Market Overview

It's Come to This: Act I: A Financially Engineered Yeoman Republic Comes into Being and Prospers


Imagine a republic whose political and financial histories begin, not accidentally, more or less simultaneously. The period in question is the late 1780s, when it is not only call-in radio crackpots and other bumpkin savants who wear knee-breeches and tri-corner hats…

Our story commences when the new nation's youngest Founder – a war hero, freshly minted lawyer, precocious political theorist and polemicist (he's just written most of what are later called Federalist Papers), and self-tutored financier whose genius even detractors acknowledge – becomes its first Treasury Secretary. He's been named to the post by the nation's admired first President. The latter, for his part, knows our friend's talents full well. He had, after all, retained the new Secretary, then aged but 21, as de facto chief of staff while leading the new nation's war for independence.

Now it happens that our Secretary's new nation is, ominously, very near bankrupt at birth. This owes partly to eight years of costly inflation- and debt-financed war. It stems also from several years' spending, sans counterpart taxing, by the nation's first post-revolutionary government – a Rube Goldberg contraption then known as ‘confederation.' That misbegotten creature, a woulda-been national government relying for funds on the voluntary donations of sub-national ‘state' governments, has happily been laid to rest, but its legacy sadly endures.

Insolvency is not the only problem confronting our new Secretary. There is also, relatedly, a painful economic contraction underway. This stems largely from the nation's insolvency itself, and a consequent shortage of both value-holding currency and sorely needed interstate collective action. Only scarce silver and gold, or barter, are widely trusted as means of exchange, so that trade and, in consequence, productive activity remain minimal. There also exists as of yet no functioning collective agent – no interstate government actor – that can supply public infrastructural goods such as roads, bridges, or canals between sub-national political units over which commerce might travel. For this reason too, enormous productive capacity sits idle.

As if all of these were not troubles enough, it now happens also that yahoos who live in the hinterland – drawling and drooling, whiskey-stilling and -swilling type folk – have been restive of late. They've been speaking of replaying the Revolution itself – this time not against absentee rulers whose authority they are not permitted to vote upon, but instead against their own freely elected new national government. Many of them still favor sub-national ‘state' over national ‘federal' government, hence sometimes call themselves ‘anti-federalists.' Naturally, they opposed ratification of our Founder-Secretary's Federal Constitution, as did many slave-owning ‘gentleman planters' to whom they look up for leadership and sponsorship. A national government, after all, might ultimately try to end slavery should it come to include many legislators from more populous ‘free' states.

What would be unambiguously comical were it not likewise indicative of profound educational underdevelopment across the new nation is that these anti-federalist, drunken yahoo type folk often are heard misquoting past panegyrics to ‘virtue' and ‘liberty,' penned by their ancestors in times when the words bore application. The whole sorry spectacle anticipates scenes their descendants will one day encounter in science fiction tales like Beneath the Planet of the Apes, in which post-apocalypse albino cave-dwellers worship underground missiles whose provenances, purposes, and mechanics they do not quite grasp… So, as I say, things don't look good. Indeed they look scary. Many of the best minds in consequence now incline to despair. They ‘seem to lack,' as the poet might have it, ‘all conviction,' while ‘the worst' for their part are all ‘full of passionate intensity.'

Ah, but this is just the sort of challenge our prodigious Secretary relishes. In order that our sorry prospect of a new nation might enjoy one final chance to finance its development by borrowing both from its own citizen-stakeholders and from the great lending houses of Europe, he has developed a plan: Treasury will issue debt instruments we later call ‘bills' and ‘bonds.' These will guarantee payouts from secure sources of funding. Among the said sources is an effective new system of ‘imposts' – that's taxes – legally grounded in authority that the new Constitution vests in the federal – no longer ‘confederal' – government.

But wait, there is more: The proceeds of the new Treasury instruments will be employed not only to finance and, as we shall see, catalyze further financing for national infrastructure development, but also to refinance debts owed by sub-national state units of government. The national government will in other words ‘assume' the states' obligations incurred during the War, which will in turn transform wealthy creditors into stakeholders in, hence supporters of, the new national rather than sub-national state governments. That will in turn further consolidate the national government, enabling it to function as a true collective agent on behalf of all citizens, effectually solving hitherto intractable problems that fragmented state governments are simply incapable, structurally speaking, of addressing.

This comprehensive and visionary plan, meditated by the Secretary back during the War when he also was sketching a draft constitution between battles, will later be recognized as having been prescient.

