Mr. Lincoln's War

We have been searching for the ‘why?’

Why does no one say “the United States are…?” Since the War Between the States, the United States has become singular.

Before 1860, the United States were not even a nation. Instead, they were a union of sovereign states. But Lincoln used the word ‘nation’ five times in his Gettysburg address. And now it is ‘one nation, indivisible.’

Before that time, Americans had assumed that free people had the right to take a union apart just as they had the right to put one together. Even Lincoln favored the right of secession, when it suited him. After Virginia seceded from the union, Lincoln plotted with unionists in Virginia’s western counties – and thus encouraged them to secede from Virginia, forming the new state of West Virginia.

You may recall how this series of letters began. Why, in the land of the free and home of the brave, I wondered, do people give up a third of their usufructs to the tax collectors? Why do they let themselves be bossed around by every half-wit regulator with a GS number? Why do they allow politicians to tell them what money they shall use…and permit public servants to set – by decree – the rates at which banks borrow from the central banking authority?

In searching for the why, we have – so far – only stumbled upon the ‘when.’ But I feel we are on the trail of something big. For we are looking into the heart of darkness – the ‘Chaos and Dark’ of the human condition.

Going back to the ‘when,’ we have discovered the birth of central banking and managed paper currency in America. Today, we look again at that period – when the whelp was still newly born and still dewy and wet…soft as a sponge and fragile as a campaign promise.

Let us see what sired this hound…and what bitch delivered it…and then, perhaps we will even get a glimpse of the ‘what’ it may become…before it darts into the dense forgotten underbrush of financial history.

After his inauguration, had Mr. Lincoln allowed the Deep South to go its own way, commented The Times of London, “the result might fairly have been quoted as illustrating the advantages of Democracy, but when Republicans put empire above liberty, and restored political oppression and war rather than suffer any abatement of national power, it was clear that nature at Washington was precisely the same as nature at St. Petersburg…Democracy broke down not when the Union ceased to be agreeable to all its constituent States, but when it was upheld, like any other Empire, by force of arms.”

The force of arms is expensive. Unlike a good business deal or a good marriage, a political transaction (that is, one that relies upon the force of arms) is never a win-win situation. Nor is it even a win-lose situation, such as a gambling wager – in which the amount won by one party is equal to the amount lost by the other. Instead, political deals involve what economists call ‘deadweight losses.” Though one side may gain an advantage at the expense of the other, the net result to the whole society is negative. In the aggregate, everyone loses.

This was true of slavery, and of the war that was supposedly fought to end it.

Plantation owners – the south’s antebellum aristocracy – were the only winners from slavery. Most whites, even in the South, gained nothing. Instead, they were forced to compete with unpaid slave labor.

In the North, whites didn’t like the idea of competing with black laborers – even if they were paid market wages. So great was the Irish immigrants’ indignation that they rioted in New York city in mid-July of 1863. In fact, the riot – in which mobs attacked rich white men and poor black men – left 1,000 people dead. It was put down on this day – July 17th – by federal troops coming directly from the battle of Gettysburg.

But even in the case of chattel slavery, the market works her own leveling wonders. A white man in the early 1800s might decide to use his $1,000 or so to buy a slave. Or he might buy government bonds. The return on either one would be about the same, according to Jeffrey Rogers Hummel in his book “Emancipating Slaves, Enslaving Free Men,” between 8% and 12% – or about what you might have gotten in stocks during the following century.

One of the big differences between a bond and a black slave, however, was that the bond had no legs. It didn’t run away.

How much would a bond be worth if it could get away from you and disappear down a dark alley? That was the problem with slavery. The South was sparsely inhabited and rich in swamps, hills and impenetrable thickets. Slaves often ran away and hid – sometimes intermarrying with local Indian tribes and forming whole new communities.

In the border states, runaways could make their way to the free states and be gone forever. So great was the risk of loss that in states such as Maryland, by the middle of the 19th century, the capital value of slaves was in decline and slavery itself rapidly disintegrating. Who would pay the equivalent of $21,000 in today’s money to buy an asset that could walk away to nearby Pennsylvania within a few hours?

Slavery, worldwide, was doomed in the 19th century. Even in Brazil, so many slaves escaped to the Amazon jungle that it became impossible to make a go of it. The value of slaves fell by 80% in mid-century and the institution was abolished in 1888.

Slaves would not long be a profitable investment in America either, without the cooperation of the entire union. The northern states had to agree to send back escaped slaves…or the ‘peculiar institution’ was finished.

