The Trade War, Central Bank Contraction, and Stock Market Volatility

Two useful emails today came from Liberty Investor’s Brandon Smith and Daily Proof’s Jim Rickards. 

Based on the correlation between G3 central bank balance sheets and stock prices, Smith  writes that the rising stock market has had had little to do with free markets but rather is the product of central bank asset purchases.  When the central bank sells assets, stock prices will reverse. 

The G3 are the US, Japan, and Europe. 

Smith claims that currently fashionable stock buybacks are the last gasp of paper money stimulus.  The trade war, in Smith’s view, is a mere distraction. 

                                     Source: Brandon Smith, Liberty Investor

Central bank monetary expansion, the result of expansion of central bank balance sheets, underlies the rising stock market that we have witnessed for the past century.  What have been remarkable about the post-2008 period are the enormous quantity of bank credit created, the enormous quantity of assets purchased, and the enormous stock market bubble. 

Central bankers and their shills in the media and academia claim that reducing asset holdings will not matter because so much assets have been purchased.  It is kind of like Bill Gates giving to charity: He is still very rich even after giving away a lot.  The Establishment claims that contraction can be done gradually and in the Goldilocks manner--just right. 

At the same time, additional regulation, including tariffs, can reduce the potency of the narcotic of flexible money by making firms less profitable, i.e., reducing efficiency.   Once a given regulatory system is in place, monetary policy will drive the stock market, but if there is disruption, then there can be sharp change. If the disruption occurs in tandem with monetary contraction, then it seems likely that it can contribute to declines.   

Smith is right that monetary contraction will threaten the stock market; adding tariffs to the mix can contribute, but it is not the underlying factor.  

Jim Rickards has been writing about central bank policy for a long time, but he puts greater emphasis on the tariffs.  He cites Patrick Donahue and Arne Delfs of Bloomberg news, who have written a piece about a warning by German chancellor Angela Merkel of a potential global financial crisis because of the tariffs.  

The Establishment is always careful not to question  central banks, for the state depends on wealth extraction from the productive population using paper money.  In this way both the financial sector and the state are aligned with the central banks. The general population believes the claims of the media and universities that big government is necessary to its well being and low wages are necessary to their happiness--except when the subject of income inequality is raised; then,low wages are a problem that requires bigger government.

Hence, Rickards's comments are compatible with Smith’s claim.  Smith's claim that news about tariffs is coordinated with central bank policy is impossible to substantiate, but the underlying elements are present. 

While stock markets decline because of monetary contraction, tapering, or deleveraging (choose your mumbo jumbo) and contraction saddens Wall Street, the average American has been hurt financially by the long-term, century-long monetary monetary expansion. It has led to declines in innovation rates and the real hourly wage. It also has led to expanding income inequality.

The Money Masters

My good friend Contrairimairi sent me this video. I am watching the first of twenty episodes now. In 1836 Andrew Jackson abolished the national bank.  I disagree with the video's claim that we need a central bank. The nation's economic growth exploded between 1836 and 1913 when there was no central bank. There were deflations but the real hourly wage increased two percent per year over the 77 year period. Since 1971, when Nixon took us off the gold standard and placed as much power in the Fed's hands and Roosevelt had in 1932, the real hourly wage has increased two percent over the 39 year period.

In the 19th century Americans fought the central bank. Today, Americans with college "educations" cannot understand how the Fed operates. Need we know more to conclude that America is a nation in decline?

Frightening US Deficits

Peter Degraaf of Kitco shows the following chart of US deficits since 1900. Degraaf obtained the chart from the St. Louis Fed. It does not appear that these numbers are corrected for inflation (that is, they reflect nominal rather than real dollars) and therefore understate the debt during World War II. However, the graph paints a frightening picture. Those who have faith in the Fed's or the banking system's ability to "mop up" (whatever that rather odd phrase, which has been used by numerous Fed advocates and apologists, really means) newly created money might be able to describe precedents for the current situation and examples of how central banks performed well. There are numerous examples of how past central banks have performed badly, of course. I do not believe that there are many where central banks, including the performance of the Fed in the 1930s and the 1970s, long performed well.

Hamilton on Banks, Paper Money and the First Subprime Bailout

Alexander Hamilton began the tradition of big government conservatism. His followers have included Henry Clay, Abraham Lincoln, Theodore Roosevelt, Nelson Rockefeller and George W. Bush. In today's nomenclature, Hamilton was the first "Republican". In other words, the Republicans have been traditionally the party of inflation, and it was only intermittently, during the century from 1871 to 1971, that the Republicans could claim to support hard money. For the first 25 years of that century, the Democrats too were a hard money party. It was only by default that the Republicans became associated with monetary stability in 1896, and they have always been wobbly supporters. The Benjamin Strong Fed was inflationary, with the approval of the Harding and Coolidge administrations. The deflation of the Hoover administration was a product of Fed policy and had little to do with Hoover. Yet, the segment of Americans who are able to grasp this issue and are anti-inflation mostly remain within the Republican party. perhaps the greatest political betrayal of the late twentieth century was Ronald Reagan's decision to adopt Keynesian (supply side) deficit and expansionist policies despite his mandate from the Reagan Democrats. Both American political parties today descend from Hamiltonian centralizing, banking and rationalizing theories. Those who are skeptical of central economic planning, big government, Keynesian economics and the ability of academics to foresee progress have nowhere to turn. Both parties are marionettes of Wall Street.

Hamilton argued for federalism and centralization of government, a central bank and for banking in general. He was an elitist who believed in the ability of bankers and merchants to make use of artificially created money in the form of bank notes to expand the economy, and this theory provided the fulcrum on which his advocacy of the Bank of the United States pivoted. He argued that bankers can rationally assess risk. He makes the same aarguments that we hear on CNN and read in the New York Times today. The themes that Hamilton emphasized, paper money, central banking, rationality of business strategy, the importance of fractional reserve banking to stimulating the economy and the ability of the business elite to build the economy were paradigms for subsequent Whig, progressive, and New Deal ideologies, of which George W. Bush and Barack Obama are the latest manifestations.

There were two strange turns in the history of the elitist, centralizing ideology. At first, Jefferson and then Jackson reacted to the Federalist-Whig philosophy of Hamilton, Clay (and then Lincoln) by advocating decentralization and hard money. Thus, decentralization and hard money were benign views that represented the values of the workman. The loco focos and workingmen's parties of the 1820s and 1830s reflected the Jacksonian resentment of banks, business monopolies, internal improvements (the profits from which went into the pockets of elite Whig stockholders) and the central bank.

