Hodak Value

This day in 1626, Peter Minuit landed on this rocky island at the mouth of the Hudson. As everyone has been taught in school, the natives sold Manhattan to Minuit for $24 of beads and trinkets.

Rubes or victims? The $24 sale price has been used, in turn, to show how naive the natives were, or how badly the Europeans abused the natives in land transactions. Very likely, neither view is warranted. While it's true that native Indians did not have the same view of property rights as the Dutch, there is plenty of evidence that they did trade in similar rights. According to one scholar, the rubes, in this case, were not the Indians, but the Dutch. You see, Minuit bought Manhattan from the Canarsee tribe--a Lenape tribe from Brooklyn. The Canarsee didn't yet have a bridge to sell Minuit, so they made do instead with selling the Dutch an island they did not own. The tribe that was really screwed, here, were the Weckquaesgeeks, an Algonquin tribe that hunted the island, but favored the more forested, northern parts.

A good deal? The sale price and centuries that have passed are often used to illustrate the power of compound interest. The $24 figure itself is rather dated--it was calculated in the 1840s based on the value of cloth, trinkets, hatchets, etc. then estimated at 60 guilders. The translation of 17th century Dutch guilders to modern US currency would equate to roughly $600--still quite a bargain. The finance textbooks tells us that if the Lenape Indians had invested that sum at a rate approximating the 6-7% average real return on investment of American assets over that 350+ year period, that they could easily buy back all of Manhattan--land and buildings--with their profits.

Of course, the natives, even if they had been disposed to such an investment, had no financial markets available to provide such an opportunity. That would have to await the development of the very properties they had just sold.

After 15 years of Montessori, private and boarding school, about 100,000 hugs and endless other embarrassments suffered at the hands of his dad, Max graduates high school tomorrow! We'll be partying all weekend with assorted family coming from all over.

Have a safe Memorial Day!

Well, there is no news in Belgium, where I was this morning on my way to Switzerland. I don't know if there is much news here, either, but I find Switzerland a much more fascinating place. While most people think of Switzerland as a peace-loving country, it's history is among the most violent in Europe right up to about 150 years ago. In fact, it's long history of being literally at the center of conflicts between ever-shifting Great Powers led them to eventually figure out that they could only be the bone between big dogs. But they also figured that if they stuck together, given their home field advantage in highly rugged terrain, they could impose a very high cost on invaders. The Swiss used this combination of circumstances to form a federation that could assert its neutrality. Once accepted as a neutral country, they were left alone to develop.

Anyone who doubts the costs that wars impose even on the victors need only look at Switzerland versus her neighbors today. Beyond its stunning topography, Switzerland has all the cultural, legal, and economic elements of a remarkably stable society. Integrity is very big here--being a person of your word. That is the ultmate source of credibility when violence has been taken away as an option. Though peace-loving, they retain their original success formula of defensive preparation. Every man has military training, sustaining the credo that preparation for war is the best insurance that you may never have to fight one. Today, being surrounded by the E.U., war is the furthest thing from the Swiss mind--a remarkable void in mindspace, given the arc of civilization in Central Europe. And they won't fight other people's wars either, given their less than proud past as a major supplier of mercenaries.

More later as we travel from the French west to the German east. I don't mean for this to be a travelogue, so I'll think some more about the lessons Switzerland has for incentives--perverse and otherwise.

Light blogging this last week because I've been in Switzerland. We've basically driven across the country, from Geneva to St. Gallen. The proximate reasons for this trip were a lecture I gave at the University of St. Gallen and our annual meeting with my partners in Lucerne.

Our Swiss partner took us on a boat ride on beautiful Lake Lucerne today to the place where Switzerland was born. He pointed out the area where the William Tell legend occured. William Tell is a Swiss hero on the order of Paul Revere or Patrick Henry in the U.S. After hearing our host retell Tell's story, I cheekily asked him, "So, how much of that story do you think is true?" He said, "Of course it's true," with the kind of smile that belied his assertion. I suggested that it was probably as true as our Paul Revere story.

