The Ascent of Money_ A Financial History Part 4

The Big Chill In 1976 a diminutive professor working at the University of Chicago won the n.o.bel Prize in economics. Milton Friedman's reputation as an economist rested in large measure on his reinstatement of the idea that inflation was due to an excessive increase in the supply of money. As we have seen, he co-wrote perhaps the single most important book on US monetary policy of all time, firmly laying the blame for the Great Depression on mistakes by the Federal Reserve.55 But the question that had come to preoccupy him by the mid-seventies was: what had gone wrong with the welfare state? In March 1975, Friedman flew from Chicago to Chile to answer that question. But the question that had come to preoccupy him by the mid-seventies was: what had gone wrong with the welfare state? In March 1975, Friedman flew from Chicago to Chile to answer that question.

Milton Friedman Only eighteen months earlier, in September 1973, tanks had rolled through the capital Santiago to overthrow the government of the Marxist President Salvador Allende, whose attempt to turn Chile into a Communist state had ended in total economic chaos and a call by the parliament for a military takeover. Air force jets bombed the presidential Moneda Palace, watched from the balcony of the nearby Carera Hotel by opponents of Allende who celebrated with champagne. Inside the palace, the president himself fought a hopeless rearguard action armed with an AK47 - a gift from Fidel Castro, the man he had sought to emulate. As the tanks rumbled towards him, Allende realized it was all over and, cornered in what was left of his quarters, shot himself.

The coup epitomized a world-wide crisis of the post-war welfare state and posed a stark choice between rival economic systems. With output collapsing and inflation rampant, Chile's system of universal benefits and state pensions was essentially bankrupt. For Allende, the answer had been full blown Marxism, a complete Soviet-style takeover of every aspect of economic life. The generals and their supporters knew they were against that. But what were they actually for, since the status quo was clearly unsustainable? Enter Milton Friedman. Amid his lectures and seminars, he spent three quarters of an hour with the new president General Pinochet and later wrote him an a.s.sessment of the Chilean economic situation, urging him to reduce the government deficit that he had identified as the main cause of the country's sky-high inflation, then running at an annual rate of 900 per cent.56 A month after Friedman's visit, the Chilean junta announced that inflation would be stopped 'at any cost'. The regime cut government spending by 27 per cent and set fire to bundles of banknotes. But Friedman was offering more than his patent monetarist shock therapy. In a letter to Pinochet written after his return to Chicago, he argued that 'this problem' of inflation arose 'from trends toward socialism that started forty years ago, and reached their logical - and terrible - climax in the Allende regime'. As he later recalled, 'The general line I was taking . . . was that their present difficulties were due almost entirely to the forty-year trend toward collectivism, socialism, and the welfare state . . .' A month after Friedman's visit, the Chilean junta announced that inflation would be stopped 'at any cost'. The regime cut government spending by 27 per cent and set fire to bundles of banknotes. But Friedman was offering more than his patent monetarist shock therapy. In a letter to Pinochet written after his return to Chicago, he argued that 'this problem' of inflation arose 'from trends toward socialism that started forty years ago, and reached their logical - and terrible - climax in the Allende regime'. As he later recalled, 'The general line I was taking . . . was that their present difficulties were due almost entirely to the forty-year trend toward collectivism, socialism, and the welfare state . . .'57 And he a.s.sured Pinochet: 'The end of inflation will lead to a rapid expansion of the capital market, which will greatly facilitate the transfer of enterprises and activities still in the hands of the government to the private sector.' And he a.s.sured Pinochet: 'The end of inflation will lead to a rapid expansion of the capital market, which will greatly facilitate the transfer of enterprises and activities still in the hands of the government to the private sector.'58 For tendering this advice Friedman found himself denounced by the American press. After all, he was acting as a consultant to a military dictator responsible for the executions of more than two thousand real and suspected Communists and the torture of nearly 30,000 more. As the New York Times New York Times asked: '. . . if the pure Chicago economic theory can be carried out in Chile only at the price of repression, should its authors feel some responsibility?' asked: '. . . if the pure Chicago economic theory can be carried out in Chile only at the price of repression, should its authors feel some responsibility?'aj Chicago's role in the new regime consisted of more than just one visit by Milton Friedman. Since the 1950s, there had been a regular stream of bright young Chilean economists studying at Chicago on an exchange programme with the Universidad Catolica in Santiago, and they went back convinced of the need to balance the budget, tighten the money supply and liberalize trade.59 These were the so-called Chicago Boys, Friedman's foot-soldiers: Jorge Cauas, Pinochet's finance minister and later economics 'superminister', Sergio de Castro, his successor as finance minister, Miguel Kast, labour minister and later central bank chief, and at least eight others who studied in Chicago and went on to serve in government. Even before the fall of Allende, they had devised a detailed programme of reforms known as These were the so-called Chicago Boys, Friedman's foot-soldiers: Jorge Cauas, Pinochet's finance minister and later economics 'superminister', Sergio de Castro, his successor as finance minister, Miguel Kast, labour minister and later central bank chief, and at least eight others who studied in Chicago and went on to serve in government. Even before the fall of Allende, they had devised a detailed programme of reforms known as El Ladrillo El Ladrillo (The Brick) because of the thickness of the ma.n.u.script. The most radical measures, however, would come from a Catholic University student who had opted to study at Harvard, not Chicago. What he had in mind was the most profound challenge to the welfare state in a generation. Thatcher and Reagan came later. The backlash against welfare started in Chile. (The Brick) because of the thickness of the ma.n.u.script. The most radical measures, however, would come from a Catholic University student who had opted to study at Harvard, not Chicago. What he had in mind was the most profound challenge to the welfare state in a generation. Thatcher and Reagan came later. The backlash against welfare started in Chile.