In the Gilded Age, the laissez-faire ideology became associated with the elite. This was a reversal. It occurred because laissez-faire became associated with social Darwinism in the ideas of Spencer and William Graham Sumner. Thus, the Mugwump Republicans carried forward the Republican centralizing and elitist views but adopted the laissez-faire and hard money philosophy of Jefferson and Jackson because it fit the ideas of social Darwinism. This deprived the hard money position of its benign, pro-worker foundation. So by adopting laissez-faire the Republicans weakened the force of its claims and destroyed it. They did this by claiming that only the fittest would benefit from hard money. This opened the door for the Democrats to claim that central banking, the chief elitist tool, was Democratic. Then, Progressivism removed the laissez-faire element from the Gilded Age's rationalizing philosophy, retaining the traditional Hamiltonian claims of rationality of business and banking elites, the importance of a centralized state, the virtue of elite experts, and centralized banking.

In 1790 Hamilton, as the first Secretary of the Treasury, wrote his Report on Public Credit and Second Report for Further Provision Necessary for Establishing Public Credit. He also wrote a report on the Constitutionality of the Bank and Report on Manufactures. The issues in the Report on Public Credit directly concerned the question of centralization and of establishing a central bank. The questions that faced the nation at that point concerned federal assumption of the states' revolutionary war debts and how such assumption would be arranged; and the question of whether the federal government should honor its debts at par, especially because speculators had purchased bonds at steep discounts; and the payment of interest on the outstanding debt. Hamilton argued for stabilizing the nation's credit record and honoring debts.

Hamilton argues for the importance of federal debt to the expansion of the US economy. He argues that a funded debt (which has been converted into bonds and for which there is funding) can expand economic activity because the debt can function as money and because debt will cause real estate prices to appreciate. The notion that inflation can help real estate investors finds legitimacy in Hamilton's report to the first Congress. He writes (p. 6):

"The effect, which the funding of the public debt, on right principles, would have upon landed property, is one of the circumstances attending such an arrangement, which has been least adverted to, though it deserves the most particular attention. The present depreciated state of that species of property is a serious calamity. the value of cultivated lands, in most of the states, has fallen since the revolution from 25 to 50 per cent. In those farthest south the decrease is still more considerable...This decrease in the value of lands, ought, in a great measure, to be attributed to the scarcity of money."

Thus, Hamilton was among the first Americans to recognize the possibility of monetary expansion to transfer wealth to the landed, the stock holder and the wealthy. This theme was to continue throughout American history except for the four post Civil War decades because of the ideology of social Darwinism. Notably, it was in the post Civil War period that the United States made the lion's share of its economic progress, beginning with the abolition of the bank in 1836 through the advent of Progressivism in 1905.

Hamilton's preference for centralization is explicit in Report on Public Credit. It is much better, he argues, for creditors to receive payments from one source than from the several states. If the central government takes responsibility "there can be no competition for resources" and "different states, from local considerations, would in some instances have recourse to different objects, in others to the same objects, in different degrees, for procuring the funds of which they stood in need. It is easy to conceive how this diversity would affect the aggregate revenue of the country....hence the public revenue would not derive the full benefit of those articles from state regulation." Moreover, "if all the public creditors receive their dues from one source, distributed with an equal hand, their interest will be the same. And having the same interests, they will unite in support of the fiscal arrangements of the government; As these, too, can be made with more convenience, where there is no competition: These circumstances combined will insure to the revenue law a more ready and more satisfactory execution."

It was important to Hamilton to establish the national credit and he was certainly concerned with the interests of creditors, whom he saw as furthering national goals. To this end, Hamilton emphasized the importance of repaying the national debt, including interest. In the end there was a slight reduction in interest (see Elkins and McKitrick, The Age of Federalism.) But the nation did not make good on the currency it used to pay for the Revolutionary War, the Continentals. The federal government allowed them to become worthless.

In Second Report on the Further Necessity for Establishing Public Credit, Hamilton argues for a central bank and extols fractional reserve banking. Little has been added since Hamilton.

One passage that caught my eye might be extended to the subprime crisis and every other boom and bust bubble that has occurred since, including the one that occurred in 1790 in New York with respect to speculation in the stock of the First Bank of the United States:

"It may be said that as Bank paper affords a substitute for specie, it serves to counteract that rigorous necessity for the metals...and...it would retard those oeconomical and parsimonious reforms in the manner of living, which the scarcity of money is calculated to produce...

"There is perhaps some truth...but...of a nature rather to form exceptions to the generality of the conclusion, than to overthrow it...a situation in which a too expensive manner of living of a community compared with its means, can stand in need of a corrective, from distress of necessity, is one which perhaps rarely results, but from extraordinary and adventitious causes, such for example, as a national revolution, which unsettles all the established habits of a people, and inflames the appetite for extravagance, but the illusions of an ideal wealth, engendered by the cause. There is good reason to believe that where the laws are wise and well executed, the oeconomy of a people will, in the general course of things, correspond with its means."

Throughout the two reports on credit, Hamilton emphasizes the rational capacity of bankers and merchants and their sound judgment (e.g., "Those who are most commonly creditors of a nation are, generally speaking, enlightened men...", p. 3, Report Relative to Public Credit).

Hamilton argues vigorously for the positive effects of monetary expansion and a central bank. He argues that "Gold and Silver, when hey are employed merely as the instruments of exchange and alienation, have been not improperly denominated dead Stock; but when deposited in Banks, to become the basis of a paper circulation...they then acquire life." By depositing money in a bank, merchants enable others to borrow and "It is a well established fact, that Banks in good credit can circulate a far greater sum than the actual quantum of their capital in Gold and Silver. The extent of the possible excess seems indeterminate; though it has been conjecturally stated at the proportions of two and three to one."

This rousing defense of fractional reserve banking presaged two centuries of booms and busts, the most recent being the multi-trillion dollar transfer of wealth to wealthy bankers from the general economy and an aggressive monetary expansion.

Hamilton's ideas were rejected in the early nineteenth century but subsequently adopted by both political parties in the twentieth. Most progress occurred in the 19th. The twentieth century was one of reaction and decline.

Revving Up the Helicopter

Howard S. Katz of the Goldbug.net has published this revised chart of expansion of Federal Reserve Bank Credit. The reserve bank credits increased by another 50% since the last chart. This variable drives the amount of money in circulation in the United States. It is likely that both Barack Obama and John McCain have favored this step although none of the major media has asked or covered this question. If you are eager to pay 30% higher prices in order to subsidize hedge fund, Wall Street and commercial banking lobbies then vote for either candidate. This has nothing to do with regulation, sub-prime mortgages or bail outs. This is classic monetary inflation brought about by irresponsible political leadership.

