The Moral Capital of the United States of America Barro observes that "authoritarian regimes may partially avoid these drawbacks of democracy" (Barro 1996, p. 2; see also Barro 1997, p. 119), especially if the government is favorable to the rights of capital. Indeed, we may read Barro's fear of democracy as a distant echo of James Madison, whom we quoted earlier.
Already in the eighteenth and early nineteenth centuries, many of the most famous writers of the time believed that democracy and capitalism were incompatible. Voters would obviously use their political powers to deprive property owners of the wealth.
Despite Madison's best efforts, soon after Senior wrote of the glories of moral capital, a number of government bodies in the United States failed to repay their bonds. Between 1841 and 1843, eight states and the territory of Florida defaulted on their obligations, and by the end of the decade four states and Florida had repudiated all or part of their debts (English 1996, p. 259). Barry Eichengreen, an economist from the University of California at Berkeley, reminds us that Charles Dickens's beloved A Christmas Carol, written during the 1840s, caught the mood of the times. Dickens had Ebenezer Scrooge awaken from a deep sleep fearing that his secure British investments have been transformed into default-prone United States securities (Eichengreen 1991, p. 149).
In the wake of the shocking epidemic of defaults, many foreign investors saw the United States as a country virtually devoid of moral capital. The same Sidney Smith, who railed against the wasteful educational system of England, caught the mood of the British in a series of famous diatribes first published in the London Morning Post. Dripping with moral indignation about the small part of his fortune he had invested in Pennsylvania bonds, Smith exploded:
There really should be lunatic asylums for nations as well as individuals .... [America] is a nation with whom no contract can be made, because none will be kept; unstable in the very foundations of social life, deficient in the elements of good faith, men who prefer any load of infamy, however great, to any pressure of taxation however light. (Sampson 1982, p. 49; citing Pearson 1934, p. 295) Few believed that the United States would emerge unscathed from this defiance of the rules of the market. Even though the United States Constitution precludes suits against states to enforce the payment of debts, The London Times predicted on December 3, 1846 that the defaulting states would have no choice but to repay their debts. The learned analysts of the paper assured their readers that the states "will deem it a not disadvantageous transaction to lay out ten or twenty millions ... in purchasing a restoration of their forfeited respectability" (English 1996, p. 272; citing McGrane 1935, p. 166).
Alas, events proved the The London Times wrong on two counts. First, many of the bonds were never repaid. The Council of Foreign Bondholders, formed in 1868, still champions the cause of the holders of those bonds that remain in default to this day (Sampson 1982, p. 50). Second, despite its presumed deficiency of moral capital, the United States went on to prosper.
To begin with, the United States had the good fortune to be far enough from Britain's mighty Navy that it was able to escape the fate of a poor country today that would dare display such an insufficiency of moral capital. Besides, the British, who lost the most from the default, were reluctant to retaliate economically because cotton was crucial for the British textile industry (English 1996, p. 259). In addition, the British had few alternative outlets for their funds. As a result, they could not convincingly threaten to withhold future investments for long.
In fact, soon thereafter, following a furious boom in railroad construction in the United States, British bondholders bought up an enormous mass of paper from the railroads, undeterred by the previous deficiencies in moral capital. Alas, these British investors suffered a second round of defaults. Bankers Magazine reported that by 1876, about 65 percent of European holdings of American railway bonds were in default (Wilkins 1989, p. 194). Even so, British investors continued to pour money into the railroads. In 1887, The Economist magazine, published in London, held out a ray of hope for those who had optimistically invested in railroad shares: "As the country fills up the dividends upon American railway shares may become more stable, and these securities may come to possess something more of an investment character."
The experience of the investors in the United States railroads reminds us that while the idea of moral capital might be well and good, the hope of profits can easily quell any doubts about moral capital. While I doubt the essential role of moral capital, I remain convinced about the importance of what Jane Jacobs called "social capital" in her book, The Death and Life of Great American Cities. While discussing the possibility of neighborhood self-government. She observed: "If self-government in the place is to work, underlying any float of population must be a community of people who have forged neighborhood networks. These networks are a city's irreplaceable social capital" (Jacobs 1961, p. 138).
Some time later, James Coleman returned to the phrase, defining social capital as "the ability of people to work together for a common purposes in groups or organization" (Coleman 1988, p. 95). According to Robert Putnam, social capital describes "features of social organization such as networks, norms, and social trust that facilitate coordination and cooperation for mutual benefit" (Putnam 1995, p. 67). So, while Nassau Senior's moral capital refers to a willingness to submit to the individualistic mores of a market society, Jacob's social capital turns our attention back to our collective responsibilities -- a concept that mainstream economics virtually rules out.
-- Michael Perelman Economics Department California State University Chico, CA 95929
Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu