Archive for February, 2011

Travels with Mullen

February 24, 2011

If behind the Australian dollar stands the power of the domestic state to impose and enforce tax obligations, behind the US dollar stands the Navy’s Fifth Fleet.

The US currency, like its Australian counterpart, is merely a certificate that can be rendered to the government as settlement for taxes due. It is an IOU, no longer convertible for bullion, etc.

The central banks of China and Japan don’t pay tax in the US. Yet they hold great troves of dollar reserves. This allows the US to afford massive quantities of imported manufactured goods and oil, far beyond its ability to export, and provides virtually unlimited funding for the international activities of the US armed forces.

Why is this? One reason lies in the wish of these exporting countries to keep their currency exchange rates competitively low.

But the deeper answer comes from the protection racket Washington runs with the rulers of Saudi Arabia, Kuwait, Bahrain, Qatar, Yemen, Iraq, Jordan etc. Military control over many of the world’s great oilfields, refineries, export terminals and shipping lanes is what secures the dollar’s status as global reserve currency.

It is widely known that, in the 1970s, officials from the US Treasury and State Department pressured the central banks and finance ministries of oil-exporting states (chiefly Saudi Arabia) to become massive holders of US Treasury securities.

OPEC governments were informed that oil prices could rise as much as desired (they had cheapened relative to grain) so long as they were denominated in US dollars, and so long as the revenues were disbursed in an agreeable manner. Oil funds were not to be converted into US corporate acquisitions, real estate or any hard assets. Instead, the Saudi government was to buy US-made military hardware: weaponry, armoured vehicles, fighter jets, helicopters, etc.

The result, four decades on, is that military expenditure makes up around 10% of Saudi GDP, a proportion easily among the highest in the world. Secondly, and above all, funds were to be invested in US government paper. David Spiro explains:

So long as OPEC oil was priced in US dollars, and so long as OPEC invested the dollars in US government instruments, the US government enjoyed a double loan. The first part of the loan was for oil. The government could print dollars to pay for oil, and the American economy did not have to produce goods and services in exchange for the oil until OPEC used the dollars for goods and services. Obviously, the strategy could not work if dollars were not a means of exchange for oil.

The second part of the loan was from all other economies that had to pay dollars for oil but could not print currency. Those economies had to trade their goods and services for dollars in order to pay OPEC. Again, so long as OPEC held the dollars rather than spending them, the US received a loan. It was therefore important to keep OPEC oil priced in dollars at the same time that the government officials continued to recruit Arab funds…

The Saudis…had the greatest proportion of dollar-denominated reserves in OPEC…In an attempt to continue the recruitment of Saudi funds, and in competition with other industrial powers, the State and Treasury Departments went to extraordinary lengths to prevent the Congress from gathering information. The Secretary of the Treasury even went to the trouble of making sure the CIA remained secretive. It was this secrecy, not accorded the investments of any other nation, that led the Commerce Department to complain that it was unable to compile accurate data on either foreign investment in the US or its balance of payments.

The friendly landlord regime in Riyadh, more than Washington’s subcontractors in Tel Aviv, or the beachheads in London or Tokyo, is the keystone in the arch of US imperial power.

Saudi rulers were quick this week to announce that the KSA stood ‘with all its capabilities’  behind ‘the restoration of calm and stability to Bahrain under its wise leadership.’ Bahrain lies within spitting distance of Saudi Aramco facilities at Ghawar, Safaniya, Abqaiq and Ras Tanura.

The Gulf Cooperation Council’s so-called Peninusla Shield is feeble, and the various branches of the Saudi armed forces are operationally dependent on their US counterparts. By design, neither can guarantee regional security without US assistance. But they can put down a civilian rebellion against the Al Khalifa family, should one arise.

The Chairman of the Joint Chiefs of Staff, on a well-timed tour of the Persian Gulf and Red Sea region, planned to ‘reassure our friends and just listen to what’s on their minds’, claiming that ‘stability is in everyone’s best interest’. Bahrain’s role in hosting the Fifth Fleet, said Admiral Mullen, ‘continues to be very strong, and I look forward to that being the case in the future.’

Funnily enough, the dollar’s special status has helped to bring about Washington’s current strategic problems. The Fed’s liquidity injection (QE2) in November 2010 mostly found its way to “emerging markets” via a dollar carry trade. This created the spike in food, currency, raw material and other asset prices that has so destabilised the satrap regimes in North Africa and West Asia.

How governments spend money

February 24, 2011

Both ordinary people and professional opinion-makers have had much to say about the Australian federal government’s decision to ‘fund’ the reconstruction of Queensland’s public infrastructure by levying a flood tax.

Less has been said regarding the government’s line that further ‘tough choices’ will be needed in the cause of fiscal discipline and sound public finance – most likely cuts to welfare expenditure.

At any rate, the commentary I’ve come across – from politicians, ‘market economists’, journalists, friends and baristas – suggests that few people have much idea what government spending actually involves: how it is done, by whom, etc.

In the case of non-professionals, this ignorance is understandable. Public discussion and explanation of the topic, by people who do know better, is usually misleading.

In most cases, this deception is deliberate.

Take the Australian government’s public position, as stated two weeks ago by Treasurer Wayne Swan in the Australian newspaper:

As the Prime Minister has said, borrowing to fund the public reconstruction would be the soft option. Instead, by applying some fiscal restraint now, we free up resources to make room for the recovery, so that it doesn’t add to pressure on our growing economy. That makes our plan to bring the budget back to surplus by 2012-13 the right one.

Our strategy has been backed by the Financial Times newspaper and international rating agencies such as Moody’s, which commended Australia’s strong fiscal discipline in dealing with the floods recovery. Fiscal responsibility is also about keeping our budget in a position where it can deal with surprises in the future. Getting back to surplus gives us the firepower to deal with future battles. During the global financial crisis, our strong balance sheet – built in part on difficult savings in our first budget – meant we were immediately able to respond to the crisis with a stimulus program that helped our economy weather the storm.

So, even while dealing with the reconstruction, the government isn’t losing sight of its broader policy objectives.

The suggestion is that the federal government, just like any private individual, is dependent on the financial system. It must fund its spending operations, ex ante, and to do so it must demonstrate its creditworthiness to the market.

This bears little connection to reality – in fact it has things backwards. The tax-and-spending activities of the federal government form the indispensable basis for the Australian financial system and for monetary circulation. That the reverse seems true is the result of determined efforts by a particular social group to mould the state to its purposes.

Let me show why.

Suppose the Australian government wants to appropriate some real resource (goods or labour). Let’s say it contracts Leighton Holdings to re-build port infrastructure damaged in Queensland’s floods.

Symbolically, this requires the government to issue a cheque drawn on the Official Public Account at the Reserve Bank. Leighton Holdings deposits the payment at its private bank, forming a liability for the banking system. In turn, that bank’s private account at the RBA is credited by a matching amount, forming a liability for the government.

Government expenditure thus occurs effectively by the crediting of accounts, i.e. increasing the reserves of the banking system. These bank reserves or ‘exchange-settlement funds’ form the basis for the private payments system. Banks and other deposit-taking institutions choose to hold reserves at some desired level of liquidity, in order to meet settlement obligations whenever they arise.

If government spending results in banks holding more reserves than they’d otherwise prefer, the overnight cash rate falls. Or suppose there are inadequate reserves, prompting more bids than offers for funds in the overnight interbank market. The cash rate will rise.

