The Economist has an interesting but, I think, historically misguided piece paralleling the current shale energy boom, especially in the West, with the Gold Rush of the 1840’s. And the similarities are indeed obvious: feverish greed, quick mineral wealth, smelly camps full of rowdy and frustrated men, American “westernness.” That’s all summed up in the old expression “black gold.”
But even as it strains comparisons past the breaking point, the piece itself reminds us, explicitly, that the thing about the Gold Rush was that any shmoe with nothing but a pick and a sieve could start looking for gold and might indeed find it: many did; others failed to. The Economist piece therefore sees the Gold Rush as something new in the world, something rowdily democratic and quintessentially American.
Whether or not that’s true, in the fracking boom, by contrast, the guys in the camps are not self-employed treasure-seekers competing with one another in a quest to wrest from the earth enough personal wealth to live a life of riotous idleness. The Economist piece itself notes that they’re workers employed by the big companies that can afford the awesome, actually terrifying technology on which this boom relies.
Nobody doing the actual labor, that is, will reap the boom’s immense profits. For the ordinary person, this is a boom in employment — of working, that is, on behalf of somebody else’s profit. To the ordinary person, the fracking boom holds out no hope, misguided or otherwise, as the Gold Rush once did, of never having to work again. That opportunity remains with the elites and their progeny.
It’s axiomatic, for the Economist, to view the Gold Rush as democratic, and therefore quintessentially American. So the piece must make the Gold Rush the first American fever for quick untold wealth, thus the template for all later booms. The piece therefore gets confused about meanings, for American ideas about wealth and democracy, of both the Gold Rush and the shale-energy boom.
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The Gold Rush wasn’t the first such event in America. The land-speculation bubble of the 18th C. was the first great American speculation rush — closely intertwined, during the Revolution, with speculation in flurries of state and federal war bonds.
And while it’s less romantic, to us, than the Gold Rush, the 18th C. land-speculation bubble has two features that make it more grimly salient, I think, than the Gold Rush, both to our current boom and to the history of American wealth, booms, and democracy.
First, the land speculation that so strongly marked the culture of 18th C. America was carried out, like today’s fracking boom, by elite profit-seekers, operating on paper, in offices and taverns and coffeehouses and drawing rooms. The people actually working the land being traded (which sometimes wasn’t worked at all, only traded, in weird helixes of spiking and flattening prices) — the families, that is, who were improving those lands by the sweat of their brows — were poor renters and smallholders with little chances of ever profiting from their labors. The 18th C. land bubble was a high-finance gentlemen’s club, upscale men dedicated to their dreams of achieving yet more dazzling riches.
One of their tactics involved shaping government to serve that interest. Just like the modern energy business.
Second, the 18th C. land-investment fever, unlike the Gold Rush, was a key contributor to making America an independent nation in the first place — to creating us as a people. It’s fundamentally American. It’s why we have this “boom” problem (and why we’re obsessed with real estate): the founders set the cultural pattern, predicating our national existence — I’ll pretend to be cautious and say “at least in large part” — on their own personal fevers for gaining extravagant wealth through speculative investment in the continent’s natural resources, beginning with what then looked like the ultimate natural resource: land itself. Physical space. Real estate.
(In passing I’ll note that American land fever was actually preceded by the possibly even more decisive North American fur trade, in which seemingly insatiable markets in France, England, Spain, and Holland caused the complete restructuring of native societies around supplying those markets, leading to new causes of war and alliances among both native and European nations, especially France and England. With pretty earthshaking results, including the Seven-Years war, which raged over the whole world, and ended with the French pulling out of North America in 1763. That pullout is what opened up western land-speculation opportunities for Brits and their colonists.)
Almost every important American founder was heavily leveraged and obsessively focused on the chaotic, swelling, inflating and deflating market for western land. George Washington, Patrick Henry, George Mason, Thomas Jefferson, Richard Henry Lee, John Dickinson, Benjamin Franklin, James Wilson, Robert Morris, James Schuyler, Alexander Hamilton, George Clinton, Samuel Adams: these are among the biggest names, some of them holding many hundreds of thousands of acres at a time, giddily buying on risky margins, borrowing to speculate, and hawking land titles to one another in a growing frenzy of terror and hope.
