramatically, and the potato harvest was destroyed in Ireland, threatening mass starvation. Young boys could be heard in the cities saying, “I be protected and I be starving.” Daniel O’Connell led demonstrations in Ireland, in which a cannon would be dragged through the streets to which was attached a sign saying, “Free trade or this.”
In November 1845, the leaders of both the Tory and Whig parties came out for repeal of the Corn Laws. In January 1846, Robert Peel told the House of Commons that the Corn Laws would be abolished. On February 27, the resolution was approved, and the Corn Importation Bill left the House of Commons on May 16, after passing on the third reading. The Duke of Wellington speedily ushered the bill through the House of Lords, and free trade became the law of the land in Great Britain on June 25, 1846.
Angered by his surrender to the free traders, the protectionist Tories forced Robert Peel to resign from the prime ministership the very same day free trade was triumphant in Britain. In his final speech before stepping down, Peel declared that he hoped that whatever government was now formed, it would continue the “application of those principles which tend to establish a freer intercourse with other nations.” And he went on to say:
If other countries choose to buy in the dearest market, such an option on their part constitutes no reason why we should not be permitted to buy in the cheapest. I trust the Government . . . will not resume the policy which they and we have felt most inconvenient, namely, the haggling with foreign countries about reciprocal concessions, instead of taking the independent course which we believe conducive to our own interests. Let us trust to the influence of public opinion in other countries — let us trust that our example, with the proof of practical benefit we derive from it, will at no remote period insure the adoption of the principles on which we have acted, rather than defer indefinitely by delay equivalent concessions from other countries.
Within three years — by 1849 — not only were the Corn Laws gone, but also were the remaining Navigation Acts carried over from the 18th century that had required goods being imported into Britain to be carried on British ships. From then on, both goods and merchant vessels from any land could arrive in Great Britain “as free as air and water,” as Henry Parnell had wished it to be in 1830.
The Importance and the Lesson of the Free Trade Movement
On June 25, 1846 Great Britain became the first country in the world to institute a unilateral policy of free trade. For the rest of the 19th century — indeed, until the dark forces of collectivism enveloped Europe during World War I — the British Empire was open to the entire world for the free movement of men, money, and goods. Its economic success served as a bright, principled example to the rest of the globe, many of whose member countries followed the British lead in establishing, if not complete free trade, at least regimes of much greater freedom of trade and commerce.
The triumph of free trade in 1846 in Great Britain was one of the shining jewels in the crowning achievements of 19th-century classical liberalism. It represented more than just the opening of the door to material prosperity among an expanding group of nations of the world. It also heralded an epoch of greatly depoliticized relationships that, in fact, made international trade the private affairs of individuals and not concerns of the state.
The emergence of socialism and neo-mercantilism towards the end of the 19th century eventually brought about the end of the classical-liberal era and its epoch of free trade. Nevertheless, the victory of 1846 demonstrates that an uncompromising, principled belief in the freedom of man can triumph and change the course of human events.
Dr. Ebeling’s new book, Political Economy, Public Policy, and Monetary
Economics: Ludwig von Mises and the Austrian Tradition is now available through Routledge and Amazon.
By Toby Baxendale, on 24 March 10
Food is on the whole cheap to us as an advanced or even a post industrial nation. Richard Cobden, with a small group of fellow manufacturers, took on the whole might of the Aristocracy in putting forward the case to abolish the Corn Laws and have unilateral free trade.
For those interested in free trade, I have dug out possibly one of Cobden’s finest orations delivered in the House of Commons, on March 13, 1845, and described by John Morley as:
“probably the most powerful speech he ever made.” Men on the Tory benches whispered to one another, “Peel must answer this.” But Peel crushed in his hand the notes he had made and remarked, “Those may answer him who can.”
For economic history buffs, you will love it. For its relevance today, we must remember we have one of the most economically insane policies that covers agricultural production in the United Kingdom and through the whole of Europe: the Common Agricultural Policy. The Tax Payers Alliance has shown us here the utter madness of the policy. Here is part of their executive summary.
“With the onset of a recession, family budgets are tight. Despite agricultural commodity prices falling from their recent exceptional high, there are still global concerns at a food crisis. Saving £400 a year, over one per cent of average household, post-tax income, would be a welcome boost for many families struggling in a these tough economic times. The Common Agricultural Policy (CAP) imposes a significant burden on families both by costing significant amounts of taxpayers’ money and by pushing up food prices: The CAP costs the UK £10.3 billion a year, £398 per household. That is equivalent to adding around £7.65 per week to family food bills.”