To prevent too much day-to-day fluctuation in bank reserves, and to maintain its target short-term interest rate, the central bank engages in open-market operations. It sells treasury securities to drain excess reserves, or buys government securities (short-term debt instruments or bonds) to inject reserves. The latter activity is known as quantitative easing.

Alternatively, reserves can be annulled through taxation.

When Leighton Holding’s tax liability falls due, it extinguishes the debt by drawing on its private bank account. This operation in turn credits the government’s account at the RBA, and drains exchange-settlement funds at the central bank.

Taxation is thus a reduction of the government’s outstanding liabilities. A government deficit, on the other hand – an excess of spending over receipts – increases the financial assets of the rentier class.

Let’s pause a minute to consider how this intersectoral flow of funds works in the present context.

As a simple matter of accounting, in any period the savings of the private sector must balance state borrowing. In the period since 2007, Australian public-sector deficits have been the flipside to private deleveraging and the current-account deficit. Households and firms cut their rates of borrowing and retired outstanding debt. With falling tax revenues and increased unemployment benefits, the government became the borrower of last resort.

Now the state, to whom debt was offloaded, seeks itself to cut expenditure and start saving (nowadays known as ‘fiscal consolidation’).

But from where will the corresponding borrowing arise? Firms show no sign of borrowing on a large scale to finance investment. The financial sector is of course a net lender, and it’s not those assets the government wishes to see run down. With no hope of a surplus with the rest of the world, this leaves only one party on which higher sectoral borrowing can be pushed.

The aim of government policy is clearly enough to increase household debt, firstly through cuts to public-sector wages and employment. Enough new unemployment will reduce pension-fund contributions; these institutional funds hold a large stock of government liabilities. Unemployed workers will also be forced to run down their savings and enter into debt.

This strategy lies behind the social convulsions presently wracking the United States, and indeed much of the northern hemisphere.

The Labor-Greens state government in Tasmania has already announced plans to reduce public-sector labour costs by 10 percent, an amount equivalent to the wages of 2300 employees.

Beneath the symbolic activities of government expenditure and taxation lies a real, unilateral transfer of wealth.

In levying a tax, the state symbolically asserts its primordial right to command a part of society’s labour time, and thereby claim a portion of the social product.

Taxation by modern states commutes the citizen’s ancient obligation to perform labour service or pay in-kind tribute to the state. Nowadays governments such as those of Australia, the US, UK, Japan or Canada (but not those of the Eurozone countries) have the sovereign power to impose and enforce periodic tax obligations denominated in a particular national currency, surrender of which is the only legal means of discharging liabilities.

This creates recurrent demand for the state currency, which otherwise possesses no inherent property or substance by which value could be imputed to it. Henceforth it is needed to settle debts; in turn, state spending creates liquidity.

When it taxes private agents such a government merely collects its own tokens. These tokens have purchasing power, and serve as unit of account, because the government undertakes to accept them in settlement of tax debts. These certificates are transferrable and, through commodity exchange, they circulate. Thus the sovereign’s power to command labour is delegated to all who hold money.

Now let’s return to our example case, based on the flood tax.

Suppose the Australian government uses the labour time of Leighton Holding workers and the resources of that company to rebuild a damaged port, yet fails to balance that with a symbolic reflux (i.e. tax or debt securities) of money equal to the value of those resources.

In that case the unit of account, the Australian dollar, will tend to fall in purchasing power. Injecting more money into the system than is taken out in tax will lead to inflation.

This is what lies behind the present government’s obsession with ‘fiscal restraint’.

When questions of public finance arise, the over-riding concern is to combat inflation. It lurks behind all public discourse, spanning the entire spectrum of respectable political and theoretical opinion: from a hard-core right that speaks of “crowding out” to the claim of putative “progressives” that the government budget should be balanced over the course of the business cycle.

Why this fixation on price stability?

The maturation of capitalist economies has propelled to the top of the social hierarchy (in Australian and elsewhere) a thin class of rentiers. The income of these agents is derived largely from dividends, interest payments, capital gains and exorbitant executive salaries (including bonuses and stock options). Their economic activity is accordingly concentrated in the finance sector. Their chief concern is that the liabilities of their debtors must not be inflated away.

To the growth in the relative weight of the financial industry within the economy as a whole, corresponds an increase in the strength of Treasury and Finance ministries compared to other government departments and agencies. Executive public-service personnel in these departments, along with the central banks, share a thin membrane with the private banking and finance industries, across which constant two-way passage secures a commonality of background, ideological outlook, labour-market conditions and policy perspective.

Special-purpose ministries continue to exist for each diverse area of state responsibility (aged care, disability support, education, immigration, health, regional development, housing, environmental policy, welfare, telecommunications etc.). But the formation of government policy across this entire breadth is increasingly controlled by the core finance-linked departments, together with the central bank.

In Australia, the Productivity Commission (part of the Treasury Department), as part of its policy-advice remit, constantly oversees and assesses the delivery of all government services and programmes.

To the rentier class thus devolves control over the state apparatus, and consequently over the fundamental social trajectory, of Australia as of every advanced capitalist country.

The priorities of the financial industry – price stability, free capital mobility, wage restraint – are now shared by all state personnel, parliamentary parties, central organs and peripheral institutions (e.g. media and academia).

These class-based goals are codified in the statutory objectives of bodies such as the Reserve Bank – which, starting from the 1990s, defined price stability as the ‘ultimate objective of monetary policy and indeed of economic policy as a whole’. (The RBA’s postwar full-employment objective, as Kalecki would have anticipated, has been sidelined).

Any public figure who questions this unholy consensus, sincerely or otherwise, is immediately subject to withering ridicule and slander, prompting either silence, recantation or career oblivion.

The resulting state conforms almost exactly to Hayek’s ‘model constitution’, in which certain matters (e.g. those pertaining to property rights) were to be exempted from the control of popularly-elected legislatures.

When it came to any broad-suffrage representative assembly, said Hayek, ‘power ought always to be limited in extent and scope, namely confined to the administration of a sharply circumscribed range of means entrusted to its care.’ Authority over matters such as taxation, the ‘framework for a functioning competitive market and the law of corporations’ should be reserved for ‘a select group of highly competent persons’, not very numerous, aged between 45 and 60, ‘who already had proved themselves in the ordinary business of life’, elected perhaps by regionally-appointed delegates of ‘relatively mature age’, then serving ‘for fairly long periods, such as fifteen years, so that they would not have to be concerned about being re-elected… nor forced to return to earning a living in the market.’

Under Australia’s Westminster system, Commonwealth and state ministers are supposed to be responsible to their respective parliaments. But increasingly executive power is wielded by “kitchen cabinets”, membership of which does not require the confidence of representative bodies.

The South Australian Labor government recently included a mining executive and a Catholic monsignor in its executive committee of cabinet; the New South Wales Labor government followed this unprecedented action by appointing two business figures, without parliamentary seats, to its own executive committee.

At the federal level, Prime Ministers too have assembled ad hoc coteries and advisory ’roundtables’, allowing business leaders to participate in decisionmaking beyond the reach of Parliament.

The authoritarian nature of all this is explicit. Institutional changes have produced government not merely on behalf – but now at the direct behest – of the financial elite.

The rise in social power of the financial elite is what lies behind that growth in authority of the executive branch (ministers as well as top levels of the civil bureaucracy), unchecked by legislative or judicial scrutiny, that is obvious in Australia as elsewhere.

