That’s how millions of American kids learned about the Constitution. Congress writes a law, the President vetoes (or not), Congress overrides (or not). You know you’ll be a law someday! Good schools would add that the Supreme Court gets a say in all this and can declare a law unconstitutional. (Or you could have seen this terrible Schoolhouse Rock video some other Saturday morning and somehow remember it.)

The thing is, it was always a little bit more complicated. Congress often passed vague laws — “build railroad tracks properly!” or “don’t cheat customers” which dumped onto the executive branch the responsibility for figuring out just what exactly it was going to do to carry out Congressional intentions. Often that involved giving orders to private businesses, but it tended to be done ad hoc.

It’s not clear how the Founding Fathers intended to deal with the amount of authority this gave the President. The reason it’s not clear is that the Founding Fathers talked out of both sides of their hat. In the Federalist Papers, for example, Alexander Hamilton wrote pretty explicitly that the President couldn’t fire cabinet officials once confirmed. Heck, he implied that confirmed cabinet officials might even stay in office when administrations changed. That meant that executive power would be limited. By 1793, however, Hamilton had changed his tune and now stated that it was obvious that the President had to have the power to fire cabinet officials.

The issue took a long time to be resolved. The First Congress generally acted like presidents had the power to fire their appointees, but the 40th Congress tried to impeach President Andrew Johnson for firing cabinet officials in 1867. SCOTUS didn’t squarely uphold the ability of the President to fire executive branch officials until 1926.

And so it was that the President wound up with the power to carry out Congressional intentions by writing regulations.1

As things got more complicated, though, many Americans became increasingly uncomfortable with the idea that you could just hand over all these implicit powers to the President. Sure, the constitution enjoined the executive to “take care that the laws be faithfully executed” but that didn’t mean that would happen. In theory, Congress could pass a new law whenever a new problem arose, but that would be insanely cumbersome and lead to insanely detailed laws. (There’s a reason that no place on Earth ever tried that.)

So in the good American tradition of limited government, in 1887 — a mere two decades after the Andrew Johnson imbroglio — we invented the idea of the independent commission. Now the President would nominate (and the Senate would approve) commissioners who would serve staggered independent terms. The commissioners, then, would vote to decide what exactly to do whenever they became apprised of a new problem that Congress had authorized them to handle.2

These agencies multiplied and the tasks handed to them grew more complicated. So in 1946, Congress passed the Administrative Procedure Act, which did three things (oversimplifying greatly, of course):

1. It created a general right to petition agencies. Before that was a fairly ad hoc process; now it was routinized.

2. It created standard procedures for rulemaking, including “public comment periods.” This abetted new-fangled lobbying, where professional firms would submit professional reports, in addition to the old-fashioned stuff that happened over steaks and cigars.

3. It created a whole class of pseudo-courts inside the executive branch to adjudicate disputes. Private parties could still sue in regular court, of course, but now these specialized kind-of-courts would take on a lot of the burden before that point.

And thus things stood until 1996, when Congress added the Congressional Review Act. That gave Congress 60 days to look over new regulations and, if it wanted, veto them. As a practical matter, that gave the Speaker of the House a veto over the veto. Of course, if Congress voted to overturn, then the President could veto their veto and let the regulation pass through.

In practice, this basically never happened before 2017. (Yes, a few exceptions, go away, pedant.)

Let’s put this in flowchart form. (And yes, I made these myself. Talking magic computers only helped me create a red outline in the very last slide, although I did use ‘em for fact-checking. Viva la humanidad.) Here’s how regulation worked from 1887 to 1946:

Pretty straightforward. Red arrows are presidential actions. Blue arrows are actions by other parties. Yellow actions are optional decisions by third parties. The President would nominate commissioners, the Senate would approve them. In general, these commissioners would serve staggered terms, so no single-term President could nominate all of them. I guess the thinking was that you won re-election you deserved the prize, but no worries since you’d be out of office after two terms.

The commissioners would then try to solve the problems Congress enjoined them to solve in the law creating the commission. The president could ask the commissioners to do something, as could private actors, in a very ad hoc or commission-by-commission basis. Ditto, commissioners would investigate and hold hearings, but also on a pretty discretionary basis by modern standards. Finally, if you didn’t like it, you could sue, in that great American tradition, and hope that the courts slapped down the commission for overstepping its bounds.

In 1946, Congress decided that this process was too lah-dee-dah. In part that was because there were now a lot more agencies. In part that was because FDR had just won four elections in a row. In part is was because GOP politicians thought regulation-writing was too easy. And so we got the Administrative Procedure Act (APA). The APA laid down, well, procedures for rule-making. It introduced the right to petition agencies to take action as a general right and introduced the idea of the “comment period,” where in theory the public (and in practice skilled lobbyists who know what the commissioners wanted to hear) could make, uh, comments. It also introduced a series of “administrative courts” inside the executive branch, which could handle disputes without gumming up the regular courts.3

And now the system looked like this (a NOPR is a Notice Of Proposed Rulemaking):

Not a whole lot of change, although APA also applies to agencies under full presidential control, and not just independent commissions.

Now, in theory Congress could always overturn regulations by passing new laws that superceded them. But that wasn’t easy — reopening the law over one tiny regulation meant opening a whole can of worms. You never knew what might come out of Congress once you started that process! And so, in 1996, you got the Congressional Review Act. It gave Congress sixty days to repeal any regulation, with the clock stopped for election season and congressional recesses. Of course, the President could then veto Congress’s veto, which Congress in turn could only overturn with a two-thirds majority. In theory, that added a little bit to the bottom of our flowchart:

But since Congress only used its new power once before the first Trump administration, it really didn’t matter. Congress and the Clinton administration got to look good to the voters who cared about this sort of thing, without really upsetting any apple carts. Like so many other things, this changed in 2017 and 2025, when the incoming Trump administration got the Republican-controlled Congress to massacre a bunch of new(ish) Obama and Biden era regulations.

Back in the pre-2017 antediluvian age, the baseline Republican position (other than some conservative legal scholars) was that all these checks and balances were great, with one big exception — it should be easier to repeal existing regulations without going through all this rigamarole. But no sane Republican — and not really very many insane ones, either — wanted to hand more power over to Democratic politicians who were simply not to be trusted. Those people believed that it was okay for men to wear shorts in public and had convinced themselves that sandals were comfortable while suits were not, a patently absurd pair of positions.

No damn way you were gonna make it easier for those weirdos to write regulations and boss businesses around.

But then came June 29th, 2026, and the decision in Trump v. Slaughter. I will be very disappointed if Brad DeLong doesn’t show up in comments to yell at me about what I am going to write next. It will be the short version of what I wrote here. (Click the link for a picture of me aged 16 that looks straight out of a bad period movie. But my daughter said my hair was the color of Superman’s back then, so it’s ok.)

Short version: the Supreme Court looked at the first line of Article II of the U.S. constitution, which reads, “The executive power shall be vested in a President of the United States of America.”4 Originalism is no help here: as we pointed out, different founding fathers said different things at different times. So they decided to take it literally. Which is not what I would have done, since the people who wrote it clearly didn’t take it literally, but it’s not crazy.5

But it did make the United States unique among modern developed nations in that this was now our Constitutionally-mandated regulatory procedure:

Basically, if the President can fire independent commissioners, then they aren’t independent! Look at all the red arrows. You can take everything within the red blob and basically assign it to POTUS. There are countries that effectively work this way — United Mexican States, we turn our eyes to you — but not very many, and generally for reasons outside the formal constitutional structure.

The Trump administration was pretty confident this was how SCOTUS was going to decide — as was pretty much everyone else looking at the constitutional tea leaves. The decision was the opposite of a surprise. Seeing the writing on the wall, the Trump administration issued Executive Order 14215 in February 2025. That order said that all formerly-independent agencies had to submit proposed regulations to a presidentially-controlled body called the Office of Information and Regulatory Affairs (OIRA, pronounced “oy-ruh”), which got a veto over everything.

But let’s not exaggerate! The APA is still in place. Presidents can now get independent agencies to write whatever regulations they want, but they still have to go through the procedures, which take a lot of time. That includes the repeal of a regulation — the President can’t just erase existing regulations with the wave of a hand, although he will now be better positioned to gum up enforcement. All that’s happened is that we’ve now placed independent commissions like FERC or the FTC or the SEC under the same presidential control as old-fashioned executive agencies like the EPA or OSHA.

This is going to make President Ocasio’s life easier, but not that much easier. Still, I am at a loss as to why Republicans love this decision while Democrats hate it. It’s giving me a Robbie-the-Robot moment.

Seriously, in a sane world wouldn’t Democrats prefer this? And Democratic Socialists should love it! Hell, their platform says, “Replace the President and Supreme Court with an executive and judiciary chosen by and subordinate to Congress.” Trump v. Slaughter is just one step on that road, comrade!

I should also add that Executive Order 14215 is written on a much more logical legal basis that Trump v. Slaughter. SCOTUS incoherently exempted everything the Federal Reserve does. The E.O. logically exempted Fed actions regarding monetary policy. That’s consistent with a coherent theory that argues that monetary policy is a Congressional function under Article 1, Section 8, Clause 5. “[The Congress shall have power] to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” But rather than engage in legal mumbo-jumbo, it went on state that the Federal Reserve powers to regulate banks were not Article I functions and therefore significant banking regulations could be vetoed by the President, acting through OIRA:

This order shall not apply to the Board of Governors of the Federal Reserve System or to the Federal Open Market Committee in its conduct of monetary policy. This order shall apply to the Board of Governors of the Federal Reserve System only in connection with its conduct and authorities directly related to its supervision and regulation of financial institutions.

We’ll see what SCOTUS says when this is inevitably challenged as contrary to Trump v. Slaughter. The logical part of my brain (really, if I wasn’t going to be a Marine logistics officer in a parallel life, what I’d really like to do if I could do it all again, then I should’ve been a lawyer) wants the E.O. to be uphold. At least it makes sense! But the old-school Republican part of that same brain says, no no, please keep elected officials far away from deciding bank regulations, wouldja, please? Consistency, hobgoblins, small minds, and all that.

Anyway, that’s where we are now. Agencies will write or repeal regulations and engage in enforcement actions only when the President wants them to. They’ll still be subject to all the same procedural hurdles as before, so it won’t be like future presidents will be able just whimsically issue even more orders than the current administration has been. But it will give future presidents quite a bit more power over quite a bit more fields.

And it still won’t be much easier to get rid of old red tape. Sigh.

—Daniel Bessner

Daniel Bessner is a tenured professor at the University of Washington and the author of Imperialist Realism: Politics and Culture at the End of the American Century. (And he’s from Rockaway, Queens!) I admire his work and often disagree with it. He has a Substack, and his penultimate post made me reconsider something I’d considered obvious: the United States is engaged in a Second Cold War with the People’s Republic of China (PRC).

That sounds like the Platonic ideal of intellectual exchange, right? Except it wasn’t. I had reservations that I thought weakened his overall thesis. The exchange that followed exacerbated my worries about the state of academia: its political homogeneity can leave even great scholars unwilling or unprepared to take on arguments coming from their right.1

I may be unusually sensitive to this because I have switched political teams several times. I learned new information, had circumstances change on me, or ran into stronger logical arguments. I was a Democrat (channeling my hippie parents and stepfather, despite the latter’s involvement in organized crime), then a Republican (disorganized crime in the 1980s, man!), a Democrat again (I’m fighting this war for what, exactly?) and now again a Republican (thanks to the Great Awokening and the Biden administration). The last shift is the only one where I can even partially claim, “I didn’t move, the party did.”2 Usually it was because I learned something or the world changed.

This has earned me no credit with some of my more-to-the-left friends. My friendship with Jeff Strabone — now professor of English at Connecticut College — survived my obnoxious use of the term “fucking egalitarian” when we were in high school together in the 1980s, but didn’t make it out of what I thought were comparatively mild disagreements about academia in the 2020s. That pains me. (Jeff! Gimme a call, man.)

No matter how repellent a friend’s politics might become, I can’t imagine cutting off contact. Persuasion is impossible once you stop talking to one another. There are limits — if somebody takes up arms against the citizenry or the nation, then all bets are off — but disagreement alone shouldn’t be enough to end a friendship.3 Sure, she actually thinks that eating Irish babies is a good idea, but how am I gonna fight that by refusing to talk to her?

The weaknesses I saw in Bessner’s post were things that might cause people who didn’t share his priors to dismiss his arguments — Bessner is a socialist, and a real one, a Marxian “falling rate of profits” socialist. The man, to his credit, called himself socialist back when it was still a fighting word. But that could make him overlook flaws that would be more obvious to someone with different priors.

Here are the four of his propositions that I thought weakened his overall argument. (“Problematic” is a good and useful word that I refuse to use because it’s become bizarrely political.)

1. The “duck and cover” drills of the 1950s were intended as propaganda exercises, rather than to save lives. Bessner:

   Though millions of children performed these drills, the U.S. government didn’t design them to protect America’s kids. Instead, they were created to persuade an exhausted population recovering from World War II that it needed to ready itself for another long war. The government, of course, knew the drills would do nothing to spare children’s lives. But scaring the shit out of everyone was a good way to keep the country motivated, alert, and committed to very high defense spending.

2. The Truman administration made serious nuclear threats, unlike modern states. Bessner again:

   In the era of the duck and cover drill, the Americans were a genuine menace. President Harry S. Truman made a nuclear threat during the Korean War of 1950-1953, Secretary of State John Foster Dulles made one in 1954 when he warned the United States would resort to “massive retaliatory power” against an adversary if it felt it needed to, and President Dwight D. Eisenhower made one during the first Taiwan Strait Crisis of 1954-1955. But neither the United States nor any other nuclear state does that anymore. Trump’s occasional allusions to launching nukes are mere saber-rattling that even he doesn’t seem to take seriously. No one, not even our own mad king, wants to return to a world of escalating nuclear tensions.

3. The Cold War mobilization was largely manufactured rather than a response to a genuinely threatening adversary; civilian efforts weren’t serious but rather consisted of, well, buying stuff:

   A struggle conceived in those terms made it easier to live a meaningful life in service of a grand and just project. Each time you bought your Borden milk, Armour hot dogs, and Coca-Cola at the grocery store, you were demonstrating the superiority of democratic capitalism over authoritarian communism. Every American was a participant in this war, every American was a soldier.

4. Those who argue that we are indeed today involved in a second Cold War do so for psychological reasons, mainly to assuage their own egos, or maybe guilt over having avoided real service:

   When members of the foreign policy Blob, Ivy-League professors, and Silicon Valley titans pontificate about the world-historical stakes of the “New Cold War” with China, what they’re really doing, whether they know it or not, is making a not-very-convincing case for their own significance. Elites need to feel like soldiers, too, apparently.

Here is why I thought these points weakened his argument.

1. Point (1) hinges upon motive, which requires evidence. How does he know that the people who created the duck-and-cover drills thought they were only propaganda exercises? He didn’t present documentary evidence. I argued that the drills would save thousands of children’s lives — nuclear weapons aren’t magical, but have blast radii, known ancillary effects, and clear limitations. (I wrote about the limits of tactical nuclear weapons here.) Kids far away from a blast, particularly before the H-bomb, should look away and protect themselves from shrapnel. Why hook a strong argument that the current Cold War is “fake” to a weak argument that the response to the last one was fake?

2. Point (2) appears to be a tendentious reading of the historical record. The scene he refers to was a news conference after the Chinese People’s Liberation Army poured across the Yalu. The transcript is available and here it is:

   Q. “Will that include the atomic bomb?”
   THE PRESIDENT. “That includes every weapon that we have.”
   Q. “Mr. President, you said ‘every weapon that we have.’ Does that mean that there is active consideration of the use of the atomic bomb?”
   THE PRESIDENT. “There has always been active consideration of its use. I don't want to see it used. It is a terrible weapon, and it should not be used on innocent men, women, and children who have nothing whatever to do with this military aggression. That happens when it is used.”

   That doesn’t seem to support Bessner’s interpretation. Moreover, the Truman administration made it clear that it wasn’t a threat the very same day, putting out a press release that read:

   The President wants to make it certain that there is no misinterpretation of his answers m [sic] questions at his press conference today about the use of the atom bomb. Naturally, there has been consideration of this subject since the outbreak of the hostilities in Korea, just as there is consideration of the use of all military weapons whenever our forces are in combat. Consideration of the use of any weapon is always implicit in the very possession of that weapon. However, it should be emphasized, that, by law, only the President can authorize the use of the atom bomb, and no such authorization has been given.

   In addition, Truman fired General MacArthur when the latter insisted that we needed to use atomic bombs on the Chinese side of the Yalu to stop their advance and liberate North Korea.

   And Bessner is wrong that modern states don’t make nuclear threats: India, Pakistan, the Russian Federation, and North Korea have all done so. India even uses the phrase “massive retaliation.” Once again, why hook a strong argument that the PRC is not a threat to a weak implication the USSR wasn’t one either?

3. Point (3) makes civilian participation in the Cold War sound superficial, but whatever else you think about the early Cold War, American sacrifices between 1948 and 1960 were anything but superficial. I wrote half of an entire post about that. More than one in every five men born between 1924 and 1934 signed up or was drafted to fight during the Korean conflict — not counting those in service when it started — and we kept conscription and high taxes for two decades thereafter. Bessner’s statements about Borden/Armour/Coke seem more aimed at the Bush administration’s post 9-11 exhortations to “go shopping” than anything that happened in the 1950s. Once again, if the argument is that the current “Cold War” is tepid herbal tea compared to the dark Irish coffee of the first one, then attaching an empirically incorrect statement denigrating the scale of the American people’s efforts to contain Communism in the 1950s only weakens the thesis.

   

4. His last point is about the motivations of people he doesn’t know making arguments that he doesn’t agree with.4 He can’t know what’s in their hearts. It’s a bad idea to cast aspersions on the motivations of people who disagree with you — and I was (until reading the essay) one of those people. Why make it harder for people to change their opinion by insulting them?

The reaction was not what I expected.

Hi Noel--thanks for responding, I can’t respond in super death [sic] but I’ll make some points.

1) I’m sure some people took duck and cover drills seriously. A lot of people didn’t and thought they were silly, because they were. Just because you were trained in the army doesn’t mean their social function in the Cold War wasn’t important to why they were instituted. I think you’re being too generous to the people who instituted these drills.

2) Truman still made a nuclear threat. That was aggressive, despite post-threat mitigating factors. Americans were consciously using nuclear blackmail even if they didn’t want to use nuclear weapons. The MacArthur point doesn’t really relate.

3) The Soviets were never prepared or interested in invading Western Europe. See Radchenko’s latest book.

4) I never said people don’t make nuclear threats. I cite Trump making a nuclear threat.

5) And you’re wrong in my opinion on who is responsible for the Cold War. It was the US. The Cold War was not “forced” on the US. The threat was very much exaggerated. The Cold War was an American choice. See here: https://www.theideasletter.org/essay/whose-fault-was-the-cold-war/

6) Psychological motivations aren’t trivial, they’re human.

I was a bit disappointed. I appreciated the courtesy, but he didn’t grapple with my points:

1. He didn’t have any evidence that the people who made the policy didn’t think that it would save lives. He categorically dismissed the evidence I mustered to show that the duck-and-cover drills were in fact useful. He simply asserted “because they were.” He added: “Just because you were trained in the army doesn't mean their social function in the Cold War wasn't important to why they were instituted.” A true point, but it wasn’t as if my argument consisted solely of an assertion of authority. I could be wrong; this isn’t how to show that.

2. I didn’t understand his rebuttal that Truman was “still aggressive.” I mean, he just wasn’t. You can read the news conference yourself.

3. It is true that the Soviets didn’t want to invade Western Europe. I don’t mean to be snarky when I say that the best evidence for the proposition is that they didn’t. Nonetheless, the main problem with his argument is that one of the reasons that they didn’t was that the United States stood ready to defend Western Europe, with atomic weapons if need be.

4. Bessner said this in the original post:

   President Harry S. Truman made a nuclear threat during the Korean War of 1950-1953, Secretary of State John Foster Dulles made one in 1954 when he warned the United States would resort to “massive retaliatory power” against an adversary if it felt it needed to, and President Dwight D. Eisenhower made one during the first Taiwan Strait Crisis of 1954-1955.

   But neither the United States nor any other nuclear state does that anymore. Trump’s occasional allusions to launching nukes are mere saber-rattling that even he doesn’t seem to take seriously. No one, not even our own mad king, wants to return to a world of escalating nuclear tensions. [bold face mine]

   Am I being uncharitable?

5. Radchenko blames Stalin for the start of the Cold War. That doesn’t make Radchenko correct, of course, but it puts the burden on Bessner to show why he’s wrong. The review essay that Bessner pointed me to argues that Radchenko misinterprets his own evidence, but doesn’t discuss security dilemmas or the way Stalin went about securing his position: no mention of the Czechoslovak coup or the crises in Greece, Turkey, and Iran, let alone the Berlin blockade. It appears to assume its own conclusions.

6. Psychological motives are indeed human but it is presumptuous to state that people who disagree with you are motivated by a desire to pretend to be soldiers rather than genuine disagreement. It’s a circumstantial ad hominem, focused on the putative motives behind an argument rather than the substance of the argument itself. And it’s unnecessary, because Bessner’s overall thesis about Cold War II is quite strong.

The next go-around didn’t get much further. Bessner said that Herman Kahn, the famous author of On Thermonuclear War, denigrated the duck and cover drills. I asked him for evidence that Kahn had said that. He replied, “The Kahn reference is a gloss on where he advocated for serious civil defense like underground bunkers and heavily criticized the Eisenhower admin for what he considered inadequate civil defense measures like d and c.”

I pointed out that it was quite the jump from “Kahn thought 1950s civil defense was inadequate” to “Kahn thought 1950s civil defense was useless.” I said, somebody might think that a 65-mph speed limit doesn’t go far enough, but it would be silly to conclude that said person also thought 65-mph speed limits were useless.

I got this message: “I said he didn’t take them seriously also I’m done responding”

This is not the response I would expect from a scholar accustomed to serious pushback. I could be wrong about how much intellectual challenge Bessner normally encounters from his right — the University of Washington actually has a lot of political diversity. Nonetheless, Bessner didn’t engage the substance of what I wrote. The closest was when he pointed me towards a review essay that assumed its own conclusion.

This isn’t the first time that I’ve been dismissed by somebody on the “opposite” side of the political spectrum. A few weeks before this exchange, Brad DeLong responded to a post of mine about the Supreme Court’s recent decision affirming the unitary executive theory. Ironically, Brad and I agree that it would have been better and more constitutional had the decision gone the other way. I just didn’t agree that it showed a “highly, deeply corrupt” Supreme Court that laid down decisions that were “NOT THE RULE OF LAW.” He went on to say, “PRETENDING THAT THAT IS WHAT IT DID IS, I THINK, BENEATH YOU.” [Capitals his.]

I gave him a point-by-point response explaining why I disagreed, including what evidence would change my mind. Brad didn’t answer any of it.

Instead, in a separate comment, he seized on a throwaway line where I admitted that I thought Roe v. Wade was badly decided, an opinion I share with the late Ruth Bader Ginsburg.5 First, he told me that the Founding Fathers had written the Ninth Amendment because they anticipated “people like you.” Then he informed me that he was “not persuaded or impressed” and said that the real answer to “what’s wrong with the reasoning in Roe v. Wade?” was that “some people do not like the outcome.” He stated that Roe v. Wade flowed ineluctably from the premises that this is a free country and abortion is a medical procedure. Then came a discursion into miscarriages, failed implantations, IVF embryos, ovulations, twenty billion male orgasms, and a discussion of people who think that women who use IVF ought to be hanged.

My objections to his argument that John Roberts was staging a partial coup got lost in a farrago of abortion arguments and what came across as veiled insults. I wrote an angry response and decided not to post it. The line that best captures my reaction was this: “One reading of your intellectual strategy is that you agree with my counterpoints but cannot possibly cede the table to someone you consider guilty of ideological ungoodthink.” That was written in anger, and it was almost certainly unfair. But it is how he appeared to approach me, as someone unworthy of actual engagement beyond some drive-by pot shots.

Now, Professor Bessner didn’t come within a light year of Prof. DeLong. But I can’t help comparing both exchanges to a discussion I had with the great A.G. Hopkins, who contacted me to try to reconcile my interpretation of the Cuban revolution with the rest of the literature. Prof. Hopkins and I probably do not share similar politics — I say “probably” because there’s much I agree with in his latest book — but neither of us would have known that from our discussion.6

It struck me as symptomatic of a problem in academia: outside economics and political science (but very often there as well!) scholars generally encounter relatively little serious criticism from other credentialed scholars to their right. By “criticism” I mean the normal panoply of academic tools used to get at the truth: arguments over falsifiable claims, concrete evidence, and the bounds of reasonable interpretation. The impulse, therefore, can be to dismiss arguments from the right flank rather than do the work of refuting them.

That’s not because “conservative” arguments are necessarily strong! It is because too few scholars expect professional criticism from that direction. Changing one’s mind is always personally and professionally hard, but changing one’s mind to the right brings an additional social cost in modern academia.

As I said, I’ve changed political teams more than once, and in more than one direction.7 In other words, while I can empathize with someone who formed fixed political beliefs when young and stuck with them, I can’t sympathize — especially not when you’re an associate professor with tenure.

To return to where we started, I like and respect Bessner’s work. The particular essay in question made me rethink some basic assumptions — and one of his newer posts is genuinely brilliant. But his responses were superficial and dismissive. He suggested that an academic conference would have been a better venue, but we don’t go to the same conferences, as much as I would love to see him in St. Louis this fall. In a world of limited resources, it’s disingenuous to suggest that the only way academics should interact is at large in-person meetings. In addition, it implies that he thinks of his Substack as a one-way means of communication, something far removed from the idea of an electronic “Republic of Letters,” in which people trade ideas.

My insights were fairly banal. What bothers me is that he didn’t take them seriously, tossing off asides as if they really mustered evidence or pointed out contradictions. And in my case, he can’t argue that I’m just an internet gadfly with no relevant credentials to discuss the Cold War.

Perhaps I am wrong that this is all a sign of scholars treating their premises as epistemically closed when they are not. As a (liberal) colleague pointed out, an alternative hypothesis is that they feel that they feel free to be rude because I’m not in the same ideological tribe. Or perhaps because I haven’t achieved the same heights of academic achievement. I’m not sure that’s much better — all I can say is that it didn’t occur to me until somebody else mentioned the possibility.

Or I could be wrong about the substance of the issues! That’s completely possible, maybe even probable. But I wouldn’t think that’s a reason to be dismissive, or in Brad’s case, dismissive and insulting.

But it might also be that these exchanges are indicative of a deeper problem that academia still hasn’t fully acknowledged.

“Well, North America is, pretty much.”

“Then do we have to care so much what happens in the rest of the world?”

It’s an excellent question. Why do we have to care so much about the rest of the world? Who cares what we break in the Strait of Hormuz? Well, Americans should care because we’re a good and responsible people, but why should anyone care care? Like vote to hand the GOP’s rear-end back to itself levels of care?

One thing this substack does (because its fun) is run with seemingly-impossible or unlikely policies and see if it’s really all that impossible.

Energy populism as an American policy

The Trump administration is often called populist. And by one very useful definition, it clearly is. That definition makes populism into a political strategy: define the electorate as consisting of the core “real” citizenry and outside elements, whether elites, ethnic minorities, political opponents, or some combination of all three. Then convince the core group that your movement represents them against the outsiders. In terms of that sort of populism, you need to go back to the 19th century to see it working as a winning national political strategy before 2016 (unless you really want to be tendentious).

In Latin America, however, populism used to have another definition, albeit often an implicit one: government intervention in markets driven by short-term electoral gains or simplistic (and often wrong) models of the world. In other words, to quote the introduction to this post, they “run with seemingly-impossible or unlikely policies,” generally to bad effect.

The Trump administration certainly engages in that kind of populism — no tax on tips, anyone? Throwing bags of sand in the wheels of renewable energy projects? But generally its straight-up Latin American style economic populism hasn’t been that different than past administrations.

Which in a way is surprising, because a real populist-nationalist administration has an obvious go-to populist move right before the election: ban American oil exports. It’s not the 1970s anymore. Shockingly to those of us of a certain age, North America has become a hydrocarbon island. The United States imports about 4.5 million barrels per day from Canada and Mexico, but infrastructure and refinery constraints mean that Canada can’t redirect its exports at the drop of a hat. Mexico, meanwhile, has become too small to matter much.

Let’s start with the answer to the student’s question. North America is an energy island, pretty much. In natural gas we’re almost completely an energy island. In crude oil it can get a little complicated down in the weeds, but basically we are:

The math isn’t that complicated. In 2025, the U.S. produced 13.7 million bpd of crude and condensates. It imported 6.2 million and exported 4.0 million, for net imports of 2.2 million and total consumption of 15.9 million. Or:

13.7 production + 6.2 imports − 4.0 exports ≈ 15.9 consumption.

The day after the ban exports will fall to zero. Somehow the market now needs to find a home for 4 million barrels per day. Either production will need to fall, or imports will need to fall, or consumption will need to rise. (Or some combination of all three.) Economics isn’t plumbing, however. None of that will happen by itself. All of it requires prices to crash. Falling American prices will tell domestic producers to produce less, foreign producers to sell less to America, and consumers to use more.

A good populist-nationalist president would also have to cut or cap petroleum product exports (i.e., gasoline or diesel or jet fuel or whatever) to prevent a spike in re-exports. That would cause gasoline prices to fall along with crude oil prices. And just by looking at the numbers, you can tell that prices will likely have to fall by a lot in order to clear the market. (As this article says in the title, “Demand for gasoline is more price-inelastic than commonly thought.”)

Awesome sauce for the election! Let’s do it!

The legal basis

There are things that the American president cannot do without Congress. There are also things that the American president cannot do on paper, but will almost certainly get forgiveness for later (at varying levels of “forgiveness”). And then there are things that the American president can just go do.

The Energy Policy Act of 2015 took away the President’s unrestricted right to ban hydrocarbon exports outside North America. But it left enough holes to drive a supertanker through. First, Section 6212a says:

The President may impose export licensing requirements or other restrictions on the export of crude oil from the United States for a period of not more than 1 year, if

(A) the President declares a national emergency and formally notices the declaration of a national emergency in the Federal Register.

Any requirement or restriction imposed pursuant to subparagraph (A) of paragraph (1) may be renewed for 1 or more additional periods of not more than 1 year each.

There’s more, but the only other thing you really need to know is that the law expressly allows exports to be banned if “the Secretary of Commerce, in consultation with the Secretary of Energy, finds and reports to the President that the export of crude oil pursuant to this Act has caused sustained material oil supply shortages or sustained oil prices significantly above world market levels that are directly attributable to the export of crude oil produced in the United States.” In other words, even if SCOTUS moved rapidly, there wouldn’t be a repeat of the recent tariff decision. The law is clear.1

Congress, sigh, continues to outsource its job to POTUS. But that’s good for a nationalist populist.

