Monday, May 07, 2007

Great minds think totally differently sometimes.

Conservatives tend to admire Sir Winston Churchill for his great political service to the British Empire during World War II. But one thing that Conservatives tend to overlook is that Sir Winston Churchill wasn't exactly the world's greatest historian (or the world's greatest peacetime politician, for that matter). Here's an example regarding Alexander Hamiliton's Report on Public Credit of 1790 that I came across when reading The Great Republic: A History of America (my boldface):
The whole debt was to be funded; all the old bonds and certificates which had been rotted by speculation were to be called in and new securities issued. A sinking fund was to be created and a national bank set up.

The moneyed interest was overjoyed by this programme, but there was bitter opposition from those who realised that the new Government was using its taxing powers to pay interest to the speculative holders of state debts now assumed by Congress. The clash between capitalist and agrarian again glared forth. The New England merchants had invested most of their war-time profits in paper bonds, which now gained enormously in value. Massachusetts, which had the largest state debt, profited most. The mass of public debt was concentrated in the hands of small groups in Philadelphia, New York, and Boston. The nation was taxed to pay them at par for what they had purchased at a tremendous discount.
This is all technically true, except that it leaves out the key fact that Alexander Hamilton was basically looking for what we now call a re-fi. According to The Age of Federalism:
Such, then, was Alexander Hamilton's grand design. The Continental debt, though originally set at 6 percent, would be funded at 4, but it would be done in such a way that the soundness of the public credit would be all but self-evident from the start.
So Churchill doesn't get the story quite right here. But suppose as Churchill suggests that paying the mammoth national war debt at par and with the original interest despite war-time inflation is a real bone-headed move. Who, then, could possibly make a decision so fundamentally flawed (embedded hyperlinks removed):
In the UK the pound was returned to the gold standard in 1925, by the somewhat reluctant Chancellor of the Exchequer Winston Churchill, on the advice of conservative economists at the time. Although a higher gold price and significant inflation had followed the WWI ending of the gold standard, Churchill returned to the standard at the pre-war gold price. For five years prior to 1925 the gold price was managed downward to the pre-war level, meaning a significant deflation was forced onto the economy.


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