“The road to hell is paved with good intentions.” - English proverb.
A perceived health crisis which grips public attention. Assisted by concerted lobbying power from special interest groups not always acting with charitable intent, the Big State intervenes. Things get worse. Is there a useful historical analogue for the Covid crisis ? As a matter of fact, there is.
By the early 20th Century, the average American was drinking about two bottles of whisky per week – seven gallons of pure alcohol per year. So the temperance movement – comprised mainly of the long-suffering wives of American drunkards – lobbied to have the demon drink banned. In 1920, they finally got their way.
The Eighteenth Amendment to the US Constitution introduced a national ban on the sale, production and transportation of alcohol throughout the United States on 16th January, 1920. The ban – prohibition – lasted until it was repealed by Franklin D Roosevelt in December 1933. The intention of the ‘dry’ movement was to reduce crime and corruption, solve social problems, lower the tax burden caused by prisons and poorhouses, and improve health and hygiene in America. It failed on every level.
A strange coalition supported prohibition. It was backed by the temperance movement – religious types who were against alcohol on moral grounds. And it was supported by the bootleggers. Their thriving trade in illegal liquor was dependent on the ban.
Far from reducing crime and corruption, it boosted both. One New Jersey businessman claimed that there were ten times more places to obtain alcohol during prohibition than there had been before. Al Capone, one of the most infamous beneficiaries of prohibition until his conviction for tax evasion in 1931, was by 1927 earning $60 million a year from alcohol sales alone. Some of those revenues were recycled back to the police and leading politicians, upon whom it is believed he spent around $75 million. But he could afford it: he had a thriving business. As he pointed out to his critics, with some justification, “all I do is satisfy a public demand.”
Not only did spending on alcohol increase, so did spending on alcohol substitutes. Beyond patent medicines, consumers switched to narcotics, tobacco, hashish and marijuana. Not only were these products potentially more dangerous and addictive than alcohol, the act of procuring them brought consumers into contact with a criminal underworld. Far from improving public health, prohibition savaged it. The death rates from poisoned liquor were appalling. In 1920, there were 1,064 deaths from tainted alcohol. By 1925, the toll had risen to 4,154. Will Rogers joked that “governments used to murder by the bullet only. Now it’s by the quart.” And the prison population exploded. The homicide rate during the 1920s rose by 78% compared to the period before prohibition. Total federal expenditures on penal institutions increased by more than 1,000 percent between 1915 and 1932. Two thirds of all prisoners entering the penal system in 1930 had been convicted of alcohol and drug offences.
So what did prohibition really achieve? By making it illicit, it made alcohol more dangerous to consume. Crime increased and became “organised”. The courts and prison systems were stretched to their limit. Corruption of public officials grew markedly. There were no measurable gains in terms of either productivity or reduced absenteeism. Prohibition removed a potent source of tax revenue even as it increased government spending: the annual budget of the Bureau of Prohibition rose during the 1920s from $4.4 million to $13.4 million, while Coastguard spending on prohibition averaged over $13 million a year. More crimes were committed because prohibition destroyed legal jobs whilst creating black market violence.
This supposedly noble but actually dismal experiment finally ended in early 1933 when President Roosevelt signed an amendment to the earlier prohibition legislation, known as the Cullen-Harrison Act. Having signed, he added: “I think this would be a good time for a beer.”
To a man with a hammer, everything looks like a nail. The central banks, for example, were formerly limited to shifting interest rates to try and control inflation. Given the magnitude of the global debt crisis, the central banks have spent the past decade and then some moving heaven and earth to try and avoid deflation – which in a fractional reserve, fiat currency world is in itself astonishing. So interest rate policy some years back reached the zero bound, and policy wonks have been engaging for years with the most aggressive forms of monetary insanity. The bond market vigilantes are now finally stirring in their corral. Be careful what you wish for..
The disaster of prohibition throws into focus the unintended consequences of government interference in free markets. But the dangers and surely unintended consequences of unparalleled government intervention in financial markets, upon the wider economy, and across society as a whole, are only now starting to become visible, thanks to the collective insanity of the Covid response. Western governments are now acting as puppet-masters for their own stock and bond markets, in many instances replacing the core functions of banks by extending or guaranteeing housing loans, and manipulating prices throughout the capital structure of the entire economy. This cannot possibly end well.
We also collectively have to survive this crisis not just materially but psychologically. In material terms, i.e. as investors, that necessitates discriminating between uneconomic assets – the paper promises of a Big State that cannot be trusted – and economic ones. In the latter case we favour the listed shares of businesses run by principled, shareholder-friendly entrepreneurs when those shares can be purchased in the market at a discount to their inherent worth, or at no great premium. We attach especial significance to high free cash flow and little or no attendant debt.
As to psychological sustenance, the inspiring example of the Canadian truckers shows us that we cannot count on the cavalry to save us; we must save ourselves against the tyranny of the technocrat, terrorist globalist agencies – the WEF, the WHO, et al. We are the people we’ve been waiting for. Attitude can yet make all the difference. There is always hope. The following extracts are from a speech given by Winston Churchill to pupils at his alma mater, Harrow School, on October 29, 1941; just a few months after the Battle of Britain and when, although it may not have been obvious at the time, having previously seemed almost hopeless for a Britain fighting almost alone, the Second World War was already at a turning point:
“..surely from this period of ten months this is the lesson: never give in, never give in, never, never, never, never – in nothing, great or small, large or petty — never give in except to convictions of honour and good sense. Never yield to force; never yield to the apparently overwhelming might of the enemy. We stood all alone a year ago, and to many countries it seemed that our account was closed, we were finished..
“Do not let us speak of darker days: let us speak rather of sterner days. These are not dark days; these are great days — the greatest days our country has ever lived; and we must all thank God that we have been allowed, each of us according to our stations, to play a part in making these days memorable in the history of our race.”
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: firstname.lastname@example.org.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.
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