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.)

The myriad small wars of the past 250 years are not precedents for President Trump’s decision to launch a surprise attack on Iran on his own authority. All of them — even Maduro’s capture — would have been countenanced by many of the men who wrote the Constitution.

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 all 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 war over 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 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 the U.K. 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.

In other words, the U.S. had no constitutional need to declare war on North Vietnam (the Tonkin Gulf Resolution authorized “all necessary measures”) and a really big diplomatic reason not to.

We’ve searched for a convincing precedent for the air campaign and blockade against Iran and haven’t found one. Either Congress or allies were consulted, or there was a genuine constitutional or diplomatic reasons for no declaration. The Libyan raid seems to be the only recent exception, and it’s a pretty small one.

But if Congress historically mattered so much, 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 already serving when the war broke out. 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 period, 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.5

By that standard, the current war with Iran is a rounding error! And that applies to Iran as well: its losses don’t approach North Korea’s. 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

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 what a declaration of war meant in people’s minds. 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 kind of contradicts the idea 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 seem to indicate a shift in the meaning of a formal declaration of war.

There is other evidence that formal declaration of “war” had become taboo between 1943 and 1950. Dean Rusk recalled that officials eschewed a declaration because they wanted to avoid “major mobilization of the manpower of the country” and “unconditional surrender as a war aim.” That makes little 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 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 But 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.” The valence of a declaration of war had to have changed.

It just seems that at a time that was squeamish about very few things, the idea of a formal declaration of war had become almost taboo. And so we went to war with North Korea (and eventually its Chinese ally) with only implicit support from Congress.

Still, Korea doesn’t look like Iran. North Korea started the war; Truman went to the United Nations; and the war was initially popular. President Truman did not take the country to war alone. Korea may have created the appearance of presidential precedent, but it was not remotely analogous to Trump’s 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 much of anything like the current conflict: a presidentially-initiated attack carried out with no Congressional or allied discussion and no apparent constitutional basis. The closest I could find was the 1986 raid on Libya, which doesn’t approach the airstrikes and blockade of Iran in scale and was in fact precipitated by hostile Libyan actions.

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 even in our world Congress authorized the use of force in both cases. In a world where declarations of war still happened, Presidents would still have inherited plenty of false precedent and they would still be the commander-in-chief. Congress’s only serious tools for stopping unilateral presidential action would remain via appropriations or via impeachment.

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.

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 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, the book became something rather different: a minor bestseller in a nation newly anxious to understand its peculiar place in the world and, perhaps more urgently, the continuing dislocations of its western neighbor.

The book was also controversial. Sobel was accused, often and loudly, of an anti-Mexican bias. The book was, in fact, banned from sale in Mexico, which only increased its sales in North America, and Sobel’s denials did little to still the criticism. He did, however, concede 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 sentence, more than any chapter 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 not a conventional historical analysis. Nor is it a polemic or a sequel in any ordinary sense. Sobel calls it “counterfactual history.” The phrase is ungainly but accurate. The book is a full-dress history of events that never occurred, complete with false footnotes, historical personages, and imaginary countries, all replicating the apparatus of sober scholarship.

The premise is that the North American rebels win the Battle of Saratoga. Britain withdraws from most of the continent. A new republic, the United States of America, is created along the Atlantic seaboard. Britain retains the northern territories, 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 first president.

Given his stated views, one expects the new republic to dissolve at once into mob rule, anarchy, or foreign conquest. It does not. Rather, for the first sixty years, the imaginary republic thrives and expands. It even seizes the northern half of Mexico. Sobel is too careful a writer to make catastrophe immediate. The prose is dry, almost clerical, and the invented documentary apparatus is handled 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 drags Europe into two decades of war before a British-led coalition restores something resembling the old order.

This is where the book’s aim becomes clear. In victory, the North American Rebellion becomes more than an isolated colonial event. Rather, it creates a new style of politics: abstract, universal, impatient, and incapable of knowing when to stop. That argument is open to objection, but Sobel pursues it with considerable force.

The chapters that follow are darker. Like the real USM, Sobel’s “USA” finds it extraordinarily difficult to deal with the institution of slavery. Unlike the USM, it fails catastrophically at peaceful abolition. Rather the institution 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 that makes the Rocky Mountain War seem like a brief skirmish. More than 300,000 soldiers die, the South is impoverished, and the victorious USA allows the southern states to re-establish Negro slavery under another name. De jure slavery is abolished decades early but 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, as if prosperity were merely a device to delay the inevitable catastrophe.

In 1914, Europe collapses into what Sobel calls the “First World War,” which too obviously makes the reader realize something worse is coming. Nonetheless, war is one of the book’s most vivid inventions. The early outbreak of war 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 weak British ties. Sobel attributes this to a militaristic streak in his fictitious republic that too-closely resembles the real Mexico. 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.” It is not an attractive coinage, but it is a useful one. The Communists construct an omnipresent security apparatus and slaughter their own citizens on a scale that exceeds even Bruning’s worst 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 middle of the book one begins to feel the hand of the author at work.

In his 1929 a series of errors by the American central bank converts a severe recession into a decade-long catastrophe. The parallel with the 1936-37 downturn is obvious, but Sobel’s invented governments are trapped by their ideological rigidity and less competent than our own. 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 Russian Communist 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 fewer than six atomic bombs are used against Germany and Japan.

The postwar chapters are the book’s bleakest. There is no equivalent of the Mason Doctrine. The USA turns inward for a second time. Half the world falls under Communist domination, from Rome and Berlin all the way to Saigon. 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 them, 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 spent itself abroad, faces Irish and Welsh terrorism at home. The USA, having abolished slavery in law but restored much of it in practice, faces an organized Negro insurgency. A Communist regime in Argentina draws America into another atomic war and then into a long occupation. The rump Mexico collapses into chaos and is also occupied by the Americans.

By 1971, where 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 ruled by Communists is at war for the third time in a century. Those who live under Communism endure a dictatorship so absolute that ordinary political language fails. Millions are dead from war, starvation, deliberate industrial extermination, atomic bombardment, racial enslavement, 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. Sobel quotes the formulation of the famous Mexican historian, Frank Dana, more than once: 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, religion, and region. 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 often unattractive, but successful, pragmatism.

In Sobel’s fictional history, by contrast, 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. Rather, he argues something colder and less direct: the radical utopianism of his “totalitarians” draws from the same philosophical well as the humane idealism of the North American rebels. When liberty fails to produce justice, the well-intentioned humanists 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 be denied?

The opposite nightmare then appears. Sobel’s “Nazis” are not treated as an accident, nor merely as German pathology. They are the inevitable counter-revolution against Enlightenment liberalism: racial, anti-rational, hierarchical, and pagan. Thus Sobel links the rise of inhuman ideologies in the Old World to the triumph of their warm and humanistic, but ultimately unsuccessful, predecessor in the New.

This is the most ambitious part of For All Time, and also the most vulnerable. Sobel is at his best when tracing the institutional consequences of bad premises. He is less persuasive when all his fictional horrors seem to descend, however indirectly, from Saratoga.

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.

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.

But there is a third episode in Cuban history: Cuba under American domination, between 1898 and 1934. The United States takes control of Cuba, declines to annex it, reserves the right to intervene, and finally overthrows the government on its way out because said government insists on repaying its debts to American creditors.

It’s a weird story. This is part I.

The annexation that wasn’t

So why didn’t the United States annex Cuba in 1898?

Well, there are three general hypotheses:

1. Anti-imperial ideology. In some readings, this is actually a form of racism; we weren’t anti-imperial so much as we didn’t want more non-white people in the polity.1

2. Cuban resistance.

3. Sugar.

The correct answer is sugar. There is something to the other two arguments. But neither was decisive in the face of opposition from sugar interests. Nonetheless, let me briefly take the other two in turn.

Yes, Congress got into the Spanish-American War in order to guarantee Cuban independence. And yes, back in 1870 the Senate declined to ratify the 1869 treaty to bring the Dominican Republic into the Union for purely racial reasons.2 So there are reasons to think that Congress didn’t want to expand southward.

But let’s be serious. The U.S. annexed the Philippines and Puerto Rico as a result of that same the Spanish-American war with no compunctions. And while Congress had declared its support for an independent Cuba, the McKinley Administration was very careful to leave the island’s status vague in the peace treaty.

But what about the Dominican precedent, you ask? The Dominicans had peacefully signed a treaty joining the United States, yet Congress said no. Well, the D.R. project was Ulysses Grant’s brainchild and came out of nowhere for most Americans. It was purely idiosyncratic and quite strange The idea of annexing Cuba, conversely, went back a long way. Moreover, domestic and international conditions in 1898 were very different than they had been in 1869 — and most importantly, while no one could deny that Cuba had a lot of black people, American opinion (elite and popular) did not consider the island to be black; racial differences did not forestall Puerto Rico’s annexation.

As for Cuban opposition, well, there was no serious violence under U.S. occupation. (This may have been related to the fact that the U.S. paid former Cuban rebel fighters the equivalent of $3,034 per person in 2024 dollars if they turned over their equipment — about 25% more than the country’s per capita GDP at the time.) Many Cuban elites were opposed to American annexation, but that’s not the same thing as stating that they would pledge their lives, fortunes, and sacred honor to prevent it.

That said, as with the debate over Castro’s intentions, it doesn’t matter. Congress was not going to accept a Cuban territory even had it been populated entirely by light-skinned northern Italians. Why not? Simply put: the domestic sugar industry. (Shrinking cane in Florida and Louisiana; booming beet in California, Michigan, Colorado, Utah, and Nebraska.) The industry’s output was trivial — a near invisible 0.3% of GDP in 1900 — but its influence in Congress was anything but that.

The power of the sugar lobby is obscured in the debates over American intervention and the Treaty of Paris, but you can see it clearly when the new Cuban government and Teddy Roosevelt tried to get a free trade treaty with the United States.3 The Cubans opened with a fairly simple proposition: “The proper solution for both countries is virtually free trade.” (Page 94.) Luis de Abad eloquently put it this way before the U.S. Congress (page 142):

The Cuban workingman remarks with surprise, without being able to explain it, that while the Stars and Stripes float on the Morro there is less bread and butter in his home and he is worse off than under the Spanish domination.

Free trade didn’t happen. All the Cubans got was a 20% reduction in the tariff faced by other foreign producers. (That’s one-fifth off the base rate for any product, not a 20-point benefit.) In return, all the Cubans had to do was add an “appendix” to their constitution — and, just to be sure, sign a treaty with the same language — giving Washington the legal right to “intervene”:

The Government of Cuba consents that the United States may exercise the right to intervene for the preservation of Cuban independence, the maintenance of a government adequate for the protection of life, property, and individual liberty, and for discharging the obligations with respect to Cuba imposed by the Treaty of Paris on the United States, now to be assumed and undertaken by the Government of Cuba.

