February 22, 2005 Not for Sale

“Something has gone seriously awry with this Court’s interpretation of the Constitution”, Thomas wrote. “Though citizens are safe from the government in their homes, the homes themselves are not”.

In 1775, Connecticut Governor Jonathan Trumbull proposed a fortification at the port of New London, situated on the Thames River and overlooking Long Island Sound. The fort was completed two years later and named for the Governor. During the Revolution, Fort Trumbull was attacked and occupied by British forces, for a time commanded by the turncoat American General, Benedict Arnold.

By the early 20th century, the Fort Trumbull neighborhood consisted of 90 or so single and multi-family working class homes, situated on a peninsula along the fringes of a mostly industrialized city center.

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In 2000, Susette Kelo and her “little pink house” became the main plaintiff in the Supreme Court eminent domain case, “Kelo v. New London”

In 1996, chemists working at Pfizer Corporation’s research facility in England were studying compound UK-92, 480 or “Sildenafil Citrate”, synthesized for the treatment of a range of thoracic circulatory conditions.  Study subjects were expected to return unused medication at the end of the trial. Women showed no objection to doing so but a significant number of male subjects refused to give it back. It didn’t take long to figure out what was happening.  The chemical compound which would one day bear the name “Viagra”, had revealed itself to be useful in other ways.

For the newly divorced paramedic Susette Kelo, the house overlooking the Fort Trumbull waterfront was the home of her dreams. Long abandoned and overgrown with vines, the little Victorian cottage needed a lot of work, but where else was she going to find a waterfront view at such a price?  It was 1997, about the time that Connecticut and New London politicians resurrected the long-dormant New London Development Corporation (NLDC), in an attempt to revitalize the city’s waterfront.

Susette Kelo sanded her floors on hands and knees as Pfizer Corporation, already occupying the largest office complex in the city, was looking at a cataract of new business based on their latest chemical compound. The company was recruited to become the principal tenant in a “World Class” multi-use waterfront campus, including high-income housing, hotels, shopping and restaurants, all centered around a 750,000 sq. ft. corporate research facility.

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Bill von Winkle stands in front of two properties he owns in the Fort Trumbull neighborhood of New London, CT

Connecticut College professor and NLDC President Dr. Claire Gaudiani liked to talk about her “hip” new development project.  Fort Trumbull residents were convinced that stood for “High Income People”. With an average income of $22,500, that didn’t include themselves.

Most property owners agreed to sell, though not exactly “voluntarily”.  There was considerable harassment of the reluctant ones, including late-night phone calls, waste dumped on properties, and tenants locked out of apartments during cold winter weather.

Seven homeowners holding fifteen properties refused to sell, at any price. Wilhelmina Dery was in her eighties. She was born in her house and she wanted to die there. The Cristofaro family had lost another New London home in the ’70s, taken by eminent domain during yet another “urban renewal” program. They didn’t want to lose this one, too.

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Susette Kelo and her “little pink house”

In 2000, Susette Kelo came home from work the day before Thanksgiving, to find an eviction notice taped to her door.

Letters were written to editors and protest rallies were held, as NLDC and state officials literally began to bulldoze homes. Holdout property owners were left trying to prevent personal injury and property damage, from flying demolition debris.

Facing a prolonged legal battle which none of the homeowners could afford, the group got a boost when the Libertarian law firm Institute for Justice took their case pro bono. There was cause for hope. Retired homeowner Vera Coking had faced a similar fight against Now-President Donald Trump’s development corporation back in 1993, when the developer and Atlantic City New Jersey authorities attempted to get her house condemned to build a limo lot.

KeloAfterWreck0209Eminent domain exists for a purpose, but the most extreme care should be taken in its use. Plaintiffs argued that this was not a “public use”, but rather a private corporation using the power of government to take their homes for economic development, a violation of both the takings clause of the 5th amendment and the due process clause of the 14th.

Vera Coking won her case against the developer and the municipality.  The casino itself later failed and closed its doors. New London District Court, with Susette Kelo lead plaintiff, “split the baby”, ruling that 11 out of 15 takings were illegal and unconstitutional. At that point, the ruling wasn’t good enough for the seven homeowners. They had been through too much.  All of them would stay, or they would all go.

