That was tried for about 30 years leading up to the start of the last century and Great Depression era. Runs on the reserves of just three banks caused the failure of thousands of other banks in 1929. It's but one of the reasons that Smithian-Laissez faire capitalism was abandoned world wide in the 1930's as people voted against moribund economies where a dollar a day was considered a good wage and farmers couldn't afford to upgrade their farm equipment. Keynesian economics transformed global financing to that of fractional reserve banking with paper money backed by federal guarantees.
Conservatives have fantasized about a fully deregulated economy since the grand failure of laissez faire capitalism in 1929. Conservative economists have dreamed about implementing their right wing ideology and mislabelling it as a free market system. Chicago School of Economics graduates and Milton Friedman got that chance on 9-11-73 for the next 16 years in a row. It lasted nine.
Tinker Bell Pinochet and the Fairy Tale Miracle of Chile
The London Observer
Sunday, November 22, 1998
SAO PAULO - Cinderella's Fairy Godmother, Tinker Bell and Senator Augusto Pinochet have much in common.
All three performed magical good deeds. In the case of Pinochet, he is universally credited with the Miracle of Chile, the wildly successful
experiment in free markets, privatisation, de-regulation and union-free economic expansion whose laissez-faire seeds have spread from Santiago to Surrey, from Valparaiso to Virginia.
But Cinderella's pumpkin did not really turn into a coach. The Miracle of Chile, too, is just another fairy tale. The claim that General Pinochet begot an economic powerhouse is one of those utterances, like "Labour's ethical foreign policy," whose truth rests entirely on its repetition.
Chile can claim some economic success. But that is the work of Salvador Allende - who saved his nation, miraculously, a decade after his death.
In 1973, the year the General seized the government, Chile's unemployment rate was 4.3%. In 1983, after ten years of free-market modernisation, unemployment reached 22%. Real wages declined by 40% under military rule.
In 1970, 20% of Chile's population lived in poverty. By 1990, the year "President" Pinochet left office, the number of destitute had doubled to 40%. Quite a miracle.
Pinochet did not destroy Chile's economy all alone. It took nine years of hard work by the most brilliant minds in world academia, a gaggle of Milton Friedman's trainees, the Chicago Boys. Under the spell of their theories, the General abolished the minimum wage, outlawed trade union bargaining rights, privatised the pension system, abolished all taxes on wealth and on business profits, slashed public employment, privatised 212 state industries and 66 banks and ran a fiscal surplus.
Freed of the dead hand of bureaucracy, taxes and union rules, the country took a giant leap forward ... into bankruptcy and depression. After nine years of economics Chicago style, Chile's industry keeled over and died. In 1982 and 1983, GDP dropped 19%. The free-market experiment was kaput, the test tubes shattered. Blood and glass littered the laboratory floor. Yet, with remarkable chutzpa, the mad scientists of Chicago declared success. In the US, President Ronald Reagan's State Department issued a report concluding, "Chile is a casebook study in sound economic management." Milton Friedman himself coined the phrase, "The Miracle of Chile." Friedman's sidekick, economist Art Laffer, preened that Pinochet's Chile was, "a showcase of what supply-side economics can do."
It certainly was. More exactly, Chile was a showcase of de-regulation gone berserk.
The Chicago Boys persuaded the junta that removing restrictions on the nation's banks would free them to attract foreign capital to fund industrial expansion.
Pinochet sold off the state banks - at a 40% discount from book value - and they quickly fell into the hands of two conglomerate empires controlled by speculators Javier Vial and Manuel Cruzat. From their captive banks, Vial and Cruzat siphoned cash to buy up manufacturers - then leveraged these assets with loans from foreign investors panting to get their piece of the state giveaways.
The bank's reserves filled with hollow securities from connected enterprises. Pinochet let the good times roll for the speculators. He was persuaded, as Tony Blair said this month in another context, "Governments should not hinder the logic of the market."
