One hundred and seventy-nine years ago, a short span in the life of a nation, the representatives of the American people, in arms against the British Crown, proclaimed on a new continent a new philosophy of government. After the end of the military struggle for independence this philosophy was set forth in detail, and with rare insight and erudition, in the Federalist Papers and finally embodied in the Constitution of the United States.
The Fourth of July could well be an occasion for getting a firm grasp on the principles on which the American Republic was founded. Our educational institutions have not coped adequately with the task of communicating these principles to students. I know from personal experience that it is possible to go through a first-rate preparatory school and an excellent college without being impressed by the sheer thrill of political and intellectual adventure associated with the launching of the United States as an independent nation.
For it was an adventure, about which there were many prophets of gloom and doom on the other side of the Atlantic and some in the newly emancipated colonies themselves. Here were thirteen sparsely populated states, more distant from each other in terms of travel and communication than New York now is from London or Tokyo, starting out as a new nation without institutions which most Europeans then regarded as essential to stability without a monarchy, an hereditary aristocracy, or an established national church.
It was easy to imagine a relapse into anarchy, followed by the emergence of a “strong man” as dictator. But apart from the tragic schism of the Civil War (slavery and the right of a state to secede from the Union were two issues which the Constitution left unsolved), the United States has enjoyed almost two centuries of ordered freedom, unmarred by plots, internal sedition and successful or unsuccessful coups d’état.
The ideal of self-government, first proclaimed for the three million Americans of 1776, scattered along the Atlantic fringe of the country, still works for 160 million Americans who have filled up a vast country. The debt which Americans today owe to the men who framed the institutions of the young Republic, to Washington and Jefferson, Hamilton and Madison, Adams and Jay, is beyond estimation.
These men sometimes differed among themselves; but when they differed, it was usually because they emphasized two aspects of a single political truth. The product of their collective wisdom, the United States Constitution, is a mechanism of extraordinarily delicate balance. So far as human wisdom could foresee dangers and provide safeguards, the individual is secured against oppression by the central government, the states are left in possession of all the functions which are not clearly the proper concern of the federal government, and the powers and limitations of the three branches of the federal government are so defined that no one of these branches can dominate the others and become all-powerful.
The Founding Fathers’ Forethought
No form of government devised in history was so careful to avoid the dangers of concentrated power and so favorable to letting the citizen go as far and as fast as his individual capacity would carry him, without state coddling, state regulation and state domination, which always go hand in hand. The Founding Fathers were mindful of the admonition voiced by one of the strongest and clearest political thinkers of the Revolution, John Adams:
The institutions now made in America will not wholly wear out for thousands of years. It is of the last importance, then, that they should begin right. If they set out wrong, they will never be able to return, unless it be by accident, to the right path.
Adams and Jefferson, Madison and Hamilton, and many of their colleagues were men of exceptional learning. They were steeped in the Greek and Latin classics, in the history of medieval and modern Europe, in British and French constitutional theory and practice. At the same time they were not cloistered scholars, but men of action, who played leading roles in overturning an old form of government and setting up a new one. As a result of this double capacity, they possessed a panoramic view of the rise and fall of states in the past combined with a clear, intimate knowledge of the special conditions of America.
A coherent body of ideas figures prominently in the philosophy of the founders of the American Republic and may be studied to advantage in the Federalist Papers. These ideas, incidentally, are not only of tremendous historical importance, but are of the utmost reality and vitality in our own time. For the noble ideal of liberty, the word most often used in the literature of the American Revolution, has been horribly perverted by fanatics and cynically misused by tyrants.
It was not only in Jacobin France that many crimes, as Madame Roland cried on the scaffold, were committed in the name of liberty. As Professor J. L. Talmon brings out in his erudite and stimulating book, The Rise of Totalitarian Democracy (Beacon Press), the ideological origins of Soviet communism are not entirely in the writings of Marx and Engels.
Robespierre and the French Jacobins, nourished on Rousseau and some of the less known collectivist thinkers of the eighteenth century, worked out a conception of a virtuous elite that was morally entitled to persuade the people — with the aid of the guillotine, and for the people’s own good, of course — to hold and express unanimous opinions which would coincide with those of the virtuous elite. This was the Model T version of modern communism, and fascism borrowed something in theory and a good deal in practice from communism.
