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VOLTAIRE'S BASTARDS -- THE DICTATORSHIP OF REASON IN THE WEST |
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17. The Miracle of the Loaves Inflation has always meant flatulence. The seventeenth century expanded the meaning of the word, beyond the blowing up with and expelling of gas, to include such attitudinal derivatives as bombast and pomposity. It was only in the 1860s that inflation focused itself on economic phenomena. This was not brought on by a revolution in the world of finance. Money has always been like a gas, which alternately rose and fell, poisoned and induced Rowers, was opaque and then clear, sweet-smelling, then noxious. With hindsight, the nineteenth-century clarification that uncontrolled money was nothing more than uncontrolled farting therefore made perfect sense. From that moment on it became almost impossible to confuse inflation with growth. And yet, that is precisely what businessmen, economists and bankers have insisted upon doing over the last thirty years. Just as our structures and elites prefer corporate manipulation to real production, so financial manipulation comes more naturally to them than the creation of new capital. The result has been the gradual conversion of our economies into myriad new forms of inflation, most of which are not measured by our many measuring institutes. Much of current economic argument turns upon levels of measured inflation which reflect the small potatoes of national economies. They do not reflect what is really happening. And so to all appearances, we do not inflate. Instead, behind an insistent discourse about sophisticated populations, postindustrial economies, postentrepreneurial corporations and service industries, we create offshore funds and uncontrollable offshore currencies, such as the Eurodollar, which grow according to their own logic. We run virtually uncontrolled money markets within our own borders. We permit highly leveraged buyouts. We allow takeovers to be financed by the privately initiated printing of money against the value of the target company's assets. We create false capital through the providing of imaginary ser vices, particularly that of selling arms. We allow the uncontrolled printing of money through such devices as credit cards. We allow banks to service their bad debts through the issuing of new shares, thus permitting the public exchanges to be used not to increase capital through debt, but to cover disintegrating capital through more debt. The list of monetary devices is endless. Most economists would protest that while these activities mayor may not add to the atmosphere which creates inflation, they are not in themselves inflation. They think that if you want to know what is happening to the economy, you can limit yourself to the consumer price index or the GNP price index or other highly specific indexes. But if these are sufficient, then why can we no longer have growth without an immediate explosion in measured inflation? The answer is that we are not experiencing real growth. And why do we have increasing prosperity at one end of society with increasing poverty at the other? Because the creation of wealth is now dependent on financial manipulation by a small percentage of the population and not on production by an integrated society. And why are we constantly being told that a fall in general standards of public service and/or standards of living is now essential to economic well-being? Because financial manipulation creates profits but adds nothing real to the economic wealth of the society. These abstract methods are so widespread and sophisticated that, as in the 1980s, they can create the impression of general prosperity when the reality is one of continued decay in both economic and social infrastructures. Our elites seem often to be the most perplexed by the inability of their systems to create real wealth. But, then, they are themselves the product of the rational system and not its creators. They therefore live in the profound expectation that their methods will work. Their isolation from reality is such that they believe their systems can produce growth where in the past only inflation has grown. *** "We are money-makers, not thing-makers," Jim Slater, English merchant banker and the father of modern inflation, declared two decades ago, not long before he crashed, bringing down banks and corporations with him. Along with others like Sir Arnold Weinstock and Lord Stokes, he had declared himself to be a. force of modernization and efficiency, a claim which had been accepted as truth by the British financial establishment. [1] Slater had been trained as a company accountant. He had a natural talent for stock market manipulation. In 1964 he created Slater, Walker Securities and set about buying companies priced below the value of their property and parts, carving them up and selling off everything concrete until only a shell remained. He and his imitators had soon destroyed hundreds of integrated engineering and production corporations because these could easily be sold off for cash. And cash could then be played with. They were engaged in the dismantling of the British economy for personal profit and pleasure through inflationary financial manipulation. Slater claimed that he was releasing productive elements caught up in hidebound conglomerates. In fact, studies of industrial reorganization in that period show that there was no benefit to the "released" companies. Slater, Walker rose to fame in part by continual lending or investing of its own money in one or another of its own companies, thus manipulating their share values. Jim Slater -- young, slim and engaging - was soon considered to be "the greatest financial wizard the City had ever known." [2] In 1969 he began to sell off his assets -- to deconglomeratize. He announced that cash was the "optimum investment" and turned his attention to areas more directly related to cash -- property speculation, financial management and investments in Hong Kong. This cash religion encouraged other banks to overextend themselves, pumped up property speculation and drove corporations to a point where 27.5 percent of their net cash flow was going out in interest payments. And yet that terrible figure was still 5 percent lower than the 32 percent currently being paid out by American corporations to cover their debts. Nevertheless, it was an unheard-of level for the times and, when the first crash came in 1973, the unconventional inflation of the British economy meant that it was harder hit than most. Even Jim Slater's wizardry couldn't maintain the illusion of his own empire. He chopped and changed through 1974 and 1975, only to be left with almost valueless remains. His operations were subject to a multitude of investigations, all of which could easily have been carried out years before when he was apparently successful. In late 1975 he was forced out of his own company, a discredited man, and the pieces were picked up by another market player, Jimmy Goldsmith. Some time passed before the British and other Western governments realized that they were failing to escape from their generalized state of depression. The habitual correctional devices weren't working. Their reaction to this failure resembled that of a manic depressive. That is, they began a long crusade against classic inflation; driving up interest rates and thus killing real investment; driving up unemployment and thus putting a strain on social services. This crusade went on and on. We are still on it. Somehow, no matter how Draconian the measures taken, we never manage to cut off the inflationary fat, clearing the way for healthy, noninflationary growth. In absolute contradiction to this depressive anti-inflationary crusade, we went on a parallel. manic financial binge. Consciously or unconsciously, we began to lift restrictions and to lower standards throughout the financial sector, thus freeing the profound forces of inflation. Of course, no one was permitted to play directly with the traditional governmental inflationary control tool -- money supply. This and the area of wage and price increases were roped off, so to speak, and kept under obsessional public scrutiny. Social justice, economic growth, the fear of nuclear war and various other themes retreated into the background as the West hovered over the monthly, weekly, sometimes daily, movements of inflationary charts. A tenth of a percentage movement up or down could cause a generalized shudder. Public life seemed to have been reduced to statistics. Elections were fought over fractions. Meanwhile, every other potentially inflationary area was gradually being opened to marketplace manipulation. General economic activity was drawn towards the financial sector by this explosion in ever-less-regulated activities. Inventiveness concentrated itself n the creation of new, immeasurable financial abstractions -- abstractions built upon abstractions -- forms and levels of leverage which made the standards of 1929 seem almost responsible by comparison. By the mid-1980s -- even before the Big Bang -- the annual value of transactions in the