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The Gilded Age (And A Very Specific Question)

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MJM58

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I'm currently in a debate with someone else, and he was making a lot of arguments that laissez-faire capitalist is a bad economic system and that the Gilded Age in America demonstrates this. He references the monopolies, the economic instability, the Panics of 1873 and 1893, J. P. Morgan's bailout, and income inequality.

My main question that I'd love to hear opinions on is why was the economy so unstable back then? In the debate, he referenced this graph (link), and he is right, it was more unstable during the Gilded Age. I also note that there was greater growth, but still, it was less stable. Why is this?

That's really mostly what I'd like to hear your opinions on, but I searched and couldn't find a discussion on the Gilded Age and how statists claim that the Gilded Age proves that unregulated capitalism is a failure. So, I wonder...

What about the monopolies? I was under the impression that even the Gilded Age wasn't pure laissez-faire capitalism, although it came close. I was under the impression that this was also the birth of corporate welfare and subsidies, and that this is what allowed monopolies to develop, because coercive monopolies can only arise with government interference in the markets.

What's the deal with the Panics of 1873 and 1893? Admittedly, I don't know much about them. What caused them?

I don't see anything inherently wrong with J. P. Morgan's bailout. After all, it was his money, he can do what he wants with it, right? But why was it necessary, as my opponent says, for him to bailout?

And what about the income inequality? Although, I don't understand why this is a bad thing. Some people are better at making money than others are, so isn't it natural that there'd be income inequality? Or is it a bad thing? Was it perpetuated by government?

I'm sorry if I sound so confused. The only things I learned in high school about all this was that the evil industrialists stole from the American middle class and made the economy terrible for their own selfish benefit, and that that's why we need to regulate them to make sure they don't ever do this again. I would really appreciate it if you all could shed some light on this subject for me. I understand it was not pure laissez-faire capitalism back then, but shouldn't things be better with minimal regulations than with the amount of regulations we have today?

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From my understanding, the 1893 crisis started with a perceived gold shortage. At first, people began buying up gold, limiting the supply available. This lead to questioning the use of the gold standard and great uncertainty. Essentially, the government scared off investments much the way they did during the great depression. Investors were scared that legislation would affect their possible investments. Another factor adding to 1893 recession was the end of the railroad boom, at least this is a claim--I am not sure that I wholly agree with this. The railroad industry did experience a major decline at this time, and the railroad industry had been a major boom industry prior, resulting from the invention of cheap steel. In my opinion, the railroad industry declined more as an effect of the times, not as a cause.

Upon doing a little research, I learned this about Benjamin Harrison, the president at the time:

Substantial appropriation bills were signed by Harrison for internal improvements, naval expansion, and subsidies for steamship lines. For the first time except in war, Congress appropriated a billion dollars. When critics attacked "the billion-dollar Congress," Speaker Thomas B. Reed replied, "This is a billion-dollar country." President Harrison also signed the Sherman Anti-Trust Act "to protect trade and commerce against unlawful restraints and monopolies," the first Federal act attempting to regulate trusts. White House Page on Harrison

This article also goes on to talk about high tariffs at the time. Trade is a necessary component of capitalism. In addition, this time period was a time period in which congress was really beginning to legislate laws regulating business practices. Although intended to increase worker safety, the industry was moving in this direction anyways, without the help of congress's coercion. Furthermore, Garet Garrett, in his book The American Story, makes an interesting point in this regard. He claims that the portrait of industrialists manipulating government is a great misconception. Citing the railroad lobby as among the most powerful at the time, yet the railroad lobby was unable to defeat the interstate commerce act.

As far as the income inequality, it is true that some men got to be incredibly wealthy, but they accomplished this through ingenuity and genius. What you are missing is that as result of these wise investments and ventures by these few individuals, raises rose steadily in the second half of the nineteenth century and so did the quality of living. You should really read Garet Garrett's The American Story if you are interested in this stuff.

Finally, around this time, Henry Ford, a capitalist, emerged on the scene, paying his workers twice the average daily wage of the time, and making a fortune while doing so. Capitalism benefited the working class more than it hurt them. The facts have been sort of twisted around. This is why suggested the book above, it tends to portray things in a different light.

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And what about the income inequality? Although, I don't understand why this is a bad thing. Some people are better at making money than others are, so isn't it natural that there'd be income inequality? Or is it a bad thing? Was it perpetuated by government?

There is nothing wrong with metaphysical "inequalities", which is the collectivist way of twisting unique individual differences into a sin.

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What's the deal with the Panics of 1873 and 1893? Admittedly, I don't know much about them. What caused them?

In post-agricultural societies, most downturns are caused by the over-extension of credit. "Over-extension" implies that the investments are not going to pay off (as a whole). At some point, this realization sets in. Instead of being the first to get in, people want to be the first to get out.

The attempt to pull back credit ripples through the economy, with creditors asking for their money back and debtors not able to repay. The way banking has been organized -- for a few centuries -- is that it is impossible for all the debtors in the economy to pay back all their debts at the time they are due. The system depends on debt being "rolled over" into new debt; i.e., the system depends on the fact that all creditors will not demand their loans back at the earliest point they may legally do so. A debtor may be solvent (i.e. able to pay back his liabilities over time), but may still go down if he cannot pay them back when they're actually due. People know that banks only keep a small reserve. If they fear that their neighbors will draw money from banks, they too will rush to do so. To illustrate, suppose a bank has 10 depositors who have each placed $1,000 in the bank. The bank has promised that it will pay back the money "on demand", but has lent the money out for months or years, keeping only a small amount on hand. If a small percentage of depositors panic and pull their money out, there will be none to make even the smaller payments requested by the others. This motivates those others to try and be the first to pull their own money out. This leads to a "run" on the bank.