Connecticut’s highest court reversed the decision, throwing out the baby AND the bathwater in a 3-4 decision. The United States Supreme Court agreed to hear the case, argued before the seven justices then in attendance on February 22, 2005.

SCOTUS ruled in favor of New London in a 5-4 decision, Justices Stevens, Kennedy, Souter, Ginsburg and Breyer concurring. Seeing the decision as a reverse Robin Hood scheme that would steal from the poor to give to the rich, Sandra Day O’Connor wrote “Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random. The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms“.

20110325_26_300x400Clarence Thomas took an originalist view, stating that the majority opinion had confused “Public Use” with “Public Purpose”. “Something has gone seriously awry with this Court’s interpretation of the Constitution“, Thomas wrote. “Though citizens are safe from the government in their homes, the homes themselves are not“.  Antonin Scalia concurred, seeing any tax advantage to the municipality as secondary to the taking itself.

In the end, most of the homes were destroyed or relocated. State and city governments spent $78 million and bulldozed 70 acres.  The 3,169 new jobs and the $1.2 million in new tax revenue anticipated from the waterfront development, never materialized.  Pfizer backed out of the project, moving 1,400 existing jobs to a campus it owns in nearby Groton.  The move was completed around the time when tax breaks were set to expire, raising the company’s tax bill by 500%.

Susette Kelo sold her home for a dollar to Avner Gregory, a preservationist who dismantled the little pink house and moved it across town.  A monument to what Ambrose Bierce once called “The conduct of public affairs for private advantage”.

Movie Trailer and feature image above from the film “Little Pink House”, scheduled for release in April, 2018.

In 2011, the now-closed redevelopment area became a dumping ground for debris left by Hurricane Irene.  The only residents, were feral cats.

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“Michael Cristofaro in the field in New London, Conn., where his parents lived. The city seized the land for a private “urban village” that was never built. Pfizer’s complex is in the background”. Credit Christopher Capozziello for The New York Times

February 5, 1637 Tulip Mania

From the “South Sea Bubble” of the 18th century to the “Bull Market” of the “Roaring Twenties and the “Sub-Prime Mortgage Crisis” of the 2000s”, economic forces had combined with irrational expectations to bid prices up to the point of collapse.   

On March 24, 2000, the New England Patriots broke ground on their new stadium home in Foxborough, Massachusetts. The internet company CMGI won naming rights, agreeing to pay $114 million over 15 years for the privilege. The 2002 season opened on September 9 in the Patriots’ new home, with tickets bearing the name, CMGI Stadium.

Except by that time, the “Dot-Com bubble”, had burst.  CMGI had ceased to exist.  The stadium itself would open, bearing the name of a razor and shaving cream manufacturer.

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The first and perhaps the oddest of such speculative bubbles may be the “Tulpenwoede” (tulip madness) gripping Holland in the 17th century.

The first European tulip bulbs came to Vienna from the Ottoman Empire in 1554, introduced by Ogier de Busbecq, ambassador from the Holy Roman Emperor Ferdinand I to the Sultan of Turkey. The tulip was different from anything in Europe, the intense, saturated colors soon turning the flower into a status symbol.

By the 17th century, Holland had embarked on a Golden Age. The East Indies trade produced single voyage profits of 400% and more, as merchants built grand estates surrounded by flower gardens. The hyacinth enjoyed early popularity, but the sensational plant at the center of it all, was the tulip.

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For much of this period, tulip bulbs were primarily of interest to the wealthy. The craze began to catch on with the middle and poorer classes by the mid-1630s.  The Scottish poet, journalist and author Charles Mackay, best remembered for his book,  Extraordinary Popular Delusions and the Madness of Crowds, wrote “The population, even to its lowest dregs, embarked in the tulip trade”.

Soon, increasing  demand drove prices to unsupportable levels.  The market soared in late 1636, as prices bid up for bulbs planted to bloom the following spring. People mortgaged homes and businesses, hoping to buy bulbs for resale at higher prices.

