Posts tagged with: Economic history

800px-Hartmann_Maschinenhalle_1868_(01)In a marvelous speech on the origins of economic freedom (and its subsequent fruits), Deirdre McCloskey aptly crystallizes the deeper implications of her work on bourgeois virtues and bourgeois dignity.

For example, though many doubted that those in once-socialistic India would come to see markets favorably, eventually those attitudes changed, and with it came prosperity. As McCloskey explains:

The leading Bollywood films changed their heroes from the 1950s to the 1980s from bureaucrats to businesspeople, and their villains from factory owners to policemen, in parallel with a similar shift in the ratio of praise for market-tested improvement and supply in the editorial pages of The Times of India… Did the change from hatred to admiration of market-tested improvement and supply make possible the Singh Reforms after 1991? Without some change in ideology Singh would not in a democracy have been able to liberalize the Indian economy…

…After 1991 and Singh much of the culture didn’t change, and probably won’t change much in future. Economic growth does not need to make people European. Unlike the British, Indians in 2030 will probably still give offerings to Lakshmi and the  son of Gauri, as they did in 1947 and 1991. Unlike the Germans, they will still play cricket, rather well. So it’s not deep “culture.” It’s sociology, rhetoric, ethics, how people talk about each other. (more…)

On Exchange and Usury, Cajetan, ThomasChristian’s Library Press has released a new translation of two treatises on exchange and usury by Thomas Cajetan (1469-1534), a Dominican theologian, philosopher, and cardinal.

Although best known for his commentaries on the Summa of Thomas Aquinas, Cajetan also wrote dozens of other works, including short treatises on socioeconomic problems.

Published under the name On Exchange and Usury, these treatises reflect on the banking industry of the early modern era in the context of the Church’s usury doctrine, examining which transactions were licit, and which involved usury, among other things. The book is part of CLP’s growing series, Sources in Early Modern Economics, Ethics, and Law.

In the introduction, Raymond de Roover summarizes some of the historical context, as well as Cajetan’s contribution therein:

Because of the Church’s usury doctrine, bankers were not supposed to charge interest and, consequently, had to look for some other way of lending money at a profit, with the result that banking became tied to exchange: local banking to manual exchange (cambium minutum), and foreign banking to real exchange or exchange by bills (cambium per litteras). Since the discounting of commercial paper was ruled out by the usury prohibition, bankers bought bills of exchange at a price that was determined by the foreign exchange rates… (more…)

Blog author: dpahman
Friday, October 19, 2012
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Working Paper: “The Eurozone Debt Crisis — The Options Now
Buchheit, Lee C. and Gulati, G. Mitu
SSRN Working Papers, October 8, 2012

The Eurozone debt crisis is entering its third year. The original objective of the official sector’s response to the crisis — containment — has failed. All of the countries of peripheral Europe are now in play; three of them (Greece, Ireland and Portugal) operate under full official sector bailout programs.

The prospect of the crisis engulfing the larger peripheral countries, Spain and Italy, has sparked a new round of official sector containment measures. These will involve active intervention by official sector players such as the European Central Bank in order to preserve market access for the affected countries.

This paper surveys the options now facing the sovereign debtors and their official sector sponsors. It concludes that there are no painless or riskless options. In the end, the question may come down to this — to what extent will the official sector sponsors of peripheral Europe be prepared to take on their own shoulders (and off of the shoulders of private sector lenders) a significant portion of the debt stocks of these countries during this period of fiscal adjustment? (more…)

In the Wall Street Journal, Acton Institute President and Co-Founder Rev. Robert A. Sirico looks at the recent “note” on economics released this week by the Vatican. The document, titled “Toward Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority,” was published with an eye toward the upcoming G-20 meeting in Cannes, France, on Nov. 3-4. This 18-page document has, Rev. Sirico observes, “been celebrated by advocates of bigger government the world over.”

But what’s missing from the popular analysis is that the Vatican document “embraces a sound economic theory concerning the cause of the world financial crisis: the breakdown of the postwar Bretton Woods monetary system and the unleashing of fiat currencies and central-bank printing presses.”