What's ‘prescient' about it? Well, one thing the Secretary has seen, while many others have not, is that want of a taxing authority was much of what rendered the first government impotent – an ‘imbecile' government, as the Secretary had dubbed it. It prevented that government's acting at all, let alone for the states as a whole. And partly for that very reason, it stood in the way of development credit as well. Hence it also effectively brought on the new nation's first slump, for reasons we've already noted. Our Treasury Secretary sees all of this, and he sees something more: A well-funded national debt-issuance not only will bind all the states into one federal union and attract needed credit; it also will bring something all nations need and our new nation lacks: an expansible medium of exchange – that is, an adjustable money supply – and, relatedly, a financial system.

You see, in order for there to be an expansible money supply that can grow with the volume of commerce, and for there to be a financial system, there have to be both financial instruments of some sort – tradable claims upon reliable wealth or revenue streams – and accessible locations where parties can trade and acquire those same instruments. But for there to be wealth or revenue streams of the requisite sort in sufficient abundance, there have to be wealth- or revenue-generating firms and, both concurrently and prior to that – so as to start and then keep the ball rolling – governments possessed of taxation and regulatory authority. Without the latter, there simply will not be enough in the way of reliable wealth or revenue streams, currency and other financial instruments, or centrally located financial markets to sustain commerce, commerce-inspired productive activity, and consequent growth.

What's the connection among all those things? Well, if financing for new firms and projects is to be had from anyone more than a few of the most risk-tolerant of ultra-wealthy grandees, and is to be readily tapped at accessible central locations, then two conditions will have to be met: There must be at least one large investment-worthy, security-issuing entity able to pay what it owes – an entity that deserves and attracts ‘full faith and credit' such that its issued securities are attractive to many. And there must be some place or places where everyone knows they can go to invest in that entity by purchasing its securities – an ‘exchange.' There is only one entity of the requisite sort – the sort that can issue securities that even the most risk-wary will buy, and securities that therefore can catalyze the emergence of more multi-purpose securities exchanges. That is a government with taxing authority it is able and willing to use, and against which it is willing to issue debt instruments – including, down the historical pike, ‘bank-‘ or ‘reserve-notes': currency.

So what our first Secretary sees is that, through a large issuance of debt securities funded by a reliable system of taxation, his Treasury will accomplish even more than national unity and the attraction of credit that's needed for development finance, important as those are. He will also effectively create the first financial instrument that can be widely traded. And he will thereby effectively instigate both (a) the creation of a money-form (or ‘money substitute' – take your terminological pick) whose supply now can grow in tandem with that of goods and services themselves, provided the tax take does too; and (b) the spontaneous emergence of ‘financial centers' where even private suppliers and seekers of capital can one day find one another.

Now, though our Secretary's plan ultimately proves a tough sell to the ‘states' rights'-favoring ‘gentleman planters' who constitute part of the new national legislature, as well as to the growing population of suspicious yahoos whose fears of ‘tyranny' and ‘stock-jobbers' the planters are adept at exploiting, it's soon approved and put into effect. It has, after all, the support of the nation's admired first President, himself a gentleman planner – save one who has risen above his parochial attachments in leading the War that has freed the full nation. Our Secretary wastes no time at all in getting things underway.

Et voi-la! The plan works. The Secretary's program succeeds more prodigiously than even he seems to have anticipated. Within days of the national debt-issuance, crowds of people are seen buying and selling the new ‘Treasuries' under a Buttonwood tree, on a street that's been named for the wall that once ran that street's course, at the southern tip of a city that for a time is the nation's political capital and now, soon enough, will be its financial capital as well. Like remarks hold of a street that is named for another tree species, Chestnut this time, in another of the new nation's large cities – a city that also has been, and for a time will again be, its political capital. And indeed all of the nation's chief cities soon feature counterpart places – places where people who once thought themselves state-stakeholders increasingly come now to think themselves national stakeholders.

Now for a while, the Treasury's new instruments amount to the sole liquid security traded across the new nation. Before very long, however, private issuers likewise begin to get into the act. Seeing as they do all the buyers and sellers of Treasuries on street-corners, they realize that they too can seek funding at those very places. In fairly short order a full stock and bond market emerges, through which new firms finance operations that will first slowly, then steadily more quickly, transform the once bankrupt and backward new nation into the world's first corporate- industrial powerhouse.

The first such private stock, as it happens, owes as much to our first Secretary as do the national debt instrument themselves. That stock is issued by a firm that our Secretary establishes in his private capacity – a bank he cofounds with one Isaac Roosevelt, which continues to this day as the oldest surviving financial institution in the nation. Many more firms of course follow in the fullness of time – canal companies, communications firms, railroads, manufacturers, multitudinous product- and service-providers, you name it.