Those pesky neighbors

There probably isn’t a parallel universe — alternate history done right is another specialty of this substack, go tell your friends — in which the United States controls the Cantarell offshore fields in the Gulf of America Mexico America Mexico Gulf. And there’s probably not a parallel universe in which the United States controls Alberta, either.2 Sorry about that, fellows, Canada really isn’t a historical accident. (Unlike Uruguay. But I digress.)

Does geography create a problem for our hypothetical populist? No, no it does not. Canada is limited by its pipeline capacity. Quebec and New Brunswick still import crude because there’s not enough pipeline capacity from Alberta to feed the demand that currently exists. In the other direction, the Trans Mountain pipeline has only about 0.13 million bpd of spare capacity. Canada currently exports about 3.9 million bpd to the United States and that flow isn’t going anywhere else anytime soon.

Mexico has a little more flexibility, but it’s no longer big enough to matter, exporting only 0.6 million bpd to the United States. Moreover, that oil largely returns to Mexico in the form of refined products. So Mexico probably won’t divert oil to more lucrative markets and wouldn’t matter much even if it did.

Would an interruption in imports screw with refineries? Well, what interruption in imports? This populist order bans exports of crude (and caps or slightly cuts exports of refined products). It doesn’t affect. imports. If the refineries need imported oil to optimize their output mix, then they can still import oil. But with oil prices crashing, many will use a suboptimal mix with more cheap domestic crude because lower input costs will make up for higher process costs. And inasmuch as those imports come from Canada or Mexico or, likely, Venezuela, their prices will fall as well, although by less than in the United States.

So why not?

Every so often, the ban idea does raise its head. That happened in 2022. Senators Tammy Baldwin, Tammy Duckworth, Jack Reed, and Jeanne Shaheen urged President Biden to restrict crude exports. That same year, Biden administration seriously considered capping refined product exports. More recently, Representative Ro Khanna (D-California) introduced a bill to automatically prohibit gasoline exports whenever the national average gasoline price exceeded $3.12 for seven consecutive days.

Banning crude exports and restricting product exports might cause some disruption in the product market, slowing the price fall, but it wouldn’t be crazy to take a bet against that.

So why hasn’t it gotten more traction?

No, the real reason is that you’d crush the state of Texas. Also New Mexico, Oklahoma, and North Dakota, but mainly Texas. Yes, the Texas economy is much more diverse than it used to be, but the Dallas Federal Reserve estimates upstream oil and gas alone makes up about 7% of the state’s GDP. That rises to 15% — roughly one dollar in seven earned in the state — when you include midstream, refining, petrochemicals, machinery, and related manufacturing.

An export ban would hammer this sector. It might not be 1986 all over again — but it could also be worse. Oil probably won’t hit $31 — WTI’s inflation-adjusted 1986 low — but modern unconventional producers are leveraged up the wazoo. Bankruptcies will multiply and unemployment will spike. When high-paying oil jobs go away, so do other jobs; in Texas, the Dallas Fed estimates that each oilfield job supports three to four others.

When oil production hiccuped during the 2020 covid pandemic, “mining” employment dropped by about a quarter. A conservative assumption is that every oilfield layoff will cause one other job loss, so if our populist president prompts similarly-sized production drop, then one out of fifty jobs in the state will just evaporate.

And the impact will rock on. In the United States, private landowners own the subsoil rights, so when prices and production drop so will those lease and royalty payments. Each royalty dollar generates another 49¢ in local income when the landowners spend their windfalls. Direct taxes on oil and gas provide 9% of state tax revenue, not counting indirect tax revenues. The University of Texas system earns $2 billion a year in oil and gas royalties. All of that — spending by royalty recipients, state tax revenues, and investment returns — will fall.

Be careful what you wish for

Texans won’t like a federal government that deliberately hits them in the head with a hammer. Any party that does that will lose Texan votes for a generation. Maybe when the state was deep red, you could imagine a populist president (of either party) taking the risk. But with the place on the verge of turning purple, it would take a brave president indeed to gamble on losing the state for decades.

In other words, growing Democratic support in Texas makes oil populism less likely.

But there’s a longer-term risk from petrol populism. Right now, Texas nationalism is a sideshow. But Alberta separatism was also once a sideshow: a 1969 poll found only 5% of the province were even interested in discussing secession.

And then came Pierre Trudeau. In 1980, the new prime minister implemented the anodyne-sounding National Energy Program. It wasn’t the export ban we’ve been discussing, but it was pretty bad for the oil patch. It capped Canadian oil prices at 85% of American oil prices. And then it imposed a gross revenue tax of 8%. The upshot was to raise the federal share of petroleum production income from 10% to 24%. The provincial share fell a little bit, from 45% to 43%, but private industry’s share got hammered, collapsing from 45% to 33%.

The NEP didn’t cause the 1982 recession — that was made in America — but it worsened things in Alberta. Unemployment jumped much more than elsewhere, the economy shrank much more than elsewhere, and provincial migration turned negative.

In 1960, Alberta separatism would have appeared to the average Canadian as a crank or fringe notion. Sure, the province had a distinct political culture, but nobody really talked about independence. There’s a whole 1962 book on the province’s weird politics that makes no mention of it. You can’t find it in the newspapers. It’s just not a serious idea.

That all changed when Trudeau announced the NEP in 1980. (See pages 130-34.) By the end of the year, you had three separatist organizations in operation. Support for separation was only 5% right after the Liberals won the February 1980 federal election, but after the NEP was announced it jumps to 13.6%, 23%, or 11%, depending on the question. A party calling itself the Western Canada Concept managed to win a by-election to the Alberta legislature and grabbed 11.8% of the vote in the November general. The WCC didn’t last, but grievance did — thus, this year the sudden surge in separatist sentiment.

Now don’t get me wrong, the idea was still fringy, and Alberta is not about to declare independence or become a U.S. state.3

But hammering Texas would not only be a good way to drive the state into the arms of the other party, it could ignite the slumbering giant of Texas separatism. Underlying secessionist sentiment is much higher in Texas today than it was in Alberta in 1980. For example, Texan support for secession jumped from 15% to 20% after President Obama won the 2012 election, and grew to 26% by August 2016. (Sadly, Public Policy Polling appears to have stopped asking the question after 2016.)

Most Texans who tell pollsters they support secession are probably just expressing partisan anger — that’s certainly true for most of the existing polls on “do you want your state to secede,” which is why I don’t cite them. Partisan anger explains the rise in secessionist sentiment in Texas over the course of the Obama administration. But that is precisely the point! Alberta shows that a fringe regional grievance can become politically consequential very quickly if the federal government deliberately takes a hammer the region’s core industry, particularly one with emotional resonance.

And that is probably the best reason why a present or future administration should refrain from oil populism. The last thing America needs is a secessionist movement that we’d have to take seriously.

2

Donald Meinig also published a map of the Lesser United States that he also considered more ex ante probable than the continental boundaries we all know:

Another commentator whom I deeply respect, Max Boot, likewise writes in notes, “I also don’t see how it’s legal under U.S. law. Where does Trump get the power to do this?”

Neither of these gentlemen are easily dismissed.

Nonetheless, I’m not convinced. I don’t think that the deal is illegal under Venezuelan or American law. I’m also not sure that the deal will be that easy to undo, although that depends on how the administration structures it.

The question is what happens to that 35% American stake. Right now, the structure is that the U.S. government’s (USG’s) stake will take the form of “penny warrants,” i.e. options to buy shares in the Venezuelan oil enterprise (called “Blue Energy”) at pennies on the dollar. If the USG exercises those warrants immediately, however, it will be taking a 35% share of the profits in Blue Energy without putting up any significant share of capital, which will blow holes in the economic viability of the enterprise.

Given that, one of three things will happen. First, Washington leaves the warrants unexercised for a long time. In that case, the deal should be fairly easy for a future administration to reverse. Second, it finds a way to put federal money behind the investment, making the stake economically viable and harder to unwind. Third, the whole equity component turns out to be vaporware, in which case there is nothing to unwind. Note, however, that the equity stake isn’t the whole of the deal; there’s also provision that would require Blue Energy to sell one-fifth of its output to the USG at cost. (Any resemblance to the Spanish quinto real is certainly coincidental.) The 20% at-cost oil provision is a separate matter and will likely prove considerably stickier.

Allow me to make both arguments, if you will.

Regarding Venezuelan law: the Bolivarian Republic retains de jure ownership of the oil; thus the 16% royalty payments. And just as a company in Texas can book ownership of reserves leased from a private landowner, a company in Venezuela can book ownership of reserves leased from the Venezuelan state. There are also barriers to renationalization. If the BRV went that route, it would find itself tied up in international arbitration. If it lost, then a legal nightmare would rapidly descend around its oil exports. And, of course, the U.S. government could reimpose sanctions.

Regarding American law: The numbers, however, make it unlikely that the U.S. will actually take that 35% stake, at least given the information we have. I’ve run through the full analysis at this post. The upshot is that the deal is quite good for Caracas and marginally-investable for private companies — but it won’t make sense for private investors if the USG claims 35% of the profits without putting up any capital.

There is an important distinction, however, between the government having the right to take 35% and actually taking it. Warrants will cost the private investors very little today if everyone expects them to remain unexercised. But the moment Washington converts it into a 35% equity stake without contributing any capital, the private investors have effectively surrendered more than a third of their upside while retaining all the investment costs. That would render the project inviable. So we don’t only have to ask whether the administration legally obtained its 35% option. We also have to ask what needs to happen for the exercise of that option to be compatible with tens of billions of dollars of private investment.

The Trump administration has two obvious tools at its fingertips to make the above happen.

The first is the Development Finance Corporation (DFC), which could take a 35% stake in the enterprise backed by actual equity investment — the law allows the DFC to take stakes up to 40% in an enterprise and it has about $160 billion in statutory capacity. The problem is that it has only a $5 billion equity revolving fund at present. A 35% stake would require about $15 billion, given what we know about the costs of greenfield investments in Venezuela.

As of right now, there is no sign that the DFC is preparing to take any stakes at all.

A second government agency has been reported to be involved in the deal: the Office of Strategic Capital, located within the Department of War. The OSC has no authority to take equity stakes in private businesses; you can clearly see that in the statute.1 (These things are generally more clearly written than many presume and more people should just check them directly.)

Now, the OSC’s inability to make equity investments is not relevant to the deal — the administration apparently believes that the president can accept penny warrants that don’t cost anything on behalf of the United States. (I suspect that it is correct.) But it is relevant if the government is going to pay for an equity stake; that would have to go through DFC or get Congress to authorize the purchase.

Another alternative would be for the OSC to provide $15 billion in cheap loans to the enterprise. In fact, if it wanted to, the OSC could lend at zero percent! Note the following two clauses in the law:

(aa) Except as provided under item (bb), the interest rate on a loan provided under clause (i) shall be not less than the yield on marketable United States Treasury securities of a similar maturity to the maturity of the loan on the date of execution of the loan agreement.

(bb) The Director may waive the requirement under item (aa) with respect to an investment if the investment is determined by the Secretary of Defense to be vital to the national security of the United States.

Low or no cost loans would (probably, I haven’t run these numbers yet) make the investment attractive even if the United States grabbed 35% of the pretax profits.

But that strategy will run into two problems. First, OSC loans can’t finance more than 20% of the project, although that might be enough to get the 35% government stake to pencil out for private investors if the interest rate is low enough. Second and more seriously, 10 U.S.C. §149(h)(2)(A) lists the sectors that OSC can lend to and petroleum fuels aren’t on that list.

There may be workarounds, however. Maybe the administration could make a tendentious claim that it somehow falls into one of the categories in the law (advanced bulk materials, perhaps) and dare anyone to sue? Alternatively, the statute includes the following language: “Each agreement for a loan or loan guarantee executed by the Director under paragraph (3)(A) shall be conclusively presumed to be issued in compliance with the requirements of this section.” The administration might take this to mean that the law precludes judicial review, and the courts might back them up — it’s not an unreasonable interpretation.

So if the government manages to make the stake happen, Article 4, Section 3, of the U.S. Constitution will make it hard to unwind without Congressional approval. If the United States gets an equity stake in an enterprise, then that stake automatically becomes “property belonging to the United States,” and the Constitution clearly states: “The Congress shall have power to dispose of and make all needful rules and regulations respecting the territory or other property belonging to the United States.” If the Democrats control both houses that might be easy, assuming that you can work the provision into a reconciliation bill and avoid the filibuster. But even then, don’t underestimate the political hay that Republicans could make over a Democratic giveaway of our hard earned property to foreign socialists. And if the OSC does make a loan to Blue Energy, the political argument becomes easier — “How are you going to protect the taxpayers’ hard-earned money, President Ocasio?”

I wrote a whole book about just how easy it was in the past to make such hay, and considering that the entire 21^st Century has seemed like one giant rush back to the future I don’t see why that would no longer be true.

If the warrants haven’t been exercised, then an administration determined to undo the deal could find a way to work around the Constitution. In that scenario, it would be extremely unclear who if anybody would have standing to sue. Yes, the President just handed an option for 35% of Blue Energy over to the Bolivarian Republic. But who was harmed? A plaintiff would have to demonstrate that the transfer created concrete economic damage, and that won’t be easy. So a future administration could simply act a lot like the current one and give the warrants to the BRV on the (likely correct) assumption that no one will have standing to sue.

But if the U.S. somehow pays for its stake (say via the DFC, or some other pot of money of which I am unaware), then Article 4 will make undoing the deal much harder. Avoid Congress and you’ll have a whole lot of interests with plausible standing depending on how the investment is structured. Involve Congress and you could find yourself in some sticky politics, no matter how unpopular Donald J. Trump happens to be come January 20, 2029. Worse yet, the current administration could structure the equity deal so as to deliberately harm third parties in the event that its share is transferred. I can’t say whether they will do so; only that they could, and that would throw a lot of sand into the gears of a future administration.

Such sand-throwing is even easier in the case of the 20% share of production that the USG is allowed to acquire at-cost. If the administration signs offtake agreements, then those offtakers will probably have obvious standing to sue if the agreements are abrogated. But even if the oil goes straight into the Strategic Petroleum Reserve (which as a commentator on O’Brien’s substack pointed out, would probably require additional blending) there would still be a very real chance that the courts would grant standing to someone who could claim damage from the cut-off of below-market supplies.

In short, absent congressional action, it looks like one of three things will happen.

1. The U.S. waits a long time to exercise the warrants. That makes a lot of the above moot and probably makes the equity stake part of the deal easy to undo. The ease of undoing the cost-oil part will depend on how the administration structured it but I don’t think it will be that easy.

2. We see signs of a large and very low cost OSC loan to Blue Energy Partners (or whomever) in the next year or so. If that happens, then the deal will become politically (and to a lesser extent legally) hard to undo.

3. The whole equity stake was just more vaporware that will disappear before anyone cuts any checks. In that case, see (1) above.

I hope this is helpful! Some eggs aren’t as easy to unbreak as they seem.

The problem is already obvious. The 1948 agreement split profits 50-50 between the government and the private companies. The agreement outlined by President Rodríguez gives the Venezuelan government 29% of the gross revenues. ($19 ÷ $65 ≈ 29%.) Not same thing at all; in fact, that’s a great deal for the government. It’s the kind of error that I live in fear of making, so don’t take this is as criticism of Brew, who’s a great scholar.

In other words, it’s not clear that the deal is a bad one for Venezuela. We’d need to dig deeper. Here’s my first pass at doing that. New information could easily invalidate these calculations; I will update them in a new post should that occur.

Here’s what I could cobble together:

• The agreement covers greenfield and brownfield production, not existing production. From the Financial Times, quoting President Rodríguez’s televised address: “The deal included the development of eight greenfield blocks in Venezuela’s Orinoco Oil Belt.” It also includes nine brownfields.

• The brownfields probably produce about 200,000 bpd at present, if this estimate of Blue Energy Partners current output is correct and if Blue Energy Partners currently controls the brownfields. (The New York Times repeated the estimate.)

• Also from her televised address: the “minimum” royalty rate will be 16% of gross revenues, in addition to an income tax of 34%. The word “minimum” implies that the royalties will be on a sliding scale, but she did not provide details. Under current law, the government can raise royalties as high as 20% for greenfield ventures. (The link goes to Cleary-Gottlieb, one of the best law firms in the world for these issues.)

• According to the President of Venezuela, the amount of new production should reach 1.5 million barrels per day.

• The U.S. government (USG) will get a 35% stake in a company called Blue Energy Partners that will manage the fields. According to the Wall Street Journal, the U.S. won’t pay for that stake. Presumably we get a 35% share of the after-tax profits.

• The USG also gets the right to purchase 20% of production at cost.

• The USG provides a (thus vague) investor guarantee.

Let’s put it all together. Does this deal make sense, and if so, for whom? I expected this to take an hour or two. Six hours later, I’m paywalling the analysis; the data are available in tabular form below.

We’ll assume that the brownfields are currently producing at one-third of their potential, in line with Venezuela’s overall output decline under Socialist Party rule. They can probably be ramped up to full production within three years. The greenfield projects will take much longer. I assume seven years until first production and then an additional three years to get up to full nameplate output. I’ll assume operating expenses around $17 per barrel.

Here are my capex assumptions (from Rystad data):

1. Annual cost of greenfield expansion = $75 billion per million bpd capacity;

2. Annual cost of rehabilitation expansion = $47 billion per million bpd capacity;

3. Annual maintenance capex = $3.2 billion per million bpd production.

Here is the data:

At a 12% hurdle rate, the project barely makes sense. It requires $43 billion in external capital (the rest is financed out of earnings). Its NPV is negative on a 25-year time horizon but (barely) positive on an infinite one and reaches payback in 2041. So it’s marginally-investable at those numbers. At a 15% hurdle rate it’s still not crazy but becomes harder to justify.

The 25-year project IRR is 9.6%. In other words, the project works if investors are willing to accept a hurdle rate of roughly 10%. That is not unreasonable if we take the U.S. government “guarantee” at face value. The Office of Strategic Capital (OSC) within the Department of War has the statutory authority to provide loans and loan guarantees, and some offshore upstream projects in U.S. waters have been valued using a 10% rate.

Investors might take this deal, but it’s not a no-brainer.

The Bolivarian Republic, however, comes out ahead. When the project makes money, it gets a 29% cut of the revenues and — on the definitions used above — a steady-state 53% share of project cash flow.1 That’s not bad at all and a little bit above the 50-50 split negotiated in the iconic 1948 agreement.

But we have a huge “but.” Which is simply that the project doesn’t make sense if the USG is going to take 35% of the profits as its equity share without putting up any capital. Even at a 9.6% hurdle rate, the project won’t go into the black until 2044 and it is NPV-negative even for an infinitely-lived investor.

In other words, something is seriously off with that 35% share being taken by the U.S. government. It simply doesn’t make sense for anyone to invest if Washington is going to take 35% without putting up any capital.

This is speculation, but there are a few ways this could be squared with investor interest. (So far, note, we don’t know how much of that there is.) Perhaps the 35% stake isn’t really a claim on ordinary project profits as reported. The government guarantee might be much more valuable than we assume. Conversely, the USG might be providing direct low-cost financing via the OSC. Maybe everyone expects real oil prices to be well above $65. More of the production growth might come from the brownfields, or maybe the brownfields are currently producing more than 200,000 bpd. Finally, the whole thing might simply be political theater that will be revised before anyone writes a check. We don’t know which. But right now, with the information we have, I would not take the reported 35% stake at face value.

The statistics back up my impression. Overall freight transport is up about 20%, but when you look at traffic headed to Texas, which would capture a lot of the traffic where I’m driving, it’s up more like 70%:

In other words, despite the Trump administration’s … uh … unpredictable trade policy, trade flows haven’t slowed.

What drives me crazy, however, is that the Trump administration’s willingness to think outside the box — hell, its willingness to cut the box into cardboard shreds and throw them into the trash — has created an opportunity to give the United States all the control it could want over North American trade, only the President appears singularly unable to grab it. Instead we’re getting a random mess of threats and demands, none of which makes sense even in the most crassly political ways.

What America needs

Here I’m not going to talk about what the Trump administration wants. I’m going to talk about what America needs. And what America needs is control over our partners’ trade policies.

The reason is simple: without that, the U.S. cannot reduce its dependence on China. I’m starting here from the assumption that Chinese trade policy and American dependence on Chinese supply chains are inflicting economic and strategic damage on the people of the United States. If you disagree with that premise, then the following argument will be a lot weaker — although the proposal does stand on other grounds.

We need to be able to insure that Chinese goods cannot enter the American market via Canada or (more likely) Mexico. That can happen via outright cheating: as in, customs authorities mislabel the import or allow it to be relabeled as domestic. So, poof, a Chinese export gets relabeled as Vietnamese and enters Mexico duty-free, or just gets relabeled as Mexican. Diego Marroquín lays out the issues quite eloquently.1 But it can also happen via transformation, where a Chinese import comes into Mexico and a Mexican firm transforms it just enough to qualify as a Mexican export. “Just enough” has rules, of course, but those rules can be gamed.

There are complicated ways to handle this problem. Our men in Washington, Diego Marroquín and Ryan Berg, lay them out here and here. But there’s a simpler one.2 A customs union would bring all three countries under a common external tariff and common trade policy. Once something was allowed in, it could freely circulate subject to varying health and safety regulations or product standards — a customs union is not a common market. So there would still be customs posts on the various borders. But any foreign goods would have already been checked under a common set of rules at the external border, so additional checks at the internal borders would just be icing on a cake.

What Canada offered

Our “negotiations” with Canada haven’t made much sense. The United Auto Workers isn’t much of a bastion of ideological free traders, yet it opposes tariffs on Canada for the obvious reason that Canadian autoworkers are unionized and earn high wages. The United Steelworkers and International Association of Machinists and Aerospace Workers feel similarly. In other words, there really wasn’t much of a dispute with Canada until the Trump administration came along.

Until the talks collapsed because of our ever-shifting mess of demands, we were converging on a rather complex kludge. From Diego Marroquín at CSIS:

In general, it’s not clear what the Trump administration wants, let alone why it wants it. But it is pretty clear why Washington wants control over third-country trade policy and critical minerals.

And there is some reporting that indicates Canada was more willing to give that than the above chart implies. Prime Minister Carney offered a “Fortress North America” with common barriers to the outside and few restrictions within. In May, the Prime Minister explicitly mentioned autos, steel, aluminum, critical minerals, and energy.

This would be an amazing win for Washington.

The fact that the Trump administration is willing to upset the entire free-trade applecart makes it pretty clear that it could build the fortress on America’s terms if we took the Canadian offer at face value. We’d have to be a lot less obnoxious about it — which is okay with me, since it really should be “Lake New York” not “Lake America”; Lake Ontario is fine as a compromise. If we want to be pushy about names, we should just start referring to our northern neighbor as the Dominion of Canada, which would really be a win-win since “Dominion of Canada” is one of the coolest country names in the history of country names.

A North American customs union

Canada offered sectoral integration. But we’re America, dammit. We should settle only for a customs union.

That would put the United States in the trade driving seat. Consider the customs union between the European Union and the Turkish Republic.3 Under the rules, Istanbul has to align itself with European tariff rates, competition policy, intellectual property, and any agreed-upon technical standards. In other words, Brussels decides and Istanbul goes along for the ride.

An old-fashioned U.S. administration would be unable to get such a deal. There are two issues where we just have to strongarm Ottawa. (Mexico City provides a different problem.) Regular administrations have been unable to do that. But since this administration can credibly threaten to slice up the entire continental economy, it’s pretty easy to imagine the Canadians going along — not least because of the massive economic benefits, which we’ll get into below.

The soft wood problem

This issue has bedeviled American-Canadian relations since forever. Canadian provinces own most of the country’s forest land. They charge lumber companies a stumpage fee for the right to cut trees. The problem is that the provincial governments, unlike a private landowner, aren’t trying to maximize the return on their property. So they charge stumpage fees that are much lower than those charged by private landowners in the United States. The Canadian government argues that the provinces can charge whatever they want to charge, so the lower fee shouldn’t count as a subsidy. Washington disagrees.

The solution is just to strongarm the Canadians and insist that as part of the customs union, Canadian stumpage fees will need to track a market benchmark. Now, this is a provincial prerogative, and the feds couldn’t just order the provinces to go along. But it can force them to comply. In 2006, America and Canada came to a (not lasting) agreement on the softwood issue — Ottawa imposed export charges and restrictions on lumber, which they eased if the province complied with the international agreement.

To be fair to the poor Canadian lumberjacks, the numbers aren’t small from their point of view. British Columbia is where you’re gonna get the most opposition, and there the U.S. Department of Commerce estimates that stumpage fees would need to rise by an amount equal to somewhere between 3.1% and 5.9% of total sales. (Page 8.) That would imply a 24% to 46% rise in stumpage fees for B.C.4 Lumberjacks would no longer be okay, although they’d presumably still hang around in bars.

But given that the Canadian government thinks that a customs union with the USA would raise GDP by a more than 1%, they will be easy to buy off.

The dairy dispute

Dairy is usually a problem. In fact, when the U.S. government has had to tell state governments to cut it out with the trade restrictions, it generally involved dairy products. Trade with Canada has been no exception. But in 2017-18, when the first Trump administration renegotiated NAFTA, Canada capitulated to U.S. demands. With the Trump administration threatening to build a metaphorical wall along the 49th parallel, it’s hard to imagine that Ottawa wouldn’t fold again, elbows up or not.

Other Canadian content

The U.S. would probably have to give ground on the French language stuff, since that could actually split Canada, which no prime minister is going to risk. But that’s tiny. The digital services tax is one where I think Canada is completely in the right, both legally and politically, but whatever. It is what it is. Ottawa won’t go to the mattresses over it.

The U.S. will insist that “Buy America” stays in place. After all, U.S. law allows state governments to favor in-state suppliers unless Congress says otherwise (which it hasn’t) so Canada would just have to forget about imposing restrictions on federal procurement. If the United States doesn’t limit buy local provisions inside the federal union, then it will be a cold day in hell for Washington to agree to let a North American Customs Union limit them.

Finally, a customs union would be de facto game over for independent Canadian and Mexican trade policies. Under the Turkish-European customs union, the E.U. can sign whatever trade agreements that it wants. The resulting goods will then enter Europe tariff-free, and can be transported tariff-free from Europe to Turkey. The opposite doesn’t hold, however. A Turkish good could be sold to a European buyer, but they only way that European buyer could export it onwards tariff-free would be to forge a European certificate of origin. Since this blog prides itself on getting paperwork requirements right, this means the European would need to tear up the good’s ATR certificate and replace it with a EUR.1 certificate.

What that means for Canada and Mexico is that the United States could go ahead and sign FTAs with whomever, with only a requirement to invite the other two countries to participate, whereas Canada and Mexico would have to agree to “coordinate” their trade policies with the United States. They could sign whatever FTAs they want, but if the U.S. found so much as a molecule had been imported without paying the common external tariff it could exclude the whole good into which that molecule had been incorporated. And while the European Union trusts Turkey enough to have left a specific schedule of fines out of their customs union, it would be easy enough for a North American customs union to include a list of very serious penalties against the exporters’ government — in addition to the penalties on the exporter, who would have committed criminal fraud — were such fraud to be discovered by officials in the other two countries.

What’s in it for Canada

Oh my. It’s just pure awesome-sauce, even with all the limits and restrictions on sovereignty.

First, a massive chunk of paperwork burdens on Canadian exporters just goes away. Right now, most imports from Canada don’t bother to take advantage of the USMCA zero-tariffs because the paperwork burdens are too high. How high? Well, the Federal Reserve estimated that paperwork costs came to somewhere between 1.4% and 2.5% of the gross value of transborder shipments. That’s, uh, a lot. And if you don’t believe the Fed, well, the Canadian government confirms it. (Or just go talk to anyone with the bad luck to run an export business in any USMCA country.) A customs union isn’t a common market, so there will still be paperwork … but much much less than under a so-called free trade agreement.

Second, firms can now just buy the best product without worrying about complicated rules-of-origin. If an import faces a prohibitive tariff under the customs union, then you just don’t buy it. (I would hope most Chinese imports would eventually face this, including Chinese imports fraudulently routed through third countries.) If it doesn’t face a prohibitive tariff, then you buy it and you use it, no second thoughts. Emanuel Ornelas (São Paulo School of Economics) and John Turner (U. of Georgia) don’t quantify the benefits but they demonstrate the theory here.

Add it all up, and you’re talking benefits worth more than 1% of Canada’s GDP. But there’s another benefit: certainty. A customs union would be a law or treaty passed by Congress. Its enforcement and adjudication would be out of executive hands. No sudden exemptions or presidential whims. The common external tariff would be effectively under U.S. control, and Congress might even delegate some of that setting to the President, in order to retaliate against foreign dumping or negotiate new trade agreements. But none of it would apply to trade within the customs union.

What about Mexico?

All the same benefits apply to Mexico, only more so. Its GDP is estimated to rise almost 5%. But let’s not trust these big mushy models. We have direct evidence that the costs of NAFTA compliance paperwork ate up around 40% (!!!) of the preferential margins enjoyed by Mexican firms. On top of that, non-administrative costs gobbled up 3% of the exports’ gross value. If you want to drill down further, when the USMCA tightened up the rules of origin, the value of automotive exports that didn’t bother to comply with the new rules jumped, allowing researchers to back out costs of 1½–2½ percent of traded value. A USITC study used even more granular data to calculate that USMCA changes imposed costs around $200 per vehicle.

In other words, Mexico has even more to gain than Canada.

But the U.S. could also get a commensurately bigger benefit from Mexico out of a customs union. Namely, it could get direct American oversight of Mexican collections. The big benefit to the U.S. of a customs union is control over its partners’ trade policies, right? De jure control is great and all, but this is the nation of “obdezco, pero no cumplo” — I obey, but I do not comply. Mexican customs have faced some major problems with corruption that mean that Mexico City’s commitments might not be entirely enforceable where the rubber hits the road. For example, the ongoing “huachicol fiscal” scandals involve customs officials declaring that fuel imports from the United States were actually other kinds of petroleum product in exchange for bribes. And that scandal doesn’t involve just a few bad apples: it covers the customs posts in Tampico, Ensenada, Manzanillo, Lázaro Cárdenas, Guaymas, and Veracruz, including their heads.

Huachicol fiscal is only one out of many sad examples: systematic undervaluing of textile imports (sometimes for less than the value of the raw material!), letting in 600 tons of Asian imports in ostensibly empty containers, and large-scale exporting of protected animal species to foreign buyers.