Abolish CAP; it serves no purpose for the public of this nation. Let farmers use cheap food and make cheaper products for the people of our nation.
Let farmers invest long term in things that people want to consume.
The following speech, made one full century and a half ago, could be made today by one of our politicians. Sadly, we seldom see such oratory in the House of Commons nowadays.
Enjoy.
“SIR, the object of this motion is to appoint a select committee to inquire into the present condition of the agricultural interests; and, at the same time, to ascertain how the laws regulating the importation of agricultural produce have affected the agriculturists of this country. As regards the distress among farmers, I presume we cannot go to a higher authority than those honourable gentlemen who profess to be the farmers’ friends and protectors. I find it stated by those honourable gentlemen who recently paid their respects to the prime minister, that the agriculturists are in a state of great embarrassment and distress. I find that one gentleman from Norfolk [Mr. Hudson] stated that the farmers in the county are paying their rents, but paying them out of capital, and not profits. I find Mr. Turner of Upton, in Devonshire, stating that one-half of the smaller farmers in that county are insolvent, and that the others are rapidly falling into the same condition; that the farmers with larger holdings are quitting their farms with a view of saving the rest of their property; and that, unless some remedial measures be adopted by this House, they will be utterly ruined.
The accounts which I have given you of those districts are such as I have had from many other sources. I put it to honourable gentlemen opposite, whether the condition of the farmers in Suffolk, Wiltshire, and Hampshire, is better than that which I have described in Norfolk and Devonshire? I put it to county members, whether—taking the whole of the south of England, from the confines of Nottinghamshire to the Land’s End—whether, as a rule, the farmers are not now in a state of the greatest embarrassment? There may be exceptions; but I put it to them whether, as a rule, that is not their condition in all parts?
The distress of the farmers being admitted, the next question which arises is, What is its cause? I feel a greater necessity to bring forward this motion for a committee of inquiry, because I find great discrepancies of opinion among honourable gentlemen opposite as to what is the cause of the distress among the farmers. In the first place there is a discrepancy as to the generality or locality of the existing distress. I find the right honourable baronet at the head of the government [Sir Robert Peel] saying that the distress is local; and he moreover says it does not arise from the legislation of this House. The honourable member for Dorsetshire declares, on the other hand, that the distress is general, and that it does not arise from legislation.
Now, there are these very different opinions on the other side of the House; but there are members upon this side representing very important interests, who think that farmers are suffering because they have this legislative protection. There is all this difference of opinion. Now, is not that a fit and proper subject for your inquiry? I am prepared to go into a select committee, and to bring forward evidence to show that the farmers are laboring under great evils—evils that I would connect with the legislation of this House, tho they are evils which appear to be altogether dissociated from it. The first great evil under which the farmer labours is the want of capital. No one can deny that. I do not mean at all to disparage the farmers. The farmers of this country are just the same race as the rest of us; and, if they were placed in a similar position, theirs would be as good a trade—I mean that they would be as successful men of business—as others; but it is notorious, as a rule, that the farmers of this country are deficient in capital; and I ask: How can any business be carried on successfully where there is a deficiency of capital?
I take it that honourable gentlemen opposite, acquainted with farming, would admit that 10l. an acre, on an arable farm, would be a sufficient amount of capital for carrying on the business of farming successfully. I will take it, then, that 10l. an acre would be a fair capital for an arable farm. I have made many inquiries upon this subject in all parts of the kingdom, and I give it you as my decided conviction, that at this present moment farmers do not average 5l. an acre capital on their farms. I speak of England, and I take England south of the Trent, tho, of course, there are exceptions in every country; there are men of large capital in all parts—men farming their own land; but, taking it as a rule, I hesitate not to give my opinion—and I am prepared to back that opinion by witnesses before your committee—that, as a rule, farmers have not, upon an average, more than 5l. an acre capital for their arable land. I have given you a tract of country to which I may add all Wales; probably 20,000,000 of acres of cultivable land. I have no doubt whatever that there are 100,000,000l. of capital wanting upon that land. What is the meaning of farming capital? There are strange notions about the word “capital.” It means more manure, a great amount of labor, a greater number of cattle, and larger crops. Picture a country in which you can say there is a deficiency of one-half of all those blessings which ought to, and might, exist there, and then judge what the condition of laborers wanting employment and food is.