Centralization of Federal Power Has Led to Coddling of Business

The relationship between the state and federal governments fluctuates, but the overall trend has been toward centralization, with a few blips. This came about in part because of the Civil War, which enforced centralization in order to achieve noble objectives. The 13th, 14th and 15th amendments enhanced federal power over the states, requiring states to recognize citizenship, right to make contracts, equal treatment under the laws and voting rights to former slaves and, for that matter, to all citizens. The states' reaction to the growth of the railroads in the late 19th century was to subsidize them, and they enhanced the natural advantages of economies of scale through land grants, rights of way and other subsidies. In turn, the new, complex corporations faced multiple regulatory regimes across the states. This raised their costs. In the 1876 Munn v. Illinois Chief Justice Morrison R. Waite, writing for the Court, held that states have the right to regulate railroads because railroads reflect the public interest. In the 1886 Wabash, St. Louis and Pacific Railroad v. Illinois, law concerning the Illinois Grange's clamoring for regulation of railroad rates was federalized. The court held that states could engage in indirect regulation like safety regulation but not direct burdens on interstate commerce like rate regulation. The following year Congress passed and President Grover Cleveland signed the Interstate Commerce, which established the Interstate Commerce Commission. The ICC's responsibility was to set maximum railroad rates and eliminate individual discrimination. Thus, the age of centralization was born.

The aim of centralization was regulation coupled with subsidization. The regulation part reflected the impetus of Populist movements like the Grange, social Gospel Christianity, fear of labor unions and socialism and pressure from Progressives like Walter Weyl and Herbert Croly who, in the early 1900s argued that European-style social democracy was more "progressive" than American laissez-faire.

The centralization of regulation helped big business because it established a stable, unitary source of regulation that made it easy to comply. Fifty states pose a fifty times greater compliance problem than a single federal government. Moreover, industry or what Williams calls "syndicalist" influence over government is easier to organize. Mancur Olson and George Stigler have written about the economic conditions for effective lobbying, and centralization of power makes lobbying considerably easier for large firms and gives them considerable advantages over small. Many small firms over a national market are far more difficult to organize than one fiftieth the number over a state-wide market. At the same time, it is far cheaper for a few large firms to lobby a single federal government than it is for them to lobby fifty state governments. Thus, in the name of "regulation" the Progressives tipped the political scale in big business's favor.

Theodore Roosevelt and other Progressives of the early 20th century believed that big business produced wealth. Historians such as Alfred Chandler argued that transportation and communication advances with respect not only to canals, railroads and then trucking and air delivery but also with respect to telegraph, telephone, and then fax, e-mail and Internet, expanded markets facilitating reduced costs and enhanced economies of scale. There were other subsidies to big business, specifically the creation of federally subsidized credit and banking through the Federal Reserve System, tariffs almost continuously to the days of Wilson and then after, cartels and price fixing during World War I, and a host of regulations that make it more expensive for small business to compete with big.

But has big business really delivered? Since 1980 manufacturing firms increasingly exited the United States. Hence, the subsidization of manufacturing through credit and protection did not yield permanent jobs to average Americans. Executive compensation, rationalized through artificially elevated stock prices due to Federal Reserve policy, has been an exercise in self indulgence and waste. Increasingly, Americans hanker after a few high-wage investment banking and celebrity jobs, and are unwilling to work hard in traditional crafts. The images of today's youth, rap singers since the 1980s, Beavis and Butthead in the 1990s, Paris Hilton today, suggest a culture of dim wittedness and sloth. These images are broadcast by subsidized big business concerns, the media conglomerates, who profit from popular music that advocates drug use and violence. Television shows like "Entourage" suggest that the way to succeed is to hang out with other self indulgent boneheads, as long as they are good looking.

The transition from decentralized to centralized federalism and from laissez-faire to statism altered incentives in the economy. The combination of centralized creation of credit and inflation of scale enhances returns to stock offerings, first because large firms are artificially profitable because of their subsidization and second because monetary expansion itself inflates the stock market by reducing interest rates. This inflation of stock returns makes investment and commercial banking far more profitable than they would be in a decentralized and laissez-faire system. In turn, firms are encouraged to maximize stock returns by minimizing costs in that low interest rates make stock returns more elastic with respect to increases in net profit. This does several things. First, firms are encouraged to move plants overseas, where labor costs are lower. Second, their incentive to innovate is reduced because ample returns can be obtained due to the reduced interest rates and the elasticity of stock prices to small gains. Why risk invention of a new technology, when you can, like the typical US CEO, simply think about reorganization or moving plants to another country and so earn $100 million? Third, the returns to initial stock offerings are enhanced. Thus, returns to investment banking exceed market levels. Because the manpower needed to issue and trade securities is small relative to the inflated returns, the high salaries divert human resources from manufacturing to investment and speculation.

It is likely for these reasons that the innovation level of late nineteenth century laissez faire America was far greater than during the Progressive twentieth century. The most innovative Americans have been attracted to investment banking and law rather than manufacturing. Firms like Intel need to recruit engineers from overseas in order to compete. This misallocation of human resources leads to lower growth and less innovation in the economy than there would have been in a decentralized, laissez-faire economy.

The coddling of business results in a trade off between risk and return. In a laissez faire economy credit is difficult to obtain, profits are reduced and stock returns are reduced because interest rates are relatively high. This results in considerable discomfort to business executives, who in the nineteenth century complained about "overproduction" and "depression". However, the decreasing prices resulting from slow monetary growth increase real gains to labor. Real wages rise because firms are forced to think carefully about productivity given the intensely competitive milieu. Moreover, innovation is stimulated because that is the only way to earn large profits. Thus, the laissez-faire economy is rocky soil in which only the hardiest firms can grow, and they grow by extending roots that crush even the largest competitive rocks. Workers, the soil in which these competitive plants grow, benefit from the nutrients that the innovative stems produce. But the weaker plants, the firms that thrive in politically driven, low-innovation "Progressivism" complain endlessly about depression, the need for subsidization, the need for a central bank, the unfairness of the competitive economy. They are, of course, backed by feudalists and socialists, who similarly yearn for stability at the price of innovation.

The Progressive economy does not reward achievement. It rewards potential. Investment banks hire from the ranks of Ivy League students, who are in turn admitted to Ivy League schools on the basis of SAT scores. But SAT scores are not achievement, they are just potential, and they do not explain the majority of what might explain achievement. Americans are rewarded for ability, and this reduces their risk. But this also has the effect of draining men and women of ability from the ranks of the innovators into the ranks of transfer recipients. There may indeed be economic gains from stock offerings and trading, but they are minute compared to the potential gains from innovation. A single Tesla is worth all of the investment bankers in history times 10. Yet of all of the thousands of potential Teslas, only a handful will succeed. Why risk failure, when a certain career in investment banking has a far greater probability of significant success. Thus, elite Americans have become increasingly risk averse. They have chosen the way of relatively certain but high returns, but sacrificed the moral rectitude of economic creation and productivity. They have come to favor the sleight of hand that Wall Street capitalism offers, claiming to create efficiency but depending upon credit expansion and government largess.

