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	CAPITALISM . . [QUOTES FOLLOW LINKS] see: ADVERTISING BIG BUSINESS BUBBLES (ECONOMIC) BURMA SHAVE BUSINESS COMMERCE COMMUNISM COMPETITION CONSUMERS COPYRIGHTS, CORPORATIONS CUSTOMERS DEMOCRACY DEPRESSION (THE GREAT) ECONOMICS, ECONOMY (THE) EMPLOYMENT FREE TRADE GLASS CEILING GLOBALIZATION INDUSTRIALISATION LABOR UNIONS MANAGEMENT MONEY SLOGANS SOCIALISM STOCK MARKET TELEVISION ADS UNIONS WORK --- ...the myth of socialism is far stronger than the reality of capitalism. That is because capitalism is not really an ism at all. It is what people do if you leave them alone. --Arnold Beichman Hoover Institute Fellow. Capitalism, it is said, is a system wherein man exploits man. And communism — is vice versa. --Daniel Bell (1919— ) American journalist and sociologist. _The End of Idealogy_ [1960] Captains of Industry. --Thomas Carlyle (1795—1881) Scottish historian and political philosopher. In _Past and Present_, title of bk. 4, ch. 4 [1843] Capitalism is about turning luxuries into necessities. --Andrew Carnegie (1835—1919) American businessman and philanthropist of Scottish birth. - Some regard private enterprise as if it were a predatory tiger to be shot. Others look upon it as a cow that they can milk. Only a handful see it for what it really is — the strong horse that pulls the whole cart. --Winston Churchill (1874—1965) British Conservative statesman and Prime Minister [1940—1945, 1951—1955]. The substance of the eminent Socialist gentleman's speech is that making a profit is a sin, but it is my belief that the real sin is taking a loss. --Winston Churchill (1874—1965) British Conservative statesman and Prime Minister [1940—1945, 1951—1955]. The inherent vice of Capitalism is the unequal sharing of blessings; the inherent vice of Socialism is the equal sharing of miseries. --Winston Churchill (1874—1965) British Conservative statesman and Prime Minister [1940—1945, 1951—1955]. House of Commons speech [22 October 1945]. - - [John D(avison) Rockefeller] was only thirty-three when he owned ninety percent of all American refineries and all the main pipelines and oil cars of the Pennsylvania Railroad. Within a few years he was the first billionaire in history. He lived most of his life more simply than most stock- brokers, like a frugal Scandinavian monarch. By his bedside in his New York house he had always on hand his Bible, though it lay on top of his bedside safe. At sixty, penitence set in. He was very much a Victorian in his capacity to rationalize his energy as the engine of God. And, as happened with many more of the money barons, the coming on of arthritis convinced him that he had made all his money for the public good. So, with complete sincerity, he disbursed it. Through a foundation created in his own name, he gave $530,000,000 for worldwide medical research. I must say that he is the only philanthropist I can think of who gave away his fortune with no strings binding its use. He was photographed everywhere doing folksy things — attending a county fair, teetering on the putting green, marrying off a couple of midgets for charity — to prove that even Rockefeller was as mortal as the rest of us and that, though he was a kind of monarch, he had the common touch. As he moved into his nineties people began to doubt his mortality, but the news that he was restricted to a gruel and Graham cracker diet brought some consolation to the poor and healthy. When he died, at the age of ninety-eight, it was as if an emperor had gone. [ . . . ] There were not many men like Rockefeller, but it didn't take many to constitute a cabal of real national, continental power that overshadowed the elected power of the Presidents of the United States. There was Henry Clay Frick, who turned coke and iron ore into gold, and E. H. Harriman, who collected railroads the way other men collect stamps. There were Harriman's rival, James J. Hill, and his ally, John Pierpont Morgan, Sr., whose specialty was money itself. And there was Frick's sometime friend and sometime enemy, Andrew Carnegie. Carnegie had three specialties: steel, making money, and giving it away. The son of a poor weaver, he was born in a stone cottage in Dunfermline, Scotland, in 1835, at a time of such depression that in the revolutionary year of 1848 the family took off for America and for a squalid house in a grimy town called Pittsburgh. The father went back to weaving and the mother went back to stitching shoe leather; it was not much of a New World for them. But their twelve-year-old boy was as shiny as an apple and as lively as a squirrel, and he went hopping up the golden ladder rung by rung: from bobbin boy to telegraph messenger to railroad clerk, to superintendent to director. Until iron entered his career, if not his soul, and finally steel. At the turn of the twentieth century he wrote an article that ended with the heroic phrase: "Farewell, then, Age of Iron; all hail, King Steel!" He was really proclaiming his own coronation, because he foresaw before anybody the infinite possibilities of steel, for bridge building and steamships, for elevators and knives and forks. Make steel, and make it cheap, and you could own the industrial empire of the new century. Before he was thirty, he had bought a large tract on Oil Creek but soon turned from oil to building, and buying up, iron and steel mills and their tributary coal and iron fields, and then the railroads that brought their products to the Great Lakes docks, and a steamship line that took them on to Europe. His monopoly of steel helped him to weather the depression of 1892, and nine years later he graciously permitted the United States Steel Corporation — formed for the purpose — to buy him out for $250,000,000. And then he abdicated, or retired, to a castle in the eastern highlands of Scotland. He was sixty-five and he had eighteen years yet to live. And he now began the career of lavish philanthropy that made his name known