But you will say, capital would be invested if it could be done with profit. I admit it; that is the question I want you to inquire into. How is it that in a country where there is a plethora of capital, where every other business and pursuit is overflowing with money, where you have men going to France for railways and to Pennsylvania for bonds, embarking in schemes for connecting the Atlantic with the Pacific by canals, railways in the valley of the Mississippi, and sending their money to the bottom of the Mexican mines; while you have a country rich and overflowing, ready to take investments in every corner of the globe, how is it, I say, that this capital does not find its employment in the most attractive of all forms—upon the soil of this country? The cause is notorious—it is admitted by your highest authorities; the reason is, there is not security for capital in land. Capital shrinks instinctively from insecurity of tenure; and you have not in England that security which would warrant men of capital investing their money in the soil.
Now, is it not a matter worthy of consideration, how far this insecurity of tenure is bound up with that protective system of which you are so enamored? Suppose it can be shown that there is a vicious circle; that you have made politics of Corn Laws, and that you want voters to maintain them; that you very erroneously think that the Corn Laws are your great mine of wealth, and, therefore, you must have a dependent tenantry, that you may have their votes at elections to maintain this law in Parliament. Well, if you will have dependent voters, you can not have men of spirit and capital. Then your policy reacts upon you. If you have not men of skill and capital, you can not have improvements and employment for your labourers. Then comes around that vicious termination of the circle—you have pauperism, poor-rates, county-rates, and all the other evils of which you are now speaking and complaining.
Now, sir, not only does the want of security prevent capital flowing into the farming business, but it actually deters from the improvement of the land those who are already in the occupation of it. There are many men, tenants of your land, who could improve their farms if they had a sufficient security, and they have either capital themselves or their friends could supply it; but with the absence of leases, and the want of security, you are actually deterring them from laying out their money on your land. They keep everything the same from year to year. You know that it is impossible to farm your estates properly unless a tenant has an investment for more than one year. A man ought to be able to begin a farm with at least eight years before him, before he expects to see a return for the whole of the outlay of his money. You are, therefore, keeping your tenants-at-will at a yearly kind of cultivation, and you are preventing them carrying on their businesses in a proper way. Not only do you prevent the laying out of capital upon your land, and disable the farmers from cultivating it, but your policy tends to make them servile and dependent; so that they are actually disinclined to improvement, afraid to let you see that they can improve, because they are apprehensive that you will pounce upon them for an increase of rent.
Now, I do not know why we should not in this country have leases for land upon similar terms to the leases of manufactories, or any “plant” or premises. I do not think that farming will ever be carried on as it ought to be until you have leases drawn up in the same way as a man takes a manufactory, and pays perhaps a thousand pounds a year for it. I know people who pay four thousand pounds a year for manufactories to carry on their business, and at fair rents. There is an honourable gentleman near me who pays more than four thousand pounds a year for the rent of his manufactory. What covenants do you think he has in his lease? What would he think if it stated how many revolutions there should be in a minute of the spindles, or if they prescribed the construction of the straps or the gearing of the machinery? Why, he takes his manufactory with a schedule of its present state—bricks, mortar, and machinery—and when the lease is over, he must leave it in the same state, or else pay a compensation for the dilapidation. [The chancellor of the exchequer: “Hear, hear!”]
The right honourable gentleman, the chancellor of the exchequer, cheers that statement. I want to ask his opinion respecting a similar lease for a farm. I am rather disposed to think that the Anti-Corn-Law Leaguers will very likely form a joint-stock association, having none but free-traders in the body, that we may purchase an estate and have a model farm; taking care that it shall be in one of the rural counties, one of the most purely agricultural parts of the country, where we think there is the greatest need of improvement—perhaps in Buckinghamshire,—and there shall be a model farm, homestead, and cottages; and I may tell the noble lord, the member for Newark, that we shall have a model garden, and he will not make any boast about it. But the great object will be to have a model lease. We will have as the farmer a man of intelligence and capital.
I am not so unreasonable as to tell you that you ought to let your land to men who have not a competent capital, or are not sufficiently intelligent; but I say, select such a man as that, let him know his business and have a sufficient capital, and you can not give him too wide a scope. We will find such a man, and will let him our farm; there shall be a lease precisely such as that upon which my honourable friend takes his factory. There shall be no clause inserted in it to dictate to him how he shall cultivate his farm; he shall do what he likes with the old pasture. If he can make more by plowing it up he shall do so; if he can grow white crops every year—which I know there are people doing at this moment in more places than one in this country—or if he can make any other improvement or discovery, he shall be free to do so. We will let him the land, with a schedule of the state of tillage and the condition of the homestead, and all we will bind him to will be this: “You shall leave the land as good as when you entered upon it. If it be in an inferior state it shall be valued again, and you shall compensate us; but if it be in an improved state it shall be valued, and we, the landlords, will compensate you.” We will give possession of everything upon the land, whether it be wild or tame animals; he shall have the absolute control.