London financial market was $75 trillion a year. That is more than twenty-five times. the total value of world trade, which was $2.84 trillion in 1988. Foreign exchange speculation in major world centres was $35 trillion a year -- twelve times the total value of world trade. These transactions represent no concrete activity. They are multiplications of paper which have no beneficial effect on economic activity. Thus, the City in London may prosper and cohabit quite happily with general economic depression in the rest of Britain. The degree to which governments have become addicted to the easy pleasures of this speculation could be seen in Britain's reluctance to put the pound into the European Snake, and indeed into the European Monetary System, both of which are attempts to develop monetary stability in a large but realistically manageable geographic area. [3] The official British argument against participation has been that the Snake might limit the government's ability to set policies appropriate for competition at home and in the world. One of the unspoken reasons was that membership in the Snake might eventually limit the City's ability to speculate in currencies. The gradual conversion of the City to the Snake came as they realized that speculation would not be limited. In this context the traditional definitions of bank exposure no longer mean very much. Writing in 1873, Walter Bagehot said of reserves: "The amount of that cash is so exceedingly small that a bystander almost trembles when he compares its minuteness with the immensity of the credit which rests upon it." [4] Bagehot's minuteness would seem enormous today. For example, in the mid-1980s, the American merchant bank Lehman Brothers had a capital base of $270 million. It had a daily exposure of $10 billion. This floating speculation in bonds and securities is done by numbers men on computers. Convention calls them bankers, but they are merely technicians, whose training resembles that of a clerk and whose talents parallel that of a racetrack bookie. They have no experience away from their screens; no understanding of the industrial activity the illuminated numbers represent. Worse still, they have neither responsibility for nor a sense of the effect that their enormous transactions might have on society as a whole. As early as 1984 men such as this were trading $4.1 trillion in a single New York merchant bank, First Boston Corporation. That was more than the total American GNP. The golden word which has permitted all of this is deregulation. The United States followed by the entire West, has raised this flag in the name of the spirit of initiative. There is no doubt that a half century of administrative structure building -- aimed at repairing the injustice, instability and damages created by nineteenth- and early-twentieth-century free markets -- had gone too far in certain areas. But the reaction to this overregulation has borne no relationship to the real problem at hand. The result has been the return of antisocial freedom: the freedom to act irresponsibly, to speculate and profiteer, not just over stocks but over money itself. The problem does not lie only with specific fashions, which may be short-lived, from currency swaps, junk bonds, financial futures and options to stock index futures (which require a down payment of only 6 percent), leveraged buyouts and over-the-counter equities, whose real value is unclear and thus open to speculation and arbitrage. Nor are these fashions as short-lived as they sometimes appear. In an economy so distanced from reality, forms of speculation no longer disappear simply because they have been exposed as of dubious value. For example, junk bonds have gone on after their disasters of the late 1980s and now represent more than a quarter of all corporate bonds rated by Moody's. Nor are these dangerous phenomena limited to the United States. Japanese regulations permit leverage based on 5 percent. British corporate debt has risen from £10 billion just before the first crash in 1973 to £53 billion billion in 1988. One might suspect that this was a creation of the inflation-infected 1970s. But official inflation seemed neither to encourage nor to discourage corporate debt. Things got even further out of control during the 1980s. The whole process was fed by minor finance companies, which under stricter regulations would be considered marginal, if not criminal. With deregulation they became banks. And the large deposit banks, seeing the enormous paper profits made by these little speculators, leaped down into the gutter to play the same game. The overall picture is what Keynes would have called a Casino society. [5] And that is now one of the determining activities of our economies. The truth is that annual growth in the U.S. economy after inflation has steadily shrunk as deregulation has proceeded: 4.2 percent during the 1960s, 3.1 percent during the crisis-ridden 1970s, and 2.1 percent during the theoretically prosperous 1980s. In Canada, despite its wide and solid social protection net, the number of people living in poverty grew in this period of deregulation from 14.7 percent in 1981 to 17.3 percent by 1985 and continues to grow. [6] On Wall Street, on April 24, 1987, a rock band appeared on the floor of the American Stock Exchange to excite brokers with its music. The Hard Rock Cafe restaurant franchise was going public. The appearance of that band on the trading floor symbolized the service- industry mind, the, role of hype in a deregulated marketplace and the idiotic joy which always appears in moments of economic anarchy. What is consistently fascinating at such moments is the self-contained, self-absorption which comes over first traders, then businessmen, then the public and their government. Everyone starts to believe that what is happening is real. Speculation is transformed by a wand into investment and investment is safe. But most incredible of all is the abrupt illumination that money is something, when everyone knows perfectly well that it is just a notion, not even an abstraction, because we are unable to agree permanently what it is an abstraction of. The best we have done is to find workable arrangements. This seems to work most successfully and for the longest period of time when there is some conservative relationship between real labour/resources/products and the quantity of money available. Within those limits a reasonable Keynesian and a reasonable monetarist are not very far apart. But people have difficulty remaining reasonable over, abstractions. Instead they get so used to their arbitrary definition of the abstraction of money that they decide it is both real and absolute. Our particular difficulties rise out of reason's natural preference for abstraction over reality. The result is quite revolutionary. We have formalized speculation into a rational system. And yet, if there is one lesson hi history, it is that inflation and depression follow on the heels of an economy which gives itself over to speculation, particularly speculation on debt. Contemporary monetarism, despite its narrow obsession with money supply and classic inflation, has produced the greatest debt levels of modern history, accompanied by onerous or impossible burdens of interest. Odder still, while the monetarists remain obsessed with the state's indebtedness, they are indifferent to unprecedented corporate and personal debt levels. In fact, the corporations are more strapped than governments by their interest payments. Interest, whether paid by governments or companies, is a basic form of inflation; but governments retain other mechanisms, such as law and regulation, for encouraging economic activity. While the British government is myopically paying out its debt, the British citizenry, for the first time in history, is spending more than it receives. Its debt load has doubled over the last six years. In the absence of real growth, corporations and individuals can only hope to repay these debts through continued inflation. Or they can default. The level of both corporate and personal bankruptcies continues to grow throughout the West, reaching historic levels each year. Now, in the early 1990s, it is three to four times higher than it was in the early seventies. The Third World debt load is part of this same process. Rarely has there been a financial obligation more evocative of the inflationary spiral built by level upon level of debt. The process of its creation is worth repeating. The United States pushed the oil states -- principally Iran -- towards unnecessary consumption, much of it military. Iran pushed OPEC for oil price increases in order to pay for its consumption. The West then printed money to pay for the oil. The oil states had to send that money back to the West to pay for goods, in large part service-industry goods, particularly arms, and to deposit it in a safe place. The Western banks then owed this money to the producers, principally the Iranians and the Arabs. And as it was on deposit, they also owed them interest. The Western economies being stagnant, because of the oil price rise and the resulting paper money inflation, the banks found