And even then, Congress balked. In 1902, the proposed agreement came under widespread condemnation in the House of Representatives. The Department of Agriculture came out against the President’s own initiative. The New York Times reported colorfully on the scene before the Ways and Means Committee:

It was impossible to determine even approximately the attitude of the committee. It seemed to be beyond question, however, that Mr. Tawney (Rep.) of Minnesota, Mr. Lu (Rep.) of Kansas, Mr. Metcalf (Rep.) of California, and Mr. Robertson (Dem.) of Louisiana were strongly against the Cubans. The questions they asked indicated this, and it also was indicated by the intimate association maintained all through the day between these gentlemen and Mr. Oxnard and his friends of the beet sugar persuasion.

The one thing made absolutely clear was that a great pressure was being brought upon the committee to prevent it, if possible, from yielding anything to Cuba. Mr. Oxnard and his friends completely filled the space in the committee room to the left of the committee table, and every man in the party was alert and active in furnishing information and in offering suggestions to the members of the committee who had espoused their cause.

The Cubans apparently lacked earnest advocates of their proposition.

So it died in Congress. Died dead. Opposition by the sugar interests meant that you couldn’t get a 20% cut in tariff rates through the House, let alone bring Cuba under the American tariff wall.

Now, T.R. was not a man to give up that easy. So in 1903 he resubmitted the agreement, this time as a treaty, allowing him to bypass the House of Representatives. In order to get it through he had to agree to higher tariffs on Cuban refined sugar, because the Havemeyer sugar trust feared that new refineries on the island might undercut it.

If that’s how hard Congressional interests fought the possibility of a tariff cut, how do you think they would react to bringing Cuba fully under the American tariff wall? Badly, that’s right. The Philippines and Puerto Rico got in because they didn’t yet possess extensive sugar industries — and in 1898, the latter wasn’t expected to in the future either. Hawaii only got in because of the combination of a planter elite that enjoyed direct family ties to New England elite Republican families, the presence of a rapidly growing community of American settlers, and some very astute politicking.

In other words, neither domestic anti-imperial sentiment nor Cuban nationalism mattered. ‘Twas old-fashioned industry lobbyists what kept Cuba a country. At least on paper. End result was an “independent” Cuba linked to the American market and subsidized by American sugar consumers, but with a constitutional clause allowing Washington to intervene.

The colony that was

Preferential access to the American market brought Cuba real economic advantages.

The above figure measures the size of the American subsidy by the difference between the revenue received by Cuban sales to the U.S. minus the revenue they would have received from sales to the U.K. market. It doesn’t hold a candle to later Soviet or Venezuelan subsidies, but it’s nonetheless relatively large. (After 1916, World War 1 sent British sugar prices soaring, making a simple measurement of the implicit subsidy impossible.)

The American protectorate had a second benefit for Cuba: investors regarded Cuban bonds nearly as secure as obligations of the United States. And nothing dissuaded them from this belief. Cuba could face armed revolts, foreign occupation, sugar price gyrations, and changes in American tariff policy without the sharp repricing seen in other Latin American countries. In fact, during the “dance of millions” speculative boom following WW1, yields on Cuban bonds fell below the United States, when the yields for other Latin American countries spiked.

Nonetheless, American tutelage didn’t transform Cuba. The export sector remained dominated by sugar. Manufacturing remained desultory, at best. Tourism was slow to expand. Cuba could borrow money at lower rates than other Latin American nations, but the U.S. State Department had the power to restrict all borrowing, and so Cuba did not invest as much in public infrastructure as it might have had it been fully independent. (Of course, it also possibly avoided worse debt crises — but as you’ll see in Part IIIb, it ran into a pretty awful one anyway.)

The Second Occupation

American control didn’t remain a distant threat. In 1906, the fraudulent re-election of President Tómas Estrada triggered riots, which grew into armed revolt. When the U.S. consul cabled Roosevelt, “Government forces are unable to quell rebellion,” Roosevelt’s personal reaction was to say to a friend, “I am so angry with that infernal little Cuban republic that I would like to wipe its people off the face of the earth.” Roosevelt, however, used more temperate language in a cable to the consul: “Perhaps you do not yourself appreciate the reluctance with which this country would intervene.”

Upon hearing of Roosevelt’s reluctance to step in, President Estrada threatened to resign, “and therefore the prevailing state of anarchy will continue.” Unwilling to invade, but also unwilling to sit idly by, Roosevelt dispatched Secretary of War Taft to Havana, with orders to take all necessary measures. (To be fair, he also dispatched nine warships carrying 6,000 soldiers to Cuban harbors.) Taft landed in Havana on September 19, 1906.

Taft rapidly realized that the government had essentially lost control of everything save a few scattered urban centers. On September 29, ten days after arrival, he commandeered an office in Havana, printed up on his own accord letterhead reading, “Office of the Governor, Republic of Cuba, Under the Provisional Administration of the United States” and declared himself the governor. He then ordered the Marines to land.4 The Americans remained in control of the island until 1909.5

Armed resistance to the occupation was minimal. Marine letters home talk about how good the shopping was in Pinar del Río.6 When insurgents returned from the field on a passenger train, the crowd went into the following call-and-response:

• Crowd: “Viva los Liberales!”

• Rebels: “Viva Cuba!”

• Crowd: “Viva los libertadores!”

• Rebels “Viva la Constitución!”

• Both: “Viva los americanos! Viva la paz! Viva Taft y Bacon! Viva-a-a-a Mister Roosevelt!”7

The 6,000-man Army of Cuban Pacification saw little action during the occupation.

Taft’s biggest headache came from annexationists among the Cuban elite and American expats. First, they spread rumors of revolt in an attempt “to show the Americans that they must remain in Cuba.” Second, they invited in a junket of Republican congressmen and tried to convince them of the wisdom of permanent association. Third, Juan Masó Parra.

The Masó Parra Conspiracy

Ah, Juan Masó. This guy was the son of a Spanish immigrant. He was also the cousin of Bartolomé Masó Márquez, President of the Cuban “Republic in Arms” during the independence war.

Masó joined the fight against Spain, but on January 19, 1898, he took his entire battalion of 107 men and defected to Madrid’s side. For obvious reasons, this made him rather disliked in Cuba, and he returned the favor by writing an entire book called Masó Parra contra Cuba. His own father reported that nothing would make Juan happier than a chance to fight Cubans again. The guy became a political extortionist, collecting commissions from both the Colombian and Venezuelan governments to not raise hell within their borders. He apparently did very well out of unrest in the Dominican Republic.

On June 22, 1907, Masó crosses the border into Haiti and walks into the Cuban consulate in Port-of-Prince, where he declares that he will return to Cuba. For reasons known to nobody, he gets a visa, even though he was on a Cuban no-entry list. In Cuba, Masó starts meeting with anyone who might even vaguely be interested in violence. And who would that turn out to be? Well, as Masó himself unwittingly told an American intelligence agent, his financiers were Cuban elites trying to bring on annexation. According to U.S. intelligence reports, a group of Cuban elites, Spanish expats, and German investors wanted to finance a “Negro revolt” which would end “the chance of Negro control” because it would terrify the Americans into making Cuba a U.S. territory.8 So the plan seemed to be to get a revolutionary army to attack American interests in order to make Washington think that they’d have to stay permanently? I’m not sure that it made sense, but that was the idea.

Anyway, the U.S. governor who replaced Taft, Charles Magoon, sent the Havana police to arrest the plot’s leaders on September 26, 1907.9

And that was sort of the end of that, although I have to point out two ridiculous ironies about the plot. First, the Military Intelligence Division — America’s proto-CIA — reported that the Spanish conspirators wanted the U.S. to take over Cuba because they, uh, wanted to prevent “[a government] like the United States which plays to the common people and makes [business] interests secondary to politics.”10 Second, the Cubans who’d helped reveal the plot were reviled by Cuban nationalists.11 So some of the conspirators wanted to annex Cuba to the United States in order to prevent Cuba from getting a government like the United States, whereas nationalists opposed to any American interference on the island yelled “traitor!” at the Cubans who helped expose a plot intended to annex Cuba to the United States.

OK, history is full of dumber things.

Although maybe the dumbest is that Masó received a pardon from the Americans only to try to overthrow the government again in May 1909, a mere three months after the Americans turned the keys back over to the Cubans.

Intimations of the end

During the occupation many people (American and Cuban) proposed that the U.S. and Cuba should form a customs and postal union. (The Platt Amendment was widely considered to commit Washington to defending the island from external threats.) Even when the proposals included a sugar carveout they floundered on Congressional opposition — sugar interests wanted to retain the option to raise rates in the future, which a formal customs union would rule out.

In part, American support for a customs union reflected the attraction of the Cuban market. Cuba was not a poor country per se — agricultural wages on the island were higher than in much of the United States; some kinds of semi-skilled labor could earn as much in Havana as they could in Brooklyn. Overall GDP per capita was higher than in the South (except Texas).

The problem was the concentration on sugar. Governor Magoon put it well in his annual report from 1908:

The industrial situation in Cuba is the same as it would be in a manufacturing community in the United States, where, each year, the mills were run to their full capacity, night and day, for six months and then closed down for six months.

The seasonality introduced all sorts of terrible uncertainty into the Cuban economy. And that was in addition to the general problem of an export-oriented economy centered on a single product, which is that it lived and died on gyrations in the sugar price. But even when sugar demand was high, the country never quite figured out what to do during the months outside the harvest. In another world, Cuba would have become a U.S. territory. Other industries would have flourished, and Cuban workers would have moved to the mainland, replaced by Spanish, Haitian, and Jamaican migrant workers who could go home when the harvest ended. (The latter part happened anyway, I should add, as the planters searched for cheaper labor.)

But none of that happened. Cuba remained dependent on sugar. And then, in 1934, Congress cut the growth opportunities of the sugar economy off at the knees. But that’s the subject for the next post.

This post has three sections. The first describes how Cuba and the United States descended into deep hostility. The second explains Cuba’s attempts to impose central planning and how it became dependent upon Soviet subsidies. The third describes how Castro somehow managed to wag the Soviet dog (at least in foreign policy) despite its dependence.

(1) Jump or pushed?

There’s an active debate over whether Castro was always a Soviet sympathizer or whether the United States drove him into their arms. There is little doubt that he was a leftist. But there is a lot of doubt as to whether he would have settled for a position like Indonesia or Yugoslavia; that is, a one-party state running a highly socialist economy, but opposed (more or less) to Moscow.

For what it’s worth, both the CIA and Richard Nixon thought a neutral Cuba under Castro was possible. At a meeting of the National Security Council on December 23, 1958, with the Batista government in full collapse, CIA director Allen Dulles gave his agency’s appraisal of Castro: “The Communists appear to have penetrated the Castro movement, despite some effort by Fidel to keep them out.” [Italics mine.] Immediately upon taking power, the rebels replaced the Constitution of 1940 with a “Fundamental Law” that prohibited confiscation. Four months later, in April ‘59, a victorious Castro went to Washington. He personally met with Vice-President Nixon, who wrote:

My own appraisal of him as a man is somewhat mixed. The one fact we can be sure of is that he has those indefinable qualities which make him a leader of men. ... He is either incredibly naive about Communism or under Communist discipline — my guess is the former. ... because he has the power to lead to which I have referred, we have no choice but at least to try to orient him in the right direction.