Take as stringent precautions as you please to compel the punctual payment of the rent; take the right of reentry as summarily as you like if the rent be not duly paid, but let the payment of rent duly be the sole test as to the well-doing of the tenant; and so long as he can pay the rent, and do it promptly, that is the only criterion you need have that the farmer is doing well; and if he is a man of capital, you have the strongest possible security that he will not waste your property while he has possession of it.
Now, sir, I do not stop to connect the cause and effect in this matter, and inquire whether your Corn Laws or your protective system have caused the want of leases and capital. I do not stop to make good my proof, and for this reason, that you have adopted a system of legislation in this House by which you profess to make the farming trade prosperous. I show you, after thirty years’ trial, what is the depressed condition of the agriculturists; I prove to you what is the impoverished state of farmers, and also of labourers, and you will not contest any one of those propositions. I say it is enough, having had thirty years’ trial of your specific with no better results than these, for me to ask you to go into committee to see if something better cannot be devised. I am going to contend that free trade in grain would be more advantageous to farmers—and with them I include labourers—than restriction; to oblige the honourable member for Norfolk, I will take with them also the landlords; and I contend that free trade in corn and grain of every kind would be more beneficial to them than to any other class of the community. I should have contended the same before the passing of the late tariff, but now I am prepared to do so with tenfold more force.
What has the right honourable baronet [Sir R. Peel] done? He has passed a law to admit fat cattle at a nominal duty. Some foreign fat cattle were selling in Smithfield the other day at about 15l. or 16l. per head, paying only about seven and one half per cent. duty; but he has not admitted the raw material out of which these fat cattle are made. Mr. Huskisson did not act in this manner when he commenced his plan of free trade. He began by admitting the raw material of manufactures before he admitted the manufactured article; but in your case you have commenced at precisely the opposite end, and have allowed free trade in cattle instead of that upon which they are fattened. I say give free trade in that grain which goes to make the cattle. I contend that by this protective system the farmers throughout the country are more injured than any other class in the community.
I will go further and say, that farmers with thin soil—I mean the stock farmers, whom you will find in Hertfordshire and Surrey, farmers with large capitals, arable farmers—I say those men are deeply interested in having a free importation of food for their cattle, because they have thin, poor land. This land of its own self does not contain the means of its increased fertility; and the only way is the bringing in of an additional quantity of food from elsewhere, that they can bring up their farms to a proper state of cultivation. I have been favoured with an estimate made by a very experienced, clever farmer in Wiltshire—probably honourable gentlemen will bear me out, when I say a man of great intelligence and skill, and entitled to every consideration in this House. I refer to Mr. Nathaniel Atherton, Kingston, Wilts. That gentleman estimates that upon 400 acres of land he could increase his profits to the amount of 280l., paying the same rent as at present, provided there was a free importation of foreign grain of all kinds. He would buy 500 quarters of oats at 15s., or the same amount in beans or peas at 14s. or 15s. a sack, to be fed on the land or in the yard; by which he would grow additional 160 quarters of wheat, and 230 quarters of barley, and gain an increased profit of 300l. upon his sheep and cattle. His plan embraces the employment of an additional capital of 1,000l.; and he would pay 150l. a year more for labour.
Now, I undertake to say, in the name of Mr. Atherton, of Wiltshire, and Mr. Lattimore, of Hertfordshire, that they are as decided advocates for free trade in grain of every kind as I am. I am not now quoting merely solitary cases. I told honourable gentlemen once before that I have probably as large an acquaintance among farmers as any one in the House. I think I could give you from every county the names of some of the first-rate farmers who are as ardent free-traders as I am. I requested the secretary of this much dreaded Anti-Corn-Law League to make me out a list of the farmers who are subscribers to that association, and I find there are upward of one hundred in England and Scotland who subscribe to the league fund, comprising, I hesitate not to say, the most intelligent men to be found in the kingdom. I went into the Lothians, at the invitation of twenty-two farmers there, several of whom were paying upward of 1,000l. a year rent. I spent two or three days among them, and I never found a body of more intelligent, liberal-minded men in my life. Those are men who do not want restrictions upon the importation of grain. They desire nothing but fair play. They spy: “Let us have our Indian corn, Egyptian beans, and Polish oats as freely as we have our linseed cake, and we can bear competition with any corn-growers in the world.” But by excluding the provender for cattle, and at the same time admitting the cattle almost duty free, I think you are giving an example of one of the greatest absurdities and perversions of nature and common sense that ever was seen.