Update: Today’s Australian Financial Review reports on the deal secretly negotiated in July 2010 by the new Prime Minister, her Treasurer and Resources Minister with mining executives from BHP Billiton, Rio Tinto and Xstrata. By scrapping the Resource Super Profits Tax, the paper estimates the Gillard government agreed to forego over $100 billion in federal revenue over the next decade. This massive figure is based on mineral price and volume assumptions obtained from Treasury. The Australian net public debt is currently around $80 billion.

A long-run look at the Egyptian economy

February 17, 2011

Commercial media and other analysts have cited rising food prices and unemployment as factors contributing to recent revolts in North Africa and West Asia, most notably that in Egypt. Egypt’s 2008 strike wave also coincided with a drastic run-up in grain prices.

But little has been said about the longer-term evolution of the Egyptian economy.

Perhaps, alongside more conjunctural influences, this had some bearing on the course of Mubarak’s rule, and on its recent termination?

I lack any in-depth knowledge on the topic, so I turned to data contained in the Extended Penn World Tables for the period 1963-2003, compiled by Adalmir Marquetti.

The standout feature (the blue line in the chart below) is rapid growth in the average rate of return on fixed-capital investment earned by firms in Egypt, beginning during the 1990s, to very high absolute levels. If we compare Egypt’s profit trajectory to that of advanced economies such as Japan, or even developing economies such as South Korea, we can see how unusual it is.

But the rise in profitability was not prompted by technical advance. Labour productivity grew quite slowly in Egypt during this period – less than 2% annually in the period after 1990.

The source of increased profitability lay mostly in demographic growth: Egypt’s workforce increased by more than 50% over that same time.

But now look at the red line plotted above. It shows that, despite increased profitability, growth in the productive capacity of the Egyptian economy has been slow.

The rate of increase in the capital stock has indeed diminished over time. In some years total investment failed even to cover depreciation, resulting in negative growth of the capital stock.

Our two time series thus show that a very small and decreasing share of profits was reinvested in plant and machinery (this explains the slow productivity growth). This caused the capital:output ratio to fall, which in turn led to a rising average profit rate.

But it also limited technical advance in the productive apparatus through which the working population was reproduced. The living standards of the population must have stagnated.

In some sense, this slow rate of accumulation is an index of the venality of the military-financial coterie surrounding Mubarak.

Under the rule of this group, the surplus extracted from the working population was dissipated by conspicuous luxury consumption (performed safely in ‘niche housing projects’ for those ‘who seek distinction’ such as Dreamland, outside Cairo. This walled compound promised to ‘spread the wings of Egyptian success stories abroad.’) The vast security apparatus, needed for the maintenance of social order and property rights, absorbed still more. (The wealth engrossed by the security apparatus nonetheless did find some productive outlets, seeping into civilian areas of the economy such as construction, textiles, petrochemicals, and automobile manufacturing. Many owners and contractors are said to have had regime ties through the officer class and the ministries of Defence and Interior, nurtured in turn by USAID.)

But the paucity of fixed-capital investment also tells us about the sectoral makeup of the Egyptian economy and class relations of Egyptian society.

IMF-led reforms after 1990 disproportionately increased the weight of unproductive sectors, most noticeably finance.

In the period under investigation, an increasing fraction of profits earned by Egyptian firms went as interest payments, dividends and other unproductive expenditure, decreasing retained earnings and thus leaving less to be productively reinvested in new buildings, equipment, etc.

The scarcity of capital, alongside strong demographic growth, implied a relative glut of labour. The employed population’s resulting lack of bargaining power saw the wage share of national income drop from 45% in 1975 to around 28% by the turn of the new century.

This is an astonishingly low figure, well below that even of countries like Brazil.

The cost of labour is governed by that of its inputs: that consumer basket of goods and services which materially reproduces the capacity to work. In modern economies, cheapening the cost of labour thus generally occurs by technical innovation that cheapens the production of food, clothes, childcare, utilities, education etc. As we have seen, Egyptian productivity growth was slow in recent decades. There was little investment in new machinery or more efficient techniques. If the cost of labour nonetheless declined sharply, this was in the first instance due to state repression and demographic growth.

The result was that the net product increased faster than wages over much of this period.

But this also says something about the existence of Egypt as an integrated economic unit. Production of the goods and services making up the real wage – the consumption basket of the Egyptian employed population, and its dependents – did not only occur domestically.

A major and increasing component of Egyptian imports, for example, is foodstuffs for human consumption. North Africa, taken together, has one of the highest food-import dependencies of any region in the world.

Growth in Egypt’s external ‘food gap’ (i.e. exports minus imports) coincided, in the 1990s, with removal of consumer subsidies for food. Household food consumption dropped by around 20% in the course of four years. Between 1987 and 2000, per capita wheat consumption fell by 12%; potato consumption was reduced by 10%. Over the next decade, food consumption was projected to fall further still.

This represented, of course, a catastrophic decline in the standard of living of the broad Egyptian population. It also constituted a terrific drop in the real wage.

From 1990 onwards, the Egyptian ruling elite increased the size of the surplus extracted from the employed population, without having to direct its flow of profits from current consumption to accumulation of investment goods. This could only occur to the extent it did because the Egyptian economy was not a segregated, closed system but was embedded in a wider international network. Wage goods and capital goods were cheapened by turning to suppliers beyond the territorial boundaries of the Egyptian state.

With growth in the relative weight of unproductive sectors of the Egyptian economy, this became ever more important.

Egypt’s massive external deficit (around 20% of GDP) with the mercantilist economies among its trading partners – Germany, Italy, China, the Netherlands, France, Belgium, etc – constituted a free subsidy, a transfer of real wealth from these export-surplus countries. It was output produced by the workers of these latter countries, but not consumed by them as part of the real-wage bundle. The surplus was, however, consumed by the Egyptian ruling elite as luxury goods, private security services, etc.

This parasitic layer was thus supported not merely by the working population of Egypt, but by that of Europe, Asia and elsewhere.

The Egyptian economy does not reproduce itself materially from period to period. It must be taken as a non-self-sufficient subset of a broader (regional or global) economy. The Egyptian population’s defence or advancement of its living standards is bound up with the fate of European, Asian and other working people. Any solution to its problems requires a leap beyond national partitions.

Political actors must operate in the geographic area that constitutes a unified economy, and unite the working population within that territory to work for common goals that can only be achieved on that scale. In the present circumstances, this scale is necessarily global.

It is in that sense, as well as the consequences for Washington and Tel Aviv, that Mubarak’s fall is of international significance.

Why a jobless recovery?

February 15, 2011

Duncan Foley gives a simple explanation for the US economy’s ‘jobless recovery.’

This phenomenon, recall, is that, while conventional measures of output (i.e. GDP) show the US economy growing strongly in recent quarters, employment is stagnant. Over 26 million workers, around 17% of the labour force, are now either unemployed or underemployed (i.e. discouraged from looking for jobs or unwillingly working part-time). Seven million fewer jobs exist than in December 2007, at the start of the Great Recession; the working-age population has grown by nearly 4 million people over that period.

Foley suggests that something is wrong with the standard metric for economic activity. The national accounts overstate the level of output contributed by various sectors, which explains why fluctuations in the total correlate so poorly with labour-market performance.

In fact, says Foley, some measured activities do not contribute to the total product at all. Such activities are supported entirely by the surplus generated in the productive or “basic” sector.