William Appleman Williams on Thomas Jefferson and the Federal Reserve Bank

Jefferson "worried lest the bank in time become an institution that cut across all regional and political lines. Doing so, he reasoned, it would subvert the authority of the states and hence replace or override them as an institution in the political economy. It would do so moreover, outside the constitutional framework. This would not only recast the entire balance of power that the constitution established, but the bank would effect the change as an institution which was not in any way directly responsible to the people. He feared the end result would be a kind of 'vassalage' imposed on both the individual and the government.

"...It was an astute analysis of the relationship between economic power and its social and political consequences, and our modern industrial corporations, together with the Federal Reserve Board itself have verified it."

----William Appleman Williams, Contours of American History,Chicago: Quadrangle Paperbacks, 1961, 1966, p. 190.

Stanley Elkins's and Eric McKitrick's Age of Federalism

Stanley Elkins and Eric McKitrick. The Age of Federalism. New York: Oxford University Press, 1993. 925 pages. Available at Amazon.com for $25.51, used and new from $6.88.

This is an important history book. It should be required reading for all Americans as we cannot understand the political dynamic in our country without a grasp of the Federalist period. Elkins and McKitrick pack this majestic study with rich and detailed information about the major players' biographies, the intellectual history behind Federalism and most of all the politics of the Federalist era.

My own interest in reading this book involved three questions: (1) to what degree is modern social democratic liberalism linked to the ideas of the Federalists; (2) to what degree has there been a continuity in the history of elitism in America (for example, were the Progressives and New Deal social democrats intellectually linked to the Federalists); and (3) to what degree did Federalism fail because of its emphasis on centralization or, to what degree did the Articles of Confederation fail because of excessive decentralization. The answer to (3) is that Federalism was replaced by Jeffersonian republicanism not on the basis on the workability or lack thereof of the Federalist ideology but because of the political ability of Jefferson and his followers, the political weaknesses and perhaps mental imbalance of John Adams and internecine fighting among the Federalists. The Federalists were elitist and did not learn how to cloak their elitism the way that the Progressives and social democrats did. With respect to substantive policy positions, the Federalists were very much in line with the Progressives and social democrats of the 20th century. The difference was the packaging, not the substance.

To answer the third question in another way, the Articles of Confederation had decentralized the American national government in ways that the Constitution corrected, and although the anti-statist philosophy of Jefferson and the anti-Federalists, rooted in English Whiggery, led to some initial opposition to the Constitution, there is little reason at this point to regard the problems with the Articles of Confederation as relevant to 21st century political debate. There was excessive decentralization, but that level of decentralization is not going to occur again unless there is a collapse of the United States government. In particular, the federal government did not have the power to tax the population directly under the Articles of Confederation and so could not have supported an army or federal law enforcement of any kind. As a result, a minor problem like Shay's rebellion was difficult to address. As well, the absence of a unified trade or defense policy made the nation weaker. Hamilton, Madison and Jay under the name of Publius addressed these questions in the Federalist Papers, and they are not controversial.

Foreign policy and defense are areas to which public goods arguments of the twentieth century apply. Thus, the Articles of Confederation did fail because of excessive decentralization, but the degree of decentralization was extreme by today's standards so that there is considerable room for decentralizing. It was, after all, Jefferson and the Republicans (or Democratic Republicans) who ultimately triumphed against the Federalists. In effect, the degree of federalism that Hamilton, Washington and John Adams implemented made a republican, anti-federalist policy workable. Even in the case of Jefferson's presidency (which is not the subject of this book) Jefferson famously took several federalist turns in areas like the Embargo Act and the Louisiana Purchase. Unless you are a dogmatic libertarian you will agree that a realistic federal government is useful and necessary.

The answers to the first and second questions begin with 18th century England, and the answer seems clear to me that there is a close link among Federalism, Progressivism and the social democratic ideology of the New Deal. Elkins and McKitrick do an excellent job of discussing the intellectual and political history. The intellectual roots of Federalism were in eighteenth century England, specifically in opposition to the ideas of Sir Robert Walpole and his "Court" ideology which the landed Whigs perceived to be corrupt. Walpole rose to power in the 1720s and built on institutions, especially the Bank of England, that had been established in the late 17th century.

"The system of public finance which thus had its birth during the reign of William III was subsequently brought to a state of considerable maturity and stability by the ministries of Walpole and Henry Pelham under the fist two Georges. But it also provided a key term in the emerging tensions of Court and Country: government money" (p. 14).

Elkins and McKitrick go on to write (p. 14):

"William III's policy of war against the France of Louis XIV, while it had the public's general support, proved vastly more expensive than anything of the sort the nation had previously undertaken. With current taxes and ad hoc private loans clearly inadequate to meet unprecedented and continuing costs, William's Treasury officials arranged with a group of London's wealthiest merchants for the first of a series of exceptionally large loans, to be secured by specific future taxes, in return for which the financiers would be granted a charter with monopoly privileges for certain forms of banking. The resulting Bank of England (1694) would handle government deposits, assist in organizing future borrowing by government, do private commercial business, and issue notes which could circulate as public currency. (Two other great chartered monopolies, the East India and South Sea Companies, would also for a time, handle large portions of the public debt.) This transformation in public finance brought long-term consequences in two broad spheres, one in the nation's business life and the other in the workings of government itself. A financial revolution of this order had of necessity to be accompanied by an administrative revolution.

"Extended periods of war, which would recur at more or less regular intervals throughout the eighteenth century, together with the growing public debt needed for maintaining them--a debt which nonetheless would prove more than adequately supportable by a very sound base of government credit--combined to bring into being a vastly expanded money market, new forms of investment, and a substantially new trading class concerned primarily with the movement of public securities and allied varieties of of negotiable paper, and with the kinds of transactions which made them profitable. Meanwhile, these same factors--an intermittent war footing and greatly increased sums available for expenditure by government--required a much expanded bureaucracy in the Treasury, Admiralty and War offices for handling them. The purposeful allocation of this patronage and other forms of royal preferment in such a way as to assure government of dependable majorities for its policies in the House of Commons was brought to something of a fine art by Sir Robert Walpole."

