The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (14 page)

From 1859 to 1925, the Italian government ran deficits over 46 years. In only 20 years was the budget balanced.The lire was not a reserve currency; Italian politicos had to do the best they could. But the debts continued and led to war. Not because anyone in particular wanted war or debt for that matter. It was just that one was an evolutionary consequence of the other and both were consequences of the natural urges of democratic society.

Out of the condition of Italian society sprang certain streams of opinion and of desire that governments acted on and people accepted or at least surrendered to with little resistance, even though they may have not approved or even understood them. Bewildered statesmen turned to government debt as a device for creating purchasing power. No one approved it in principle. But there was no effective resistance because people demanded the fruits it brought. Another was the ever-growing reliance of social-welfare measures to mitigate the privations of the indigent, the unemployed, the sick, the aged. The instruments of debt and spending became standard equipment of politicians. And this need for spending opened the door to an easy surrender to the elements most interested in militarism and its handmaiden, imperialism.
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Whenever the debts threatened to overwhelm the nation, inventive politicians found new enemies to distract the people and quiet opponents.“If the country had no natural enemy to be cultivated, then an enemy had to be invented,” wrote Flynn.
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Following the war with Turkey, World War I provided fresh diversions. But after the war, the debts mounted even higher.The prewar debt was 15 billion lire. When the war ended it was four times as much. But after the war came new promises: an old-age pension system, unemployment insurance, a national heath care plan.The deficit reached 11 billion lire in 1919, then rose to 17 billion in 1921. How could the debts possibly be paid? Was there any way out, people wondered?

It was at this point that a scoundrel worthy of the crisis arrived on the scene and proceeded to make things worse. Benito Mussolini was the man for the job—energetic, opportunistic—with no scruples or fixed positions to hamper his movements. Mussolini, like Roosevelt, Bush, and practically every politician elected to any office in the entire twentieth century, denounced the loose spending policies of his predecessors and then spent even more. He decried the unbalanced budgets that had brought Italy to the brink of ruin and then piled new debt on the heavy end of the scale. Taking office in 1921, he found himself with a debt of 93 billion lire. By 1923, the
New York Times
estimated that his debt had risen to 405 billion lire, with a deficit for the year of 83 billion lire.

“Spending had become a settled part of the policy of fascism to create national income,” concluded Flynn, “except that the fascist state spent on a scale unimaginable to the old premiers.”
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“We were able to give a new turn to financial policy,” explained an Italian pamphlet from the period, “which aimed at improving the public services and at the same time securing a more effective action on the part of the state in promoting and facilitating national progress.”
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The policy ended in disaster. Spending on domestic programs shifted to spending on military ones. Soon, Italy was at war again. In blood, steel, shame, disgrace, and financial ruin, it settled its accounts.

The romantic lure of empire—the political pull of military spending, the economic delusion, the polished brass and boots—it was all too much to resist. Despite a disastrous experience in World War I, even the fun-loving Italians were soon marching around in jackboots and getting out maps of Abyssinia under Mussolini’s new leadership.

Mussolini was the perfect fascist. Like America’s leading neoconservatives, he was really a leftist, who saw an opportunity. And also like America’s neoconservatives, he was an admirer of Machiavelli, who believed that the ruler “must suppose all men bad and exploit the evil qualities in their nature whenever suitable occasion offers.”

Even Americans were impressed.“He is something new and vital in the sluggish old veins of European politics,” said Sol Bloom, then chairman of the House Foreign Relations Committee in 1926. “It will be a great thing not only for Italy but for all of us if he succeeds.”
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In investments, as in war, an early defeat is often more rewarding than a later one. Fortunately for the Italians, the African campaign was a fiasco. In a few years, Mussolini was hanging from a meat hook and Italians went back to making shoes, handbags, and pasta.

A characteristic of all empires is an elevation of the military caste. The essential business of empire builders is providing security for parts of the world beyond their own homeland—whether the subject nations want it or not. That is a military exercise. Over time, other forms of business and commerce are neglected. But military might rests on economic might.

People are generally blockheads when it comes to military adventures. Built into their genes is not only the desire to lord it over their neighbors, but also a deep distrust of anyone who fails to do his duty when the nation is at war. That is one of the things that make empires so attractive. Once underway, they meet with little domestic resistance. As time goes by, not only do other forms of business drop by the wayside, so do other domestic concerns. Everything gets sacrificed to the war gods—even the liberties for which they are meant to be fighting.

All that is needed is a war. For that, American imperialists have been blessed twice. First, in 1950, began the war against the Evil Empire. It was a nearly perfect military engagement; it threatened every life in America in a tangible, but not immediate, way. Billions of dollars would have to be spent to protect the nation. Everybody and everything must be available for confiscation, should the need arise. Even money that did not exist—the wealth that future generations had not yet earned—seemed a small price to pay to meet the danger right in front of them.

The
New York Times
of October 31, 1951, noticed the change:

. . . the Korean War has brought a great and probably long-lasting change in our history and our way of life . . . forcing us to adopt measures which are changing the whole American scene and our relations with the rest of the world. . . . We have embarked on a partial mobilization for which about a hundred billion dollars have been already made available. We have been compelled to activate and expand our alliances at an ultimate cost of some twenty-five billion dollars, to press for rearmament of our former enemies and to scatter our own forces at military bases throughout the world. Finally, we have been forced not only to retain but to expand the draft and to press for a system of universal military training which will affect the lives of a whole generation.The productive effort and the tax burden resulting from these measures are changing the economic pattern of the land.