Observe how the financial system moved from paper record-keeping to electronic databases. Increased technical efficiency would, ordinarily, reduce the amount of labour and resources required to perform an activity. The mechanization of agriculture, for example, eliminated the peasants of Europe. But the automation of financial ‘services’ has not reduced the number of bankers and brokers. Quite the reverse is true. This is because finance, as an unproductive sector, grows proportionately with the surplus generated elsewhere, consuming ever more resources. The wages, profits and rent received by participants in these unproductive or ‘non-basic’ activities deduct from society’s output.

Expansion of the unproductive sector increases the magnitude of claims on wealth, thereby reducing the surplus available for productive investment and employment.

FIRE (finance, insurance and real estate), but also legal services, advertising, luxury goods and armaments, should therefore not be included in any worthwhile measure of output. The growing proportion of US GDP taken up by such activities (especially finance, military expenditure and public administration), and the concentration of post-2009 ‘green shoots’ in unproductive sectors of the economy, helps to explain the jobless recovery. (The same has been said for India.)

Since the 1970s economic and employment growth have increasingly diverged, prompting the general population’s standard of living to stagnate. With each successive US recession, ‘recovery’ has involved less and less employment growth.

But Foley includes as unproductive sectors health and education. He seems to suggest that the entire service sector is unproductive. Yet health and education are essential for the material reproduction of society and of the capacity to work of the employed population. On most reasonable definitions and typologies of productive versus unproductive sectors, such as those by Shaikh and Tonak, Roy Grieve or Dave Zachariah, they are considered to be productive.

Trust me

February 10, 2011

Until the 1960s, the majority of financial assets were owned directly by private individuals and wealthy households.

Over the following decades there developed what Minsky called ‘money-manager capitalism.’ Institutional investors — insurance companies, pension and mutual funds — became the largest holders of stocks and bonds, managing the portfolios on behalf of their customers.

A mostly unremarked-upon feature of this change has been the rise of the trustee as a distinct social role.

Along with direct owners of property, and their managerial agents, trustees now hold rights of control (i.e. disposition) over a huge volume of claims to wealth (i.e. they have both legitimate authority and residual power to decide what to do with an asset where this is not specified contractually).

As employee savings are compulsorily channelled into financial markets, and the demand for funds from commercial and industrial firms slows down, the custodial and administrative power of these intermediaries has swelled.

What has this meant for the beneficial owners, and trustees themselves?

Australian has one of the largest pool of pension assets in the world, behind only the US, UK and Japan. Industry funds constitute around one-fifth of this total, some $226 billion dollars. As a proportion of GDP (now over 100%), the assets of Australian superannuation funds rank with Switzerland and the Netherlands.

The market saturation of defined contribution schemes (where risk is shifted to the beneficiary) is unmatched in any other country.

And the governance structure of Australian industry superannuation funds is unique.

This feature derives from the peculiar circumstances by which universal superannuation was introduced (part of the 1986 Accord between unions and the Labor government that sought to limit wage growth). Unions are recognized as key ‘stakeholders’ that, together with firms, deserve representation on boards.

As a result, union secretaries and officials make up half of the trust directors responsible for prudential oversight and deciding upon, or outsourcing, investment strategies.

Board positions are regularly used as stepping-stones to parliamentary careers. Union bureaucrats use them to establish business knowledge, contacts and profiles.

Superannuation payments are a compulsory deduction from wages, over which the employee surrenders decision-making power, while retaining the risk that the accumulated amount will not prove sufficient to fund his or her retirement. The justification for this policy comes from neoclassical economics: a larger pool of savings will increase investment.

But, as Minsky showed, money-manager capitalism doesn’t fund employment-generating investment — quite the opposite.

Constrained by the single-minded focus of fund managers on ‘shareholder value’, large firms are reluctant to undertake fixed investment in new plant and equipment. The focus of managers settles on balance-sheet restructuring (buying and selling financial assets, issuing liabilities then buying them back) and payment of dividends.

Thus the record of recent decades shows that economies with the largest batch of pension funds (US, UK, Netherlands, Switzerland, Australia) display a comparatively low rate of capital-stock accumulation. Growth in jobs, wages, productivity and living standards has lagged accordingly.

The inflow of funds to financial markets serves only to bid up asset prices, before being absorbed as household debt, banker bonuses and luxury consumption.

So the interest of employees clearly lies with abolishing state-mandated superannuation. On the other hand, a powerful set of incentives — the salaried position of trustees, their future career prospects, and their proximity to power — ensure that trustees support its continuation.

The livelihoods and the social existence of trustees is bound up with the fate of the rentier class, with whom their interests, too, are aligned. The inclusion on pension-fund boards of union bureaucrats has been crucial in establishing this link and commonality of interest with the capitalist elite.

Off course, union leaders benefit from increased capital income only to a very limited extent — the vast majority of their income derives from wages and salaries. But a portion of their remuneration, and a substantial amount of their social influence, now depends on expanding the pool of assets controlled by pension funds.

This allows the development of a broader social alliance or settlement. The material benefits of neoliberalism have been captured almost exclusively by high finance and the ultra-rich, but the adherence of other social strata has been essential to its stability.

Money-manager capitalism allows, for the first time, most household balance sheets to include some mix of financial assets. Media boosters describe this as a ‘democratization’ of ownership, henceforth diffused downwards, and now including ‘mum and dad investors’.

In fact, the rise of institutional investment funds brings an unprecedented concentration of income and wealth in the hands of a tiny minority of financial aristocrats.

Trusteeships allow other social layers to enter this inner citadel of privilege. By extending administrative authority and control over investment strategies to salaried ‘member representatives’ and union bureaucrats, the support base for a drastically unequal social hierarchy has been broadened.

Many of these union figures have  recently served as board members of AustralianSuper, one of the largest pension funds.

They bring irresistibly to mind Zinoviev’s characterization of Australian Labor politicians and union bureaucrats as ‘a constant prey of leaders on the make for careers’:

Upon the backs of the laboring masses there arise, one after another, little bands of aristocrats of labor, from the midst of which the future labor ministers spring forth, ready to do loyal service to the bourgeoisie… They act the parts of workers even now. But in reality they are only agents of the financial plutocracy in the camp of the workers. The caste of the “leaders” here appears quite openly as a unique type of job trust.

Trustees, of course, are not entitled to the full panoply of bourgeois rights.

Private property entitles the owner (or his agents) to various exclusive rights: use, inheritance, residual claimancy, transfer (buying and selling), etc.

The trust, on the other hand, is a hybrid form that ‘un-bundles‘ various rights and assigns them to various parties. Trustees have control rights but don’t receive ownership income, and may not dispose of the property. They owe a fiduciary duty to beneficiaries of the trust: officially, they are the latter’s servants.

In the case of pension funds, directors are obliged to pursue high risk-adjusted returns at low cost. They must be seen to act in the interest of members, and not derive personal advantage (self-dealing) from exercise of their power.

Trusts, moreover, often are formed in situations where state-owned property has been converted to a private asset, and consequently they may demand of the trustee some residual form of ‘social responsibility’.

Alongside prudential care of the beneficiary’s interest (as just described), in these circumstances the trustee may also appear as a representative or defender of ‘community interests’ against purely commercial, profit-maximizing imperatives.

This is especially the case where, as with industry pension funds in Australia, the trustees are linked to ‘progressive’ politics or the union bureaucracy.

Communal land recognized under native title, for example, is compulsorily vested in bodies corporate: Indigenous Land Councils and trusts. Council and trust directors are conferred with rights of management, administration and negotiation over land use and development. In wielding these powers they are legally obliged to act with regard for ‘community interest’.