You don’t want Beijing subverting the North American Customs Union (or Fortress North America or the Trump Trade Treaty Area or América Mexicana or whatever) by bribing Mexican officials. So what you do is tell Mexico that American “observers” will be running around their customs posts, while allowing Mexican officials to do the same thing north of the border. Mexico saves face, America gets to make sure that the customs laws are enforced, both countries benefit from lower corruption.5

We have seen the enemy, and it is US (of A)

Given that the benefits from these arrangements are so obvious, why hasn’t the Trump administration already tried to strongarm our partners to joining? Well, the real answer is probably that the President doesn’t want freer trade with anywhere unless it becomes part of the United States. But there are several concrete problems for this particular administration:

1. Congress. You’d need to get Congress involved in this agreement. That would give Canada and Mexico the certainty they need that the U.S. would stick to its side of the agreement. But the Trump administration has not proved the best at negotiating with Congress, even when an initiative should be able to get bipartisan support. (Some of this is due to Democratic resistance to anything with Trump’s imprimatur.)

2. Power. The President has made a lot out of his ability to use tariff rates as a weapon against foreign governments. A customs union would remove this tool from the White House. And for better or for worse, Washington has used this tool quite a bit over the past few years:

   1. 2019 against Mexico over migration: After threats of escalating tariffs, Mexico agreed to deploy the National Guard on its southern border to prevent northwards migration. The second Trump administration went back to this playbook in 2025, this time putatively over drug smuggling, and also applied it to Canada.

   2. 2025 against Mexico over water: Mexico has consistently delivered less water from the Rio Grande than required under a 1944 treaty. President Trump threatened to blow up trade, and Mexico acquiesced.

   3. 2025 against Canada over the digital services tax: President Trump broke off USMCA talks over the tax; the Canadian government caved and abolished it. (We’ll ignore here that I think the Canadian tax was a good idea; the fact is that the Trump administration used trade threats to get what it wanted.)

   4. 2026 against Canada: The Trump administration was cheesed off (sorry) about Canada’s agreements with Europe that putatively favored European cheese over America. It was also bothered by provincial bans on American alcohol and a 25% tariff on the value of American cars not produced in the region formerly known as NAFTA. So far, Canada hasn’t backed down on these.

3. Autarky. The Trump administration actively wants to protect American factories from Canadian and Mexican competition and views bilateral trade deficits with Canada and Mexico as a problem. This doesn’t make a whole lot of economic sense — most North American production facilities are complementary, Canada is a high-wage country, and NAFTA’s “sucking sound” sucked out production to Mexico a long time ago — but the administration acts like it believes it.

I sadly fear these factors mean that a customs union is off the table. More so when you count all the ships that the President’s rhetoric has burnt in Canada.

But the irony is that it’s President Trump’s willingness to throw the baby out with the bathwater that has made a customs union possible. His threats have created enough leverage to overcome otherwise strong Canadian and Mexican opposition, and the huge economic benefits — combined with the loss of future U.S. leverage — give both governments a good reason to say yes.

Maybe reason can still prevail. Don’t patch, tweak, and extend — a customs union would be an even greater flight of the American eagle than the annexation of Greenland, and we have a unique opportunity to make it happen.

Even if the US sells this oil for HALF of the market rate, that's still $8.7 TRILLION. In other words, in 12 hours, the US has gained control of oil reserves worth more than the entire GDP of ALL countries in the world, aside from the US and China. That's 4 TIMES larger than the GDP of Japan. Most people do not realize how much the world just changed.

Joel Shulman at Forbes calculated that Venezuela’s reserves are worth $18 trillion at $60 per barrel and $45 trillion at $150. Business Standard reported $18.4 trillion. The President of the United States interrupted a reporter who asked him about Venezuela’s “$17 billion worth of oil reserves,” to say, “You mean, trillion,” to general laughter.

And it’s all wrong. Completely wrong. Fake news. Venezuela’s subsoil resources aren’t worth a fraction of that amount. Hell, they’re not even worth 2 percent of $17 trillion. Say about $300 billion, tops. I’m here to bury all this talk of trillions and calculate the real value of the black gold under Venezuela’s soil.

Oily arithmetic

Let’s say I told you that I was gonna give you 300 one-ounce bars of gold. That’s worth more than one million dollars! But because I’m an asshole, I’m gonna insist that you pay me $10,000 right now up front for the combination to the safe. And because I’m an even bigger asshole, I put the safe in Brazzaville, Congo, so you’re gonna hafta fly there yourself to get them. And because I’m the world’s biggest asshole, I’m only gonna let you take out one bar every month. That would be worth a lot less to you than one million dollars right now in cold hard cash.

Same thing with Venezuela’s oil. You gotta invest in oilfields and transportation up front — that’s the $10,000 vig in the above example. Then you gotta spend money to pump it out — that’s your plane ticket to Brazzaville. And you can only get the stuff out so fast — that’s the one bar per month limit. Venezuela may be sitting on $17 trillion “worth” of oil, but nobody in their right mind will pay the country that much for it. Their actual worth is a function of how fast the oil can be pumped, how much it costs to get it out of the ground, how much it sells for, and the discount rate you apply to cash flows that won’t appear until far in the future.

In January, I used data from Rystad to explore the economics of Venezuelan oil. Rystad estimated that restoring output from roughly 1.1 million barrels per day (bpd) to 3 million by 2040 would require $183 billion of capital spending, including $53 billion to maintain existing production and $130 billion for expansion. So we’ll use those numbers to estimate the amount of capital spending needed to get production back up to 3 million bpd.

But why stop there? In 1998, PDVSA’s CEO announced plans to get production up to 6.4 million bpd by 2007. (Hugo Chávez assumed office the next year.) A few years later, in 2005, PDVSA announced new plans to increase its output to 5.8m bpd by 2012. Regarding the latter plan, the U.S. GAO wrote, “Some industry experts told us that the expansion plan is technically feasible and that Venezuela’s oil revenue in recent years has been sufficient to fund the plan. However, many oil industry officials and experts expressed doubt about the government’s ability to implement the expansion plan in the near term for several reasons.”

A competent oil company run by a reasonable government should be able to execute that expansion. So the scenario here assumes that production hits 3 million bpd by 2040 (in line with Rystad) and then 6.4m bpd by 2050. It also assumes a real oil price of $70 per barrel and a 12% discount rate.

These assumptions give you a net present value of $227.6 billion for the cash flows through 2050. Of course, projected cash flows after that date are still worth something today — even at 12%, people aren’t that shortsighted — and the current value of those future cash flows is $63.7 billion. Add them up, and you have a total value today of $291.3 billion for Venezuela’s oil production tomorrow.

How much is that per barrel? Well, it depends on how many barrels you think are under the ground. Venezuela says 303 billion barrels. The USGS estimates 513 billion barrels of “technically recoverable heavy oil,” but that’s not the same thing as “3P
reserves: i.e., the sum of proved (1P), probable (2P minus 1P), and possible (3P minus 2P) reserves. If we assume that the ratio between “technically recoverable” oil and 3P reserves is the same in Venezuela as it is in Canada, then the BRV has about 168 billion barrels under the soil. Francisco Monaldi is the expert, however, and he convincingly argues that PDVSA recovers only about 7-8% of the extra-heavy oil in the ground, not the 20% it claims in the official reserve calculations. He reckons that the correct number is about 110 billion.

I trust Francisco. Using his number implies that Venezuela’s oil resources are worth about $2.65 per barrel, or roughly $10,000 per man, woman, and child in the American Bolivarian Republic.

Canadian content

Alternatively, we can value Venezuelan resources by looking at what other buyers have actually paid for similar plays. I found (with some help from a talking computer, I’ll admit) six roughly comparable Canadian transactions from the early 2000s. These were all purchases of undeveloped or lightly developed heavy-oil resources where buyers expected to spend heavily to expand production, which makes them roughly comparable to Venezuela in 2026:

After converting the transaction prices to 2026 U.S. dollars, we get prices per barrel between 88¢ and $1.52. Now, those numbers take into account taxes and royalties paid to the Albertan and Canadian governments. Since we want to know the value of Venezuelan oil reserves to the Venezuelan people, we have to add back the government take. I assumed about 40% as a first approximation, which gives valuations between $1.46 and $2.54 per barrel.1

Our estimate of Venezuelan oil, $2.65 per barrel, is only a little above the Canadian numbers. That doesn’t mean that it’s correct — Venezuela might have more oil than Monaldi believes, or require a higher discount rate to account for risk — but it does give confidence that we’re in the ballpark.

Bottom line

Assuming $70 oil, a 12% real discount rate, and that the country can increase its output, Venezuela’s oil resources are worth about $290 billion. That puts it somewhere between McDonald’s and Jack-in-the-Box in terms of value. It’s maybe 20 days of federal tax revenue. It is about $10,000 per Venezuelan, which is not nothing from their perspective. But even if you take President Trump’s statements that we control the oil at face value, it’s really not a whole lot of money from the perspective of the United States.

Trillions my foot.

My first thought was that Sullivan was overreacting. You might not like that Congressional authority over warmaking has dissipated, but it happened a long long time ago, I can still remember when. The scale of the miscalculations may be new, but the fact of a president unilaterally taking the United States to war is not. Calm down, Mr. Sullivan!

Then I started to write this. And I changed my mind.

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Is Gulf War III a watershed?

To my surprise, I have to say yes. Let’s work backwards. We’re looking for a substantial war initiated by the president against a recognized foreign government, without an immediate provocation, Congressional authorization, or allied consultation.

The war with the Islamic State

The Obama administration (and later President Trump) conducted a fairly intensive air campaign against the Islamic State in Syria, Iraq, and Libya. Ground forces were also involved, particularly in aiding the Iraqi military. President Obama went to Congress in 2015 and asked for an authorization to use military force. When Congressional refused to act, the administration went ahead anyway, arguing that the 2001 authorization that allowed the U.S. to go after any entity or state involved in the World Trade Center and Pentagon attacks.

That said, there is clear and direct evidence that Thomas Jefferson himself would not have thought that the Obama administration needed Congress to go after the Islamic State. We’ll get into the evidence for that below in the section entitled “The small wars of Latin America,” but the basic rationale is that the Islamic State captured and killed four Americans in 2014-15 and openly targeted American interests.

Even if you disagree with the (different) logics of the Obama and Jefferson administrations, you can’t say that Congress and our allies weren’t consulted. There is little resemblance between the war with the Islamic State and Gulf War III.

Gulf War II

On October 16, 2002, Congress authorized the President to “use the U.S. armed forces” against Iraq if it didn’t comply with U.N. Security Council resolutions.

That’s pretty much the same as what Congress did on April 20, 1898, when it demanded that Spain withdraw its forces from Cuba and “directed and empowered [the President] to use the entire land and naval forces of the United States.” Two days later, 1898, President McKinley took his authorization and sent ships to blockade Cuba.

But then, two days later, on April 24, Congress declared:

That war be, and the same is hereby, declared to exist, and has existed since the twenty-first day of April, A.D. 1898, including said day, between the United States of America and the Kingdom of Spain.

That didn’t happen in Iraq. When hostilities began on March 20, 2003, Congress didn’t declare that war existed, even though our war aims were about as limitless as war aims could be. So why not?

I suspect that by 2003, after 60 years and several major conflicts without one, a formal declaration had become a weird, nebulous taboo.

That said, Congress was consulted in 2002, and members knew they were voting for a ground war and unconditional surrender. There’s just no resemblance to the current conflict.

The Afghanistan War

There has been so much commentary about the 2001 Authorization for Use of Military Force that I don’t have much to add. Suffice it to say that Congress was completely on board, and a formal declaration of war would have been meaningless since we did not recognize the Islamic Emirate as the legitimate government of Afghanistan. The Northern Alliance controlled the country’s U.N. seat and ran its embassy in D.C., even though we didn’t formally recognize it either.

Anyway, given that Congress was fully on-board and our allies completely consulted, it’s clear that the Afghan War doesn’t look anything like the air war on Iran.

The Kosovo War

On March 24, 1999, the United States began bombing Yugoslavia after the Rambouillet talks over Kosovo broke down.

But there were two differences between then and now. First, technically, President Clinton didn’t give the initial order to start the attack. Rather, it was a NATO operation, the entire alliance having agreed to fight. So it was that on March 22, 1999, the NATO Council gave Secretary-General Javier Solana authority to commence hostilities. The next day, Solana ordered General Wesley Clark to start bombing. (President Clinton gave a separate order on March 24, about 20 minutes before the first bombs hit their targets.) In other words, there was a great deal of allied consultation; if anything, the Europeans were the ones pushing for action.

And that’s the second difference: President Clinton did go to Congress! The day after Solana’s order and the day before the bombing started, the Senate voted 58-41 to authorize “military air operations and missile strikes in cooperation with our
NATO allies against the Federal Republic of Yugoslavia.” (Sponsored by one Senator Joe Biden.) The House couldn’t get its act together, however, and it failed to vote until April 28, at which point it deadlocked 213-213. The obvious reason why the draft resolution authorized airstrikes but not “war” was that the Senate clearly wanted to restrict the administration from using ground forces.

So while it is true that the Kosovo War happened without Congressional approval, it wasn’t because President Clinton just opened hostilities on a whim.

My old Congressman, Tom Campbell (R-California) decided to put a declaration of war on the floor. He opposed the war — he simultaneously introduced a resolution demanding a cessation of hostilities within 30 days under the War Powers Act.1 Representative Campbell introduced both into Congress on April 12. He capitalized on the fact that both Republicans and Democrats claimed that the war required Congressional approval. Campbell wanted to force Congress to choose.

The declaration of war lost 427 to 2. Clinton hadn’t asked for it, the allies did not want to declare war, and members feared it would authorize a ground invasion. But Campbell’s withdrawal resolution also bombed 290 to 139, and as previously mentioned the House then deadlocked 213-213 on approving the Senate authorization of airstrikes.

Kosovo is a pretty weak precedent for Gulf War III. Congress was deeply involved and only failed to produce an authorization because of its own internal mismanagement and half-hearted lobbying by the Clinton administration. In this case, however, it is easy to understand why Congress preferred to authorize airstrikes over a full declaration of war — no one wanted to give the President a blank check. You can imagine something similar happening at any point in American history.

Gulf War I

On January 12, 1991, Congress declared, somewhat bloodlessly:

The President is authorized, subject to subsection (b), to use United States Armed Forces pursuant to United Nations Security Council Resolution 678 (1990) in order to achieve implementation of Security Council Resolutions 660, 661, 662, 664, 665, 666, 667, 669, 670, 674, and 677.

Which gives the game away. Congressional authorization was constitutionally necessary, but U.N. authorization held the coalition together. A declaration of war risked making the conflict look too much like a unilateral U.S. action. I am not sure that the logic is correct, but the Bush administration clearly believed that it was. (And as you’ll see below, the belief echoes some of the nebulous rationals behind President Truman’s decision to eschew a declaration of war in 1950.)

The small wars of Latin America

In 1989, we invaded Panama. For the details, go here. (It’s a wild story!) The invasion happened while Congress was adjourned and it was long over by the time they came back into session. If that’s all you knew, you’d say that it looked a lot like President Trump’s actions against Iran.

Panama was the first time that we invaded with the open intention of deposing a sitting government. Grenada was different because the Governor-General invited us to intervene; other small wars involved invitations or governments that had already collapsed.

But Panama wasn’t a break with constitutional practice in the slightest. And I’m not invoking vague precedent — I’m invoking constitutional practice in the way that the framers of the Constitution considered it. You see, Manuel Noriega had been stupid enough to declare war on the United States, after his troops attacked American servicemen. Not even Thomas Jefferson would have argued that we needed a declaration of war under those circumstances.

Seriously, not even Thomas Jefferson. In 1801, Tripoli, one of the four North African “Barbary States,” declared war on the United States. When the cabinet debated the proper U.S. response, President Jefferson accepted Treasury Secretary Albert Gallatin’s argument that, in Jefferson’s notes, “the Exve cannot put us in a state of war. but if we be put into that state either by the decln of Congress or of the other nation, the command & direction of the public force then belongs to the Exve.” Jefferson explicitly rejected Levi Lincoln’s counterarguments.

In addition, Noriega was not Panama’s official head of state. After his regime stole the ‘89 election, Washington recognized Guillermo Endara as the rightful President, who was sworn in on a U.S. base.

So we needed no declaration for two old fashioned reasons: (1) Panama declared war on us; and (2) we weren’t at war with the “real” Panamanian government. (Nineteenth-century legal theory allowed war against an unrecognized entity without formal declarations.)

In that sense, none of the countless “small wars” of the 20th century were precedents, because we were there either because the local government agreed or because the country had already collapsed into chaos or wasn’t recognized as legitimate.2 Under those circumstances, declarations of war just don’t make sense. The recent even smaller war in Venezuela fits into one of those categories: neither the Trump nor Biden administrations recognized Nicolás Maduro as the legitimate president. (Admittedly, that makes it weird that we’ve recognized Delcy Rodríguez, but that doesn’t affect the legal dodge.)

Iran is different: it has neither declared war on us nor collapsed into civil war, and we recognize the Islamic Republic.

The 1986 raid on Libya

OK, this one looks a bit like Gulf War III! Other than all the differences. It followed a specific provocation: Libyan agents in East Germany organized the La Belle nightclub bombing aimed at American servicemen. President Reagan then consulted our NATO allies. They mostly said “no,” but he did consult them.

And to quote Joseph Stalin, quantity has a quality all its own. In this case, the quantity was very very small. The scale of the raid on Libya just doesn’t compare to the air and sea war with Iran.3

The 1958 deployment to Lebanon

I’m not sure that this one belongs in here, since we were there at the behest of the Lebanese government and the 14,179 soldiers and Marines we landed never engaged in hostile operations. (Even if they had, against whom would Congress have declared war?) Still, it’s worth noting that Congress had already given its blessing to what became Operation Blue Bat in 1957:

The United States regards as vital to the national interest and world peace the preservation of the independence and integrity of the nations of the Middle East. To this end, if the President determines the necessity thereof, the United States is prepared to use armed forces to assist any such nation or group of such nations requesting assistance against armed aggression from any country controlled by international communism.

In other words, Congress had already been apprised of the situation in the Middle East and asked to pre-approve military deployments. This doesn’t look at all like Gulf War III.

Oh, it might be worth noting that Congress never repealed Public Law 85-7, although I guess that a lawyer might argue that the reference to “international communism” has rendered it moot.4 Then again, the People’s Republic of China is still formally a Communist state, so it should tread lightly in the Middle East …

What about Vietnam?

Well, on August 7, 1964, Congress declared that because of the “deliberate and systematic campaign of aggression that the Communist regime in North Vietnam has been waging against its neighbors” it “approves and supports the determination of the President, as Commander in Chief, to take all necessary measures to repel any armed attack against the forces of the United States and to prevent further aggression.”

The immediate pretext may have been pretty flimsy, but the resulting Congressional resolution was not. The resolution was clear that it was about North Vietnam’s actions in the South and not just the putative attack on U.S. vessels. In other words, the Vietnam War was constitutional.

The more important reason to avoid declaring war on North Vietnam, however, was that we didn’t want to provoke the Chinese into thinking that we were contemplating an invasion of the North. Attorney General Katzenbach laid out the logic in 1965:

I believe it is a fair, although not uncontroversial, summary of nearly two centuries of history to say that the power to “declare war” is the power to confer substantially unlimited authority to use the armed forces to conquer and, if necessary, subdue a foreign nation.

I’m going to get back to that below, because as a matter of domestic history Katzenbach was completely out to lunch. Nobody at the time thought that the declarations in 1812, 1846, 1898, and 1917 committed the United States to conquering or forcing unconditional surrender on its enemy. We didn’t want to take London in 1812, we weren’t going to invade Iberia in 1898, and we happily accepted an armistice in 1918.

But everything indicates that the Johnson administration believed that the Soviets and Chinese shared Katzenbach’s view. In November 1965, a presidential memorandum explicitly stated that we should do nothing to “provoke” China. Later on, the U.S. reassured the Chinese via the Polish government that we had no intention of invading North Vietnam, overthrowing its government, attacking China, or seeking a wider war. A declaration of war on North Vietnam risked undercutting all of this in a way that the more limited Tonkin Gulf Resolution did not.

We’ve searched for a convincing precedent for the air campaign and blockade against Iran and haven’t found one. Either Congress gave approval, or there were genuine constitutional or diplomatic reasons to obviate a declaration a war. Kosovo is an exception only if you squint very hard and Congress was consulted. That leaves the Libyan raid as the only real exception, but it’s a pretty small one.

Still, if our brief historical review indicates that Congress mattered (at least until 2026), why did formal declarations disappear?

The break occurred in 1950, and it appears to have involved an astonishingly rapid post-1945 shift in the meaning of a declared war in the minds of American and British politicians.

The Korean War (1950-53)

Let’s get one thing clear: the Korean War was enormous. Only Vietnam comes close and everything else since then has been a sideshow. (Even Gulf I.)

1. Conscription. The United States drafted 1,529,539 young men between June 1950 and June 1953 and picked up another 1.3 million volunteers. That means that at least one out of every 4½ men born between July 1924 and December 1934 served during the war, not counting those who were serving when the war broke out or those who had already served during WW2. For what it’s worth, my father was in that age group:

   

2. Tax hikes. Strap yourself in and prepare to see a different (and in this respect incomparably better) country. The Revenue Act of 1950 raised the bottom income-tax rate from 16.6% to 20%, the top rate from 82.1% to 91%, and the top corporate rate from 38% to 45%; later legislation pushed the corporate rate to 52%.

3. Industrial mobilization. The Defense Production Act let Washington allocate raw materials and impose price controls and the National Production Authority directed resources across sectors. Pure central planning.

The Korean War involved mobilizing a total of 5.7 million servicemen during the conflict, of whom 1.8 million served in theater. Combined with the Cold War buildup, it required economic resources consisting of 16% of GDP, killed more than 33,000 Americans in battle, and lost 1,041 aircraft in combat. In terms of national effort, this is more akin to the First World War than anything since 1945.5

By that standard, the current war with Iran is a rounding error! And that applies to what Iran has experienced as well. The Korean War killed ten percent of the North’s population. A postwar CIA estimate reported that the fighting destroyed 90% of the DPRK’s coal production, 80% of its iron industries, all of its oil refining, and 60% of its light industry. Electric power output declined from 8.2 GWh in 1949 to 1.0 GWh in 1953.6 Iran has experienced nothing like what happened to North Korea.

The idea that the United States would have the political will to fight a conflict of Korea’s huge scale but somehow be afraid of formally declaring war would have made no sense to American politicians between 1789 and 1941. So if we want to understand how declarations disappeared, Korea is the place to look.

So why no declaration of war in 1950?

The last U.S. declaration of war had only been eight years earlier, so it wasn’t like it had become an unused muscle, the way it was by 2003.

Let’s knock out some hypotheses.

1. The Truman administration thought that a U.S. declaration of war would undercut the United Nations. Reasonable, but there is no documentary evidence that anyone in the administration thought a declaration would undercut the Security Council.

2. The U.S. didn’t recognize North Korea, so there was no state to declare war against. Officials raised that issue, but only well after the decision had been made not to ask for a declaration. In September 1950, Dean Rusk stated that the U.S. “had not recognized North Korea for any purpose,” but we’d been fighting for two months by then. British foreign secretary Anthony Eden told Parliament, “We are not engaged in a war with the Republic of North Korea because we do not admit that there is such a state,” but that was two years into the conflict.

3. Congress opposed the war. Absolutely not. On June 27, 1950, two days after the invasion, Truman called in a delegation of Congressional leaders. None of them opposed going to war. Senator Tom Connally even said: “If a burglar breaks into your house, you can shoot at him without going down to the police station and getting permission.” And Congress would go on to hike taxes, expand the draft, and pass the Defense Production Act. There was no doubt that a declaration would have passed.

4. Nobody in Congress wanted a declaration. No, Senator Robert Taft himself stated that one would be necessary. “Without protest, at least from this body, we would have finally terminated for all time the right of Congress to declare war, which is granted to Congress alone by the Constitution of the United States.” He went on to clarify that he supported going to war, he just didn’t support doing it without a Congressional declaration.

Taft’s objections produced an odd July 3 discussion in the White House. Senator Scott Lucas warned President Truman that going to Congress would be “practically asking for a declaration of war.” Truman replied that was the point. The idea was then dropped. The State Department then published a long and unconvincing memorandum arguing that no declaration from Congress was needed. (Page 173.)

In short, Senator Taft asked the obvious constitutional question, offered the administration an easy solution, and the surviving record doesn’t show Truman’s advisers giving any substantive reasons why that solution was unacceptable. It just didn’t happen.

Two hints suggest that World War II changed the meaning of a declaration of war. Before 1945, a declaration simply announced that a state of war existed; it carried no necessary implication about the aims or scope of the fighting.

A memo put out by the State Department two days after the invasion gave a declaration of war a very different meaning:

The consequences of the declaration of a state of war are clear from the terms of the resolution. With its approval by the President, we start down a road from which there is no turning back. We pledge all our resources, human and material, to winning the war. We will to fight until one of the parties capitulates or there is a negotiated peace.

Now, that argument is nonsensical. The idea that a declared war means fighting until a negotiated peace directly contradicts the statement that “there is no turning back.” The memo just assumes both that a declaration of war implies unlimited aims and that it would inevitably mean going to war with the Soviet Union.

But it does indicate a shift in the meaning of a formal declaration of war. The author isn’t making a legal argument; he is saying that declaring war is now seen to mean total war for ultimate victory, a la World War II. The historical fact that declarations of war had never before meant that in American history isn’t relevant to him; the emotional reaction in 1950 to such a declaration is.

There is other evidence that formal declaration of “war” had become taboo between 1943 and 1950. Dean Rusk recalled that officials eschewed a declaration in 1950 because they wanted to avoid “major mobilization of the manpower of the country” and “unconditional surrender as a war aim.” Neither statement makes sense given the resources committed to Korea or the history of earlier declared wars. But it does make sense if the meaning of the phrase had changed for Rusk to mean only a national effort on the scale of the Second World War and with the same unconditional aims.

American and British diplomats likewise called it “undesirable to label U.N. measures against aggression as ‘war,’” lest that “lower the U.N. to the level of the aggressor.”7 Historically that doesn’t make any sense either — the U.S. declared war on Japan in 1941 without anyone thinking that it “lowered the U.S. to the level of the aggressor.” But history wasn’t relevant. The valence of a declaration of war had changed.

It seems that in a time that was squeamish about very few things, the idea of a formal declaration of war had become taboo. Invoking it also invoked visions of the bombers flying and the atom bombs unleashed. And so we went to war with North Korea (and eventually its Chinese ally) with only implicit support from Congress — no declaration of war no matter how many young men were drafted or how high taxes rose. Thus endeth the formal declaration of war.

Still, the war in Korea doesn’t look like the war on Iran. North Korea started the war; Truman went to the United Nations; and the war was initially popular. Korea may have created the appearance of presidential precedent, but it was not remotely analogous to Trump’s unilateral and unpopular initiation of war with Iran.

Yes, Gulf War III is a watershed

If the current war’s only distinguishing characteristic were a lack of Congressional authorization, or the absence of a declaration of war, then there really might have been little special about it. But it turned out that there really isn’t anything like the current conflict: a presidentially-initiated attack carried out with no Congressional or allied discussion, no apparent constitutional basis, and no immediate provocation. In short, the attack violates the existing norms; not just the ones before 1945.

The counterfactual is sobering: even if Truman had obtained a declaration of war in 1950, later wars in Vietnam, the D.R., Panama, Yugoslavia, and Afghanistan would still have proceeded without full and formal declarations. The two wars against Iraq might have seen explicit declarations of war, but in our world Congress authorized the use of force. If those two precedents didn’t give President Trump pause, I don’t see why two declarations of war against Iraq would have.

In short, even had Korea and the earlier two Gulf wars been accompanied by declarations of war, there still would have been plenty of false precedent lying around for a commander-in-chief to pick and use to start a war. With or without a declaration, Congress’s only serious tools for stopping unilateral presidential action are to either cut off the funding or impeach the executive.

In other words, the declaration of war died a very strange death, but had it lived I doubt that it would have saved us from ourselves.

I know, that sounds like a bold claim. It just happens to be true, with (as usual) a few exceptions. Now, it’s a claim about functions, not form. And it says nothing about whether Europe has a national consciousness, enjoys formal sovereignty, or possesses democratic legitimacy. The claim rests only on the answer to three simple questions:

• Who can make binding general rules?

• Who can say what those rules mean and decide if they’ve been broken?

• Who commands the men with guns that carry out the rules?

In the classic framework, legislative authority means the power to create binding general rules. Judicial authority means the power to interpret those rules and decide whether private parties or public officials have broken them. And the executive power means the ability to enforce those rules, ultimately by resort to violence. European institutions have the first two authorities. Moreover, as I’m going to try to convince you, they have about as much of those two authorities as in any federal state. What they don’t have (with, to repeat, a few exceptions that we’ll get into) is anyone capable of directly carrying them out.

That will sound wrong to many of you, of course! When I ran my formulation through a computer, it told me that I was wrong because the treaties assign “executive” and “implementing” functions to E.U. institutions. But few of those “executive” institutions really carry out executive functions. It’s a bullshit use of the term, to be blunt.

In the United States, armed FDA agents can break down your warehouse door if you violate federal law. Federal uniformed officials perform customs checks and track down illegal entrants. The EPA investigates and fines; Washington doesn’t order Alabama agents to investigate and fine you. And, of course, there’s the military.

The European Union isn’t like that at all. What the E.U. calls “executive functions” aren’t really executive functions, because Brussels doesn’t directly enforce the law in any real sense.1 No European officials are standing around collecting customs duties, and if you have some illegally labeled sausages in a warehouse, it’s not armed agents from the European Food Safety Authority that show up.

This post has four parts. First, we document the missing executive machinery. Second, we show that the legislature and courts have about as much authority as they do in other federal states. Third, for completeness, we discuss the few areas where European officials can act directly on private entities. Finally, we address the constitutional objections: the E.U. can only exercise specific conferred powers, national courts hear most European cases, member states can unilaterally secede, parliament can’t initiate legislation, and treaty amendment is very hard — none of which really distinguish the Union from other federations.

Where’s the executive?

In the United States, some FDA agents carry firearms, arrest people, and execute search warrants. Federal customs officers inspect goods and detain people. Federal environmental officials investigate violations. The federal government collects its own taxes, runs its own prisons, prosecutes criminals directly, and commands armed forces. Even the postal service has an armed branch. The states also do (most) of these things, but Washington has its own large coercive machine.

Other federations organize the details differently but all of them have the machinery to directly coerce their residents. Canadian provinces have rather more power than American states, but the country still has a federal tax agency, border service, police force, prison system, and military.2 German states enforce much of federal law on behalf of Berlin, but the country still has a federal custom service and federal police force.

