The Mystery of Wyndclyffe
by Addison
Wiggin
The
Daily Reckoning
posted October
3, 2003
The Daily
Reckoning PRESENTS: From "rugged individualism" to "keeping
up with the Joneses"... what became of "the missing
lessons of U.S. history?"
"Guys,
here's a rich metaphor for you," writes friend and colleague
Porter Stansberry. "The house that originally spawned the
term 'keeping up with the Joneses' and which led to the building
of gaudy mansions on the Hudson river is collapsing and in disrepair..."
The story was
printed in yesterday's Wall Street Journal. "It was the
original McMansion"... so grand it had its own name: Wyndclyffe.
The house was built in 1853 by Edith Wharton's spinster aunt,
Elizabeth Schermerhorn Jones, and kicked off a flurry of mansion
building up the Hudson River valley. Wyndclyffe sported a four-story
tower, 24 rooms, 80 acres of lawn and "sweeping river views."
After the completion
of the Jones house, turret towers and extra wings began appearing
on nearby homes - hence the now-famous phrase, 'keeping up with
the Joneses.' Nowadays, the maxim illustrates the modern desire
of suburban Americans to keep up appearances... by taking out
home equity loans to buy Humvees and home theater systems.
Last week,
as you'll recall, we had to save face for arriving late to a
symposium conducted here in Paris by economist Hernando de Soto
- by running his overhead projector. We'd like to return to the
scene of the crime for a moment. De Soto is doing some of the
most interesting work in economics today... and having picked
up his book, "The Mystery of Capital," we've become
intrigued with the question he poses in chapter five: "What
became of the missing lessons of U.S. history?" (And...
we also still feel like we owe him something for interrupting
his speech.)
Hernando de
Soto runs a think tank called the "Institute for Liberty
and Democracy." With a name like that, you'd think it was
an half-cocked Washingon-based fundraising scheme invented by
friends and associates of Richard Perle. It's not. Headquartered
in de Soto's native Peru, the Economist magazine called the Institute
for Liberty and Democracy one of the most important think tanks
in the world. "Over the past five years," de Soto explains
in The Mystery of Capital, "I and a hundred colleagues from
six different nations have closed our books and opened our eyes
- and gone out into the streets and countrysides of four continents
to see how much the poorest sectors of society have saved. The
quantity is enormous.
"The poor
inhabitants of [Third World] nations," explains de Soto,
"some five-sixths of humanity, do have things, but they
lack the process to represent their prosperity and create capital.
They have houses but not titles; crops but not deeds; businesses
but not statutes of incorporation. It is the unavailability of
these essential representations that explains why people who
have adapted every other Western invention, from the paper clip
to the nuclear reactor, have not been able to produce sufficient
capital to make their domestic capitalisms work."
The inability
of poorer countries to transform their assets into usable capital
is not the end-game of some sort of neo-colonial monopolistic
conspiracy, de Soto's argument goes. Rather, the West is oblivious
to the developing nations' dilemma: "Westerners take this
mechanism so completely for granted that they have lost all awareness
of its existence... " So much so that its history is all
but undocumented.
De Soto's search
for the reasons why capitalism thrives in the West - but is the
target of scorn elsewhere in the world - has led him through
thousands of pages of archived material, much of it detailing
the westward expansion of U.S. pioneers in the late 18th and
early 19th century. Going back as far as 1783, for example, George
Washington "complained about 'Banditti... skimming and disposing
of the cream of the country at the expense of the many.'"
These banditti were squatters and illegal entrepreneurs occupying
lands to which they had neither title nor deed.
"Americans
and Europeans," says de Soto, "have been telling the
other countries of the world, 'you have to be more like us.'
In fact, they are very much like the United States of a century
or more ago, when it too was an undeveloped country. Western
politicians were once faced with the same dramatic challenges
that leaders of the developing and former communist countries
are facing today."
In the U.S.,
it wasn't until the application of the doctrine of 'pre-emption'
that America's backwater culture began picking up the steam that
would empower it to become the foremost economic power on the
planet. Preemption allowed a squatter who had made improvements
on a piece of land, simply by building shack or a mill there,
first right of refusal on its purchase. Once the deed became
legal, it also became a commodity.
Henry Clay,
a Senator from Kentucky in the early 19th century, explained
the process: "They build houses, plant orchards, enclose
fields, cultivate the earth and rear up families around them.
Meantime, the tide of emigration flows upon them, their improved
farms rise in value, a demand for them takes place, they sell
to the newcomers at a great advance and proceed farther west...
in this way thousands and tens of thousands are daily improving
their circumstances and bettering their conditions." The
squatters, banditti and flagrant ne'er-do-wells thus became the
vaunted 'pioneers' of American history.