The lenders who financed all this nuttiness were often one and the same bunch of people, with Philadelphia bankers like Morris and Wilson leading the way (hence — “at least in large part”! — the First Bank of the United States). Their blithe eagerness to lend money to themselves and their friends for the purpose of risky speculation inflated the apparent value of the subject properties; and with the value of the collateral land so apparently high, why not lend? And there’s your bubble, as George Soros explains one: lenders forget that what’s really driving up values is their own willingness to lend.
Once the land market was saturated, with everyone hyperextended on the ownership side, and they couldn’t sell anything to one another any longer, they started grabbing visiting foreigners by the lapels and pitching land at them, too. It was death to show fear, so big men who were essentially bankrupt in all but dubious financial instruments and mysterious titles to millions of acres of western land they’d never seen — and would have to go to war with native people to conquer — spent more and more borrowed money to support their ostentatious lifestyles: carriages, clothes, parties, food, collectibles.
When it was all over, James Wilson, one of the architects of the Constitution and a Supreme Court judge, was in debtors prison. So was Robert Morris, the high-finance whiz of the Revolution. Cooler heads did manage to keep and pass down huge fortunes.
The Gilded Age was not what we often call it, a falling-off from founding values. It replicated them. Lending, borrowing, and speculating is pretty much what our founders did all day. Indeed, the run-up to the Revolution may usefully be seen — ALILP! — as a falling out not between “patriots” and “Tories” but, first, between expansionists and anti-expansionists; then, between one group of expansionists (Patrick Henry, e.g.) and another group (Lord Dunmore, e.g.). That’s the important things about this insane founding bubble: it didn’t merely coincide, in some oddball and possibly historically entertaining way, with the founding. Much of history wants to construct it that way, but to a significant extent, the bubble was the founding.
Hand in hand with what I cover in Founding Finance came “founding real estate,” or “the founding as real estate,” or “founding developers.” The Gilded Age, the New York City real estate boom today, the shale-fracking industry in the West: these elite enterprises, and their often disastrous effects on ordinary people, are expressions of, not deviations from, the foundational values of the nation. Any democratizing element in the Gold Rush would be an anomaly, not a model.
Thanks Bill — pointing my students toward this — we’re reading FF in about six weeks or so — hope you’re doing well —
It’s very satisfying to know that “Founding Finance” is being read in class!
I love to see the reality of human nature burning holes through myth.
Thanks, too, for confirming what I suspected and fleshing out some details. The native Americans were surely blindsided by the strange European notion of property rights and political lines in the sand. The tribal cultures had an entirely different relationship with the land, respecting nature’s treasures enough to tread lightly, living in harmony with it. The Europeans came along with their greed, guns, and attitudes, and exterminated anyone who stood in their way.
I’ve also noted that the “leaders” you mentioned were fascinated with machines and industrialization. Adam Smith’s Wealth of Nations was published in 1776 to great acclaim. He promoted machinery to maximize output with a minimum of labor. The book was written from a tax collector’s point of view and goes into detail about all the types of taxes kings can collect. But even Smith claimed the king could not get away with a tax on income, because people would resent the king’s snooping into their private finances.
I’m sure Alexander Hamilton studied Smith well, and the whiskey tax was his way of insuring perpetual, guaranteed income to the first central bank, to pay interest on the federal debt. It also granted the federal government the authority, if not the right, to enter anyone’s property or home on suspicion of illegal whiskey making.
Fracking is industrialization gone haywire. The oil companies are struggling with overhead, primarily debt overhead, and income is not keeping up with expenses. They have to show a profit to justify dividends, to keep their stocks churning, because they are getting more income from stocks than oil. That’s why we are seeing so many mergers and acquisitions, postponing of drilling projects, and layoffs of workers. It helps that the government subsidizes the oil industry, and collects lots of taxes on oil sales. With all those pension funds languishing in treasuries and on Wall Street, they are heavily invested in pretending energy demands are growing, just as the “economy” is improving.
I believe we had a similar situation with Treasury Secretary Hamilton playing both ends against the middle and using the federal government to fund Wall Street.