The opposition to the growing state, somewhat corrupt in making political appointments and expanding government (sound familiar?) was what Elkins and McKitrick call the "Country" philosophy of the Whigs. They characterize the debate between Walpole's centralizing strategy and the free market opposition as between Court and Country. Perhaps it is not coincidental that 280 years later the election of George Bush has been characterized as a contest between largely rural "red" states and largely urban "blue" states dominated by college educated professionals linked to the central banking system through employment in big business, Wall Street, government, health care and the legal system.

Elkins and McKitrick argue (p. 15):

"To the extent that the resulting Country opposition had a community of sentiment and purpose, it derived from a somewhat indeterminate mixture: a sense of exclusion, suspicion of the news kinds of power and new ranges of influence that money seemed to be opening up in London and Westminster, and hostility to men who appeared to be threatening the standards and values of which rural squires who had customarily seen themselves as the hereditary custodians. The Country voice, to which were added those of a variety of literary types, was loud in judgment.

"A perilous new era, as the Country saw it, had arrived, one in which the decisions and choices that most affected the nation's liberties, well-being and morals were more and more removed from the hands in which they had traditionally been safest--from the body that is, of the nation's landed proprietors--and were now lodged elsewhere and out of reach. Though the Glorious Revolution of 1688-9 had supposedly blown away the last traces of the divine right of kings, the Crown's executive power had nevertheless taken on a new weight, exercised in new ways and now appeared more pervasive and menacing than ever. The houses of Parliament could no longer be seen as an independent force in government or as the guardians of liberty and virtue in the nation's life, because the base upon which virtue in public service was presumed to rest--landed property and freehold tenure as the safest guarantee of independent judgment and action--was being sapped by the power of money. While the burden of a rising national debt and costs of continuing wars were being principally borne by the gentry through the land tax and excise, men in the City whose wealth was based not on the real value inherent in land but on the ephemeral values of paper and credit were enriching themselves at the nation's expense. Meanwhile, the royal ministry, with its enhanced latitude of initiative and action, and with this new class at its beck and call, was perverting the independent will of Parliament and purchasing its subservience to the Crown's own will through offices, honors, and perquisites. The sacred balance of the constitution, the venerable equilibrium of king, lords and commons, was teetering over an abyss of corruption."

"...Country spokesmen (Whigs) sounded a continuous call for a return to cheap, simple and honest government. They attacked the excise and land tax as impoverishing the nation, wars and funded debts for the same reason (and because both the burdens and the profits fell on all the wrong people), the standing army because of what it boded for the nation's liberties, and all these things because of their potential for corrupting the nation's virtue. Meanwhile, in defense of the balanced constitution and genuine mixed government they kept bringing up Place Bills to limit the Crown's patronage powers and to keep down the numbers of pensioners and placemen sitting in Parliament, and they called for more frequent elections in order to check the range of temptations laid before a too entrenched membership of the House of Commons...

"The response of Court-minded--or non-Country minded--publicists to the Country polemics was not made in a language that challenged in any fundamental way the principles the Country stood for. Indeed, they professed by and large to hold all the same principles, other things being equal. They put their emphasis, however, on the practical and technical considerations in government, foreign relations and economic life that must modify too literal construction of those principles..."

(Note Martin J. Sklar's article on Woodrow Wilson, "Woodrow Wilson and the Political Economy of Modern United States Liberalism" in Murray Rothbard's and Ronald Radosh's New History of Leviathan*. Much like the "Court's" strategy in 18th century England (p. 7):

"Perhaps the greatest source of historical misconception about Woodrow Wilson is the methodological compartmentalization of his mentality into two distinct components, the "moralistic" and the "realistic" or "commercialistic", as if they were discrete and mutually exclusive...wherever Wilson is perceived to have spoken or acted for 'the little man','democracy','liberty','individual opportunity'and the like, he was 'liberal' and moralistic; wherever he is preceived to have spoken or acted for corporate interests, economic expansion abroad and the like, he was 'conservative,' 'commercialistic,' 'expedient,' or realistic." Perhaps Wilson made the transition from Elkins's and McKitrick's Country to Court in his own lifetime.)

Going back to Elkins and McKitrick:

"...Court supporters could be as ready as anyone to deplore the burdens of war, to admit the possibility of the debt getting out of hand, or to acknowledge that standing armies needed watching, or to concede that money, commerce and virtue did not always go together. Nevertheless, the world of the eighteenth century had become immensely widened in scope for the interests of the British nation. A far-flung network of overseas trade, a colonial empire and a due weight in the power relations of Europe all required an active foreign policy and a professional military and naval establishment for giving effect to it. Moreover, such commitments and responsibilities would scarcely even be thinkable without a dependable system of public finance to support them.

"Thus while such received civic humanist values as those concerning luxury, corruption and virtue may not have been exactly repudiated, Court language certainly showed a decidedly revised slant on them. For instance, whatever the virtue once inherent in citizen militias in preference to standing armies, it was now out of the question to send off such a body to be destroyed in France or anywhere else. As for the public debt, the very size of it and the sound credit of the government on which it rested could be seen as testimony to the patriotism and good faith of the class willing to invest their money in it. And as the nation prospered and commerce flourished, luxury itself need not be thought of as leading to certain corruption if it brought refinement and amenity to the common life. So the emergent financial system, the government structure that administered it, the men of affairs who both supported and profited from it, and the beneficent consequences for the nation that could be claimed to flow from it were all defended in strong accents...

"...Virtually nobody was yet prepared to argue that regular parties might be a good thing; Court and Country each charged the other with stirring up faction; and many a country gentleman shied away from joining in any sustained and systematic effort to discredit the Court's established policies...

"...There appears to be a striking parallel between the Court-Country divisions of Georgian England and those that subsequently appeared in Washingtonian America.

"The principal concerns of the Country viewpoint in England re-emerged with an exceptional degree of similarity in the new republic and gave form at virtually every turn to the opposition temper which developed in very short order in response to the policies and actions of the new federal government...As the Hamiltonian program revealed itself over the next two years--a sizable funded debt, a powerful national bank, excises, nationally subsidized manufactures, and eventually even a standing army--the Walpolean parallel at every point was too obvious to miss. It was in resistance to this, and everything it seemed to imply, that the Jeffersonian persuasion was erected."

Jefferson's republican philosophy was largely a response to Hamilton's big government approach. According to it "a predominantly agricultural society was seen as the kind inherently most virtuous, the freest from corruption, the kind best constituted for resisting decay, and the one most to be desired for the American republic." At the root of Jefferson's emphasis on an agricultural America was a mistaken belief in Malthusian economics. In Jefferson's and Madison's view:

"What was above all to be avoided was an unholy alliance of commerce, manufacturing, money and public credit fostered by an intrusive and interfering government. The right kind of commerce could flourish in a world of free trade such as that envisioned by Adam Smith in his famous indictment of mercantilism. Such a world, as the Americans knew all too well, did not yet exist."