Questioning legends is a much less popular pastime than propogating them. It almost seems unpatriotic to embrace the truth, suggesting that the first casualty of war never really recovers. Nevertheless, questioning the legends a significant part of my upcoming series on the History of Scandal, starting with the Enron Story. (I didn't intend to segue that harshly into self-promotion. Really.)

On this day in 1893, the price of silver lost 15 percent of its value. This collapse triggered a panic that would eventually engulf over 600 banks and 15,000 businesses in bankruptcy, and lead to fifteen percent unemployment for the next several years.

What would cause such a drop in silver? How could a drop in one commodity have such a devastating effect? Just a few years earlier, the country was on a gold standard, which meant that the government had to keep gold reserves against which federal certificates could be redeemed. Since federal certificates were the basis for credit throughout the banking system, the gold standard, had the effect of keeping a lid on commodity prices and restricting the amount of credit that banks could issue. The resulting price stability and sound banking practices were beneficial to the East Coast money centers, but put a crimp on farmers and miners (i.e., commodity producers) who were subject to the tender mercies of fluctuating demand and (for the farmers) uncertain supply. This created the feeling among the western and southern population that the gold standard was mainly for the benefit of the urban bankers in the Northeast. Populist politicians fanned this suspicion, and in 1890 Congress passed the Sherman Silver Purchase Act which required the government buy 4.5 million ounces of silver per month, a dramatic increase from its earlier pattern of purchases.

This Act had several effects that would set the economy up for the Panic of 1893 and ensuing depression, including:

How many people know what the Declaration of Independence actually says? My son, who just got back from a course at FEE (he loved it) read it yesterday because he figured it was probably worth knowing first hand.

Much of what we know about the drafting of the Declaration comes from John Adams. Adams had agitated for a formal declaration. He pushed through the formation of a subcommittee to write it and the quiet, young Jefferson as a member of that subcommittee. Here is his famous recollection of the argument with Jefferson over who should draft it.

The subcommittee met. Jefferson proposed to me to make the draft.

I said, 'I will not,' 'You should do it.'

'Oh! no.' 'Why will you not? You ought to do it.'

'I will not.'

'Why?'

'Reasons enough.'

'What can be your reasons?'

'Reason first, you are a Virginian, and a Virginian ought to appear at the head of this business. Reason second, I am obnoxious, suspected, and unpopular. You are very much otherwise. Reason third, you can write ten times better than I can.'

'Well,' said Jefferson, 'if you are decided, I will do as well as I can.'

The Declaration ends with the famous pledge by the signers of "our Lives, our Fortunes, and our Sacred Honor," but few people understand how dangerous the Declaration really was for it's signers. Up until July of 1776, members of the Continental Congress could hold out some hope for a negotiated settlement with the Crown, whereby they might get the King to see the errors of his ministers in provoking the colonies, and perhaps be spared from hanging for treason. The colonies were in a state of rebellion for over a year by then. The Continental forces had lost every battle thus far, and was steadily approaching desperation.

Against this backdrop, the Declaration was drafted and passed, personally calling the King a "tyrant" and completely severing the bond to England. This was the point of no return. To every practical person alive that day, each signer of the Declaration had basically signed his death warrant. It wasn't until the following Christmas eve that there arose the first glimmer of hope among the colonists to be free of the Crown, and among the signers of living to an old age, when General Washington would win his first battle in his surprise attack on Trenton after crossing the Delaware.

The Declaration was originally passed on July 2nd when most delegates were in a rush to get out of Philadelphia. John Adams sent a letter to his wife the next morning predicting the celebrations that continue to this day, kind of:

The Second Day of July 1776 will be the most memorable Epocha, in the History of America. . . . It ought to be solemnized with Pomp and Parade, with Shews, Games, Sports, Guns, Bells, Bonfires, and Illuminations from one End of this Continent to the other from this Time forward forever more.

As it turns out, the Congress debated a few more changes in the final draft on July 3rd and 4th before finally approving the document. Thus history fixed the date joining Adams and Jefferson in history forever as the 4th of July. Adams and Jefferson both died on July, 4, 1826.