For Jose Pinera, just 24 when Pinochet seized power, the invitation to return to Chile from Harvard posed an agonizing dilemma. He had no illusions about the nature of Pinochet's regime. Yet he also believed there was an opportunity to put into practice ideas that had been taking shape in his mind ever since his arrival in New England. The key, as he saw it, was not just to reduce inflation. It was also essential to foster that link between property rights and political rights which had been at the heart of the successful North American experiment with capitalist democracy. There was no surer way to do this, Pinera believed, than radically to overhaul the welfare state, beginning with the pay-as-you-go system of funding state pensions and other benefits. As he saw it:

What had begun as a system of large-scale insurance had simply become a system of taxation, with today's contributions being used to pay today's benefits, rather than to acc.u.mulate a fund for future use. This 'pay-as-you-go' approach had replaced the principle of thrift with the practice of ent.i.tlement . . . [But this approach] is rooted in a false conception of how human beings behave. It destroys, at the individual level, the link between contributions and benefits. In other words, between effort and reward. Wherever that happens on a ma.s.sive scale and for a long period of time, the final result is disaster. 60 60

Between 1979 and 1981, as minister of labour (and later minister of mining), Pinera created a radically new pension system for Chile, offering every worker the chance to opt out of the state pension system. Instead of paying a payroll tax, they would put an equivalent amount (10 per cent of their wages) into an individual Personal Retirement Account, to be managed by private and competing companies known as Administradora de Fondos de Pensiones Administradora de Fondos de Pensiones (AFPs). (AFPs).61 On reaching retirement age, a partic.i.p.ant would withdraw his money and use it to buy an annuity; or, if he preferred, he could keep working and contributing. In addition to a pension, the scheme also included a disability and life insurance premium. The idea was to give the Chilean worker a sense that the money being set aside was really his own capital. In the words of Hernan Buchi (who helped Pinera draft the social security legislation and went on to implement the reform of health care), 'Social programmes have to include some incentive for individual effort and for persons gradually to be responsible for their own destiny. There is nothing more pathetic than social programmes that encourage social parasitism.' On reaching retirement age, a partic.i.p.ant would withdraw his money and use it to buy an annuity; or, if he preferred, he could keep working and contributing. In addition to a pension, the scheme also included a disability and life insurance premium. The idea was to give the Chilean worker a sense that the money being set aside was really his own capital. In the words of Hernan Buchi (who helped Pinera draft the social security legislation and went on to implement the reform of health care), 'Social programmes have to include some incentive for individual effort and for persons gradually to be responsible for their own destiny. There is nothing more pathetic than social programmes that encourage social parasitism.'62 Pinera gambled. He gave workers a choice: stick with the old system of pay-as-you-go, or opt for the new Personal Retirement Accounts. He cajoled, making regular television appearances to rea.s.sure workers that 'n.o.body will take away your grand-mother's cheque' (from the old state system). He held firm, sarcastically dismissing a proposal that the country's trade unions, rather than individual workers, should be responsible for choosing their members' AFPs. Finally, on 4 November 1980, the reform was approved, coming into effect at Pinera's mischievous suggestion on 1 May, international Labour Day, the following year.63 The public response was enthusiastic. By 1990 more than 70 per cent of workers had made the switch to the private system. The public response was enthusiastic. By 1990 more than 70 per cent of workers had made the switch to the private system.64 Each one received a shiny new book in which the contributions and investment returns were recorded. By the end of 2006, around 7.7 million Chileans had a Personal Retirement Account; 2.7 million were also covered by private health schemes, under the so-called ISAPRE system, which allowed workers to opt out of the state health insurance system in favour of a private provider. It may not sound like it, but - along with the other Chicago-inspired reforms implemented under Pinochet - this represented as big a revolution as anything the Marxist Allende had planned back in 1973. Moreover, the reform had to be introduced at a time of extreme economic instability, a consequence of the ill-judged decision to peg the Chilean currency to the dollar in 1979, when the inflation dragon appeared to have been slain. When US interest rates rose shortly afterwards, the deflationary pressure plunged Chile into a recession that threatened to derail the Chicago-Harvard express altogether. The economy contracted 13 per cent in 1982, seemingly vindicating the left-wing critics of Friedman's 'shock treatment'. Only towards the end of 1985 could the crisis really be regarded as over. By 1990 it was clear that the reform had been a success: welfare reforms were responsible for fully half the decline of total government expenditure from 34 per cent of GDP to 22 per cent. Each one received a shiny new book in which the contributions and investment returns were recorded. By the end of 2006, around 7.7 million Chileans had a Personal Retirement Account; 2.7 million were also covered by private health schemes, under the so-called ISAPRE system, which allowed workers to opt out of the state health insurance system in favour of a private provider. It may not sound like it, but - along with the other Chicago-inspired reforms implemented under Pinochet - this represented as big a revolution as anything the Marxist Allende had planned back in 1973. Moreover, the reform had to be introduced at a time of extreme economic instability, a consequence of the ill-judged decision to peg the Chilean currency to the dollar in 1979, when the inflation dragon appeared to have been slain. When US interest rates rose shortly afterwards, the deflationary pressure plunged Chile into a recession that threatened to derail the Chicago-Harvard express altogether. The economy contracted 13 per cent in 1982, seemingly vindicating the left-wing critics of Friedman's 'shock treatment'. Only towards the end of 1985 could the crisis really be regarded as over. By 1990 it was clear that the reform had been a success: welfare reforms were responsible for fully half the decline of total government expenditure from 34 per cent of GDP to 22 per cent.

