Our final excerpt from Chapter 2 of Santayana’s Curse.
Continued from Timeo Danaos (et Romanos).
… this was to be the high point of Italian finance – or perhaps the better geographical metaphor would be the saddle point that separates two deep valleys – for it coincided with the long political ascendancy of those champions of deficit finance and executive vote-buying, Prime Minister Depretis and his Finance Minister Magliani. From 1884 onwards, for each of the next thirteen years, the budget was unbalanced, the trade deficit grew, the exchange rate fell, and monetary disorders compounded the fiscal ones.
As John T Flynn put it, in “As We Go Marching”, the man his enemies soon dubbed the ‘incorruptible corrupter of all’
…promised every sort of reform without regard to the contradictions among his promises. He promised to reduce taxation and increase public works. He promised greater social security and greater prosperity. When he came to power, he had no program and no settled notion of how he would redeem these pledges. His party was joined by recruits from every school of political thought. He found at his side the representatives of every kind of discontent and every organ of national salvation. The oppressed tenants along with the overworked and underpaid craftsmen of the towns crowded around him, beside the most reactionary landowners and employers, to demand, as one commentator said, the honouring of the many contradictory promissory notes he had issued on his way to office.
Living from hand to mouth to keep himself in power, seeking to placate groups of every sort, Depretis used the public funds freely. Roads, new schools, canals, post offices, public works of every sort were built with public funds obtained by borrowing.
Depretis now discovered he had got hold of a powerful political weapon…. Deputies could be bought. But Depretis found that instead of buying the deputies he could buy their constituents. Every district wanted some kind of money grants for schools, post offices, roads, farm aid. The Premier found that he could buy the favour of the constituency by spending public money in the district. The deputy had to prove to his people that he was sufficiently in the favour of the Premier to bring such grants to them. The philanthropic state was now erected in Italy and it was never to be dismantled.
The 1929 edition of the Encyclopaedia Britannica delivered this terse, yet damning verdict on a joint reign which showed the way for every New Deal, Great Society, Solidarity Fund, and stimulus package ever since:-
In their anxiety to remain in office Depretis and the finance minister, Magliani, never hesitated to mortgage the financial future of their country. No concession could be denied to deputies, or groups of deputies, whose support was indispensable to the life of the cabinet, nor, under such conditions, was it possible to place any effective check upon administrative abuses in which politicians or their electors were interested.
But if the infant Italy – already showing the way for a later dealer in men’s souls, Benito Mussolini – posed great problems to the LMU, let us not overlook the turmoil associated with Greece, either.
As Parker-Wills wrote of that nation’s inclusion in the scheme:-
It is hard to see why the admission of Greece… should have been desired or allowed by that body. In no sense was she a desirable member of the league. Economically unsound, convulsed by political struggles, and financially rotten, her condition was pitiable. Struggling with a burden of debt, Greece was also endeavouring to maintain in circulation a large amount of inconvertible paper. She was not territorially a desirable adjunct to the Latin Union, and her commercial and financial importance was small. Nevertheless her nominal admission was secured, and we may credit the obscure political influences… with being able to effect what economic and financial considerations could not. Certainly it would be hard to understand on what other grounds her membership was attained.
A century later, Sophia Lazaretou set out the background to the problem in her 2002 treatise, published by the Bank of Greece itself, entitled ‘Adventures of the Drachma’:-
Beginning in the mid-1870s, political instability in Greece led to an increase of fiscal deficits. The segmentation of the Parliament into many small political parties and the short-lived governments caused a loss of revenues due to the laxity in tax collection and an increase in expenditure due to the numerous dismissals and transfers of civil servants that accompanied each change of government. None of the 19th century governments dared to undertake a budget reform, namely to improve the tax collection system and raise revenues from income taxes. Public expenditures – overwhelming government consumption – were financed by domestic borrowing… resulting in an excessive burdening of the budget during the second half of the 1870s.
As she went on to relate, the analogy was further reinforced a decade later when all-too compliant foreign lenders became the primary source of funds and Prime Minister Harilaos Trikoupis took the opportunity to embark upon an ambitious programme of infrastructure-led modernisation, principally involving those old dirigiste favourites – railways, canals, and commercial real estate:-
During this period, the Greek governments were able to raise foreign loans on favourable terms for the implementation of infrastructure projects… From 1889 and onwards, foreign creditors willingly provided the Greek governments with long-term loans with small or no pledges and at a low interest rate… Nevertheless, the high level of primary expenditures and, more importantly, of expenditures for the repayment of the outstanding domestic debt, and their financing through foreign borrowing, created high interest payments, which perpetuated fiscal deficits.
But alas, problems elsewhere in the world soon rudely interrupted this reverie as contagion spread from Portugal’s bankruptcy and the storm associated with the Argentina-related Baring’s Crisis. Faced with a cessation of the further flow of foreign finance and hit by the collapse of its surprisingly important export trade in Corinthian currants, Greece suspended external debt service in December 1893 with Trikoupis’ resonant announcement, “Regretfully, we are bankrupt.” In the aftermath of her military defeat by Turkey four years later, the exhausted country – its debt now quoted at today’s standard ‘distress level’ of 1,000 bps over the benchmark British Consols – was forced to submit to the indignity of allowing an International Committee for Greek Debt Management to dictate all aspects of economic policy.
However, far from being the sort of disaster we are so widely admonished against bringing about in our contemporary flounderers, the ensuing fiscal austerity and monetary deflation in fact marked a return to prosperity as competitiveness increased, entrepreneurial calculation was facilitated, savers were reassured, and foreign capital was encouraged to venture back. An export boom soon led to renewed domestic growth and the development of new industries (especially the shipping trade for which the country is still so renowned today).
One of the abiding themes here is that the tangled web woven by politicians when they choose to impose top-down solutions to their citizens’ need for a reliable medium of exchange opens up a field both fertile with honest error and fraught with conflicts of interest (such as the desire for seigniorage income and the recourse to manipulation of the currency either as a mercantilist tool, to force-feed industrial development, or to gull the state’s creditors).
Another is the habitual intemperance of a populist executive when its spending habits are not severely trammelled about with meaningful financial, political, or moral restrictions. The road to office, too, is paved with good intentions and the bill for the tarmac and ballast which went into building it is all too often written on a posteriority – and, ideally for the office-holders, a posterity – to whom its presentation for payment can often be delayed but never indefinitely postponed.
Though it has done little to lessen the regularity of the recurrence of such failings, the fact of their long-held appreciation can be demonstrated in the words of two former statesmen who, if hardly innocent themselves of all manner of enormities, at least understood the fatal juxtaposition of the temptations of power and the control of the purse.
After realising that he had been supplanted in the counsel of his master, Louis XIV, by the war minister Louvois, Colbert soon learned that the latter had persuaded the King to borrow the monies needed to meet his vast expenditures. The great finance minister fulminated at his rival, thus:
You are triumphant! Do you not suppose that I knew as well as you that the King could raise money by borrowing? No, I advised him against it. Well, now we have started the game, just wait and see. The king will increase his extravagance and you will have to raise taxes to pay the interest. If the loans have no limit, neither will the taxes.
More than 100 years later, seared in the holocaust unleashed by the hyperinflation of the Revolutionary assignats, the role model of the present occupant of the Élysée palace, Bonaparte himself, exclaimed at his first cabinet council:-
National debt is immoral and destructive, silently undermining the basis of the state; it delivers the present generation to the execration of the next. I will pay cash, or I will pay nothing.
Santayana’s Curse is now available for Kindle.