By 1982, the pyramid finance game was up. The Vial and Cruzat "Grupos" defaulted. Industry shut down, private pensions were worthless, the currency swooned. Riots and strikes by a population too hungry and desperate to fear bullets forced Pinochet to reverse course. He booted his beloved Chicago experimentalists. Reluctantly, the General restored the minimum wage and unions' collective bargaining rights. Pinochet, who had previously decimated government ranks, authorized a program to create 500,000 jobs. The equivalent in Britain would be a government program for 4 million workers.
In other words, Chile was pulled from depression by dull old Keynesian remedies, all Franklin Roosevelt, zero Margaret Thatcher. (The junta even instituted what remains today as South America's only law restricting the flow of foreigncapital.)
New Deal tactics rescued Chile from the Panic of 1983, but the nation's long-term recovery and growth since then is the result of - cover the
children's ears - a large dose of socialism.
To save the nation's pension system, Pinochet nationalized banks and industry on a scale unimagined by Communist Allende. The General expropriated at will, offering little or no compensation. While most of these businesses were eventually re-privatised, the state retained ownership of one industry: copper.
For nearly a century, copper has meant Chile and Chile copper. University of Montana metals expert Dr. Janet Finn notes, "Its absurd to describe a nation as a miracle of free enterprise when the engine of the economy remains in government hands." (And not just any government hands. A Pinochet law, still in force, gives the military 10% of state copper revenues.)
Copper has provided 30% to 70% of the nation's export earnings. This is the hard currency which has built today's Chile, the proceeds from the mines seized from Anaconda and Kennecott in 1973 - Allende's posthumous gift to his nation.
Agribusiness is the second locomotive of Chile's economic growth. This also is a legacy of the Allende years. According to Professor Arturo Vasquez of Georgetown University, Washington DC, Allende's land reform, the break-up of feudal estates (which Pinochet could not fully reverse), created a new class of productive tiller-owners, along with corporate and cooperative operators, who now bring in a stream of export earnings to rival copper. "In order to have an economic miracle," says Dr. Vasquez, "maybe you need a socialist government first to commit agrarian reform."
So there we have it. Keynes and Marx, not Friedman, saved Chile.
But the myth of the free-market Miracle persists because it serves a quasi-religious function. Within the faith of the Reaganauts and Thatcherites, Chile provides the necessary genesis fable, the ersatz Eden from which laissez-faire dogma sprang successful and shining.
Half a globe away from Chile, an alternative economic experiment was succeeding quietly and bloodlessly. The southern Indian state of Kerala is the laboratory for the humane development theories of Amartya Sen, this year's winner of the Nobel Prize in Economics. Committed to income re-distribution and universal social services, Kerala built an economy on intensive public education. As the world's most literate state, it earns its hard currency from the export of technical assistance to Gulf nations. If you've heard little or nothing of Sen and Kerala, maybe it is because they pose an annoying challenge to the neoliberal consensus.
This week, the international finance Gang of Four - the World Bank, the IMF, the Inter-American Development Bank and the International Bank for Settlements - offered a $41.5 billion line of credit to Brazil. But before the agencies hand the drowning nation a life preserver, they demand Brazil commit to swallow the economic medicine that nearly killed Chile. You know the list: fire-sale privatisations, flexible labor markets (i.e. union demolition) and deficit reduction through savage cuts in government services and social security.
Here in Sao Paulo, the public is assured these cruel measures will ultimately benefit the average Brazilian. What looks like financial colonialism is sold as the cure-all tested in Chile with miraculous results.
But that miracle was in fact a hoax, a fraud, a fairy tale in which everyone did not live happily ever after.
Gregory Palast writes the award-winning column, "Iside Corporate America" fortnightly in Britain's Sunday newsaper, The Observer, part of the Guardian Media Group, where this first appeared. For comments or request to reprint, contact: www.gregorypalast.com
The London Observer
In fact, the most prosperous economies of the last century were those that made strong investments in public infrastructure with amenities for the working poor and middle class. About half of the wealth generated in the largest economy in the world, the U.S., is generated by public pensions, medicaid for the poor, public education and affordable housing. These systems of provision have little to do with the free market, according to economist James Galbraith.