Many historians, myself included, have seized on these and other statements to conclude that Castro’s Cuba was not fated to become part of the Soviet Empire.1

But the debate is moot. Why? The reason wasn’t the implacable anti-Communism of the Eisenhower administration. Nor was it some inevitable affinity between Havana’s new rulers and Nikita Khrushchev. No, the reason the debate is moot is that American investors were never going to sit back and watch Mr. Castro seize their properties. They were going to scream bloody murder, and in a country like the United States, no administration would be able to sit idly by and ignore them, no matter how much doing so might be in the national interest. A tit-for-tat series of provocations was inevitable, and in the context of the Cold War, that would have driven any leftist government, no matter how moderate, into Moscow’s arms.

(I wrote a book about this problem called The Empire Trap; its main thesis is that U.S. foreign policy has been just as subject to interest-group capture as its domestic policy. All uncited claims below are from my book.)

Washington tries hard to do nothing

The Cubans declared land reform on May 17, 1959. The Agrarian Reform Act limited individual landholdings to roughly 1½ square miles but allowed sugar and cattle holdings as large as five square miles. No non-Cubans (or foreign corporations) would be allowed to purchase rural property in the future. Current shareholders in corporations that grew sugarcane would have to divest any shares in a corporation that processed sugarcane. As a result, sugar processors lost about 2 million acres.

Cuba lacked sufficient dollars to pay cash compensation, so it offered nontransferable 20-year bonds with an interest rate capped at 4.5%, a mere 12 basis points above the rate on 10-year U.S. government securities. Moreover, the law valued the properties at their 1958 appraisals.2

The U.S. government reacted moderately. This was Dwight Eisenhower. It accepted the use of appraised value and merely requested that Cuba pay in “long-term bonds that would be marketable and would be payable in dollars.”

U.S. investors? Not so much. Robert Kleberg, a Texan with extensive Cuban holdings, complained to the Senate majority leader — one Lyndon Baines Johnson. They went way back: LBJ’s first job in Washington had been as a staffer to one Richard Kleberg, the “cowboy congressman.” As importantly, Assistant Secretary of State for Inter-American Affairs Roy Rubottom and Assistant Secretary of State for Economic Affairs Thomas Mann were both from Texas. These Texan connections mattered — if Kleberg wanted a meeting with Eisenhower administration officials, Kleberg was gonna get a meeting with Eisenhower administration officials.

And it was in a meeting with Secretary of State Christian Herter on June 24, 1959, that we have our first record of a proposal to cut off Cuba’s ability to sell sugar to the United States. Soon enough, Kleberg got the chance to repeat his proposal to President Eisenhower in the Oval Office.

American sugar interests were split. The refiners backed Mr. Kleberg. But the rest of the American plantation owners disagreed with the Texan: they wanted Washington to ask Cuba for a sugarcane exception to the Agrarian Reform Act. They went so far as to tell the Administration in writing: “Other lands present no real problem — they are not a serious matter.”

Eisenhower did nothing. He wanted to do nothing. Unlike Guatemala in 1954, there were no counter-revolutionaries waiting in the wings to replace Mr. Castro.3 The State Department resolutely recommended that the President do nothing. One 1959 memo stated, “I think our point of departure must be that keeping Cuba out of the Sino-Soviet orbit, and returning it to the Inter-American system, is more important than the salvaging of the U.S. investment in Cuba to the complete satisfaction of the U.S. business community. This is a bitter pill to swallow.” Another read, “Cutting the sugar quota is the ultimate weapon in relations with Cuba,” and recommended doing so only after the Soviet Union took an action “supporting Castro which we consider intolerable.” A third outlined:

The political effects of a quota cut would be: (a) to create hatred of the United States in Cuba and elsewhere in the hemisphere; (b) to increase sympathy for Castro, thereby probably prolonging the tenure of his regime; (c) to give what would be, with perhaps some justification, clear evidence of a policy of economic coercion of a country 90 miles from our shores; and (d) to create for ourselves the eventual problem of trying to pull up Cuba’s weakened economy after Castro has gone.

Even the CIA got into the “don’t do anything!” act. A National Intelligence Estimate dated March 22, 1960, bluntly stated, “We believe that Fidel Castro and his government are not now demonstrably under the domination or control of the international Communist movement.” The estimate went on to state, equally bluntly, that the CIA did not believe that Castro’s regime was vulnerable to falling under such domination. According to the report, damage to America’s strategic interests was being caused by the U.S. reaction to Castro’s policies, not Castro’s actions themselves.

Washington fails to do nothing

And what was the U.S. reaction to which the CIA referred? It wasn’t the Eisenhower administration. Nope. It was Florida. (More accurately, Florida being Florida.) And to a lesser extent, Congress’s, back at a time when Congress acted the way the Founders intended.

1. In October 1959, Cuban counterrevolutionaries start flying private planes from Florida airstrips carrying white phosphorus bombs and machine guns to strafe Cuban positions, including one in the Havana suburbs. President Eisenhower wants them stopped but fears domestic blowback. So the administration convinces itself that the raids were an unimportant sideshow, which has the advantage of being true, militarily and economically.

2. But not politically. No Cuban government can ignore attacks from a private air force operating 90 miles away. Castro’s foreign minister writes to the U.S.: “The Cuban people know, from bitter experience, that if the government of the United States sets in motion its formidable system of vigilance and defense it is almost impossible to conspire in its territory, traffic in arms, leave its ports illegally, or take off in airplanes without proper papers.” The U.S. briefly cracks down on the flights after one of them shoots up a passenger train on October 22nd, but then loosens up again, against presidential wishes.

3. Negotiations over American properties in Cuba go nowhere during the rest of the year, although Fidel kindly (or maybe ominously) tells the U.S. ambassador that he “admires Americans, especially tourists, for whom he is planning great things.”

4. Nonetheless, in January 1960, President Eisenhower requests that the CIA start preparing contingency plans to overthrow the Cuban government. The bombings step up throughout the month.

5. On February 14, 1960, the Russians send First Deputy Anastas Mikoyan to Havana, where he negotiates a deal to buy 425,000 tons of sugar in 1960 and one million tons per year through 1964 for 3¢ per pound. This isn’t a Soviet subsidy: Cuban sugar trades at 5.4¢ in the U.S. Cooler heads seem to be getting the upper hand in Washington: on March 22, a National Intelligence Estimate bluntly declares, “We believe that Fidel Castro and his government are not now demonstrably under the domination or control of the international Communist movement.” In fact, the CIA goes on to warn that the danger to U.S. strategic interests comes from U.S. policy towards Castro, not Castro himself.

6. And then, on March 4th, the Le Coubre explodes in Havana harbor. For those of you who don’t remember Le Coubre — most people don’t — it’s a Belgian freighter filled with munitions for Cuba. These were bought by the Cuban government with Cuban money; they did not come from the Soviet Bloc. Che Guevara rushes down to the scene to help, producing the iconic photo that now graces poseur T-shirts the world over, although I myself much prefer this one:

   

   The Cubans blame the Americans for the explosion — the poetic justice given the USS Maine is hard to ignore.4

7. On March 17, President Eisenhower gives the go-ahead to activate the contingency plans and start actively preparing to overthrow Castro. Eisenhower tells everybody to keep this secret, but that proves not possible, what with training camps in Guatemala being hard to hide. On April 23rd, Cuba’s Foreign Minister, Raúl Roa, says as much in a public speech.

8. On May 31st, Castro asks American-owned refineries to process Soviet crude oil. The companies say no.5 On June 28th, Castro takes over the refineries.

9. The next day a sanctions bill hits Congress. It passes 396-0 in the House and 84-0 in the Senate. The bill cuts Cuba’s sugar quota from 3.1 million tons to 2.4 million, effectively kiboshing Cuban exports for the rest of the calendar year.

10. Castro retaliates by expropriating all American-owned property on the island — with compensation to be paid from sugar revenues earned on sales to the United States above the pre-existing quota and price. (Take that, Yankees!)

11. Finally, on July 9, 1960, Nikita Khrushchev speaks on the Cuban situation before the unlikely forum of the Russian Federative Soviet Republic’s Teacher’s Congress. He thunders to the audience — which includes, symbolically, his own childhood teacher — that as a result of the American “economic blockade,” Cuba would now be under the umbrella of Soviet rocketry:

    Soviet artillerymen can support the Cuban people with their rocket fire, should the aggressive forces in the Pentagon dare to start intervention against Cuba. And the Pentagon would be well advised not to forget that, as has been shown by the latest tests, we have rockets which land accurately in a predetermined square target 13,000 kilometers away. This, if you wish, is a warning to those who might like to solve international problems by force and not by reason.6

    In case the point wasn’t clear, Che Guevara clarifies the next day before a crowd of 100,000 in Havana:

    Cuba is now, in addition, a proud Caribbean island defended by the missiles of the greatest military power in history.

You can imagine how all this goes down in the United States during a presidential election year.

In short, you had two givens in this situation. First, Castro was going to redistribute land. Second, the United States was going to be incapable of containing its political response to the first point. Put those together, and you can see why it doesn’t matter whether Fidel marched into Havana intending to create a socialist state or whether he only decided to become a Communist under American pressure; either way, Cuba was going to join the Soviet Bloc unless the Americans somehow managed to overthrow him first. Which they emphatically did not manage to do.

The rest is, as the podcast title goes, history.

(2) Joining the Soviet

Cuba soon became more Catholic than the Pope, much to the chagrin of the men in Moscow. Fidel also proclaimed revolution throughout the Third World, announcing that any revolutionary movement could count on Havana. Eventually, in 1972, he had his country join the Soviet. Which is not a typo; read on.

The Cubans first tried crash industrialization. In 1961, Che Guevara drew up a list of targeted industries. Shopping list in hand, he traveled around the Eastern bloc for the needed credits. The biggest investment turned out to be a pencil factory.

Now, there were some impressive commitments: expansions of the existing steel and cement plants, a diesel motor plant, a gigantic textile mill, a ball bearing plant. (Don’t knock the latter!) But these hadn’t been finished by the time the big push runs out of steam in late 1963.

Pretty much everything went wrong.

The problem wasn’t the capital goods, those could be had from the Soviets, the problem was that all these plants required intermediate goods that were in scarce supply in the Eastern bloc … and Cuba’s existing industrial plant required Western spare parts. So Cuba still had to export to the West, except that it had already blown giant holes in its ability to do so: with workers being transferred to industrial projects, sugar production crashed from 6.8 million tons in 1961 to 4.8 million in 1962.

A CIA assessment identified three major problems:

1. The level of managerial ability. As in, Cuba had almost none. “The evidence indicates that inexperienced management probably has been the principal cause of the decline in industrial production apparent during the last 2 years.”

2. “Apathy and disaffection within the labor force.” Which isn’t surprising, considering the precocious attempt to create the New Cuban Man. Workers got no raises or bonuses, just exhortations to engage in “socialist emulation.”

3. Finally, spare parts shortages. It concluded that they were not yet binding, but would become more serious over time, since the Soviets could not easily provide them but Cuba faced hard currency shortages in its trade with the West.

The Cubans recognized pretty early that the plan was off the rails. In September 1961, Fidel started complaining about lazy workers. By March 1962, Guevara himself called it, “An absurd plan, disconnected from reality, with absurd goals and imaginary resources.”7 About the best thing that could be said for the industrialization push was that the Cubans stopped it before it led to mass starvation, unlike the Soviets, Chinese, and (later) Ethiopians.

Unfortunately, what came next wasn’t much better. Against Soviet advice, Cuba pushed to break its need for Eastern Bloc support by increasing exports at all costs. They nationalized all food marketing, so the remaining private farmers had to sell to the state at controlled prices. The Cubans then squeezed wages, in order to generate higher savings … which brilliantly included depriving the best workers of their higher salaries.8 It’s probably less than shocking that a 1968 study found that “one-quarter to one-half the workday was wasted due to overstaffing and poor discipline.”9

The government then drafted the entire male labor force and set everyone who wasn’t needed elsewhere to the sugar fields. Again, as Communist policies go, this was pretty vegetarian — there were no mass casualties, no starvation. But it turned out to be a terrible policy: the Cubans failed to meet their 10 million ton target, but they came close — only to see world sugar prices fall to 2¢ in 1966-69. As a result, Cuba failed to generate hard currency exchange and wound up selling its entire crop to the Eastern Bloc at heavily subsidized prices.10

In short, Cuba became locked into subsidized sugar exports to the Soviet Bloc. Communist countries became Havana’s sole suppliers of oil, coal, iron, cotton, timber, pig, grain, fertilizers, trucks, cars, and most machinery. Cuba increasingly failed to cover the cost of those imports from its Soviet Bloc exports, so it needed more and more balance-of-payments support, which could not be paid back.

Socialists to the rescue

After a lot of lobbying, in 1972, Cuba became a full member of the Council for Mutual Economic Assistance, commonly called Comecon. In Russian, the organization’s acronym was SEV (СЭВ), short for Sovet Ekonomicheskoy Vzaimopomoshchi — literally, the Soviet of Mutual Economic Assistance. Cuba had joined the Soviet. I told you the opening line wasn’t a typo!

Cuba had already received much help from Eastern Europe, but the SEV put it on a formal basis. Cuba (along with Mongolia and North Vietnam) automatically received special status as a developing economy, which which entitled it to balance-of-payments support — e.g., cheap credits whenever imports exceeded exports.

Everyone knew that these arrangements were bad for everyone: an official Polish report declared that Cuba’s SEV dependence was “destabilizing.” In 1974, the Russians tried to pressure Fidel to improve relations with the United States and attract American tourists. With Cuba’s economy still in need of Western inputs, this would also have the salubrious effect of stopping the inexorable growth of the Communist state’s debt to Western banks and taken pressure off the SEV.

You won’t be surprised to know that El Comandante’s response was:

We are in no hurry. We can wait ten or twenty years. Condemnation of the blockade of Cuba is growing, and the North Americans are increasingly isolated. The blockade is harming us, but we can wait. Argentina’s U.S. companies are willing to sell us automobiles. The United States, as well as U.S. businesses, are facing a dilemma. They have to choose between U.S. and Argentine law.11

Well, friendly Argentine governments (under President Juan Perón, and then his successor — and wife — President Isabel Perón) were not going to last. The 1976 coup dropped Cuba further into dependence on the Soviet.

How dependent?

John Devereaux of CUNY did the work. For comparison, he added U.S. aid flows between 1941 (the start of the war) and 1959. In his words, “The results are startling.”

That is simply incredible. Almost the point where I want to check the calculations (and ask what happened in 1974) but Devereux is an excellent economic historian.12 It’s more than farm states get in the U.S., it’s more than the European Union transfers to its poorer states, it’s more than northern Italy gives to the South.

(3) Wagging the Dog

And yet, this poor mendicant state not only managed to institutionalize its subsidy flows — and collect them from all of Eastern Europe, not just the USSR proper — it wound up driving Soviet foreign policy in the 1970s. Angola is where you can see it most clearly, although there are echoes across Africa and (to a lesser extent) Latin America. For space, however, I’ll stick to Angola here.

In the 1960s, Havana and Moscow were often frosty, because Cuba was all-in on Third World revolution, whereas the Soviets thought that would just be a mess.

In 1974, there’s a military coup in Portugal and the new government abruptly declares that is going to quit Angola. Note here that the Portuguese had practically won the war of independence: none of the three main rebel factions were particularly organized or well-armed by this point. In fact, two of them — the openly Marxist Popular Movement for the Liberation of Angola (MPLA) and the American-supported National Front for the Liberation of Angola (FNLA) spent more time fighting each other than the Portuguese.

Anyway, with Portugal out the door at maximum speed, the country looked to fall into the hands of the Marxist-Leninist Movimento Popular de Libertação de Angola (MPLA). The prospect of a Communist Angola right on what was then their northern border did not please the South African government. So it swept across the border on October 14th, before the Portuguese had fully withdrawn.

The MPLA folded up in the face of Operation Savannah, which advanced an astonishing 3,159 kilometers in 33 days at a cost of 5 dead and 41 wounded. Gabriel García Márquez (yes, that García Márquez) described it such: “It was like a Sunday drive: the South Africans played festive music on cassette-decks fitted to their tanks.” So things looked pretty bad for the MPLA. There were already a few Cuban trainers in-country, but nothing that could withstand the South African advance.

Now, one thing to keep in mind is just how small this South African force actually was. At its peak, it numbered about 3,000 soldiers, backed by an unknown number of badly-trained members of the non-Communist FNLA independence forces. It was this force that looked set to bring down the MPLA.

And so, on November 4th, 1975, Fidel Castro decided to help out his old African allies. As far as we know, he made this decision without consulting Moscow. So no modern airlift here. Nope. Instead, starting on November 7th, the Cubans cobbled together some ancient Bristol Britannia 318 turbo-props. These planes normally had no way to make it across the Atlantic without refueling but the Americans were not about to let them refuel in the Azores. So the Cubans bolted extra tanks to the Bristol Britannia, flew them out of the easternmost point on the island, and somehow managed to get them all the way to Cape Verde without losing a single plane. The Cubans kept coming; by January over 1,000 soldiers were arriving every week, in five round trip flights.

Cuba was not acting at Moscow’s behest. In fact, Moscow was perfectly willing to cut its losses and write off Angola. After all, it wasn’t like the MPLA had actually taken power; letting it fall would not reverse the Marxist arrow of history. Antoly Dobrynin wrote in his memoirs that Cuba acted “on their own initiative and without consulting us.”13 I could review the evidence that Moscow had no intention to intervene, but it seems sufficient to quote Henry Kissinger in 1999:

We could not imagine that he would act so provocatively so far from home unless he was pressured by Moscow to repay the Soviet Union for its military and economic support. Evidence now available suggests that the opposite was the case.

Once Moscow realized that the Cubans intended to commit more than one 5,000-man division, the Soviet ambassador in Havana asked the Cubans to tone down their support. Which they refused to do.

And that forced Moscow’s hand. It couldn’t stand by in the face of such fraternal socialist bravery! So, finally, in January, it gave the Cubans the use of more modern IL-62 transports. It also agreed to replace all of the equipment the Cubans had brought with them and started to supply the in-country Cubans from Moscow.

The South Africans weren’t prepared for this sort of opposition, so they withdrew. Of course, the war went on and the Cuban presence grew. It’s not clear that the Soviets wanted to get involved at all. And when they did, the Cubans often got in the way — for example, in 1977 the Cubans blocked a Soviet attempt to engineer a coup in Luanda and get rid of the MPLA. The Cubans then proceeded to send thousands of non-combatants to shore up the MPLA’s administration and secret police, not entirely unlike what they’d do in Venezuela a few decades later.14

Ultimately, 337,033 Cuban soldiers and a bit more than 50,000 civilians would serve in Africa — about one-in-seven of all Cuban men who turned 18 between 1975 and 1991.15

Demetropolitanization? It’s a mouthful, but accurate

Cuba wasn’t decolonized so much as the de-metropolitanized: its metropole simply fell apart in 1989-91. The Russian Federation that emerged from the wreckage had little ability and less desire to continue its expensive relationship with Cuba. Neither Communism and the October Revolution was a source of legitimacy for the new Russia, so why should the romantic Caribbean revolution and the old bearded guy with the green fatigues enjoy any special privileges?

But Cuba survived the loss of the subsidies. The Russians had saved the Cubans from the worst consequences of their own model, thereby giving the time for central planning and the Communist Party to entrench itself. When Soviet support went away, Cubans got a lot poorer — but reform never went beyond the bare minimum before the country found a new source of support in the Bolivarian Republic.

Of course, this wasn’t the first time that a foreign-backed Cuban regime had collapsed when subsidies went away. It was the second. And while the collapse of that first regime did involve some spectacular changes of government, it did not lead to anything resembling real reform of the system. That will be the subject of our next installment, when we tackle the American withdrawal from its Cuban colony in 1934.

After the Revolution, Cuba became an integral part of the Soviet system. The Revolution was a domestic affair, but Soviet support made it much easier to stamp out markets and capitalism and build something more Catholic than the Pope. In other words, in a world where the Movimiento 26 de Julio takes power but receives no Soviet support, Cuba might have still swung hard to the left, but it would have been simply impossible to dismantle the private sector as thoroughly as it did.

When the Soviet Union collapsed, so did Cuba. But it managed to reform enough to buy time to find a second sponsor: this time the Bolivarian Republic of Venezuela (BRV). Venezuelan aid was never as large as Soviet aid, so Cuba had to continue to develop its tourist sector, but it was enough to forestall more thorough reform. Most shockingly, Venezuelan aid allowed the socialist Republic of Cuba to ignore the collapse of its agricultural sector.

Now, with the last vestiges of Venezuelan support disappearing, and the Americans going after the viability of the tourist sector, Cuba is facing collapse again.

This wouldn’t be the second time the perennial colony of Cuba collapsed because a foreign patron unilaterally decolonized it withdrew its support. It would actually be the third. In the 1930s, the United States wrapped up its semiformal empire on the island and what do you know? The economy collapsed, and hadn’t really recovered by the 1950s.1

In all three cases, the collapse provided an opportunity for reform that was not taken. In Cuba’s case, “decolonization” usually means its foreign patron yanks away the subsidy that has been covering the system’s internal contradictions, and the resulting crash is the moment when reform is possible but repeatedly rejected.

Two threads run through all three cases, more thoroughly each time. First, in all three cases the Cuban tail tried to wag the imperial dog: with slight success in Washington, much more in Moscow, and downright domination in Caracas. Second, in all three cases the Cubans would have preferred a much more formal relationship than the one they actually got, in order to protect themselves from the political winds in the metropole, but in all three cases they ultimately failed.

This series of three posts will move backwards through three empires that dared not speak their name: Venezuela, the Soviet Union, and the United States. Here we’ll briefly review the current crisis and then dive into the Venezuelan connection.

The current crisis

Cuba is on the brink of collapse under an American quasi-blockade. I am choosing my words carefully. The long-standing U.S. embargo was most emphatically not a blockade: Cuba could trade with anyone they wanted, as long as the counterparty was willing to pick a fight with Washington about the Helms-Burton Act. And trade they did! Europeans bought vacations and the Chinese bought cigars and all was … not precisely well, but well enough.