it handy to lend part of their enormous new deposits out to the Third World. The theory was that so much cash. would speed development, thus creating a new market for unwanted Western goods. This didn't help the developing countries, however, because their economies had been paralysed by the same oil price increases, as well as by the decline in commodity prices caused by the collapse of Western economies. So the banks lent them more money to support the original loans. The more the West lent, the less the Third World could pay back. As it now stands, many of them cannot even service the debt without bankrupting themselves, causing civil disorder and destroying what little social stability they have. Clearly the money is lost. However, our governments and banks have now spent a decade twisting and turning, forcing the debtors through stricter economic hoops than any Western country has imposed on itself. And when this produced no repayment, but instead exacerbated local poverty and suffering, our solution was to lend yet more money, thereby creating yet more unpayable debt. We then began forgiving a few hundred million here, writing down a few more there, rescheduling anything that seems on the verge of becoming what it actually is -- a bad debt. One international conference has followed another as we have attempted to maintain the illusion of viable loans. When James Brady, the American secretary of the treasury, proposed an integrated plan for dealing with the situation, there was a sigh of relief in sensible quarters and anger in much of the banking community. But the Brady plan didn't even go halfway towards dealing with the problem. It was a quarter step in muffled boots. The publicity surrounding these debt-restructuring plans is such that people tend to imagine the problem is now being dealt with. In fact, the Third World debt did not shrink and indeed continues to grow. The fear rational structures have of recognizing reality, calling it reality in open, public terms and dealing with it as reality is so deep set that even steps in the right direction must be disguised as something else. Were any citizens to settle down and listen to what our economic spokesmen are actually saying about the Third World debt, they would be astonished. The only possible conclusion they could draw is that our structures and/or our elites are mythomaniacs. That is, they are compulsive mythologizers. But this need to describe reality other than as it is -- that is, to lie compulsively -- is merely a facet of the rational conviction that man can and will change circumstances to suit his own plan. The more abstract our economies, the easier it is to believe that imaginary financial situations can be endlessly manipulated. There is, however, nothing in history to prove that this is so. *** During the sixth century B.C., the people of Athens fell slowly into troubled times. The City was dominated by the Eupatridae, the aristocracy of birth, who controlled the government, owned most of the land and used its power to drive the poorer fanners into debt during bad seasons. The Eupatridae acted as bankers. When the farmers were unable to meet the interest payments on their debts, they were reduced to the state of serfs on what had been their own land. Some were sold into slavery. A serf or a slave was, needless to say, no longer an Athenian citizen. This debt situation spun further and further out of control. Faced by an impossible division between rich and poor, resulting in economic instability and the risk of revolution, the desperate Athenians called Solon into public office and gave him full powers. Twenty years earlier, he had already served as archon -- the annual chief ruler. He was also Athens's leading poet. He used his poetry to set examples and to create political drive. His message was constant: moderation and reform. He was as opposed to revolution as he was to tyranny. This sense of moderation is important to understand in light of what followed. Already the unpayable debts and the growing inequalities had pushed him to write:
The atmosphere in which he took power was not so very different from the one we know today. The same manic-depressive mood layover the society, The Draconian financial/legal policies of the depressive rulers were based on Draco's original legal code. The manic counterweight revolved around the uncontrolled activities of the rich. Solon's first act on taking power was to redeem all the forfeited land and to free all the enslaved citizens. This he did by fiat. That is to say, he legislated immediate default. The Athenians called it the "shaking off of burdens," but in practical terms what he had done amounted simply to ripping up the debt papers. In his own words, he had
Having released both the people and the nation from their paper chains, he was able to reestablish the social balance. From there he went on to create a code of fair laws (in place of Draco's) and to lay the foundation for a democratic constitution. Athens immediately began its rise to glory, spewing out ideas, theatre, sculpture and architecture, democratic concepts and concrete riches. All this eventually became the foundation of Roman and indeed of Western civilization. Today we cannot move a step without some conscious or unconscious tribute to the genius of Solon and of Athens -- a genius unleashed by defaulting on debts. Henri IV was probably the greatest king of France. His road to the throne was long and expensive, Winding as it did through a civil war which raged across the country. When he was finally upon it in 1600, the country lay in ruins and the government in debt to the amount of 348 million livres -- a colossal sum for the time. Henri's chief minister was Sully, who to this day is considered one of the finest and most careful of public servants. He first refused to pay the interest on the debt. Then he negotiated the rates down from those originally agreed. He refused to meet the payment schedules. One way and another, he as good as defaulted. Within a decade he and Henri had rebuilt France. In 1789 Jefferson wrote from Pads to James Madison about the principle of debt, applying common sense to reality. Today names such as Brazil or Peru could be substituted for that of eighteenth-century France.
Throughout the nineteenth century. the loans which financed large American capital investment programs, mounted by private consortia, were continually defaulted on. The history of the American railroads is a history of default. More specifically, the history of American capitalism is one of default. This happened in a spectacular manner during the Panics of 1837, 1857, 1873, 1892-93 and 1907. None of this reneging happened in the civilized manner organized by a Solon or a Sully. Rather it involved a panic and a crash. which created massive bankruptcies. which in turn wiped out massive debts. Because of the disordered way in which each ripping up of obligations came, the result was always a short period of Widespread depression before the cleansed economy took off again with renewed force. In the Panic of 1892-93 alone, four thousand banks and fourteen thousand commercial enterprises collapsed. In other words. the nonpayment of its debts was central to the construction of the United States. The difference between Henri IV and the American railway crashes is one of method. not content. The great depressions of the last hundred and fifty years can be seen as the default mechanisms of middle-class societies. Depressions free the citizens by making the paper worthless. The method was and is awkward and painful, particularly for the poor. but it destroys the paper chains and permits a new equilibrium to be built out of the pain and disorder of collapse. One of the most surprising innovations of the late twentieth century has been not only the rationalization of speculation but, beyond that, the attachment of moral value, with vaguely religious origins, to the repayment of debts. This probably has something to do with the insertion of God as an official supporter of capitalism and democracy. There is a tendency to assume that the German thinker Max Weber made sense of all that in the early years of the twentieth century with such books as The Protestant Ethic and the Spirit of Capitalism. Weber described the rise of capitalism as both an initiator and then a product of the Reformation. The result was the bourgeois businessman who, "as long as he remained within the bounds of formal correctness, as long as his moral conduct was spotless and the use to which he put his wealth was not objectionable, could follow his pecuniary interests as he would and feel that he was fulfilling his duty in doing so." But Weber also pointed out that the success of capitalism led to an abandonment of Christian values and became "the pursuit of wealth, stripped of its religious and ethical meaning." He described the resulting high capitalism as a mundane passion resembling sport. What's more, he specifically exempted the "usurers, military contractors, traders in offices, tax farmers, large merchants and financial magnates" [8] from his Protestant-capitalist theory. The simple truth is that the