What is not so clearly understood, here or abroad, is that these are no temporary measures for a temporary emergency but rather the beginning of a wholly new military status for the United States, which seems certain to be with us for a long time to come.
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As long as the empire lasts.

On the other side of this vast mobilization was another imperial power doing its own mobilizing—and for similar reasons. Both were in the protection racket. Both benefited—in an imperial sense—from the rivalry. But the Soviet Union’s economy had been so wrecked by its economists and central planners, it couldn’t keep up. By the 1980s, it was no longer a worthy adversary. By 1989, it came to its senses and got out of the empire business. Dropped tax rates came to an across-the-board 41 percent.
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And then, went on its way.

During the period of the Cold War—from 1950 to 1989, including the hot periods in Korea and Vietnam—the United States spent a total of $5 trillion protecting the free world from the Evil Empire. If it had not spent a dime, the outcome might have been exactly the same—but we cannot know that.

What we know is that after the collapse of the Soviet empire, only one was still standing. But it left this American empire in an awkward position. It was in the business of providing protection, but from whom? How could it justify high rates of taxation? How could it continue to employ its military men? For a few years—during the Clinton administration—the nation hesitated. But by 2004, the Pentagon budget was nearly 20 percent greater than it was in 1989.

Fortunately for the imperialists, on September 11, 2001, a small group of Muslim terrorists managed one of the most daring and successful attacks in history.With resources no greater than a chemical trace of those of their enemies in the United States, terrorists hijacked commercial airliners and flew them into landmark buildings in New York. The event was seen on television around the world. Within hours, George W. Bush announced a new war—against terrorism. This was an absurd stretch, too. Never before had a war been declared against a tactic. It was as if he had gone to war against naval blockades or fighting on Sunday. Every other empire made war on its enemies or its friends.The Bush administration was making war on no one in particular, and everyone in general. Every fighting force uses terror at one time or another. Besides,
terror
could be defined almost any way you wanted, and is only unacceptable so long as it remains unsuccessful. A terrorist who succeeds gets to have tea with the Queen of England, as did Menachim Begin.

But none of these issues seemed to matter. In the homeland, scarcely anyone complained.

“We are no longer able to choose between peace and war. We have embraced perpetual war. We are no longer able to choose the time, the circumstance or the battlefield.”
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You may think that this is a quotation from a journalist after September 11, 2001. Actually, it is a quote from Garet Garrett, writing about the Cold War in 1952. The comment works for the entire period, just as it would have worked for the Romans almost anytime during their 900-year empire. Or for the Mongols or even the British.

Garrett leaves us another interesting quote from the period:

“Talk of imminent threat to our national security through the application of external force is pure nonsense,” said General Douglas MacArthur. “Indeed it is a part of the general pattern of misguided policy that our country is now geared to an arms economy which was bred in an artificially induced psychosis of war hysteria and nurtured upon an incessant propaganda of fear. While such an economy may produce a sense of seeming prosperity for the moment, it rests on an illusionary foundation of complete unreliability and renders among our political leaders almost a greater fear of peace than is their fear of war.”
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Was he speaking in 1952 or 2002?

Senator Flanders elaborated in 1951:

Fear is felt and spread by the Department of Defense in the Pentagon. In part, the spreading of it is purposeful. Faced with what seem to be enormous armed forces aimed against us, we can scarcely expect the Department of Defense to do other than keep the people in a state of fear so that they will be prepared without limit to furnish men and munitions.... Another center from which fear is spread is the State Department. Our diplomacy has gone on the defensive. The real dependences of the State Department is in arms, armies and allies. There is no confidence left in anything except force. The fearfulness of the Pentagon and that of the State Department complement and reinforce each other.
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“Senator Flanders missed the point,” says Garrett. “Empire must put its faith in arms. Fear at last assumes the phase of a patriotic obsession. It is stronger than any political party.”
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Neither Flanders nor MacArthur recognized what business America had gotten itself into.

As the imperium moves toward a military footing, civil institutions sink. Senators still debate the merits of particular items of legislation and still sneak pork-barrel projects into military authorizations, but more and more, they become idle windbags rather than real legislators. Even when they see clearly the drift of the continent, they are powerless to stop it. Garet Garrett mentioned the case of Senator Taft discussing the expenses of the Korean War in March 1950.

“I do not know how long this program is going to continue. . . . We simply cannot keep the country in readiness to fight an all-out war unless we are willing to turn our country into a garrison state and abandon all the ideals of freedom upon which this nation has been erected.”
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Still, Senator Taft was not going to stand in the way of empire. He voted for the appropriations bill.

Fifty-five years later, the people’s representatives don’t even want to take up the most important issues. Maybe they are too hot to handle. Or maybe, somehow, they know that the important issues are beyond them. It is as if some instinct directs people to doing Nature’s own work. Nature will not tolerate an imperial monopoly forever. The empire must find a way to exterminate itself. No one wants to stand in its way. The two most important public issues of the early twenty-first century were the growth of debt in the United States, both public and private, and the stretch of American military resources around the world. Each of these matters had the potential to ruin the imperium itself and gave rise to vital questions. Why are we meddling all over the world? And, how are we going to pay for all the promises we’ve made? Every publicly elected official should have posed these questions. But almost none did.