But this time is different.

1. The United States is putting the screws on all petroleum imports. And even though the U.S. Navy hasn’t (yet) stopped any tankers, everyone knows that the United States has turned into the honey badger of the Western Hemisphere. We don’t need to stop tankers because everyone increasingly believes that we would. Even poor President Sheinbaum of Mexico is going along. Cuba has some domestic oil production, but at some point what’s left of the transportation network is going to seize up.

2. The Trump administration has declared that any Europeans traveling to Cuba will be denied visa-free access to the United States … and good luck getting a visa.

To be frank, it’s hard to imagine regime collapse. There is no opposition in Cuba and state control remains strong. But power supplies are collapsing and transportation will soon freeze up. With no serious sources of foreign exchange, the country will become dependent on foreign food aid. The thing is, the governments of North Korea and Venezuela both survived science-fictional economic collapses. Moreover, neither of the previous two collapses led to rapid regime change. Unless the U.S. decides to step up its actions, it’s not clear why this time should be different.

Venecuba, a single nation

From the Economist, in 2010:

When he was visiting Cuba in 2005 Fidel Castro said publicly to him that their two countries were “a single nation.” “With one flag,” added Mr Chávez, to which Mr Castro replied, “We are Venecubans.”

Analysts disagree as to whether Mr Chávez or Mr Castro intended to formally unite the countries. We do know that Chávez floated the idea of a “Bolivarian Confederation” between the two at various times and in 2007 he went to the voters and asked them to change this (very boring and legalistic) article of the Constitution:

Article 153: The Republic shall promote and encourage Latin American and Caribbean integration … the Republic may transfer to supranational organizations, through treaties, the exercise of the necessary authorities … Provisions adopted within the framework of integration agreements shall be regarded as an integral part of the legal order in force, and shall be applicable directly and with priority over internal legislation.

to this turgid but nonetheless much less boring paragraph:

Article 153: The Republic shall promote the integration, Confederation, and union of Latin America and the Caribbean with the aim of configuring a great regional political, economic, and social power bloc. In order to obtain this objective, the State will favor the construction of new models of integration and union across our continent, to permit the creation of a geopolitical space within which the peoples and governments of our America shall construct a single Greater National project, which Simón Bolívar called “A Nation of Republics.”2

The prose is terrible, but terrible in a recognizably leftist manner. Substantively, the change in wording would have altered little …but approval of the new version would show popular support! A Nation of Republics! He might as well have run up a flag reading: us and Cuba, man, how about it?

Well, the public said “no.” Three years later, in 2010, a poll showed that 85% of Venezuelans didn’t want their country to become “more like Cuba.”

So that didn’t happen.3

But what did happen was a massive informal integra … no, it was more like a Cuban takeover. The island of Cuba got oil. Mainland Venezuela got good doctors, very good secret policemen, and plenty of Cuban bureaucrats. Those bureaucrats wound up effectively running the security services, the presidential guard, the economic planning bureaucracy, and much of the military.

Formally, the core of the system was a trade. Cuba sent over advisors and medical personnel. The Venezuelans paid not the individual Cuban expats, but the Cuban government, mostly in the form of crude oil. The Cuban refinery at Cienfuegos refined that oil … and sent much of it back to Venezuela for foreign exchange. Of course, Havana overcharged for its part of the trade, and Caracas happily went along.

Cuba did very well out of Venecuba, even if it failed to fully formalize the relationship, which might have offered some protection against Venezuelan political winds (if not necessarily the 160th Special Operations Aviation Regiment). Venezuela overpaid for the doctors; Cuba underpaid for its oil. There is a way to come up with a rough idea of the subsidy. On the doctors’ side, we can subtract the amount taken by the Cuban government from the salaries and support received by the doctors. On the oil side, Cuba paid for its oil on credit, which it never paid back. So add those two numbers, and you’ll have a very rough idea of the size of the Venecubano transfer.

Aritmética venecubana

To the numbers! How big was the subsidy?

Cuban GDP

First we need to know Cuban GDP. That’s not easy! For reasons that maybe made sense before the Trump administration, the World Bank and IMF all value Cuba’s GDP at the official exchange rate of one peso per dollar. Except that’s silly — the parallel market rate for the peso averaged 24 per dollar after 2005. That implies that we should just divide Cuba’s official GDP by 24, but that’s silly too: the one-to-one exchange rate really did apply to huge chunks of the economy, like the tourist sector! In 2020, Pavel Vidal did the work and calculated an average exchange rate of 2.38 per dollar. That cut the figures for Cuba’s nominal dollar GDP in half.

Still, 2.38 per dollar seems high: the calculation assumes that the official rate applies to the entire public sector: the “state business system and mixed capital, public institutions, fiscal budget, rationed consumption markets, public services to the population, banks.”4 That seems wrong. Lots of what state companies did involved purely domestic transactions — say, confiscating agricultural production from Cuban farms and transferring it to rationed markets, or paying for investment using workers paid in CUP rather than CUC. In 2021, the Cuban government unified the exchange rates and the resulting average rate crashed from 2.4 per dollar to 26 per dollar.

Did the country’s dollar GDP really fall tenfold that year, or was that just when the Cuban government recognized reality? I mean, sure, you state expenditures and investment spending at the 1:1 exchange rate, but would any foreigner have been willing to pay for the resulting services and equipment at the 1:1 price?

Well, no. Prices soared by a factor of five while the exchange rate collapsed by a factor of ten so maybe nominal GDP dropped “only” by half. That’s well within the experience of other countries experiencing crises on the level of the one that shellacked Cuba in 2020-21, so let’s accept the Vidal numbers and move on.

Venecuban transfers

Now we need to know the scale of the transfers from Venezuela to Cuba.

This is a blog substack, so I’ll keep it quick and dirty. Werlau (2013) estimated that Venezuela paid about $5,000 per month for each Cuban doctor — an extravagant number; you could hire an entry-level family doctor from Spain — but the doctors themselves received only $900 to $1,740 per year for their services. If that’s true, then you could reasonably conclude that the whole program is pure subsidy.5

But that’s probably not correct. First, the Cuban doctors really did provide value. Second, many of those Cuban doctors were basically drafted into the program, so Havana could pay them wages far below market. Some of the rents, therefore, were extracted from them, not from the BRV. We don’t want to include that in the calculation of Venezuela’s transfers to Cuba. So let’s value the doctors at their replacement cost, using the $940 average monthly salary for Venezuelan doctors. If Venezuela was paying roughly $5,000 a month per Cuban doctor, but the replacement cost of a public-sector doctor was only $940, then the gap is a crude lower-bound resource transfer to the Cuban state. Multiply that $4,060/month gap by the total doctor-months Venezuela brought in in 2007-17 and you get a total transfer to the Cuban state of $53 billion in 2007-17 …

… unless you believe that Cuba’s organizational services were worth an 80% margin. Maybe. I could be biased, but I have trouble believing that.

Then let’s get a low estimate for the underpayment for crude oil. I’m going to do something … uh … crude: treat the unpaid oil credit as a transfer. The actual terms are opaque, but there is a 2019 estimate that Cuba owed the Venezuelan government $11.4 billion, which most observers agree the BRV never intended to collect. We can allocate that unpaid-debt stock across 2007-17 in proportion to annual physical oil shipments. This ignores aid flows, price discounts, refinery investments, and refined-products pricing, so it is a lower bound.

In a bit more detail: First, it ignores Venezuelan aid projects, such as the expansion of the Cienfuegos refinery. Second, it ignores the fact that Cuba refined a lot of Venezuelan oil and sent it back to Venezuela, in essence capturing the crack spread for itself. I am not adding pricing/refining margins here, only unpaid credit. Third, it leaves out the fact that half of all Venezuelan petroleum exports consisted of refined products, which were sold at less than market prices (or Cuban refining costs). Finally, who knows if that $11.4 billion debt figure is comprehensive? I know many U.S. Army finance officers who would love to poke around inside the BRV’s accounting — MOS 36A, it’s a good career — but sadly those records are still in Delcy Rodríguez’s hands.

That said, it does give us a rough lower-bound estimate of the size of the transfers:

These numbers are enormous. They’re on the order of the net subsidy that Alabama receives from the rest of the United States (roughly 15% of Alabama’s GDP), only the rest of the U.S. receives considerable benefits from its spending in Alabama: the 20th Special Forces Group, Army aviation at Fort Rucker, the rocket research in Huntsville, keeping the interstates open across the state, the emotional benefit from helping fellow Americans, etcetera. It is unclear at best what the average Venezuelan got from their government’s massive support for Cuba.

Venecuba is (was?) a thing

The BRV government, on the other hand, got a lot of value out of its support for Cuba. It tamed its own military, created a police state, took control of the economy (albeit incompetently), and developed new surveillance systems. In addition, the BRV benefitted from the mystique surrounding Fidel Castro and his Revolution. Consider:

• During the 2002 coup, Chávez was suicidal, but Fidel Castro talked him down and convinced him to neither kill himself nor resign. The Chavista defense minister at the time later stated that the call with Castro was “the determining factor. His advice allowed us to see better through the darkness. It helped us a great deal.”

• Venezuela renamed its armed forces the Bolivarian National Armed Forces (FANB) and redesigned the uniforms along Cuban lines. Cuban ideology permeated the whole organization:

  

  If you don’t know the origins of “Homeland, Socialism, or Death … we will win!” well, now you do. It comes directly from the slightly shorter Cuban version from 1960: “Homeland or Death, we will win!” It says something that it was the Venezuelans what added the “socialism.”

• Thousands of Cuban trainers arrived, who were “housed in military installations and given lodging, food, and transportation.” But it didn’t stop there …

• In 2008, Venezuela allowed foreigners to serve in the military. This was clearly aimed at Cuba. At first, Cuba limited its involvement to placing officers in the FANB planning apparatus, but according to Venezuelan military sources who talked to a pair of American academics, Cuban personnel eventually took direct command of logistics, support, and transportation. Only the President stood above the Cubans in the chain of command. (Honestly, given the Venezuelan military’s disastrous attempt to mobilize against Colombia in 2008, this was certainly helpful.)

• Cuban officers monitored and reported on military morale, both for officers and the enlisted ranks. Cubans (reportedly wearing either civilian clothes or distinctive black uniforms) in Military Counterintelligence Directorate (DGCIM), were stationed inside FANB facilities where they would “compile dossiers on perceived troublemakers and report any signs of disloyalty, according to more than 20 former Venezuelan military and intelligence officials.”

• Cuba developed Venezuela’s “Homeland Card” system, which has proven to be an incredibly useful instrument of machine politics and political repression.

• “Cuban officers control Venezuela’s public notaries and civil registries. Cubans oversee the computer systems of the presidency, ministries, social programmes, police and security services as well as the national oil company,” reported Moisés Naím in the Financial Times.