around the world. Carnegie exemplifies to me a truth about American money men that many earnest people fail to grasp — which is that the chase and the kill are as much fun as the prize, which you then proceed to give away. --Alistair Cooke [Alfred Cooke] (1908—2004) British-born American broadcater and journalist. _America_ [1973] - Here's the rule for bargains: 'Do other men for they would do you,' That's the true business precept. --Charles Dickens (1812—1870) English novelist. _Martin Chuzzlewit_, ch. 11 [1844] When the shallow critics denounce the profit motive inherent in our system of private enterprise, they ignore the fact that it is an economic support of every human right we possess and without it, all rights would soon disappear. --Dwight D. Eisenhower (1890—1969), American Army General, supreme Allied commander WWII, NATO commander, American President [1953—1961]. - What kind of society isn't structured on greed? The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system. --Milton Friedman (1912—2006) American laissez-faire economist; winner of the 1976 Nobel Prize for Economics. History suggests that capitalism is a necessary condition for political freedom. --Milton Friedman (1912—2006) American laissez-faire economist; winner of the 1976 Nobel Prize for Economics. _Capitalism and Freedom_ [1962] Underlying most arguments against the free market is a lack of belief in freedom itself. --Milton Friedman (1912—2006) American laissez-faire economist; winner of the 1976 Nobel Prize for Economics. - No two countries that both have a McDonald's have ever fought a war against each other. --Thomas Friedman (1953— ) American journalist. In _N.Y. Times_ [8 December 1996]. - Under capitalism man exploits man. And under Communism it is just the reverse. --John Kenneth Galbraith (1908—2006) American economist. _A Life in Our Times: Memoirs_ [1981] Over the centuries those who have been blessed with wealth have developed many remarkably ingenious and persuasive justifications of their good fortune. The instinct of the liberal is to look at these explanations with a rather unyielding eye. Yet in this case the facts are inescapable. It is the increase in output in recent years, not the redistribution of income, which has brought the greatest material increase, the well-being of the average man. And, however suspiciously, the liberal has come to accept the fact. --John Kenneth Galbraith (1908—2006) American economist. _The Affluent Society_ [1958], pp. 96-97 - The worst crime against working people is a company which fails to operate at a profit. --Samuel Gompers (1850—1924) American labor union leader. - [A bank executive talks to his subordinates in a staff meeting:] Levy transition fees. And maintenance fees. And fees for opening an account, closing an account, having less than three accounts, and having more than two accounts. I want to see late charges, early charges, and surcharges on other charges. I want a fee for foreign accounts, a fee for domestic accounts, and a fee for accounts subject to audits. You get the picture? Institute a contact fee, a telephone charge, a bookkeeping adjustment charge, a sinking fee, a flotation fee, and you, Nichols, go to the New York Public Library and — I don't care how long it takes — find five fees that no one has ever heard of. Look especially hard into Babylonia, the Sumerians, Byzantium, and the Holy Roman Empire. Those guys knew what they were doing, and they had balls. --Mark Helprin (1947— ) American novelist and journalist. _Memoir from Ant-Proof Case_ - I was guilty of judging capitalism by its operations and socialism by its hopes and aspirations; capitalism by its works and socialism by its literature. --Sidney Hook (1902—1989) American educator and social philosopher. In a consumer society there are inevitably two kinds of slaves: the prisoners of addiction and the prisoners of envy. --Ivan Illich (1926—2002) Austrian philosopher. _Tools for Conviviality_, ch. 3 [1973] - Capitalism, n. The astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone. --John Maynard Keynes (1883—1946) English economist. The engine which drives Enterprise is not Thrift, but Profit. --John Maynard Keynes (1883—1946) English economist. _The Treatise on Money_ [1930] - Whether you like it or not, history is on our side. We will bury you. --Nikita Khrushchev (1894—1971) Soviet statesman, Premier [1958—1964]. Speech to Western diplomats in Moscow [18 November 1956]. On the whole, with scandalous exceptions, Democracy has given the ordinary worker more dignity than he ever had. --Sinclair Lewis (1885—1951) American novelist and playwright. _It Can't Happen Here_ [1935] These capitalists generally act harmoniously and in concert, to fleece the people. --Abraham Lincoln (1809—1865) American Republican statesman, President [1861—1865]. Capital is reckless of the health or length of life of the laborer, unless under compulsion from society. --Karl Marx (1818—1883) German political philosopher. Those fighting for free enterprise and free competition do not defend the interests of those rich today. They want a free hand left to unknown men who will be the entrepreneurs of tomorrow... --Ludwig von Mises (1881—1973) Austrian-American liberatarian economist. Normally speaking, it may be said that the forces of a capitalist society, if left unchecked, tend to make the rich richer and the poor poorer and thus increase the gap between them. --Jawaharlal Nehru (1889—1964) Indian statesman. "Basic Approach" in Vincent Shean _Nehru_ [1960]. - Any rich man does more for world peace than all the jerks pasting VISUALIZE WORLD PEACE bumper stickers on their cars. The worst leech of a merger and acquisitions lawyer making $500,000 year will, even he cheats on his taxes, put $100,000 into the public coffers. That's $100,000 of education, charity, or U.S. Marines. And the Marine Corps does more for world peace than all the Ben and Jerry's ice cream ever made. --P.J. O'Rourke (1947— ) American political satirist. Omnipresent amid all the frenzy of Shanghai is that famous portrait, that modern icon. The faintly smiling, bland, yet somehow threatening visage appears in brilliant hues on placards and posters, and is painted huge on the sides of buildings. Some call him a genius. Others blame him for the deaths of millions. There are those who say his military reputation is inflated, yet he conquered the mainland in short order. Yes, it's Colonel Sanders. --P.J. O'Rourke (1947— ) American political satirist. - - America's abundance was created not by public sacrifices to 'the common good,' but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America's industrialization. They gave the people better jobs, higher wages, and cheaper goods with every new machine they invented, with every scientific discovery or technological advance — and thus the whole country was moving forward and profiting, not suffering, every step of the way. --Ayn Rand (1905—1982) Russian-born American writer. _Capitalism: The Unknown Deal_ [1966] The rotter who simpers that he sees no difference between the power of the dollar and the power of the whip, ought to learn the difference on his own hide — as, I think, he will. Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to be the tool by which men deal with one another, then men become the tools of men. Blood, whips, and guns — or dollars. Take your choice — there is no other — and your time is running out. --Ayn Rand (1905—1982) Russian-born American writer. _Atlas Shrugged_ [1957], ch. 2 "The Aristocracy of Pull" When 'the common good' of a society is regarded as something apart from and superior to the individual good of its members, it means that the good of some men takes precedence over the good of others, with those others consigned to the status of sacrificial animals. --Ayn Rand (1905—1982) Russian-born American writer. "What is Capitalism?" _Capitalism: The Unknown Ideal_ [1966] It only stands to reason that where there's sacrifice, there's someone collecting the sacrificial offerings. Where there's service, there is someone being served. The man who speaks to you of sacrifice is speaking of slaves and masters, and intends to be the master. --Ayn Rand (1905—1982) Russian-born American writer. _The Fountainhead_ [1943] I will not attempt, in a brief lecture, to discuss the political theory of Objectivism. Those who are interested will find it presented in full detail in Atlas Shrugged. I will say only that every political system is based on and derived from a theory of ethics — and that the Objectivist ethics is the moral base needed by that politico-economic system which, today, is being destroyed all over the world, destroyed precisely for lack of a moral, philosophical defense and validation: the original American system, Capitalism. If it perishes, it will perish by default, undiscovered and unidentified: no other subject has ever been hidden by so many distortions, mis- conceptions and misrepresentations. Today, few people know what capitalism is, how it works and what was its actual history. When I say "capitalism," I mean a full, pure, uncontrolled, unregulated laissez-faire capitalism- with a separation of state and economics, in the same way and for the same reasons as the separation of state and church. A pure system of capitalism has never yet existed, not even in America; various degrees of government control had been undercutting and distorting it from the start. Capitalism is not the system of the past; it is the system of the future — if mankind is to have a future. --Ayn Rand (1905—1982) Russian-born American writer. _The Virtue of Selfishness_ [1964] The 'common good' of a collective — a race, a class, a state — was the claim and justification of every tyranny ever established over men. Every major horror of history was committed in the name of an altruistic motive. Has any act of selfishness ever equaled the carnage perpetrated by disciples of altruism? Does the fault lie in men's hypocrisy or in the nature of the principle? The most dreadful butchers were the most sincere. They believed in the perfect society reached through the guillotine and the firing squad. Nobody questioned their right to murder since they were murdering for an altruistic purpose. It was accepted that man must be sacrificed for other men. Actors change, but the course of the tragedy remains the same. A humanitarian who starts with declarations of love for mankind and ends with a sea of blood. It goes on and will go on so long as men believe that an action is good if it is unselfish. That permits the altruist to act and forces his victims to bear it. The leaders of collectivist movements ask nothing for themselves. But observe the results. --Ayn Rand (1905—1982) Russian-born American writer. Men have been taught that the highest virtue is not to achieve, but to give. Yet one cannot give that which has not been created. Creation comes before distribution — or there will be nothing to distribute. The need of the creator comes before the need of any possible beneficiary. Yet we are taught to admire the second- hander who dispenses gifts he has not produced above the man who made the gifts possible. --Ayn Rand (1905—1982) Russian-born American writer. _The Fountainhead_ [1943] pt. 4, "Howard Roark" Ch. XVIII - A holding company is a thing where you hand an accomplice the goods while the policeman searches you. --Will Rogers [William Penn Adair Rogers] (1879—1935) American humorist and actor. In our industrial and social system the interests of all men are so closely intertwined that in the immense majority of cases a straight-dealing man who by his efficiency, by his ingenuity and industry, benefits himself must also benefit others. Normally the man of great productive capacity who becomes rich by guiding the labor of other men does so by enabling them to produce more than they could produce without his guidance; and both he and they