Faith and credit

Spengler on markets, trust, and democracy:

Something other than mere trading skills was required for an investment-driven economy, and that was long-term credit, a concept that derives from the Latin credere, “to believe”. It is not an exchange of one peasant’s eggs for another peasant’s barley, or Mexican silver for Chinese silk, but rather a commitment of the savings of whole populations to grand ventures that would pay interest because they drove growth.

Capital markets, moreover, create a kind of democracy. If the whole of society relies on the public debt as a store of value, the value all the savings of society is gauged directly or indirectly against the benchmark of public debt. But that also puts power in the hands of the market: the market has the power to tell the government whether it is doing well or badly, by selling or buying the public debt. It is not simply that the government creates a market that provides convenience and advantages to the people: it becomes dependent on the people’s faith in its policies. When that faith is shaken, as in southern Europe two years ago, and confidence flees the government debt market, the result can be catastrophic. Free capital markets require governments to win the faith of the people.

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That is the Jewish genius: to be able to inspire faith (or what is usually called “confidence” in markets) to make possible long-term investments in capital markets involving millions of participants. The investors in a bond or stock issue are not linked by ties of family or personal loyalty, but rather by contract, law and custom. Their obligations extend beyond the ancient loyalties of family and clan. That may seem obvious on first reflection. But most countries in the world lack functioning capital markets, because faith is absent. The public does not trust the government to enforce contracts, or the management of a company not to steal money. That is emphatically true in China, which is struggling to create modern capital markets rather than depend on state banks and shadow financing. In backward countries, trust is inconceivable outside the narrow circle of blood relations. Firms remain small because trust is restricted to family members.

. . . In the absence of faith, there never will be enough lawyers to enforce contracts, or policemen to arrest embezzlers, or watchdogs to extirpate government corruption. Something more fundamental is required: a sense that the law is sacred, and if any of us breaks the public trust, all of us are damaged. Our rabbis of antiquity said, “All of Israel stands surety for each other.”

Adam Smith’s invisible hand isn’t enough. Capital markets require more than the interaction of self-interested individuals: they require a common sense of the sanctity of covenant, of mutual obligations between government and people, and between one individual and the next. That is why the United States of America is the most successful nation in economic history. It was founded by devout Christians who hoped to construct a new nation in emulation of ancient Israel.