The other day I called up my friend Larry and caught him in the middle of some on-line stock trading. “Actually, trading options,” he said, “And I’ve been doing pretty well.”
Seeing what shape the economy has been in, I expressed surprise. He spent the next 40 minutes or so explaining what ‘options’ were, and how they differed from ‘futures’, how both of them related to the stock market and investment companies, and so on. At the end of his explanation I was still mostly in the dark, but one pattern emerged clearly.
“It’s gambling!” I said, amazed. “The stock market is just a legal gambling casino, where people bet on, uh… other people’s perceptions of… the value of… percentages of… ownership of… companies that do real work! You know, that sounds downright sinful.”
“Bingo!” he laughed. “All investment – including banks – is gambling, but very few people realize it. That’s why our economy’s in its present mess.” He then went off into a ten-minute rant about how the government should never have bailed out the ‘stupid’ banks who made the same mistake that caused the 1929 Crash: treating loans, debts and mortgages as if they were real property, which they aren’t. “It should let those fools collapse,” he said, “And let the smaller, smarter banks pick up the pieces. The only problem with that is ‘transparency’: letting people know exactly what their assets are really worth. Anything else loses people’s confidence in their value. Those fool banks’ own secrecy has lowered the value of their assets.”
“…Because,” I realized, “It lowers people’s perceptions of the value of… Wow! Then if those banks had been totally honest, stated publicly everything they were doing, where every penny of their money was going, then everybody would have known what they were worth…”
“And their value couldn’t have gotten inflated, and subsequently deflated,” he finished the thought. “Besides, their investors would have seen when and where they made bad decisions, and would have called them on it. That’s precisely how and why the smaller, smarter banks have survived – to pick up the pieces, as they’re doing now.”
“And as you’re doing with your ‘options’,” I guessed. “So Ben Franklin was right; honesty really is the best policy.”
“Bingo!” he laughed again, and then sailed off into another rant about how, in the 19th century – before the Federal Reserve had even been dreamed of, before there was any FDIC ‘oversight’ or ‘insurance’ for banks, when America’s currency was entirely solid – the value of our money actually increased; what $1.00 would buy in 1800 could be bought for $.80 in 1900. Nobody really trusted banks then, but subjected them to constant scrutiny; the banks with the most obvious ‘transparency’ drew the most investors, and those that were secretive soon failed. “Truth can be a deadly weapon,” he finished.
But I was struck by another thought. During that same 19th century America, with its childlike belief in honesty, became one of the richest countries in the world. But there are plenty of countries – societies, cultures – in the world (I name no names) which hold that truth is a ‘precious jewel’: much too precious to be given away for free; no, it must be sold to the highest bidder, and even then it’s acceptable to cheat the buyer if you can. These same cultures – some of them millennia old – may have some incredibly wealthy individuals, but the majority of their people are dirt poor and always have been. Even the benefits of modern industry – most of it given outright to those societies by countries like America – haven’t made much difference. Could their very attitude toward honesty be the cause?
Why not? When you assume that everyone you deal with will lie and cheat you if he can, you respond by lying and cheating in turn; otherwise, the other guy will take you for a gullible fool, easily robbed, and he really will rob you blind. This makes any kind of transaction as slow and cautious as a hand-off between illegal drug-dealers – which is not the way to create a fast-moving, flexible, elaborate and sturdy economy. Those dishonest cultures have long histories of producing wily merchants and a multitude of thieves, and of playing economic warfare with their trade-partners – which usually ends in ruin. This is why these third-world countries have remained notoriously corrupt and poor, despite America’s and Europe’s best efforts to help them.
This is why I’m suspicious of people who insist that America must become more “global in outlook” and adopt a policy of “realpolitik”. They’re as good as saying that we must adopt an attitude of constant cynicism, lying and cheating: that we should become as corrupt as the nations we’re dealing with, or else let ourselves be robbed blind.
No, that way lies disaster. History and economics show us that we have to stick rigidly to our principles, uphold honesty and simply not deal with cultures that refuse to do the same, regardless of what tempting profits they may offer us in the short run. In the long run, honesty – transparency, as Larry called it – is what will save us.
Franklin, who hobnobbed with the courts of Europe and was quite familiar with “realpolitik”, knew whereof he spoke.