• Finally, the two governments signed agreements which, in the words of the U.S. embassy in Caracas, allowed “cooperation in investigating political crimes and offenses which are considered illegal in only one of the two countries.” It also allowed Cuban officials to “act directly in Venezuela, without judicial supervision, to investigate people and property for trials in Cuba.” Later agreements in 2010 and 2018 extended the ability of Cuban police to “to carry out intelligence and police tasks in Venezuela.”

And, as mentioned before, it was Cuban soldiers around the Venezuelan president whom U.S. soldiers killed during the Maduro raid.

Now Vene and Cuba have separated

Venecuba was falling apart well before the U.S. Army invaded Venezuelan airspace. The mainland’s economic mismanagement meant that it could provide less and less economic support for the island. The “Greater National” projects mostly came to naught, the Cienfuego refinery expansion aside. Cuba was forced into wrenching economic adjustments after 2018, with particularly painful adjustments in 2021 and 2024. And now the last of the Venezuelan links is cut off.

The future is precarious. I admit, I am skeptical that the Cuban regime will fall unless the U.S. does something more than blockade the oil. Please note the italics if you want to mark me to market: I will be wrong if the U.S. leaves policy where it is right now in February 2026 and the Cuban socialist state falls nonetheless. If the U.S. intensifies its actions and then the regime in Havana collapses, well, that’s entirely consistent with my prediction. (It’s also what I kind of suspect will happen, but my crystal ball is cracked where the Trump administration is concerned.) “Stepping things up” could mean anything from generalizing the current blockade into an actual naval interdiction of commerce, actively aiding (or even creating) opposition organizations on the island, or sending in the Marines. But as it stands now, I think that the socialist Republic of Cuba will survive.

Why do I think that the regime can weather the loss of Venezuela, even in the context of an American blockade?

Well, Cuba has been here twice before. Both times the regime survived, to the surprise of many. The next two posts in this series will explore those episodes.

Can Europe end that dependence? Mark Rutte, NATO’s civilian head and former Dutch prime minister, says “no.” Speaking to the European parliament:

If anyone thinks here . . . that the European Union or Europe as a whole can defend itself without the U.S., keep on dreaming. You can’t. … If you really want to go it alone, forget that you can ever get there with 5 percent [of GDP spent on defense]. It will be 10 percent.

Is Rutte right? Is strategic autonomy for Europe a chimera, something politically impossible to muster and economically impossible to afford?

I am loath to contradict a former Prime Minister, who also has access to a hell of a lot more information than I do. I’m just a guy, a former E-5, a nobody.

Modesty and disclaimers out there … the evidence is that Rutte is wrong. (Ed West is my witness that I started work on this before the FT ran its article today.) As a citizen of both continents, the possibility of a rupture pains me — never did I imagine that American and Dutch interests wouldn’t align! But here we are, and it matters that Rutte is wrong.

A common European defense will save money

NATO has a common military command and strives for “interoperability”: that is, NATO forces use the same ammunition and power standards and the like. But they are not equipped with a common kit. For example, Europe uses 55 different land combat systems and 39 air systems, as opposed to 5 and 10 for the United States.1 Worse yet, there is a huge variance across countries in the share of their active-duty soldiers who are actually deployable in case of war. This number doesn’t matter much for places like Finland and Poland, which border the Russian Federation, but it makes a big difference for, say, Belgium. (The Royal Netherlands Army, of course, scores very high —although this number may have declined since all Dutch land forces are now effectively integrated into the Bundeswehr.)

Europe could save quite a bit of money by eliminating all the duplication and taking advantage of economies of scale. In 2020, the European parliament commissioned a study that aimed to estimate the potential savings from creating a common military. As shares of GDP and military spending, here are the estimates:

Carlo Cottarelli and Leoluca Virgadamo at Bocconi University doubted this estimate — it’s really big! So the European Parliamentary Research Service later used a more direct methodology and came up with a number that was about half the size, but still large:

To be fair, the second methodology envisioned a less-comprehensive military unification than the first one and limited itself to areas where the authors felt comfortable with the data. R&D, for example, included only “emerging disruptive technologies” in the second estimate, whereas in the first it included things like creating tastier ration packs and redesigning camouflage patterns.

In short, creating a European military would allow Europe to get the same bang for somewhere between four-fifths and three-fifths of its current spending.

Creating new capabilities isn’t that expensive

But Europe also has to create new capabilities if it’s going to free itself from dependence on the Americans. How much would that cost?

Two estimates are floating about, both from 2025. The International Institute for Strategic Studies (IISS) estimated the capital cost of replacing U.S. combat capabilities, which came to somewhere between €200 and €305 billion. It’s a little hard to convert these numbers into an annual flow, since they don’t include the full life-cycle costs nor personnel costs (they do include munitions), and presumably the flow of expenditures will be lumpy. They end by saying it will cost a cool $1 trillion over a quarter-century, which comes to €35 billion per year.

That seems kinda small, actually. No? It’s 0.2% of the E.U.’s GDP, which is almost a rounding error in light of the massive increases in spending that we’re currently seeing. Spending hit 1.9% of GDP in 2024 and is scheduled to head up to 5% in most countries, which by the IISS’s lights should be much more than enough to replicate America’s current military presence in Europe.

European and American military spending, share of GDP

In short, the IISS’s high estimate of the cost to replicate American capabilities is about the same as the low estimate of what the Europeans could save by getting their act together and creating a common military.

But there’s a problem. This spending is going to be lumpy. There will be short-term spending to rapidly expand land forces and build electric flying robots (the IISS estimate doesn’t reckon with the ongoing revolution in military affairs), but also much longer term projects to figure out how to do things like build nuclear submarines.

Alexandr Burilkov and Guntram Wolff at Bruegel produced a much more back-of-envelopey estimate that it would require roughly €250 billion per year to match American capabilities. That’s a lot more than the IISS! But it nonetheless implies that European annual spending will “only” rise to 3.5% of GDP per year — which if you take the 20% cost savings seriously means that a common European military would require 2.8% of the Union’s GDP per year.

The problem lies in several vital capabilities … but most of them would probably not be needed to fight off the Russians, or even a Russo-Chinese alliance. The E.U. could certainly use an expanded nuclear deterrent, but the French one is pretty robust, barring some revolutionary increases in the effectiveness of antimissile technology. (Which could happen, of course.) Airlift capabilities will take a long time to rival the U.S., but that’s less than vital in a war against Russia. Space is dicier — as are American intelligence capabilities and our amazeballs “suppression of enemy air defenses-slash-destruction of enemy air defenses” that everyone saw in Venezuela. But you can fight and win a territorial war without fully replicating them.

Plus American training training training training. Which is not as easy to reproduce as people who haven’t experienced it might think.

The bottom line is that building an independent European defense is far from insurmountable, and looks quite affordable, even if it can’t be done quickly.

Political will could change quickly

Right now Europe is increasing defense spending, but there’s not a whole lot of political will to create a European armed force. Oh, the Spanish foreign minister might say that the continent needs a “European army,” but it’s a freaking word salad:

We must go to a European army. I am very much aware that you don’t do that from one day to the other, but if we are doing a coalition of the willing when it comes to security for external threats to Europe, we can very well do it for us, for our deterrence.

Right. We need an army but you know, we can do a coalition of the willing. Huh? At least the French have been direct: European defense would rest upon the sovereign choices of each nation.

Except the French statement is not clear at all either. After all, a nation can make a sovereign choice to merge its military with another nation’s. The Nordic countries have operationally merged their air forces, integrating the chain of command, creating a joint logistics system, combining training, and using similar equipment.2 In December, the Finnish defense minister went so far as to say (assuming you trust the automated translation), “The Nordic air forces will form a unified air force in the future.” They’ve also centralized ammunition production and purchases and created a common field uniform, albeit with separate camouflage patterns.3

And without anybody noticing, the Kingdom of the Netherlands has done just that, quietly merging all of its land forces into the army of the Bondsrepubliek next door, despite, uh, checkered historical relations.

Still, those are isolated examples. Why might general European sentiment change?

Well, Janan Ganesh recently wrote a column entitled, “The right will want a United States of Europe.” He said:

The right, above all the hard right, should favour a United States of Europe. And over time, I think it will, at least on the continent, if not in Britain. A unified Europe, a cause that has long been associated with liberals, will start to appeal to traditionalists as the only hope against brash, technologically ascendant superpowers to the west (America) and east (China). It will be framed as a matter of cultural survival.

Ed West agrees, writing:

Right-wing Europeanism is certainly growing, and is based on a real identity, stronger than the post-national ethos that currently defines the E.U. It’s real because, like all strong nationalism, it’s based on a sense of the “other” — Russia and Trump’s America, yes, but more so immigration from the Islamic world.

If they’re right, then the European pendulum might swing quickly in favor of a European military once the older generation of rightists is out of the way, especially if there was a way to build one separately from the current European Union.

One weird trick to create a real European army

Back in the 1950s, western Europe hammered out an entity called the European Defence Community (EDC). The idea was to allow Germany to rearm without creating a German military. Essentially, the treaty would have combined the armed forces of the Netherlands, Belgium, France, Italy, and Luxembourg into the European Defence Forces (EDF), with a common uniform, and then allowed German units to be created under its auspices.

The innovation at the heart of the EDC was the Commissariat. It consisted of nine people appointed by governments but serving fixed six-year terms. The Commissariat would have been charged with signing defense contracts and executing budgets — national governments set budgets and policy, but it was this independent group what would ensure that contracts went to the lowest bidder unless security concerns meant that a single company should get it … which the Commissariat would decide. In fact, the treaty gave the Commissariat authority over all war-related production.

This is heady stuff, more so than the mere fact that national units would be lumped together into multinational divisions. (NATO already does that, just without a common uniform.) And while a common uniform would be pretty cool, it doesn’t mean that much in practice.4 The EDC’s real innovation was the way the treaty made sure that there wouldn’t be any national favoritism in war production and ensured that everything would be standardized and fixed capabilities would be shared in pursuit of a single strategic vision.5

But the French parliament killed it in 1954 — by the expedient of indefinitely postponing discussion rather than voting “no” outright — so in order to resuscitate it, you’d need to go through the whole arduous process of reinventing the wheel by getting all twenty-seven E.U. states to agree. Right?

Maybe not! Here comes the weird trick.

And an Italian legal scholar, Federico Fabbrini, has argued that the treaty is still alive and the ratifications of the four countries that agreed to the treaty are still valid. So all you would need to do to bring it back is get France and Italy to ratify.

Moreover, a resuscitated EDC will have no direct ties to the E.U., which will please many right-wingers who increasingly support European unity but consider the E.U. to be irredeemable. The EDC Treaty makes reference to an Assembly, but those clauses do not refer to the European Parliament.6 The Treaty is also full of references to NATO, which might be a problem if the worry is a bolshy American government. But the references are all conditional — lots of “may” and “recommend” and “with the agreement of.” So that shouldn’t pose a problem.7

It is true that if the revived EDC were to assume by itself the entire burden of recreating America’s European presence, the burden would be a little higher — but still only 2.0% of the combined GDP of the six EDC states, even using the high cost estimate of $250 billion per year. In other words, their defense spending would have to rise from 1.7% of GDP in 2024 to 3.7% of GDP.