Against all utopian conceptions, such as Rousseau’s “general will,” which would lead to an absolute concentration of governmental power, the Founding Fathers set their faces like flint. From study and personal experience they knew what liberty was and what it was not. They knew that a mob or political party operating without opposition could be just as cruel, just as destructive of freedom, as an absolute monarch or a military dictator. One of the clearest and profoundest statements of this deep distrust of concentrated state power is that of Madison in Number 47 of The Federalist:
The accumulation of all powers, legislative, executive and judiciary, in the same hands, whether of one, a few or many, and whether hereditary, self-appointed or elective, may justly he pronounced the very definition of tyranny.
Safeguards against Big Government
Far from deifying the state, the Founding Fathers regarded government as a necessary but dangerous instrument, which required many safeguards against abuse. Although they were accustomed, especially in New England, to the grassroots local democracy of the town meeting, they drew a careful distinction between the terms democracy and republic. Madison states the distinction in Number 14 of The Federalist:
In a democracy the people meet and exercise the government in person; in a republic they assemble and administer it by their representatives and agents. A democracy, consequently, will be confined to a small spot. A republic may be extended over a large region.
It is evident from the tone of The Federalist and other political writings of the time that the Founding Fathers were not devotees of unlimited majority rule or of over-strong government. They recognized that minorities and individuals have rights, such as life, liberty and property, which no majority may lawfully take away. It is significant that the Constitution devotes at least as much attention to telling the government what it may not do as to telling it what it may do, and its prohibitions are expressed in plain, unambiguous, uncompromising language:
Congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press.
It is worthwhile to contrast these simple flat assurances with the long-winded resolutions of the United Nations on these subjects, full of escape clauses, weasel words, and loopholes for evasion. The Declaration of Independence takes its stand on “the laws of Nature and of Nature’s God”; and belief in natural law and inalienable rights which men possess independently of government and which no government may lawfully deny, withhold, or abridge is one of the cornerstones of American liberty.
In the literature of the American Revolution there is no demagogic attempt to set human rights against property rights. In the Federalist Papers and in other publications it is recognized that the right to acquire and own property is a basic and very important human right. As John Adams wrote:
The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.
Here, then, are the foundations of the free society of the American Republic: belief in natural law and inherent, inalienable human rights, intense distrust of any concentration of power in government, a suspicious attitude toward tyranny, whether of monarch or mob, including tyranny of the majority. Insofar as these foundations have been respected, America has prospered and grown great. It is where they have been most eroded and whittled away that some of the clearest danger signals in our national life are flying.
The Young French Visitor
Some of these danger signals were clear as early as the 1830s to the most profound and clear-sighted observer of the young American Republic, Alexis de Tocqueville. His work, Democracy in America, is a double masterpiece. It is a most penetrating study of the United States, its political institutions, its psychological traits, at the time of Andrew Jackson’s presidency, and it contains some strikingly accurate predictions of the American future. It is also a most searching study of the positive and negative sides of the leveling democracy which was beginning to prevail in the Western world. And it is written in a style that is always lucid and readable and often strikingly brilliant. For understanding the main political and psychological currents in the American history, de Tocqueville’s work is a worthy companion of the cogent, close-knit reasoning of the Federalist Papers.
As an observer of American life, de Tocqueville steers a middle course between sentimental gush and the squeamish repulsion which some cultivated Europeans like Mrs. Trollope felt for the free-and-easy frontier manners, with the copious expectorations of tobacco juice and the habit of calling all and sundry colonel or captain. He notes the self-reliant individualism of the American character:
The citizen of the United States is taught from his earliest infancy to rely upon his own exertions in order to resist the evils and the difficulties of life; he looks upon social authority with an eye of mistrust and anxiety, and he only claims its assistance when he is quite unable to shift without it.