Was it worth it? Was it worth the huge moral gamble that the Chicago and Harvard boys made, of getting into bed with a murderous, torturing military dictator? The answer depends on whether or not you think these economic reforms helped pave the way back to a sustainable democracy in Chile. In 1980, just seven years after the coup, Pinochet conceded a new const.i.tution that prescribed a ten-year transition back to democracy. In 1990, having lost a referendum on his leadership, he stepped down as president (though he remained in charge of the army for a further eight years). Democracy was restored, and by that time the economic miracle was under way that helped to ensure its survival. For the pension reform not only created a new cla.s.s of property-owners, each with his own retirement nest egg. It also gave the Chilean economy a ma.s.sive shot in the arm, since the effect was significantly to increase the savings rate (to 30 per cent of GDP by 1989, the highest in Latin America). Initially, a cap was imposed that prevented the AFPs from investing more than 6 per cent (later 12 per cent) of the new pension funds outside Chile.65 The effect of this was to ensure that Chile's new source of savings was channelled into the country's own economic development. In January 2008 I visited Santiago and watched brokers at the Banco de Chile busily investing the pension contributions of Chilean workers in their own stock market. The results have been impressive. The annual rate of return on the Personal Retirement Accounts has been over 10 per cent, reflecting the soaring performance of the Chilean stock market, which has risen by a factor of 18 since 1987. The effect of this was to ensure that Chile's new source of savings was channelled into the country's own economic development. In January 2008 I visited Santiago and watched brokers at the Banco de Chile busily investing the pension contributions of Chilean workers in their own stock market. The results have been impressive. The annual rate of return on the Personal Retirement Accounts has been over 10 per cent, reflecting the soaring performance of the Chilean stock market, which has risen by a factor of 18 since 1987.

There is a shadow side to the system, to be sure. The administrative and fiscal costs of the system are sometimes said to be too high.66 Since not everyone in the economy has a regular full-time job, not everyone ends up partic.i.p.ating in the system. The self-employed were not obliged to contribute to Personal Retirement Accounts, and the casually employed do not contribute either. That leaves a substantial proportion of the population with no pension coverage at all, including many of the people living in La Victoria, once a hotbed of popular resistance to the Pinochet regime - and still the kind of place where Che Guevara's face is spray-painted on the walls. On the other hand, the government stands ready to make up the difference for those whose savings do not suffice to pay a minimum pension, provided they have done at least twenty years of work. And there is also a Basic Solidarity pension for those who do not qualify for this. Since not everyone in the economy has a regular full-time job, not everyone ends up partic.i.p.ating in the system. The self-employed were not obliged to contribute to Personal Retirement Accounts, and the casually employed do not contribute either. That leaves a substantial proportion of the population with no pension coverage at all, including many of the people living in La Victoria, once a hotbed of popular resistance to the Pinochet regime - and still the kind of place where Che Guevara's face is spray-painted on the walls. On the other hand, the government stands ready to make up the difference for those whose savings do not suffice to pay a minimum pension, provided they have done at least twenty years of work. And there is also a Basic Solidarity pension for those who do not qualify for this.67 Above all, the improvement in Chile's economic performance since the Chicago Boys' reforms is very hard to argue with. The growth rate in the fifteen years before Friedman's visit was 0.17 per cent. In the fifteen years that followed, it was 3.28 per cent, nearly twenty times higher. The poverty rate has declined dramatically to just 15 per cent, compared with 40 per cent in the rest of Latin America. Above all, the improvement in Chile's economic performance since the Chicago Boys' reforms is very hard to argue with. The growth rate in the fifteen years before Friedman's visit was 0.17 per cent. In the fifteen years that followed, it was 3.28 per cent, nearly twenty times higher. The poverty rate has declined dramatically to just 15 per cent, compared with 40 per cent in the rest of Latin America.68 Santiago today is the shining city of the Andes, easily the continent's most prosperous and attractive city. Santiago today is the shining city of the Andes, easily the continent's most prosperous and attractive city.