Upon the last occasion when I spoke upon this subject, I was answered by the right honourable gentleman, the president of the Board of Trade. He talked about throwing poor lands out of cultivation, and converting arable lands into pasture. I hope that we men of the Anti-Corn-Law League may not be reproached again with seeking to cause any such disasters. My belief is—and the conviction is founded upon a most extensive inquiry among the most intelligent farmers, without stint of trouble and pains—that the course you are pursuing tends every hour to throw land out of cultivation, and make poor lands unproductive. Do not let us be told again that we desire to draw the labourers from the land, in order that we may reduce the wages of the work-people employed in factories. I tell you that, if you bestow capital on the soil, and cultivate it with the same skill as manufacturers bestow upon their business, you have not population enough in the rural districts for the purpose. I yesterday received a letter from Lord Ducie, in which he gives precisely the same opinion. He says: “If we had the land properly cultivated, there are not sufficient labourers to till it.” You are chasing your labourers from village to village, passing laws to compel people to support paupers, devising every means to smuggle them abroad—to the antipodes, if you can get them there; why, you would have to run after them, and bring them back again., if you had your land properly cultivated. I tell you honestly my conviction, that it is by these means, and these only, that you can avert very great and serious troubles and disasters in your agricultural districts.
On the last occasion when I addressed the House on this subject, I recollect stating some facts to show that you had no reasonable ground to fear foreign competition; those facts I do not intend to reiterate, because they have never been contradicted. But there are still attempts made to frighten people by telling them: “If you open the ports to foreign corn, you will have corn let in here for nothing.” One of the favourite fallacies which are now put forth is this: “Look at the price of corn in England, and see what it is abroad; you have prices low here, and yet you have corn coming in from abroad and paying the maximum duty. Now, if you had not 20s. duty to pay, what a quantity of corn you would have brought in, and how low the price would be!”
This statement arises from a fallacy—I hope not dishonestly put forth—in not understanding the difference between the real and the nominal price of corn. The price of corn at Dantzic now, when there is no regular sale, is nominal; the price of corn when it is coming in regularly is the real price. Now, go back to 1838. In January of that year the price of wheat at Dantzic was nominal; there was no demand for England; there were no purchasers except for speculation, with the chance, probably, of having to throw the wheat into the sea. But in the months of July and August of that year, when apprehensions arose of a failure of our harvest, then the price of corn in Dantzic rose instantly, sympathizing with the markets of England; and at the end of the year, in December, the price of wheat at Dantzic had doubled the amount at which it had been in January; and during the three following years, when you had a regular importation of corn,—during all that time, by the averages laid upon the table of this House, wheat at Dantzic averaged 40s. Wheat at Dantzic was at that price during the three years 1839, 1840, and 1841. Now, I mention this just to show the fact to honourable gentlemen, and to entreat them that they will not go and alarm their tenantry by this outcry of the danger of foreign competition. You ought to be pursuing a directly opposite course—you ought to be trying to stimulate them in every possible way, by showing that they can compete with foreigners; that what others can do in Poland, they can do in England.
But we are told that English agriculturists can not compete with foreigners, and especially with that serf labour that is to be found somewhere up the Baltic. Well, but flax comes from the Baltic and there is no protective duty. Honourable gentlemen say we have no objection to raw materials where there is no labour connected with them; but we can not contend against foreigners in wheat, because there is such an amount of labour in it. Why, there is twice as much labour in flax as there is in wheat; but the member for Shoreham favours the growth of flax in order to restore the country, which is sinking into this abject and hopeless state for want of agricultural protection. But the honourable baronet will forgive me—I am sure he will, he looks as if he would—if I allude a little to the subject of leases. The honourable gentleman on that occasion, I believe, complained that it was a great pity that farmers did not grow more flax. I do not know whether it was true or not that the same honourable baronet’s leases to his own tenants forbade them to grow that article.
Now, I have alluded to the condition of the labourers at the present time; but I am bound to say that while the farmers at the present moment are in a worse condition than they have been for the last ten years, I believe the agricultural labourers have passed over the winter with less suffering and distress, altho it has been a five-months’ winter, and a severer one, too, than they endured in the previous year. [Hear!] I am glad to find that corroborated by honourable gentlemen opposite, because it bears out, in a remarkable degree, the opinion that we, who are in connection with the free trade question, entertain. We maintain that a low price of food is beneficial to the labouring classes. We assert, and we can prove it, at least in the manufacturing districts, that whenever provisions are dear, wages are low; and whenever food is cheap, wages invariably rise. We have had a strike in almost every business in Lancashire since the price of wheat has been down to something like 50s.; and I am glad to be corroborated when I state that the agricultural labourers have been in a better condition during the last winter than they were in the previous one. But does not that show that, even in your case, tho your labourers have in a general way only just as much as will find them a subsistence, they are benefited by a great abundance of the first necessaries of life? Altho their wages may rise and fall with the price of food, altho they may go up with the advance in the price of corn, and fall when it is lowered; still, I maintain that it does not rise in the same proportion as the price of food rises, nor fall to the extent to which food falls. Therefore in all cases the agricultural labourers are in a better state when food is low than when it is high.
