Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Events in the automobile business just happened to provide a recent demonstration that Robert Morris had been absolutely correct in jiggering the Constitution to frustrate the worst disasters latent in the Industrial Revolution. The unelected President of the United States during its formative trials, Morris knew what he was doing, did it parsimoniously and in public, and steered its legal system (at the Constitutional Convention) to devise a stable arrangement without further insight from his successors.

At that time, both the borrowing power of the new republic and its ability to start new businesses seemed limitless, leaving adequate room for businesses to raise working capital by selling shares of their ownership , while government raised capital by borrowing against this previously unrecognized capacity. So the deal was to confine government borrowing to the control of the people (i.e. Congress), in return for forbidding the government to control the slightest fragment of business ownership. Ultimately, the people also limited wars through this two-step process, since paying for wars was typically the main reason governments needed money. We could go to war if we wanted, but the populace had to be in favor of paying for it.

In the War of 1812 and the Vietnam War, Congress effectively withdrew its approval of the adventure, and those wars came to a negotiated end. By contrast, the Mexican and Spanish-American Wars were equally questionable on a moral level, but the population supported them until we won. Morris was apparently shrewd about this. In two and a half centuries, ours is the only republic to have survived so long. Gouverneur Morris (no relation) was the elegant legal draftsman of the Constitution, but he missed the whole point and later renounced it. By contrast, Robert Morris the businessman, philanderer, and land speculator, is seldom recognized for his Constitutional role, but the resulting masterpiece long outlives his personal reputation.

To get back to the automobile business, the Japanese Nissan Company, and the French Renault Company, were having trouble selling their small vehicles in the United States, where drivers prefer big gas guzzlers in spite of the efforts of President Obama to coax them into smaller cars. The two companies formed a business arrangement of some sort, under the leadership of an Egyptian CEO, who managed to strengthen the Japanese but not the French component. The Egyptian CEO then decided it would improve things to merge the two car companies, but the French President decided it was better for his political purposes to have the French company absorb the Japanese one, using the argument it would improve sales in the U.S. So he discovered the 15% ownership shares already owned by the French government created voting control, enabling him to increase French ownership to 20%. The story is as yet incomplete, but this much is enough to illustrate the confounding effect of political motives clashing with commercial ones. Robert Morris knew how to prevent it: only back the currency with money you can borrow in the marketplace. When borrowing dries up, you've reached the limit of lending power.

That system worked for a century, as we gradually expanded wealth and borrowing in tandem. It's possible we may now be reaching the limit of our collective borrowing capacity, or globalization may simply have thrown borrowing out of harmony with volatile business wealth. Either way, right now it would seem desirable to restrain further borrowing while resisting the temptation to overvalue its source.

Nevertheless, we visibly have idle cash in the economy. We here propose to enlarge the nation's working capital by putting some of this working capital to work, but basing it on private collateral rather than government borrowing power. That magic would be created by placing up to 18% of GDP in private hands through medically escrowed index funds, accumulated to support Health Savings Accounts, but fully fungible. A few would be willing, the rest of the 18% would be too timid. A long duration of escrow would ensure high long-term interest rates and serve as a mechanism of control which could be modulated upon signs of overheating, but it might take some time to learn how to use it. At times when more borrowing is undesirable, this borrowing capacity may be countercyclical, which is often to say a good investment. But at other times it would not necessarily be a bad investment unleveraged. It could theoretically represent a huge increase in the money supply and have to be regulated gradually; it is through regulation that political control might override the business one. It must have taken Robert Morris some time and experimentation to perfect his system; the same is true of this one.

Originally published: Tuesday, January 10, 2017; most-recently modified: Wednesday, June 05, 2019