“Slavery was doomed politically even if Lincoln had permitted the small Gulf Coast Confederacy [when Lincoln took office only a few states in the Deep South had bolted] to depart in peace,” writes Hummel, “The Republican- controlled Congress would have been able to work toward emancipation within the border states, where slavery was already declining. In due course, the Radicals could have repealed the Fugitive Slave Law of 1850. With chattels feeling across the border and raising slavery’s enforcement costs, the peculiar institution’s final destruction within an independent cotton South was inevitable.”

“Slavery [is] much more secure in the Union than out of it,” said Alexander Stephens, who would become Vice President of the Confederacy.

Thus, Abraham Lincoln, running for president and seeking votes wherever he could get them, pledged to enforce the slave recovery provisions passed by Congress. Northern abolitionists were appalled. They even suggested that the North should secede from the union – so that escaping blacks could find sanctuary north of the Mason-Dixon line.

There is no foolishness to which a man will not stoop, dear reader, if he has a mob at his back and a public office within his grasp. Instead of letting the Deep South do as it pleased…Mr. Lincoln decided he would tell them what to do.

But Mr. Lincoln’s war – like slavery – was expensive, and turned out to be the biggest lose-lose proposition of America’s entire history.

At first, the introduction of greenbacks and huge new demand for war supplies triggered an economic boom. “The farms teem, the workshops and the factories whir, and the bustle of trade fills the streets,” the New York Times reported in 1863.

But it was mostly an illusion – like the recent bubble in high tech. “Adjusting for inflation,” says Hummel, “workers’ wages actually fell by one-third…[and] the 1860s saw the American economy’s worst performance of any decade between 1840 and 1930, with real income per capita falling by 3%.”

Of course, that was just the beginning of the losses. The total cost of the war was about $6.6 billion, split more or less evenly between the two sides. “The North’s side alone,” Hummel observes, “was enough to buy all slaves and set up each family with forty acres and a mule.”

Instead, Lincoln’s war left one dead soldier for every 6 slaves liberated. And it left blacks in the South as destitute as whites.

It also provided inspiration for future wars. General Sherman, marching through Georgia as Ludendorf would later march through Belgium, issued an order to shoot Southern prisoners: “should a Union man be murdered, then a rebel selected by lot will be shot…In aggravated cases, retaliation will be extended as high as five for one.”

Grant, meanwhile, decided to lay waste to the Shenandoah Valley. He wanted it stripped so bare “that crows flying over it for the balance of this season will have to carry their provender with them.”

Hardly a single household in the South avoided the loss of life or property. Those in the North did little better.

The number of people working for the Federal government rose almost five-fold. Central banking was launched…along with unbacked paper money…and an income tax. And scarcely a single provision of the Bill of Rights was left intact.

“The civil war of ’61,” observed Harvard professor George Ticknor, “has made a great gulf between what happened before it in our century and what has happened since, or what is likely to happen hereafter. It does not seem to me as if I were living in the country in which I was born or in which I received whatever I got of political education and principles.”

More on Thursday…on what is likely to happen hereafter…

Bill Bonner
Baltimore, Maryland
July 17, 2001

Let’s begin with The Big Picture.

Investors continue to lose money. In the first quarter of this year, Schwab reported, its customers lost $200 billion from the previous year. The S&P 500 is down over the last 3 years. The Dow is down over the last two. And the Nasdaq is still about 60% below its level of March 2000. The stock market meltdown that began last year has erased as much as $10 trillion in paper wealth worldwide.

The Fed is desperately trying to replace that lost paper wealth with new paper. In a single week in late June, the Fed added $42.8 billion in new cash. This year, more than $1 trillion will be added. Interest rates have been cut 6 times in the first 6 months of this year – to the point where the real cost of borrowing for Fed members is near zero.

Despite this, the price of gold goes nowhere. You can buy an ounce today for about what you would have paid two years ago. And long bonds – which should be falling in anticipation of an inflation threat – cling to 5% yields.

Meanwhile, all over the world, economies are weakening. And American consumers – upon whose broad backs the entire world’s economic growth seems to rest – grow more feeble and more likely, day by day, to shrug off the burden.

All of this points in a single direction – towards the worst possible denouement – deflation. The Levy Institute: “The U.S. economy is probably now in recession, and a prolonged period of subnormal growth and rising unemployment is likely…”

Over the past few years, The Levy Institute has argued that, “…the expansion of aggregate demand had been structured in an unusual and unsustainable way – unsustainable because it relied upon a continuing growth of private spending in excess of disposable income. It has become pretty clear during the last six to nine months that the process of implosion that so concerned us has now begun.”

Eric, what say ye?

******

– Well, no one said it would be easy to be bullish about a market full of stocks without any earnings. Six interest rate cuts and a lucky rabbit’s foot can only take you so far.

– Yesterday’s body-blow de jour was dealt by semiconductor stocks, or more precisely by Applied Materials CEO, Jim Morgan – normally an upbeat sort of guy.