Now, I hold that this duty begins nearer home, and that the landed proprietors are the parties who are responsible if the labourers have not employment. You have absolute power; there is no doubt about that. You can, if you please, legislate for the labourers, or yourselves. Whatever you may have done besides, your legislation has been adverse to the laborer, and you have no right to call upon the farmers to remedy the evils which you have caused. Will not this evil—if evil you call it—press on you more and more every year? What can you do to remedy the mischief? I only appear here now because you have proposed nothing. We all know your system of allotments, and we are all aware of its failure. What other remedy have you? For, mark you, that is worse than a plaything, if you were allowed to carry out your own views. [Hear!] Aye, it is well enough for some of you that there are wiser heads than your own to lead you, or you would be conducting yourselves into precisely the same condition in which they are in Ireland, but with this difference—this increased difficulty—that there they do manage to maintain the rights of property by the aid of the English Exchequer and 20,000 bayonets; but divide your own country into small allotments, and where would be the rights of property? What do you propose to do now? That is the question. Nothing has been brought forward this year, which I have heard, having for its object to benefit the great mass of the English population; nothing I have heard suggested which has at all tended to alleviate their condition.
You admit that the farmer’s capital is sinking from under him, and that he is in a worse state than ever. Have you distinctly provided some plan to give confidence to the farmer, to cause an influx of capital to be expended upon his land, and so bring increased employment to the labourer? How is this to be met? I can not believe you are going to make this a political game. You must set up some specific object to benefit the agricultural interest. It is well said that the last election was an agricultural triumph. There are two hundred county members sitting behind the prime minister who prove that it was so.
What, then, is your plan for this distressing state of things? That is what I want to ask you. Do not, as you have done before, quarrel with me because I have imperfectly stated my case; I have done my best, and I again ask you what you have to propose? I tell you that this “Protection,” as it has been called, is a failure. It was so when you had the prohibition up to 80s. You know the state of your farming tenantry in 1821. It was a failure when you had a protection price of 60s., for you know what was the condition of your farm tenantry in 1835. It is a failure now with your last amendment, for you have admitted and proclaimed it to us; and what is the condition of your agricultural population at this time?
I ask, what is your plan? I hope it is not a pretense—a mere political game that has been played throughout the last election, and that you have not all come up here as mere politicians. There are politicians in the House—men who look with an ambition—probably a justifiable one—to the honours of office. There may be men who—with thirty years of continuous service, having been pressed into a groove from which they can neither escape nor retreat—may be holding office, high office, maintained there probably at the expense of their present convictions which do not harmonize very well with their early opinions. I make allowances for them; but the great body of the honourable gentlemen opposite came up to this House, not as politicians, but as the farmers’ friends, and protectors of the agricultural interests. Well, what do you propose to do? You have heard the prime minister declare that, if he could restore all the protection which you have had, that protection would not benefit agriculturists. Is that your belief? If so, why not proclaim it? And if it is not your conviction, you will have falsified your mission in this House by following the right honourable baronet out into the lobby, and opposing inquiry into the condition of the very men who sent you here.
With mere politicians I have no right to expect to succeed in this motion. But I have no hesitation in telling you that, if you give me a committee of this House, I will explode the delusion of agricultural protection! I will bring forward such a mass of evidence, and give you such a preponderance of talent and of authority, that when the blue book is published and sent forth to the world, as we can now send it, by our vehicles of information, your system of protection shall not live in public opinion for two years afterward. Politicians do not want that. This cry of protection has been a very convenient handle for politicians. The cry of protection carried the counties at the last election, and politicians gained honours, emoluments, and place by it. But is that old tattered flag of protection, tarnished and torn as it is already, to be kept hoisted still in the counties for the benefit of politicians; or will you come forward honestly and fairly to inquire into this question? I can not believe that the gentry of England will be made mere drumheads to be sounded upon by a prime minister to give forth unmeaning and empty sounds, and to have no articulate voice of their own. No! You are the gentry of England who represent the counties. You are the aristocracy of England. Your fathers led our fathers; you may lead us if you will go the right way. But, altho you have retained your influence with this country longer than any other aristocracy, it has not been by opposing popular opinion, or by setting yourselves against the spirit of the age.