Yet there are obvious principal-agent difficulties (conflicts of interest + asymmetric information) involved in both cases.

In the case of pension funds, directors and their activities are remote from member observation and control. Trust deeds confer on boards the power to engage fund-management companies, to negotiate the latter’s fees for investing in various asset classes, and to appoint day-to-day managers and consultants. The possibility of unobserved collusion with these external parties exists.

The same is true for the Indigenous directors of the prescribed bodies corporate that hold communal title.

Generally, when trustees exercise power on behalf of beneficiaries, their effort and degree of competence aren’t directly observable, and their good-faith performance of duties can’t reliably be inferred from outcomes (e.g. from the level of royalty or other payments to native title holders made under the terms of land use agreements made with mining companies, or from the performance of superannuation funds invested in financial securities).

The terms of the relationship, being non-verifiable, aren’t legally enforceable by a third party (e.g. courts). If poor results occur, then the agent (negotiator, portfolio manager) can always plausibly claim that he or she did the best possible under the circumstances.

Given that the trustee can’t credibly commit to suppress his own interest and carry out the terms of the exchange, and the beneficiary can’t enforce such behaviour, then the beneficiary wouldn’t voluntarily engage in the transaction.

Indeed, as we’ve seen, native title holders delegate management functions to land trusts, and employers entrust their savings to superannuation funds, only because they are obliged to do so by government legislation.

For such arrangements to be politically sustainable (i.e. for them not to seem like arbitrary coercion), then the very weak accountability of agents to principals, and the former’s opportunity to gain at the latter’s expense, must be downplayed.

The appearance of a commonality of interest, and a general affinity between the parties, must be advertised.

In the case of land trusts and superannuation funds, this confluence of interests is supposed to derive from shared ethnicity and party allegiance.

The use of trust directorships for career advancement tells us a different story. The current and ex-union officials shown above, and the likes of Patrick Dodson, have leveraged their positions as trustees to establish contacts and gain entry to federal and state parliaments, advisory panels, corporate boards of directors, consultancies, etc.

Of course, the social role of trust director is not equivalent to that of  corporate director or senior manager. These latter groups, thanks to the scale of executive remuneration (and increasingly the use of stock options in salary packages) have merged with the class of asset owners.

The social role of the trustee nonetheless derives from the same historical process from which managers and the joint-stock company emerged.

Both are part of an innate tendency towards the ‘depersonalization’ of capital ownership, away from a concrete class of wealthy individual capitalists. The pop-cultural image of the heroic entrepreneur (Bill Gates, Richard Branson, John Galt, Tony Stark), who both owns and manages his business, is an archaic holdover.

Capitalist firms have developed as a succession of ever-more ‘abstract’ and impersonal juridical entities: from sole proprietorships and family firms, to partnerships, joint-stock companies, mutual funds and state corporations.

The tasks of organizing and controlling the production process increasingly devolve to paid functionaries. The shareholder — no longer an individual but an institution or fund — accrues capital income from the asset, but has little direct control over the property.

This tendency to depersonalization makes the task of identifying the political character of a given social group, or private individual, somewhat more difficult. As property rights evolve, novel roles and social relations are created.

This, perhaps, accounts for the illusions retained by some in the ‘progressive potential’ of certain groups.

Solid methodological advice from Republicans

February 7, 2011

The congressional Commission of Inquiry into ‘the causes, domestic and global, of the current financial and economic crisis in the United States’ has handed down its report. Despite its length and surface detail, star testimony and subpoenaed documents, the report is predictably superficial. For all the analytic insight on show, it might have been written by mainstream journalists in September 2008. The crisis is pinned on poor risk management by corporations, lack of prudential oversight by government regulators, shoddy ratings agencies, and a general absence of ‘accountability and ethics’. One of the report’s few worthwhile remarks comes in a dissenting statement from Republican appointees to the Democrat-led Commission:

Not everything that went wrong during the financial crisis caused the crisis, and while some causes were essential, others had only a minor impact. Not every regulatory change related to housing or the financial system prior to the crisis was a cause. The majority’s almost 550-page report is more an account of bad events than a focused explanation of what happened and why. When everything is important, nothing is.

[…]

[Our] explanation for the credit bubble should focus on factors common to both the United States and Europe, [recognise] that the credit bubble is likely an essential cause of the U.S. housing bubble, and that U.S. housing policy is by itself an insufficient explanation of the crisis. Furthermore, any explanation that relies too heavily on a unique element of the U.S. regulatory or supervisory system is likely to be insufficient to explain why the same thing happened in parts of Europe.

The people is an eternal infant

February 4, 2011

The frenzied, lawless “mob” was a favourite image of nineteenth-century European literature, and survived right down to the interwar novels of Céline. For more use by Flaubert of the theme, see the great curmudgeon’s letters to George Sand, sent from Croisset in March and April 1871:

[The] insurrection in Paris is, to my eyes, a very clear and almost simple thing. What retrogressions! What savages! How they resemble the people of the League and the men in armour! Poor France, who will never free herself from the Middle Ages! who labours along in the Gothic idea of the Commune, which is nothing else than the Roman municipality. Oh! I assure you that my heart is heavy over it!

[…]

“Ah! God be thanked, the Prussians are there!” is the universal cry of the bourgeois. I put messieurs the workmen into the same pack, and would have them all thrust together into the river!

[…]

I hate democracy (at least the kind that is understood in France), that is to say, the exaltation of mercy to the detriment of justice, the negation of right, in a word, antisociability…

The Commune rehabilitates murderers, quite as Jesus pardoned thieves, and they pillage the residences of the rich, because they have been taught to curse Lazarus, who was not a bad rich man, but simply a rich man…

The only reasonable thing (I always come back to that) is a government by mandarins, provided the mandarins know something and even that they know many things. The people is an eternal infant, and it will be (in the hierarchy of social elements) always in the last row, since it is number, mass, the unlimited. It is of little matter whether many peasants know how to read and listen no longer to the cure, but is is of great matter that many men like Renan or Littre should be able to live and be listened to! Our safety is now only in a LEGITIMATE ARISTOCRACY, I mean by that, a majority that is composed of more than mere numbers.

The spectre is revived by present-day media descriptions of looters and criminals in the disaster zones of New Orleans, Haiti and now cyclone-hit Queensland. As ever there is little evidentiary basis for such claims, and their origin lies mostly with anti-popular prejudice and sensationalism. Their “intellectual” source is the Hobbesian dictum that auctoritas, non veritas facit legem, and thus that morality and social order cannot survive without the enforcing role of Leviathan.

Thus we come to the ideological purpose of the trope, at least in contemporary settings:

  1. To build support for the domestic deployment of military forces, and rule by ministerial decree, to restore “order.”
  2. To distract from the contribution to “social breakdown”, where it occurs, of inadequate planning, evacuation or mitigation measures, public-service provision and emergency response by civilian authorities.

New Zealand’s Canterbury Earthquake Response and Recovery Act 2010 confirms the broader purpose of “mob” commentary in the wake of natural disasters, protests etc. The aim is to extend the unchecked powers of the state’s executive branch, at the expense of other government agencies and, of course, the population itself.

The identification of “failed states” is used to legitimise military interventions across borders, in defiance of international law. Talk of mobs and looters, on the other hand, prepares ground for the use of military and other forces against “security threats” on home soil. Policing duties for colonial troops in East Timor and Solomon Islands shade readily into domestic operations in far-North Queensland, the Northern Territory or wherever emergencies arise.