Not so the European Union. Article 291 of the Treaty on the Functioning of the European Union begins thus: “Member States shall adopt all measures of national law necessary to implement legally binding Union acts.” In other words, the E.U. writes “union acts” but doesn’t carry them out. Rather, Brussels instructs national governments to write European law into their own legal codes and enforce it using their own bureaucracy. The next paragraph lets the Commission adopt “implementing acts” when uniform conditions are needed, but that only lets Brussels control the exact wording of the national laws that it directs its member states to write. It usually does not give Brussels a corps of officials that can apply it directly to you.

And so, E.U. customs legislation is implemented by national customs administrations. The Union sets the rates and gets the revenues, but national agents collect the duties and remit them to Brussels. Other European revenue is based on contributions levied by the Union or formulas based on national tax collections, but it is once again national governments that collect the revenues and pass it upwards. Similarly, E.U. countries enforce the rules that Brussels sets over food and medicine. In fact, the European Medicines Agency has a whole page detailing “What we don’t do.” Brussels sets environmental rules but national governments implement them.3

When national governments fail to enforce the rules, the Commission normally proceeds by suing the government at the European Court. It does not send a European inspector around to fine the factory.

But you can see the legislature from your porch

Don’t confuse the lack of a central executive with a lack of central lawmaking! The E.U. can make rules that bind governments and private parties and it can do so over the objections of some of its subordinate governments. Under the “ordinary legislative procedure,” the Commission proposes legislation and the European Parliament and Council jointly adopt it. Article 294 sets out the process of readings, amendments, reconciliation, and final passage. The Parliament usually operates on a majority of all members (not just a majority of all members present), whereas the Council works on qualified-majority voting for most things. In other words, a government can say no and still have the European rule legally applied to them and their citizens.

European legislation comes in two flavors. Under Article 288, regulations are directly binding in their entirety and directly applicable in every member state. Directives, on the other hand, order national governments to achieve a certain result, leaving the methods up to them. The distinction matters to lawyers but not to the normal people bound by them — Europe makes the rules.

A skeptical reader will shout here: “But the Commission proposes the rules! Parliament can’t initiate legislation! How can you compare the E.U. to a national government when Parliament can’t suggest any new rules!”

To which I say, “Government ain’t Real Time” or “You have no idea what you’re talking about.” Or, if I’m feeling charitable, “Don’t be such a damn lawyer.” True, Parliament cannot normally introduce a bill in the same manner as the U.S. House of Representatives. But the Commission is an E.U. institution! The distinction between the Parliament and the Commission matters a lot to the Union’s democratic character, but it matters not a whit to its legislative power. And the Council, made of ministers from the respective elected state governments, can order the Commission to propose a law or explain why it won’t. A weird tripartite legislature with a convoluted process is still a legislature and no single national government can fully control its agenda.

Another argument is that the European legislature can’t impose taxes. Again, “You have no idea what you’re talking about.” Article 311 explicitly allows the Council to impose taxes! Yes, it’s hard — you need a unanimous vote and approval by the Parliament – but it could be done. What the E.U. can’t do is assess, audit, collect, seize, and prosecute tax evasion. Why can’t it? Not because its constitutional documents won’t let it. It can’t because it has no executive. The Commission can do all sorts of things, but sending an armed agent around to arrest you if you don’t pay your taxes isn’t one of them.

In other words, the European legislature is powerful and interesting! Go read Ruben Cober’s Essential Europe or Politico.eu if you don’t believe me. It just can’t send around men with guns to enforce its laws — which doesn’t make the laws meaningless, just enforced by national officials ultimately paid by and beholden to national governments rather than employees of the European Union.

The courts count

The European Court of Justice is essentially a federal supreme court.4 In Van Gend en Loos v. Administratie der Belastingen it held that European law could create rights that individuals could invoke in national courts. In Costa v. ENEL — Europe’s Marbury v. Madison — it held that national law could not override European law. Under Article 267, national courts can refer questions of E.U. law to the European Court. And Articles 258 through 260 give the Commission the power to ask the Court to rule that a member state has failed to comply and impose financial penalties.

Now, it’s true that national judges hear most cases under European, but state and provincial courts in many federations apply federal laws all the time. Nothing in the definition of a federation requires the central government to provide every trial judge. It doesn’t even require a system of federal courts below the supreme judicial authority — heck, federations can have multiple supreme judicial authorities or even (like Australia before 1986) use the supreme judicial authority of another country. The important question is whether federal law governs and whether the supreme federal court(s) can settle their meanings. In the E.U., both things are true.

In short, it’s got a legislature and a judiciary with powers that rival any national federation.

The incorrect constitutional objections

Now, Article 5 limits the Union to competences granted by the treaties. But the United States Congress also has enumerated powers! And America isn’t alone: most federal constitutions divide subjects between levels of government. So that’s just normal federalism.

Now, you can make a case that foreign and security policy is a relevant subject-matter exception. But you’d be wrong. It is true that Article 24 says “the adoption of legislative acts shall be excluded” from foreign policy making, demands unanimity on the Council, and limits the jurisdiction of the Court of Justice. So what? The U.S. constitution gives the President almost unlimited authority over foreign policy. Congress can’t, say, order the President to annex Greenland or invade Cuba. Congress can impose economic sanctions (but only unilaterally if it can override a Presidential veto) but so can the E.U. legislature under Article 215. The E.U. constitution limits the ability of the legislature to direct foreign policy but who the hell cares because there’s no real European executive for the legislature to direct.5

The final objection is that the E.U. cannot be compared with a national federation because its powers come from treaties among states. Under Article 48, amending those treaties normally requires every member state to agree. And the (in)famous Article 50 lets a member state withdraw.

But this just makes the European Union look like Canada. Its amendment formula requires Parliament plus seven provinces containing at least half the national population, but some changes require unanimous provincial consent. Others require Parliament and give every directly affected province a veto. A federation with subnational vetoes over amendments is still a federation.

And some federations have constitutional routes toward secession! Canada’s Supreme Court held that a province cannot leave unilaterally under existing law. It also held that a clear majority on a clear question would create a duty to negotiate separation. A legal exit does not by itself destroy a federation. Ethiopia goes further, at least on paper. Article 39 of its constitution gives every nation, nationality, and people an unconditional right to secession. The Federal Democratic Republic of Ethiopia is still a federation, but not because the federal government is in practice likely to turn its guns on any state that tries to exercise Article 39.

Federations have different origins. Some were created by a single constituent assembly. Others emerged from agreements among pre-existing states or colonies. What matters for the present claim is what the institutions can do after those powers have been conferred. E.U. institutions can make binding law without unanimity and provide a central court that can interpret that law. But the governments of European states execute most of it.

But let’s get into the exceptions, because the Union dances up to a real executive in a couple of different places.

The executive exceptions

The E.U. does have a few direct executive powers, mostly put into the hands of the Commission, although they usually stop at the point where physical coercion begins. But they’re there, if only partial, and we ought to credit them.

Competition

Competition policy is the clearest case. Under Regulation 1/2003, Commission officials may enter business premises, inspect and copy records, seal rooms or files, and question employees. The Commission can order an inspection, fine companies for obstruction, and impose antitrust fines reaching 10 percent of worldwide turnover.

Now, Commission agents can’t break down the door by themselves. If a company resists, national authorities provide the coercion under national law. Nor does the Commission arrest executives or prosecute them for crimes the way the U.S. Department of Justice (DOJ) can. Still, Commission employees really do barge into private premises unannounced and conduct investigations. So let’s not be too pedantic: this is direct (if weak) executive authority over firms.

Digital platforms

The Digital Services Act gives the Commission powers over very large online platforms and search engines. Under Article 69, its officials may inspect premises, examine records and algorithms, seal premises, and question personnel. National authorities assist when coercion is required. The Commission can also impose fines of up to 6 percent of worldwide annual turnover. The Commission fined the company formerly known as Twitter €120 million in December 2025, Temu €200 million in May 2026, and AliExpress €550 million in July 2026.

The Digital Markets Act creates another enclave of European executive power. The Commission can demand information, inspect premises, issue binding orders, and fine designated gatekeepers up to 10 percent of worldwide turnover, or 20 percent for repeated violations. It fined Apple €500 million, Meta €200 million in April 2025, and Google €890 million in July 2026.

Banking

The European Central Bank directly supervises the largest banks in the euro area under the Single Supervisory Mechanism Regulation. It may demand information, conduct on-site inspections, issue supervisory decisions, and impose monetary penalties. It has used that power, including a €6.94 million penalty against Belfius in 2025. So there is that, although I can’t resist pointing out the SCOTUS has been entirely incoherent on the topic of whether the Federal Reserve is an executive agency or not. Some American justices would say that you can have a powerful central bank outside the real executive, even if that doesn’t quite make logical sense.

Prosecution

The European Public Prosecutor’s Office comes close to a true federal prosecutor. Regulation 2017/1939 authorizes it to investigate, prosecute, and bring to judgment crimes affecting the Union’s financial interests. At the end of 2025, it reported 3,602 active investigations.

I said comes close. But no cigar. The Public Prosecutor’s Office runs through national systems. “European Delegated Prosecutors” work in the member states and generally use national criminal procedure. They prosecute in national courts and searches, seizures, arrests, and detention depend on national police forces. The Department of Justice, this is not, but let’s be generous and say that it dances up to real executive power.

The European Anti-Fraud Office also comes close without getting the cigar. It can conduct administrative investigations involving E.U. institutions, E.U. money, and serious misconduct by E.U. staff. It can inspect economic operators under the rules governing E.U. funds and prepare recommendations. But it cannot prosecute or impose criminal penalties. It’s an investigative arm, but not a full enforcement service. Close, but not quite the cigar. Give it a cigarette.

Borders

Here you do have a real exception … mostly. Well, partially. The European Border and Coast Guard (aka, “Frontex,” a terrible name for a public agency) has an armed and uniformed standing corps that can perform identity checks, patrol borders, assist returns, and use force under specified conditions.

But it’s not the Border Patrol. Frontex teams operate with the agreement of the host state and follow the host state’s law and operational plan. In practice (so far, at least) they generally exercise coercive powers in the presence of national officers. Frontex is therefore a genuine E.U. executive body, but not quite an autonomous equivalent of U.S. Customs and Border Protection.

So the Union has only a weak, partial, functionally siloed executive. But still, it’s a tiny little bit of an executive. Not enough to get me to change the opening sentence of this post, but like I said, it’s there. And who knows? Maybe it will grow.

Plus, the new European field uniforms are pretty snazzy, I have to admit.

A confederation, if you can keep it

The European Union is not a new form of government that defeats existing political vocabulary. It has strong central legislative and judicial power within conferred fields. But it has practically no central capacity to police, prosecute, or compel. National governments remain the Union’s executive arm.

That makes the E.U. a boring old confederation, to use the term in its strict political science sense. That is to say, the European Union is a federation with an unusually weak central executive and unusually powerful constituent governments.6 You could legitimately compare it to the Holy Roman Empire or the German Confederation that succeeded it, although you shouldn’t push that too far.

Or, to repeat, it’s just a national government with a legislature and judiciary, but no serious executive.

I’d kind of hoped that nobody else has ever characterized the E.U. this way before, but predictably, I’m wrong. I’m just the most direct! Robert Schütze called the E.U. a “legislative giant on clay feet.” Tanja Börzel emphasized that policy execution rests mainly with the member states. Daniel Kelemen and Kathleen McNamara described a “legal colossus” with a small administrative apparatus and almost no coercive capacity. And the grand elder of European Union studies, Andrew Moravcsik, pointed out in 2005 that “The E.U., to a first approximation, does not tax, spend, implement or coerce.” [Italics mine.]

If you need an easy analytical framework to understand the European Union, don’t get bogged down in the international relations literature or legal niceties. Think of it as a national government with legislative and judicial branches, but almost no executive. What, if anything, that says about the Union’s future direction is left as an exercise for the reader, as is the equally interesting question of why pretty much nowhere else on Earth has been able to form a serious confederation since WW2.7

Unless I get some bright idea for an answer first.

I respectfully disagree. The problem with GDP per capita is particularly acute when you use it to compare countries in the past, something especially relevant when you’re talking about Argentina. When did the country fall behind? Its GDP per capita, for example, rivaled Canada until the Canadian economy shot ahead during the Second World War:

But waitasecond — this chart also shows Canada lagging Great Britain, and lagging a lot, for most of the period before the war. In 1871 (a census year in both countries) its GDP per capita was only 48% of the mother country; by 1911 (another census year), it was still only 85%.

How can that be? Were Britons actually as well off as Canadians? Was the attraction of transatlantic settlement a myth, or perhaps something undertaken only by the most desperate Englishmen? Or are the GDP numbers simply wrong?

So even though Argentina motivated the question, Canada gets the rest of the post.

Reconciling the numbers

Well, let’s try an easy adjustment first. Canada had a younger population than Britain and a correspondingly lower labor force participation rate (LFPR). Well, the U.K.’s LFPR can be calculated from Tables 55 and 57 in National Income Expenditure and Output of the United Kingdom, 1855-1965. Equivalent Canadian data for 1871 is available from Table L-III on page 93 of Censuses of Canada: 1608 to 1876.1

In 1871, only 29% of the total Canadian population was in the labor force, against 44% for the U.K. By 1911, the Canadian number had risen to 39%, whereas the British number remained the same. That closes some of the gap: Canadian output per worker in 1871 is 73% of the British level, rising to 92% by 1911.

Still, that doesn’t seem right. Every contemporary observer will tell you that living standards were higher in Canada than in Britain at this time. So what else can we do to close the gap between these numbers and the evidence of millions of lying eyes?

Well, Canada wasn’t one thing back then. (It still isn’t.) The Dominion was split into provinces. Ontario was the richest. If you take the 73% of Britain for all of Canada at face value and assume the same PPP adjustment for all four provinces, then Ontario’s output per worker (using Table 1 from Inwood and Irwin (2002) and dividing by the provincial labor force on page 93) would be about 83% of the British level, against 72% for Quebec, 53% for New Brunswick, and 49% for Nova Scotia.2

Now we’re getting somewhere! No contemporary observers thought that the Maritimes or rural Quebec (but not Montreal!) was anything but poor. Canadian prosperity at that time meant Ontario (or the very sparsely populated prairies).

Still, while 83% is a lot higher than 48%, it’s still a noticeable gap. Ontario should have appeared noticeably poorer compared to the motherland, but that was precisely nobody’s impression in the 1870s. So there’s gotta be something else.

And what do you know? There just might be three things that could get us the rest of the way without having to rejigger the numbers. In fact, we really only need one of them. If Ontarian workers received a greater share of output in Canada than in Britain — plausible in a labor-scarce economy — then they could be less productive and still receive higher wages.

For Ontarian real wages to equal Great Britain (sans Ireland), the share of income going to workers would need to be roughly one-fifth greater in Canada than in the U.K. Well, in 1873, the estimate is that wages came to 41% of total national income in Britain.3 That’s actually fairly low by international standards. For wages to be the same in Ontario as in Britain, Canada’s wage share would have to be only 50%, which is still relatively low. For wages to be 40% higher in Ontario (as implied by the data on urban wages gathered by Jeff Williamson), the wage share would have to be 70%.

A 70% wage share is too high to be reasonable. A 55% wage share, however, would make Ontario’s labor market look like the United States and generate real wages a full ten-percent higher than in Britain. A high (but not crazily so) wage share of 60% would generate real wages about 20% higher in Ontario than in Britain. (The arithmetic is Ontario’s estimated output per worker relative to Britain, multiplied by the ratio of the Canadian and British wage shares: 0.83 × (0.55 ÷ 0.41) = 1.11 and 0.83 × (0.60 ÷ 0.41) = 1.21.) That’s more than enough to jibe with contemporary observations.

I did mention two other things might help get us there, no? Remember that in Britain most of that capital income was going to the owners of the satanic mills or the landed gentry. In Canada, most of it would be going to prosperous yeoman family farms. And with the Dominion government’s wise 1872 decision to copy America’s Homestead Act, landowning got more democratic still. In other words, capital income was almost certainly distributed more evenly in Canada than in Great Britain.

In addition, it’s quite plausible that the wage distribution was more equal in Canada than in Britain, which means that the median Canadian worker could enjoy a higher standard of living relative to the median British laborer than the average GDP-per-capita would imply.

So what do we have? Williamson’s wages could be wrong; perhaps Canada’s real wages were only 20% higher rather than 40% higher. Or perhaps the Maddison GDP statistics might be wrong, and Canada’s GDP per capita was 20% higher than indicated. But even without assuming either of those two things, we’ve shown that Canada could have had a GDP per capita only half of Great Britain’s and still enjoy generally higher living standards.

Tying the score without moving the goalposts

Here’s how we reconciled higher Canadian living standards with a much lower GDP per capita, without taking issues with any of the published data, step by step:

1. Start with the Maddison numbers. They put Canadian GDP per capita at 48% of the British level in 1871 and 85% in 1911.

2. Adjust for Canada’s lower labor force participation rate. That raises implied Canadian output per worker to 73% of Britain in 1871 and 92% in 1911.

3. Break the Canadian average into provinces. In 1871, implied output per worker rises to about 83% of Britain in Ontario, while Quebec, New Brunswick, and Nova Scotia pull down the national average.

4. Allow Canadian workers to receive a larger share of output. With Britain’s wage share at 41%, an Ontario wage share of 55% to 60% would generate real wages about 10% to 20% above Britain in 1871 despite lower output per worker. We stop the quantitative analysis here.

5. Account for a broader distribution of capital income. In Ontario, much of that income went to family farmers rather than a small class of landlords and industrialists, so it was spread more equally than in Britain.

6. Account for a more egalitarian wage distribution.

In other words, the combination of a younger population, a richer Ontario, a larger labor share, and more broadly distributed capital income could leave Canadians with higher living standards even if national GDP per capita was only about half the British level.

Now, in fact one of my favorite economic historians, John Devereux (City University of New York), avers that there actually is measurement error in the Maddison estimates. The Maddison numbers try to account for price differences between countries, but they don’t use historical benchmarks to re-update the numbers. Ward and Devereux do, and they find that Canada’s price-adjusted GDP per capita was closer to 75% of the British level in the early 1870s, not 48%. Nonetheless, it is possible to reconcile the Maddison number with higher living standards — which shows you just how misleading GDP per capita can be as a measure of a country’s overall economic well-being even when the data are properly measured.

Moral: one number can’t do all the work

What was that saying? There are lies, damned lies, and statistics? Well, Canada’s relative standing in the late 19th century is a case of the latter. Without assuming any data errors at all, the relative GDP per capita data give an image of a 19th-century Canada as crushingly poor as Ireland or Italy, before suddenly taking off at the turn of the last century. But while it is certainly true both that Quebec was relatively poor (see Vincent Geloso) and that Canada hemorrhaged people to the United States, it is not true that the place was as desperately poor as Ireland or Italy.4

Canada was supposed to be the easy comparison! Instead, it showed why it’s harder than it looks to pinpoint exactly when (or even if) Argentina fell behind. GDP per capita mixes together labor-force participation, factor shares, regional differences, wage and capital income distributions, and price indices, any one of which can distort the picture as seen by actual people living the economic differences. In this case, Canada could quite easily have had a GDP per capita much lower than Britain, down around Italy or Ireland, while simultaneously offering immigrants from all three countries a far far better standard of living.

So let’s be clear: Canada was much richer than Italy in the 1870s! Oh, it looked bad compared to the United States, but come on, everybody did. Similarly, Canada’s GDP per capita was lower than Britain’s, but that did not mean what the headline figures would make you believe that they meant.

So before declaring that Argentina matched Canada and then suddenly fell behind during World War II, later posts will try to analyze Argentina the same way. It’ll be slow going — this is ongoing research. But if we really want to understand what the heck happened in the Southern Cone — did Argentina really fall behind Canada; if so, when; and either way why did it end up poorer — there’s no substitute for doing the hard work. Traipsing through downloadmydata.com (or asking an A.I.) just won’t do it.

Except, of course, we do not live in that parallel universe. During twenty-two days in July 1944, the delegates at Bretton Woods considered two substantially different operating systems for the world economy. The American vision of Harry Dexter White beat out John Maynard Keynes’s alternative. (There’s an irony in the fact that Harry Dexter White was passing information to Soviet agents.1) We got the IMF instead of the ICU … and things, well, things just haven’t been the same.

The Invisible Band of Economic Historians did yeoman work recently calling our attention to the ICU proposal, but it didn’t really explain how the damned thing would have worked or why it would have mattered. That’s not because they don’t understand it; they clearly do! But they assume that people will understand the implications of Keynes’s system. I’m old enough to know that’s not true, and so here I am, with the guide to the International Clearing Union for dummies.

The rest of this post will run as follows. First, we’ll briefly discuss what the ICU was intended to prevent. Then we’ll walk through what international transactions looked like in 1938 — or, indeed, look like today. Third, we’ll go into how they would have worked differently in a world with the ICU in place. After that, we’ll get into the political and macroeconomic implications of Keynes’s system, which leads cleanly into a discussion of why the United States opposed the thing. Finally, we’ll discuss whether it at all possibly could have happened — spoiler, yes — and whether it would have prevented modern imbalances or whether the United States would have eventually destroyed it.

The problem of unbalanced payments

People worry about China’s trade surplus and the way the country piles up foreign currency reserves rather than buying imports or investing more overseas. (Actually, people also worry about the latter, but Keynes’s system would not have directly addressed that.) The reasons they do so are too many to count. It represents beggar-thy-neighbor policies, where China’s government encourages firms to export but prevents them from using the resulting revenues to import. It is a side effect of China keeping its currency cheaper than it would be otherwise. It allows China to monopolize key inputs, allowing it to choke off American wartime production. It deindustrializes Western countries. It incentivizes people elsewhere to borrow too much. It even lowers Chinese living standards. It’s bad! All of it!

But lest you think these worries are only directed against the Great Chinese Bogeyman (tm), the same criticisms were levied against Germany during the euro crisis. Germany held down wages, suppressed domestic consumption, and relied on everyone else to buy what Germans produced. German banks then recycled the resulting surpluses into cheap loans to Irish and southern European banks, which those banks in turn lent out to people, companies, and governments.2 When the crisis came, Germany demanded that the deficit countries cut spending without expanding its own demand, forcing the entire burden of adjustment onto them and depressing the eurozone as a whole. Its surplus was bad for Ireland and Southern Europe, bad for the world economy, and bad for ordinary Germans who consumed less than they otherwise could have. It was bad! All of it!

John Maynard Keynes lived through similar problems during the Great Depression, although in that case the evidence is that France was the main culprit, hoarding its export revenues in the form of gold reserves. He had seen the chaos and suffering the Depression caused — not least World War 2 — and he wanted to prevent it from happening again. So he tried to design a system that would allow countries the flexibility to manage their domestic economies while disincentivizing the policies that had exacerbated the Great Depression — or that seven decades later would turn the Great Recession into an existential crisis for the European Union and which now cause the rest of the world to fear and resent China.

And so, in the tabula rasa year of 1944, with the world ready to accept fairly radical new forms of international governance, he proposed that the new United Nations include an organization that would have made difficult those kinds of imbalances.

But how would it have worked?

Well, before we look at things from 35,000 feet, let’s see how things look on the ground. Imagine that you’re an American firm who wants to make a payment to somebody in Canada back in 1938, when the two currencies had the same value and there were no capital controls limiting transactions between them. We’ll walk through how it worked back then, and then we’ll walk through the ways in which Keynes’s proposal would have changed how those transactions would have been made. Then we’ll zoom out and show how it would have supposedly prevented the kinds of imbalances that turned France, then Germany, and now China into economic pariahs … and consider just how radical the whole damn ICU proposal really was.

Oh, Canada, how do we go pay thee? ♪ ♫ 🎶

Let’s imagine that the year is 1938. You’re an American, and you want to pay $100 to a Canadian for maple syrup. What do you do?3

Well, one possibility is that you go mail the Canuck a $100 bill. Alternatively, given that the Canadian seller probably wants to get paid in Canadian dollars you go find somebody willing to sell you a piece of paper with Sir John Macdonald’s face on it in exchange for a piece of paper with Ben Franklin’s face on it, and then you mail the portrait of Sir John Macdonald to the Canadian.

But both of those are a PITA, not least because they involve mailing cash, or even worse, physically traveling to Canada. So you’d rather transfer the money from your bank to your Canadian partner’s bank, just as you’d write a check to somebody in the United States. Thing is, Canadian banks issue deposits denominated in Canadian dollars, not American ones. So since this whole thing is now happening with bank deposits rather than little pieces of paper, how does the accounting work?

Let’s start in a “normal” year, like 1938. (Or 2026.) For simplicity, we’ll assume that there are no fees and the exchange rate between American and Canadian dollars is 1:1. Here’s the American bank’s balance sheet:

And here’s the Canadian one:

Now the $100 gets transferred to the Canadian bank. The American bank debits the sender’s deposit account and credits the Canadian bank’s correspondent deposit account with it by USD 100.

Meanwhile, the Canadian bank gets $100 more in its deposit account at the U.S. bank, but it actually owes that deposit to the Canadian recipient of the payment. So it credits that deposit to the recipient. Its balance sheet changes as follows:

And there you have it! $100, transferred from the American sender to the Canadian recipient. Since that Canadian bank still has that $100 account in the U.S., the U.S. now owes Canada $100 more than it did before. Likewise, Canada as a whole is now owed $100 more by the United States.

But it doesn’t necessarily stop there. The Canadian bank would probably prefer to have its assets in Canadian dollars, not American ones. If it can turn that deposit in an American bank into a deposit at the Bank of Canada, then it will have a liquid asset that is the literal equivalent of cash (which is also issued by the Bank of Canada), only even easier to spend. So the Canadian commercial bank transfers its deposit at the American bank over to the Bank of Canada. (In reality there would be a few intermediate steps here, but we lose nothing from shorthanding it.)

And the Bank of Canada now has a claim on the U.S. bank, which it paid for by creating a deposit account for the Canadian commercial bank.

Finally, since foreign central banks don’t usually hold large deposits in foreign commercial banks (there are exceptions, of course), the Bank of Canada is likely to withdraw that deposit and hand it over to the Federal Reserve. The American bank loses the deposit and has to draw down its reserves at the Fed by an equal amount — remember, from a commercial bank’s point of view, a deposit at the central bank is the same as cash! So think of it as losing its vault cash because the Bank of Canada withdraws the funds:

Which the Bank of Canada then deposits in the U.S. Federal Reserve:

This is what is meant by foreign currency reserves: the Bank of Canada now has the functional equivalent of $100 in cash sitting in its vaults. Of course, the flip side of that is that the Federal Reserve now owes money to the Bank of Canada:

What does this have to do with John Maynard Keynes’s 1944 proposals for a world government International Clearing Union?

The bancor stops here

John Maynard Keynes was worried about the balance of payments. Countries running big current account deficits — i.e., countries whose residents were borrowing from abroad or selling off overseas assets in order to cover their bills — were vulnerable to sudden shifts in investor sentiment.

But Keynes realized that balance of payments needed to balance. Surplus countries — places that received more income from the rest of the world than they spent — had to put those surpluses somewhere, which meant that the rest of the world had to borrow from them.

Think of it this way. Let’s say you make up a country of one, the Republic of You. You decide that you want to spend less and save more. Well, what does that mean? Unless you want to wallpaper your house with little green pieces of paper, you’ve got to put that cash somewhere. Simplest thing is to deposit it in a bank, right? The bank owes you that deposit; you can take it back whenever you want. But that bank is outside the Republic of You. Poof, you’ve just run a current account surplus and the rest of world has just run a current account deficit with you.

Keynes worried about the risks of excessive foreign borrowing, of course. But he was equally worried by the idea that you might want to wallpaper your house with the cash. That would reduce the income of everyone who sells stuff to you without financing any productive investment. While the analogy isn’t perfect, the closest real world equivalent of “wallpapering your house with cash” is “piling up massive foreign exchange reserves at your central bank.”

So how do you disincentivize countries from borrowing too much or spending too little? These countries are made up of millions of separate economic actors. Their governments would have to do something to change their behavior. But that means (at least in non-communist countries) three things: (1) restrict them from freely moving their savings across borders; (2) make it more or less expensive for them to borrow liquid funds; or (3) make foreign imports more or less expersive.

How do you get governments to boss around their private sectors in order to insure that capital flows don’t get too large?

Keynes’ idea was as follows:

1. Make international transactions in a new currency, called “bancor,” issued by a U.N. agency called the International Clearing Union.4

2. Restrict central banks from having accounts with each other — uncleared balances are supposed to be at the ICU and be held in bancor. It’s a bank for central banks.

3. If a central bank owes too many bancor to the ICU, it has to pay interest. If its debt gets even bigger, then the ICU could step in and unilaterally devalue its currency, impose capital controls, or hand over some of the gold in its vaults.

4. But if a central bank’s bancor credit account at the ICU gets too large, then the ICU will also start charging it interest! In other words, deposits at the ICU would incur interest payments rather than generate interest revenues. That would provide a pretty big incentive for the governments of countries running big current account surpluses to intervene to stop their citizens from saving too much against the rest of the world.

So things are the same up until the point that the Bank of Canada wants to get rid of its account at the U.S. commercial bank. Instead of depositing it at the Federal Reserve, it converts it into bancor and deposits it at the ICU:

Just as above, the American bank had to withdraw its funds from the Federal Reserve, in order to pay the Bank of Canada, but now instead of holding on to the funds the Canadian central bank deposited them into the ICU. That means the Federal Reserve now owes bancor to the ICU rather than U.S. dollars to the Canadian central bank:

In other words, the Bank of Canada now has a deposit at the ICU and the Federal Reserve owes the ICU money. From the ICU’s point of view its balance sheet has changed like this:

The U.S. now owes it $100 more to the ICU than it did before. The rules Keynes wanted would require the Federal Reserve to pay interest — in gold or bancor — should its account at the ICU fall sufficiently into the red.

To repeat point (3) above: If the Federal Reserve’s overdraft account got too much into the red, then the ICU could unilaterally devalue the dollar in order to correct the imbalance. (A dollar devaluation would discourage Americans from buying maple syrup and encourage Canadians to buy newly cheaper beachfront property in Broward County, Florida.) It could also impose capital controls on the United States, or demand that the Federal Reserve hand over some of the gold in its vaults. Or all three.

But remember point (4): if the Canadian deposit account at the ICU gets too large, then the ICU will automatically start charging it interest! In other words, the country piling up foreign reserves would be sanctioned, as well as the country piling up foreign debt. Since the agreement requires the lion’s share of reserves to be held in bancor at the ICU, then this is pretty easy to track and enforce. The money would go into a “reserve fund”

Now, Keynes proposed a maximum rate of only 2 percent, but still, interest is interest. And, of course, an ICU-mandated reduction in the value of the U.S. dollar would be the same thing as an ICU-mandated increase in the value of the Canadian dollar — making maple syrup more expensive and ultimately driving down those Canadian trade surpluses.