Unfortunately
- as we're wont to say here at The Daily Reckoning - nothing
fails like success.
"[The
pioneers'] successors," de Soto observes (that would be
you, me, the Fed, etc...), "have lost contact with the days
when the pioneers who opened the American West were undercapitalized
because they seldom possessed title to lands they settled...
when Adam Smith did his shopping in black markets and English
street urchins plucked pennies cast by laughing tourists on the
banks of the Thames... when Jean-Baptiste Colbert's technocrats
executed 16,000 small entrepreneurs whose only crime was manufacturing
and importing cotton cloth in violation of France's industrial
codes. That past is many nation's present."
The process
of change, according to de Soto, is unquestionably a political
one: revolution. "In most nations of the West," says
Hernando, "the major task of widespread property reform
was completed only about a century ago; in Japan it has been
in place for less than fifty years... Law [has thus been made]
to serve popular capital formation and economic growth. This
is what gives the present property institutions of the West their
vitality. The property revolution was a political victory. In
every country it was the result of a few enlightened men deciding
that official law made no sense... if a sizeable part of the
population lived outside it."
The neo-cons
have taken the political lesson to heart and, like the Leninists
of the early 20th, are using Iraq as a test case to see if revolution
can be had at the point of a gun. In the meantime, the Fed and
Treasury have lost their way altogether. Gone are the days when
self reliance meant busting your gut to build a house, a factory...
or even a fine piece of furniture. Now, credit lines grow ever
longer and home equity loans more ubiquitous.
Boobus Americanus
- to borrow a phrase from HL Mencken, by way of our friend Doug
Casey - has regressed along the line from 'know-how' to 'nowhere.'
And judging from the reader mail we expect to receive upon publication
of this letter, they're quite belligerent about it.
Bill Gross
calls it "hegemonic decay." In his September Investment
outlook for PIMCO, Gross writes, "Pretend you are the head
of a household. You earn a good living, but it never seems to
be enough. There are bills to pay, the Joneses to keep up with,
you've had your eye on that goofy Hummer for at least three months
now. You'd like to save money, but you can't or you won't, so
you don't. In fact, each year for the past decade you've had
to borrow 4, 5, 6% of your annual income to pay for what you
want. You're running a personal deficit, not a surplus."
People are
no different than countries... sooner or later, the bill comes
due. Gross: "With no savings and a boatload of debt, the
wheels all of a sudden go into reverse. Creditors are not so
friendly... Forget the Hummmer, pal. You're thinking of survival,
not staying up with Joneses. This hegemon with a face... has
started to decay."
The great mystery,
at least from the vantage point of your puzzled Parisian pontificators,
is: how is it that the country from whence naturally arose the
property rights that helped unlock de Soto's 'dead capital' -
and serves as a model for emerging nations today - is also the
current site of the most egregious credit-goosed spending binge
and bust in economic history? The answer, we fear, lies somewhere
in the ruins of Wyndclyffe.
Sincerely,
Addison
Wiggin
The
Daily Reckoning
P.S. "Miss
Jones, Edith Wharton's spinster aunt," the WSJ article states,
"was a cousin to the Astors and entertained William and
Henry James in the mansion. After she died, the house was purchased
by Andrew Finck, a brewer who, legend has it, set up a beer tap
that flowed from the basement to the tennis courts. During the
depression [the last great credit-goosed financial disaster to
visit the land], Wyndclyffe was neglected, like many other lavish
houses of the time. Then it had a string of owners, most of whom
didn't live in the house or make repairs. Neighbors say Wyndclyffe
briefly housed a nudist colony in the mid-century."
The ruins are
apparently littered with garbage and frequently used by bands
of nosed-ringed teenagers, dressed in black, and sporting Matrix
style long coats. When asked what should be done with the ruins,
Charles Eggert, who owned Wyndeclyffe in the 60s and 70s, said:
"Maybe some crazy idiot will buy it. I think it should be
torn down."
Addison Wiggin is the
Managing Editor of The Daily Reckoning, a daily e-mail offering
"erudite," "witty," and "sensible"
commentary on the day's stock news. Click here to sign up for a free
subscription.
He is also
the co-author, with Bill Bonner, of "Financial
Reckoning Day:
Surviving the Soft Depression of The 21st Century" (John
Wiley & Sons New York, London), currently available at Amazon.
Also, we highly
recommend Hernando de Soto's book, The
Mystery of Capital, as essential reading for Daily Reckoning faithfuls...
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