In other days, when the battle and the hunting-fields were the tests of manly vigor, your fathers were first and foremost there. The aristocracy of England were not like the noblesse of France, the mere minions of a court; nor were they like the hidalgos of Madrid, who dwindled into pigmies. You have been Englishmen. You have not shown a want of courage and firmness when any call has been made upon you. This is a new era. It is the age of improvement; it is the age of social advancement, not the age for war or for feudal sports. You live in a mercantile age, when the whole wealth of the world is poured into your lap. You can not have the advantages of commercial rents and feudal privileges; but you may be what you always have been, if you will identify yourselves with the spirit of the age. The English people look to the gentry and aristocracy of their country as their leaders. I, who am not one of you, have no hesitation in telling you that there is a deep-rooted, an hereditary prejudice, if I may so call it, in your favour in this country. But you never got it, and you will not keep it, by obstructing the spirit of the age. If you are indifferent to enlightened means of finding employment to your own peasantry; if you are found obstructing that advance which is calculated to knit nations more together in the bonds of peace by means of commercial intercourse; if you are found fighting against the discoveries which have almost given breath and life to material nature, and setting up yourselves as obstructives of that which destiny has decreed shall go on,—why, then, you will be the gentry of England no longer, and others will be found to take your place.
And I have no hesitation in saying that you stand just now in a very critical position. There is a wide-spread suspicion that you have been tampering with the best feelings and with the honest confidence of your constituents in this cause. Everywhere you are doubted and suspected. Read your own organs, and you will see that this is the case. Well, then, this is the time to show that you are not the mere party politicians which you are said to be. I have said that we shall be opposed in this measure by politicians; they do not want inquiry. But I ask you to go into this committee with me. I will give you a majority of county members. You shall have a majority of the Central Society in that committee. I ask you only to go into a fair inquiry as to the causes of the distress of your own population. I only ask that this matter may be fairly examined. Whether you establish my principle or yours, good will come out of the inquiry; and I do, therefore, beg and entreat the honourable independent country gentlemen of this House that they will not refuse, on this occasion, to go into a fair, a full, and an impartial inquiry.”
By Toby Baxendale, on 1 March 10
 I founded the Cobden Centre inspired by the writing of F A Hayek, particularly his reference in “Denationalization of Money: the Argument Refined” (IEA, 1976) from which the following quote is taken.
Free Money Movement
What we now need is a Free Money Movement comparable to the Free Trade Movement of the 19th century, demonstrating not merely the harm caused by acute inflation, which could justifiably be argued to be avoidable even with present institutions, but the deeper effects of producing periods of stagnation that are indeed inherent in the present monetary arrangements.
Now of course that Free Trade Movement was the movement set up by the businessman and radical social reforming liberal, Richard Cobden. Hayek knew that the original founders of that movement attacked the import tariffs or “Corn Laws” that harmed ordinary people. The Corn Laws forced the price of basic food stuffs so high that the working man was almost paying what we would pay today on our mortgages.
The legal privilege that this gave landowners to price gouge the masses at the expense of the privileged few was an outrage and the courageous corn law reformers did away with this invidious protection by repealing the Importation Act of 1815 with the Importation Act of 1846.
In Bright, J. and Thorold Rogers, J.E. (eds.) [1870](1908) Speeches on Questions of Public Policy by Richard Cobden, M.P., Vol. 1, London: T. Fisher Unwin, republished as Cobden, R. (1995), London: Routledge/Thoemmes, they cite a quote from a working man who sums up the iniquities of the Corn Laws that Richard Cobden used:
When provisions are high, the people have so much to pay for them that they have little or nothing left to buy clothes with; and when they have little to buy clothes with, there are few clothes sold; and when there are few clothes sold, there are too many to sell, they are very cheap; and when they are very cheap, there cannot be much paid for making them: and that, consequently, the manufacturing working man’s wages are reduced, the mills are shut up, business is ruined, and general distress is spread through the country. But when, as now, the working man has the said 25s. left in his pocket, he buys more clothing with it (ay, and other articles of comfort too), and that increases the demand for them, and the greater the demand…makes them rise in price, and the rising price enables the working man to get higher wages and the masters better profits. This, therefore, is the way I prove that high provisions make lower wages, and cheap provisions make higher wages.