My dad was the first to call this morning to wish me a happy birthday. I figured he was the first person to wish me that when I came into the world, but he reminded me that things were different then. The father typically paced the waiting room until a doctor came out to announce, "Congratulations, it's a boy." After a while, the dad would be taken to a window behind which were an array of newborns that all looked much less like him than his bald, crotchety Uncle Saul. My case was complicated, my dad told me, by the fact that the doctors found the umbilical cord around my neck, and had to cut my mom to get me out which, at that time, was still a serious operation.

In contrast, when my big guy was born on this same day 18 years ago, I was in the operating room to see him emerge. (Like me, a generation earlier, he decided he wouldn't leave his mother without a scar for her trouble.) So, like every year since, we wished each other a happy birthday.

Actually, it's birthday week. My best friend was also born this day, and my wife on Monday. I took her out then, and she's taking me out tonight. Neither of us is that into growing older, but I always remind her that it's better than the alternative.

Which reminds me of the lady who brought me into the world. She was a 22 year old girl when the doctors cut her. Year's afterward, she often showed me her scar to remind me of the day I started causing her trouble--probably the weakest attempt at Jewish mother guilt I've ever seen. No doubt, the biggest trouble I caused her--also no fault of mine--was my near death due to illness just a few months after I was born. The doctors plainly told my parents that my survival was a miracle. My dad, who was hunted by Nazis as a child in France, probably took it as just another bit of good luck in an outrageously lucky life, but event clearly traumatized my mom. I believe it contributed to her unadulterated sincerity every time she wished me happy birthday thereafter. I've missed her calls very much these last few years.

Today in 1787, the delegates at the Constitutional Convention in Philadelphia put their names to their new creation. The Constitution was a remarkable document in several ways. First, it's short. At 5,000 words, it may be the shortest national constitution ever written. Our Founding Fathers understood the virtue of keeping it simple. People have to understand the rules if they are to accept them, let alone abide by them.

In contrast, the proposed E.U. constitution was about 150,000 words. Few understood it what it actually said. Its length and jargon was an insult to a free and educated people. It went down in flames. I'd like to think that the example of our short, relatively transparent document was partly responsible for that.

Much of our Constitution's power came from its support by a literate, propertied class upholding a heritage of personal and economic freedom. If it had been drafted outside of this context of the highly evolved social institutions it sought to support, the Constitution would have likely have ended up as merely 5,000 words on a piece of paper. Consider this cheap imitation:

The Constitution guarantees all Frenchmen equality, liberty, security, property, public debt, freedom of worship, public schooling, public relief, unrestricted freedom of the press, the right to assemble in groups, and the enjoyment of all the rights of man.

Or consider this phrase from another constitution:

In conformity with the interests of the working people, and in order to strengthen the socialist system, the citizens of the U.S.S.R. are guaranteed by law: 1. freedom of speech; 2. freedom of the press; 3. freedom of assembly, including the holding of mass meetings; 4. freedom of street processions and demonstrations.

Of course, the greatest thing about our constitution is that, despite its flaws and its reliance on highly imperfect people and institutions, it works. In the end, it delivers a government that is pretty much what the people want.

Yesterday's WSJ has a story about Ohio Attorney General Marc Dann. Dann is nurturing a reputation as a "bad cop" in enforcement against certain business practices. He says:

My job is to be the bad cop, and I'm comfortable with that role because I believe a terrible crime has been committed.

Sure, that didn't work out perfectly, but Santayana's famous quote works well, here. About 130 years ago, Ohio attorneys general began a crusade against Rockefeller and Standard Oil. Ohioans of the day viewed Standard's products as superior in quality as well as lower in price. They saw Rockefeller as a local Clevelander who did well, a rags-to-riches story to inspire youths everywhere, and a boon to their state's move to compete with Pennsylvania and New York as a major industrial and financial center. Ohio's political and media elite had other ideas.

Euclid Avenue, 1912

Ohio's politicians began what can only be called an obsessive campaign against Standard Oil. Ohio tax authorities began the relentless pursuit of Standard, and Rockefeller personally, for highly questionable tax liabilities. In 1890, Ohio's attorney general, successfully went after Standard's charter, forcing the trust to temporarily dissociate. These attacks propelled the careers of these prosecutors, and sold a lot of newspapers based on the narrative of the "tough" public servant pursuing a big business "unaccountable to the people."