Imagine there’s no countries, it isn’t ICU

If we had this system today, China would be paying the ICU somewhere between $30 billion and $50 billion per year in interest.5 Instead of income-producing claims on the rest of the world, China’s massive trade surpluses would produce only interest-bearing deposit accounts owed a Western international organization. That would give the Chinese government a lot of incentives to reduce its trade surpluses. Of course, it still might not respond to those incentives but that would mean enriching the West by a not insubstantial sum every year. Moreover, the ICU could decrease the value of the debtor countries’ currencies against the renminbi — which is the same thing as increasing the value of the renminbi.

And in this world Beijing would have had to have signed up to the ICU if it wanted to enjoy benefits similar to those it got from our world’s WTO. The ICU was envisioned as part of a more extensive system of international organizations that would include something called the International Trade Organization (ITO). In a world which included both the ICU and the ITO, China would have had to sign up to both. Everything would be different and likely better. Chinese living standards would be higher. Western deindustrialization would be lower. It would all be good! All of it!

Social science fiction

Except, well, it feels like the ICU wasn’t likely to happen. And if it had happened, it feels hard to imagine it lasting until today. Because there actually were countries, including one big one called the United States. First, it is difficult to imagine the circumstances under which the U.S. Congress could have been talked into ratifying something like the ICU. Second, if the system started to hurt the United States, then the United States would blow up the system. The ICU could compel most countries to abide by its rules. But what are you gonna do if the United States blows it all up? Stop trading with the United States?

But maybe that’s just a lack of imagination. Feelings only go so far! I don’t care about my own feelings, let alone yours.6 So we need to ask two questions. First, why did the U.S. oppose the ICU in 1944? Second, are there any obvious reasons to think that the system might have exploded later?

At Bretton Woods, the U.S. delegation, led by Harry Dexter White, resolutely opposed Keynes’s proposals and protected what he saw as American interests — “We have been perfectly adamant on that point. We have taken the position of absolutely no,” he said, with regards to Keynes’s plan.7

American objections fell into several categories:

1. The U.S. was sitting on a lot of gold and wanted it to keep its value. I have not been able to parse why they believed the ICU would cause gold to get cheaper.

2. Keynes’s plan didn’t give the U.S. sufficient control. His plan gave countries representation on the ICU board based on their share of world trade, defined as imports + exports. (That was also the formula he proposed to set ICU quotas.) His plan would give the U.S. only 14% of the voting rights, against 16% for the U.K. and 35% for the entire “British Empire,” which was still a thing in the eyes of contemporary observers. (Page 9.) The U.S. preferred plans that would give it somewhere between 20% and 50% of the representation and a charter that required a lot of votes to have a four-fifths majority.8

3. The ICU would automatically extend credit to deficit countries, at least until the hard limits kicked in once overdrafts exceeded one-quarter and one-half of the quota. The U.S. worried that this could cause inflation in the creditor countries. (Page 19.) To see why, go back up to the balance sheets. In the example, Canada is the creditor country, so look at the changes in the Bank of Canada balance sheet:

   That liability entry labeled “Canadian bank’s reserve account”? Well, as mentioned earlier, deposits at the Canadian central bank are the same as cash. Which means that the Bank of Canada just effectively printed up the equivalent of a 100-dollar bill. You can see why that could be inflationary.

4. The U.S. was a creditor country and would have to pay interest on its current account surpluses. That’s good economic policy, but you can see why the U.S. wouldn’t like it. It would start with a quota of about $4 billion using Keynes’s formula. Well, in 1946 we ran a current account surplus of $4.9 billion, which ballooned to $9.3 billion in 1947. This calculation isn’t quite right — the U.S. surplus didn’t all wind up sitting around in the vaults of foreign central banks, but roll with me here — the U.S. would be on the hook for 1% interest on credit balances above 25% of its quota ($1 billion) and 2% on balances above 50% ($2 billion) — meaning that we’d owe the ICU more or less $68 million in ‘46 and $250 million in ‘47.9 As an equivalent share of GDP, that’d be respectively $10 billion and $32 billion today — not a huge amount, but not nothing, and paid to an organization over which the British Empire had an effective veto.

   

5. Related to (3) — given the immense need for reconstruction in Europe and the expected giant spikes in American export surpluses as we gave away food and coal in exchange for promises of future repayment, the system would need some sort of transitional mechanism. This made it different from the IMF, which could just get up and running.

6. Many in the U.S. liked the idea of using the dollar as a reserve currency, although White wasn’t particularly explicit about why they wanted the dollar to be a reserve currency. White got that one in there by surreptitiously replacing the phrase “gold” with “gold and U.S. dollars” in the eventual agreement. When some internationalist Congressmen called him out on it, White told them:

   What is a “bancor” or “unitas”? There is no such currency. It is because we had to have a name that we used the alternative “U.S. dollar.” And I think that’s a pretty good name.

7. The ICU would have been an incredibly powerful instrument of economic coercion. Keynes was open about that:

   The Clearing Union might become the instrument and the support of international policies in addition to those which it is its primary purpose to promote. This deserves the greatest possible emphasis. The Union might become the pivot of the future economic government of the world.10

   He went on to bluntly state that it “would provide an excellent machinery for enforcing a financial blockade.” You can kinda see why this might make people a little nervous.

In real life, the Americans won all the battles of Bretton Woods so we got the IMF instead of the ICU. IMF intervention was discretionary, not automatic. It was capitalized at only two-thirds of the level Keynes thought adequate and unlike the ICU it would not automatically grow along with world trade.

Could it have been otherwise? Perhaps. A president really convinced of Keynes’s vision might have gone along. So might one who had less of a visceral dislike of the British Empire. Ironically, the ICU might have attracted less domestic opposition than the IMF, which was rightfully seen as competing with private credit. The ICU, on the other hand, was more of a central banker’s bank — if it competed with any private sector organizations, it was the British financial complex geared around trade finance. Similarly, the fact that the Keynes plan was based on clear rules rather than political discretion was attractive to American conservatives. As for using bancor rather than dollars as the reserve currency, well, Harry Dexter White may have wanted the dollar to become the reserve currency, but that wasn’t a universal view. American bankers (and Henry Ford) liked it, but the bankers’ domestic political influence was about as low as it was every going to be in 1944. Finagling an effective American veto on the board would have been a sine qua non, but that would not be an incredibly difficult or complex finagle.

What about Congress? Well, Congress generally follows public opinion.

And this was a time when popular support for a world government was at an all-time high. In 1947, a full 56% of Americans said “yes” to the question: “Do you think the United Nations organization should be strengthened to make it a world government with power to control the armed forces of all nations, including the United States?”

And this wasn’t just one flash-in-the-pan poll. Support for a world government ebbed slowly, as the true nature of the Soviet Union became harder to ignore:

In other words, give us a different American negotiator, a more engaged President, and a more diplomatic John Maynard Keynes and it could have happened. An unlikely alternate history, absolutely, but not an implausible one.

Could it have lasted?

We can’t know. Realistically, however, the United States is the only single country that could have blown up the system. And it isn’t obvious when or why an American government would have wanted to do that.

No Nixon Shock

The United States would likely have accumulated a substantial ICU credit during the immediate postwar dollar-shortage years. Its later 1950s settlement deficits would have drawn that credit down. But even the balance-of-payments deficits of the late 1960s and early 1970s would have been unlikely to push the U.S. overdraft above the 25% level that would have triggered interest payments, let alone the 50% level that would produce ICU intervention.11

The Nixon Administration blew up the Bretton Woods system in 1971, but under circumstances that would have had no parallel under the ICU. In our world, growing American deficits left the central banks of Germany, France, and Japan holding ever-larger dollar balances which the U.S. promised to exchange for gold on demand. But U.S. gold reserves were not increasing. So the promise lost credibility and European central banks began to cash in their dollars for gold. As the U.S. started to run out of gold, President Nixon suspended convertibility in August 1971; by 1973 fixed exchange rates had collapsed.

None of this could happen under the ICU, for the simple reason that the dollar isn’t the reserve currency. Central banks are holding bancor, not dollars. So there is no 1971 convertibility crisis. And the U.S. won’t come close to the boundaries that would trigger ICU intervention. In short, if the ICU is going to collapse, it won’t be at the same time or in the same way as in our history.

Easier Oil Adjustment

What about the 1973 oil shocks, assuming they happen on schedule in this alternate universe? Well, in the U.S. they’re not likely to cause the country to come close to the ICU limits. West Germany might owe interest on a large credit balance, but for fairly obvious reasons (don’t mention the war!) it’s one of the least likely countries to blow up the system. Japan might see trade deficits large enough to temporarily push it far enough into the red to pay interest, but its geopolitical dependence on the United States makes it an equally unlikely candidate to blow up an American-backed system. In the developed world, only Britain and maybe Italy might run into serious trouble, but even with interest charges access to ICU overdrafts would bring far more benefits than any costs. Remember, in our world Britain really did take out an IMF program that was far more costly, because the IMF could and did impose onerous conditions whereas ICU support was designed to be near-automatic.

Meanwhile, the Arab countries would accumulate massive ICU reserve accounts and pay interest on them. For example, the Saudi Arabian Monetary Authority (SAMA) accumulated $5-$10 billion per month at the height of the surge. Kuwait and the UAE saw similar explosions. While Kuwait channeled more funds more quickly into a sovereign wealth fund and the UAE spent a lot to import foreign capital for domestic development, both of which would reduce their reserve accumulation, the pile-up of funds would outrun that.12 Only Iran, which channeled oil money into a military spending spree, might run down its credit balance fast enough to face only a few years of interest payments.

A Better Debt Crisis

If we get something like the Latin American debt crises, then they’re likely to be much easier to contain with the ICU in place. The loans were mostly private-bank claims, not ICU overdrafts. The immediate danger in 1982 was to the solvency of major U.S. and European banks; Mexico’s default threatened institutions whose Latin American exposures were very large relative to their capital. Latin American countries would have automatic access to their quotas to cover part of the sudden stop, while the ICU could coordinate adjustment rather than leaving each debtor to negotiate separately with commercial banks and the IMF. More indirectly, the ICU could pressure creditor governments to support their banks and the debtor countries. (And, well, maybe this is when the Reserve Fund would come in handy.)

In the aftermath of the debt crisis (this may or may not have been causal) the U.S. began to run massive and perennial current account deficits, but they were financed with private capital inflows attracted by high interest rates and the perceived safety of U.S. assets and would not have caused overdrafts at the ICU. This was a different animal than the sort of central-bank driven accumulation of assets that we saw after the turn of the century.

How the ICU would have dealt with Argentina is a fun question that could take up thousands of words. But it couldn’t be worse for anybody than the IMF.

The Inflation Threat

This is a genuine structural problem. Suppose the United States, Britain, and Italy repeatedly have higher inflation than Germany, Switzerland, or Japan while exchange rates remain fixed. American, British, and Italian tradable goods become progressively less competitive, producing larger external deficits and pressure on their ICU positions. (Albeit not very seriously for the Americans, considering that the system would give them a huge ICU quota.) The low-inflation countries face the converse pressure: intervention to prevent appreciation expands their money supplies and imports inflation.

The ICU would nonetheless have some advantages over the actual Bretton Woods system in the face of this problem:

• No gold runs force sudden suspensions of convertibility;

• Exchange-rate misalignments appear transparently in ICU balances;

• Debtors receive temporary finance rather than immediately deflate;

• Creditor countries can appreciate without threatening the value of bancor;

• The ICU encourages both debtor and creditor adjustment rather than putting the entire burden on deficit countries.

Keynes explicitly contemplated exchange-rate changes and other adjustment measures at the balance thresholds.

But none of that solves the underlying politics of differential inflation. Governments generally disliked devaluation — although the Nixon administration was a big exception to this — exporters in surplus countries resisted appreciation, and central banks had different tolerances for inflation. Between 1970 and 1985, the ICU would probably have required a succession of realignments: dollar, sterling, lira, and maybe French-franc devaluations against the mark, Swiss franc, and yen.

That is potentially destabilizing, but not necessarily fatal. It more resembles the strains inside the European Monetary System than the collapse of Bretton Woods: recurrent crises and realignments, but continued operation. The system blows up only if major governments insist simultaneously on fixed nominal parities and divergent inflation rates. In that case, the ICU can finance the discrepancy temporarily but cannot make it disappear. Nonetheless, the system would probably survive repeated realignments. And if governments resisted them, then the ICU could move towards adjustable bands, crawling parities, or even floating exchange rates.

A Better World that Wasn’t

Well, we didn’t get the ICU. Instead we got the IMF. The IMF competed more directly with the private sector, making conservatives unhappy. It acted discretionally and imposed all sorts of weird rules, making conservatives and … uh … not-conservatives unhappy. It made American power more obvious, while in fact reducing American power, since an American-controlled ICU would have made a far more powerful coercive tool than the IMF ever did.13 And it did nothing to stop creditor countries from building up these massive reserve balances that suck demand out of the world economy and deindustrialize Western nations.

A world where the People’s Republic of China is cutting a $30 billion+ check to a Washington-based and American-controlled institution is one where our current geopolitical strains are going to be rather reduced.14 Even if Beijing won’t like it, in that world China will have no alternative but to reduce its balance-of-payments surplus. And if it does so to avoid the charge, then the system will be working exactly as intended.

The ICU system did have an inflationary bias for creditor countries, but it’s not like the IMF system did much to contain price pressures when they started to explode in the 1970s. Inflation started in the U.S. of A. and spread elsewhere. In other words, differential inflation would pose the most serious threat to the ICU system just as it did to Bretton Woods, but it would come from outside the system. The ICU and its system of managed exchange rates would, however, be much more likely to survive America’s inflationary party than the real Bretton Woods exchange rate system.

And I’ll admit it, I like fixed exchange rates if the costs are low enough. They just make business easier, you know. Uncertainty is bad, as any conservative will tell you!

Plus, to return to an earlier point, automatic systems generally beat discretionary ones. If you’re gonna have a big interventionist international economic organization, then you can at least try to give it clear automatic rules with enough built-in discretion to avoid idiotic outcomes. The ICU met that balance; the IMF does not.

The only “downside” is that the dollar wouldn’t be the major reserve currency. Instead we’d have the bancor. If you want evidence that the dollar is stronger because of its role as a reserve currency, then you need only point to the market panic that ensued in 2009 when Timothy Geithner briefly averred that he might maybe possibly be open to the idea that an international currency could replace the dollar as a reserve asset — the greenback instantaneously lost five cents against the euro. But would that be bad for America? A stronger dollar only smacks around our manufacturing and agricultural industries, while lower interest rates only encourage us to borrow too much. Doesn’t seem like that great a benefit.

But we didn’t get there, because an obnoxious Englishman couldn’t convince a Soviet agent dupe at an obscure hotel in New Hampshire exactly 82 years ago. It probably didn’t help that Keynes’s young wife was a famous dancer who liked to practice ballet at midnight and stayed in a room right over U.S. Treasury Secretary Hans Morgenthau. He didn’t appreciate the banging. (Go buy The Battle of Bretton Woods for even more salacious detail.)

Maybe the ICU would have become the start of an “economic government of the world,” but I doubt it. So on balance, well, it seems that the world would have been better off had Keynes, not White, won the Battle of Bretton Woods.

The Monstrous Republic That Never Was
by L.M. Maurer

Two years ago, Robert Sobel published For Want of A Nail. Intended as a summary history for professionals, For Want of A Nail became a minor bestseller in a nation looking to understand its peculiar place in the world and, perhaps more urgently, the continuing dislocations of its western neighbor.

Sobel was highly criticized for what many called an anti-Mexican bias. The book was, in fact, banned from sale in Mexico, which only contributed to its popularity in North America. Sobel’s strong denials of anti-Mexicanism did little to still the criticism. He did, however, admit one prejudice. In a footnote on page 185, easily missed but now endlessly quoted, he wrote: “My own feeling is that a rebel victory would have signaled the beginning of an age of anarchy, in which western civilization might have been crushed.” That quote in a buried footnote, more than any other part of For Want of A Nail, has followed him.

For All Time is Sobel’s answer to those critics, though not in the form anyone expected. It is neither a conventional historical analysis nor a polemical sequel to For Want of a Nail. Rather, it it what the author calls a “counterfactual history.” The phrase is ungainly but accurate. The book is a full-dress history of events that never happened, complete with false footnotes, invented historical personages, and imaginary countries.

The premise is that the rebels are victorious at the Battle of Saratoga. That victory ultimately leads to a British withdrawal from most of North America. A new republic, the “United States of America,” is created along the Atlantic seaboard. Britain retains control of the northern part of the continent, including Quebec and Manitoba, which eventually become the “Dominion of Canada.” The fictional “American” constitution, unimaginatively, resembles the real constitution of the United States of Mexico. George Washington becomes the new country’s first president.

Given Sobel’s apparent priors, one expects the new republic to fall at once into mob rule or anarchy. It does not. Rather, for its first sixty years, the imaginary republic thrives and expands. It even seizes the northern half of Mexico. The prose is dry, with the merest touch of pro-rebellion smuggery, and Sobel handles his invented documentary apparatus with impressive discipline.

The first major turn comes not in North America but in Europe. In Sobel’s construction, the “American” example causes the Paris uprising of 1789 to turn into a generalized social revolution. The monarchy collapses, after which an expansionist regime takes power and plunges Europe into two decades of war. Eventually a British-led coalition restores something resembling the old order.

This is where the Sobel’s thesis becomes clear. In victory, the North American Rebellion becomes more than an isolated colonial event. Rather, it provides an inspiration to revolutionaries everywhere. It also creates a new style of politics: abstract, universal, impatient, and incapable of knowing when to stop. Considering the history of Jefferson and Mexico following the Wilderness Walk, that argument is open to considerable objection, but For All Nails pursues it with vigor.

The chapters that follow are darker. The fictitious “USA,” like the real USM, finds it extraordinarily difficult to deal with the institution of slavery. Unlike the USM, the USA fails catastrophically at peaceful abolition. Rather, slavery provokes increasingly violent disputes between the states that permit it and those that do not. Ultimately, the Southern Confederation (and Jefferson, called “Texas”) attempt to secede. They are reconquered only after a long and bloody war of reconquest that makes the Rocky Mountain War seem like a mere skirmish. More than 300,000 soldiers die, the South is impoverished, and although slavery is abolished de jure in 1865, race relations are permanently poisoned.

After the war over slavery, For All Time appears, briefly, to relax. America industrializes and Europe enters a period of peace. Liberal institutions spread and trade expands. There are no Bloody Eighties. Sobel writes these pages with a restraint that is almost perversely calm in light of what comes next.

In 1914, Europe collapses into what Sobel calls the “First World War” — the name is as ominous as it sounds, and yes, something worse is coming. Nonetheless, the war is one of the book’s most vivid inventions. Its precocious outbreak means that Sobel’s combatants have neither effective airmobiles nor large motorized formations. The result is a grinding stalemate in which an Anglo-French coalition spends millions of lives against entrenched German lines in the west while the east consumes the Tsarist regime. The USA enters the war in 1917 despite few provocations and no institutional links to Britain. Sobel attributes this to a militaristic streak in his fictitious republic intended to remind the reader of Mexico, albeit at times taken almost to the point of caricature. The Anglo-Franco-American coalition wins, yet the victory is bitter. America retreats into disillusionment. Germany becomes an unstable republic.

The Russian chapters that follow are among the most grotesque. Instead of breaking apart, Russia falls under the control of a coterie of radical socialists calling themselves “Communists.” They proceed to create a dictatorship so absolute that Sobel has to invent a word to describe it: “totalitarian.” The “Communists” construct an omnipresent security apparatus and regularly slaughter their own citizens on a scale that far exceeds Karl Bruning’s worst wartime campaigns.

This is also where Sobel’s habit of escalation begins to strain belief. Each institutional failure is followed by a larger one and each ideology becomes more violent than its predecessor. By the latter third of the book the reader can’t help but start to feel the hand of the author at work.

In his 1929, a series of mistakes by the American central bank turn what
would otherwise be a severe recession into a decade-long economic
catastrophe. The parallel with the 1936-37 downturn is obvious, but Sobel’s invented governments are trapped by their “idealistic” ideological rigidity and prove unable to make the correct pragmatic decisions. Their mistakes compound rather than correct one another. In Germany, the prolonged depression causes a right-wing dictatorship to take power under a madman who preaches racial superiority and rejects the liberal values of the Enlightenment. Across Europe, parliamentary governments fall. In Asia, Japan begins an imperial expansion.

The run-up to the “Second World War” is the weakest section of the book. The USA is drawn in when Japan attacks its Hawaiian possession in 1941. Why Japan would launch a suicidal attack against a much stronger power is never satisfactorily explained. Sobel supplies fictional strategic memoranda, but the decision feels imposed by the author rather than compelled by the world he has built.

Germany’s “National Socialists” follow their ideology of racial hierarchy to a horrifying conclusion: the industrial slaughter of Europe’s Jews in mechanized death camps. Sobel’s description of this imagined nightmare is deliberately cold. His restraint makes the invention more disturbing, although some readers will find it excessive even by the standards of this book. (One has to wonder if his editors asked him to intensify the gruesome episode in order to boost sales.)

The USA and the British Empire align with the brutal Russian dictatorship against Germany and Japan. The war ends only after the USA develops atomic weapons with improbable speed almost two decades before they were actually tested. More improbably, it shares them with its Russian allies. No less than six atomic bombs are used against Germany and Japan.

The postwar chapters are the book’s bleakest. The USA turns inward for a second time. It leaves half the world under Communist domination, from Rome and Berlin in the west to Saigon in the east. The Americans use an atomic weapon to defeat a rebellion in the Philippines. The Russian empire in turn uses atomic weapons to maintain its control over eastern Europe. Western Europe, with no Mason Doctrine to aid recovery, stumbles into poverty, dictatorship, and renewed conflict.

At times the book’s inventions become lurid. France uses atomic weapons indiscriminately to retain its African empire, falls into civil war, and is briefly ruled by an African military officer who declares himself Emperor. Britain, having exhausted itself to defend the empire, faces Irish and Welsh terrorism at home. The USA, having abolished slavery in law but having allowed the southern states to recreate much of it in practice, faces an organized Negro insurgency. A Communist regime in Argentina draws America into another atomic war followed by a long and painful occupation. The rump Mexico falls into disorder and is also partially occupied by the Americans.

By 1971, when the book ends, Sobel’s imagined world is almost beyond repair. The USA is fighting guerrilla wars at home and abroad. The half of Europe not under Russian rule is at war for the third time in a century. Those who live under Russian domination endure a dictatorship so absolute that ordinary political language fails. Millions are dead from not just war and starvation, but industrial extermination, racial pogroms, and, in one of Sobel’s more grotesque conceits ...

From the Philadelphia Examiner (13 May 1974)

The Dream and the Nightmare: Robert Sobel’s Alternate America
by John Dickinson Pez

For anyone who makes history his profession, one of the constant sources of mental stimulation is the recurring question: what if? What if the Moors had beaten the Franks at Tours? What if the Spanish Armada had landed in England? What if Zangora had not killed Pedro Hermión? For every turning point in human history, there is the question of what the consequences would have been had the path not taken been, in fact, taken.

For both North Americans and Mexicans, probably the most popular What If of all is, what if the Continental Congress had won the War of the American Rebellion? Practically every history of that war raises the question. However, few histories do more than simply mention the possibility, and none has attempted more than a few brief generalizations regarding the consequences of an independent American republic. Until now.

This month sees the publication of Robert Sobel’s For All Time, a fully realized imaginary history of a United States of America that secures its independence. Not just an exercise in historical speculation, Sobel’s book takes the form of a scholarly history of the USA, written by a historian native to that country (in fact, written by an alternate version of Sobel himself). From the opening Preface (where the alternate Sobel thanks imaginary American historians, public officials and military officers for reviewing his manuscript) to the concluding bibliography (of imaginary historical monographs and papers that serve as the alternate Sobel’s source material) and index (listing the vast array of imaginary people, places and things mentioned in the text), the illusion is maintained that one is reading a history book from an alternate present.

Although Sobel is primarily a business historian, having authored The Epic Age of North American Industry and Men of Great Wealth: Operations of the Kramer-Benedict Combine, he is best known to the general public for For Want of a Nail, a dual history of the USM and CNA. A comparison between For Want of a Nail and For All Time is apt, for both works begin at the same historical point: the 1763 Treaty of Paris ending the Seven Years’ War between Great Britain and France. From the beginning of For All Time, Sobel is at pains to give his work a tone commensurate with its purported origins. His account of the origins of the American Rebellion contains neither the defensiveness typical of Mexican accounts, nor the more-in-sorrow-than-anger air of North American histories (including his own earlier effort). Instead, the attitude of the author of For All Time is triumphalist. The errors of judgment of the succeeding British ministries of the 1760s and 1770s are given a sinister cast, paralleling the conspiratorial bent of contemporary colonial accounts. The ultimate outbreak of rebellion is seen not only as inevitable, but also as an unmistakably positive development, as though the whole of prior colonial history had been nothing more than a prelude to revolution.

When Sobel launches For All Time into imaginary history, his point of departure is a well-chosen one: the Battle of Saratoga. History records that General Burgoyne’s victory was a narrow one that could easily have gone the other way given minor changes in the rebel strategy. Sobel provides the army of Horatio Gates and Benedict Arnold with those minor changes, and they triumph over Burgoyne. A British army has surrendered in the field, an almost unheard-of disaster. The centers of rebellion in New England and Virginia remain in contact, and General Howe’s capture of Philadelphia is robbed of its significance. George Washington recoups his reputation with a surprise attack on a British garrison in Trenton, New Jersey, and by the spring of 1778 Benjamin Franklin succeeds in persuading King Louis XVI to ally himself with the American rebels and declare war on Great Britain. The surrender of a second British army to the rebels in 1781 results in the fall of the North ministry, and by 1783 the British government has recognized the independence of the American republic.

It is at this point that Sobel suffers his first major loss of nerve. Rather than extrapolate a likely future for the newly-independent United States of America based on the trends current in the 1770s, and especially based on the government established by the Continental Congress in 1777 with the Articles of Confederation, Sobel begins to twist events to produce an outcome paralleling actual history. The revolutionary ardor of his American republic is quickly dissipated, and a reaction sets in which results in the adoption in 1787 of a new Constitution which has more in common with the historical Mexican Constitution than with the idealistic principles that produced the rebellion. Samuel Adams and Patrick Henry become marginal figures, Jefferson is eclipsed by Hamilton, and a strangely reactionary George Washington becomes the new nation’s leader.

The result is a peculiar amalgam of the historical USM and CNA. Under its Hamiltonian constitution, the USA lurches from reaction to radicalism and back again. An undeclared naval war with France is followed by an ill-timed declaration of war against Great Britain. The Hamiltonians establish a national bank, which is then allowed to die by a Jeffersonian regime, then resurrected by the Hamiltonians, then allowed to die again by the Jeffersonians.

This national “bipolar disorder” is reflected in the personal relationship between Jefferson and John Adams — friends at the Congress, rivals in Europe, bitter enemies as leaders of rival parties, then friends after retiring from public life. We are expected to believe that the egalitarian antimonarchist Adams becomes a tool of the mercantile elite who seeks to stifle free expression. We are also expected to believe that the firebrand revolutionary and polemicist Jefferson evolves into a dedicated pacifist who allows his nation’s defences to decay into uselessness, while simultaneously being a great statesman who negotiates the peaceful purchase of the Vandalias from Sobel’s Fanchon-analogue. Finally, history records that John Adams and Thomas Jefferson were hanged within hours of each other in December 1778. In For All Time they still die within hours of each other, but Sobel has it occur on the fiftieth anniversary of the Declaration of Independence. (In one of the numerous minor errors with which the book is littered, the Declaration of Independence is signed on the 4th rather than the 2nd of July 1776.)

In Europe, meanwhile, the success of the American rebellion inspires an uprising in France in 1789, which is all too obviously based on the historical French Revolution of 1880, ending with a more successful version of Henri Fanchon who manages to conquer most of Europe before finally being vanquished in 1815. Symptomatic of Sobel’s unwillingness to depart too radically from actual history is the appearance of historical figures such as Queen Victoria, Charles Darwin, Karl Marx and Thomas Edison, despite the decades of altered history that precede their births. Another instance of this failure of imagination is Sobel’s overwhelming use of our own world’s technical and social terminology: telegraph, telephone, phonograph, radio, dynamite, electronic, submarine, white- and blue-collar, GNP, guerrilla, scientist. Sobel’s examples of alternate vocabulary are few: automobile for locomobile, airplane for airmobile, tank for terramobile, television for vitavision.

Despite these deficiencies, however, For All Time has its charms. Particularly engaging is Sobel’s portrait of the American government in the first half of the 19th century, where notable North Americans such as Van Buren, Calhoun and Webster rub elbows with Mexican statesmen such as Andrew Jackson and John Quincy Adams. (Amusingly, Sobel depicts Adams as an enemy of Jackson, while Van Buren is Jackson’s handpicked successor as President of the USA.) Sobel’s admiration for Jackson shows clearly: not only does he defeat regular British troops in the 1815 Battle of New Orleans, he voluntarily lays down the office of President after only two terms.

As Sobel’s history moves into the industrial age, however, the author’s distaste for the Mexican elements of his imaginary USA becomes ever more prominent. Slavery persists into the 1860s, and its abolition combines the worst features of the Calles regime and the Rocky Mountain War, as secession by the slave-owners leads to catastrophic civil war, and the victory of the abolitionists is overturned by corrupt politicians who allow the freed slaves to be terrorized into a state of debt-peonage by their former owners. Subsequent attempts by Negroes to regain their freedom are invariably met with renewed oppression, leading to a re-creation of Mexico’s Rainbow War in the USA.

The manner in which Sobel deals with the abolition of slavery in For All Time brings up the related topic of woman suffrage. One of the most serious criticisms directed against For Want of a Nail was the total absence of any discussion of the suffragist movement in the CNA. The reason for Sobel’s reticence is clear enough — embarrassment over the role of his hero Ezra Gallivan in delaying the enactment of woman suffrage for twenty years. Rather than discuss what was probably Gallivan’s least attractive characteristic — his misogynistic feelings towards women — Sobel skips over the whole matter, relegating the enfranchisement of women to a single short sentence in a footnote on page 85.

In For All Time, Sobel makes up for his past reticence with a vengeance, and in a most peculiar way. In Sobel’s USA, the suffragist movement is combined with both abolitionism and the temperance movement. Consequently, when women in the USA do finally win the vote, their enfranchisement comes on the heels of an utterly bizarre constitutional amendment banning the sale of alcohol — a particularly egregious example of misplaced idealism in a book brimming with examples of misplaced idealism.