share in the benefit, which comes also to the public at large. The superficial fact that the sharing may be unequal must never blind us to the underlying fact that there is this sharing, and that the benefit comes in some degree to each man involved. --Theodore Roosevelt (1858—1919) American Republican statesman and President [1901—1909]. Fifth Message to Congress [5 December 1905], quoted in Edmund Morris, _Theodore Rex_. Entrepreneurial profit . . . is the expression of the value of what the entrepreneur contributes to production in exactly the same sense that wages are the value expression of what the worker 'produces.' It is not a profit of exploitation any more than are wages. --Joseph Alois Schumpeter (1883—1950) Morovian-born American economist and sociologist. Competition brings out the best in products and the worst in people. --David Sarnoff (1891—1971) Russian-born American pioneer in the development of both radio and television broadcasting. You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold. --attributed to George Bernard Shaw (1856—1950) Irish comic dramatist, literary critic, Socialist propagandist, and winner of the Nobel Prize for Literature in 1925 [he didn't accept it.] Next to the right of liberty, the right of property is the most important individual right guaranteed by the Constitution and the one which, united with that of personal liberty, has contributed more to the growth of civilization than any other institution established by the human race. --William Howard Taft (1857—1930) 27th President of the United States [1909—1913] and Chief Justice of the Supreme Court [1921—1930]. _Popular Government_ [1913], ch. 3 The public be damned! I'm working for my stockholders. --attributed to William H. Vanderbilt (1821—1885) American railway magnate. - Less than seventy-five years after it officially began, the contest between capitalism and socialism is over: capitalism has won. "Reflections: The Triumph of Capitalism" in _New Yorker_ [23 January 1989]. -- A Merchant's Evolution Spanning Three Centuries, Sears Roebuck Saga Mirrors Development of U.S. Business By Cynthia Crossen & Kortney Stringer _The Wall Street Journal_ [18 November 2004] Until Sears Roebuck Co. and its competitor, Montgomery Ward & Co. — blanketed the U.S. with catalogs in the late 19th century, Americans had no idea how many things they wanted. Most Americans — about 70% — lived on farms, miles from the nearest neighbor or general store. Their utilitarian clothes were made at home and laundered on a washboard. They didn't have cars or telephones. Their fortunes rose and fell with their harvests; but even in good years, there was rarely money left over for "store-bought" goods. A peddler might happen by occasionally, carrying his entire inventory on his back. General-store prices were high. In 1891, a barrel of flour with a wholesale cost of $3.47 sold for more than $7 at a general store. Sears catalogs [. . .] brought the wider world to America's doorsteps. So when thousands of rural Americans began receiving the Sears Roebuck catalog in the 1890s, they quickly dubbed it the "consumer's bible." It offered not only practical hard goods, such as Prairie-Breaking plows and Mark Your Poultry leg bands, but also such luxuries as ladies' kid opera slippers and ostrich-plume hat trimmings. The prices were rock bottom — indeed, Sears advertised itself as the "Cheapest Supply House on Earth." Best of all, thanks to the railroad, rural free mail delivery and parcel post, buyers no longer had to drive their buggies for hours to go to the store. The store was coming to them. Sears's sales went from $750,000 in 1895 to more than $10,000,000 in 1900, surpassing Montgomery Ward for the first time. [. . . ] But it was Sears Roebuck that first turned America into a consumer democracy, where everyone from Maine to California had equal access to the same goods at the same price. Isolated farm families could now keep up with changing fashions, as well as the rapidly escalating number of manufactured goods available for sale. The company's money-back guarantee reassured wary customers that they could trust a merchant whom they couldn't see. Over the next few decades, its sales grew steadily, and the catalog became a fixture in millions of American homes — and outhouses. But during those same decades, many of the company's customers were migrating to the cities, where they could shop at department or chain stores, such as those of J.C. Penney and F.W. Woolworth. And with more and better cars and roads, even those who remained on farms or in small towns could travel farther afield to shop. Already, the company's founding principle — to bring cheap merchandise to remote areas of the country — was being challenged. In the 1920s, the company made a bold strategic decision: It would supplement its mail-order business by opening its own retail stores in America's growing metropolitan areas. Wouldn't that simply shift sales from one arm of the company to another, Robert E. Wood, a Sears executive, was asked. "Better to lose that business to one's self," he said, "than to someone else." So in 1925, Sears opened its first retail store in Chicago, and by 1933, the company was operating 400 stores. In one 12-month period during that time, a new store opened on the average of every three days. The Sears retail stores offered the same kind of one-stop shopping as the old general stores, but with much more inventory and lower prices. Most stores were built on the fringes of cities, where rents were cheaper than downtown. And because of the sheer volume of its orders, Sears carried a lot of clout in negotiating prices with wholesalers. In 1931, Sears's retail stores outsold the mail-order operation for the first time. The enormous combined market nudged the company into creating its own brand names, including Craftsman, Kenmore and DieHard. During the Depression, Sears, like almost every other American company, lost