Sir Robert Peel, who was Prime Minster at the time, was very educated in the works of Hume, Ricardo and Smith: he understood the law of comparative advantage. With a massive starving Irish population (the “potato famine”) and pressure from the likes of Cobden at home, Peel powered through the repeal of the laws. In Morley, J. (1905) The Life of Richard Cobden, 12th ed., London: T. Fisher Unwin, 985 p., republished by London: Routledge/Thoemmes (1995), Peel said in his resignation speech after the repeal had been done for the UK:
In reference to our proposing these measures, I have no wish to rob any person of the credit which is justly due to him for them. But I may say that neither the gentlemen sitting on the benches opposite, nor myself, nor the gentlemen sitting round me—I say that neither of us are the parties who are strictly entitled to the merit. There has been a combination of parties, and that combination of parties together with the influence of the Government, has led to the ultimate success of the measures. But, Sir, there is a name which ought to be associated with the success of these measures: it is not the name of the noble Lord, the member for London, neither is it my name. Sir, the name which ought to be, and which will be associated with the success of these measures is the name of a man who, acting, I believe, from pure and disinterested motives, has advocated their cause with untiring energy, and by appeals to reason, expressed by an eloquence, the more to be admired because it was unaffected and unadorned—the name which ought to be and will be associated with the success of these measures is the name of Richard Cobden. Without scruple, Sir, I attribute the success of these measures to him.
The pound Sterling has lost some 99% of its value since the suspension of commodity-backed money post World War I, as successive governments have chosen not to confront their electorates in an honest fashion and say how much all the activities they say they are doing for you to get your vote will cost you. Instead, tax receipts pick up the majority of the costs of government, but there is always a bit of debt they choose to monetize. This means printing it out of nothing or creating it electronically our of nothing, a term which today is now called QE or quantitive easing.
So, instead of a Free Money Movement, I have started what I call the “Honest Money Movement”.
Why do I use the word honest?
Well I simply use it to show that, like the iniquitous Corn Laws that our forefathers sought to destroy as they gave privilege and wealth to one minority party at the expense of the masses, governments can take everyone’s wealth to benefit them and the few who organize this wealth transfer for them, i.e. the Central Bank and its client banks in the private sector who organize bond sales and purchases. They get the new money wealth effect first, just like the aristocratic land owners of old got the excess price of corn at the expense of the masses of working people.
If honest money is demanded, a government can no longer monetize debt it has to live or fall by its tax receipts only. This means when a politician comes to you at election time with a menu saying “we are going to give you X and Y” they will now have to say, “we propose to take £A and £B from you and give £A and £B to Mr X and Mrs Y” and you can then decide the merits of this knowing what you are getting yourself involved with.
Sir Robert Peel plays another role in our story. He was the first Prime Minster to do something about the bad effects of private sector bankers issuing notes purporting to convert into gold on demand. The trouble being, just as the landed aristocrats kept corn high at the expense of the wealth of the people, so the goldsmiths issued promises to pay on demand on bits of paper that functioned as money, over the actual amount of gold in their safe keeping. This criminality was stopped by the Bank Charter Act of 1844: the original text can be seen here and the amended text, that is still in force today, can be seen here.
Unfortunately for us, there was no restriction on the creation of demand deposits. A demand deposit is where a bank creates an IOU or a bank deposit out of thin air which functions as money.
You as the deposit holder can make payments to anyone who will accept your transfer of this IOU to them. Whenever you write a cheque it is drawn on a bank deposit, whenever you make an electronic payment, you make it from a bank deposit. In Peel’s day, there were over 20 bits of paper, called promissory notes, issued by the goldsmiths of the day, to every unit of gold. When people tried to redeem in gold, there was a “panic” and bust followed the boom.
The rapid creation of bank demand deposits since then has had the same effect. I seek to encourage an amendment to the Bank Charter Act to include deposits and finish off the job that Peel so courageously started. This would stop credit-fuelled boom and bust. All booms and busts, even the South Sea Bubble and the Tulip Mania, can be traced back to credit-fuelled binges that have been created by governments. Remove this power from the governments and their proxies, the bankers, and we can have honest money, peaceful enjoyment of the fruits of our labours and the enrichment of only those who earn it.
 A starting point to advance this honest money movement is our banking reform proposal is available here. I hope you will help push for reform and end dishonest money and dishonest government.
More information
- Toby’s interview with Brian Micklethwait explores Toby’s philosophy in more detail: it can be found here.
- The staggering errors behind the policy of QE.
- In The Causes of the Economic Crisis, Mises forecasts and explains the breakdown of the German mark and the market crash of 1929: buy here or read online here (PDF).
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