Springtime of peoples

February 3, 2011

The images, vocabulary and above all the political lessons of 1848 have found re-employment in recent weeks.

Here’s Flaubert, in Sentimental Education, describing popular delirium amid the February storming of the Tuileries Palace:

Suddenly the “Marseillaise” resounded. Hussonnet and Frédéric bent over the balusters. It was the people. They rushed up the stairs, shaking with a dizzying, wave-like motion bare heads, or helmets, or red caps, or else bayonets or human shoulders with such impetuosity that some people disappeared every now and then in this swarming mass, which was mounting up without a moment’s pause, like a river compressed by an equinoctial tide, with a continuous roar under an irresistible impulse. When they got to the top of the stairs, they were scattered, and their chant died away. Nothing could any longer be heard but the tram of all the shoes intermingled with the chopping sound of many voices. The crowd, not being in a mischievous mood, contented themselves with looking about them. But, from time to time, an elbow, by pressing too hard, broke through a pane of glass, or else a vase or a statue rolled from a bracket down on the floor. The wainscotings cracked under the pressure of people against them. Every face was flushed; the perspiration was rolling down their features in a large bead. Hussonnet made this remark:

“Heroes have not a good smell.”

“Ah! you are provoking,” returned Frédéric.

And, pushed forward in spite of themselves, they entered an apartment in which a dais of red velvet rose as far as the ceiling. On the throne below sat a representative of the proletariat in effigy with a black beard, his shirt gaping open, a jolly air, and the stupid look of a baboon. Others climbed up the platform to sit in his place.

“What a myth!” said Hussonnet. “There you see the sovereign people!”

The armchair was lifted up on the hands of a number of persons and passed across the hall, swaying from one side to the other.

“By Jove, ’tis like a boat! The Ship of State is tossing about in a stormy sea! Let it dance the cancan! Let it dance the cancan!”

They had drawn it towards a window, and in the midst of hisses, they launched it out.

“Poor old chap!” said Hussonet, as he saw the effigy falling into the garden, where it was speedily picked up in order to be afterwards carried to the Bastille and burned.

Then a frantic joy burst forth, as if, instead of the throne, a future of boundless happiness had appeared; and the the people, less through a spirit of vindictiveness than to to assert their right of possession, broke or tore the glasses, the curtains, the lustres, the tapers, the tables, the chairs, the stools, the entire furniture, including the very albums and engravings, and the corbels of the tapestry. Since they had triumphed, they must needs amuse themselves! The common herd ironically wrapped themselves up in laces and cashmeres. Gold fringes were rolled round the sleeves of blouses. Hats with ostriches; feathers adorned blacksmiths’ heads, and ribbons of the Legion of Honour supplied waistbands for prostitutes. Each person satisfied his or her caprice; some danced, others drank. In the queen’s apartment a woman gave a gloss to her hair with pomatum. Behind a folding-screen two lovers were playing cards. Hussonnet pointed out to Frédéric an individual who has smoking a dirty pipe with his elbows resting on a balcony; and the popular frenzy redoubled with a continuous crash of broken porcelain and pieces of crystal, which, as they rebounded, made sounds resembling those produced by the plates of musical glasses.

Then their fury was overshadowed. A nauseous curiosity made them rummage all the dressing-rooms, all the recesses. Returned convicts thrust their arms into the beds in which princesses had slept, and rolled themselves on the top of them, to console themselves for not being able to embrace their owners. Others, with sinister faces, roamed about silently, looking for something to steal, but too great a multitude was there. Through the bays of the doors could be seen in the suite of apartments only the dark mass of people between the gilding of the walls under a cloud of dust. Every breast was panting. The heat became more and more suffocating; and the two friends, afraid of being stifled, seized the opportunity of making their way out.

In the antechamber, standing on a heap of garments, appeared a girl of the town as a statue of Liberty, motionless, her grey eyes wide open – a fearful sight…

They were filled with ardour. They went back to the Palais-Royal. In front of the Rue Fromanteau, soldiers’ corpses were heaped up on the straw. They passed close to the dead without a single quiver of emotion, feeling a certain pride in being able to keep their countenance.

The Palais overflowed with people. In the inner courtyard seven piles of wood were flaming. Pianos, chests of drawers, and clocks were hurled out through the windows. Fire-engines sent streams of water up to the roofs. Some vagabonds tried to cut the hose with the sabres. Frédéric urged a pupil of the Polytechnic School to interfere. The latter did not understand him, and moreover, appeared to be an idiot. All around, in the two galleries, the populace, having got possession of the cellars, gave themselves up to a horrible carouse. Wine flowed in streams and wetted people’s feet; the mudlarks drank out of the tail-ends of the bottles, and shouted as they staggered along.

“Come away out of this,” said Hussonnet; “I am disgusted with the people.”

All over the Orléans Gallery the wounded lay on mattresses on the ground, with purple curtains folded round them as coverlets; and the small shopkeepers’ wives and daughters from the quarter brought them broth and linen.

“No matter!” said Frédéric; “for my part, I consider the people sublime.”

The overthrow of Louis Phillippe, and creation of the Second Republic, thus prompts an upswell of shared democratic feelings and faith in the unity of the non-aristocratic classes:

The attention of Frédéric and Hussonnet was distracted by a tall fellow who was walking quickly between the trees with a musket on his shoulder. A cartridge-box was pressed against his pea-jacket; a handkerchief was wound round his cap. He turned his head to one side. It was Dussardier; and casting himself into their arms:

“Ah! what good fortune, my poor friends!” without being able to say another word, so much out of breath was he with fatigue.

He had been on his legs for the last twenty-four hours. He had been engaged at the barricades of the Latin Quarter, had fought in the Rue Rabuteau, had saved three dragoons’ lives, had entered the Tuileries with Colonel Dunoyer and, after that, had repaired to the Chamber, and then to the Hôtel de Ville.

“I have come from it! all goes well! the people are victorious! the workmen and the employers are embracing one another. Ha! if you knew what I have seen! what brave fellows! what a fine sight it was!”

And without noticing that they had no arms:

“I was quite certain of finding you there! This has been a bit rough – no matter!”

A drop of blood ran down his cheek, and in answer to the questions put to him by the two others:

“Oh! ’tis nothing! a slight scratch from a bayonet!”

“However, you really ought to take care of yourself.”

“Pooh! I am substantial! What does this signify? The Republic is proclaimed! We’ll be happy henceforth! Some journalists, who were talking just now in front of me, said they were going to liberate Poland and Italy! No more kings! You understand? The entire land free! the entire land free!”

[…]

Frédéric, though he was not a warrior, felt the Gallic blood leaping his veins. The magnetism of the public enthusiasm had seized hold of him. He inhaled with a voluptuous delight the stormy atmosphere filled with the odour of gunpowder; and, in the meantime, he quivered under the effluvium of an immense love, a supreme and universal tenderness, as if the heart of all humanity were throbbing in his breast…

After this Frédéric went to see the Maréchale… All was quite now. There was no reason to be afraid. He kissed her, and she declared herself in favour of the Republic, as his lordship the Archbishop of Paris had already done, and the magistracy, the Council of State, the Institute, the marshals of France, Changarnier, M. de Falloux, all the Bonapartists, all the Legitimists, and a considerable number of Orléanists were about to do with a swiftness indicative of marvellous zeal.