Hamilton aimed to implement the British "Court" system in America. But (p. 27) "it was Jeffersonian Republicanism and not Hamiltonian Federalism that would provide the opening political opener for the emergence and growth of nineteenth century middle class capitalism. In contrast to Federalism, which was elitist, Jeffersonian Republicanism was inclusive and it attracted small artisans in the cities as well as entrepreneurs. In contrast, Federalism was elitist and its elitism led to its rejection.

Elkins and McKitrick argue that historians have overlooked Hume's importance to Hamilton's thinking because Hume was not so famous an economist as Smith. Hume, they argued, emphasized development economics to a greater degree than did Smith (p. 107). They write:

"In the economic essays of David Hume, published in 1752, one finds a theoretical projection of the optimum conditions for economic development: a rudimentary but shrewd forerunner of what would in our own day come to be called developmental economics...Hume's case for a commercial society goes well beyond simply the argument for national strength. In 'Of Refinement in the Arts' he insists not only that such a (commercial) society allows a nation to be strong in times of crisis but that it is, by its very nature, a good society...Here then was a very strong case for an urban, commercial society. Its common man of virtue was not the yeoman farmer but the skilled city artisan...'Of Money' and 'Of Interest' explore the relation between the available supply of money at any given time and the general level of productivity of the entire economy. In them, Hume challenges certain common suppositions. An increase in the money supply, according to conventional wisdom, should lead to a directly proportional increase in prices. But this would only happen, says Hume, if 'every man' were to have the same sum 'slipt into his pocket in one night.' If however, the increase were concentrated in relatively few hands, the conditions would be created whereby it would be used to increase the community's real wealth, which is not money but the production of commodities. More physical goods would thereupon be available, and thus prices would not rise in direct relation to the increase of money. The same argument is made with regard to the interest rate, which in the eighteenth century was regarded as the barometer of the community's economic health. It was commonly supposed that the interest rate rose or fell in direct proportion to the amount of money available--the more plentiful, the lower the interest and vice versa--but Hume denies that it worked in any such direct or mechanical way. The key variable is again the degree and manner in which liquid capital is concentrated, the assumption being that it will be in the hands of the most energetic and enterprising men in the community. These are the merchants, the men who are able to exercise the most rational choices as to the alternative uses for money, and it is this very process of directing money into the most productive channels whether through direct investment or lending at interest--rather than the simple quantity of it--that governs the interest rate.

(p. 112) "...Hamilton knew that despite an enormous expansion of the public debt since 1750 England's credit was stronger than ever, and even more significantly, that its economic growth during that same period had been phenomenal. America, meanwhile, unlike Great Britain, did not intend to be plagued by a string of interminable wars, and could thus steadily reduce rather than increase its public debt. Meanwhile, a funded debt combined with a national bank would not only open for the United States sources of credit that were not previously available but would also provide a stable circulating currency that could be expanded to meet the requirements of trade. A generation of merchant-enterprisers would thereby be given access to the capital needed to realize the vast potential of a whole continent endowed with untapped resources and an industrious, expanding population. Even if the public debt were not reduced--of it were reduced only very slowly, which was probably what Hamilton had in mind--the taxes for supporting it would constitute a steadily diminishing burden on a population growing both larger and richer..."

"So central, indeed, was the public credit to the country's well being, as Hamilton saw it, that every means must be taken to protect it. A war with any country would threaten that credit; another serious dispute with Great Britain would destroy it...Another way of putting this would be that America's prosperity and that of Great Britain were inseparable.

Hamilton's principal design reached its completed form in "Report on the Public Credit of January 9, 1790". Elkins and McKitrick emphasize that Hamilton's mind projected fluidly.

(p. 115) "In Hamilton's scheme of things the dynamic force was beyond doubt the merchant class. These were the men who could and would use capital to create more capital--who would build the ships, develop the markets, provide the goods and make the decisions that affected the uses to which the community's resources would be put...Hamilton's faith in the capacity of the merchant class to perform a creative role in the nation's life could rest on a persuasion that this class was the receptacle for a wide variety of knowledge, experiment and ideas...Parallel with Hamilton's projection for America as a society was one for the United States as a government. The government required a sound system of taxation, undoubted stability of credit both national and international, an orderly funding of the several complicated layers of public indebtedness that had grown out of the Revolution."

Many of the early Federalist debates concerned how to "fund" the public revolutionary war debt. "The capital created by a funded debt to become 'an accession of real wealth rather than merely an 'artifical increase of Capital', it must serve "as a New power in the operation of industry' and this would occur only if it went through the hands of men who would use it to build ships and factories, launch business ventures and augment commerce.

Key problems were whether to honor the Continental debt at par, whether to assume the state war debts, how to do the accounting for and settle the Revolutionary War accounts among the states. Hamilton proposed that the federal government assume the states' war debts and a settlement of accounts whereby no state could lose (p. 120). Honoring the debt at par or 6 percent was not possible, but Hamilton proposed a compromise of 4% interest, lowering the interest rate somewhat but to a moderate degree. He set up an excise tax on whiskey to accomplish this. A national bank would provide a dependable ciruclating currency and would manage the financial transactions of the Treasury (p. 123). Moreover, relations with Great Britain would be improved in order to improve trade and so make tariff income more stable.

The authors go on to write (p. 227) : "We cannot account with final precision for all the origins of Hamilton's bank plan, though certain of the main sources are clearly enough identified. In this instance, unlike that of his first Report on Public Credit, Hamilton's direct theoretical inspiration did not come from David Hume. Hume recognized that banks could be useful in providing credit for an expanding economy, but he also believed that they were an inflationary influence and that they encouraged unduly the export of specie. Hamilton could look, however, to a number of recognized authorities such as Postlethwayt and and Adam Anderson, or a favorable theoretical exposition of banks and their functions. He made considerable use of Adam Smith...There was a very close correlation, moreover, between Hamilton's final plan and the charter of the Bank of England, and in all likelihood he worked with a copy of the British statute at his elbow." One of the chief influences on Hamilton was William Pitt (p. 227-8).

The bank's opponents made arguments similar to those of libertarians like Howard S. Katz today (p. 229): "'This bank,' said Stone of Maryland, "will raise in this country a moneyed interest at the devotion of Government; it may bribe both States and individuals.' Jackson of Georgia thought it was 'calculated to benefit a small part of the United States, the mercantile interest only..' He called it a 'monopoly...of the public oneys for the benefit of the corporation to be created. But the kind of country-party fundamentalism with regard to banks that was to become so prominent in the politics of a lter generation was not nearly so sharp here. Men were against it but were not entirely sure why..."