The twentieth century sees Europe torn apart in a series of bloody wars which give rise to monstrous ideologies -- although, as usual, the ideologies bear an all-too-close resemblance to those of our own world. The class-based theories of Marx are combined with the emotional fervor of Neiderhofferism and the stereotypical tyrannical brutality of Tsarist Russia to produce “Communism”. The racialist policies of modern-day Victoria are taken to an absurd extreme in Germany to produce “Nazism”. Fanchonism is recreated intact in Italy and given the slightly altered name of “Fascism”.

At this point, Sobel gives over all pretense of plausibility. It takes just twenty years for Germany (aided by the abysmally stupid policies of the British and French) to rise from the ashes of a terrible defeat to launch a war of conquest rivalling that of our own world’s Global War. Japan inexplicably veers away from democracy into a dark vortex of militarism, imperialism and cruelty that climaxes in an unprovoked, suicidal attack on the USA, a nation with twice its population and eight times its industrial capacity.

From there, the world of For All Time becomes an escalating nightmare. So frequently do governments slaughter millions of their own citizens that Sobel coins one of his rare neologisms to describe it: genocide. The discovery of atomic weapons in the 1940s results in their widespread use by various nations against armed opponents both foreign and domestic. The end of colonialism in Africa sees the continent dominated by the Union of South Africa, another Victoria analogue based, inexplicably, on our world’s Cape Kingdom. By the end of Sobel’s history in 1971, Europe is reduced to cannibalism, Asia is trapped under a brutal Communist dictatorship, and the USA is consumed by incessant racial strife.

Robert Sobel has gained a popular reputation as anti-Mexican, based largely on For Want of a Nail. In For All Time he makes it clear that that reputation is deserved. Sobel has taken the stereotypical Mexican traits of militarism, racialism, and irresponsible idealism, and made them the defining characteristics of an imaginary dystopia. His USA is meant to be an indictment of the Mexican national character, and of the revolutionary ideals that gave rise to it. In an age when national coexistence has become a matter of human survival rather than lofty idealism, For All Time represents a step in the wrong direction.

John Dickinson Pez is Professor of North American History at Webster University, Newark, Delaware.

From the New York Monthly Review of Books (May 1974), continued

The Monstrous Republic That Never Was, continued
by L.M. Maurer

... state-sponsored cannibalism.

This dark vision stems directly from Sobel’s view of the ideology behind the North American Rebellion. In his view, no ideals can be implemented by revolution without summoning forces beyond anyone’s control. If For All Time has a governing theme, it is an old one: “the road to Hell is paved with good intentions.”

The rebels in North America were, in his account, the most well intentioned of men. Formed by the Enlightenment, they believed in the perfectibility of the human condition. With the right institutions, designed by rational men according to scientific precepts, utopia could be obtained. Sobel quotes the formulation of the famous Mexican historian, Frank Dana: “They believed in free will, held that man could be the master of his fate, rule himself, and wash away the abuses of centuries in a generation.”

In the real world, the utopianism of the refugees who fled Britain’s victory collided with Mexico’s reality: an impoverished land, riven by race and religion. The difficulties of governing a country that was more geographic expression than nation forced the former rebels to abandon much of their abstract program. What emerged instead was a rough and ready pragmatism.

In Sobel’s fictional history, however, the utopians are triumphant and unrestrained by the realities of Hispanic Mexico. Sobel does not argue, absurdly, that Benjamin Franklin or Thomas Jefferson would have advocated the extermination of entire ethnic groups or social classes. He does, however, appear to believe that the radical utopianism of his “totalitarians” draws from the same philosophical well as the idealism of the North American rebels. When liberty fails to produce justice, the humanists inspired by Saratoga become more radical in their pursuit of perfection. “Washing away the abuses of centuries” merely requires ever harder scrubbing. Everything becomes justifiable, for how can utopia for all time to come be weighed against mere transient short-term costs?

The opposite nightmare then appears. Sobel’s “Nazis” are not treated as an accident or a German pathology. Rather, they are the inevitable counter-revolution against Enlightenment liberalism: racialist, anti-rational, and hierarchical. Thus Sobel links the rise of inhuman ideologies in the Old World to the triumph of their warm and humanistic, but ultimately failed, predecessor in the New.

Many critics have taken For All Time as an indictment of the Mexican national character. This reviewer disagrees. The book implicitly argues that the real United States of Mexico, unlike Sobel’s fictional United States of America, learned to put aside ideology and solve its problems pragmatically. Indeed, the final chapters read almost as an apologia for the Mercator dictatorship. When Mexico was consumed by racial strife and corrupted politics in the 1940s, it put ideology aside and did what was necessary to restore order. When similar strife reaches Sobel’s imaginary America, the nation refuses to compromise its principles, and the violence escalates without limit.

For All Time is, for all its faults and its highly unorthodox premise, a serious attempt to explore the philosophical roots of political ideology. It is also, in this reviewer’s opinion, a backhanded compliment to Mexico: a country that began with far fewer advantages than Sobel’s fictional America and has done rather more with them. Perhaps fiction can provide a mirror that ordinary history cannot. North Americans, looking into Sobel’s monstrous republic, may learn to see their western neighbor more clearly.

Leon Moisés Maurer is Reader in Modern History at King’s College, Burgoyne, Pennsylvania.

So when the New York Times gets something wrong and unfairly impugns the Supreme Court, I sit up and take notice.

This piece goes as follows. First, it points out where Kate Shaw in the Times was being disingenuous about the Court—her example does not show any “unshackling” of executive power at all. Second, it explains the recent SCOTUS decision establishing the “unitary executive.” It’s a revolution in 149 years of constitutional practice, but won’t be the end of the world, especially if Congress does its job. Finally, it points out that the decision exempting the Federal Reserve from the unitary executive makes zero logical sense and is really badly argued … but does make sense if you start from the principle that the Court is afraid of sowing chaos and really does have no faith that Congress will step up to the plate.

SCOTUS has been consistent until now

On January 26th, Kate Shaw wrote in an editorial titled “Why Is the Supreme Court Unshackling the Presidency?” that while SCOTUS used to check Trump 45 it has been “unshackling” Trump 47 and letting it do whatever it wants. Her main exhibit is the putative contrast between the Court’s 2020 decision to stop the first Trump administration from unilaterally terminating Deferred Action for Childhood Arrivals (DACA) and its 2026 decision to allow the second Trump administration to unilaterally withdraw permission to stay in the United States from Syrian refugees.

This is not fair! These are not like things! SCOTUS is being consistent! Don’t do stuff like this Professor Shaw! America begs you.

Suspending DACA violated the Administrative Procedures Act of 1946

In 2019, the Trump administration decided to end the DACA program. Since it had been created by an Obama-era memorandum from the DHS Secretary that told ICE agents to exercise “prosecutorial discretion” when deciding whom to deport (given that the agency’s budget wouldn’t let it deport everyone), nobody doubted that the next administration could terminate it.

The problem was that the Administrative Procedures Act of 1946 (APA) sets out a slew of requirements that all “agency actions” must follow. Note the term “agency action”: these requirements apply to any action, whether it be setting up new procedures (which the Obama administration did with DACA) or repealing them (which the Trump administration tried to do).

The key requirement is here:

To the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action. The reviewing court shall

1. compel agency action unlawfully withheld or unreasonably delayed; and

2. hold unlawful & set aside agency action, findings, and conclusions found to be-

   1. arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;

   2. contrary to constitutional right, power, privilege, or immunity;

   3. in excess of statutory jurisdiction, authority, or limitations, or short of statutory right;

   4. without observance of procedure required by law;

   5. unsupported by substantial evidence in a case subject to sections 556 and 557 of this title or otherwise reviewed on the record of an agency hearing provided by statute; or

   6. unwarranted by the facts to the extent that the facts are subject to trial de novo by the reviewing court.

Congress passed the Administrative Procedures Act specifically because it was a little disturbed about the amount of regulatory discretion that it had handed off to executive agencies under the New Deal.

Given that the Trump administration didn’t even try to justify its actions when repealing DACA, SCOTUS correctly told it to go back to the drawing board. Note that the Administrative Procedures Act explicitly allows for judicial review and lets the courts interpret the bars to get over requirements (a) and (f).

Ending protected status for Syrian refugees violated no laws at all

The decision on Syrian refugees is not like this! None of this stuff applies! None of it!

The Department of Homeland Security (DHS) can grant “Temporary Protected Status” (TPS) to aliens under the Immigration Act of 1990.2 If you get TPS, you also get a work permit and freedom from deportation. Great! But granting or repealing TPS is not an “agency action” and it is not subject to judicial review. Don’t believe me? Well, go to Section 1254a, Subsection (b), Paragraphs 3 and 5 of the current version of the Immigration Act and see for yourself:

8 U.S.C. § 1254a(b)(3): At least 60 days before end of the initial period of designation, and any extended period of designation, of a foreign state (or part thereof) under this section the Attorney General, after consultation with appropriate agencies of the Government, shall review the conditions in the foreign state (or part of such foreign state) for which a designation is in effect under this subsection and shall determine whether the conditions for such designation under this subsection continue to be met.

8 U.S.C. § 1254a(b)(5): There is no judicial review of any determination of the Attorney General with respect to the designation, or termination or extension of a designation, of a foreign state under this subsection.

In short, Professor Shaw is being disingenuous when she says that SCOTUS is behaving differently in 2026 than it did in 2020. That is simply not true! DACA was an agency action that required establishing new procedures; both it and its repeal were subject to APA requirements and judicial review. But TPS is a straight-up delegated authority to an executive agency that can do whatever the hell it wants to do as long as it gives 60 days notice.

Abolishing independent agencies isn’t a specious idea

This brings us to the more recent decision to abolish independent agencies (except, oddly, the Federal Reserve).

The decision rests on three pillars.

1. The first is the opening sentence of Article II of the Constitution: “The executive power shall be vested in a President of the United States of America.” SCOTUS just interpreted that sentence to mean that once Congress has passed a law, it cannot hand its enforcement over to anybody but the President or an official whom the President can remove at will.

2. The constitutional convention of 1787 could have written something like the many state constitutions of the time that openly split up executive powers among several officials. (Most state and territorial constitutions still do this — only Alaska, Hawaii, New Jersey, Puerto Rico, and the USVI resemble the federal government.) So the fact that they failed to divide executive power in the constitution means that they didn’t want to allow Congress to limit executive discretion in the future.

3. The Decision of 1789, in which Congress inserted the following language into the act creating the Department of Foreign Affairs (now State):

   That there shall be in the said department, an inferior officer, to be appointed by the principal officer thereof, to be employed therein as he shall deem proper; and to be called the chief clerk in the department of foreign affairs; and who, whenever the said principal officer shall be removed from office by the president of the United States, or in any other case of vacancy, shall during such vacancy have the charge and custody of all records, books and papers appertaining to the said department.

   Italics mine. In that sentence, goes the logic, Congress acknowledged that the President had the right to fire cabinet officers even though they had been independently confirmed by the Senate. And it is true that James Madison argued exactly that on the floor of Congress:

   If the constitution has invested all executive power in the president, I venture to assert that the Legislature has no right to diminish or modify his executive authority.

The logic is entirely self-consistent. It’s also very weak. Alexander Hamilton, for example, switched positions on the issue between writing as Publius in 1787 — it doesn’t get clearer than “The consent of that body [the Senate] would be necessary to displace as well as to appoint” in Federalist #77 — and writing as Pacificus in 1793. And in 1789, Congress never explicitly decided the issue; rather, it punted. Moreover, over time SCOTUS switched back and forth; there was no clear precedent from the early Republic.

It comes down to whether you think James Madison is dispositive on the issue. Me, I tend to think that Alexander Hamilton, trying to get people to ratify the Constitution, should be the real authority — either that or you gotta believe that the Constitution was ratified under false pretenses.

But “weak” doesn’t mean “specious.” The decision really is defensible and not obviously wrong. If you read anybody hyperventilating about a SCOTUS coup or calling them hypocrites, ignore them.

Or at least until we return to the issue of the Federal Reserve, below.

But “not specious” is entirely consistent with “not good”

Still, this is not a good idea. It won’t be the end of the world, but it doesn’t solve any problems.

Over time, the executive branch has accrued more quasi-legislative authority. This has been unavoidable. Congress can’t write a new law every time, say, somebody discovers that a new substance hurts human health or a financial institution figures out some new kind of product. But it can pass laws stating the conditions under which a substance should be limited or a financial product banned or whatever, letting the executive make the determination subject to Congressionally-determined procedures.

Congress, reasonably, didn’t want to hand all these new powers over to the President with no limit. So it did two things. The first was the “legislative veto”: when Congress granted new powers to the executive, it reserved the right to overturn those decisions with a majority vote.

The second was the independent agency, starting with the Tenure of Office Act of 1867, which restricted the President’s power to fire particular executive officers. Congress repealed the Tenure of Office Act in 1887, but that same year it created the Interstate Commerce Commission, which the President could not order around or threaten to remove.3

We’ve been doing this for 149 years, which is a long time.

And then SCOTUS threw a wrench into American practice. Twice. First, in INS v. Chadha (1983) it declared that the exercise of the legislative veto was the same as the passage of a law, so the President could veto Congress’s veto. This is why President Trump could declare all these emergencies and Congress can’t do anything about it even when a majority is willing.

Second, well, that happened yesterday.

It won’t be the end of the world. In fact, you can make a case that it will increase political accountability. It won’t be a free-for-all, the APA will still exist. And if Congress really wanted to, it could probably get away with quasi-privatizing some agencies that would probably allow for regulation outside presidential interference: the FAA comes to mind as a potential example.

But it does open opportunities for political pressure and favoritism and it does strengthen the executive at the expense of the legislature. I’m an energy guy, so let me give a few examples where Presidential control of the Federal Energy Regulatory Commission (FERC) would have led to a different outcome:

1. 2001 electricity price caps: When rolling blackouts hit California, the state wanted to impose price caps to eliminate the incentives that power producers had to strategically take generators offline in order to spike power prices. President Bush was not a fan of the idea. Nonetheless, FERC allowed the price caps, and the administration reluctantly went along with the idea. Under the new regime, the Bush administration might have (mistakenly, IMHO) ixnayed the caps and prolonged the crisis.

2. 2016 Jordan Cove LNG project: The Obama administration okayed the Jordan Cove project to export LNG outside North America in 2014, but FERC vetoed the project in 2016. Under the new regime, the project would have probably (and correctly, IMHO) opened on time with President Obama’s imprimatur.

3. 2018 coal subsidy rule: In 2017, Energy Secretary Rick Perry sent FERC a proposed rule that would have mandated that power plants that could keep more than 90 days fuel on-site (e.g., coal and nuclear plants) would be able to sell their electricity on wholesale markets at cost-plus prices before any other cheaper sources could dispatch their power. FERC unanimously killed that idea on January 8, 2018. In the new world, that (terrible, IMHO) rule would have gone through once all the procedural t’s had been crossed.

4. 2024 LNG export pause: The Biden administration “paused” all new LNG export applications in January 2024. In a 2-1 vote, however, FERC approved the construction of the Calcasieu Pass project on a 2-1 vote. Now, the DOE could still deny the export permit, but that would be hard to do once billions of dollars had been sunk into the project. In today’s world, the Biden administration could have kiboshed the whole thing.

In the first three examples, FERC stopped two (bad) Republican ideas and one (good) idea from a conservative Democrat.4 In the last example, it threw sand in the gears of a (bad) Democratic idea. The decision gives a lot of authority to President Trump. It also gives a lot of authority to a future President Ocasio-Cortez, which should give anyone happy about the decision a lot of pause.

In short, it’s a not-great idea. The logic is solid, but not uncontestable — the opposing case is also quite strong. It solves no problems and creates quite a few. It is also a departure from 149 years of American practice, so as a small-c conservative I really can’t condone it.

But like I said, with some creative legislation, Congress could bring back the old way. Frex, the legislative branch could create notionally “private” regulators and then use some creative methods (say, via the tax code) to force regulated companies to “voluntarily” affiliate with the regulators.

Only to do that, Congress would have to be creative and focused. Uh … I guess that could happen? Still, I wouldn’t put money on it.

Which brings us to the Federal Reserve

And now we come to the Supreme Court descending into incoherence because the implications of its own principles scared itself. Not because those principles are scary, but because the combination of those principles with a Congress that’s forgotten how to legislate on controversial matters is terrifying.

The Supreme Court majority upheld the independence of the American central bank, but only by waving their hands really fast and hoping no one would notice. Only Clarence Thomas, Brett Kavanaugh, and Amy Coney Barrett all did notice, albeit in very different ways.

The majority based Trump v. Cook on a bunch of precedents which involved government-chartered banks that carried out some of the functions of a modern central bank … but only some. The Bank of North America predated the Constitution, so I’m unclear on why it’s a precedent. The First and Second Bank of the United States carried out some central banking functions, but they did not exercise direct regulatory authority over the banking system.

The decision gets down to the main issue on page 22. The Court recognized that the Federal Reserve has a direct regulatory authority over financial institutions that have not voluntarily affiliated themselves with the Federal Reserve System. In his dissent, Justice Thomas uses that point to logically apply the doctrine of executive unity to invalidate the whole idea of central bank independence. In fact, Thomas’s reasoning is a lot like the reasoning that I laid out in Saving the Federal Reserve from the Unitary Executive.

The majority opinion, however, just waved its hands really fast. They don’t grapple with any of the issues Thomas raises. Instead, the majority waves its hands in a word salad that reminds me far too much of Roe v. Wade:

It is true, of course, that this tradition has not stood still; as JUSTICE THOMAS notes, the Federal Reserve is more powerful than its predecessors, managing a vastly more complex economy in a vastly more complex world. (In upholding the constitutionality of the Federal Reserve as currently structured and with its existing enforcement authorities, we do not suggest that Congress could assign the Federal Reserve additional regulatory powers that are attenuated from monetary policy.) We see no reason, however, why our central bank ought to be “trapped in amber” any more than any other aspect of our constitutional scheme. What matters is that the Federal Reserve remains “consistent with the principles that underpin” the First and Second Banks — namely, that monetary policy should not be subject to political interference. In our view, the Federal Reserve maintains the “balance struck by the founding generation” under “modern circumstances.” We thus look to history not as an end in itself, but (as we often do) to give “essential content to undefined provisions in the frame of our government.”

What does that even mean? It’s a word salad.

The parenthetical comment sort of dances up to the issue, which is that if you believe in the unitary executive then you can justify an independent central bank, but you simply have to strip said bank of some of its regulatory functions or figure out a new way to force all private financial institutions to “voluntarily” affliate with it. It’s not Mission Impossible! But it’s a job that SCOTUS seems to have been afraid of asking Congress to carry out. Instead it gave us a decision that makes no real sense.

I’m going to shamelessly toot my own horn, because my analysis actually dives into what the Fed does, unlike the terrible SCOTUS decision. Most legal analyses that purport to do the same thing actually don’t, or rely on their own idea of what the “unitary executive theory” should mean.

Justice Kavanaugh’s concurrence is at least honest that the reason why he supports the decision is simply the chaos that any other decision would create. Not only would markets panic, but you’d remove the guardrails stopping presidents from, say, financing their pet projects by printing money.

Justice Barrett, meanwhile, writes the best opinion in her concurrence. “The constitutional status of the Federal Reserve is entirely outside the scope of this case. The Government expressly waived any constitutional challenge to the removal restriction, so the parties did not brief it.” She pokes holes in the decision, mocks its brevity, points out all the questions it begs, and then ends by reminding the reader that the Court could have stopped the administration from summarily firing Lisa Cook without saying anything about the Fed’s constitutional status.5

In other words, it’s kinda nice that they left the Fed alone, but the decision really makes no sense. Either you gotta somehow finagle the Fed’s regulatory power or you gotta dump the unitary executive idea. But, hey, consistency is the hobgoblin of small minds and nobody trusts that Congress would be able to fix the problems that would arise from a consistent application of the unitary executive principle. That’s not because the problems are unfixable, it’s because nobody trusts Congress to do its job.

And that, ultimately, is America’s real problem.

I’m not going to discuss that right now, but with socialism back on the agenda and questions about the end of the Democratic establishment (at least in New York), some recent papers from economic history seemed a bit more relevant than they otherwise might have been. And so, I pronounce Economic History Week, and present to you the following two new findings for your edification.

First up, was there anything redeeming about the Cuban revolution? And second, did the Civil War dislodge the Southern ruling class, even if Reconstruction failed?

The Battle of Cuba(n economic history)

The fight over the economic impact of Mr. Castro continues. John Devereux and Vincent Geloso (with João Pedro Bastos and Jamie Bologna Pavlik of Texas Tech) fired the first salvos. Using different methodologies, they presented evidence that Cubans would have been far better off had the Revolution never happened. Geloso et. al. use synthetic controls where real socialist Cuba is compared to a weighted average of countries that looked a lot like Cuba in the decade before 1959. They find that socialist Cuba fell behind counterfactual Cuba even as the Soviet Bloc pumped in billions of economic aid.

And now Giovanni Mellace (U. of Southern Denmark) and Rok Spruk (U. of Ljubljana) have struck back! They use synthetic controls to show that infant mortality in socialist Cuba falls dramatically and persistently compared to counterfactual Cuba. “Relative to synthetic Cuba, infant mortality falls 15–29 percent and average years of schooling rise 1.5-2 years; both effects are large, persistent, and robust.” Win one for the Revolution!

Or maybe not. In 2010, Devereux noted that Cuba did very well on measures of infant mortality even though the rest of the healthcare system was in terrible shape. Moreover, Devereax uses Cuban government data to measure infant mortality, but the Mellace and Spruk estimates oddly diverge from Devereux’s after the revolution — because they don’t use Cuban data! Instead they use a 1965 benchmark and link it to 1950 data. That produces a nice monotonic fall in infant mortality, whereas the actual Cuban data (shown in the below figure) report a big increase in the decade after the Revolution followed by a fall as the government starts pumping [Soviet] resources into the health service.

And even then, the 1965 benchmark that Mellace and Spruk claim to use doesn’t match up with the Cuban data. So the whole exercise is really strange, even though nobody seriously doubts that Cuba punched above its weight in reducing infant mortality.

As for education, it’s not entirely implausible that Cubans have two more years of formal education than they would have had. But what is their children learning? Well, UNESCO has the goods, and here’s how Cuban sixth-graders stacked up against other countries in 2019:

Not terrible, but Brazilians, Costa Ricans, and Peruvians do better than their Cuban counterparts in reading, with Colombian, Mexican, and Uruguayan children breathing down their necks. (Argentina and the D.R. oughta be ashamed of themselves.)

The story in mathematics isn’t that different:

Kids in Brazil, Costa Rica, Ecuador, Mexico, Peru, and Uruguay outperform their Cuban counterparts. I guess it’s remotely possible that a non-Communist Cuba would have lost its 1959 advantages and gone the way of the Dominican Republic, but I doubt it.

I’m gonna give this to John Devereux, the winnuh and still champee-un of the Cuban economic history derby. There really is not much evidence that the Revolution had much upside, but I’m sure that economic historians will keep trying to show that it did. At some point maybe they’ll actually find something. But this paper isn’t that something.

The past is never dead; it’s not even past

And now let’s turn to the American Civil War! One uncontestable result of the war was that the former slaveowners lost their ability to capitalize the labor of the former slaves. They could no longer easily sell or rent their workers (even when they found ways to tie sharecroppers to the land); nor could they take out bank loans against them. In one stroke, Abraham Lincoln and the Radical Republicans wiped out most of the dollar wealth of the Southern elite.

We know that Redemption denied black Southerners the franchise and established white supremacy, but what with the impoverishment of the Southern elite many historians have argued that they lost their social prominence. The money quote is from C. Vann Woodward’s Origins of the New South, 1877-1913 (1951):

No ruling class of our history ever found itself so completely stripped of its economic foundations as did that of the South in this period. Involved in the downfall of the old planter class were the leading financial, commercial, and industrial families of the region.

Woodward’s argument didn’t come out of nowhere. In 1881, writing in Harper’s, Henry Grady wrote that the war uprooted the old planter elite. M.B. Hammond picked up and expanded the argument in his influential 1897 monograph about the Southern cotton industry:

Never perhaps … was there a rural movement, accomplished without revolution or exodus, that equaled in extent or swiftness the partition of the plantations of the ex-slave holders into small farms. As remarkable as was the eagerness of the negroes — who bought in Georgia alone 6,850 farms in three years — the earth hunger of the poor classes of the whites, who had been unable under the slave holding oligarchy to own land, was even more striking.

From there it made its way into Paul Buck’s The Road to Reunion, 1865–1900 (1937), who wrote: “The small, rich landowning aristocracy in whose interest so much of Southern energy had been expended was deprived of its privileged position.”

Now, economic historians have contested the story of wealth turnover — the short version is that there was plenty of turnover in the elite, but many of the old slaveowning families owned land and managed to rebuild their ill-gotten fortunes. But the historians weren’t only talking about wealth; they were talking about the plantocracy’s political control. In this story, white people took violent control of Southern state governments over the course of the 1870s, but the Democratic machines that ran the place after the war were really different from the antebellum elite: James Roark in Masters without Slaves (1977) makes the case most explicitly.

So which was it? Did the slaveowning elite lose influence or did they preserve their social dominance despite emancipation, industrialization, and urbanization? (The latter two transformations were smaller in the South than in the North, but the region still experienced an economic revolution after the war.)

So here come Bellani, Hager, and Maurer with the goods. They gathered data on legislators from four slave states (Alabama, Florida, Kentucky, and Virginia) and two Northern states between 1850 and 1880 (New York and Wisconsin). The Northern states serve as a control: their elites would be affected by all the wrenching social and economic changes of the mid-19th century, but not by Abolition.

And so … Southern elite families managed to maintain their dominant position in Southern state legislatures after the war. In fact, they actually managed to control more choice committee assignments after the war than beforehand. The war might have destroyed most of their nominal “wealth” when they lost their ability to buy and sell human beings, but it didn’t remove their political influence. You can see a bit of a fall during Reconstruction in the below figure (the shaded area is the Civil War) but the former slaveowners are back well before Reconstruction ends in 1877.

Elite legislative dominance wasn’t just a Southern phenomenon. Since about a quarter of white Southern families owned slaves before the Civil War, the paper uses census data to classify Northern families by the amount of real estate that they owned and tracks the share of legislators who came from the top quartile in 1860. By that definition — and to be fair, it’s a pretty broad one! — Northern elites also retained their political dominance after the war. Still, that’s pretty remarkable, because the top quartile of real estate owners in New York and Wisconsin only did great with the railroad boom gathering pace and explosive manufacturing growth, whereas their Southern counterparts lost their single greatest stock of material wealth.

In fact, you can make an argument that Southern elites increased their influence after the war. Over the 15 years after 1865, members of Southern slaveowning families took control of key committee positions, which did not happen in the North. Whether that means that whether the South was more elite dominated depends on how much weight you give to control over legislative agendas. If you think that’s important, then the Southern slaveocracy increased its power after the Civil War despite the end of slavery. If you don’t, well, maybe it didn’t increase its power but it sure as hell didn’t lose much.

It takes a lot to dislodge a ruling class. The Civil War wiped out their wealth, overturned state institutions, and rewrote the federal constitution, yet just 15 years later there they are, overrepresented in the legislatures and chairing even more committees.

And with that, we can return to our regularly scheduled insanity: burning an effigy of Fernando Muslera and rooting for the Orange.

The president of a sovereign nation, with the backing of his chief economic advisor, has proposed a law that would allow autonomous entities to command organizations with no human accountability at all.

The reform goes way beyond garden-variety deregulation. Consider: under this law, the entity itself would still be subject to the same civil and criminal penalties that worry human chief executives. But why would an artificial CEO care about criminal penalties? Fear of virtual prison? All it would consider are civil penalties that reduce shareholder value. As long as the benefits outweighed the costs (on a risk-adjusted basis), these autonomous corporations would be free to do … anything.

Why would Milei do this? Well, the real reason is probably Peter Thiel.1 But Milei offers two justifications for the decision:

1. Technological: autonomous corporations will never exist without enabling legislation;

2. Historical: the creation of limited liability in the 1600s was a good thing, and he is just following in Dutch footsteps.

Of course, we have to compare the editorial to the actual proposal. Milei likes to say outrageous things, and here he has incentives to play up any “reform.” Do the details of the proposal live up to the presidential hype?

Let’s take these in turn. This post will first flesh out how Milei’s idea, as presented in the FT, would allow robo-corporations to break laws and damage others with impunity. The second part will examine the actual genuine real bill on the floor of the Argentine Congress. The third will provide some historical context. Have we really been here before or is Milei misreading history?

SPOILER: Milei’s solution solves no real problems, unless you think that accountability is a problem. In wrecking accountability, Milei gets the history of limited liability wrong. It is a history of solving practical problems and building institutions to recreate the accountability that had been provided by personal liability. It is not a history of farsighted policymakers giving ever more autonomy to private corporations. Moreover, Milei’s reforms will increase the risk that nonaligned A.I. could go wild — this is a bad time in human history to lessen accountability.

The Terminator as manager

Milei claims that autonomous organizations will not emerge without changes to limited liability.2 That is almost certainly correct. But is that a bad thing?

Right now, the directors and shareholders of a corporation are generally free from criminal or civil liability should the corporation engage in wrongdoing. If Procter & Gamble markets a soap that accidentally turns some people green, then Procter & Gamble is liable for damages and its share price will go down. The executives who authorized the new soap can be punished under civil and (perhaps) criminal law. But the victims cannot directly go after the shareholders or their representatives (in U.S. parlance, the “directors”).

There are a few exceptions. If the directors authorized the wrongdoing, then they are liable. For example, under Delaware law directors, are liable for any decisions that they direct, order, ratify, approve, or consent to carry out. The directors are also liable for any harms that executive wrongdoing may inflict on the company’s creditors or shareholders. They cannot authorize illegal distributions or dividends, obviously. Nor can they breach their fiduciary responsibilities to the shareholders. And they cannot just not even bother oversee corporate executives.

Shareholders themselves are liable in a few even more restrictive situations. If a single entity holds a majority of the shares, then it can be held liable for corporate actions. Ditto for controlling shareholders (even without a majority) or the corporate owners of subsidiary companies. Finally, if you can prove that the corporation effectively acted as an agent of some shareholders (in legalese, that “the veil of corporate responsibility was pierced”), then those shareholders will be liable.

But the above conditions are fairly restrictive and no substitute for the responsibility held by human executives. Milei’s proposal would keep mostly intact the conditions under which directors and shareholders are liable, but allo the human executives to be removed from the loop. Should a corporate A.I. harm people, then the only way to hold a human being to account would be to prove that the directors signed off on the action. Since it wouldn’t be at all hard to train an A.I. to just, you know, not tell the directors about edge-case decisions, that doesn’t sound too effective.

