Recently by Gary North: Rothbard’s The Mystery of Banking

Financial columnists of the sky-is-sagging perspective have searched for an accurate metaphor to describe the current economy. We have all failed.

“A slow-motion train wreck” doesn’t work, because train wrecks as bad as what we are facing are high-speed.

Then there is the “car without brakes.” But at least the driver can take his foot off the gas pedal. Congress is accelerating.

I have promoted “the burning trestle.” But, again, the engineer could put on the brakes. No such luck. Congress is accelerating.

How about “the Titanic”? That’s closer to it. But there was a specific timetable available. The ship’s designer knew how long the ship had. There were some lifeboats. “Women and children first!” (Actually, the boats were not all filled. If a person had leaped off the deck, he might have swum to a half-filled boat. A few did.) The male passengers knew they were doomed. They adjusted mentally to reality. There was no yelling and screaming. There was no blame-shifting, since the captain planned to go down with his ship. There was a dull acceptance of reality. That’s surely not Congress.

So, I have tried once more. I have dug into American history to come up with something plausible. I fear that it is too plausible.

MEMPHIS, 1878

In early summer, 1878, telegraph reports announced that yellow fever had broken out in the Caribbean. On July 27, it reached New Orleans.

Yellow fever was a dreaded disease. When it struck a city, many thousands of residents came down with it, and thousands died. It had hit Philadelphia in 1793, with devastating effects. There is a book about this: Bring Out Your Dead.

Physicians knew in 1878 the disease’s symptoms and deadly effects. They just did not know what transmitted the disease. A Cuban physician, Carlos Finley, theorized in 1881 that a variety of mosquito was to blame, but this was not proven until Walter Reed’s team conducted research two decades later in the aftermath of the Spanish-American War in Cuba.

In 1878, experts knew that it was a summer disease. It always ceased when cold weather hit. They knew that it was deadly. In the 1850s, New Orleans was hit four times. About 20,000 people died. In 1873, a quarter of the residents of Shreveport, Louisiana died from it.

They also knew that it was relentless. It would spread up the Mississippi River, day by day. There was no stopping it. It had done so three times before in Memphis: in 1855, 1867, and 1873, when 2,000 people died, a fearful 40% of those who came down with it.

What were the results in 1878? When the disease hit, 25,000 people fled the city. About 17,000 people did not. Of these, 80% came down with the disease. About 5,000 died. About 80% of these were whites. This was normal. In Africa, the disease had always killed a far higher percentage of whites than Africans.

The city collapsed economically. It lost its charter in 1879. The state took over the city’s finances. It took 20 years for the city to recover.

But this is not the heart of the Memphis story. The heart of the story is this: the population sat, nearly immobile, as word reached it, day by day, that the plague was on its way north.

We know the phrase, “a deer in the headlights.” For a few seconds, a deer is immobilized. But then it runs. People don’t. You have heard that a frog will not jump out of a pot of water if the water warms slowly to boiling temperature. It’s not true. But people will stick with hopeless projects and dreams for years, only to lose everything. Few events confirm this better than Memphis in the summer of 1878.

In a fine article, “Epidemic,” published in 1984 in American Heritage, the author described the two weeks leading up to the plague.

Like someone alone at midnight hearing approaching footfalls on the stairway, Memphis waited while the disease came nearer. On August 9 word came of yellow fever in Grenada, Mississippi, only a hundred miles to the south. But boosterism whistled brightly. “Keep cool!” said the Memphis Daily Appeal four days later. “Avoid patent medicines and bad whiskey! Go about your business as usual; be cheerful, and laugh as much as possible.”

That paragraph has stuck in my mind for over 20 years. I have watched the debt of the United States government ratchet upward relentlessly, just as yellow fever moved up the Mississippi in 1878. The boosters – on Tout TV, The Wall Street Journal, The New York Times, and virtually all academic economists except for the Austrian School – have assured us that deficits don’t matter. They have also warned us not to take patent medicine, such as a the twin ideas of a Federal budget surplus and a gold coin standard.

“Laugh as much as possible,” they have assured us. “Don’t worry. Be happy.” Economic growth will let the government meet its obligations. No, it will not pay off the debt. The Federal debt is said to be eternal. But the Treasury will make the interest payments, keeping investors happy – rich investors.