ground. But its focus on basic goods for thrifty consumers sustained its expansion, though at a much slower rate. In the midst of widespread hardship, the company had another strategic breakthrough in 1931. Taking advantage of its growing popularity as a seller of inexpensive auto parts — especially tires — Sears diversified into auto insurance with its Allstate subsidiary. At first, Allstate insurance was available only by mail, and the trusted name quickly captured many rural customers. But urban buyers were slow to follow until Allstate offices were installed in the company's retail stores. World War II ended the company's steady growth, and several of its stores closed. Because of rationing, the number of items the company could offer was reduced. But the war didn't hurt the company nearly as much as the enormous shift in the country's postwar demographics. Sears's traditional customers tended to be practical, price-conscious members of the working and middle classes. In the economic boom of the 1950s, some of these customers — blue-collar workers in factories — lost their jobs to the burgeoning service sector. Others enjoyed a rising tide of affluence that would have been unimaginable to their grandparents, who may once have ordered a 12-pound ham from Sears for less than 12 cents. Specialty stores would soon entice them away from the everything-for-everyone retailer. Since the 1960s, Sears has found itself between a rock, a hard place and a very hard place. When Wal-Mart Stores and K-Mart Corp. appeared on the scene, Sears lost its crucial price advantage. Home Depot Inc. offered more — and less expensive — hardware. L.L. Bean's flannel shirts were just as durable — and more stylish — than those from Sears, and the Bean catalog copy was written for baby boomers. Technology, particularly for managing inventory, also raced ahead of Sears's old-fashioned infrastructure. In the company's state-of-the-art Chicago headquarters, which opened in 1906, the pneumatic tube was the cutting-edge tool of commerce. But in late 20th-century America, large retailers had to adapt to consumers who could find almost anything anywhere for almost any price. The Sears that shipped the Family Cheese-Making Apparatus and the steel safes for your home was gone. Sears changed America, but in the end, America overtook Sears. - TOPICAL One of the sad signs of our times is that we have demonized those who produce, subsidized those who refuse to produce, and canonized those who complain. --Thomas Sowell (1930— ) American economist and author. - Blockbuster meets Netflix: A tale of two companies By Jonathan V. Last Philadelphia Inquirer Dec 10, 2008 PHILADELPHIA: With all the talk of bailouts last week, it's worth remembering this cardinal truth: Some businesses deserve to die. Creative destruction is the term Joseph Schumpeter used to describe the healthy evolution of economies as outmoded businesses are displaced by more efficient ones. Take, for example, the case of Blockbuster and Netflix. We all know Blockbuster, which was founded in 1985 and became America's biggest video rental chain. Pre-Blockbuster, video stores were mostly mom-and-pop affairs, but Blockbuster introduced economies of scale and expanded aggressively. At its height, Blockbuster owned more than 9,100 stores and commanded nearly half the U.S. video rental market. Its big profits prompted Viacom to purchase the business for $8.4 billion in 1994. But markets change. The DVD emerged as the successor to the VHS tape in the late 1990s. The movie studios wanted to keep the rental arrangement that had existed with VHS tapes. When a movie was first released on VHS, a single copy would cost about $120. This price was intentionally prohibitive, so that the only practical way for consumers to see a movie at home was to rent it. Only after several months of release would the price be dropped to ''sell-through,'' or about $20. In return for this window, Blockbuster gave the studios 40 percent of their rental revenues. The executives at Blockbuster, however, demanded a greater percentage of the rental revenues from DVDs. It was a disastrous decision. In response, the studios adopted the sell-through model we know today: The day a DVD is made available for rent at Blockbuster, it is also available for purchase for about $20 from retailers. While Blockbuster was foolishly forcing the movie studios to change the economics of movie rentals, a rival company emerged to change the delivery mechanism. In 1999, a little outfit called Netflix started charging users a flat monthly subscription fee and delivering DVDs by mail, allowing people to rent as many movies as they liked for as long as they wanted. Netflix represented an immediate, existential threat to Blockbuster. The giant should have acquired or crushed the upstart. Indeed, a former executive told Variety in 2005 that Blockbuster had passed up an opportunity to purchase Netflix for $50 million. Blockbuster believed it could preserve its outmoded model even in the face of tectonic shifts in the market. Netflix saw its subscriber base rocket from 239,000 in 1999 to 1.5 million in 2003. Today it stands at 8.7 million. The company's revenues went from $270 million in 2003 to $1.2 billion in 2007. It took five long years just for Blockbuster to launch a copycat version of Netflix's DVD-by-mail system. By then it was too late. Beginning in 2001, Blockbuster took staggering losses for six years out of seven. It lost $1.2 billion in 2004 alone. Eventually spun off from Viacom, Blockbuster's stock today hovers around $1 a share. Purchased just 14 years ago for $8.4 billion, Blockbuster now has a total market capitalization of $227 million. And Netflix? It now has a market capitalization of $1.4 billion and growing. In nine short years, it destroyed Blockbuster and created a new mode of home-video delivery. Yet Netflix is now intent on destroying its own business model and creating a more efficient one. In 