collecting of interest on debts contradicts the entire history of Christian doctrine. It is not a matter of fair versus unfair interest rates, To lend money for profit was and remains a basic venal sin, In this sin of' usury it is the lender who is in the wrong, The borrower has weakened in a moment of need and the lender is exploiting his weakness, This theme has reappeared constantly throughout history to justify not only default but often the confiscation of the lender's goods and sometimes his life. Christianity was by no means alone in its attachment of sin to lending. The moneylender was most definitely not on the fast Buddhist track to nirvana. Muslim lenders, at least in theory, were risking death. And it was clearly laid out in the Torah that Jews should not charge other Jews interest. [9] European anti-Semitism was often rationalized by the immoral status of lending. But Jewish banking power was largely a self-fulfilling prophesy for Catholic states. In some cases Jews were forbidden any other occupation, By borrowing from individuals unprotected by the official racial or religious organization, it was all the easier for Christians to default. A little religious excitement would do the trick. Or a periodic pogrom. Or simply, in the case of kings, a refusal to pay, leaving the Jewish lender with no legal recourse. By organizing European society so that Christians could borrow from Jews, the Christians avoided contravening Catholic law. And the Jews, by lending to Christians, were not in contravention of their own religious laws. In other words, both sides were avoiding divine retribution by means of a technicality. Of course, base anti-Semitism was attached to all this and it cannot be ignored. However, the list of unrepaid, jailed, exiled and hanged Catholic and Protestant lenders is so long that the default syndrome must also be looked at quite apart from religious and racial prejudice, The stark fact is that financiers have never had a respectable status in Western society; neither in its Christian nor its capitalist period. Bankers were never integrated as a class of worthy citizens along with burghers, merchants and capitalists. They were never considered to be making a contribution to the social fabric. Interest paid them was always believed to be money for nothing and therefore both immoral and inflationary in the most basic sense. They have always lived on the margins of the law and of society. From time to time individual bankers were swept up into the mainstream and won power and glory. But the moment they were no longer useful, they were flung back into the gutter. Jacques Coeur, for example, rose through the tax-farm system in Bourges in central France early in the fifteenth century. Speculation made him still richer and he put himself in the service of King Charles VII. Gradually he combined his Europe-wide financial empire with official functions -- Minister of Finance, Royal Counselor, diplomatic negotiator. He financed the King's conquest of Normandy in 1450-51. Eventually the King and the great nobles were deeply in debt to him. He was conveniently charged with the murder of the King's mistress, Agnes Sorel and imprisoned although cleared. He managed to escape to Rome. In 1716 a Scottish monetary theorist was given permission to tryout his paper money system in France. The government was heavily in debt and John Law's inflationary method promised to solve its problem. By 1718 he dominated the royal treasury and the financial-markets through a spiraling international speculation which was built upon the imaginary development of a colony in Louisiana. The frenzy reached its apogee early in 1720, then collapsed, forcing Law to flee. He died penniless in Venice. Very little changed over the years. In 1893 Emile Zola published his novel Money, in which he illustrated the methods of the financial markets and the moral opprobrium which fell upon the bankers of the day. His central character was a banker-promoter, Monsieur Saccard, who specialized in running up stocks which were issued on the basis of theoretical developments elsewhere -- in this case, the Middle East. Because of the facility with which he makes money, he is the star of the financial world. As Zola points out: "what's the point in taking thirty years of your life to earn a miserable million francs, when in an hour, by a simple investment on the Exchange, you can put it in your pocket? ... You become disgusted by honest savings, you even lose all sense of value." [10] Although Saccard's promotion eventually collapses, ruining hundreds of people, he simply begins again. People like Zola's banker-promoter were often very rich, but no one really wanted to know them or know too much about them. They were speculators, marginal, nonproductive but always tempting. Our contemporary investment bankers -- whom we celebrate as pillars of society and bastions of capitalism -- are Monsieur Saccard's successors. The emergence of the banker and speculator at the top of our list of worthy citizens is perfectly rational. When a well-tailored, responsible-sounding vice president of a deposit bank makes an appearance, this general social promotion of money lenders seems to make sense because he is an executive employee, a technocrat and an expert. The reassuring sounds he makes cause the observer to forget the historic and indeed actual implications of treating him with such awe. It is far easier for the citizen to focus sensibly on those bankers who are still kept on the margins of society. At the mention of the name T. Boone Pickens, for example, the citizen can easily say to himself, "Now this is a speculator." But this speculator is supported by the most respectable New York investment banks -- by precisely those well-tailored, responsible-sounding bankers who produce awe and respect wherever they go. And yet Pickens is, if anything, a more doubtful figure than the Monsieur Saccard of Zola's story. The respectable bankers are embarrassed by his crudeness and yet annoyed to find themselves mere followers in his financial games. The result is that they have taken up his methods while being careful to remain clothed in their own respectable appearance. *** The new respectability of bankers has added weight to the argument that paying debts is a moral obligation. And yet it is hard to forget that whenever a society has defaulted on a crippling debt, its economy has been the better for it -- sometimes so much so that, as in the Athenian or American case, the whole fabric of the society was catapulted into growth and creativity. The Third World debt crisis is a prime example of economic common sense in conflict with structural morality. Since the early 1980s, people as varied as the former New Zealand Conservative Prime Minister Robert Muldoon and the British Socialist economist Lord Lever have been calling for what amounts to a general default on the debt. [11] Their point was that it would be far better' to do it fast and to clear away the paper chains than to go on constructing elaborate mazes of new paper, which have all the disadvantages of a default and none of the advantages. The new paper syndrome simply drains the energies of both the debtor and the lender countries for the sole purpose of protecting an illusion. No doubt the deed would already be done if our general deposit banks had not attempted to hide their original error by throwing the money of their small and medium depositors after that of the artificial oil profits. Besides, the general rise of debt and deficits has created an unspoken fear -- that ripping up the Third World notes might destroy the sense of moral obligation other debtors feel towards other debts. The Third World's paper obligations are, after all, only the leading edge of a Western civilization dependent, as it has never been in the past, on debt manipulation rather than industrial production for economic survival. Right behind the nations of Africa and Asia are those of Central Europe, to say nothing of the Western governments themselves, the corporate world and even the individual citizens, all of them more or less chained up by their paper obligations. In fact, the sum which is destroying Third World societies isn't really very significant by Western standards. At $1.2 trillion, the entire Third World debt is less than the annual U.S. government budget. The London financial markets, it is worth repeating, do $75 trillion worth of transactions per year. If the paper were ripped up today, without any agreement among the parties, the banks would have a bad year, but they wouldn't go bankrupt. In fact, the smarter banks have already written down some of the amounts they are owed. One of the things which stops us from doing it, with or without agreement, is the peculiar morality that public and private structures have arbitrarily welded onto the act of debt repayment. Tawney, in Religion and the Rise of Capitalism, pointed out that however badly medieval man did behave, he did so in a context which insisted upon his duty to alleviate the poverty of others and in full knowledge that the accumulation of riches was endangering his soul. The rise of the work ethic