The ups and downs of wealth

Over the past hundred years wealth inequality has followed a U-curve. It passed from a high point on the eve of WW1 to a low point following WW2 and then bounced back, especially since the 1980s. The reduction in inequality was due partly to a considerable contraction of wealth in general and partly to rising wages. Its increase followed the reversal of those trends. The two World Wars destroyed a lot of material wealth – on the Western front and then across Europe and East Asia (creative destruction à la Schumpeter) – but the major loss was financial wealth. Post-war double digit inflation and debt defaults devalued it to almost nothing. During the same period farmland lost value but urban real-estate compensated that by proportionally gaining value.

Surplus or unspent incomes can be invested in a variety of ways. Some will bring in rent, some dividends and some interest. However, unrestrained investments in real-estate and company shares tend to inflate their prices and consequently reduce capital gains, whereas lending at interest seems to have no limits. As the accumulation of wealth grows, it relies increasingly on debt to bring a return. When inflation is negligible, as it was in the decades preceding WW1, lending to governments at home and abroad brings an annuity that is secure.

Thus there grew up during the nineteenth century a large, powerful, and greatly respected class of persons, well-to-do individually and very wealthy in the aggregate, who owned neither buildings, nor land, nor businesses, nor precious metals, but titles to an annual income in legal tender money. […] Before the war these medium fortunes had already begun to suffer some loss (as compared with the summit of their prosperity in the middle ‘nineties) from the rise in prices and also the rate of interest. But the monetary events which have accompanied and have followed the war have taken from them about one-half of their real value in England, seven-eighths in France, eleven-twelfths in Italy, and virtually the whole in Germany and in the succession states of Austria-Hungary and Russia.

J. M. Keynes (1923) (1)

Inflation was the great leveller that accompanied both World Wars. After 1945 the leisured classes were obliged to work, an impulse that contributed to the rapid development of post-war economies. Inflation struck again in the 1970s and ‘80s, but since then it has been consistently low. And this low rate of inflation coincided with increasing Treasury debts and housing mortgages. Wealth could accumulate in gilt-edged securities as it had a century before. Every year several percentage points of GDP were lent to governments and banks, bringing a modest but safe return. Governments spent these loans as though they were tax incomes, and needed new ones all the time, while banks used them to guarantee multiple mortgages and consumer credit. So happened what had to happen. Governments entered a borrowing spiral where debts increase just to cover interest dues. The mortgage boom inflated property prices and when the bubble burst, as they finally do, millions of people were left owing much more than their property was worth, negative equity on a huge scale, a black hole that threatened to engulf the banking system.

With the new millennium time seemed to accelerate. America was attacked and retaliated, drawing itself and its allies into a new cycle of interminable war. Meanwhile debts were piling up relentlessly. Then Lehman Brothers capsized and governments started bailing frantically. The bankers were saved from drowning and got cash for trash, but this flow of liquidity had to come from somewhere and governments, whose debts were reaching astronomical heights, were facing increasing difficulties in finding new supplies, and interest rates were rising dangerously. Lenders at home and abroad were holding back, and banks were in bad condition and unable to help. Central banks have the unique power to create money out of nothing (ordinary banks can only do this for credit, which is an ephemeral monetary creation). Unfortunate past examples and statutory rules forbid them from giving this supplementary legal tender to the Treasury, to subsidise its spending. The extra money has to be circulated by the banking system. To get round this injunction, quantitative easing consists in central banks buying various bonds from the other banks with fresh cash, which is then used to buy new government debts. Central banks are collecting old debts and commercial banks are collecting new ones, and both series are overvalued because of artificially low rates of interest.

A century ago the upper-middle class described by Keynes “owned titles”, with the upper class owning the rest. Today’s wealth is entrusted to professionals who offer much larger gains than mere rent, interest or dividends, and take much greater risks. These gains have nothing to do with any value produced. They come from speculating on the rising and falling prices of equity and commodities. And today’s wealthiest are not leisurely. They often cumulate a generous salary and their wealth grows that much faster. As aggregate wealth grows more quickly than income, it claims an increasing share of income, so that a few get richer and many stay poor. A reversal of this inequality before it gets out of hand could probably be achieved by strongly progressive taxation but, to be effective, it would have to be coordinated worldwide, which seems unlikely in the foreseeable future. The alternative is a repeat of the collapse of Treasury debts that occurred last century. If the debts of local and central administrations were written off (+/- 200% of national income), between 5 and 10% of national income would not be paid as interest and could be consumed as goods and services or spent for the common weal.