2007, the company began streaming some of the movies in its library over the Internet. Today Netflix has the most seamless digital-download system going. Subscribers can access 12,000 movies and TV shows to watch on their computers or televisions. Digital downloading has long been thought of as the Holy Grail of home video. Instead of trying to protect its mail-order model against it, Netflix tackled the new technology head on. It's not clear how streaming video will affect Netflix's DVD-by-mail business or its bottom line. But Netflix decided digital downloading is the future, and that if the company didn't embrace it, someone else would. As for Blockbuster, its days are numbered. When the behemoth finally breathes its last, should Congress bail it out? Because if the president-elect and the Democratic Congress are going to give handouts to every poorly managed concern suffering the effects of creative destruction, there's a line around the block of people who'd like some cash. For instance, you may have noticed that the newspaper industry isn't doing so well. And this week the WNBA saw a franchise go bust. And . . . well, let's not go giving anyone ideas. - - "Is the Medicine Worse Than the Illness?" By James Grant _The Wall Street Journal_ [20 December 2008] It is a sorry place at which we Americans find ourselves this none-too-festive holiday season. The biggest names on Wall Street have gone to their rewards or into partnership with the U.S. Treasury. Foreigners stare wide-eyed from across the waters. A $50 billion Ponzi scheme (baited with, of all things in this age of excess, the promise of low, spuriously predictable returns)? Interest rates over which tiny Japanese rates fairly tower? Regulatory policy seemingly set by a weather vane? A Federal Reserve that can't make up its mind: Is it in the business of central banking or of central planning? And to think -- our disappointed foreign friends mutter -- all of these enormities taking place under a Republican administration. Trust itself entered a bear market in 2008, complementing and perhaps surpassing the selloffs in stocks, mortgages and commodities. Never to be confused with angels, we humans seem to outdo ourselves when money is on the line. So it is that Bernard Madoff, supposed pillar of the community, stands accused of perpetrating one of the greatest hoaxes since John Law discovered the inflationary possibilities of paper money in the early 18th century. Barely nudging Mr. Madoff out of the top of the news was the Federal Reserve's announcement last Tuesday that it intends to debase its own paper money. The year just ending has been a time of confusion as much as it has been of loss. But here, at least, was the bright beam of clarity. Specifically, the Fed pledged to print dollars in unlimited volume and to trim its funds rate, if necessary, all the way to zero. Nor would it rest on its laurels even at an interest rate low enough to drive the creditor class back to work. It would, on the contrary, "continue to consider ways of using its balance sheet to further support credit markets and economic activity." Wall Street that day did handsprings. Even government securities prices raced higher, as if, somehow, Treasury bonds were not denominated in the currency with which the Fed had announced its intention to paper the face of the earth. Economic commentators praised the central bank's determination to fight deflation -- that is, to reinstate inflation. All hands, including President-elect Obama, seemed to agree that wholesale money-printing was the answer to the nation's prayers. One market, only, registered a protest. The Fed's declaration of inflationary intent knocked the dollar for a loop against gold and foreign currencies. In many different languages and from many time zones came the question, "Tell me, again, now that the dollar yields so little, why do we own it?" It was on Oct. 6, 1979, that then-Fed Chairman Paul A. Volcker vowed to print less money to bring down inflation. So doing, he closed one monetary era and opened another. With Tuesday's promise to print much more money, the Federal Reserve of Ben S. Bernanke has opened its own new era. Whether Mr. Bernanke's policy of debasement will lead to as happy an outcome as that which crowned the Volcker anti-inflation initiative is, however, doubtful. Whatever the road to riches might be paved with, it isn't little green pieces of paper stamped "legal tender." Our troubles, over which we will certainly prevail, stem from a basic contradiction. The dollar is the world's currency, yet the Fed is America's central bank. Mr. Bernanke's remit is to promote low inflation, high employment and solvent finance -- in the 50 states. He wishes the Chinese well, of course, and the French and the Singaporeans and all the rest besides, but they don't pay his salary. They do, however, buy the U.S. Treasury's bonds, which frames the emerging American dilemma. If the Fed is going to create boatloads of depreciating, non-yielding dollar bills, who will absorb them? Who will finance the Obama administration's looming titanic fiscal deficits? Who will finance America's annual surplus of consumption over production (after 25 more or less continuous years, almost a national trait)? Inflation is a kind of governmentally sanctioned white-collar crime. Every crime needs a dupe. Now that the Fed has announced its plan to deceive, where will it find its victims? Mr. Bernanke has good reason to worry about the economy. We all do. In the boom, a superabundance of mispriced debt led countless people down innumerable blind investment alleys. E-Z credit financed bubbles in real estate, commodities, mortgage-backed securities and a myriad of other assets. It punished saving and encouraged speculation. Imagine a man at the top of a stepladder. He is up on his toes reaching for something. Call that something "yield." Call the stepladder "leverage." Now kick the ladder away. The man falls, pieces