The Best and Worst of Times
Written by Paul Siluch
January 25th, 2024
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.”
- A Tale of Two Cities, by Charles Dickens (picture from original manuscript)
I don’t know about you, but I find it hard to read the news these days. Every headline trumpets war, misery, and decline. Yes, the world has more conflicts than at any time since WWII. Democracies are faltering. Deficits are ballooning in every country, and on and on.
But as Charles Dickens showed, we have been through times like this before.
The novel A Tale of Two Cities was set during the French Revolution of 1789. This was a revolt caused by prices of bread spiking due to crop shortages. King Louis XVI tried to raise taxes to refill the state’s empty coffers, but the peasants revolted. He lost his crown, and then he and his lovely wife – Marie Antoinette - lost their heads.
For a ‘head of state’, you would definitely prefer to leave by limousine than by guillotine.
One half of the story took place in Paris, a city engulfed in fiery revolution. The other half was set in London, which escaped the turmoil and went on to prosper.
Global tensions were boiling in 1789. Poland and Russia were at war (again), Belgium, Haiti, and Ireland were in revolt, and both France and the United States of America were broke.
Does it sound a bit like the world today?
The “worst of times” had its roots in money, while “the best of times” occurred simultaneously because of rapid technological change. Let’s have a closer look at why 1789 is similar to today.
Money
France had run out of money because of too much spending by the royals. King Louis XVI needed 32 servants to serve him dinner, as well as 128 musicians and 48 doctors just for him. Who paid? The royal court taxed the poorest heavily while exempting nobility and clergy completely.
“I will never consent to the plundering of my clergy and my nobles,”
- King Louis XVI
Louis refused any thought of lower spending. He was the king, after all. He could spend whatever he liked.
Until he couldn’t.
When bread prices bread rose, people revolted in what we now call The French Revolution. Fiery leaders took command and created a sort of citizen’s assembly but were economically just as inept as the royal court was.
Need money? Print it! They printed a new paper money called assignats backed by nothing and froze prices on essential commodities. Almost exactly what the king had been doing.
No one trusted the new money and people kept their goods locked away. Everything was hoarded. Soap disappeared from shelves and shopkeepers were executed. Soap became even more scarce.
More money and fewer goods cause inflation, and that is what France experienced. From essentially 0% in 1789, inflation peaked at 50% per month by 1796 (source: University of Texas).
Jean Valjean – the fictional hero of Les Misérables – was imprisoned for 19 years for stealing a loaf of bread. In real life, many were simply shot.
Les Misérables – original art
France returned to a gold and silver-backed currency system in 1800 under Napoleon. Goods reappeared once people trusted money again and markets could function. The country was leaderless, however, and the population sought the strong hand they’d had with the king and made Napoleon emperor.
He declared war on almost every nation and won much for France, then lost it all and was exiled.
Across the Atlantic, the newly formed United States of America was also dead broke. The expensive war of independence from Britain had left it in debt to numerous nations, including France.
Led by Alexander Hamilton – the subject of the popular Broadway musical Hamilton – the country took a different approach. A new bank called the Bank of the United States took out a massive foreign loan, bought gold and silver, then issued new gold-backed dollars.
People trusted the new money immediately.
Hamilton expanded taxes on customs and opened the U.S. Mint to issue coins and currency as well as the New York Stock Exchange in 1792. These actions gave confidence to depositors, businesses, and lenders across the new nation.
Alexander Hamilton - National Portrait Gallery
By 1793, the U.S. stabilized its financial system. It took just three years - the fastest modernization of a national financial system ever recorded.
The U.S. de-centralized banks and markets rather than having one man oversee everything, allowing markets to thrive. The U.S. paid off its entire debt by 1830.
Are there lessons for us today? Centralized authorities aren’t as smart as they think they are, and they usually end up borrowing and spending too much. Devaluation through printing too much currency leads to inflation. Just about every nation in the world is guilty of this today. The recent surge in prices - inflation - is the most visible result.
Taxes must be raised, and budgets cut. The U.S. could enact a GST value-added tax like Canada and Europe have, as well as a national gasoline tax. Both would help. Canada has fewer levers to pull but it can be done. And markets must be allowed to function. Too much intervention leads to chaos and revolution.
Technological Change
Although hard to see, 1789 was also “the best of times” due to rapid technological change. Some of these changes have parallels to today:
- New regions were opening. Captain George Vancouver began the exploration of the west coast of North America in 1791. Africa began to be explored and opened to trade.
Like North America and Africa in 1789, outer space is now opening to widespread exploration. Rockets launch almost daily and the first experiments with space-based solar arrays sending power to Earth just concluded successfully.
- The first smallpox vaccination – the world’s first immunization – was administered in 1796. 400,000 people in Europe died from smallpox every year in 1800. This dropped dramatically after the new vaccine became widespread.
- The Industrial Revolution changed the face of Europe with the advent of the steam engine and industrial mining of coal. By 1820, steam engines could be found de-watering mines and powering looms in every major country. France’s wars and inflation caused it to fall behind Britain and Germany, but it eventually caught up.
Today, the AI and knowledge revolution is just starting to gather speed. Some say artificial intelligence will make the advent of the internet look like the cartoon before the feature movie.
- Famines occurred almost once every decade from 1500 through 1800 in Europe (historian Fernand Braudel). These ended suddenly with the widespread planting of the potato, a strange but nutritious plant brought to Europe by the Spaniards. Potatoes doubled the food supply of Europe and led to larger and healthier populations.
Because we now eat too many potatoes, we invented miracle drugs to reverse obesity!
When it feels like the worst of times, I remind myself that history repeats itself. The problems of 1789 took years to solve and some of these were hard years.
But we found ways out of past troubles, and we will again.
Great Expectations
For children, Christmas is often a time of wanting something and not getting it.
Markets may be setting themselves for a similar disappointment when it comes to lower interest rates.
Ever since interest rates peaked last year, investors began to speculate on interest rate cuts. Today, markets expect 6-7 rate cuts by Christmas of 2024, shaving the current U.S. rate of 5.25% on T-Bills to all the way down below 4%.
The Fed grinch is telling us to only expect 3 rate cuts this year.
If interest rates stay high, it means stock markets may be disappointed.
Not so far, though. Markets are off to a roaring start in 2024 with many markets hitting new all-time highs. Even the Japanese market is rising and is close to finally breaching the old peak set in January of 1990.
It is also an election year. 64 countries head to the polls in 2024 representing 49% of the global population. This means governments will be spending and stimulating to get your vote.
China – a country not having an election this year – has begun the stimulus race with $278 billion set aside to buy stocks and an easing of reserves banks must hold. Both could boost Chinese stocks.
For new money invested this year, we recommend the usual boring mix:
- GICs (term deposits) or bonds in staggered maturities of 1, 2, and 3 years.
- A balanced mix of stocks or mutual funds, with a preference for global over just Canada or the U.S. Why? It may finally be Asia’s turn to shine. China’s index is back at 2007 levels and Japan is back to what it was in 1989. Money may shift back due to cheaper valuations.
Planning and Dreaming
It is New Year’s Resolution time, and we are getting many requests asking “how long will my money last if I spend $X for the next 25 years?”
Contact us if this is on your 2024 To Do list. We can run several scenarios for you.
Our calculator only goes to age 100 though, so warn us if you have a parent that old!