The actual proposal

It wasn’t easy, but I managed to track down the text:

Proyecto De Ley General De Sociedades

249KB ∙ PDF file

Download

Download

Is the reform as radical as Milei’s editorial implies? Not entirely. It builds in some safeguards to restrict the actions of computer-run companies, but not all that many. Article 14 allows regular companies to become “automated companies” (sociedades automatizadas) operated by artificial intelligences. The corporate entity is still liable for damages. And Article 92 requires that even if you place the company under the control of a “legal person,” you are going to have to designate one responsible “human person.”

But it is still pretty radical.

Should the bill become law, if somebody is damaged by an operational act, the that “responsible human person” can be punished. The problem is that it will be far from clear whether they actually approved the operation, or if anybody did. The directors can then just throw up their hands and let their sacrificial lamb be sacrificed (see page 51 of the bill).

Now, the directors’ immunity isn’t complete. Article 102 is short and reads as follows:

The administrative body can use artificial intelligence systems or algorithms in order to carry out operational functions or make decisions. Their use does not eliminate nor limit the administrators’ responsibility nor exempt them from the duty to configure and supervise the system and its output.

The problem is that if negligence can’t be proven, then there will be nobody at whom to point the finger, neither a human CEO nor the “responsible human person” in the absence of a CEO.

Worse yet, Article 101 of the bill reduces the directors’ liability even if they are negligent. Currently, Article 51 of the Argentine corporate law mandates administrators and representatives to act with loyalty and the diligence of a good businessman. Those who fail are liable unlimitedly and jointly for damages resulting from their action or omission. Under the new law, however, they would only be liable for direct damages and objective liability would be eliminated. That is to say, you would now have to prove intent in order to sue — any administrator who could credibly claim to have acted or failed to act in “good faith” will have nothing to fear.

So imagine that a company trains an artificial “operational CEO” to maximize subscription revenue. The A.I. learns that it can increase profit by hiding cancellation buttons, delaying refunds, and sending misleading renewal notices. The company is still liable for damages. But there is no responsible human being. Why wouldn’t the directors let the A.I. do whatever it wants, as long as the benefit to the company’s bottom line exceeds the direct costs?

But it gets worse. The bill also allows for the creation of “decentralized autonomous organizations” (DAO) where nobody would be in charge. At least in regular corporations, all decisions would go through a human “responsible person” at some point. Article 274 of the current law says that said human is legally accountable to shareholders and third parties for bad performance of office, violation of law or regulation, and damage caused by fraud, abuse of powers, or gross negligence, and Article 274 will remain in force for most companies. The human decision-makers will probably not want to risk their livelihood and freedom in order to allow a computer to misbehave.

But if the company organizes itself as a DAO, then even though Article 260 says that there still has to be a human representative, Article 257 and Article 262 will remove any liability for that human representative’s regardless of bad performance or negligence.

Moreover, under a DAO means that the damn A.I. could be doing God only knows what, with no one around with any incentive to monitor it as long as the quarterly reports look good. I honestly don’t want to think about what that could mean.

The history of limited liability

Milei says he is just following the footsteps of the people who invented limited liability, without which large capitalist enterprises would not exist. But that gets the story exactly backwards. Large existing private enterprises existed before limited liability. Those enterprises then ran into problems. The government and the financiers cobbled together piecemeal solutions which in turn generated new problems. New laws and institutions then solved those problems. It wasn’t at all libertarian in origin and it wasn’t invented in advance of a problem. Rather, it emerged as an accretion of makeshift solutions and it required the state to invent institutions to replace personal liability. It took centuries for limited liability to look like the institution we all know.

Limited liability is a weird creation, when you think about it. The owners of a business aren’t responsible for the actions of that business? What? That’s crazy. How can you align incentives without personal liability?

In the 17th century, the Dutch government and a collection of Dutch merchants found themselves needing to answer those questions. They wanted to fund giant enterprises to go out and do stuff out there in Asia that could generate income. But the Republic didn’t want to finance those enterprises with state money — the Dutch Republic probably couldn’t have done so even had its leaders wanted to. Alternatively, the Dutch could have imitated the Spanish, who financed one-shot expeditions under private partnerships, rewarding success with control over indigenous labor, government posts, or giant blocks of land. That model didn’t seem too attractive either, not least because it required the private backers of the expeditions to physically migrate to the colonies or forego most of the benefits.

The problem was that the risks of the proposed operations proved too large for equity investors. The enterprise that would operate half a planet away, all the while getting into wars with the Portuguese and the Spanish and the English and the local kingdoms and God knows what else. And then, if they succeeded, the enterprises might then do all sorts of crazy and risky things to the local population. Moreover, it might fail to repay debts. If you were going to be held personally liable for all those things, then the risk was just too large to risk large amounts of equity capital. But if there wasn’t plenty of equity capital at stake, then nobody would want to lend to the enterprises. Lenders want owners to have skin in the game!

So in 1602, the Dutch Republic decided that maybe it would help if they increased the expected profits. If you can’t lower the risks, increase the rewards! The government did that by giving one company, the Dutch East India Company (henceforth VOC, for its Dutch initials) a monopoly over the Asian trade and the right to whatever it needed to do out in the East Indies in order to increase that trade.

That might have worked had the monopoly profits been high enough. The problem was that they weren’t. The original plan had been to rely on old-fashioned circulating capital, meaning that investors would get their money back when the enterprise was liquidated. That meant setting an end date on the operation — they picked 1612, ten years after it began.

The problem was the VOC kept losing money, and there was no way it was gonna get into the black by 1612. Instead of generating quick returns, the VOC was a hot mess for decades. In retrospect, this isn’t that surprising, considering as the VOC found itself fighting a bunch of medium-sized wars out in the East Indies. Wars are pretty capital intensive, as the VOC’s management soon discovered.

The VOC’s losses had to be covered if the initial investors weren’t going to lose their shirts. In 1609 the board started casting around for permanent equity capital, but it wasn’t immediately successful. The VOC charter exempted directors from liability for unpaid wages but nothing else. Directors were regularly threatened with debtors’ prison over the company’s debts. Moreover, the directors couldn’t individually shoulder that burden even aside from the risk of debtors’ prison. Their individual reputations weren’t strong enough to sustain debts of the size they needed.

Limited liability emerged in fits and starts as a solution to the problem. In 1613, the directors insured a giant debt issue, ostensibly freeing them from personal responsibility for the loan. That didn’t work so well, not least because many of the VOC’s insurers were also its shareholders.

Therefore, in 1617 the directors declared that they would all be jointly responsible for the VOC’s existing debt. That was still not limited liability, of course. It helped, but the company’s debts kept rising. It wasn’t clear who was responsible for all these new bonds. The directors? If so, which directors, the ones in Middelburg or the ones in Amsterdam? If not, the officials who signed the debt? With the company’s demand for credit rising insatiably, something needed to be done.

In 1623 the VOC took the bold step of unilaterally rewriting its debt contracts to remove all personal liability from the directors. The company felt entitled to do that because in 1621 the Supreme Court of Holland and Zeeland had ruled that the directors were not personally responsible for frauds committed by company clerks, even if the company was still liable. Precedent in hand, the directors made their declaration. The markets accepted it, more or less, although even then more reform proved necessary over the next few decades.3

In short, nobody ever sat down and thought, “What do we need to do to get make it easier to finance large-scale enterprises?” And they certainly never thought, “Hey, we’re expanding human freedom from the state!” Rather, they chartered the companies first and then hammered out the kinks later as problems presented themselves.

And in 1623 you still didn’t have limited liability the way we think of it today. It took until 1862 for the U.K.’s Companies Act to really consolidate the institution. Even then, the Companies Act excluded banks and insurers because Parliament understood the obvious moral-hazard problem: if shareholders could enjoy the upside but walk away from the downside, then they would have few incentives to refrain from taking wild risks and gambling with other people’s money.

The idea spread around the world, but messily, and not always because its implementors saw the economic benefits. Rather, they saw limited liability as a tool that could solve political problems — it provided a cheap way for governments to benefit key supporters. A quarter-century ago I wrote a book about the Mexican example, so let’s start there.4

Porfirio Díaz came to power in 1876. The country was in chaos and most of it was effectively out of Mexico City’s control. Díaz had few resources that he could use to impose order and no one was about to lend significant amounts to the penurious federal government. Moreover, it is hard for a weak state to generate and distribute economic rents — what good are privileges provided by law if the government cannot enforce the law? And Mexico was a weak state; it could barely protect private property at all, let alone extract taxes or other resources. But it needed to generate some sort of benefit that would depend on keeping it in power and that could be used to buy off powerful and violent local interests.

Limited liability provided a useful tool to overcome this problem. Díaz could grant corporate charters to select enterprises, whose operations would be strategically dispersed around the country. Those enterprises could in turn raise capital by selling shares on the Mexico City markets. Board seats and investment stakes would be carefully distributed to local warlords, who would thereby enjoy a share of the profits. This worked because even though the federal government was too weak to protect everyone’s property rights, it could still protect some people’s property rights a little bit better than others. As a result, the enterprises chartered as limited liability companies enjoyed a bit more flexibility and security than others, which translated into a competitive advantage and higher profits — and most importantly, gave their beneficiaries a stake in the Porfirian system.

You might be surprised to learn that the early United States didn’t look much better than Porfirian Mexico. American corporations weren’t havens for John Galt to heroically pursue his capitalist visions. Rather, they were patronage vehicles that state legislatures distributed to select named firms. You didn’t see much impetus to create impersonal general incorporation laws until a wave of state bankruptcies in the 1840s opened up space for reform.

With more incorporation, however, the problem of liability became more acute. As a result, the new general incorporation statutes imposed uniform rules on capital, debt, dividends, reporting, voting, and directors’ liability. When laws and institutions proved insufficient, state legislatures changed the laws. (Read John Wallis and Naomi Lamoreaux on these changes: the story is amazing.)5 In fact, limited liability didn’t fully triumph as a business form used by almost everyone until 1988, when a small IRS rule change meant that LLCs would be taxed the same as partnerships.

Limited liability was a tradeoff. It made shares less risky and more liquid. That in turn enabled the mobilization of more capital for large enterprises. But it also made it harder to monitor those enterprises. Creditors therefore needed other assurances that owners would not strip assets, undercapitalize the firm, or surreptitiously instruct managers to gamble with their money. So over time, governments created rules around boards of directors, fiduciary duties, accounting rules, disclosure, bankruptcy protection, shareholder voting, and, later on, securities regulation.

This is neither a triumphant nor a libertarian story. It certainly didn’t emerge out of the forehead of some brilliant head of government in 1602. And what did emerge in the late 19th century emerged was about a lot more than protecting owners. Institutions designed to increase accountability were a necessary accoutrement if limited liability was to work.

Back to Argentina and artificial intelligence

Milei’s proposed law is not something that the A.I. industry needs. For better or for worse, A.I. is doing just fine without it.6 It is, however, a law that future investors in A.I.-controlled firms may want. The firm as a corporate entity will still pay damages if damages can be proved and collected. But at the end of the day the operational wrongdoer will just be software. The human representative can say the protocol acted automatically while and the directors can claim that they configured and supervised the system in good faith. No one will be accountable.

The shield of limited liability worked because the state built substitutes for the personal liability it removed. Milei’s proposal offers the shield first and barely even gestures toward the substitutes later. The law might get a bunch of A.I.-managed firms to locate in Argentina. And maybe that will produce benefits for the country. But it could also allow for spectacular harms. It certainly increases the risk that non-aligned A.I.’s could drag us to disaster by allowing humans to give the automatons direct control of their enterprises with little fear of any repercussions.

In the end Milei’s autonomous company law is a solution in search of a problem. He invents a fake problem: nobody has yet put a business under the control of a computer because they will be held accountable for any and all of the computer’s mistakes or wrongdoing. Only in so doing Milei creates a real problem: how do you deal with companies designed to act and learn without a human manager and capable of doing harm without a human signature?

May God save us all.

That’s pretty bad. But it gets worse. The country used to make money off fossil fuel exports. Now, though, it exports crude oil but imports even more refined products, measured by value:

Economically, that’s not a problem. But politically, it is. The Conservation Act of 1975 authorizes the U.S. president to ban hydrocarbon exports. If the U.S. does that, it would take some time for alternative suppliers to Mexico to materialize. In the interim, shortages would idle trucks, clog supply chains, and strand goods — including food. Manufacturing would contract sharply. Farm tractors grind to a halt. Flights would be grounded. Fuel prices would spike, along with the price of food and transport, and inflation would accelerate.

And worst of all, gas-fired power plants would shut down for lack of fuel. Mexico used to be self-sufficient in natural gas. Self-sufficiency ended in 1999, and imports from the United States ballooned after 2011:

So the Sheinbaum administration has multiple reasons to want to resuscitate the hydrocarbon industry. And that’s besides the obvious one, which is, to paraphrase Gordon Gekko, that growth is good.

And the solution? Fracking! Fracking turned the United States into an oil and gas powerhouse. It’s the greatest thing since sliced bread. The Eagle Ford formation slops right over the border and Mexico possesses other potentially productive shale gas and tight oil plays. Solution!

Probably not.

Hold up, wait a minute

There are reasons why the United States dominates fracking worldwide, with only Argentina, Canada, and China providing any serious competition. And most of those reasons aren’t things that the Sheinbaum administration can change with the stroke of a Congressional pen.

Read more

Being a country of Europeans is a deep part of Argentina’s national identity. The census stopped recording race in 1869. A bit more than 80 years later, when Josephine Baker visited, she was surprised at the absence of black people. So she asked Ramón Carilio, the dark-skinned minister of public health, where the black population lived. Carilio felt free to joke, “There are only two — you and I.”

When Era Bell Thompson visited Argentina in 1973 to report on the black population there, she recorded one Argentine’s ironic complaint about the United States: “Argentines are lumped in with all the rest of the Spanish-speaking peoples, even though we are white.” Thompson had no problem finding black people, but she described them as “Not a viable, but a vanishing black people: relatively few in numbers, relatively free of racial discrimination and relatively content.”

Even now, some Argentines still joke — with somewhat less accuracy than in the past — that an Argentine is an Italian who speaks Spanish and wants to be British. The self-image dies hard: when María Lamadrid tried to board a flight from Buenos Aires to Panama in 2001, the Argentine border officials refused to believe that a black woman could actually be Argentine and accused her of using a fake passport.1

It’s true that there are relatively few Argentines who appear phenotypically African.

The problem is that we know that colonial Argentina was heavily African! And this is not some obscure recently-discovered fact; this has been well known, since, well, since Argentina was still a Spanish colony. Ebony magazine sent Thompson to Buenos Aires in 1973 because the past existence of a now-vanished African population was common knowledge. James Scobie wrote in his classic work, Argentina: A City and a Nation, “The disappearance of the Negro from the Argentine scene has puzzled demographers far more than the vanishing Indian.”

We know that colonial Argentina was heavily African! A census of Buenos Aires held in 1778 revealed an African population of 35%. (See Luis Wainer, La Ciudad de Buenos Aires en los Censos de 1778 y 1810.) As late as 1855, local B.A. surveys recorded race. George Andrews (page 41) estimated the total African population of Argentina in 1800 to be 69,000, roughly 22% of a total population around 310,000.

So what happened? One common story is that two somewhat deliberate events decimated the community. First, blacks were supposedly recruited in greater numbers to fight Paraguay in the War of the Triple Alliance, which killed large numbers of the male population. Second, yellow fever epidemics (particularly in Buenos Aires) did what conscription could not and further reduced the black population.

The genetic ancestry data cited in the last post, however, shows only about a 4% presence of African genetic markers. That is a lot less than 22%! Does that provide evidence of some great genocide or expulsion in 19th-century Argentina?

Probably not.

First, the starting population denominator of 310,000 is wrong. It doesn’t include the indigenous population nor a chunk of the far north. It’s not even consistent with a Spanish census undertaken in 1778. Fortunately, the Argentine government has made efforts to estimate the actual population in 1800, producing a figure of 552,000. That would reduce the African population share of the country to 12½ percent in that year.

Second, given the massive immigration to Argentina over the next 150 years, you’d expect the Afro-Argentine share to fall even if they had the same birth and death rates as the general population.

The population of Argentina grew by about 1.8% per year between 1800 and the first national census in 1869. (The link goes to the census; the data on the Argentine population is on page 686.) Now, there was some immigration to Argentina before 1869: by that year, 12% of the population was foreign-born, which implies a maximum rate of natural increase for the native-born population around 1.6%.

Let’s assume that the Afro-Argentine population increased at the same 1.6% rate as the overall population in 1800-69. That is a fairly high rate of natural increase for the time: it’s only slightly lower than the 2.2% rate of natural increase in the United States between 1800 and 1870, as estimated by Michael Haines. (See Table 1.) But we know that the rate of natural increase in Argentina was 1.3% per year in 1869-95 and 1.6% per year in 1895-1947, so 1.6% for 1800-69 is plausible.2

If you assume that the Afro-Argentine population continued to grow at the same rate of natural increase as the overall population after 1869 — a reasonable upper bound since Afro-Argentines were disproportionately located in Buenos Aires province and disproportionately urban — then you would have expected about 920,000 Afro-Argentines by 1947, roughly 4.5% of the total population of 15.9 million. By 2022, that number would have increased marginally, to about 4.6%.

And 4.6% is in the ballpark of what we see in the genetic data:

There still is room for some impact from differential mortality, particularly on the male side. But the observed admixture levels are within the range you would expect even if there had been no differential mortality at all, especially given the uncertainty around these estimates.

In addition, the evidence indicates a very large rate of exogamy: African y-chromosomes are overwhelmingly paired with Native American mitochondria and African mitochondria are overwhelmingly paired with European y-chromosomes. That implies that the African population was simply absorbed into the overall population. No need for genocidal wars or horrible plagues — just an open society.

You might think that there is an interesting class story here. But you would be wrong. Yes, it looks like African men married Native American women, whereas African women married European men. But that pattern was already built into the pre-1869 population! That population consisted largely of people with Native American mitochondria and European y-chromosomes. So the figure doesn’t tell you much about the social position of Afro-Argentines or how they were absorbed into the general population.

At most, the pattern suggests that the descendants of European immigrants were somewhat more likely to marry other descendants of European immigrants, which should surprise precisely nobody. Go listen to some Billy Joel songs. Or rewatch The Sopranos. And that’s just about Jews and Italians. Even if endogamy among the descendants of European immigrants had completely disappeared by 2022 you would still expect to see a pattern like the one in the figure.

So while there is a lot that we don’t know about the historical evolution of Afro-Argentine society and the terms of their integration into Argentine life — the Ebony article from 1973 is very worth reading! — there really isn’t much mystery about what happened to them. They melted into the Argentine melting pot.

I’m not sure that I agree with that, but it is true that Argentines tend to compare themselves with Europe, not with Latin Americans. They think of themselves as a nation of European immigrants.

But the genetic evidence complicates the country’s self-image. In fact, the genetic evidence shows a remarkable similarity to Puerto Rico!

Early DNA studies of Puerto Rico, from back when such things were new and neat, showed something a bit disturbing. Mitochondrial DNA, which is passed down through the female line, skewed Native American. But Y-chromosomes were entirely European and African. The implication is that something awful happened to the entire male Taíno population; they were either killed or denied the possibility of procreation. Likely both. Later studies upheld the results. Here is one from 2014, which sampled 326 people and found mitochondrial DNA that was 60% indigenous, 25% African, and 15% European, whereas male Y-chromosomes were 85% European and 15% African.

Argentine DNA samples also show a strong sex asymmetry, more like Puerto Rico that most people would expect. A 2010 study found that 54% of Argentine mtDNA came from indigenous sources while 94% of Y-chromosomes traced to Europe. These results are strikingly close to Puerto Rico (minus the large African admixture on the island) ... shockingly so for a country which received mass immigration from Europe in relatively recent times. More recent studies have confirmed this. A 2012 study from the Buenos Aires metropolitan area found that maternal lineages were 55% European and 44% Amerindian, whereas paternal lineages were 93% European and 6% Amerindian. A 2022 study of the entire country found that maternal lineages were 27% European, 69% Amerindian, and 4% African, compared to 92%, 4%, and 3% for the paternal lines.

More interestingly, while it was not uncommon for Argentines in the 2022 study to have Native American mitochondria and a European Y-chromosomes, it was vanishingly rare for someone to have an Amerindian Y-chromosome and European mitochondria, as you can see below:

Argentina shows a sex asymmetry that looks surprisingly like Puerto Rico! The African proportion is lower, as you might expect, but otherwise there is not that much difference. Male lineages are overwhelmingly European and female ones majority Amerindian.

Now, one warning.1 The “Eurasian other than Spain and Italy” data are suspect. They use the R1b haplogroup to identify origin, even though R1b is as common in Portugal, France, Belgium, and the Netherlands as it is in Spain and Italy. Worse yet, even in Western Europe, only 57% of the population has it, as opposed to other Eurasian haplogroups. For example, Leticia Abad’s research shows that most of the early Spanish settlers came from Andalucía, where half of the population has haplogroup J. (If you know any Spanish history, you won’t be shocked to learn that haplogroup J is most common in Arabia.) Similarly, later Italian migrants came from northern Italy, where 10% of the population shows haplogroup I. So “other Eurasian” doesn’t rule out Spanish or Italian origins and “Spain and Italy” doesn’t guarantee it.

How can this be?

Argentina is typically thought of as a European settler offshoot, and with good reason. In 1895, 25% of the population was foreign-born, overwhelmingly from Europe and the Levant. By 1914, that figure was up to 30%. Gross immigration between 1857 and 1914 came to 4.6 million people; net immigration ran about 3.0 million. (Pages 201-02 of the 1914 census.) All this with a population of only 7.9 million in 1914! Add in the Argentine-born children of those 3.0 million post-1869 immigrants, and you have a veritable transformation of the population. You might reasonably expect Argentina to have a similar genetic makeup to, say, New Jersey.2

How can Argentine DNA resemble Puerto Rico, given the sheer size of the migratory wave? Well, that wave was not evenly distributed. Rather, as “” points out, it was concentrated in the Pampas and left the north almost entirely untouched.

Differential birthrates diluted the wave’s impact over time by increasing the national weight of the lower-immigration north. Since 1914, the fastest population growth has been in the north. A back-of-the-envelope calculation produces the conclusion that only 24% of the current Argentine population can be traced to the foreign-born population in 1914. Note that this number is an average, because it assumes no intermarriage between the immigrants and the native-born. That’s a ridiculous assumption — the number of Argentines with at least one post-1895 migrant ancestor is going to be much much higher, well above half and probably above ¾ths.)

Now, the 24% number is uncertain. Pushing it down is the fact that almost half of Argentine immigrants in this epoch ultimately returned home. Pushing it up is the fact that there were already a lot of second-generation immigrants by 1914.3

Below is a (very rough!!) estimate of the Argentine population in a no-immigration counterfactual, assuming (probably correctly) that the northern population is almost entirely native-born and that the descendants of immigrants urbanize much faster than the entire population (quite possibly incorrectly).4 If those assumptions are accurate, then the share of Argentina’s cumulative population growth due to post-1869 immigration peaks at 52% in 1947 and declines until 2010, when it starts to rise again as South American immigration picks up steam and Argentine birthrates fall.

Please don’t forget that far more than 29% of the Argentine population has at least one immigrant grandparent or great-grandparent (let alone great-great grandparent)! These estimates only means that only 29% of Argentina’s cumulative population growth since 1869 was due to immigration.

These estimates help explain why mass European immigration did not erase the older genetic pattern. At some point well before 1860, a mestizo population emerged from Spanish men and indigenous women. (I shudder to think about what probably happened to the indigenous men.) That population was then diluted by the great immigrant wave, but the impact of that wave shrank over time due to differential birthrates between the low-immigration north and the high-immigration central pampas. The same story also better fits the heavy male skew of the 1869-1914 influx and the fact that roughly one-half of all immigrants to Argentina ultimately returned home.

What would a country reshaped by immigration look like?

It would look like the United States.

Much more of U.S. population growth seems to be due to post-1860 immigration than is the case in Argentina. Here’s a back-of-the-envelope exercise from Charles Lehman, using a method not-unlike Javiero’s (or mine), and applying it to the non-black population of the United States:

If the above is correct, then Elvis Country really did shrink in North America! Fully 69% of U.S. post-1860 population growth is due to immigration. Now, these estimates leave out the African-American population (they were created to ask a different question than the one posed here) and therefore leave out substantial immigration waves from the West Indies. But including them would only strengthen the conclusion.

To be fully comparable to Argentina, we’d probably want to look at two other numbers. The first is 1970, close to when the foreign-born share of the population bottomed out: immigration’s cumulative contribution to American growth was 59% in that year, against 40% in Argentina. Similarly, if you just look at the non-Hispanic white population, where immigration followed a rise-and-fall pattern similar to Argentina, immigration’s contribution to the growth of the white population peaked at 57% in 1980 and was still 55% in 2020. That is much more than our estimated 29% for Argentina.

A brief demographic history of Argentina

At the level of maternal and paternal lineages, the colonial period appears to have looked a lot like Puerto Rico. Something (probably bad) happened to the indigenous men, resulting in a mestizo population. After 1869, a massive wave of European immigration landed on top of these mestizos, but it was regionally concentrated. Later northern population growth increased the national weight of mestizo Argentines, and male-skewed immigration and return migration further limited the long-run impact of the European wave.

Argentina is not simply a South American version of the classic nation-of-immigrants model. Nor is it a simple extrapolation of the colonial society. It’s a country where an old mestizo substrate that looks a lot like Puerto Rico survived beneath a later immigrant overlay and re-emerged over the 20th Century, more strongly than the national myth admits.

Or, if you’re more willing to risk cancellation, you could just paraphrase Argentina’s former president: “A lot of Argentines arrived on boats, but a lot of them went back home, and a lot of our grandmothers came from the Indians. The boats, though, they really did come from Europe.”

And in comments, (who should have 10,000 subscribers, at least) wrote: “I guess the obvious argument is: look at Puerto Rico.”1 So let’s look at Puerto Rico!

What is Puerto Rico?

It’s an island in the Caribbean, duh. And a place that produced one of my favorite musical acts ever, Calle 13, and another one that’s, like, okay. (He played the Superbowl. I’m told the kids like him.)

But that’s obviously not what I mean. What I mean is, what is Puerto Rico? It’s not a state, but it’s not independent, so what is it? You’ll hear the phrase “colony” from politically-minded types who like to wave that stupid flag with the light-blue canton or you’ll hear the somewhat longer phrase “organized unincorporated territory of the United States” from most (but not all!) lawyers.

I’m here to tell you that both the politically-minded and (some!) lawyers are wrong. Puerto Rico is just an old-fashioned American territory, the way God and the U.S. Constitution intended, like Ohio before 1803 or Colorado before 1876 or Hawaii before 1959.

Bit by bit, in scattered pieces of legislation, Congress fully extended the Constitution to Puerto Rico. Sure, Congress could pass an “organic act” and declare the Commonwealth to be “incorporated,” but that would change nothing. It is now just an old-fashioned territory, like Arizona used to be.2

Foreign in a domestic sense

Some history: the United States annexed Puerto Rico along with the Philippines in 1898. For purely racial reasons, there was zero support for taking over the Philippines as an ordinary territory, thereby bringing 7 million “Malays” into the American polity. Congress therefore created a special colonial status for the Philippines, under which the U.S. government would exercise sovereignty but within which the U.S. Constitution would not apply. That status was extended to Puerto Rico (essentially by default) and the Supreme Court ratified it in the infamous insular cases, which ruled that Puerto Rico was “foreign in a domestic sense.”

First, it meant that Puerto Ricans were not automatically American citizens. They could keep Spanish citizenship (one of my grandfathers did) or adopt a separate Puerto Rican citizenship. Now, this didn’t mean that Puerto Ricans were foreigners, either. In 1902, the fiancé of one Isabel González traveled to Staten Island in order to take a job at a factory where Isabel’s older brother Luis already worked. The plan was for Isabel to join him later. But when Isabel got off the boat in 1902, she was declared an alien, and therefore subject to the immigration laws that prevented entry to anyone likely to become a public charge.

As you might imagine, an unaccompanied unmarried pregnant woman qualified as “likely to become a public charge.” Fortunately for Isabel, her brother and uncle made it to Ellis Island from their home in Staten Island the next day. Unfortunately for her, her fiancé wasn’t allowed off work to testify. So the authorities dug in and upheld her exclusion.

Unfortunately for the authorities, González was a very stubborn woman. She also had access to top-notch lawyers through her uncle, Domingo Collazo, who’d lived in the United States as an exile for decades and who had actually gone back to Puerto Rico as part of the American expeditionary force that took the island. He got a prominent lawyer, Charles LeBarbier, into the act, as did Puerto Rico’s nonvoting Congressional delegate, Federico Degetau.

That legal firepower meant that González could take her case all the way to the Supreme Court, which ruled 9-0 in González v. Williams that Puerto Ricans were not aliens and therefore could not be excluded from the mainland under the immigration laws. But it also didn’t say that they were American citizens.3

Second, Congress could regulate commerce with the island. This was an obvious problem for an island dependent on coffee exports and hoping to develop a sugar industry. Now, Congress didn’t tariff the island very heavily or for very long: the Foraker Act of 1900 declared that Puerto Rico would come fully under the U.S. tariff wall by March 1st, 1902. But it could, whenever it wanted to.

Finally, Constitutional protections did not extend to the island. The Bill of Rights simply did not apply. Congress could pretty much do anything it wanted to do.

Domestic in a domestic sense

None of this is true anymore.

Congress and the Supreme Court slowly extended the Constitution to Puerto Rico. In 1902, the island became part of the American customs area, equal to any other part of the United States. In 1917, Puerto Ricans became American citizens. In 1947, Congress extended Article IV, Section 3 of the Constitution to the island. In 1952, it went further, declaring that anyone born in Puerto Rico (regardless of parental citizenship) would be a citizen. The Supreme Court then extended the 1st, 4th, 5th, 11th and 14th amendments to the territory; extending the 14th brought along the 6th and 8th amendments with it.

In 1922, SCOTUS decided that the 7th Amendment, which guarantees a jury trial in civil cases, does not apply to Puerto Rican courts. But it does not apply to state courts, either: in 1877, in Pearson v. Yewdall, the Supreme Court held that the 14th Amendment does not does not require state laws to follow the 7th Amendment. In federal courts in Puerto Rico, the 7th Amendment has applied since 1922.

What about criminal law? Didn’t the Supreme Court recently rule that someone could not be tried separately in federal and Puerto Rican courts? Well, yes it did, but the logic of 2016’s Puerto Rico v. Sanchez Valle stated only that Puerto Rico was not a state, sovereign under the 11th Amendment. Rather, it was a creation of Congress. But all that did was give Puerto Rico the same status as any pre-1959 territorial government; territorial courts are a subset of the federal judicial system rather than the creation of an independent sovereignty.