Rockefeller eventually, and with a heavy heart, moved his family and his headquarters east to escape the persecution. Standard's mammoth financial and business activities followed him to New York. The oil refining industry shifted to what would become the "Chemical Coast" of New Jersey. Despite the fact that Cleveland is where the mighty New York Central, Erie, and Pennsylvania railroads converged on a fine harbor, Cleveland lost its industrial anchor, and the transportation hub of the U.S. would migrate west to Chicago.

Euclid Avenue, 2006

Today, when a New Yorker or Philadelphian wanders the streets of Cleveland, it seems like a city that has been largely bypassed by the 20th century. While other cities went through ups and downs with the economy, from the late 1800s Cleveland only went down. Unlike Philadelphia, Chicago or Pittsburgh, Cleveland never bounced back from the depression. Most businesses along what was once a thriving Euclid Avenue remain shuttered to this day. No major business calls Cleveland its home.

The destruction of Cleveland's hopes of becoming a major city on par with Philadelphia, Pittsburgh, or Chicago was not an economically driven loss. It was a politically driven forfeit.

So, Ohio's current attorney general comes from a distinguished line of "tough" guys going after "criminal" business interests.

At least the Indians are still in the pennant race.

The first Thanksgiving story, as they teach it in school:

Our national holiday really stems from the feast held in the autumn of 1621 by the Pilgrims and the Wampanoag to celebrate the colony's first successful harvest.

The Pilgrims would not have survived at Plimouth without the help of the native Wampanoag people and their leader Massasoit. So it was fitting that they joined the Pilgrim's feast. Massasoit sent several men to hunt deer as a gift to the English for their feast.

And this entry from Wikipedia:

The early settlers of Plymouth Colony in Massachusetts were particularly grateful to Squanto, the Native American and former British slave who taught them how to both catch eel and grow corn and also served as their native interpreter. Without Squanto's assistance, the settlers might not have survived in the New World.

This story sounds so nice, full of cooperation, success, and good food.

Here's the Thanksgiving story you might have missed:

On this day in 1867, Alfred Nobel patented dynamite--a stable compound of nitroglycerine and silica that could be remotely detonated with a blasting cap. We could now literally move mountains.

Thirty years later, Nobel's will was executed with a 31 million kronor (about $5 million at the time) endowment for the prizes for which he is now best remembered. Whether or not he created a "Peace" prize out of a sense of guilt, as some historians contend, I highly doubt. But there is no doubt that his invention made both large-scale construction and large-scale killing much easier, and he was acutely aware of the implications of the latter for his legacy.

If Nobel's impact on the world is considered by some (not me) ambiguous, the value of his Peace prize is (at least, I think) far more so. Here is an excellent primer on what it takes to win one.

Anna Mary Robertson was born on a small farm in rural New York in September of 1860. As soon as she was able to work, she hired herself out to help older couples in their homes. At the ripe age of 27, she married a farmer named Thomas Moses. They moved south, settling in Virginia on a 600 acre farm doing mostly dairy chores.

"Here our ten children were born, and there I left five little graves in that beautiful Shenandoah valley, coming (back) to New York state Dec. 15, 1905, with our five children to educate and put on their own footing."

"Leaving me unoccupied, I had to do something, so took up painting pictures in worsted, then in oil..."

You will hardly find anything about F. Joseph Giessler in or out of the blogosphere, so I'll provide this landing point on Google.

Joe grew up in northeastern Ohio, I believe it was on a farm near Akron, during the Depression and war. He went to Case University (now Case Western Reserve) to study engineering, where he graduated at the very top of his class. There he met his wife, JoAnne. After a stint in the military, they settled in Dayton, near her family and the Wright-Patterson air base that would directly or indirectly employ his considerable engineering talents for most of his working life.

The first time I met Joe was in 1986, at a lunch in Philadelphia that his daughter had somewhat anxiously arranged for me to meet her parents. We got along well from the start. Joe and JoAnne became wonderful in-laws and grandparents to our children. Although their daughter and I split when the kids were still infants, I continued to get cards or presents from her parents every birthday and Christmas to this day. On one of my birthdays when I happened to be in Cincinnati on business, they drove down from Dayton to take me out to dinner. We always appreciated our time together. Even after being forced to retire due to rapidly deteriorating vision, Joe never lost his optimism and willingness to explore new things. He even took up ballroom dancing.