Praised Local Initiative
As an authentic nineteenth-century liberal, de Tocqueville approves this tendency; he notes that the sum of private undertakings far exceeds all that the government could have done. He notes that there is no such thing as an American peasant and that although education is spread thinly, there are no pools of total illiteracy and stagnation. Again and again he praises the vitality of local initiative which builds excellent schools and churches and keeps the roads in good repair without any meddling interference from a centralized bureaucracy. And he pays to America of that time two compliments which are more impressive because he does not spare criticism on other points:
The European generally submits to a public officer because he represents a superior force, but to an American he represents a right. In America it may be said that no one renders obedience to man, but to justice and to law….
All commodities and ideas circulate throughout the Union as freely as in a country inhabited by one people. Nothing checks the spirit of enterprise…. The Union is as happy and free as a small people, and as glorious and strong as a great nation.
De Tocqueville is not blind to the fact that Americans possess the defects of their virtues. He notes a considerable downgrading of intelligence in high places since the formative years of the Republic. There is a memorable picture of the restless materialism which causes Americans to pursue illusions to the end of their days:
A native of the United States clings to this world’s goods as if he were certain never to die; and he is so hasty in grasping at all within his reach that one would suppose he was constantly afraid of not living long enough to enjoy them. He clutches everything, he holds nothing fast, but soon loosens his grasp to pursue fresh gratifications…. Death at length overtakes him, but it is before he is weary of his bootless chase of that complete felicity which is forever on the wing.
A source of fascination in de Tocqueville is his rare gift of accurate prediction. Some of his observations fit America, and the world, in the middle of the twentieth century even better than the conditions of his own time. There was no income tax in the America which de Tocqueville visited; but he foresaw the shape of things to come:
Universal suffrage invests the poor with the government of society…. Wherever the poor direct public affairs and dispose of the natural resources it appears certain that, as they profit by the expenditure of the State, they are apt to augment that expenditure…. I have no hesitation in predicting that, if the people of the United States is ever involved in serious difficulties, its taxation will speedily be increased to the rate of that which prevails in the greater part of the aristocracies and monarchies of Europe.
There is the famous and remarkable forecast of the era of the American-Russian Cold War:
There are, at the present time, two great nations in the world which seem to tend toward the same end, although they started from different points: I allude to the Russians and the Americans…. All other nations seem to have nearly reached their natural limits…but these are still in the act of growth…. The Anglo-American relies upon personal interest to accomplish his ends, and gives free scope to the unguided exertions and common sense of the citizens; the Russian centers all the authority of society in the single arm; the principal instrument o£ the former is freedom; of the latter servitude. Their starting point is different and their courses are not the same; yet each of them seems marked out by the will of heaven to sway the destinies of half the globe.
De Tocqueville was alarmed not by “excessive liberty” in the United States, but by inadequate securities against tyranny. For, like other nineteenth-century libertarians who were democrats only with reservations — like Burckhardt, Acton, Mill — he realized that there was danger in the tyranny of the majority and sensed that the dykes which the framers of the Constitution had erected against this kind of tyranny were being weakened by the upsurge of democracy in the raw.
He realized that the day of the absolute hereditary monarch and of the privileged aristocrat was gone; but he saw new perils to liberty on the horizon of the future. With remarkable perspicacity he foresaw two developments which became realities in the twentieth century: the totalitarian society of communism and fascism and the paternalistic Welfare State. Regarding the former, he noted the likelihood that
those hideous eras of Roman oppression, when the manners of the people were corrupted, their traditions obliterated, their habits destroyed, their opinions shaken and freedom, expelled from the laws, could find no refuge in the land
might recur. Certainly the crimes of a Stalin, a Hitler, a Mao Tse-tung, far exceed anything that could be laid to the charge of a legitimate ruler in the era of royal absolutism.
There’s never been a better time to remember the revolutionary and even libertarian roots of the American founding, and there’s no better guide to what this means in the narrative of the Colonial period than Murray Rothbard.
Still more vivid and eloquent is de Tocqueville’s imaginary sketch of a paternalistic state which would not practice the bloody oppression of dictators, but would reduce each nation “to nothing better than a flock of timid and industrious animals, of which the government is the shepherd,” that would undertake “to spare its subjects all the care of thinking and all the trouble of living.” The American Republic was, in the winged phrase of Lincoln, conceived in liberty.