Problem: for every dollar invested in government debt, the private sector is not funded. Capital flows to Washington and out again to the welfare-warfare state’s constituencies. The government’s percentage of invested funds keeps growing. But, the boosters assure us, “There is no such thing as crowding out.” This is a corollary of their fundamental axiom: “There are government-supplied free lunches.”

Back to Memphis. On August 13, the first yellow fever death was reported. The boosters stopped boosting. They ran. So did 25,000 others.

The word “ran” is a euphemism. They could not run. They could barely walk out. The roads were clogged with refugees.

“On any road leading out of Memphis,” one survivor recalled, “could be seen a procession of wagons, piled high with beds, trunks, and small furniture, carrying, also, the women and children.” The male refugees walked alongside, either despondent or excitedly shouting to each other. Boats and trains were jammed. People forced open windows and doors and fought their way aboard. “The ordinary courtesies of life were ignored,” recalled John M. Keating, editor of the Daily Appeal and one of several who would write books about that appalling summer and autumn. “There was only one thought uppermost … an inexpressible terror.”

Inside of ten days, some 25,000 people poured out of the city – anyone who had kinfolk or could afford to rent accommodations in places as far off as St. Louis, Louisville, and Cincinnati. Passage was neither easy nor unobstructed. Nearby towns set up quarantines, backed by gun-toting enforcement committees. Many who fled were turned back or forced to camp in the woods. A few unlucky steamboat passengers spent the whole epidemic trapped on board, refused permission to land anywhere.

This has played out in crises as far back as there are records of social crises. People sit calmly, self-assured. Then a great fear grips them at the same time. They try to get away. But the cost of getting away is high. Not everyone can escape.

So it was in Memphis. About 11,000 blacks stayed behind. Of these, fewer than a thousand died. “Virtually every one of the 6,000 white men and women still in the city fell sick, and there were 4,024 deaths – almost a 70 percent mortality rate. The number of deaths rose in September to nearly 200 per day.”

The author goes on to describe hellish scenes. I shall mercifully skip over them. But this description is memorable.

Yet what left the strongest impression on some was not these grisly sights but the overpowering emptiness. Keating recalled that “an appalling gloom hung over the doomed city. At night it was silent as the grave, by day it seemed desolate as the desert. There were hours . . . as if the day of judgment was about to dawn. Not a sound was to be heard; the silence was painfully profound. Death prevailed everywhere. . . . Even the animals felt the oppression and fled from the city. Rats, cats, or dogs were not to be seen.”

There were stories of heroism, of physicians and nurses and nuns who stayed behind to nurse the ill and dying, and who died for having stayed. Some 54 physicians came down with the disease – about half of those who stayed behind – and of these, 33 died. There were also stories of cowardice, drunkenness, and theft. In other words, in the crisis, people’s character became clear to others. This is normal.

There was even a “prostitute with a heart of gold” story. One local madame sent her staff away and turned her house into a hospital. She served as a nurse. She died. The upper class citizens, on their return, buried her in Elmwood Cemetery, where members of the upper class were buried – and still are, a walled-in garden spot in the midst of a very poor neighborhood. (It was within walking distance of the church I attended.)

You can read the entire article. I recommend that you do.

UP THE RIVER IT COMES

This week, the U.S. government came to a last-minute agreement to increase the debt ceiling by at least $2.1 trillion. That is supposed to tide the government over until January 2013.

Think about this. The Federal government plans to spend at least $2.1 trillion more than it takes in over the next 17 months. This is no secret. It was the basis of the deal.

A bipartisan committee will be set up that will identify spending cuts (“no” will vote the Democrats) and tax increases (“no” will vote the Republicans).

If the committee fails to propose solutions – if! – there will be automatic cuts by the President in January 2013. Note: even if a new President is elected in 2012, Obama will preside over these allocated spending cuts. He will still be in office for three weeks.

Then, with a new Congress and maybe a new President, the Federal government will have to eat the famous S-sandwich – or else borrow more. The debt ceiling debate will come to the forefront again.

We can see where this is headed. Think of New Orleans in late July of 1878. The plague has hit. The deficit will eat into the debt ceiling, month by month. Up the mighty Mississippi of government spending will come the plague, city by city.

Obama hopes to get this issue out of the campaign in 2012. Maybe the boosters will be successful again. After all, they were successful until August 13, 1878 in Memphis.