Each particular crisis revolves around a different industry (or set of industries). So, the 1873 and 1893 panics involved railroad booms (remember how the dot-com bubble popped?) Sometimes, a truly revolutionary technology can result in great improvements in standards of living; yet, the accompanying euphoria can see more money being thrown at the industry than is warranted (at least in retrospect). Most panics also have their cast of villains: one or two big companies that did something shady. These actors do not cause the boom and bust, they ride the boom and precipitate the bust: i.e., they make things worse. Sometimes, these actors did not do anything illegal, they simply did something stupid. In fact short term thinking causes much heavier losses than any actual criminal acts.

In modern times, except for wars, the root cause of busts and booms can always be traced to the ebb and flow of levels of credit. When a depression becomes a panic, it is almost always because of some type of "run" on banks or bank-like institutions. In other words, the mismatch in duration of when money is legally due and when it can actually be paid allows creditors to demand money that cannot actually be repaid. This causes fear to escalate into a panic. The traditional way of "dealing" with panics has been that people and banks (or finance companies) that have invested in poor ventures lose money; those who have deposited funds with such banks and finance firms lose money. Even some investments that might have made it in normal times go down during a panic. In other words, marginal investments lose, along with the actually poor ones. Over a few cycles people behind "smart money" become richer and those behind "dumb money" lose. It is analogous to biological evolution, applied to investments.

In fact, for someone who has not gone hog wild, and still has a cash reserve and depositors who believe firmly in his long-term approach (e.g. J.P.Morgan), a panic was a time to buy assets in fire sales. This is not the primary reason people like Morgan acted during panics. They realized that the system as a whole could be threatened if panic was allowed to spread. However, there is also a sense in which they were not "bailing people out". In essence, the decision making of the deep-pocket folk goes something like this: some investments of the boom have been bad, and must be allowed to fail; but, other investments are suffering because of "contagion". The solution is to draw the line and make a judgement of which ones are in each category. Then, deploy cash into the ones that are temporarily down, but which will be good in the long run.

In the U.S., the crisis of 1907 was the last one where private investors played the lead role in deciding when to pull back credit, who should fail and who should be rescued. The Fed was formed in 1913 because the government wanted to play a larger role. Unsurprisingly, the plan for the Fed was pushed by a certain bunch of bankers. Well, the problem is that governments are not driven primarily by the desire for profit, and the people in government don't put their own money on the line. At the sign of a downturn, the government has a propensity to not want to let the failures fail. They start to help much earlier than someone like Morgan would have done -- when things have turned down, but not yet dropped "enough". This can often have a modulating effect. The government also has a capability that Morgan did not have: the ability to redistribute money. The government can take money from Morgan, before Morgan would ever act, and give it to some of the marginal companies. Voila! The downturn is less steep!

This process (aka "the socialization of losses") modulates the previous evolution-like successes and failures. The longer-term result is a lower variability coupled with lower growth. In banking itself, the government has mostly run smart, super-conservative bankers out of business. How're they going to make money in an environment where the government underwrites the liabilities of the other bankers?

The two really drawn out depressions in that chart you linked to have been on the government's watch: the "great depression" and our current one.

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Book suggestions for this kind of thing:

On the so-called Guilded Age in general:

The Capitalist Manifesto, Andrew Bernstein

The Politically Incorrect Guide to American History, Thomas E Woods

How Capitalism Saved America, Tom DiLorenzo

The Myth of the Robber Barons, Folsom and McDonald

Capitalism: The Unknown Ideal, Rand (also has several chapters covering monopoly theory and comments on corporatism)

On the 19 century financial panics and crises

History of Money and Banking in the United States, Murray Rothbard

Economic. Depressions: Their Cause and Cure, Murray Rothbard

On inequality: basically, contrary to the assumption of the Marxist doctrine of class warfare, there is nothing wrong with downright inequality. On the free market, people earn income in proportion to their productive abilities, which means in accordance with the amount of and intensity of other people willing to trade with them, which means in accordance with ability to satisfy the wants of more people, which means there will be inequalities of wealth because every person is unique. A man has a right to make such exchanges as long as he does not infringe against the rights of someone else. Everyone has the right to make exchanges. Absolute equality is impossible and contrary to the nature of man as unique individuals.

Obviously we can see that there was in fact more inequality of wealth in the pre-capitalist eras, and the poorest person now has access to much more than even kings and emperors. The general trend of capitalism is healthy growth whereby luxuries for the rich in one age become commonplace for everyone.

see on this:

"Notes on the History of American Free Enterprise," Capitalism: The Unknown Ideal, Rand

"An Untitled Letter" critique of egalitarianism in Philosophy: Who Needs It, Rand

See the title essay, and also "Freedom, Inequality, Primitivism and the Division of Labor" in Egalitarianism as a Revolt Against Nature, Rothbard

"The Impossibility of Equality," "The Attack on Freedom of Contract," "The Attack on Income According to Earnings," Power and Market, Rothbard

See also the "Wilt Chamberlain argument" against egalitarian justice in Anarchy, State, and Utopia, Nozick

http://en.wikipedia.org/wiki/Anarchy,_State,_and_Utopia#Distributive_justice

Edited by 2046
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Looking at softwareNerd's reply, talking about investors asking for their money back from debtors, this was the case in 1893. Investors where attempting to get their money back to buy up gold, and there was, to some degree, a run on the banks to get money out to buy up gold. This was all caused by fears of a gold shortage.

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