The fall of the Monarchy had been so rapid that, as soon as the first stupefaction that succeeded it had passed away, there was amongst the middle class a feeling of astonishment at the fact that they were still alive. The summary execution of some thieves, who were shot without a trial, was regarded as an act of signal justice. For a month Lamartine’s phrase was repeated with reference to the red flag, “which had only gone the round of the Champ de Mars, while the tricoloured flag,” etc.; and all ranged themselves under its shade, each party seeing amongst the three colours only its own, and firmly determined, as soon as it would be the most powerful, to tear away the two others.

As business was suspended, anxiety and love of gaping drove everyone into the open air. The careless style of costume generally adopted attenuated differences of social position. Hatred masked itself; expectations were openly indulged in; the multitude seemed full of good nature. The pride of having gained their rights shone in the people’s faces. They displayed the gaiety of a carnival, the manners of a bivouac. Nothing could be more amusing than the aspect of Paris during the first days that followed the Revolution.

The despatched Orléanist regime had found its social base exclusively among the financial aristocracy. This layer, according to Flaubert, ‘would have sold France or the human race in order to preserve their own incomes, to save themselves from any discomfort or embarrassment, or even through sheer baseness, through worship of force.’

But these disoriented bankers now scramble to proclaim their amity, not just with their fellows in the possessing class, but with the employed and downtrodden population:

Of all Frenchmen, M. Dambreuse was the most alarmed. The new condition of things threatened his fortune, but, more than anything else, it deceived his experience. A system so good! a king so wise! was it possible? The ground was tottering beneath their feet! Next morning he dismissed three of his servants, sold his horses, bought a soft hat to go out into the streets, considered even letting his beard grow; and he remained at home, prostrated, reading over and over again newspapers most hostile to his own ideas; he was plunged into such gloomy reflections that even the jokes about the pipe of Flocon had not the power to make him smile.

As a supporter of the late reign, he was dreading the vengeance of the people on his estates in Champagne, when Frédéric’s lucubration fell into his hands. Then it occurred to his mind that his young friend was a very useful personage, and that he might be able, if not to serve him, at least to protect him; so, one morning, M. Dambreuse presented himself at Frédéric’s residence, accompanied by Martinon.

This visit, he said, had no purpose save that of seeing him for a little while, and having a chat. He rejoiced at the events that had happened, and with his whole heart adopted “our sublime motto, Liberty, Equality and Fraternity,” having always been at heart a Republican. If he voted under the other regime with the Ministry, it was simply in order to accelerate an inevitable downfall. He even inveighed against M. Guizot, “who has got us into a nice hobble, we must admit!” By way of retaliation, he spoke enthusiastically about Lamartine, who had shown himself  “magnificent, upon my word of honour, when, with reference to the red flag-”

“Yes, I know,” said Frédéric. After which he declared that his sympathies were on the side of the working-men.

“For, in fact, more or less, we are all working-men!” And he carried his impartiality so far as to admit that Proudhon had a certain amount of logic in his views. “Oh, a great deal of logic, deuce take it!”

The period of Provisional Government — and Europe’s Springtime of Peoples — henceforth allows a flourishing of opinion and revolutionary fervour:

The mummer, from the moment that his future colleague aspired to represent the province, declared himself his servant, and offered to be his guide to the various clubs.

They visited them, or nearly all, the red and the blue, the furious and the tranquil, the puritanical and the licentiousness, the mystical and the intemperate, those that had voted for the deaths of kings, and those in which the frauds in the grocery trade had been denounced; and everywhere the tenants cursed the landlords; the blouse was full of spite against broadcloth; and the rich conspired against the poor. Many wanted indemnities on the ground that they had formerly been martyrs of the police; others appealed for money in order to carry out certain inventions, or else there were plans of phalansteria, projects for cantonal bazaars, systems of public felicity; then, here and there a flash of genius amid these clouds of folly, sudden as splashes, the law formulated by an oath, and flowers of eloquence on the lips of some soldier-boy, with a shoulder-belt strapped over his bare, shirtless chest. Sometimes, too, a gentleman made his appearance – an aristocrat of humble demeanour, talking in a plebeian strain, and with his hands unwashed, so as to make them look hard. A patriot recognised him; the most virtuous mobbed him; and he went off with rage in his soul. On the pretext of good sense, it was desirable to be always disparaging the advocates, and to make use as often as possible of these expression: “To carry his stone to the building”, “social problem,” “workshop.”

Flaubert finds much drollery in this radicalisation — such as a picture by the failed artist Pellerin, which depicts ‘the Republic, or Progress, or Civilisation, under the form of Jesus Christ driving a locomotive, which was passing through a virgin forest.’

Especially suspicious is the political “commitment” of his aimless protagonist. Frédéric attends a meeting of the “Club of Intellect”, where he witnesses speeches by assorted cranks, bores, non-French speakers, and Sénécal, the club’s Robespierre-aping, Socialist president:

It was necessary to take a level which be above the heads of the wealthy. And he represented them as gorging themselves with crimes under their gilded ceiling, while the poor, writhing in their garrets with famine, cultivated every virtue. The applause became so vehement that he interrupted his discourse. For several minutes he remained with his eyes closed, his head thrown back, and, as it were, lulling himself to sleep over the fury which he had aroused.

Then he began to talk in a dogmatic fashion, in phrases as imperious as laws. The State should take possession of the banks and of the insurance offices. Inheritances should be abolished. A social fund should be established for the workers. Many other measures were desirable in the future.

But the author reserves much of the mockery for his old target, that narrow-minded mercantile and commercial class, which grows uneasy with Louis Blanc, the National Workshops, progressive income tax and the forces of Socialism:

[All] the excesses and all the grievances, were just now being exaggerated by having superadded to them Ledru-Rollin’s circular, the forced currency of bank notes, the fall of the funds to sixty francs, and, to crown all, as the supreme iniquity, a final blow, a culminating horror, the duty of forty-five centimes! And over and above all these things, there was again Socialism! Although these theories, as new as the game of goose, had been discussed sufficiently for forty years to fill a number of libraries, they terrified the wealthier citizens, as if they had been a hailstorm of aerolites; and they expressed indignation at them by virtue of that hatred which the advent of every idea provokes, simply because it is an idea – an odium from which it derives subsequently its glory, and which causes its enemies to be always beneath it, however lowly it may be.

Then Property rose in their regard to the level of Religion, and was confounded with God. The attacks made on its appeared to them a sacrilege; almost a species of cannibalism. In spite of the most humane legislation that ever existed, the spectre of ’93 reappeared, and the chopper of the guillotine vibrated in every syllable of the word “Republic,” which did not prevent them from despising it for its weakness. France, no longer feeling herself mistress of the situation, was beginning to shriek with terror, like a blind man without his stick or an infant that had lost its nurse.

The bitterness of the possessing classes is expressed by the banker Dambreuse:

One could scarcely recognise in him the same man. For the past three months he had been crying, “Long live the Republic!” and he had even voted in favour of the banishment of Orléans. But there should be an end of concessions. He exhibited his indignation so far as to carry a tomahawk in his pocket.

Martinon had one, too. The magistracy not being any longer irremovable, he had withdrawn from Parquet, so that he surpassed M. Dambreuse in his display of violence.

The banker had a special antipathy to Lamartine (for having supported Ledru-Rollin) and, at the same time, to Pierre Leroux, Proudhon, Considérant, Lamennais, and all the cranks, all the Socialists.

“For, in fact, what is it they want? The duty on meat and arrest for debt have been abolished. Now the project of a bank for mortgages is under consideration; the other day it was a national bank; and there are five millions in the Budget for the working-men! But luckily, it is over, thanks to Monsieur de Falloux! Good-bye to them! let them go!”