Maybe we are farther up the banks of river than we think. (I know we are up the creek without a paddle, but that is a different metaphor.) Maybe the Federal Reserve System can keep the party going beyond 2013. But there is no early winter in this scenario. There is no day of deliverance. It’s summer from now until the plague hits.

About 17 years ago, Agora Publishing invented a new advertising tool, the bookalogue. It replaced the then-fading magalogue. A bookalogue was a cheaply printed paperback book that was mass-mailed to mailing lists. It sold newsletter subscriptions.

The commercial bookalogue was modeled after the highly successful paperback book by Rear Admiral Jeremiah Denton, When Hell Was in Session (1976). That was the autobiography of Denton’s years in a North Vietnamese prison. It was mass-mailed as a fund-raiser. It got him elected U.S. Senator from Alabama in 1980.

Agora’s bookalogue was The Plague of the Black Debt (1994). It sold a lot of newsletter subscriptions. It also informed millions of people who read at least part of it. It was the right title. But it was premature. Here we are, 17 years later, still watching the Federal debt climb like a rocket – a booster rocket – yet with the 90-day T-bill interest rate at six-one-hundredths of a percent. That was not conceivable in 1994.

TODAY’S BOOSTERS

Today’s boosters take comfort from the fact that national government debt is still being funded at low rates, at least outside of Greece, Portugal, and Spain. They proclaim that, in theory and in all likelihood, it will always be funded at low rates.

Boosters are everywhere. They have dominated the media throughout my lifetime. Boosterism became the favored outlook after 1945. It was appropriate back then. Social Security was not yet a source of red ink. Red ink arrived in 1977. Carter hiked FICA rates and promised that this would last until the year 2000, but the program was busted again in 1983, when Reagan and Congress raised the tax again. It is now in red-ink mode again. More money is flowing out than is flowing in. The Trust Fund is selling its IOUs back to the Treasury, and the Treasury is using money from the general fund to make up the difference.

Medicare arrived in 1965. It will bankrupt the government if it is not changed. So, it will be changed. We know when: in the midst of a monumental crisis, called “The Can Is Too Big To Kick.”

If “kick the can” is not the phrase of the year for 2011, there is no justice.

The boosters know the can is growing. But, for as long as Congress can keep kicking it, they will continue to boost.

This is merely the Federal government’s debt burden. There are state and local burdens. Then there is the massive debt burden of consumer debt, which must be rolled over. It is never paid off, any more than government debt is.

The boosters scream for more government spending whenever consumers slow their spending. That is the Keynesian mantra. They are dominant in the media. “Consumers must spend!” This requires more debt. The boosters recommend more consumer debt.

Consumers are willing, but their budgets are tight.

Banks are not lending. They are sitting on top of $1.2 trillion of excess reserves at the Federal Reserve.

Small businesses are not borrowing, either. Same reasons as the bankers: fear of the future.

Keynesianism is visibly failing. But Keynesianism’s 75 years of unpaid bills have not come due yet. They will.

Red ink will produce yellow fever. We can see it coming up the river of Federal spending.

Anyone who pays attention can see this. The vast majority ignore it. They do what 25,000 residents of Memphis did until August 13. They sit tight. They hope for the best.

In panic, they will run for the exits. There will be few, and they will be a lot more expensive than they are today.

CONCLUSION

Agora in 1994 called this the plague of the black debt. I call it the yellow fever economy. It is the same economic problem: massive debt.

The U.S. government is a sub-prime borrower. The major credit-ratings agencies do not admit this, any more than they admitted it with respect to low-income real estate borrowers in 2007.

There were boosters in 2007. Angelo Mozilo of Countrywide Financial was a booster. Chuck Prince of Citicorp was a booster. Stanley O’Neal of Merrill Lynch was a booster. They are all gone now – very rich, but gone.

There will be other boosters who will be long gone after this strain of yellow fever has killed off the dreams of hundreds of millions of people worldwide. These boosters will not be buried in the equivalent of Elmwood Cemetery after the plague has departed. I am working on my list. You should work on yours. One name is sure: Ben Bernanke.

The news reports are clear. The yellow fever economy is coming. But most people sit tight. They listen to the boosters. “Keep cool! Avoid patent medicines and bad whiskey! Go about your business as usual; be cheerful, and laugh as much as possible.”

Don’t.

August 6, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North