The fact that my older son is now studying to become a 'third-generation' engineer derives from a lineage through me from Joe, and likely reflects a greater respect for the latter. I always had a unique regard for Joe in a similar way that I do for engineers in general. Most other disciplines--literature, philosophy, economics--invariably devolve into myriad conceptions of what mankind could be, resulting in a normative push on society toward some distant ideal. Engineers solve problems. They pull society up one measured step at a time. That's what Joe was like--in his work, with his family, and with everyone else privileged to gain his friendship. The world is several steps improved by him.

Joe passed away at age 75 last week. Even in his brief, but vicious illness, he retained that uniquely Midwestern mixture of sobriety and humor, while clearly and courageously communicating his sense that his love for his family, at least, was undying.

This day in 1943, the Secretary of Agriculture banned sliced bread in the U.S. That may sound like a dumbass thing to do. It was, but at the time it was accepted as just one more sacrifice to be made for the war.

While most people in America had gotten used to the convenience of pre-sliced bread, nobody complained about this ban any more than the innumerable other rationing and similar inconveniences borne by "home front." Most Americans, filled with patriotic fervor and more than a little fear--the war wasn't going well for us at that point--felt that these hardships were minor compared to the sacrifices of the citizens of our war-torn allies, or by our sons, husbands, and brothers fighting overseas. Freedom isn't free, as they say.

But did the ban on bread slicing really help? Could it? Collectivist reasoning in self-defense makes a lot of sense. We need to work together in a coordinated, non-market way to thwart a determined enemy. But collectivist reasoning in allocating scarce resources in a large economy is rarely sensible at any time, even in war. One might say that it would be ungracious to look at the ban on sliced bread in economic terms, but World War II was certainly an economic as well as military struggle. Our economic might contributed every bit as much as the bravery of our soldiers in the Allied victory over the Axis powers.

The point of the ban was that the metal that might otherwise go into making or repairing bread slicers was needed for the war effort. The problem was that none of the bread slicers already out in bakeries would be turned into munitions or jeeps. That wasn't the point. The point was that no more slicers or parts would be made in order to reduce demand for metal being purchased by the government for armaments. Existing slicers would just stopped being used.

So, all of our hard-working citizens, mostly women, were now having to toil away in the fields and factories, then come home to take care of their children and keep their homes in order, including working through ration books to prepare for the next week or month, as well as contributing to the needs of neighbors undergoing particular hardships because their men were gone, as well as do whatever else was necessary in their communities...and now slice their own bread, too. It's difficult for us today to understand what was really so great about sliced bread, but there was a reason it took off at that point in our history. It saved precious labor at a time when labor was our scarcest resource.

The government did not likely end up with an ounce more metal than it was already going to get--they were buying it all up, and all the factories that could be used to supply bread slicer parts had already been turned to the war effort. This ban would, predictably, simply idle a lot of labor-saving capital.

Even if the public was economically literate enough to understand that banning bread slicing was as silly as it sounds, they bore the ban graciously and without complaint. In fact, the ban played to the guilt of most people in America, acutely aware of the sacrifices going on beyond the home front, and not being able to do enough for the war. The government telling them that being denied sliced bread helped our boys in arms actually made many people feel better, even if the claim was bogus.

If our Secretary of Agriculture's economic literacy matched his taste for economic command and control, he might have dictated that bread slicing continue as much as possible. The government could have said, "Sliced bread is patriotic. It gives our hardworking women in our factories who are building our Victory ships and planes a few moments of rest when they get back home." Instead, our government chose to go beyond the necessary privations suffered at home into unnecessary ones. And, in a coup of collectivist ideology in which that wartime administration excelled, it probably even made the sufferers feel a little better about themselves.

John Steele Gordon, eminent historian and popular guest speaker in my "History of Scandal" course, just wrote a terrific article in Commentary entitled Look Whose Afraid of Free Trade.