At one point, “one single root of the rare species called the Viceroy”, sold for “two lasts of wheat, four lasts of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four tuns (barrels) of beer, two tuns of butter, One thousands lbs. of cheese, one complete bed, a suit of clothes, and a silver drinking-cup”.

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Semper Augustus Tulip 17th century

12,000 guilders were offered for only 10 bulbs of the extremely rare Semper Augustus tulip, more than the cost of an Amsterdam townhouse.  Even that wasn’t enough to clinch the deal.

In early 1637, single “Viceroy” bulbs bid between 3,000 and 4,200 guilders, at a time when skilled craftsmen earned 300-350 guilders a year.

“Couleren” bulbs were most commonly traded, single hued flowers of yellow, red or white, followed by the multi-colored “Rosen” and “Violettin”.  Rarest and most sought after were the vivid streaks of yellow or white on the red, brown or purple backgrounds of the “Bizarden” (Bizarres). Ironically, these were the most sickly specimens, victims of a “Tulip breaking virus” which “broke” petals into two or more hues.

Confidence evaporated in 1637 and the market collapsed. The last recorded market data were reported on February 5, as 98 sales were recorded at wildly varying prices.

Those who had taken possession of bulbs found their worth to be a fraction of the prices paid. Others were locked into futures contracts, obliged to pay ruinous sums for comparatively worthless flower bulbs.

TulipBulbsFrom the “South Sea Bubble” of the 18th century to the “Bull Market” of the “Roaring Twenties and the “Sub-Prime Mortgage Crisis” of the 2000s”, economic forces had combined with irrational expectations to bid prices up to the point of collapse.

The Tulip Mania of the 1630s was the first such speculative bubble.  Perhaps ‘Bitcoin’ will be next.   The laws of economics, are not to be denied.

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October 24, 1929 Crash

A convincing case may be made that it was the Reduction of government spending in the years following WWII, that put wealth back in the pockets of the people who created it in the first place, finally ending the Depression.

Warren Harding entered office on March 4, 1920, in the midst of the sharp recession following WWI.

Harding’s Treasury Secretary, Andrew Mellon, believed that money was driven underground or overseas as income tax rates increased. Mellon held the heretical belief for that time, that lower tax rates led to greater levels of economic activity and that, as people had more of their own money to work with, the higher activity level resulting would increase tax revenues.

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President and Mrs Calvin Coolidge with Andrew Mellon and others on the White House lawn

Based on Mellon’s advice, Harding cut taxes, starting in 1922. The top marginal rate was reduced annually in four stages from 73% in 1921 to 25% in 1925. Taxes were cut for lower incomes starting in 1923.

Vice President Calvin Coolidge became President in August 1923, following Harding’s untimely death. Coolidge would follow Harding’s economic policies of low taxation and high growth, the result would become the “Roaring 20s”.

Revenues to the treasury increased substantially, resulting in a 36% reduction of the national debt.  President Kennedy tried the same tactic with the same result in the 1960s.

Opponents called it “Voodoo Economics” when President Reagan used the same tactic in the 1980s, but the results were the same.  Same thing when President Bush the younger did it in the 2000s.

Economists and historians debate, because that’s what they do, but the results speak for themselves.

Unemployment and inflation both declined throughout the 1920s, while wages, profits and productivity increased.  The decline in what Carter-era economists called the “Misery Index”, was the sharpest in history.

The twenties became a time of wealth and excess, and speculation in the stock market increased exponentially. New investors poured into the market in the belief that, like the housing market of the 2000s, prices could never go down. It was a nine year run when the Dow Jones Industrial Average increased tenfold, peaking at 381.17 on September 3, 1929.

Rising share prices encouraged more people to invest, even if they didn’t have the money to do so. Brokers were routinely lending investors up to two thirds of the face value of stocks. Over $8.5 billion hung out on such loans, more than the amount of currency circulating in the entire country, at that time.