As all of this development proceeds and the Treasury's credit and impost revenue grow, the now ‘energetic' and well financed national government, as the Secretary described and designed it, begins over time to ensure that the proceeds of growth flow out broadly. Labor laws, health and safety regulation, social safety net legislation, and ultimately the tax code itself, all within national rather than sub-national ‘state' jurisdiction, ensure the expansion of what becomes a vast middle class, which comes to be called the ‘backbone' of the nation. In effect, we become a nation of more or less economically secure ‘yeomen' of the sort that the Secretary's principal political antagonist – a slave-owning ‘gentleman planter' who died in great debt to French vineyards, clothiers, furniture-makers and booksellers, but who wrote beautifully of liberty and self-sufficiency – had eloquently called for. And we do so precisely by means that the Secretary had presciently put into place.

The growth of this middle class ‘yeoman' portion of the population, what's more, spurs further and faster growth on the part of the nation's economy itself. For these people provide the lion's share of what later comes to be known as growth-fueling ‘consumer demand.' It is their purchases that provide incentives to firms to produce and provide more and more, hence to employ and pay more and more too. It is likewise their purchases, therefore, that spur technology- and further employment-encouraging investment across the nation's economy. (A few of the nation's later industrialists intuit this connection, and thus voluntarily pay their employees high wages in order that they might purchase the industrialists' products.) The nation accordingly grows and develops much faster, and more sustainably, than do its counterpart former-colony nations to the south. In those latter places, which later come to be called ‘banana republics,' old feudal patterns of ownership and production prevail, so wealth tends to concentrate at the tops of the distributions. Consumer demand levels accordingly remain low. And so economic growth remains stunted for centuries.

Now, as all of this financial, consequent productive, and more or less egalitarian development proceeds, one thing that tends to slip notice is that those Treasuries that set the whole process in motion continue to constitute, even as late as the 21st century, by far the deepest, most liquid of all of the nation's enormous investment markets. And there is more: They also constitute, from the mid-20th century on down, the deepest such market in all of the world. Indeed they become the global economy's principal reserve asset – the investment par excellence in which all who hold surplus can safely both store and then re-release value, and on which all who require collateral can rely in their credit transactions.

This depth in the market for Treasuries – which is to say, this volume of Treasury debt outstanding – yields additional collateral benefits, pun quite intended. It enables Treasuries, for example, to serve as an asset – indeed the asset – through which another, later-instituted instrumentality can carefully manage the nation's credit and monetary conditions with a view to maintaining both full employment and healthy price- and financial stability. That is our central bank, aptly called a ‘federal reserve,' itself partly reprising a role formerly served by an ancestor institution that our Founder-Secretary also established, but which the earlier mentioned yahoos – beginning with the yahoos' own aforementioned slave-holder ‘liberty'-loving French-wine-drinking president – subsequently destroyed to the economy's renewed detriment. Treasury market safety and depth also enable those instruments later to underwrite a vast overnight lending infrastructure known as the ‘repo' market, which comes to constitute a critical part of the nation's now highly sophisticated financial system.

Yes, Treasuries are ‘as good as gold' where financial instruments of all sorts, including currencies, are concerned. And much the same will hold true of their cousin, the dollar, the moment there comes into being a truly national currency linked to the national debt instrument. This happens about 60 years after our Secretary's decease, as a means of financing a civil war against slaveholding yahoos still up in arms about our Secretary's continuing legacy – a long story better told elsewhere.

These forms of ‘gold,' whose supply is not a hostage to such accidents as the earth's supply of shiny metal but instead is managed carefully by educated public servants, lie at the very core of our new nation's grand financial, economic, and political success. They are in effect the ‘fuel' that feeds its engines of prosperity. And it's all because that credit-rating which the Secretary made it top priority to develop was, indeed, developed – then maintained for centuries. And that is all because, in turn, the system of reliable taxation that he had introduced to guarantee those instruments and then spread the gains across the population continued to function, hence to underwrite that steady growth of the economy which it first set in motion back in those fateful 1780s.

Ah, but even the most seemingly miraculous of success stories can sometimes come a cropper. And so it happened to our republic some 230 years after its birth. What happened, you ask? The story is long, but not very complicated. It is in essence the story of a steady dismantling, by latterday ‘gentleman planter' counterparts and their duped yahoo henchmen, of all that our first Treasury Secretary and his successors worked prodigiously to construct. To that we turn next time…

Posted-In: News Politics Legal Treasuries Events Global Economics Success Stories


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