The short answer: the Democrats! Gordon writes that, historically speaking, this is a surprising turn-around. For most of its existence, the Democratic party has been the party of free trade, generally at odds with protectionist Republicans. (Yea, Smoot and Hawley were Republicans.) Well, things have clearly (or maybe not so clearly) turned around. As always, Gordon weaves a tight thread in his depiction of fascinating ideas through time. Great read.

I just hope she isn't in some gulag after this:

More here.

HT: an uncredited reasonoid

That headline contradicts most people's view of the history of Social Security, the most visible, surviving legacy of the New Deal. But it's true.

Roosevelt, of course, promoted and signed into law the original Social Security Act of 1935. But that law set up a forced savings/redistribution program for limited portion of the population (* details below the fold). It used the contributions from the participants to set up reserves, and it paid beneficiaries from those reserves. The plan was more or less self-contained. In 1943, President Roosevelt vetoed legislation that would turn Social Security from the forced savings/redistribution program it was set up to be into the pay-as-you-go program that, once his veto was overriden, we know today.

The 1943 debate on this law centered on governance. For Roosevelt, good governance meant continuing the Social Security program as it was originally envisioned--actuarially self-financing. To Arthur Vandenberg and other Republicans, it was clear that Congress was simply using the "reserve fund" as a cover to squander money on pet projects. In their minds, shutting down the "reserve" was just a way of restoring fiscal discipline.

I'm finally onto McCullough's 1776. One of the great things about this book is that it looks at the Revolution from both sides, quoting liberally both British and American soldiers who left a record. This gives the reader a bit more complete sense of what was driving the events.

Of course, a historical book can't win a Pulitzer if it doesn't tell a story, and this one is no exception. Having just read about the Battle of Brooklyn as a story, with intent leading to action, even with unpredictable outcomes, simply reminded me of how chaotically history can actually unfold.

In 1776, McCullough creates an interesting portrait--snapshot, really-- of George Washington, drawn largely by the way he was viewed by his contemporaries. The book also illustrates was how remarkably difficult it is to judge leadership by any single measure, or even a collection of them.

In McCullough's story, Washington reveals a glaring weakness in military strategy, a weakness revealed both in the qualitative views of men who could observe him, as well as in poor results on the battlefield. Washington's main strength appears to be his luck, and the fact that he superbly, consciously, looked and acted the part of a leader. Today, few would put someone like Washington at the head of an army, and fewer yet would keep him there after the string of losses he suffered after Boston. Yet, Washington was the right man to lead the Revolution.

What McCullough left out (explained well in Flexner's book) was how tenuous was the faith in Washington held by the Continental Congress by the end of 1776. Washington, in fact, barely survived a political conspiracy to oust him. (He was extremely lucky that way, too.) Washington was thus able to keep his job, and generals like Nathanial Greene who shared Washington's dismal record on the battlefield. Greene would eventually prove instrumental in driving Cornwallis to his last stand at Yorktown, and Washington, of course, would lead that final siege to victory. Nobody could have predicted it.

I have to take the day off tomorrow, so here are my early best wishes for a Happy 4th.

Having recently read 1776, I'm reminded how remote the situation of our Founding Fathers must seem to Americans today. The Declaration ends with the famous pledge by the signers of "our Lives, our Fortunes, and our Sacred Honor." Today that sounds like the kind of campaign hyperbole spouted by presidential candidates when they're concluding a stem winder.

Here is a trick question: which presidential candidate do you think would stand for freedom if they knew that losing the election meant the distinct possibility of death by public hanging? Which would do so if they knew that they had something like a ten percent chance of winning?

Answer: Neither. Not necessarily for lack of courage, but because neither candidate stands for freedom.

Up until July of 1776, members of the Continental Congress could hold out some hope for a negotiated settlement with the Crown, whereby they might get the King to see the errors of his ministers in provoking the colonies. The colonies had been in a state of rebellion for over a year by then. By June 1776, they were facing long odds behind an army that was barely being held together.

This was the point when the Founding Fathers decided to attack the King personally, publicly calling him a "tyrant." This was the moment they chose to completely sever their bonds to England, and challenge the most powerful military on Earth. To every practical person alive that day, each signer of the Declaration had basically signed his death warrant.

And they weren't doing it for better health care or teachers unions.