out of the Reformation changed all this, equating poverty with laziness and wealth with the idea of just rewards for hard work. [12] What followed was the unprecedented mistreatment of a large segment of society by a small segment. This social disorder was itself followed by the slow reintegration of the morality of social responsibility into Western society -- that is, into the new nation-states. It was as if general common sense had extracted in extremis the best from the defunct medieval contract and then set about forcing it upon the new rational structures which were rapidly taking form. Our current attitudes towards debt confirm that we have moved on to yet another stage. Now social morality is subordinated to the efficient functioning of the system. In this stage the social contract is subordinated to the financial contract. The idea of morality has been so deformed that it is used as a simile for the efficient functioning of systems and, therefore, as a simile for the respecting of contracted debts. The result is that we are unable to use our common sense to weigh the poverty and suffering created by the debt against the relatively limited impact on the system of a default. And so, each time Mexico was considered unofficially bankrupt because of its inability to meet the interest payments on its debt, we felt obliged to offer a series of huge new loans. These were not designed to relaunch the Mexican economy. They were merely papers aimed at financing the Mexicans to pay the interest on the other papers which they already owed us. The advantage to Mexico was nil; to our banks, probably less than nil in the long term, because yet more unpayable debts were being created; to our society, certainly a lot less than nil, because it locked us further into a maze of artificial financial limits. And when a new Venezuelan government came to power in 1989 in an atmosphere of general hemispheric enthusiasm, the first Western act was to force an austerity program upon the President, with the intent of ensuring responsible debtor attitudes. When this program led to rioting and deaths, the reaction was twofold. First, American Secretary of the Treasury Brady proposed his quarter-step restructuring plan. The effect of this slow, negative process was to worsen the agony instead of resolving the problem: The Venezuelans themselves initiated a desperate conversion program. This involved giving ownership in parts of their national patrimony in return for cancelling the paper obligations. The program bears an eerie resemblance to Thomas Jefferson's "unnatural" scenario, in which insolvent debtor Frenchmen would have to abandon their country to lender Dutchmen. Crises such as these are repeating themselves throughout the Third World. As the realization of the de facto default gradually sinks into the slow, slow minds of the financial and economist communities, a curious response emerges. The Third World, they say, should stop blaming the Western bankers for its problems. The real problem is the absence of capitalism in its countries. The real culprits are therefore governments of the Right and the Left that try to direct their national economies. Of course, there is some truth in this. Throughout the Third World there is room for the releasing of responsible capitalism. But far more important are responsible agricultural programs which would encourage peasants to leave their hopeless urban slums and return to the land. In any case, responsible capitalism is not what most of the financiers and economists have in mind. Their imaginations are filled with the releasing of pent-up market forces. What they want is an industrial revolution which, like that of the West, must necessarily pass through the ugly, uncontrolled first period in which new industrial infrastructures are matched by social disruption and suffering -- in other words, low wages, no job security and no environmental or safety regulations. No one puts it quite that way, but this is assumed in the argument. However, there is no relationship between the unleashing of capitalism and the unpayable debts. There was a relationship in their creation. The original debts were incurred in an attempt to industrialize the Third World through the unleashing of capital. The World Bank and Robert McNamara led the way, followed enthusiastically by the banking and economist communities. But the attempt failed and the debts then became the barrier to future economic activity, particularly capitalist activity. The debts came to represent the victory of rational paper illusions over real activity. The problem is not the refusal of governments to unleash capitalist forces. The problem is the impossibility of breathing life into these countries so long as the unpayable debts remain in place. By confusing the continued smooth functioning of systems on the one hand with moral values on the other, our society loses its ability to examine and judge whether each structure has any useful value. The practical effect of our hypnotized state is to leave moneylenders in charge of the economic and social agenda. The Third World debt is only a slice of this problem. The way we look at inflation and corporate financing is determined by the same confusion. Even government debt could be looked at in a different way and perhaps dealt with in a different manner if the nature of debt and of interest payments were examined dispassionately. If the importance of debt is reduced to its use as an abstract enabling device, then paper inflation, interest and repayment can be handled in a practical manner. *** The hypnotic effect this uncontrolled paper economy has had can be seen in the world of corporate acquisitions. From the farthest margins of legality, a new kind of acquisitor advanced onto the respectable public stage in the early eighties. These men could be seen as a second generation of Jim Slaters. But when you examine a T. Boone Pickens, an Ivan Boesky, a Paul Bilzerian or a Henry Kravis, you realize that, while their technical skills are more sophisticated than those of the original corporate raiders, their intentions and social standards are actually far cruder. They seem to have evolved backwards, resembling, if anything, characters out of Zola. Their equivalents exist throughout the West, all united by a belief that capitalism is a paper transaction. They could be called the new inflationists. That society has accepted them so naturally seems to confirm our decision to normalize speculation as the leading edge of capitalism. And there can be no doubt that we have accepted. As early as 1983, for example, Pickens's epic run at Gulf Oil was backed by America's largest bank holding company, CitiCorp. [13] That attempted takeover was played out like a parable of modern economics. On one side there was Gulf, the fifth largest American oil company, widely considered by the business community to be the perfect manager's operation. However, its return on capital for the preceding five years had been the lowest of the fourteen major U.S. oil companies; its dividend growth the slowest. And it had a lamentable record when it came to discovering new American oil. The lethargy of the directionless, self-justifying, risk-fearing managers had finally become so great that they had stumbled into financial trouble and woken themselves up, so to speak, by falling over. As a result they actually began making some personnel changes in order to give the appearance of trying harder. Given the wide shareholder base and the company's repeated failures, we are led by the theory of free enterprise to expect that a responsible segment of the owners would rise up and replace the entire management with a new team. Instead Pickens arrived on the scene, having bought 13.2 percent of the company's shares, thanks to various forms of leverage. He was not an alternative to bad management. He was in the ball-and-chain business. What attracted him was that poor management had caused the share values to slide to the point where they stood at $40 versus the estimated $114 value of the company's assets. Mr. Pickens made no secret of what he intended to do if successful in getting control. He would sell off the company's oil and gas reserves -- its only real assets -- for a cash profit. In other words, he would strip the company. Of course, this intention was dressed up in technocratic verbiage, in order to imply the opposite. The reserves were to be spun off into a "royalty trust." This would siphon off the company's earnings directly to the shareholder. The little shareholder would thus benefit from his investment. With a logic which would have confused Ignatius Loyola himself, it was explained that this removal of potential reinvestment capital would have the effect of increasing investment. The reality was quite different from these imaginative explanations. Pickens had created a situation in which he couldn't lose. Either he would force his way onto the board of directors and from there force the company to sell off its assets, giving him a cash profit. Or, having already driven up the share prices by making the market expect a selloff, he would force the management's friends