Jefferson wanted to augment the number of representatives in the House since "the only corrective of what is corrupt in our prsent form of government will be the augmentation of the numbers in the lower house so as to get a more agricultural representation, which put that interest above that of stock jobbers." In 1791-2 the Republican opposition to the Federalists emerged "in reaction to the rising influence of the Treasury over Administration policy" (pp. 257-8). "Madison's attempt to prevent the establishment of a national bank" had not been fruitful. "Only two major items remained to complete Hamilton's program. One was congressional approval of a plan for direct assistance to domestic manufacturing through a system of tariffs and bounties. The other was the establishment of a model manufacturing corporation--financed and organized on a sufficient scale that it might take full advantage of government bounties and new labor-saving machinery, and compete successfully with European manufactures...Hamilton's subsequently famous Report on the Subject of Manufactures was submitted to Congress on December 5, 1791. Hamilton took the occasion to prepare a major policy statement, a labor which occupied him for well over a year. As much a work of theory as a series of particualr recommendations, the Report on Manufactures was intended to establish the ground for a systematic fostering of industry by government...In his commitment to the advantages of a mixed economy, together with his concern for the productivity of the nation as a whole there is a ring of modernity. The one writer of the eighteenth century whose experience and perceptions were in certain ways analogous to Hamilton's was David Hume...The Report on Manufactures, with its acute sensitivity to the many benefits that increased manufacturing might bring to an overwhelmingly agricultural economy, is in some respects the most Humean of all Hamilton's papers."

Hamilton argued against both Jefferson's and the Physiocrats' emphasis on agriculture and against Smith's laissez faire argument (p. 259). Hamilton argued that laissez faire overlooks "the deadening force of habit and custom. People do not easily make a spontaneous transition to new pursuits, nor are cautious sagacious capitalists normally disposed to sink their money in uncertain ventures. Thus, the incitement and patronage of government were needed both to overcome old habits and to embolden reluctant investors.

"The theoretical sections of the report reaches its culmination with Hamilton's effort to show that scarcity of capital is not a valid objection to a wide-scale launching of industrial enterprise. Among the remedies are the introduction of banks, with their powerful tendency to extend the active Capital of Country, as well as the attractions of America for foreign investors, both having already been demosntrated by experience. Hamilton's principal counter-arguemnt, however, is a defense of the funded debt, the existence of which relieves from all inquietude on the score of want of Capital. He insists that the funded debt, though not in itself an augmentation of the country's real wealth, is nonetheless a powerful instrument for bringing such augemntation about. The taxes required for servicing the debt may, if the debt is not excessive, serve as a stimulus to greater exertions throughout the community...

"Hamilton now makes the general assertion -- which in a modern developing state would be taken as a matter of course -- that a mixed economy is ' more lucrative and prosperous' than a purely agricultural one...Hamilton concludes by recommending a combination of tariffs, bounties and premiums on specific manufactured products. The proposals themsevles were modest, but the overall intention was an explicit policy of active government support of industrial growth for the benefit of the entire economy...It would be...misleading...to picutre Hamilton as conjuring up a kind of 'neo-mercantilism'. Mercantilism was a conscious policy of controlling the economy for purposes of state; Hamilton's purpose was a temporary stimulation of key sectors in an effort to mobilize the energies of the entire community...His ends were...complex and wnet well beyond simpleprotection.

Madison, who opposed Hamilton's statist governmental structure, began his opposition in Congress by attacking a bill that came up on February 3, 1792 for the encouragement of cod fisheries. "The word 'bounty' set off an uproar" (p. 276) as monopolistic interferences in the marketplace. As well, speculation in stock of the Bank of the United States led to the Panic of 1792 and increasing scepticism about Federalism.

"Duer and Macomb had secretly made it up between them that their partnerhsip would be of one year's duration and that they would 'be concerned in making Speculations in the Debt of the United States and in the Stock of the Bank of the United States and Bank of New York to the 31 December 1792.' They anticipated a rising market and may even have attempted to corner it. They made extensive contracts for future delivery and to pay for them began borrowing sums large and small at extravagant interest, from all classes in the city. They also laid hands on most of the cash surplus of the SUM (Society for Establishing Useful Manufactures, the embryonic industrial incubator that Hamilton had aimed to establish and to gain governmental support for it), of which both were leading directors. This furious activity was contagious, and by February, New York City was in a speculative frenzy. Other eastern cities were affected as well. Stocks, however, did not rise as fast as expected, and by March Duer, his credit exhausted was in deep trouble...Duer's failure led to other failures and by early April the city was in the grip of panic...by the fall of 1792 things were on the mend...Duer went to debtor's prison on March 23...Duer remained in jail, hopelessly insolvent, for the rest of his days...The atmosphere, nonetheless, had been heavily poisoned. A tendency to ascribe the most extensive evils to Treasury influence and to see in it a steady perversion of public morals was now very widespread. Many had come to believe--Jefferson and Madison among them--that Hamilton himself was enmeshed in corruption. There was a direct relation between such convictions and the eruption of open partisanship that occurred in the spring and summer of 1792. The last shred of likelihood, moreover, of general support for a program of encouragement to manufactures had been blow away forever.

"A major casualty of the Society for the Establishment of Useful Manufactures. Though it was not until aferwards that the Society even got going, and although it continued operations until 1796, the Panic had nonetheless dealt it a mortal blow....For more than a generation in the future no large-scale manufacturing enterprises of any sort would be successfully launched in America. Clearly something was missing from the Humean-Hamiltonian projection of a happy mercantile-industrial commonwealth which needed only the capacity to concentrate capital under the benevolent eye of government...the failure of such indispensable elements as management and technology...At the same time, something more than a country-party fundamentalism was involved in the Jeffersonian-Madisonian rage at 'gambling scoundrels' and in the Virginians' hatred of Hamilton and all that he stood for...It was all well and good to establish the public credit in such a way as to engage the resources of teh community's most energetic men, thus making the public debt an instrument whereby capital might be concentrated for future development...What is to stop the spirit of speculation from becoming an end to itself?

"Seth Johnson wrote to Andrew Craigie in 1791:

"The best support and surest resource of a nation:

"'is in the industry and frugality of its Citizens--whatever in any way tends to lessen or destroy those useful habits must be considered highly prejudicial--The present rage for Speculation by producing in some a sudden and great acuisition of wealth, allures others, of all ranks, from those regular habits of business thro' which the acquirement of property tho slow is Certain, to engage in what, like gaming depends on chance--They feel all the anxiety and eagerness attendant on deep play.