– But, as Bill Fleckenstein of grantsinvestor.com reported, when “Sunny Jim” addressed the Semicon West trade show yesterday, “[He] acknowledged that the [semiconductor] recovery might not occur till the second half of 2002.”

– Thanks to the dire auguries, Applied Materials’ stock fell 9% yesterday, dragging down the Sox (semiconductor stock index), which fell about 7% on the day. The NASDAQ, Dow and S&P 500 all finished the day in the red as well. The Dow surrendered 67 points, while the NASDAQ fell more than 55 points to 2,029.

– From the “Whom should we believe” files: Motorola Chairman and Chief Executive Christopher Galvin predicts that the semiconductor industry will resume double-digit growth next year. Yet, Japan’s five largest computer chip manufacturers have all slashed their capital investment plans by more than 25% this year. You decide.

– “U.S. households are more indebted than they had ever been, and total debt is greater than total disposable income,” Bridgewater Associates reports. “Despite relatively low interest rates, household debt service payments eat away a near record 14.35% of disposable income.”

– Charles W. Peabody, bank analyst with Mitchell Securities, points out that the current debt service burden is “the highest level since the fourth quarter of 1986, which, at 14.38%, was the highest level ever since the Fed started tracking these data.”

– My friend, Frederick J. Sheehan, Jr. of John Hancock’s Asset Management, writes, “U.S. consumers have spent money like drunken sailors. That is, if the drunken sailors had sold the U.S.S. Nimitz and spent the proceeds in addition to their paychecks.”

– Nevertheless, most banks are turning a blind eye and continuing to lend with abandon to household borrowers.

– “While banks are cutting off corporations,” says Bridgewater, “only a relatively small percentage of banks are tightening standards on households. In the most recent Federal Reserve survey, a mere 4% of banks were tightening standards on mortgages, 19% on consumer loans and 20% on credit cards.”

– However, Peabody says there are signs already of developing weariness in the mortgage market. “Earlier this week, the Mortgage Bankers Association announced that its refinancing volume index had fallen to 1,200, down 21% for the week ended July 6. This index has now been cut by over half since peaking at over 2,803 on March 23, 2001. This weakening refi trend was echoed in recent days by other financial institutions.

– Countrywide Credit announced that its ‘refinance’ loan volume fell in June (from record levels in May) for the first time in 2001.”

– Pity the mighty Fed chairman. He tries to lead, but neither the economy nor the stock market care to follow. The second-half rebound anticipated by nearly every market strategist on Wall Street is MIA.

– “This is now the most aggressive monetary easing in the Federal Reserve’s 88-year history!” says James Stack of Investech Research. “Never before – with interest rates already at single-digit levels – has the Fed cut the Discount Rate by a full 2.75 percentage points in less than six months…this is true panic.”

– So what good is all this rate cutting? Not much so far. The Dow and the NASDAQ have both declined since the Fed started easing on January second.

– Nor is the bond market benefiting from Fed policy. Bianco Research calculates, “Despite the Fed easing 275 basis points this year, the 30-year bond lost 2.41% in the first half of 2001. The 30-year’s return is so dismal that it even underperformed the Dow Jones industrial average, which lost 1.85% over the same time period.”

– Interestingly, Bianco points out, “The gold/silver stock index (XAU) has returned 4.4% [year-to-date] versus a loss of 6.70% for the S&P 500.”

– “Some Fed officials still remember – and believe – that an easy monetary policy can have negative consequences,” writes Andy Kashdan of grantsinvestor.com. “Fed Governor Laurence Meyer noted in a speech last month that “we have to be concerned that as we ease to mitigate the risks of a persistent slowdown or recession, we do not at the same time create conditions that would lead to higher inflation as the expansion gathers momentum.” Meyer did not have to add that even worse would be higher inflation before the expansion has yet to appear.

*****

And what else? [asks Bill…]

*** More evidence of a real estate boom in Baltimore. I walked across the square to look at a house for sale. Five years ago, the 19th century rowhouse could have been bought for $200,000. Now, the same owners are asking $400,000.

*** Who would have believed that an investment in some of the most despised real estate in America would have performed better than the S&P?

*** A thin, nervous man showed us around the place. He had the wary look of a compulsive worrier, frightened by the thought of any change. I saw the twitch of his mustache and the fear in his eyes when I described how we might be able to put a new staircase along the back wall. Of course, this only encouraged me to think more expansively. ‘Yes, and we could knock down this wall completely…” I said, as the panicked look deepened. “and build an atrium all the way to the 4th floor…and tear down this brick wall and rip out these partitions….”

*** He could not take it any more. He turned around and took refuge in a dark, quiet corner until we had left.