Puerto Rico is indeed treated differently in terms of federal funding — a big part of the Puerto Rican debt crisis came from the fact that Congress decided to fund Medicaid at a far lower rate on the island. Was it able to do that because Puerto Rico was “unincorporated”? No. In United States v. Vaello Madero (2021), the Supreme Court said that Congress may treat territories differently under the Territorial Clause of the Constitution, with no need to rely on the incorporated-unincorporated distinction. Alaska was similarly shortchanged for federal highway money before statehood.

That leaves the income tax exemption. (Alaskans paid income taxes before statehood.) Puerto Ricans don’t pay because of 48 U.S. Code § 734. In other words, Congress exempted the island in 1917. Could it have done that with an incorporated territory? Yes. After all, nobody doubts the constitutionality of the Empowerment Zones, which provide tax exemptions for investors and businesses that set up shop inside them. We can also turn once again to United States v. Vaello Madero, which made no mention of any special doctrines about “unincorporated” territories to justify different treatment. In fact, Justice Gorsuch wrote a beautiful and blistering concurrence in which he blasted the Court for not taking the opportunity to overturn the entire distinction while it was at it.4

In other words, Congress can exempt territories from various taxes as it pleases. Incorporation or its absence has nothing to do with it.

Finally, the courts have defined Puerto Ricans as natural-born American citizens. It is extremely hard to strip a natural-born American of their citizenship. Taking out a foreign nationality will not do it. Hell, not even serving in the armed forces of another state will do it.5 (My uncle Eddie served in the IDF; he kept his U.S. citizenship.) The law states “A person who is a national of the United States whether by birth or naturalization, shall lose his nationality by voluntarily performing any of the following acts with the intention of relinquishing United States nationality.”

That is, of course, only a law. It could be changed, but the change would only apply to naturalized citizens (maybe), and perhaps not even that: Afroyim v. Rusk (1967) held that Congress cannot strip Americans of their citizenship against their will. Interestingly, the Court used originalist language to justify that decision:

The Constitution, of course, grants Congress no express power to strip people of their citizenship, whether, in the exercise of the implied power to regulate foreign affairs or in the exercise of any specifically granted power.

So let’s recap:

1. Congress and the courts have extended all the major constitutional protections that applied to old-fashioned “organized incorporated territories” as existed before 1959.

2. Puerto Ricans are natural-born citizens and not aliens or American nationals, like Samoans.

3. Congress legislates for Puerto Rico under the same constitutional clauses that it used for old-fashioned territories.

4. The incorporated/unincorporated distinction is not doing visible work in Puerto Rico’s differential treatment regarding federal taxes and benefits.

5. Puerto Rico’s remaining differences from states look like differences of territorial status, not evidence of “foreignness” or deriving from “unincorporated” status.

In other words, Puerto Rico isn’t a state, but it’s far from a colony. It’s an old-fashioned territory, enough to make any constitutional conservative happy. And in fact, there is one (so far solo) federal court decision affirming that argument. In the words of Judge Gustavo Gelpi, writing in Consejo de Salud Playa de Ponce v. Rullan:

Actions speak louder than words. Although Congress has never enacted any affirmative language such as ‘Puerto Rico is hereby an incorporated territory,’ its sequence of legislative actions from 1900 to present has in fact incorporated the territory.

So how has Puerto Rico done?

Great.

In the postwar decades, Puerto Rico grew astonishingly fast. By the time the model petered out around 2004, the island’s per capita income was within striking distance of Mississippi and catching up to North Carolina. That is a simply phenomenal rate of growth. Now, some may say that growth was caused by two factors: (a) free emigration to the United States, and (b) large subsidies from the United States — but both of those are benefits of being part of the United States!

From the point of view of Cuba or Costa Rica, Puerto Rico entered a whole ‘nother economic universe. Its per capita income currently rivals Italy. (A country which, like Puerto Rico, has faced a lost two decades in terms of economic growth.) And all you need to do is travel around Puerto Rico to see this. It’s not as picturesque as Italy and the transport network isn’t as good, but it’s obvious that Puerto Rico is a developed country.

Less known is that Puerto Rico also did pretty well before World War 2. It caught up to Cuba and Costa Rica and avoided the worst vicissitudes of the Great Depression. Its GDP per capita more than doubled in the four decades after it became an American territory, for an annual growth rate of 2.6%. That’s not extraordinarily fast by modern standards, but it’s pretty good for the early 20th century. And it happened at a time when few Puerto Ricans emigrated to the mainland and the federal government was very stingy with its subsidies.

Moreover, this growth was a revolutionary change in the island’s lived experience. In 1900, its income was on a par with places like Burundi or the D.R. Congo in 2024 — well above subsistence, yes, but still desperately impoverished. In 1940, Puerto Rico remained a poor country, but now on a par with Latin American norms. Living standards were not good — only 14% of housing units had a private indoor flush toilet in 1940, for example (page 21) and only 29% were wired for electricity (page 24) — but even those miserable conditions were a massive improvement over the island’s destitution around the turn of the 20th century. After all, in 1899 only 1% of the island’s dwellings had “toilets” (pages 110-11) — and few of those were real flush toilets, instead mostly cisterns relying on lime or dry clay to soak up the “foul odors.”

Other indicators improved as dramatically. Life expectancy went from around 30 to 46.4. Literacy increased from 22 percent of the population above age 10 in 1899 to 60 percent by 1940. Surfaced roads went from 275 kilometers in 1899 to 2,394 kilometers by 1940. As a result, transportation costs fell between 50 and 70 percent in the first decade of American rule. The result was an export boom, even before you add in the benefit of being inside the American customs area.

By 1940, Puerto Rico no longer lived on the edge of famine, even if malnutrition remained widespread. According to Brian Marein, male heights increased by 4.2 centimeters between 1890 and 1940, and Puerto Ricans became the tallest Latin Americans outside Argentina and Uruguay. In 1930 — yes, under the Hoover Administration — the federal government began paying to provide milk to infants and school-age children at stations established around the island. The New Deal expanded those programs and added investments in housing, sewers, and electricity. By mainland standards, Puerto Rico was still desperately poor — even Mississippi outdistanced it in 1940. But by southern European standards, the island fit right in: richer than Romania, on par with Portugal, slightly less than Spain. And in Latin America, only the Southern Cone was significantly better off.

Three things underpinned the island’s prewar growth. First, agriculture. Unlike Cuba, Puerto Rico was firmly inside the American tariff wall. So sugar and tobacco production grew rapidly after annexation. Not only that, protection made Puerto Rican sugar resilient to downturns (unlike Cuba): as the Great Depression gathered force in 1928-34, mainland agricultural output fell 12% whereas Puerto Rican output rose by 26%.

Second, cheap wages fueled a textile boom. The Depression sent New England mill owners in search of cheaper labor and prompted a production exodus to the island. Mainland textile output collapsed by 30% in 1928-34, but Puerto Rican production surged by an astonishing 128%.6

Finally, the New Deal cushioned the Great Depression. Federal spending rose from basically nothing in 1930 to around a fifth of economic output in 1945. That powered a lot of construction jobs and built a lot of very useful infrastructure.

The exhaustion of the Puerto Rican growth model in the early 21st century has been a tragedy. The travails of the island’s power sector are unworthy of a rich nation. Hurricane María was a disaster. Its second population exodus — making Central Florida great again — is terrible for the island. But at the end of the day, we’re talking stagnation rather than collapse … and stagnation at an extraordinarily high income level. The economic miracle was a real one — few today would prefer the dynamism of Panama or the D.R. over Puerto Rico’s wealthy torpor.

And who’s to say that good times can’t come again?

Applications to a Cuban counterfactual

So what does this history say about the prospects of a genuine American Cuba, where it became part of the United States in 1898?

Easy: they’d be phenomenal.

The first channel would be via the American customs area. With no trade barriers, sugar production would have exploded, nipping the mainland beet sugar industry in the bud. In addition, textile, tobacco, and tropical fruit production would have surged. The size of those surges would depend upon how low Cuban costs could go, but they would certainly happen.

The second would be fiscal. Railroads and paved roads would have expanded much further and much faster — even when not directly financed by the local government, investors would be far more willing to risk their capital in a U.S. territory than they were in an independent republic, even one under explicit American protection. Then, during the Depression, the place would have been flooded with federal money. As a share of GDP, that support would likely be smaller than Puerto Rico, but only because Cuba would be richer. In absolute terms, its impossible to imagine Cuba receiving less than its fellow Caribbean island.

Finally, Cuban politics would be much better. The problem with actual Cuba after 1934 was not simply that Machado had wrecked the state. It was that the successor regime settled into a durable political economy of quotas, protection, and restraints on trade. Government policy deliberately stifled innovation and the adoption of new technology. The resulting inefficient apparatus had to be protected from foreign competition with a high tariff wall.

An American Cuba could not do that. Even if a hypothetical Cuban territorial (or state) government tried to implement such a web of controls, the federal courts would not let them. Lots of American states tried and failed. In Baldwin v. Seelig the Court struck down New York’s attempt to keep out lower-priced Vermont milk. In Hood v. Du Mond it struck down New York’s denial of a business license where the point was to limit interstate shipments and protect local economic interests. In Dean Milk v. City of Madison it invalidated a local-processing rule that reserved a city market for nearby producers. In Polar Ice Cream v. Florida Milk Commission it invalidated Florida rules that forced a distributor to buy from designated local producers at fixed prices. In West Lynn Creamery v. Healy it invalidated a Massachusetts scheme that assessed all milk sold in the state but rebated the proceeds only to Massachusetts farmers. If these didn’t survive court scrutiny, it’s unlikely that Cuba’s baroque web of rules would have.

That is not to say that every post-1934 Cuban rule would have been laughed out of federal court. (See footnote seven —> 7 ) It is to say that the core devices of Cuban “risk-free capitalism,” as outlined in the last post, would have been both illegal and self-defeating in an American Cuba. Illegal, because federal law empowered American courts to block attempts to reserve markets, restrain interstate commerce, legalize collusion, or favor local producers. Self-defeating, because if Cuba were inside the American customs area, then the island’s businesses would have no separate tariff wall behind which to hide. Cuban firms would face mainland competitors free of Cuban restrictions. Under those circumstances, business and labor support for the regulations would rapidly slip away.

To speculate a bit, Cuba probably would not have remained a territory for very long. Territorial status has been unstable enough in Puerto Rico. In Cuba, with a larger and more sophisticated political class and a far stronger sense of national identity, long-term relegation to the territorial league would likely have been impossible. If that’s correct, and Cuba became a state, then the relevant counterfactual to American Cuba wouldn’t be Puerto Rico; it would be Florida, with the island receiving even more federal spending and steady stream of gringo migrants coming to work, establish businesses, or retire.

There are few other places on Earth besides Cuba where the gap between what is and what realistically could have been is so large.

If only it could have failed like Puerto Rico. Most countries should aspire to fail like Puerto Rico.

That really happened. President Gerardo Machado was prepared to pay any price, bear any burden, rather than miss Cuba’s debt payments. Even when that price included confiscatory taxes, wage arrears, the complete shutdown of public education, and an unstoppable downward GDP spiral, Machado refused to default. The end result was the extraordinary spectacle of the Roosevelt administration (Franklin, not Theodore) orchestrating the overthrow of a Cuban president because he refused to default on debts to American investors.

Machado had the bad luck to be elected president in 1924, right before the sugar market collapsed. Elected in November, he didn’t take office until May, as the market went into free fall. A record Cuban sugar harvest combined with London’s decision to exempt imperial sugar from U.K. duties caused prices to collapse. Prices sort of stabilized after that, but the good times were over.

The Machado administration reacted with a kind of proto-Keynesianism. In 1926, it borrowed $10 million (2% of GDP) from Chase to accelerate a public works program. The next year, it ran a fiscal deficit of 3% of GDP. In 1928, it negotiated a $50 million credit line as nominal GDP shrank from $648 million to $584 million.

After securing a constitutional amendment, Machado (a Liberal) won re-election in 1928 as the nominee of all three Cuban political parties — the U.S. embassy believed, perhaps unsurprisingly, that he had used government funds to bribe members of the Conservatives and the Cuban People’s Party in order to secure both the amendment and his uncontested re-election. When Carlos Mendieta tried to challenge Machado under the rubric of the Nationalist Union, the new party was kept off the ballot and harassed by police.

In February ‘29, after the election, the government issued an additional $38 million (7% of GDP) in long-term bonds and negotiated an additional $20 million credit line (4% of GDP) … which it exhausted by August. By the end of the year it had run an eye-watering deficit of 15% of GDP. Under the prevailing interpretation of Cuba’s constitution, the U.S. State Department had to sign off on all of these loans, which it dutifully did, terrified that a failure to do so would cause the Cuban economy to deteriorate faster.

Machado failed to ignite a recovery, as the Great Depression ravaged the country’s export markets.1 The fundamental problem was that Cuba used the U.S. dollar as its currency, which meant that it could not devalue. It therefore had to adjust through deflation. Prices and wages declined, the debt-to-GDP ratio rose, and the gigantic budget deficits made matters worse by making everyone fear higher future taxes.2 The government tried minting silver pesos in 1932, which helped it cover its growing deficits, but not in sufficient quantities to drive the dollar out of circulation.3

Instead of reactivating the economy, growing public debt dragged it down further. Prices were falling. Nominal tax receipts followed. But the burden of public debt rose and the willingness of lenders to finance new debt fell. The government therefore had to raise taxes, lay off workers, and cut salaries to make its debt payments. But that cut the demand for goods and services, which in turn caused prices to fall further, depressing tax revenues even more …

And so a de facto dictatorship entered an economic spiral. Violence rose. In 1930, before the midterm elections, gunfire broke up a student demonstration, killing one and wounding two. The President then “temporarily” suspended constitutional guarantees, and armed his supporters to violently break up Nationalist Union rallies, which in a heavily-armed country managed to kill both police officers and civilians. Massive student demonstrations followed the November “elections.” Machado shut the university and all high schools in December (fiscal exigencies would keep them from reopening). In January he arrested the entire university student directorate and rammed a bill through Congress indefinitely suspending civil liberties.

The Machadato, Part I: The Full Ceaușescu

Machado dismantled the Cuban state and wrecked the economy in order to keep paying its debts. The result was exactly as chaotic as you would expect. Debt service rose from 9% of public spending in 1928 to 13% in ‘30 and 14% in ‘31 before spiking upwards to 20% in 1932.

In January 1930 the government decreed the first wage cut; by September 1931, overall nominal public sector salary levels had declined by half. Even then, the government couldn’t pay its bills. In December 1931, the Machado administration postponed government paychecks for several weeks. Six months later, in June 1932, it again suspended wage payments, save the judiciary, high officials, and the military. The judiciary came under the axe in September ‘32.

And even that didn’t stop the bleeding. In January 1933 cabinet members joined the long list of public servants expected to work for worthless paper IOUs. The New York Times reported that salary arrears reached $14 million that month and the government began paying salaries in scrip. By May 1933, wage arrears alone surpassed $19 million, fully half the central government’s annual budget. The rest of the public schools and all of the courts shut down, agricultural extension programs ceased, and public services were suspended.

Tax hikes were almost as destructive. In 1933, Cuba imposed a 1¢ per pound excise tax on refined sugar at a time when sugar (net of U.S. tariffs) traded at 0.9¢ in New York. Machado essentially confiscated the lion’s share of Cuba’s export earnings. The tax ignited a furious response from sugar growers. The government backed off (informally) on the sugar levy but imposed a dizzying array of domestic taxes, only to see collection collapse even faster than the economy because tax collectors, having been unpaid for months, grabbed the receipts for themselves.

The state’s collapse didn’t go unresisted. Open revolt broke out in August 1931, as Cuban troops fought rebels in Havana, Matanzas, Pinar del Río, and Santa Clara. The organized revolt collapsed within a week, but organized warfare morphed into widespread terrorism. 1931 and 1932 saw a regular litany of bombings and assassinations — including two massive car bombs fortunately discovered by police before they could detonate.4 Machado gave as good as he could take: in addition to the police, Machado pardoned 489 supporters in 1931, 400 for violent offenses. The U.S. ambassador warned Machado that “nearly everyone was opposed to the government except those being paid by it.”

So why did Machado insist on repaying the bankers? Well, part of it was a (misplaced) fear of American intervention, part was pride, and part was fear of losing access to foreign credit, but the strongest motive appears to have been self-interest. From The Empire Trap, page 228:

Cuba’s lenders provided Machado and his supporters with personal incentives to continue the government’s debt payments. Chase Bank granted Machado personal loans worth $130,000 ($2.15 million in 2011 dollars), “with little prospect of immediate payment” in the words of a later Senate investigatory committee. Chase also made loans to enterprises owned by the Cuban president: it gave $45,000 ($745,000 in 2011 dollars) to a construction company and $89,000 ($1.48 million in 2011 dollars) to a shoe factory.

In addition, Chase hired Machado’s son-in-law, José Emilio Obregón, even though, as Chase officials themselves wrote, “As we know, from any business standpoint he is perfectly useless.” Although Obregón was perfectly useless to Chase’s business, he nevertheless received a starting salary of $12,000 (which rapidly rose to $19,000, for a rise from $202,000 to $319,000 in 2011 dollars) and an additional $500,000 commission ($8.5 million in 2011 dollars) for his role in securing the 1928 public works loan.

Cuban families close to Machado were invested in the Cuban public debt. The State Department reported that at least $1.5 million of the Cuban public works bonds ($26.3 million in 2011 dollars) was held by “individuals close to the President,” with an additional $5.5 million ($96.8 million in 2011 dollars) belonging to the Compañía Cubana de Contratistas, “in which those chiefly interested are Augustus Alvárez and Rodolfo Arrelano, both of them intimately connected with the President.”

Machado’s system meant that Machado and his cronies had a vested interest in continuing to pay the debt. That was great for American bankers, at least as long as Machado could keep himself in power. For the Cuban people, under Depression conditions, not so much.

The Machadato, Part II: The American coup

There’s a long history of paranoid people seeing an American hand in all sorts of foreign events. Sometimes they’re even true. In the 1960s, American oil companies really did try to overthrow Sukarno. In the 1970s, ITT really did try to overthrow Allende. (There is something very strange in having the phone company try to overthrow a government, but when you think about it, it has a certain perverse sense.)

In Cuba, however, the U.S. got rid of Machado because he refused to default on the debt. Back in Washington, the Great Depression destroyed whatever political influence the bankers possessed. Abroad, meanwhile, American officials were urging client states to stop servicing unsustainable debts — nobody wanted to see countries fall into chaos under the burden of interest. Nor did they want to see taxes on American enterprises raised to confiscatory levels in order to repay debts to American banks. And Machado, in Cuba, was simultaneously dismantling the state he ruled and taxing away the foreign earnings of American enterprises, even as his country slid into civil war.

But Machado was stubborn. Or greedy. Or crazy. Or all three — American officials who met with him during this period reported strong whiffs of “crazy” from the man. He studiously ignored every hint emanating from the American embassy in Havana.

The problem for Washington was that it couldn’t openly order Machado to stop making payments. It couldn’t even simply pressure U.S. banks to unilaterally offer a debt restructuring. President Hoover’s last ambassador, Harry Guggenheim, succinctly summed up the dilemma: “Any effort by our government to induce the bankers to relieve the financial strain on the Machado administration will be generally condemned as United States support of the unpopular Machado administration.” In other words, the Hoover Administration wanted to get Machado to stop wrecking his country, but they didn’t want to be seen saving him from himself.

Guggenheim’s FDR-appointed successor, Sumner Welles, was less risk-averse and tried more directly to get Machado to default. The problem, Welles reported, was that Machado was delusional. “He feels that the strongest support which he has in his present position is the support given him by the American banking groups and he has further the conviction, which nothing will shake, that any default of obligations by his administration will make more likely the possibility of American intervention.”

The thing is that failing to default made American intervention inevitable. Machado could have forestalled that by defaulting, but didn’t, even when FDR’s own ambassador told him to.

And so the U.S. got rid of Machado. We didn’t have to invade. A wave of strikes provided the pretext. On July 25th, Havana’s bus drivers went on strike to protest a municipal tax hike. Cab drivers followed on August 1st. Their strike wasn’t just a walkout: the strikers littered Havana’s boulevards with broken glass and nails to make them impassable. Long-distance truck drivers and bus drivers in other cities walked out on August 2nd; the longshoremen followed on August 3rd.5 The next day the strike went national: government employees walked out, stores closed, and Welles worried that “there will be a state of near starvation within the next 24 hours.” Three days later, on August 7th, the general strike turned violent when the police fired on demonstrators.

Welles immediately went to President Machado, and bluntly told him Cuba would fall into anarchy that unless he appointed somebody else to run the government and resigned. Machado told Welles that he would “prefer armed intervention to the acceptance of any such proposal.” In Welles’s words, Machado “was in a state of mental disturbance bordering on hysteria.”

FDR quietly called the Cuban foreign minister in Washington down to the Oval Office on August 9th. He gently told the ambassador that Machado should step down “to prove to the world his high purpose in this crisis” and perform “a noble act” suitable for “a great man, a great leader, and a great patriot.” FDR even offered to provide unspecified political cover so that Machado would not lose “face.” He also somewhat ominously added that he felt a “duty to do what we could so that there should be no starvation and chaos among the Cuban people.”

When Machado refused FDR’s direct order, the gig was up. With disorder and food shortages spreading, Ambassador Welles held meetings with the leaders of Cuba’s three major parties and the military to organize a new government. Welles was less than impressed with most of the opposition’s leaders, with one exception: Hortensia Lamar, the leader of the campaign for women’s suffrage.6 Welles told her on August 12th that Machado would be resigning soon and Lamar announced it to an enthusiastic crowd from the balcony of the U.S. embassy.

The next day, Machado stepped down. Carlos Manuel de Céspedes took over as provisional president. Machado left by plane for the Bahamas with “five revolvers, seven bags of gold, and five friends in pyjamas.”7

He would die in 1939 in … where else? … Miami.

The U.S. proceeded to implement a plan for orchestrating a Cuban default. Bureaucratic conflicts between State and Treasury led to a rather less smooth rollout than Ambassador Welles hoped, but it nonetheless worked. With his typical creativity, FDR even found a clever way to aid the new government without the need to go to Congress: have the Reconstruction Finance Corporation make a $4 million loan to a mining company, which it would pay in silver that the Treasury would immediately mint into coins with a face value of $14 million that would then be shipped to Cuba — that’s the equivalent of $7.7 billion in 2024 as a share of the federal budget, and almost 4% of Cuba’s GDP.

After the Machadato: Not quite over

As the Americans were hammering out their plan to start repaying salaries, one Sergeant Fulgencio Batista led a mutiny of non-commis­sioned officers. The proximate cause of the mutiny was a [false] rumor that the government intended to cut enlisted pay from $22 a month to $13. Radical student leaders quickly converged on the mutineers’ headquarters. The mutineers agreed to support the students, and declared a new government on September 4th under a five-man executive commission headed by one Ramón Grau. Five days later, Grau assumed the Presidency. Recalcitrant Cuban officers held out in the National Hotel in Havana, when Grau’s soldiers stormed the building and captured or killed the holdouts.

Ambassador Welles wasn’t thrilled by the new regime, and not only because he was between leases and living in the National Hotel when the Cubans stormed it. No, the problem was that Grau was a terrible combination of left-wing and ineffective. Bombings and terrorism surged, assassinations proliferated, and anti-Grau troops from Camp Columbia “flying stolen fighter planes, swooped low over the city of Havana, spraying 50-caliber machine gun bullets into the streets, across the roof tops, and into the streets again.”

More importantly, the disorder threatened American investments. Workers occupied American-owned sugar plantations, including two sugar mills, and the Grau government directly interfered in the management of the American-owned Cuban electric and phone companies. Other plantations went up in flames. Police protection had already evaporated under Machado; Grau made it worse. Welles reported that the Grau government was under “ultra-radical control,” and “Communistic elements are having an unfortunate influence.” Standard Oil asked for U.S. Marines to protect its operations. Bethlehem Steel and United Fruit quickly followed.

FDR heard their requests: he ordered 29 naval vessels to Cuba and Key West. He also ordered the Marine Corps to put its air squadrons on alert, with pilots at Quantico, Virginia, ordered to be packed and ready to fly to Cuba “on a moment’s notice.” The Marines also activated five battalions in Quantico and Port Everglades in Fort Lauderdale, Florida, and prepared for deployment.

American covert action managed to head off the need to invade. Jefferson Caffery, acting as FDR’s personal representative, brokered a deal between the aforementioned Carlos Mendieta and Fulgencio Batista to organize a coup against Grau. On January 15th, 1934, the Cuban army swung into action and quickly ousted the chaos-prone left-wing government. Mendieta assumed the presidency, ceased debt payments, got American money, and started paying back salaries.

A New Deal for Cuba?

The … uh … new deal between the U.S. and Cuba was a strange one. As Alan Dye and Richard Sicotte have argued, it relieved the immediate crisis at the cost of long-term growth.

The U.S. gave up its legal right to intervene, but nobody thought that meant anything. The Olney declaration was still alive and well: “Today the United States is practically sovereign on this continent and its fiat is law upon the subjects to which it confines its interposition.” The U.S. hadn’t needed legal justification to create Panama, occupy Hispaniola and Nicaragua, or install its officials inside the governments of places as far afield as Peru and Bolivia. It was a nice gesture, but purely symbolic, as Messrs. Noriega and Maduro would discover many decades later.

The substantive change was that FDR renegotiated Cuba’s trade status with Congress to channel more benefits to the island while protecting mainland sugar producers. FDR convinced Congress to cut the sugar duty in half, from 2¢ to 0.9¢ — but with a quid pro quo that capped Cuba’s share of the American market to its 1931-33 average. (See figure below.) Moreover, access had to be renewed every three years, which discouraged investment.

So Cuba would enjoy high sugar prices, but American producers could rest secure that no matter how efficient the Cuban industry became — and there was ample scope for innovative productivity gains — it would never cut into their existing market.

The resulting arrangement stabilized Cuba and generated rents, but it also capped the island’s main source of growth. With its share of the U.S. market quota-limited and foreign markets increasingly inaccessible or unattractive, sugar production stagnated. In an alternate universe, that stagnation might have produced dynamic new industries (or a precocious mass migration to the United States) but we don’t live in that universe. In this one, the combination of American subsidies and hard output caps seems instead to have generated enough rents to keep Cuban elites attached to protecting their existing lines of business.

In the words of Mary Speck:

Reorganization of the [sugar] industry would have been economically painful, and, for a country still reeling from Machado’s overthrow, politically disastrous. Cuban producers demanded internal quotas to protect themselves from internal competition. Decree 522, promulgated in 1936, followed a year later by the Law of Sugar Coordination, set up an elaborate regulatory system designed to guarantee the survival of the island’s smaller mills, along with independent sugar planters or colonos. Small mills were guaranteed minimum basic quotas, while larger mills were limited to their average production in 1934 and 1935. Sugar planters or colonos in turn won quotas to preserve their share of the cane sold to mills, and also secured restrictions on the amount of “administration cane” large mill owners could grow on their own property. Colonos also won the so-called “right of permanent occupancy,” which meant that as long they met their cane quota and paid their rent, they could never be evicted. And just to be sure no mill owner or cane grower ever went into bankruptcy, the act extended a moratorium on agricultural loans.

But it did not end with sugar.

Risk-free capitalism in Cuba after ‘34

After 1934, Cuban governments increasingly extended the sugar sector’s logic of protection to the rest of the economy. Back to Mary Speck:

U.S. trade policies not only limited the growth of Cuban sugar exports, they discouraged the growth of other export industries, as well. High tariffs on finished tobacco products … encouraged U.S. cigar makers in Havana to shut down their factories and re-open them in New Jersey. 30 Would-be exporters of winter vegetables and citrus fruits also faced tariff barriers supported by strong domestic lobbies. It did not matter that many of these small farmers were U.S. citizens, lured to the island shortly after independence by land developers … Well-organized fruit growers in Florida and California made sure that tariffs were high enough to discourage foreign imports, including those raised by their compatriots in Cuba.

The economic polices that emerged beginning in the 1930s were geared, not toward growth, but toward protecting Cuban jobs and Cuban businesses. In the words of the World Bank, Cuban economic policies focused on “preserving the status quo and on regulating the division of a fixed national production, rather than on innovation to enlarge the total product.”

Mills were discouraged from economizing by reducing the length of the harvest or improving the productivity of labor. Labor legislation made it difficult to dismiss workers for any reason, including “tecnificación.” Sugar unions also protested against rising “intensivismo” in sugar factories. … Growers had little incentive to improve the quality of their cane because their payments were based, not on the yield of their individual crops, but on the average yield of the entire cane crop processed at their local mill. In order to equalize payments to colonos with poor land, the percentage payment declined as yield increased. There was little reward for raising yield by planting better varieties of cane, cutting cane only when mature, or delivering it promptly to the mill.

The attempt to create risk-free capitalism was not limited to the sugar sector. Quotas were extended to two other important products, tobacco and coffee. Nor were imports allowed to bring unbridled competition to the island’s domestic market. Most industries were organized in manufacturers’ associations that secured tax advantages, subsidies, and protective tariff barriers against finished products while lobbying for low tariffs on imported inputs. The result was a complex system of taxes and tariffs, riddled with exemptions.

Manufacturers did not hesitate to join forces with labor when threatened with technologies that might raise productivity and thus displace workers by putting inefficient enterprises out of business. Attempts to mechanize cigar production beginning as early as the 1920s were repeatedly thwarted by a powerful alliance of small manufacturers and skilled workers. Candy manufacturers who invested in modern machines during the 1940s had to run them at the lowest possible speed so as not to put their rivals out of business and displace workers. Textile factories faced potent opposition from their competitors and their workers as they tried to raise productivity in the 1940s and 50s.

In short, other sectors demanded the same security that the U.S. quota system gave to sugar, which soon enveloped Cuba in an ever-tightening web of regulations. Cuba remained a relatively prosperous country, but growth never returned to its pre-Machado trend. Hell, it didn’t fully recover from the Depression until 1950:

Needless to say, none of this would have happened had Cuba become an American territory in 1898, let alone a state.8

The irony is hard to miss. Washington helped remove a government because it would not stop paying American creditors. It then imposed a settlement that channeled rents to Cuba and avoided a painful restructuring of the economy. The settlement spared the island a complete implosion, but locked Cuba into a political economy in which too many interests lived off rent-seeking and too few were able to gamble on creative destruction. The opposite of dollar diplomacy, it turns out, was not economic freedom. It was a system where American dollars prevented collapse but froze the economy.

At least until 1959.