of debt crashing to the floor around him. The Fed, watching this preventable accident unfold, rushes to the scene too late. Not only did Bernanke et al. not see it coming, but they actually egged the man higher. You will recall the ultra-low interest rates of the early 2000s. The Fed imposed them to speed recovery from an earlier accident, this one involving a man up on a stepladder reaching for technology stocks. The underlying cause of these mishaps is the dollar and the central bank that manipulates it. In ages past, it was so simple. A central banker had one job only, and that was to assure that the currency under his care was exchangeable into gold at the lawfully stipulated rate. It was his office to make the public indifferent between currency or gold. In a crisis, the banker's job description expanded to permit emergency lending against good collateral at a high rate of interest. But no self-respecting central banker did much more. Certainly, none arrogated to himself the job of steering the economy by fixing an interest rate. None, I believe, had an economist on the payroll. None facilitated deficit spending by buying up his government's bonds. None cared about the average level of prices, which rose in wartime and sank in peacetime. It sank in peacetime because technological progress and the opening of new regions to agricultural production made merchandise and commodities cheaper and more abundant. Not everyone agreed that these arrangements were heaven-sent. In comparison to the rigor of the gold standard, paper money seemed, to many, an intelligent and forgiving alternative. In 1878, a committee of the House of Representatives was formed to investigate the causes of the suffering of working people in the depression that was five years old and counting. Not a few witnesses pleaded for the creation of more greenbacks. They asked that the government not go through with its plan to return to the gold standard in 1879. But the nation did return to gold -- it had financed the Civil War with paper money -- and the depression ended in the very same year. Gold is a hard master, and a capricious one, too, insofar as growth in the world's monetary base depends on the enterprise of mining engineers. But, as we have seen lately, there is no caprice like the caprice of sleep-deprived Mandarins improvising a monetary solution to a credit crisis (or, for that matter, of fully rested Mandarins setting interest rates by the lights of their econometric models). The times were hard in the 1870s and, for that matter, again in the 1890s, but Americans repeatedly spurned the Populist cries for a dollar you didn't have to dig out of the ground but could rather print up by the job lot. "If the Government can create money," as a hard-money propagandist put it in an 1892 broadside entitled "Cheap Money," "why should not it create all that everybody wants? Why should anybody work for a living?" And -- in a most prescient rhetorical question -- he went on to ask, "Why should we have any limit put to the volume of our currency?" A couple of panics later, the Federal Reserve came along -- the year was 1913. Promoters of the legislation to establish America's new central bank protested that they wanted no soft currency. The dollar would continue to be exchangeable into gold at the customary rate of $20.67 an ounce. But, they added, under the Fed's enlightened stewardship, the currency would become "expansive." Accordion-fashion, the number of dollars in circulation would expand or contract according to the needs of commerce and agriculture. Elihu Root, Republican senator from New York, thought he smelled a rat. Anticipating the credit inflations of the future and recalling the disturbances of the past, Mr. Root attacked the bill in this fashion: "Little by little, business is enlarged with easy money. With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community. "Bankers are not free from it," Mr. Root went on. "They are human. The members of the Federal Reserve board will not be free of it. They are human....Everyone is making money. Everyone is growing rich. It goes up and up, the margin between costs and sales continually growing smaller as a result of the operation of inevitable laws, until finally someone whose judgment was bad, someone whose capacity for business was small, breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure. "That, sir," Mr. Root concluded, "is no dream. That is the history of every movement of inflation since the world's business began, and it is the history of many a period in our own country. That is what happened to greater or less degree before the panic of 1837, of 1857, of 1873, of 1893 and of 1907. The precise formula which the students of economic movements have evolved to describe the reason for the crash following the universal process is that when credit exceeds the legitimate demands of the country the currency becomes suspected and gold leaves the country." Little did Mr. Root suspect that the dollar would lose its gold backing altogether -- that, starting in 1971, there would be nothing behind it more than the good intentions of the U.S. government and (somewhat more substantively) the demonstrated strength of the U.S. economy. Still less could he have guessed that the world would nonetheless fall in love with that uncollateralized piece of paper or -- even more astoundingly -- that the United States would enjoy so great a reservoir of good will that it would be allowed to borrow its way to a net international investment position of minus $2.44 trillion ($17.64 trillion of foreign assets held by Americans vs. $20.08 trillion of American assets held by foreigners). "It goes up and up," Mr. Root said of the inflationary cycle, but just how high he could not have dreamt. Knowledge of the precepts of classical central banking prepared no one to understand, much less to anticipate, the Fed's conduct in this credit crackup. The central bank is lending