to buy his 13.2 percent of the shares for roughly the same cash profit. In other words, either he destroyed the company or he further indebted it. In both cases, the money generated would be pure inflation. What followed was a battle between a lethargic group of technocrats trying to save their jobs and a raider who wasn't interested in the industry or the company. His weapons were cash and the manipulation of the free enterprise system. The managers were armed with the full panoply of corporate and legal structures and regulations. The battle surged one way and then the other. Just as Pickens appeared to be on the edge of victory, the Gulf management discovered a technicality capable of saving their day. If a majority of shareholders voted to move the company to Delaware, local laws would permit management to refuse Pickens a seat on the board. The struggle veered onto new ground -- a proxy battle leading up to this vote. Managers are always at an advantage in the manipulation of invisible voters, and they were able to scrape together a narrow majority. The company decamped to Delaware, though nothing actually moved. It was a paper operation. In this battle between employed incompetence and irresponsible greed, there was no hint that the shareholders, the financial authorities, the large financial institutions or even the government had any sense that the free enterprise system was running off its rails. They all seemed to find the events quite normal. In fact, Pickens was backed by almost half the shareholders and by many of the most respectable financial institutions. His snatch-and-run technique was analyzed by all the public financial experts -- from the Wall Street Journal to the Financial Times -- as if it were a bonafide takeover attempt, rather than a simple stripping operation. Only a few years before, these people had treated Pickens as a charlatan. What had changed their minds? Before Gulf, he had made a much-criticized snatch-and-run operation on the $4 billion oil company, Cities Service. This takeover bid had also "failed." However, the aim of the operation had been achieved -- he and his backers made a large profit. Because the mainstream definition of contemporary capitalism centres on the word profit, that made him respectable. Pickens is only one among hundreds of old-style sharks to have been welcomed into the mainstream of the American marketplace. Paul Bilzerian, for example, worth some $40 million, made a dozen or so runs at banal companies going innocently about their business before he was arrested. Hammermill Paper or Cluett Peabody and Company would look up from their desks and shop floors, startled by an unusual sound. Suddenly, out of the night, a madman would come charging in, a great word over his head, the blade glinting with menace. Needless to say, they either fainted or paid up. Bilzerian didn't even bother to invent justifications, such as Pickens's insistence that he is standing up for the little shareholder." If I were writing an article about myself," Bilzerian once said, ''I'm not sure I'd write a positive story." [14] Or consider the takeover of Beatrice, the consumer products giant. This unwieldy corporation was the creation of management men who had produced false growth through buyouts and diversification. In 1987 they, in turn, found themselves under attack from Kohlberg, Kravis, Roberts. Kravis used a tiny slice of equity -- $40 million -- to manipulate the purchase of Beatrice for $6.2 billion. [15] They then broke up the company and sold off pieces for about $3 billion. The whole process -- from the $40 million investment to the $3 billion wrecking profit -- took sixteen months. Not a penny of growth was involved. Kravis claimed that he had done the economy a service by taking production units away from administrators and selling them to doers. Of course, there is an element of truth in this; the kind of truth which is produced by logic out of control. One group of technocrats -- the management -- had created a monstrous conglomerate, fomenting their sort of inflation in the process. Then a second group of technocrats -- the takeover specialists -- had come along to break it up, thus fomenting another. The purchasers of the units sold off by Kravis are now labouring under a whole new and unnecessary burden of debt -- $6 billion worth. This debt has been added to the American economy. It frees no one and involves no investment in new production. The Kravis argument is sophistry intended to cover the reality of a purchase based on valueless junk bonds and fast speculation. Quite apart from the buy-sell profit, the professional fees included $10 million to Drexel Burnham Lambert for junk bond financing; $45 million to Kohlberg, Kravis, Roberts for putting the deal together; $33 million to three banks -- Kidder Peabody, Lazard and Salomon -- for advice. None of these fees relates to economic activity. If our system allowed for prosecution on the basis of the spirit of the law or of the spirit of capitalism in a democracy, Henry Kravis would be a criminal. Instead his exploits are admired. This can only encourage others and make the producers of real goods feel that they are wasting their time. *** Specific blame for this situation is laid by many people at the feet of men such as Donald Regan -- who converted so much of the American public interest into a broker's dream world of commissions, commissions, commissions. This assignment of responsibility has the advantage of placing the problem in a specific country under a specific government. It is then possible to talk of Reaganism and the uncontrolled and irresponsible eighties. The reality is that the problems were not proper to the United States. Western economies, one after another, went down the same road. None of the highly educated elites - business management, government management or economists in general- rose in protest. As a matter of fact, those experts provided the rational structure and the vocabulary which gave the whole profiteering approach a socially acceptable appearance. No doubt the result was not exactly as they had imagined it. Perhaps that is why the authorities, along with the general public, were reassured in a childlike way by the revelation that some of these transactions had actually been illegal. The Boesky revelations followed by those on Michael Milken brought forth a collective thrill. In Britain there was a heave of self-righteousness over the Guinness case. The President of the French Republic went on television to muse about the nature of money and joined in the theoretical public soul-searching over the insider trading of his friend Monsieur Pelat. Abruptly there was a general feeling that things had changed; that a new more responsible era had begun with the new decade. But what was this feeling based upon, apart from wishful thinking and the easy pleasures of a few high-profile fraud cases? There has been virtually no reform of the laws and regulations relating to financial transactions. A great part of what is technically legal in the marketplace remains economically irresponsible. At 25 percent of all corporate bonds rated by Moodys, the junk bond is very much an economic tool of the nineties. When one of the most exciting and profitable new international financial markets is consecrated to swapping Third World debt among banks, it is clear that the investment houses have not rediscovered the virtues of financing new production. Kravis has left the bad publicity of the greedy eighties behind him and now offers a whole new approach to recycling his highly leveraged assets. An ever-growing number of American banks are either going bankrupt or being artificially maintained in existence by the federal emergency bank insurance system, which is itself effectively bankrupt. Meanwhile, major new financial scandals appear at brief intervals. A series of linked stockbroker insolvency scandals erupted in Milan in 1991. Revelations of wrongdoing at the major American investment bank, Salomon Brothers, brought on legal charges and a major corporate shakeup. Warren Buffett, the "clean" financier brought in to repair the damage immediately volunteered that the temptations and the rules remain as they were in the American system. And the people who "attempt to behave badly ... seem to be getting away with it." The British Serious Fraud Office began an international investigation of the large leisure company, Brent Walker. Among other problems, one billion pounds had mysteriously disappeared from their accounts in a matter of a few months. The result was 18 months of financial crisis followed by a major restructuring which involved 18 corporations. A series of Swedish finance companies collapsed in 199, culminating with Gamlestaden. Weak regulations resulting in poorly secured loans were pinpointed by a government study. The ex-New York mayoral candidate, Rudolph Giuliani, in his days as a U.S. attorney, instigated many of the fraud prosecutions of the late eighties. He believes that the financial community has "the ability to self-correct." [16] This implies that those under prosecution have deviated from general standards. That is