In 1792, Philip Frenau, writing as Brutus in his National Gazette in Philadelphia wrote (p. 283):

"'that a system of finance has issued from the Treasury of the United States and has given the rise to scenes of speculation calculated to aggrandize the few and the wealthy, by oppressing the great body of the people, to transfer the best resourcews of the country forever into the hands of the speculators, and so fix a burthen on the people of the United States and their posterity, which time, instead of diminishing will serve to strengthen and encrease...with unilimited import and excise laws pledged for its support and copied from the British statute book.'"

In 1792 Jefferson (p 287-8):

"had several private conversations with Washington...in the course of which he seems to have put few checks on his detestation of Hamilton's Treasury and the debaucheries to which he thought its policies were leading. He believed that the Treasury 'possessed already such an influence as to swallow up the whole Executive powers"; that it had contrived a system for luring the citizens into 'a species of gambling, destructive of morality, & which had introduced it's poison into the government itself"; and the the Report on Manufactures, which he hoped would be rejected, went beyond any measure yet advanced for turning the Repbulic into an unlimited government...and that 'there was a considerable squadron in both (houses)whose votes were devoted to the Paper and stock jobbing interest."

Elkins and McKitrick (p. 301) emphasize the elitist nature of Hamilton's ideology:

"Nothing he did was undertaken in a spirit basically hostile to the interest of a very special class in American society, those men in whose hands he still believed the nation's future prosperity rested. Nothing had altered for him the Humean vision of the merchant-enterpriser, the man of large affairs, as the type whoe creative energies would transform the continent. True, the Virginians viewed that type through very different eyes, and the words they applied to him were not honorific ones. But otherwise they were really not wrong when they repeated in endless ways that Hamilton was usuing the financial power of the United States -- as he had determined to do from the beginning, for the benefit of speculators."

Libertarian interpretations of history often assume that Progressivism was imposed afresh in response to advocacy of business interests in the late nineteenth and early twentieth centuries. However, it is more accurate to view Progressivism as an atavistic reappearance of 18th century Hamiltonian Humeanism. To the degree that Keynesian economics was a similarly atavistic and reactionary reappearance of Humean economic theory, it may be argued that there have been two cycles of American history. The Hamiltonian Federalist cycle from 1790 to 1800, which led to the Jeffersonian revolution of 1800. Then, the Progressive-New Deal cycle which reimposed Federalism first in the very Hamiltonian name of economic efficiency and management of the large "trusts" and then in the cloak of social democracy, with central banking being strengthened to new heights in 1932.

*Murray Rothbard and Ronald Radosh, editors, A New History of Leviathan: Essays on the Rise of the American Corporate State. New York: EP Dutton & Co., 1972.

The Left As Teen-Age Rebellion

The programs that the left advocates have done little to help and instead have harmed the poor. American inner cities deteriorated in response to urban renewal and welfare programs. The socialist revolution in Russia resulted in the starvation of millions of peasants and a wide range of ethnic hatreds. The Chinese socialists have oppressed and murdered Tibetans and the religious as well as millions of politically incorrect businessmen and bourgeoisie. More people have been slaughtered by the left and by socialism than by the advocates of any other creed or belief system. There has not been a socialist economy that has produced economic progress, and the general result of socialism as in Cuba and North Korea have been violent suppression and impoverishment of the poor. Yet, sociopathically, the academic left continues to justify, rationalize and lie about the effects of its programs.

In America, the left advocates a Kafkaesque program of large institutions, big government and centralized control. Its program includes not only the bureaucratization of medicine but also of investment, self-defense, business and political speech. The failure of its programs do not deter its commitment to rigid, large scale enterprises. For instance, the left remains obsessively attached to social security and the Federal Reserve Bank despite dismal benefit/contribution ratios from the former and inflation and corruption from the latter.

The left's recidivist advocacy of failed ideas can be explained in three ways. One, the left might be depicted as religiously obsessed with its ideas, and riddled with power needs, and so habituated to its love of government and centralized power despite seventy years of repeated failure. Two, the left is cognitively limited. Although many on the left are not smart, many are smart enough to grasp the pragmatic implications of its program. So this is at best a partial explanation. Three, the left is economically motivated.

There is a recurrent theme that goes something like, "Oh, isn't it amazing that George Soros or this or that businessman is a billionaire and yet he favors our (left-wing) positions". Conversely, many Libertarians and conservatives conceive of businessmen as supportive of the free market position, and then are astounded when businessmen do not support that view. In reality, the left's views coincide fairly neatly with the views of big business. Big business believes in big government because without it it would not be so big. The political scientist Charles Lindblom in his book on market economies remarks on the "privileged" position of big business, and indeed, since the days of Hamilton big business has relied on centralized government. There is no evidence that government support of big business helps the public in any way. Rather, subsidization makes firms less efficient and less customer oriented. For instance, cable television, telephone, public utilities, health care, banking and insurance firms are subsidized and they are among the least customer-responsive firms. The reason is that government regulation reduces competition.

Chief among government subsidies to big business is first the Fed, which provides interest rate and loan subsidies to business, and second, higher education, which provides training to large firms, to a degree at public expense. Thus, professors' livelihoods are linked to the welfare of big business and they themselves enjoy subsidies just like the ones big business enjoys. Without big business demand for graduates, there would be no demand for universities. So why are academics so often critical of big business?

In fact, university professors are NOT critical of big business where it counts, and their criticisms are not adverse to big business's interests. Big business is not adverse to enhanced central control, socialism, regulation and the mixed economy because such control eliminates competition. Universities have, as well, been the chief advocate of central banking through economics and business programs. Big business would not be so big without the Fed, and without the regulation that historians and sociologists advocate. There are few economists who question central banking, and of all the issues this is the one that big business cares about most.

University professors depend on big business much as teen-agers depend on their parents. Without big business demand for graduates, there would be no demand for universities. Thus, like teen-agers, university professors rebel by criticizing big business's hypocrisy, its lack of "social responsibility", and its selfishness, even as the professors themselves are equally hypocritical, equally irresponsible socially and even more selfish than business executives. But, like teen-agers, the university professors return home to be fed at the end of the day, and find the possibility that they will be thrown out and sent to work unthinkable. Moreover, the upshot of their criticisms, like teen-agers', is a psychological replica of the institutions and habits that they criticize. In other words, they claim to criticize big business even as they advocate systems that are necessary to it. In the end, the university professors are the chief proponents of big business capitalism, helping it by diverting attention to shrill issues like diversity and global warming.