Obviously neither France nor Italy is going to bring the EDC back to life today. And as a practical matter, they would need buy-in from Germany, Belgium, and the Netherlands, even if their parliaments don’t need to take a formal vote.8

But if the political winds shift the way Ganesh (and maybe West?) think that they will, then building a European force will be easier than expected. Once conservatives start to think of themselves as European — driven by the contrast with all the not-European threats out there — then a united Europe as a bulwark against those threats becomes thinkable.

But

I don’t think this will happen. But I think it should. I think it should even if there is a rapprochement between Europe and a future American administration. The math adds up, the threats are real, and the management problems were sorted out in 1954. Just do it!

I love soccer! It’s a great game. I like watching it, I like playing it.1 I root for Ajax in the Champions League (when they’re in) and sometimes Barça (when they’re not). I love the international game even more. Argentina and the Netherlands and God save me if they ever play each other. I’ve even occasionally watched the NYCFC.

But the truth is (sorry) I like playing baseball orders of magnitude more than soccer. And I generally like watching both baseball and “American soccer” — what my daughter charmingly calls football of the NFL variety — a little bit more than soccer, at least outside the fervor of the World Cup.

Why is that?

Well, the truth is that soccer really is different from American sports in some fundamental ways. That makes it a taste that is actually kind of hard to acquire, despite the sport’s near universal appeal across the globe.

Professional fouls

What’s a professional foul? Well, I discussed it here in the context of European politics, so let me quote myself:

A professional foul in soccer is where a player decides that taking the penalty for a foul is better than letting the opposing play succeed.

An iconic case of a professional foul was in 2010 when Luis Suárez saved Uruguay’s bacon by slapping a ball away with both hands that was otherwise going to hit the net. Sure, he was sent off and Ghana got another penalty kick, but if he hadn’t done that the match would have been over and with it Uruguay’s World Cup hopes.

I was watching the match in Cambridge, Massachusetts, and the Americans around me were outraged. Even the Uruguay fans looked a little weirded out. But Matias Mori, the Chilean guy I was drinking with, well, he was plussed. (Is that a word?) Unphased. Unbothered. So was Luis Suárez. His teammate, Diego Forlan, had this to say when the two countries were about to meet again in 2022:

It’s not a revenge match for us. If Ghana see it that way, that’s on them. They’ll use it for motivation so that they can say, “This is our chance for revenge against Uruguay.” That’s valid. [But] the rules say that if you use your hand to handle the ball inside the box it’s a penalty. And what happened? It was a penalty and [Suárez] was sent off. What was the result? A penalty for Ghana and they missed it. Done. End of story.

Here’s the problem for Americans: our big three sports are all set up so the concept of the professional foul just doesn’t make sense. (I’m skipping the fourth one, hockey, until the very end of this post.) It’s literally not possible in two of them and feels very different in the third. So when you see a player deliberately breaking the rules, it comes across as, well, cheating.

Take American football. The rules kill the whole logic of the professional foul at the root. First, plays stop discretely, so there is rarely a need to commit an infraction to halt a developing threat. Second, penalties are compensatory, completely undoing the benefit of the foul and adding a little more pain on top. Soccer doesn’t have that — the penalties go up with severity, but they aren’t designed to neatly undo the tactical advantage. (How would you even do that in a continuous game like soccer?) Finally, when both of the above break down, the team that was fouled can choose whether to accept the penalty or accept the play’s result. You just can’t say “this is worth it” in advance, because the other side decides whether your foul helped them or not.

Baseball goes even further. I was talking this over with a bunch of people at a bar (where else?) and I suggested that maybe some plays at the plate would qualify as a sort of professional foul? A “play at the plate” is when a runner is sliding towards home and the catcher tries to tag him out. But sometimes, you know, maybe the catcher will body check the runner, even though body-checking is against the rules.

Only baseball short-circuits the logic. If a player without the ball obstructs the runner, then the run will be awarded anyway. If the catcher has the ball and roughs up the runner (without tagging the runner with the ball), same thing, and the catcher would be tossed from the game. (Not to mention that the benches would clear and somebody would get punched in the face. Although I guess a catcher would have protection in a bench-clearing program situation.) There isn’t even a pithy phrase for roughing the runner (like, uh, “roughing the runner”) because it just doesn’t happen on purpose. The same is true for near-miss cases like catcher’s interference or obstruction: the foul gives the other guy a base and why the hell would you do that on purpose?

Now, you might think that basketball is similar to soccer. After all, there is the intentional foul. Here a defender deliberately fouls somebody to stop the clock and force free throws instead of allowing a three-pointer or losing possession. That’s the same thing, right?

Yes, yes it is … but it doesn’t feel like it. There are three reasons for this. First, there is a LOT of scoring in basketball. So an intentional foul feels less portentous than a professional foul. Second, there is a LOT of scoring in basketball. People who love basketball generally find soccer interminable. The reverse also holds: basketball isn’t boring, not at all, but I have had a lot trouble really getting into it because there’s too much scoring. You don’t get the kind of drawn-out drama that characterizes American football, baseball, and soccer.2 Third, basketball has a much more stop-and-go quality than soccer. So penalties can be well calibrated to the crime: free throws, bonus rules, clear-path fouls, and take-foul penalties are much more exact than yellow cards, red cards, advantage rules, and stoppage time.

Time-wasting as a tactic

Time-wasting works in soccer for the same structural reason as the professional foul: time itself is a scarce defensive resource. A team with a lead can convert possession into minutes burned. Shielding the ball in the corner, slow restarts, goalkeeper delay, well-timed mysterious cramps — they all cut into the opponent’s remaining attacking opportunities while keeping the ball notionally in play. Stoppage time only weakly compensates, so the trade is predictable and repeatable. So wasting time remains central to match management.

American football looks similar on the surface but that collapses under inspection. Yes, teams manage the clock, but they do so through explicitly legal mechanisms: kneel-downs, runs up the middle, forcing the opponent to burn timeouts. There is no analogue to soccer’s grey-zone delay, because the rules precisely specify how time can be consumed and when the clock stops. You can’t just hang out with the ball or stall indefinitely inside a play. “Clock management” is part of American football strategy. But soccer’s time-wasting, well, that comes across to an American football fan as just more cheating.

Now, baseball doesn’t have a clock but something a lot like soccer’s time-wasting once almost killed the sport. Before 2000 or so, there was an unwritten rule against pitchers and hitters deliberately slowing the game. But as that taboo broke down — in part because computers showed that delay did in fact reduce risk — delay turned into a science. The hitter would dawdle to try to break up a pitcher’s rhythm, the pitcher would stand around or make endless pickoff attempts to cool a hitter’s hot bat. The whole game slooooooooooooooowwwwwwwwed down.

But once the league recognized that what had once been an idiosyncrasy had turned into a systematic tactic, they banned it. Poof, give the pitcher 20 seconds to throw the ball, limit pickoff attempts, make the batter get into the box quickly, and make the penalties severe enough that no sane person would run out the clock. And that was the end of that.

And basketball? Well it’s nothing like soccer, superficial resemblances to the contrary. There’s a shot clock. Once a team gets the ball, it has 24 seconds to make a shot. You can’t just exist with the ball. Moreover, when there is a timeout the clock stops one-for-one. No vague stoppage time.3 So teams manage the clock but within very tight constraints. Soccer has no equivalent. If the ball is in play, the main clock is running. That’s why go-slow tactics work.

But Americans have to get used to the deliberate delays. If you grew up with the sport, or learned to love it like I have, then you think of soccer as mostly continuous action; aren’t the American sports the ones with all the breaks? But it doesn’t seem that way if you’re new to the game. Soccer really is an acquired taste, like good beer or fine wine. Alla yous out there in the wider world think it’s just fun natchully. Nopety nope nope.

Screwing up as an offensive strategy

Okay, I really mean “setting up set pieces,” not “screwing up.” But to an American unversed in the ways of the beautiful game, deliberately screwing up is what it looks like.

In soccer, teams sometimes don’t try to score right away. Instead, they try to win corners or free kicks, which are special restarts near the opponent’s goal. These situations matter because everyone stops, lines up, and the attacking team gets to run a rehearsed play. In a corner kick, the offensive team gets to kick a dead ball right into a crowded penalty area where chaos favors the attackers. Fans recognize this immediately. When a player shoots into a defender and knocks the ball out of play and sets up a corner, it usually isn’t a mistake.

This only works because soccer allows restarts to be unequal by design. A foul near the goal or a forced clearance creates a moment where the attacking side has an advantage it didn’t have seconds earlier. Teams try to create these moments deliberately and repeatedly. It helps weaker teams to score and makes a tied late game start to look like everybody’s losing both their minds and their ability to play. They’re not! It’s part of the drama!

But it doesn’t read that way to an American sports fan.

The whole thing mostly doesn’t compute in baseball. What, you gonna deliberately hit a foul ball in order to … what? I mean, players sometimes do hit a whole bunch of foul tips instead of striking out, but that’s the opposite of a frantic mess and they certainly don’t look incompetent, even to somebody with little idea what’s happening. The hitter would genuinely prefer to get on base!

There is one situation where stuff like this would have made sense in baseball: the infield fly. That’s where a batter accidentally pops the ball up and it comes down in the infield, near the bases. A player should just catch the ball, one out, end of story. But if there is more than one opposing runner on base, well, then you might wanna deliberately let the ball hit the ground, pick it up, and then try to get both (or all three) of ‘em out. So baseball simply declared that if a pop-up is gonna hit the infield, it’s just an automatic out. No reason to incentivize a player to deliberately screw up.

American football once had a faint version of this in the onside kick. Normally, after a score, the ball is handed to the other team. The onside kick let a team gamble instead: kick the ball a short distance and try to recover it themselves. It was risky, but it created a special, high-stakes situation. Over time, the league decided this was too disruptive and changed the rules to make it almost impossible. That’s why set pieces remain key to soccer strategy — and why nothing quite like them survives elsewhere: the football and baseball created rules to kill similar tactics.

And basketball? Well, I know a young American lady who likes likes to watch soccer but plays baseball and loves everything about basketball. She told me that she dislikes soccer set pieces. They just seem “wrong.” So I asked her why and she said, “In basketball, a bad shot is just, like, a bad shot.”

The reason, once again, is the shot clock. In basketball, once a team has the ball, it’s got a fixed amount of time to do something with it. If you don’t shoot in time, the ball is automatically handed to the other team. That forces every possession to resolve itself. You just can’t deliberately fail in order to get a better kind of possession next. “A bad shot is just, like, a bad shot.”

From a basketball perspective, deliberately shooting into a defender to win a corner looks like intentionally missing in order to get rewarded with a better chance. In basketball, if you throw the ball off a defender on purpose and it goes out of bounds, you usually lose the ball. You do not get to reset the play with an advantage. So the idea that “screwing up” can be productive runs directly against how basketball fans understand offense.