incorrect. They are in the mainstream. The worst you could say about them is that they are swimming just ahead of the corporate average. In Britain Lord Roskill's Committee Report on Fraud Trails began as follows: "The public no longer believes that the legal system in England and Wales is capable of bringing the perpetrators of serious frauds expeditiously and effectively to book.... The public is right." [17] In New York, the quantity of insider-trading violations has leapt up since deregulation. Even before Boesky, the SEC had brought seventy seven enforcement actions between 1982 and 1985. That is the same quantity as between 1934 and 198I. It is not that men are more dishonest. It isn't simply that deregulation has returned us to the atmosphere of pre-1929, although it has. These are both results, not causes. As Robert Lekachman. then professor of economics at the City University of New York, said, "The market is no more crooked than ever, but it's still less honest than Monte Carlo, because there at least you know how much the house takes." [18] In a study of young men caught in the Boesky scandal, Carol Asher round them to be from middle-class backgrounds, with average BA's but a subsequent degree from one of the best business or law schools. They had above- average salaries and were on the promotion track, Their colleagues described them as "motivated," "bright," "conscientious," "determined," "intense," "eager," "entrepreneurial" and "very hard working." [19] In other words, they neither needed to break the law nor were apparent lawbreaking types. They were simply part of an overall economic atmosphere in which the definition of smart had nothing to do with social standards, because society had canonized structure and the manipulation of it. They were like most people on Wall Street or in the City or the Bourse. Perhaps they had gone one step too far, even by the generally accepted standards. The product of this atmosphere has been a general concern about the decline in ethics. Business schools have rushed to create courses on ethical behaviour. [20] But when the economic system has been abstracted from reality, there is nothing concrete upon which ethics can be judged. The result is a wild inflation in the definition of integrity. These flatulent ethics mirror our monetary inflation. An ethical decision taken under current business structures has no more reality than a real estate transaction in a Monopoly game. *** Beyond these national and multinational manipulations of money and ethics, there is a whole parallel world which is entirely free from the need to manipulate because it isn't subject to any rules or standards. This twilight zone of finance -- offshore, tax free, unregulated -- is so imaginary that it could be considered pure inflation. Arid yet. the elements with which this zone plays are drawn from the real economies of nations. The world of offshore funds, for example, takes us directly into the adventures of Zola's financier, Monsieur Saccard, selling the shares of his imaginary Middle East development on the Paris Bourse. and of the great English crash known as the South Sea' Bubble, The South Sea Company was rounded in 1711 with the idea of trading in slaves in Spanish America. In 1720, despite mediocre growth, the company proposed assuming the British national debt. Parliament accepted and the company's shares soared from 128 to 1,000 and then collapsed. Apart from all the people ruined, a subsequent investigation revealed massive public corruption. It was the same year as John Law's fiasco in Paris. Somehow the imposition of physical distance -- of borders and of seas -- between the investor and the investment has always given the investor a childlike confidence in his own judgment. Knowing that he cannot know what is really involved seems to make him more optimistic. Australian and Canadian mining stocks were sending shivers of almost erotic delight through the comfortable classes of Europe, such as the English gentry and the Parisian medical profession, as long ago as the mid-nineteenth century. With some spare time and some spare cash these same people still love to search desperately through their atlases for obscure settlements where gold or oil strikes have theoretically been made, while the shares run up and up. Before its spectacular bankruptcy, Dome Petroleum's mysterious Arctic strikes were the stuff of dreams in European country houses. [21] But this distant wish fulfillment has taken on a whole new abstract charm in the late twentieth century. Offshore funds and the Eurodollar market, just to name two, are previously undiscovered universes. Even an atlas cannot tell you in which country these operations take place; nor a planetarium upon which sphere. They reside solely in the human imagination. The Quantum Fund, managed by George Soros, is a good example of this new-universe imagination. Soros has even written a book on his methods called The Alchemy of Finance. There is no more inflationary idea than the turning of base metal into gold. This he has apparently done with his Fund valued in the billions of dollars. It is based in the Caribbean tax haven of Curacao, thus escaping most Western disclosure requirements. He is among the most successful offshore money managers and revels in secrecy as he leaps from stocks to commodities to currency, and from country to country. One year gold is to be made in Finland, then perhaps in bananas, then in deutsche marks, then through the desperate middle European governments. The trick to his success seems to be the speed at which he moves and the essential customer confidence in his skills. They must have confidence because they cannot verify his actions. But is it confidence in his ability to choose investments, finance them with a complex undisclosed system of debt and realize profits in an unexplained manner? Or is it confidence in a dream which is the essence of inflationary riches? Stocks and commodities have been wonderful sources of offshore manipulation, but nothing has been as exciting as currency speculation. During the last fifteen years of floating rates, all of our private financial institutions, plus the "entrepreneurial" money men, like Soros, have been able to devote themselves to playing the numbers. The competing interests of various nations have permitted the currency market speculators to play one economy off against another, thus running the currencies up and down, while leaping nimbly back and forth to make a profit on both sides. Soros fondly remembers making "the killing of a lifetime" in 1985 by getting himself on the right side of the dollar's decline. His Fund made a 122 percent return that year. Finance ministers, who are meant to devote their time and energy to creating a solid financial base for national administration and growth, are instead forced to spend a good part of their lives outthinking the currency speculators. It is difficult for them to keep a step ahead because the speculators' abstract approach has nothing to do with capitalism, growth or investment. In fact, it doesn't have much to do with any economic factor. Currency speculation is the closest thing to a child's game that a grown man can play for a living. It is also the hardest activity for a single government to stop. And so the game of numerical abstractions goes on, unsettling incomes, production and stability. In the seventeenth century, Soros would have been hanged. Today, he is profiled in the International Herald Tribune and lauded for his talents. [22] *** So many kinds of inflation have now been invented that we do not have the. tools to measure them. We are still far from even admitting to ourselves that they are inflation. Instead we stick stubbornly to our classic measurements based upon narrow lists of concrete terms. But why should the measurement of inflation be based upon the sort of items which our society now says are marginal in such a sophisticated world? If we have turned our main drive towards the service industries, of which financial services are a part, then the nature of inflation has changed and we must examine what we really think it is. For example, the credit card is a private means for printing currency which escapes any central bank control of the money supply. In the second half of the eighties, German credit cards multiplied approximately five times to some five million. From 1976 to 1988, the number of Visas and MasterCards in Britain went from 6.4 million to 24.5 million. For the single year 1987-88, British credit card spending grew 26 percent to some £8 billion. In France, there were 17.7 million cards by the end of 1988. In 1988 spending literally doubled in twelve months to 458 billion francs. The result of this evolution has been a massive growth in personal debt throughout the West. During the 1980s credit card spending multiplied seven times in Canada. In 1988 alone Canadian credit card debt grew from 10 to 12 billion dollars. [23] Even in areas theoretically measured for inflation, the figures are deceptively low because they are not designed to reflect service economies. The increase in property costs, for example, will probably reflect