by Nick Land
Downton on down
Martin Hutchinson argues that — even after factoring in the crushing losses of WWI — the ‘Downton era’ did things better:
In certain respects — behavioral and otherwise — the “Downton Abbey economy” of 1920 was greatly preferable to the one we are experiencing today. […] A move to a “Downton Abbey economy” should not imply a sharp increase in inequality, rather the opposite. It is interesting to note that almost 100 years of progressive bloat of the public sector in both Britain and the U.S. — supposedly undertaken to reduce economic inequality — have in reality tended to increase it. […] Public spending (including local government) was around 25% of GDP in Britain in 1920 and about 15% of GDP in the U.S., compared to 40% plus in both countries today. It must be questioned what benefits the public has gained, either in greater equality or better services, from the massive rise in public spending since the Downton Abbey period, which itself was inflated from pre-World War I days.
Apart from smaller government and less inequality, the Downton Abbey economy had a number of other advantages over today’s … First, total factor productivity growth was much greater. The decade saw the most rapid adoption of the advances in power and transportation that had grown up from the 1880s. The result was U.S. TFP growth of around 2% annually, about double the recent rate. This generated an explosion in living standards during the decade.
Second, the “Downton Abbey economy” had much lower asset prices because of higher interest rates and much easier construction procedures. Shares paid higher dividends and were much lower valued in terms of assets and earnings, while leverage ratios were infinitely more conservative. The world was used to a gold standard, in which leverage could kill you in a downturn, and was much more careful about incurring it. Real estate was valued at its rebuilding cost, and rebuilding costs were much lower than today because there were no planning approvals and no environmental-impact statements. I have written several times about the extraordinary inflation of infrastructure costs, from the 1920-27 Holland Tunnel’s $48 million, equivalent to $700 million in today’s prices to the outrageous projected $9 billion of the recently cancelled Trans-Hudson Tunnel (functionally an identical project). In “Downton Abbey’s” world, real estate costs were modest and new infrastructure projects were built on time, at a fraction of today’s real cost.
Third, the “Downton Abbey” world had positive real interest rates and no inflation psychology. People could be assured that their efforts in saving would not be destroyed by inflation or by being dumped into an overvalued bubble stock market. While World War I had brought a doubling in prices in Britain and the United States, everyone expected that this process would be largely reversed, probably by a British return to the gold standard. Indeed, until World War II, those expectations were realized. For people planning their lives, it was a much easier era. In peacetime, money was a solid store of value, not something that had to be monitored constantly for inflationary erosion.
Finally, both the economic system and the financial system were carried on with high standards of integrity, more so in Britain than in the U.S., but higher in both countries than today. Banks, corporations and managers relied heavily on their reputation, and those doing business with them made careful enquiries about that reputation. There were few fallible government regulations, no bailouts and little leverage. A notable feature of the Bernard Madoff Ponzi scheme of 2008 was that it was able to attract about 500 times as much money in real terms as the $3 million collected in 1920 by the Charles Ponzi and carry on for about 40 times as long as Ponzi’s eight months. The ability of Madoff to grow so big and last so long is testimony to the futility of modern regulation and to the sad decline of ethical standards in today’s blue-chip houses.