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The Root of the Wall Street Debacle By: Theodore Dalrymple
FrontPageMagazine.com | Tuesday, February 10, 2009


There is no finer way to destroy bourgeois society, said Lenin, than to debauch the currency, a policy that he therefore favoured.

A great deal of debauchery has gone on since Lenin’s day, not necessarily with revolutionary intentions. Whether it was at all avoidable, at least at an acceptable price, is a question I do not enter into; but that it has had an effect on people’s conduct, and even on their character, seems to me to be very likely.

When I was growing up (and I am not yet an ancient man), many of the coins we used were a hundred years old, and some were a hundred and thirty years old. Occasionally, indeed, one would find a pre-Victorian coin amongst one’s change. This was not entirely absurd: for, to take a single example, it cost only two and a half times as much to post a letter as it had a hundred and twenty years earlier. Now it costs 77.8 times as much in nominal terms. Most of the debauchery of the currency, then, has occurred in my lifetime.

The presence of such coins in one’s pocket gave one the feeling (false, as it turned out) of continuity and predictability. A prudent person with a desire to live in comfort but not luxury could predict – more or less – how much he would need to accumulate before he could afford to retire, and how long he could expect to live did not affect the calculation. Since he believed that the currency would hold its value, slow and gradual accumulation, with cautious investment, seemed to be a sensible thing to do.

Now take my own current situation by contrast. My attitude to money is not Napoleonic: I have no desire to be an Emperor of money, or to impress anyone with the magnificence of my worldly goods. On the contrary, I now have a horror of standing out from the crowd in this respect, and vulgar flauntings of great wealth unaccompanied by taste or discrimination appal me (though I admit that those with more economic drive than I may not only be invaluable to the economy as a whole but also do great good by their philanthropic activities and cultural patronage).

On the other hand, I have a fear of poverty. While my desire for possessions has declined – indeed, I already wish I had fewer of them – I most certainly do not want to find myself in a situation aged seventy, eighty or ninety in which I cannot guarantee myself a degree of physical comfort. What is romantic or at least bearable to the young is torture to the old.

But how much do I need to secure myself? How am I to calculate it?

Never having lived beyond my means, I was nevertheless encouraged by financial advisers for a number of years to borrow up to the hilt continuously, taking out bigger and bigger loans as my assets increased in value, and to buy the most expensive house possible. The money I had borrowed, they told me, would rapidly decline in value, while the house would appreciate. In other words, I could in essence get something very valuable for nothing, or at least for much less than it would soon be worth.

There is no doubt that in a period such as that through which we have just lived, this was good advice for me personally – so long as I knew when to stop. Through caution, I missed the boat early in my adult life when I had the opportunity to buy a property in London that would now be worth $5,000,000 by taking out a loan of $100,000: a sum that seemed immense to me then, but derisory now, and indeed derisory within a very few years. I would have borrowed good money and paid back bad, in the process acquiring a valuable asset.

My caution notwithstanding, it is clear to me when I look at the value of what I have accumulated that I have done far better out of inflation of asset values than out of saving. Like millions of others I bought assets mainly of a non-productive nature such as property (to buy which I borrowed not up to the hilt, but according to what I thought I could comfortably reimburse even if interest rates went up to 20 per cent, and therefore did not make as much as I might have done had I been more adventurous). But if instead I had simply deposited savings at prevailing rates of interest, I could not have used the accumulated money to buy more than a fraction of what I now possess.

Good for me, and good for millions of others in like situation, you might say. We have all done very well out of it. Yes, but in the process the very values that we once thought of as bourgeois – thrift, honesty, self-restraint, etc. – have been destroyed. If slow and patient accumulation is the road to personal ruin, then the opposites of bourgeois virtues seem to become wise and prudent: extravagance, craftiness, lack of self-restraint and so forth. And such qualities are bound to extend beyond the economic sphere. Inflation has the effect upon character that the Black Death once had.

Inflation has turned us all into speculators. If, as I approach the autumn of my days, I wish to ensure an adequate income for myself from my own private funds, at a time when my earning capacity would decline even in the absence of an economic downturn, what choice have I but to speculate? I am not alone, of course: scores of millions of people are in the same boat.

It is obvious to me that, after the current period of deflation caused by the sudden contraction of demand, there is going to be very rapid inflation. Governments almost everywhere are going to – indeed have had already to – inflate their way out of debt, and no fixed yields are going to keep up with the rate of inflation to come. So I must protect the value of my financial assets: but how? Gold, property, land, securities? There is the making here of yet further bubbles and Ponzi schemes, from which I personally may emerge a winner, if I am lucky or wise, but which will not answer to the needs of millions as a whole.

Inflation altered our conception of wealth and how it is made, and in the process altered our behaviour, I would say for the worse. It has made us more shifty than thrifty. Of course, bubbles have occurred before, one has only to read Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, published in 1843 by Charles Mackay, to know that. But never has the need for speculation become quite as deeply entrenched in the popular psyche, including mine, as it is now, and inflation is at the origin of this. Never before has personal financial stability or survival depended so much, as it does now, upon speculation. That is why past inflation is at the root of the Wall Street debacle.

Of course, there are no final causes in human affairs. What caused the inflation in the first place? That is another question entirely.

Theodore Dalrymple, a physician, is a contributing editor of City Journal and the Dietrich Weismann Fellow at the Manhattan Institute.


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