only sales of new construction or rent increases in specific areas. Thus the 2 to 5 percent inflation figures which Western countries have been announcing do not include a full measurement of the tripling of most urban housing costs over the last ten years. [24] Most consumer price index food lists are based on an assemblage of staples which hardly represent what people actually eat. The price of these staples moves far slower than the majority of foods, partly because they are staples and are not a growth area in consumption; and partly because the cost of staples is often indirectly controlled by general government programs, precisely because these areas do involve staples. Dairy, grain and egg production are typical of this phenomenon. Or again, barometers such as the. GOP deflator measure the price of output produced entirely inside }he country. They don't deal with imports. Even the illicit drug trade must be seen as an integral part of this swirling inflation. Estimates put it at some $300 billion a year. Enough, the Japanese deputy Finance Minister says, to "undermine the credibility of the financial system." [25] What, then, is one to think of the equally artificial arms market, three times larger than the drug market, with the added advantage of being both legal and secret? It appears nowhere in our monthly or annual inflation figures. And what about the very straightforward question of interest rates? We seem to feel that levels are now higher than necessary, although tolerable when compared to those of the late 1970s. But current rates are actually very high when seen in the context of successful earlier economies. From 300 B.C. to A.D. 100, the Greeks charged between 6 and 9 percent. The Romans ranged from 6 to 8 percent between 500 B.C. and A.D. 100. As the Empire went into decline, the rates rose to 12 percent and after A.D. 300, went up still further. In the eighteenth century, British rates were around 6 percent; French 2 to 6 percent. In the nineteenth century, a period of strong growth, British rates were 4 to 5 percent; French, 3 to 6 percent; German, 4 percent; and American, 6 to 8 percent. And throughout most of the twentieth century, until 1973, rates were around 3 to 6 percent. [26] For twenty years we have sometimes been below 10 percent, but more often above it. In general our rates for preferred customers are double historical averages. And the ability to print private money through credit cards has created a parallel interest rate which has been running between 15 and 22 percent. Third World loans and junk bonds almost all run at these levels. Common sense tells us that interest has nothing to do with real production or growth. It is an added nonproductive cost; that is, inflationary. Most of our economists remain convinced that high interest rates kill inflation, when the exact opposite is true. Nor do any of our official methods of measurement reflect the explosion in service industry costs. The current economic religion preaches the essential nature of service expansion. On the other hand, those who measure inflation apparently consider much of the sector to be nonessential. Hotel rooms, restaurant costs, up-market clothes and luxury and semiluxury food costs have all been moving up on a regular basis at more than 10 percent a year. With the rise in two-job families, a whole series of services, which are still left out of most measures of inflation, have become necessary to many people, from prepared foods to laundry. These costs have almost all been rising at around 10 percent a year. The art market explosion -- with the participation of everyone from highly conservative pension funds to marginal speculators -- is merely a smaller version of the junk bond phenomenon, as is the market in luxury illusions. One hesitates to mention Judy Garland's little red shoes from the Wizard of Oz being auctioned off for $165,000 or bottles of virtually dead nineteenth-century wine for tens of thousands or the van Goghs and Picassos sold for tens of millions. But these are part of a surprisingly large area in which objects of no value, or of a value which bears no reasonable relationship to the sums paid, have entered into the economy. Western civilization used to limit itself to one South Sea Bubble at a time. And when it burst we would settle down for a while, severely chastened. We now run thousands of bubbles concurrently and the inflationary cycle is so strong that when one pops, the paper money immediately inflates a new one. The inflationary speculation of the financial sectors nevertheless dwarfs all the others. What is, the difference between a Weimar banknote, a junk bond and a deposit bank preferred share floated to cover nonrecuperable loans? Nothing except appearance. All three are pure inflation. One indication of how far things have gone is the desire of business to see government intervene each time the situation gets out 6f hand. The Willingness of governments to do so, despite a supposed devotion to market forces, shows that they realize just how dangerous the current system is. The irony of deregulation is that the more freedom business is given, the more dependent it becomes upon government as the saviour of last resort. Financial marketplaces have never been capable of self-limitation except through catastrophe. One of our accomplishments was to regulate most of these explosions out of existence. Financial deregulation has reintroduced them. A well-trained city dog kept within set parameters can look after itself for a limited period in limited circumstances. An untrained dog shows more initiative but will inexplicably lick or bite children, run away, defecate on Persian rugs, demand endless scraps from the table and get run over. We have unleashed increasingly 'untrained dogs in highly urban settings. The regulatory authorities are therefore forced to stay on permanent emergency footing in order to avoid catastrophes, while these animals wander freely across intersections and through houses. Is it surprising, then, that inflation has dogged us for almost twenty years? Even the official sort, inaccurate and deceptively low; is constantly bubbling up, driven not by wages or wheat but by the multitude of inflationary elements we refuse to count. It is perfectly appropriate that the United Kingdom, the country that has most successfully reduced its national debt while sustaining for more than a decade a combination of extreme classic anti-inflationary policies with extreme deregulation, should today be the country least able to shake rising prices. The ability of governments in general to control their money supply as a means of controlling inflation is now virtually irrelevant. The money supply is as much in the hands of all these new indirect money printers as it is in those of any government mint. If the governments print, they are simply adding to the inflationary activities of private business. If, in an attempt to "strangle" inflation, they don't print, then they won't be able to pay their own bills. The current situation, in which governments stand as the saviours of last resort -- having abandoned many of their intermediate powers of guidance -- actually breeds irresponsibility. And while government intervention late in the day prevents general calamities, it also maintains the fiction that the system is healthy. If the West were serious about inflation, it would have installed rigorous regulations to discourage the myriad new forms of speculation and accompanied this by interest rates of 5 percent or less. The effect would have been to discourage financial bubbles in the developed economies, while encouraging real investment in production, which translates into real growth. Solon, in the very act of laying the foundations for Western civilization, identified the danger areas -- "Public evil enters the house of each man." In a world of self-interest and self-delusion, he kept a measured view and a measured hand, treating debts with the same evenness that he treated justice. One of his aims was to demonstrate how each man might control the speculator within himself. Even-handed, careful, antirevolutionary, viewing all individual action as part of a whole, he was perhaps the first complete man of reason; an early version of Pascal Paoli or Thomas Jefferson. And to demonstrate the dangers of believing in one's own rational skills, he completed his task and then left Athens for ten years. In this way he avoided hero worship and the resulting temptation to hold on to power in the name of glory. His simple precepts are useful when thinking about government debt, corporate debt, futures, junk bonds, money markets, offshore funds, the speculation in capital goods, interest rates, imaginary services and in general the increasing conversion of Western monetary structures into a type of financing which creates profits but not real wealth. These are abstractions upon abstractions upon the great abstraction itself -- money. In Solon's clear and integral view, public evil has installed itself in every man's house. And it is comforting us with an inflation of self-delusion.
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