As with 2007-08, there were early tremors that showed the bubble was about to burst. Then as now, such signals were seen only in hindsight, as the rising crescendo that was 1929, continued.

stock-market-crash-of-1929-newspaper-ABThere was a brief contraction in March, but the first of the “Crash” began on “Black Thursday”, October 24, 1929. The market lost 11% at the opening bell, amidst heavy trading.   To quell the frenzy, Wall Street financial firms Morgan Bank, Chase National and National City Bank of New York stepped up and bought large blocks of US Steel and other “blue chip” stocks, at prices well above where they were trading.

The tactic had the effect of stopping the slide, much as it did during the Panic of 1907. This time however, the relief would be short lived. “Black Tuesday”, October 29, saw the Dow Jones contract by 12% on a volume record which would stand unbroken for forty years. The president of the Chase National Bank said at the time “We are reaping the natural fruit of the orgy of speculation in which millions of people have indulged. It was inevitable, because of the tremendous increase in the number of stockholders in recent years, that the number of sellers would be greater than ever when the boom ended and selling took the place of buying“.

Fears of the Smoot-Hawley tariff act fueled a further contraction in the following weeks.  Apparently, for good reason. When President Hoover signed the protectionist measure into law in 1930, American imports and exports shriveled by more than half.

Historians debate whether the stock market crash led to the Great Depression, or if the two events coincided. Only 16% of US households were actually invested in the stock market at the time, but the psychological effect was profound.

Easy credit and unbounded confidence had led to a speculative bubble which had finally burst.

DJIAEconomists still argue about the interventionist policies, which followed. The guy who needed to support his family was grateful to be put to work on a WPA project, but the government doesn’t produce wealth.  Every dollar spent had first to be extracted from the wealth producing, or “private”, part of the economy.  You can’t fill a swimming pool, by draining one end of it into the other.

The stock market and unemployment rates staggered throughout the 1930s.  It was WWII that finally put people back to work.

Yet that was merely activity, from an economic point of view. War production wasn’t growth, it was more like giving sugar to the kids, and watching them run around the house. A convincing case may be made that it was the Reduction of government spending in the years following WWII, that put wealth back in the pockets of the people who created it in the first place, finally ending the Depression.

An indicator of that wealth, the Dow Jones Industrial Average, wouldn’t retake the high ground of 1929, until 1954.

July 10, 1946 Ruined

Paper money crashed in the post-Revolutionary Articles of Confederation period, when you could buy a sheep for two silver dollars, or 150 paper “Continental” dollars. Creditors hid from debtors, not wanting to be repaid in worthless paper currency. For generations after our founding, a thing could be described as worthless, as “not worth a Continental”.

You’ve worked all your life.  You’ve supported your family, paid your taxes, and paid your bills. You’ve even managed to put a few bucks aside, in hopes of a long and happy retirement.  “Inflation” is such a bloodless term.  What if you hadn’t touched that “nest egg”, and its purchasing power was suddenly diminished…by 10%…40%…70%.

Throughout Roman antiquity, coinage retained a high silver content as a matter of law.  Precious metal made the coins themselves objects of value and, for 500 years, the Roman economy remained relatively stable. Republic morphed into Empire over the 1st century BC, leading to a conga line of Emperors minting mountains of coins in their own likenesses. Slaves were worked to death in Spanish silver mines, to satisfy an endless need for the metal. Birds fell from the sky over vast smelting fires, yet there was never enough silver.  Silver content was inexorably reduced, until the currency itself became worthless.  Roman currency collapsed in the 3rd century reign of Diocletian. An Empire and its citizens were left to barter as best they could, in a world where money no longer had any value.

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German children playing with worthless currency, 1923.

In the waning days of the Civil War, the Confederate dollar wasn’t worth the paper it was printed on. Paper money crashed in the post-Revolutionary Articles of Confederation period as well, when you could buy a sheep for two silver dollars, or 150 paper “Continentals”. Creditors hid from debtors, not wanting to be repaid in worthless paper currency. Generations after our founding, the worthlessness of a thing could be described as “not worth a Continental”.

The assistance of French King Louis XVI was invaluable to Revolutionary era Americans, but French state income was only about 357 million livres at the time, with expenses of over half-billion. France descended into its own Revolution, as the government printed “assignat”, notes purportedly backed by 4 billion livres in property expropriated from the church. 912 million livres in circulation in 1791 rose to almost 46 billion in 1796, of a note whose purchasing power had diminished by 99%.