But liberty is one of the most complex, as it is one of the most precious, of human conceptions. It flourishes best in the kind of equilibrium between government and citizen, individual and society, majority and minority which the Founding Fathers wrote into the Constitution. The dangers to true liberty vary from generation to generation; but it can never be maintained without constant struggle. There is no surer guide to the principles of political liberty than the Federalist Papers; no more penetrating and imaginative study of the forces that may wreck or sap liberty than de Tocqueville’s great classic.
There could be no better Fourth of July reading than some of the outstanding passages in both these works.
This article was originally published July 1955 in The Freeman.
An MP3 audio file of this article, read by Floy Lilley, is available for download.
An energy analyst is outraged that taxpayer dollars are being used for a bailout of the bus industry that’s comparable to the now defunct “cash for clunkers” program.
“What they’re saying is that [these buses] have better fuel economy and there’s less maintenance, and that may be the case. These buses may be better — but if that’s the case, they shouldn’t need taxpayer dollars to help these companies fund them,” Loris continues. “Bus companies can make those decisions on their own if these buses are economically competitive with diesel buses.”
Unintended Consequences
Before I knew anything about the finance industry, if someone had thrown out the name “Blackrock” I would have conjured up a scene from the Wild West, a cattle rancher hiring a gunslinger to roust out the sheep farmers and take control of the town. But now, of course, I know that BlackRock is a financial behemoth with $1.5 trillion in assets under management — soon to be over $2 trillion due to its purchase of Barclay’s asset management business. But of more note than its asset footprint is the mantle BlackRock is gradually assuming as the arbiter of value.
BlackRock won a set of contracts to provide analytics for the New York Fed’s trillion dollar mortgage-backed purchase program. Now, BlackRock may end up with an NAIC contract to analyze the mortgage-backed securities in insurers’ portfolios.
I do not mean to diminish BlackRock’s laudable role in assisting in many ways with the financial crisis – coming forward when a number of other large firms demurred. But as one contract is piled on another, their models will become the standard for pricing mortgages, complex derivatives and structured products. Unlike the money management business, which is competitive and relatively transparent, this is a monopoly ready for the making. A monopoly because the more institutions, industry associations and regulatory bodies that employ their services, the more they become the de facto standard. Over time, auditors, clients and equity holders – perhaps even regulators – will start saying, “Well, it is nice to see what your internal models have to say about your portfolio value, but we want your portfolio benchmarked using the BlackRock model.” A BlackRock seal of approval; BlackRock, the JD Powers of portfolio quality.
Here are the problems with this:
First, of course, is the well-known issue of allowing a private enterprise to have monopoly control of a utility – in this case a de facto replacement of the rating agencies (not a bad thing in itself) by putting one firm in the position of providing the benchmark pricing of financial products. Second, there are natural conflicts of interest given that BlackRock is also the asset manager for the New York Fed’s Maiden Lane portfolios and has raised over half a billion in private capital to purchase legacy securities as part of PPIP. (Though I should add that BlackRock is aware of this issue and has stated the firm has strict internal controls preventing any valuation services from being gamed by its investment arm. Which should make us all feel a lot better).
But the most critical problem is that its approach is at variance with the broadly held view that we need to have transparency in the derivatives markets because, unlike, say, RiskMetrics, BlackRock does not share the specifications of the models it employs. We don’t really know what these models are doing. Valuations based on a black-box BlackRock model, or, for that matter, anyone else’s black box model, do not get us the transparency we need. I don’t care what a trading desk uses for its decision making, but when it comes to valuations that carry beyond the firm, we need to be able to see and critique the models that are being used. If a model is to become a standard, if it is going to be used for regulatory or other benchmarking purposes, it should be transparent and subject to peer review.
Which gets to a simple point: If we want to go down the path of standardized valuation and comparability in these complex portfolios, we need open derivatives models. One thing we should have learned from the rating agency debacle is that even if we put aside the issues of monopoly power and conflict of interest, we cannot stop with having the proprietor of such models say, “Trust me, I know what I’m doing.”
Originally published at Rick Bookstaber’s Blog