Rev. Sirico:

We went from a hard-money regime, in which there were restrictions on the power of central banks and financial institutions to create money and credit, to one where money became purely paper. There were no restrictions remaining on the power of governments to finance unlimited debt. Banks could create credit seemingly without limit. Central banks became the real power in the world economy.

None of this was true under a gold standard. That system limits the expansion of credit by an indelible physical fact. There was a limit, a check, a rule that went beyond the whim of financial masters and politicians. The Vatican seems to understand this.

But discerning the disease and finding the cure are very different undertakings, and here the document falls short. It imagines a new world central bank and political authority that will rule without “any partial vision or particular good” but rather seek “the common good.” Its decisions should “be made in the interest of all, not only to the advantage of some groups, whether they are formed by private lobbies or national governments.”

Somehow, with an intelligence never before discovered in government bureaucracies, these proposed global authorities would create “socio-economic, political and legal conditions essential for the existence of markets that are efficient and efficacious.”

Read “The Vatican’s Monetary Wisdom” on the website of the Wall Street Journal (may require registration).

Economic historian Brian Domitrovic has an interesting post up at his Forbes blog, Past & Present, on the proximate causes of the 2008 meltdown. According to Domitrovic, uncoordinated, even “weird” fiscal and budgetary policy in the early 2000s kept investors on the sidelines, and then flooded the system with easy money. The chickens came home to roost in 2008 (and they’re still perched in the coop).

In 2000, as the stock market was treading water in the context of the mammoth surplus and the electoral contest over fiscal policy, it was indicating that investors wanted to see what would ensue. What came was poorly-crafted tax policy and movement to gobble up the surplus on the spending side.

[After the crash of 2001-2003 and brief recession] the Federal Reserve stepped in to try to pick up the slack since fiscal policy had gotten weird. It was then, 2001-2003, that the Fed plumbed new lows in the federal funds rate

Finally, in 2003, Bush announced that the marginal rate of the income tax would be taken down immediately and somewhat substantially, to 35%. The Fed pivoted to raise rates, giving us an approximation of the Reagan-Volcker policy mix of the 1980s of real tax cuts and tight-ish money.

But for several years, too much money had been in the system, and it proceeded to migrate to monetary policy hedges, above all oil and land, the latter especially desirable because housing debt was fulsomely guaranteed.

Not only were these policies imprudent from a cold hard economic point of view, they weren’t capable of producing the human benefits they were supposed to. The false compassion of Bush-era conservatism is tied up with both the over-spending of the 2000s and the imprudent loans encouraged by an ultra-low interest rate environment and the “Ownership Society” of the 2004 campaign.

Government compassion does nothing to empower the poor—rather than pulling them out of poverty, it encourages reliance and assails their dignity. No matter how nice everyone’s being, nothing changes. And while some of the instincts behind the Ownership Society were right, the idea that it would be good for people to own houses they couldn’t properly afford was destructive. It severed the natural connection between labor and its results.

Domitrovic goes on:

The primary question we must ask about the 2000s is not what caused the crisis as the decade came to a close, but why was growth so subpar the whole time? Ultimately financial crises reflect the declining potential of the real economy to deliver…

And of course the economy will not grow and wealth will not be created under policies which undermine the dignity of Man’s labor. By reducing economics to fiscal calculus, academics and policy makers throw out half their toolbox: if the fiscal and budgetary warnings weren’t enough from 2000 to 2008, there were also human and moral warnings. Domitrovic (who, to be clear, is not one of those who has thrown out half his toolbox) concludes:

By rights, today we should not be mired in economic malaise; rather, we should be enjoying a fourth decade of prosperity on the heels of the roaring 1980s, 1990s, and 2000s.

By rights indeed, but our economists have cast off right, and reduced their science to a materialist one.

Until recently, many thought that Europe had escaped the worst of the 2008 financial crisis. Some even argued that the crisis has demonstrated the European social model’s superiority over “Anglo-Saxon capitalism”. In 2010, however, we have seen an entire country bailed out, riots in Athens, governments slashing budgets, and several European nations staring sovereign debt default in the face. Some are even claiming that the euro is finished. So what went wrong for Europe? How adequate have been the responses of European governments? And what are the consequences for America? The video is from the Aug. 2 Acton Lecture Series in Grand Rapids, Mich.