The money in their pockets was literally, not worth the paper it was printed on.  One historian described the economic policy of the Jacobins, the leftist radicals behind the reign of terror, as:  “[A]n utter exhaustion of the present at the expense of the future”.

In each of these historic cases, nothing defined and established the value a currency, except what a willing buyer and a willing seller agreed it was worth.  There was no “there”, there.  It all sounds depressingly familiar.

The Austro-Hungarian Empire was on the losing side of WW1, and broken up after the war.  Lacking the governmental structures of established states, the newly independent nation of Hungary began to experience inflation.  Before the war, a US Dollar would have bought you 5 Kronen.  In 1924, it was 70,000.

10Hungary replaced the Kronen with the Pengö in 1926, pegged to a rate of 12,500 to one.

Hungary became a battleground in the latter stages of WW2, between the military forces of Nazi Germany and the USSR. 90% of Hungarian industrial capacity was damaged, half of it destroyed altogether.  Transportation became difficult, with most of the nation’s rail capacity damaged or destroyed.  What remained was either carted off to Germany, or seized by the Soviets, as reparations.

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The loss of all that productive capacity led to scarcity of goods, and prices began to rise.  The government responded by printing money.  Total currency in circulation in July 1945 stood at 25 billion Pengö.  Money supply rose to 1.65 trillion by January, 65 quadrillion in April and 47 septillion in July.  That’s a Trillion Trillion.  Twenty-four zeroes.

Banks received low rate loans, so that money could be loaned to companies to rebuild. The government hired workers directly, giving out loans to others and in many cases, outright grants.  The country was flooded with money, the stuff virtually grew on trees, but there was nothing to back it up.10000

Inflation took a straight line into the stratosphere.  The item that cost you 379 Pengö in September 1945, cost 1,872,910 by March, 35,790,276 in April, and 862 billion in June.  Inflation neared 150,000% per day, as the currency became all but worthless.  Massive printing of money had accomplished the cube root of zero.  The worst hyperinflation in history peaked on July 10, 1946, when that 379 Pengö item from September, cost you 1,000,000,000,000,000,000,000,000.

The government responded by changing the name, and the color, of the currency.  The Pengö was replaced by the Milpengö (1,000,000 Pengö), which was replaced by the Bilpengö (1,000,000,000,000 Pengö), and finally by the (supposedly) inflation-indexed Adopengö.  This spiral resulted in the largest denomination common currency note ever printed, the Milliard Bilpengö.  A Billion Trillion Pengö.

The thing was worth twelve cents.

100000One more currency replacement and all that Keynesian largesse would finally stabilize the currency, but at what cost?  Real wages were reduced by 80% and creditors wiped out.  The fate of the nation was sealed when communists seized power in 1949.  Hungarians could now share in that old Soviet joke: “They pretend to pay us, and we pretend to work”.

The ten worst hyperinflations in history occurred during the 20th century, including Zimbabwe in 2008, Yugoslavia 1994, Germany 1923, Greece 1944, Poland 1921, Mexico 1982, Brazil 1994, Argentina 1981, and Taiwan 1949.  The common denominator in all ten were massive amounts of government debt, and a currency with no intrinsic worth.

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A Billion Trillion Pengö. The largest denomination common currency note ever printed. It was worth about twelve cents.

In 2015, Boston University economist Laurence Kotlikoff testified before the Senate Budget Committee.  “The first point I want to get across” he said, “is that our nation is broke.  Our nation’s broke, and it’s not broke in 75 years or 50 years or 25 years or 10 years. It’s broke today”.

Kotlikoff went on to describe the “fiscal gap”, the difference between US’ projected revenue, and the obligations with which our government has saddled the taxpayer.  “We have a $210 trillion fiscal gap at this point”, Kotlikoff testified.  11.6 times GDP, the total of all goods and services produced in the United States.

On top of that, the United States owes something close to twenty trillion dollars, in fiscal operating debt, and our currency is unmoored from anything of inherent value.   We spend a lot of time, talking about politics.  Perhaps we should be talking about math, instead.