freely, all right, but not at the stipulated "high" interest rate. As a matter of fact, it is starting to lend at a rate below which there is no positive rate. The gold standard was objective. Modern monetary management is subjective (under Alan Greenspan, it was intuitive). The gold standard was rules-based. The 21st century Fed goes with what works -- or seems to work. What it hopes is going to work for the fellow who fell off the stepladder is more debt and more dollars. Just how much of each can be found every Thursday evening on the Fed's own Web site. Open up form H4.1 and prepare to be amazed. Since Labor Day, the Fed's assets have zoomed to $2.31 trillion from $905.7 billion. And what is the significance of this stunning rate of asset growth? Simply this: The Fed pays for its assets with freshly made dollars. It conjures them into existence on a computer; "printing" is a figure of speech. In this crisis, the Fed's assets have grown much faster than its capital. The truth is that the Federal Reserve is itself a highly leveraged financial institution. The flagship branch of the 12-bank system, the Federal Reserve Bank of New York, shows assets of $1.3 trillion and capital of just $12.2 billion. Its leverage ratio, a mere 0.9%, is less than one-third of that prescribed for banks in the private sector. Such a thin film of protection would present no special risk if the bank managed by Timothy F. Geithner, the Treasury secretary-designate, owned only short-dated Treasurys. However, the mystery meat acquired from Bear Stearns and AIG foots to $66.6 billion. A writedown of just 18.3% in the value of those risky portfolios would erase the New York Fed's capital account. In congressional testimony eight years ago, Laurence Meyer, then a Fed governor, tried to allay any such concerns (which then must have seemed remote, indeed). "Creditors of central banks...are at no risk of a loss because the central bank can always create additional currency to meet any obligation denominated in that currency," he soothingly reminded his listeners. Yes, today's policy makers allow, there are risks to "creating" a trillion or so of new currency every few months, but that is tomorrow's worry. On today's agenda is a deflationary abyss. Frostbite victims tend not to dwell on the summertime perils of heatstroke. But the seasons of finance are unpredictable. Prescience is rare enough in the private sector. It is almost unheard of in Washington. The credit troubles took the Fed unawares. So, likely, will the outbreak of the next inflation. Already the stars are aligned for a doozy. Not only the Fed, but also the other leading central banks are frantically ramping up money production. Simultaneously, miners and oil producers are ramping down commodity production -- as is, for instance, is Rio Tinto, the heavily encumbered mining giant, which the other day disclosed 14,000 layoffs and a $5 billion cutback in capital expenditure. Come the economic recovery, resource producers will certainly increase output. But it is far less certain that, once the cycle turns, the central banks will punctually tighten. The public has been slow to anger in this costliest and scariest of post World War II financial crises. Wall Street and the debt ratings agencies have come in for well-deserved castigation. But pointing fingers rarely find the Federal Reserve, whose low, low interest rates helped to set house prices levitating in the first place. After Mr. Bernanke gets a good night's sleep, he should be called to account for once again cutting interest rates at the expense of the long-suffering (and possibly hungry) savers. He should be asked to explain how the central-banking methods of the paper-dollar era represent any improvement, either in practice or theory, over the rigor, elegance, simplicity and predictability of the gold standard. He should be directed to read aloud the text of critique by Elihu Root and explain where, if at all, the old gentleman went wrong. Finally, he should be directed to put himself into the shoes of a foreign holder of U.S. dollars. "Tell us, Mr. Bernanke," a congressman might consider asking him, "if you had the choice, would you hold dollars? And may I remind you, Mr. Chairman, that you are under oath?" James Grant, the editor of Grant's Interest Rate Observer, is the author most recently of "Mr. Market Miscalculates." - ----- bourgeois (adj.) 1. Associated with affluent middle-class people, who are often characterized as conventional, conservative, or materialistic in outlook 2. According to Marxist theory, relating to the social class that owns the means of producing wealth and is regarded as exploiting the working class laissez-faire [les-ey FAIR], adjective: The principle that business, industry, trade, etc. should operate with a minimum of regulation and interference by government. end page | CALAMITIES - CALM | CALUMNY - CANADA | CANCER - CAN'T WIN | CAPITALISM | CAREFREE - CARPE DIEM | CARTER (JIMMY) - CATS & DOGS | CAUSES AND CONSEQUENCES - CENSORSHIP | CERTAINTY - CHANGE | CHANGING (ONE'S MIND) & CHANGING TIMES | CHARACTER | CHARACTER ASSASINATION - CHEERFULNESS | CHEER UP! - CHILDHOOD | CHILDREN | CHILDREN'S RHYME | CHILE & CHINA | CHOCOLATE - CHRISTIANITY | CHRISTMAS | CHURCH - CIGARS | CIRCUMSTANCES & CITIES | CIVILITY - CIVIL RIGHTS | CLARITY - CLICHES | CLOTHES - COFFEE | COLD - COLORS | COMEDY | COMFORT - COMMON SENSE | COMMUNICATION | COMMUNISM | COMPANIONSHIP - COMPASSION | COMPETITION - COMPLIMENTS | COMPOSERS - CONDUCTORS | CONFESSION - CONQUEST | CONSCIENCE - CONTENTED | CONTEXT - CONVERSATION | CONVICTION & COOKING | COOLIDGE - CORPORATIONS | CORRECTING - COURAGE | COURT - COWS | CREATIVITY - CRIME | CRIME & PUNISHMENT - CROOKS | CRITICISM & CRITICS | CROWD (THE) - CUBA | CULTURE - CYNICS | | A | B | C | D | E | F | G | | Return Home | The Credits | The Cast | Act 1 | Act 2 | Act 3 | The End | The Reviews | Photos |

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