Accumulated wealth grows faster than national income. If wealth was only invested productively this could not happen but, at some point in the growth cycle, unproductive investments in public and private consumer debts take over. This is a surreptitious political decision that creates the demand for debt by reducing taxes and blocking wages. Debt allows wealth to grow beyond its legitimate size. A very small minority are allowed to cumulate such a large share of income that they cannot spent it, and the rest of society is obliged to borrow from them. Once this process is in place, the growth of wealth and debt is unstoppable. But both are just paper and writing, and can be wiped out overnight. In 1930 Keynes mused overoptimistically on how things might be.

When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of the semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialist in mental disease. (2)

There are no signs of that yet, though the extreme concentration of riches is provoking some indignation among a growing number of people.

A propertied class does not dispossess itself voluntarily, it has to be constrained. This has happened in the past with revolutionary confiscations and inflationary devaluations, great upheavals that accompanied war and destruction. The unlimited accumulation of wealth by a few individuals is detrimental to the rest of society as it depends increasingly on public and private debts. This could be resolved by strong progressive taxation and by reducing income inequality, thereby avoiding the climactic consequences that arise every hundred years or so. But these are political decisions that are shaped by the ambient ideology. The notion that the state should tax wealth instead of borrowing it and that income differences should be limited can be argued on the basis of economic stability – debts are inherently destabilising – but the proposition seems very lack-lustre compared to the glitter of super-rich celebrities.

Ronald Reagan was recorded saying that he had refused to play in films (what a loss!) because the tax-man would take all his earnings. Manifestly Reagan had no love of his art, but he was wealth’s best friend and its best promoter, along with mentor Maggie. Since then, those ideas have pervaded everything. Wealth accumulation must have no limits and – the populist bluff – everyone can participate. The project was doomed because the poor can only accumulate a small share of a small income, whereas the rich can accumulate a larger share of a larger income. The trickle did not reduce the disparity, and then the trickle turned out to be negative equity. When a few own the nation’s productive capital, strategic decisions are taken without consulting the people. When a few own the nation’s future incomes, the people need not be consulted as they are bound by debts. When a few own the nation, democracy becomes a farce where successive puppets are dangled in front of the public for election, and Big Money always holds the strings. Talented people in every domain are put on the pay roll. Even rebellion and dissent are showered with cash and end up mainstream as commercial products for mass consumption. Money makes the world go round, but as wealth grows so does its claim on income, which does not grow as fast. (3)

In the 1850s, after a long study of 18^th century archives, Alexis de Tocqueville suggested several reasons for the sequence of events that followed the French revolution of 1789 (4). He noted that that the nobility had become an inbred cast separated from the rest of society, after abandoning all political power to the state and keeping the privilege of avoiding taxation. The monarchy had centralised every aspect of local and national administration, making it vulnerable to a takeover. It had abolished ancient parliaments and levelled all its subjects to an egalitarian dependency. Absolute monarchy had predetermined the path of revolution for a return to tyranny. When the revolution unfolded, the liberty that had animated it at the start was soon submerged by a centralised imposition of equality, because the two valuable concepts are inherently contradictory. Liberty encourages inequality and equality restricts liberty. At about the same time as Tocqueville, Henri Lacordaire commented that “Between the strong and the weak, between the rich and the poor, between the master and the servant, it is freedom that oppresses and the law that emancipates.” And, at the turn of the century, Anatole France noted amusedly that “The majestic equality of the law forbids the rich as well as the poor from sleeping under bridges, from begging on the streets and from stealing bred.” Oscar Wilde was more dramatic and sensitive.

“In war,” answered the weaver, “the strong make slaves of the weak, and in peace the rich make slaves of the poor. We must work to live, and they give us such mean wages that we die. We toil for them all day long, and they heap up gold in their coffers, and our children fade away before their time, and the faces of those we love become hard and evil. We tread out the grapes, and another drinks the wine. We sow the corn, and our own board is empty. We have chains, though no eye beholds them; and we are slaves, though men call us free.” The Young Prince (1891)

To protect the weak and the poor, liberty must be restrained by law. But civil rights do not ensure social equality. And excess equality by regimentation leads to tyranny, to the absolute power of one over the undifferentiated many. Taking liberty and equality for its motto and stubbornly trying to synthesise the contradiction, the French Republic added fraternity. But empathy is an unpredictable emotion, whereas taxing instead of borrowing and wages instead of credit might lead to a median way between those two monumental ideals.

1. Essays in Persuasion, Classic House Books, p. 49/50

2. Ibid. p. 199

3. for those who have not read the book:

http://piketty.pse.ens.fr/files/capital21c/en/pdf/F5.8.pdf

4. Alexis de Tocqueville, The Old Régime and the Revolution:

https://archive.org/details/oldregimeandrev00tocqgoog