Not knowing how to maintain the three hundred thousand men in the national workshops, the Minister of Public Works had that very day signed an order inviting all citizens between the ages of eighteen and twenty to take service as soldiers, or else to go to the provinces and cultivate the ground there.

They were indignant at the alternative thus put before them, convinced that the object was to destroythe Republic. They were aggrieved at having to live at a distance from the capital, as if it were a kind of exile. They pictured themselves dying of fevers in desolate parts of the country. To many of them, moreover, who had been accustomed to work of a refined description, agriculture seemed a degradation; it was, in short, a mockery, a decisive breach of all the promises which had been made to them. If they offered any resistance, force would be employed against them. They had no doubt of this, and made preparations to anticipate it.

About nine o’clock the riotous assemblies which had gathered at the Bastille and at the Chatelet ebbed back toward the boulevard. From the Porte Saint-Denis to the Porte Saint-Martin nothing could be discerned save an enormous swarm of people, a single mass of a dark blue shade, nearly black. The men of whom one caught a glimpse all had glowing eyes, pale complexions, faces emaciated with hunger and excited with a sense of injustice.

Meanwhile, some clouds had gathered. The tempestuous sky roused the electricity that was in the people, and they kept whirling about of their own accord with the great swaying movements of a swelling sea, and one felt that there was an incalculable force in the depths of this excited throng, and as it were, the energy of an element. Then they all began shouting: “Lamps! lamps! ” Many windows had no illumination, and stones were flung at the panes. M. Dambreuse deemed it prudent to withdraw from the scene.

These conflicts finally issue in the uprising and massacres of the June Days, ‘a terrible battle [that] stained Paris with blood’:

Four barricades formed at the ends of four different ways enormous sloping ramparts of paving-stones.

Torches glimmered here and there. In spite of the rising clouds of dust he could distinguish foot-soldiers of the Line and National Guards, all with their faces blackened, their chests uncovered, and an appearance of wild excitement. They had just captured the square, and had shot down a number of men. Their rage had not yet cooled….

The Rue Saint-Victor was quite dark, without a gaslamp or a light at any window to relieve the gloom. Every ten minutes could be heard the words:

“Sentinels! mind yourselves!”

And this exclamation, cast into the midst of the silence, was prolonged like the repeated striking of a stone against the side of a chasm as it falls through space.

Every now and then the stamp of heavy footsteps could be heard coming nearer. This was nothing less than a patrol consisting of about a hundred men. From this confused mass escaped whisperings and the dull clanking of iron; and, moving along with a rhythmic swing, it melted into the darkness.

In the middle of the crossing, where several streets met, a dragoon sat motionless on his horse. From time to time an express rider passed at a rapid gallop; then the silence was renewed. Cannons, which were being drawn along the streets, made, on the pavement, a heavy rolling sound that seemed full of menace – a sound different from every ordinary sound – which oppressed the heart. These interruptions served to intensify the silence, which was profound, unlimited – a black abyss. Men in white blouses accosted the soldiers, spoke one or two words to them, and then vanished like phantoms.

The guard-house of the Polytechnic School was crowded. The threshold was blocked up with women, who had come to see their sons or their husbands. They were sent on to the Panthéon, which was being utilised as a dead-house ; and no attention was paid to Frédéric. He pressed forward resolutely, solemnly declaring that his friend Dussardier was waiting for him, that he was at death’s door. At last they sent a corporal to accompany him to the top of the Rue Saint-Jacques, to the Mayor’s office in the twelfth arrondissement.

The Place du Panthéon was filled with soldiers lying asleep on straw. The day was breaking; the bivouac-fires were extinguished.

The insurrection had left terrible traces in this quarter. The soil of the streets, from one end to the other, was covered with piles of various sizes. On the wrecked barricades had been piled up omnibuses, gas-pipes, and cart-wheels. In certain places there were little dark pools, which must have been blood. The houses were riddled with projectiles, and their framework could be seen under the plaster that was peeled off. Window-blinds, attached by a single nail, hung like rags. The staircases having fallen in, doors opened on vacancy. The interiors of rooms could be seen with their papers in strips. In some instances dainty objects had remained quite intact. Frédéric noticed a timepiece, a parrot-stick, and some engravings.

When he entered the Mayor’s office, the National Guards were chattering without a moment’s pause about the deaths of Bréa and Négrier, about the Deputy Charbonnel, and about the Archbishop of Paris. He heard them saying that the Due d’Aumale had landed at Boulogne, that Barbès had fled from Vincennes, that the artillery were due from Bourges, and that abundant aid was arriving from the provinces. About three o’clock some one brought good news.

Truce-bearers from the insurgents were in conference with the President of the Assembly. Thereupon they all made merry…

Flaubert then describes the consequences of defeat:

There were nine hundred men in the place [imprisoned in the Tuileries, under the terrace at the water’s edge], huddled together in the midst of filth, with no attempt at order, their faces blackened with powder and clotted blood, shivering with ague and breaking out into cries of rage; and those who were brought there to die were not separated from the rest. Sometimes, on hearing the sound of a detonation, they believed that they were all going to be shot. Then they dashed themselves against the walls, and after that fell back again into their places, so much stupefied by suffering that it seemed to them that they were living in a nightmare, an awful hallucination. The lamp, suspended from the arched roof, looked like a stain of blood, and little green and yellow flames fluttered about, caused by the emanations from the vault. Through fear of epidemics, a commission was appointed. When he had advanced a few steps, the President recoiled, frightened by the stench from the excrements and from the corpses.

As soon as the prisoners drew near a vent-hole, the National Guards who were on sentry, in order to prevent them from shaking the bars of the grating, prodded them indiscriminately with their bayonets.

As a rule they showed no pity. Those who were not beaten wished to signalise themselves. There was a regular panic of fear. They avenged themselves at the same time on newspapers, clubs, mobs, speech-making everything that had exasperated them during the last three months, and in spite of the victory that had been gained, equality (as if for the punishment of its defenders and the exposure of its enemies to ridicule) manifested itself in a triumphal fashion – an equality of brute beasts, a dead level of sanguinary vileness; for the fascination of self-interest equalled the madness of want, aristocracy had the same fits of fury as low debauchery, and the cotton cap did not show itself less hideous than the red cap. The public mind was agitated just as it would be after great convulsions of nature. Sensible men were rendered imbeciles by it for the rest of their lives.

[…]

Père Roque had become very courageous, almost foolhardy. Having arrived on the 26th at Paris with some of the inhabitants of Nogent, instead of returning with them, he had offered his assistance to the National Guard encamped at the Tuileries; and he was quite satisfied to be placed on sentry in front of the terrace at the water’s side. There, at any rate, he had these brigands under his feet! He was delighted to see them beaten and humiliated, and he could not refrain from uttering invectives against them.

One, a young lad with long fair hair, pressed his face to the bars, and asked for bread. M. Roque ordered him to hold his tongue. But the young man repeated in a mournful tone:

“Bread!”

“Have I any to give you?”

Other prisoners presented themselves at the venthole, with their bristling beards, their burning eyeballs, all pushing forward, and yelling:

“Bread!”

Père Roque was indignant at seeing his authority slighted. In order to frighten them he took aim at them; and, borne backward into the vault by the crush that nearly smothered him, the young man, with his eyes staring upward, once more exclaimed:

“Bread!”

“Hold on! here it is!” said Père Roque, firing a shot from his gun. There was a fearful howl then, silence. At the side of the trough something white could be seen lying.