My old friend Scott just reminded me that there is one circumstance in basketball where bouncing the ball off a defender is accepted. Imagine the ball has just gone out of bounds, and your team has a player looking to pass it in. He has five seconds, but because the other team has five people covering his four teammates, he can’t find a decent passing opportunity. So he might deliberately try to bounce the ball off the lower body of the nearest defensive player hard enough to have it go out-of-bounds again. His team keeps possession and gets to try again. But it doesn’t necessarily lead to a better advantage and, in Scott’s words, “It’s a clever, athletic play: smart and fast.” To a basketball fan (hypocritically or not) that doesn’t seem like a screw up.

Set-piece hunting still feels perverse to basketball eyes … even ones that have already been seduced by the beautiful game.

The offsides trap

I have to mention soccer’s infamous offsides rule, right? If you’ve heard it all, then go ahead, skip down, just subscribe first, okay?

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The offsides trap sounds like a trick but it’s really a powerful collective weapon that more resembles a dance than anything else. Properly executed, it really is beautiful, but it depends upon a rule that kinda sounds random if you don’t understand it.

Very briefly: the offsides rule means attackers are not allowed to receive the ball if they are closer to the enemy goal than the last defender at the moment the pass is played, not counting the goalkeeper. (The reason is that otherwise players would have an incentive to just hang around the goal waiting to kick something in and that would be boring. It’s kinda the equivalent of baseball’s pitch clock and infield fly rule.) Defenders exploit this by stepping forward in unison just before the pass, leaving the attacker suddenly — and illegally — ahead of play. The result is that an attack that looked alive is erased by timing and coordination alone, even though the ball was kicked into the goal.

If it works, the offensive play is invalidated even before it starts. It’s brilliant, sporting time travel, totally magical to watch. But if you don’t understand why the offsides rule exists, it just comes across as a random WTF thing, where a bunch of players make a strange forwards move and then that awesome-sauce goal you just watched is overturned by that weird dude at the end waving a flag.

Baseball once flirted with something that looked, from a distance, like an offsides trap: the defensive shift. Teams would stack fielders on one side of the field based on where a hitter was likely to hit the ball. Nothing illegal was happening. The pitcher threw, the batter hit, the ball was live. But the defense had moved in advance to where the danger was expected to appear. For Europeans, think of it as the back line sliding ten meters early, not to catch anyone offsides, but to smother the pass before it arrived.

But the shift differed from the trap because no time travel was involved. The offsides trap lets the defense say, “this move never existed.” The defensive shift only let them say, “this move is less likely to work.”

Hitters, see, could beat the shift. Wee Willie Keeler, a short professional baseball player from Brooklyn, explained how: “Hit it where they ain’t.”4 If the batter beat the shift, then he beat the shift. The shift changed probabilities and turned singles into outs more often than before, at the cost of making other hits more damaging. That is a fundamentally different mechanism from the offside trap, which erases the attack altogether.

Moreover, Major League Baseball (MLB) reacted once the shift became too common. It got to be that it was turning the game into one of outs and home runs with none of the exciting stuff in-between those two extremes, squashing the offense and confusing casual fans. So the league changed the rule to say that infielders hadda stay on their side of the infield until the pitch is thrown. Baseball saw anticipatory collective defense and put the kibosh on it. Soccer saw the same thing and made it a central feature of the game. (Not that I’d know how you’d get rid of it even if you wanted to — and I wouldn’t want to!) But it’s off-putting to Americans not raised on soccer.

Bottom of the ninth

I guess I should draw some deep conclusions here about the American character or the European spirit or whatever. Or do talk about a bunch about hockey. (Why don’t hockey fans automatically like soccer? Hockey players do the opposite of diving, man, and the game is like soccer on 50 milligrams of speed. Goddamned game has a position called the “enforcer.” I don’t need to say more.)

But no, I’m just gonna hope I’ve made my point, which is that soccer is a great great game, but there are real genuine structural differences that mean that an American just isn’t gonna automatically turn it on and like it.

I will conclude, however, with one deep point about a country that is neither the United States, nor in South America, nor Europe. Mexico, los Estados Unidos Mexicanos, is obviously the perfect country, sports-wise. They love basketball in Chiapas and Chihuahua, baseball is played from Cancún to Tijuana, the NFL is popular enough to consider giving the capital an expansion team, and I don’t have to talk about soccer. I’ve even seen people watch hockey and like it. Como México, no hay dos.

They just gotta start winning at something and not just playing it.

So which one is right?

Well, let’s see.

Rystad Energy tried to cost out what it would require to get Venezuela’s output back up to 3 million barrels per day (bpd) by 2040. They estimated that it would require $183 billion in capital expenditures to accomplish that, broken out as follows:

Explained: the field will need $53 billion over 14 years to maintain current production ($36 billion + $17 billion). Additional amounts will need to be invested to get production back up to historic levels.

While it is possible that this could happen more quickly than Rystad estimates, it is nonetheless a pretty rapid rate of growth in historic perspective:

We can back Rystad’s capex estimates into a rough annual flow over the period. We’ll only consider the expansion: that is, the $148 billion that needs to be invested in order to increase production beyond 1.1 million bpd, rather than keep existing fields running. Assuming an operating cost of roughly $17 per barrel (this is optimistic, but I’ll discuss below in another post) then you get a flow of expenditures and output that looks like this:

The last line gives the net present value in 2041 of all subsequent expenditures, assuming a certain level of continuing capex to keep production going. You can then use the above data to back out the minimum price per barrel at which the project makes sense for any given discount rate. Let’s run with 12%. That is a relatively low hurdle rate for an oil project in a country like Venezuela. Still, it isn’t unreasonable given how much pressure companies will come under from Washington to expand production. In order to get the equilibrium price, you divide the net present value (NPV) of expenditures by the NPV of the number of barrels that you expect to produce.

That equilibrium price turns out to be $39 per barrel. This $39 figure reflects project economics without any taxes or royalties. Consider it a counterfactual benchmark. Currently, Venezuelan crude is trading at roughly $22 below Brent, which is (coincidentally) around $39 per barrel. And that price is almost certain to rise in the absence of sanctions and legal uncertainty: the historical discount on Venezuela’s Merey blend has been around $7 per barrel, not $22. Even with Rystad’s high capex estimates and a long payoff period — the expansion as a whole won’t generate a positive cash flow until 2038 — investing in the Orinoco appears to make sense on project economics.

To be clear for readers unversed in accounting: this does not mean that the project will fail to earn a return for investors. They still earn a 12% return on their capital. It just means that the payoff is back-loaded.

But to repeat, this all assumes that the Venezuelan government charges no royalties, taxes, or fees. Nothing. Zip. Nada. Which is obviously not the case.

Moreover …

The Bolivarian Republic’s fiscal system is crazy

On paper, Venezuela’s fiscal regime doesn’t look insane. There is a 63.4% combined royalty, production tax, and export charge — that’s 63.4% percent right off the top, not of income. In practice, however, the government generally cuts the combined levy to 40.1%. Then once that is paid, the government applies a 50% income tax rate. Now, that’s a pretty high tax rate — 40.1% off of gross revenues and then half of the remaining profits — but isn’t completely out-of-line for traditional oil projects.

Except that the places that have punitive fiscal regimes like the BRV also have low lifting costs and require low capital expenditures. That does not characterize Venezuela.

So what’s the breakeven price under Venezuela’s system? We can do this quick-and-dirty or we can do it right. Quick and dirty: gross taxes of 40% plus income taxes of 50% means a marginal government share of revenues in the in the 70% range.1 That means that the post-tax breakeven price per barrel (at a 12% hurdle rate) becomes:

Whoa.

Doing it right produces an even higher number: breakeven comes to an astronomical $157 per barrel, assuming that capital expenditures can be recovered through 10-year straight-line depreciation. The gap arises because straight-line depreciation means that capital costs are recouped slowly rather than expensed up-front. That means investors need more cash more quickly to hit the same hurdle rate.

Below are the results of the calculations: the project’s total NPV (including the 12% return) doesn’t go positive below that astronomical oil price.2

In other words, ExxonMobil’s CEO is correct. Venezuela needs a saner fiscal system before anyone will invest. The current Venezuelan fiscal regime is punishing and the risk of expropriation is high, in addition to the already-significant project risk given the terrible state of the fields and facilities.

It is possible to calculate the maximum government share of gross revenues that at any given oil price that will still let the investors hit their hurdle rate. At $56 per barrel, that number comes to about 30%. It will also yield the Venezuelan government about $12 billion per year once production hits 3 million bpd. A royalty of 30% off the top is not unreasonable — in Texas, private landowners generally charge around 25%.3 And, of course, Venezuela could add in income taxes or a sliding royalty scale or accelerated depreciation or all sorts of other things to that would preserve their average share of revenues while making things more attractive for private investors.

But the government is going to have to revamp its fiscal system and the United States is going to have to guarantee that it won’t change in the future. President Trump may not have wanted to hear that news, but it is nonetheless true. I presume that somebody in the State Department is explaining this to Delcy Rodríguez as you read this.

Right?

Venezuelan nationalizations came in two waves. The first was in the 1970s, under President Carlos Andrés Pérez. They were generally negotiated and the American companies did pretty well. In fact, given that the original concessions were slated to expire in 1983, it isn’t even clear that we should call them nationalizations at all.

The second wave was under Hugo Chávez in the 2000s. Those nationalizations were neither negotiated nor fully compensated and they remain a huge mess. Love it or hate it, President Trump has a point when he says, “They took our oil rights,” if not quite our land.

Venezuelan commentators have mostly jumped to the conclusion that President Trump was referring to 1976 rather than the more recent depredations of the Chavistas. I’m honestly not sure why; it isn’t like any of them are shills for the Bolivarian government.

1976 and all that

In general, foreign nationalizations of American property have been contentious, to say the least. I wrote an entire book about how the U.S. government has proven itself generally unable to resist pressure to protect its investors, so when countries nationalize American assets they risk unleashing the panoply of pressures that Washington can bring to bear.

Venezuela’s nationalization of American oil assets in 1976 was not like that. The United States barely noticed. And the reason for that, quite simply, is that there was little expropriable value at stake because the concessions were due to expire in 1983. In fact, Venezuela had always given out time-limited oil concessions. The Hydrocarbon Act of 1943 created standard 40-year concessions (Article 26) after which both the lands and fixed investments would revert to the state (Article 80). Importantly, the Hydrocarbon Act did not overturn previous concessions — the oil companies could choose whether to keep their old concessions or switch to the new 40-year contracts (Article 95).1

The upshot is that the 1976 bargaining was just over the remaining seven years on the contracts. The companies managed to get compensated for that. In addition to a payment of $1.02 billion ($4.4 billion in 2024 dollars), they received a combination of operating fees and licensing payments that maintained their income streams into the 1980s:

You’ll have to take my word for it that the nationalization of the iron industry was equally fair to American shareholders. (Read my book!)

Unlike Brooklyn, not a whole lot of robbery was going on in the Venezuelan oil sector in the 1970s.

The Bolivarian Revolution

Well, that’s a different story again. Hugo Chávez broke contracts, forced sales, imposed illegal payments, and just plain expropriated businesses right and left. Venezuela never quite toppled over into Cuban-style communism simply because the country’s private sector was too entrenched (and old-fashioned communism too discredited) but it came pretty close.

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