The Economic Crisis, Deflation and the Louisiana Purchase

In order to make this connection, I'm going to need to spell out a few terms, so bear with me a moment.

The first term I need to define is "value". While value usually refers to a state that is a function of worth divided by price ("that's a great value on that can of beans" is a statement about cost/benefit). Because I need a transitive verb, I'll be referring to value as the worth that someone applies to some thing ("I value your trust" for example).

That said, value is something that is very relative. You may value a high-performance sports car while I might value a well-crafted wine or a meticulously painted Repan or Degas. Furthermore, you may think very lowly of my grape juice and old paintings, while I may assign little value to your brightly polished chunk of metal. The important thing is that no one thing has the exact same value to more than person.

The other term here is money. Money is a fictional construct that allows people to quantize the value that they put on something. It helps us see the relativity of value (and to a lesser extent, wealth), and allows us to trade things of equal value, (not objectively, but subjectively based on the person and item). In the end, if we feel that we've given away something that means more to us than what the other person had to part with, we feel treated unfairly. Money both reveals and alleviates this to a great extent. In any case, the important thing to remember about money is that it isn't real. It doesn't represent the actual value of anything. This is why we're allowed to do really goofy stuff with it, as it's pretty much all math, and hypothetical, fiat-based situations.

Anyways, let's get to the heart of the matter. So we've got this economic crisis going on (click here for a really good, simple explanation). What's of particular note of interest here is how money and wealth relate to each other.

People value houses. This idea of value, over a period of time, caused the amount of money required to get that to go up. In theory, this was just matching the price with the value (trying to make things even), but in reality, the price vastly outstripped the value. Eventually, people started to figure this out in a very brutal way.

So, through a complex series of financial services multiplied by time and events, it all came crashing down. This lost a lot of investors their money. They did not, however, lose their wealth. Remember, money isn't wealth. All the things that the investors valued, like their house and their children and their Degas in the living room were left untouched. Some people did lose these things, like the deadbeats who couldn't pay their mortgages who lost their homes and the investment bankers who lost their shirts, but most people lost things like pensions, college savings, and other things where nothing was physically taken away from them.

Of course, these people (ie. everyone) did lose something. They lost their ability to be able to afford things they value, like food, once they retire. They lost their ability to give their children a valuable education. These things are worrying, but far from immediate. These things, rather, are relegated to the world of "wall street", a fake world where people trade around worthless scraps of paper and electronic bits. If this were the only result of the economic collapse, there wouldn't be much of a problem. This crisis, however, has bled into "main street".

For example, few people are going to have enough things that other people value enough to buy a home by trading it in. Instead, people usually borrow the money to do this. Said money has mostly dried up at the moment. Likewise, there are a lot of businesses out there that create things that everyone values, like cars, who, due to stupid stuff that they've done with labor unions and risky investment, taxes, etc. are forced to take the money they get and basically throw it away, rather than exchange it for things that are valuable (such as parts to make new cars). When this happens, businesses go bust, and people lose their jobs.

So what? All a job gets you is money, and money is fake anyways, right? Of course, a vast majority of people are completely ignorant about how to get the things that they value without just handing over money to someone else to get it. This means that a person who becomes unemployed is left with two choices: learn how to grow food real quick, or get a new source of money so that you can just buy things again.

In the end, it's a breakdown of value. When we're faced with a situation where we can only purchase so much value, we tend to rank things, and just as quickly bump up the value of the top things and bump down the value of other things. We start ranking things into needs and wants, and statements like "we don't need new rotors on our car yet" start showing up. It's not that people intrinsically want working breaks less, but its value is decreased relative to other things when the money is tight.

Of course, what this brings is deflation. As we value things less, the prices go down to match the value. As prices go down, so do the balance sheets of companies. In a perfect world, this would be fine, as employers would simply match the cost of living decrease to a pay decrease and everything hits equilibrium again.

Of course, to some people, particularly people who big into big labor, are horrified at even the idea of wages (money) going down, even if it allows them to buy the same, or more goods and services (value). Likewise, modern economics are big into inflation, in part because of what their ideologies tell them about deflation. In the perfect world of most modern economists, people who have a lot of money will loan it out as interest, which creates more money (I borrow $10 and give back $11, there is now an extra dollar of money in the system). Of course, more money spread around the same amount of wealth (value) causes the price to go up. They have more money to deal with it, the rest of us who aren't lending out money at interest don't. See THIS map of US inflation and how it's changed since modern monetary policy started being implemented in the 30's and 40's).

So, when prices are not allowed to deflate, yet the value of things is going down (due to a system which has created a crisis), eventually things collapse, and the money price of things goes up while the value of things continues to go down. In the end, you have "stagflation". When this happens, anyone is in a tight jam, especially if you're literally fighting for your survival.

France had just such a problem. Back in the early 1800's every single European country was sending it's armies into France in order to remove a particular political leader and return France to it's old, pre-revolutionary, autocratic, bureaucratic self. No one was buying French goods, as their value was decreased for political reasons (and because they might be just about to be blown up by English cannons). As exports tanked, jobs started bleeding like neck wound (like today). Suddenly, people made things which were valuable to themselves, but less valuable to others. As jobs went away, nobody had any money, and scarcity suddenly kicked in to drive up prices. It was Jimmy Carter meets the industrial revolution.

So, what could France do? Napoleon, in his genius, decided to take the millions and millions of angry, unemployed French people and press them into the army. Now people had jobs, AND France was less likely to immanently collapse due to foreign invasion. Two birds with one stone. The problem, of course, was how to fund it all. In the end, the French needed to take something that they had that had little value to them, and find someone for whom it had a lot of value. The money gained from the sale could quickly be turned over into something that France actually valued, like muskets.

The answer was land. Just like state governments and movie stars today, France started selling off the assets it didn't need to afford the ones it did. In France's case, it literally decided to sell its global empire (which hadn't been doing much for it). The prime slab was in the Americas: Louisiana.

Back, long ago, North America was divided up like a jawbreaker. There was the hard center between Boston and Charleston on the Atlantic coast that belonged to Britain. Outside of that was a concentric ring that went through the Caribbean through New Orleans and St. Louis up through Quebec. Outside of that was lands claimed by the Spanish, or were considered to worthless to take from the native populations. Of course, after the American Revolution, the need to contain the British was drastically weakened, as their only holdings were Fort Detroit and Ottowa. Combine that with a string of successful slave rebellions in the Caribbean, and all the sudden France's desire for empire waned. Simply put, there wasn't nearly as much value in North America as there had been when they took the trouble to carve out the territory in the first place.

But if there was someone who was willing to buy the land from France, especially for an amount of money greater than France valued it, then it would be in their best interest to sell it and turn the money into something it did value. The United States was only too willing to oblige. They needed space, they needed stable trading ports, and, most importantly, they needed the lowest number of threatening European powers bordering their fragile near-confederacy as possible.

Thomas Jefferson was willing to shell out $10 million (in 1803 dollars!) just for the port of New Orleans and the immediate surrounds. The French, on the other hand, needed more money, so they were willing to throw in the entire rest of the Louisiana Territory (all 1 million square miles) in with it for a mere $5 million more. The Americans were stunned. The deal was just too good to give up.

In the end, America bought the territory and doubled in size. France was able to get the funding it needed to raise 3 million soldiers and win the battle of Austerlitz a few years later. Win-win.

Perhaps, assuming we don't change policy to actually fix the problems we're in right now, we could consider something likewise for our current economic woes.