Economics: Repeating Rhymes

by John on February 13, 2012

 Harpers Weekly,  1871

As Mark Twain famously didn’t say: “History may not repeat itself, but it certainly rhymes.”  There is something unfortunately close to doggerel here, when considering the nostrum that tax cuts and bailing out the wealthy improves the economy. Reviewing the Bush tax cuts and the current Republican candidate’s positions, recall Treasury Secretary Andrew Mellon’s policies prior to the Great Depression. Not only did Mellon, then one of America’s riches men, cut the maximum individual tax rate from 77 to 25 percent, but he also cut corporate taxes. He then engaged in an extraordinary program of refunds, rebates and remissions totaling another $6 billion (in 1930 dollars) during his nine years in office. To top it off, he proposed “replacing the lost revenues with a regressive national sales tax on all articles of retail trade”.

As the Depression began, Mellon stated: “Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High cost of living and high living will come down. People will work harder, live a more moral life.” (1)  If this doesn’t rhyme with Bush’s tax cuts and Romney’s position on not bailing out GM and letting the housing market continue to fail, what does? In Mellon’s favor, he believed that earned income should be taxed at a lower rate than capital gains, a far cry from the current carry-tax breaks for private equity. But this is all mere doggerel compared to the epic poem of the successive decline of the three main financial empires that preceded the U.S: Spain, Holland and England, who all repeated essentially the same stanzas of economic rise and fall, none learning from its predecessor.

Each country became, in turn, the world financial center. In the early 1500s, Spain became the world’s leading economic force as New World gold and silver flooded into their economy, creating an empire under Charles V that stretched from Antwerp, in the Lowlands, all the way to Italy. But by  the 1580s the largest segment of Spanish industry, textiles, had peaked. Industry continued to decline as capital fled for investments in the debt instruments of an increasingly profligate monarchy, creating a financial market focused on money at interest, and rents. The financial commentators of the time noticed.  Writing in 1600, Gonzalo de Cellorigo,  observed “an extreme concentration of rich and poor and there is no means of adjusting them one to another. Our condition is one in which we have rich who loll at ease, or poor who beg and we lack people of the middling sort, whom neither wealth or poverty prevents from pursuing the rightful form of business enjoined by natural law.” (2)

The Thirty Years War finally put paid to Spanish ascendancy, along with the expulsion of Protestants from the Spanish Netherlands, with many of the merchants and skilled craftsmen fleeing north to Amsterdam. By 1600, the Dutch soon had the largest merchant fleet and developed a significant technological edge in many industries, especially ship-building, textiles and specialized manufacture, as well as developing the precursor to modern banking. They held an edge from the 1600s to the late 1700s, when once again capital fled industry for the financial sector. Stunningly, much of that capital was invested in the next emerging financial empire, England. At their peak, the wealthy of Holland owned one quarter of England’s public debt, along with one third of the shares of the Bank of England and the British East India Company, while their manufacturing mostly peaked in the 1720s. Earlier, travelers had commented on the wealth of the Dutch middle class, but in 1764, English writer James Boswell noted: ”Most of their principal towns are sadly decayed, and instead of finding every mortal employed, you meet with multitudes of poor creatures who are starving in idleness.” (3)

England followed almost exactly the same path as Spain and Holland, with the rise of trade and the Industrial Revolution, an increasingly wealthy middle class and the celebration of manufacturing by the early Victorians, followed by the rise of the financial sector and investments abroad from the Argentine to Australia and America. As in Holland, capital fled England’s productive economy. Yet, like the Dutch, the British claimed that the substantial income from their global investments would offset the decline in Britain’s internal economy, with its ever-growing wage inequality. By the late Victorian age, lack of investment had rendered much of England’s manufacturing economy obsolescent. Yet the share of wealth of the top one percent continued to increase to 69% while, at the same time, Britain’s share of world manufacturing declined from 32% in 1870 to 15% in 1910. During this period, the U.S. share of manufacturing rose from 23% to 35% as America started the same historical cycle all over again.

Romney, Gingrich and Santorum are beyond intellectual redemption with their pandering and pimping in an attempt to procure the Republican base, and the 4th estate is never going to insist that they answer difficult fundamental questions.   However, for pundits such as David Brooks and those who call for moral rectitude and other nostrums to save us by restoring American exceptionalism, consider the preceding brief economic history. Then, with the current levels of inequality in an America that assigns up to 40% of corporate profits to the financial sector, look at Neil Degrasse Tyson’s excellent video graphic (4) on the decline of U.S. science .   Next, please explain, to borrow the title from Carmen and Rogoff’s excellent book on eight centuries of financial crisis, why ‘This Time is Different.’


Notes:   There’s nothing really new in this piece, and even the sources have been used repeatedly in both the academic and popular press.  What is really depressing is that they are so readily available, yet we get so little historical context in the current economic debates.   I’ve just listed the main sources with some comments.

1. Hoover, The Memoirs of Herbert Hoover. Vol.III  (McMillan 1952)  p. 30.  This quote fromHover’s Memoirs can be found on-line in the original McMillan version at: and it is very informative to read it in the context of Hoover’s views at the time, and how they were influenced by Mellon.

2. Elliot, Imperial Spain, 1479-1716. (Penguin, 1970)  p. 310  The full  quote, well worth reading,  is available on-line at: if you ‘search inside the book for ‘arbitristas’

3.  Boswell’s comments regarding Holland in his letter of 17 June 1764, to Temple are most instructive. “Utrecht is mostly ruined….” It’s on line with a little scrolling to page 288 at:

4.  Recorded 2011/05/12 during Tyson’s lecture at the University of Washington entitled “Adventures of an Astrophysicist”

{ 1 comment… read it below or add one }

Toby February 22, 2015 at 4:53 am

Interesting analysis, but isn’t economy really about value creation, with the average standard of living being related to the average value creation. Money is just to keep people from having to barter suppling liquidity, and truly free markets distribute wealth/value according to market forces.

Sports figures and CEOs are paid so much because of the bidding war for their scarce and valuable resource.

If you want more income equality to some extent, but more importantly to get the less wealthy to a higher standard of living, then first get everyone employed, then educate them and motivate
them to maximize their human capital. A one-way exchange of money that lacks the exchange of value in return between the partners in the exchange (redistribution) distorts the markets and should make the cost of buying value increase and just decreases the ratio of value creation to money supply.


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