It is a sign of Chile's success that the country's pension reforms have been imitated all across the continent, and indeed around the world. Bolivia, El Salvador and Mexico copied the Chilean scheme to the letter. Peru and Colombia introduced private pensions as an alternative to the state system.69 Kazakhstan, too, has followed the Chilean example. Even British MPs have beaten a path from Westminster to Pinera's door. The irony is that the Chilean reform was far more radical than anything that has been attempted in the United States, the heartland of free market economics. Yet welfare reform is coming to North America, whether anyone wants it or not. Kazakhstan, too, has followed the Chilean example. Even British MPs have beaten a path from Westminster to Pinera's door. The irony is that the Chilean reform was far more radical than anything that has been attempted in the United States, the heartland of free market economics. Yet welfare reform is coming to North America, whether anyone wants it or not.

When Hurricane Katrina struck New Orleans, it laid bare some realities about the American system that many people had been doing their best to ignore. Yes, America had a welfare state. No, it didn't work. The Reagan and Clinton administrations had implemented what seemed like radical welfare reforms, reducing unemployment benefits and the periods for which they could be claimed. But no amount of reform could insulate the system from the ageing of the American population and the spiralling cost of private health care.

The US has a unique welfare system. Social Security provides a minimal state pension to all retirees, while at the same time the Medicare system covers all the health costs of the elderly and disabled. Income support and other health expenditures push up the total cost of federal welfare programmes to 11 per cent of GDP. American healthcare, however, is almost entirely provided by the private sector. At its best it is state-of-the-art, but it is very far from cheap. And, if you want treatment before you retire, you need a private insurance policy - something an estimated 47 million Americans do not have, since such policies tend to be available only to those in regular, formal employment. The result is a welfare system which is not comprehensive, is much less redistributive than European systems, but is still hugely expensive. Since 1993 Social Security has been more expensive than National Security. Public expenditure on education is higher as a percentage of GDP (5.9 per cent) than in Britain, Germany or j.a.pan. Public health expenditures are equivalent to around 7 per cent of GDP, the same as in Britain; but private health care spending accounts for more (8.5 per cent, compared with a paltry 1.1 per cent in Britain).70 Such a welfare system is ill prepared to cope with a rapid increase in the number of claimants. But that is precisely what Americans face as the members of the so-called 'Baby Boomer' generation, born after the Second World War, begin to retire. 71 71 According to the United Nations, between now and 2050 male life expectancy in the United States is likely to rise from 75 to 80. Over the next forty years, the share of the American population that is aged 65 or over is projected to rise from 12 per cent to nearly 21 per cent. Unfortunately, many of the soon-to-be-retired have made inadequate provision for life after work. According to the 2006 Retirement Confidence Survey, six in ten American workers say they are saving for retirement and just four in ten say they have actually calculated how much they should be saving. Many of those without sufficient savings imagine that they will compensate by working for longer. The average worker plans to work until age 65. But it turns out that he or she actually ends up retiring at 62; indeed, around four in ten American workers end up leaving the workforce earlier than they planned. According to the United Nations, between now and 2050 male life expectancy in the United States is likely to rise from 75 to 80. Over the next forty years, the share of the American population that is aged 65 or over is projected to rise from 12 per cent to nearly 21 per cent. Unfortunately, many of the soon-to-be-retired have made inadequate provision for life after work. According to the 2006 Retirement Confidence Survey, six in ten American workers say they are saving for retirement and just four in ten say they have actually calculated how much they should be saving. Many of those without sufficient savings imagine that they will compensate by working for longer. The average worker plans to work until age 65. But it turns out that he or she actually ends up retiring at 62; indeed, around four in ten American workers end up leaving the workforce earlier than they planned.72 This has grave implications for the federal budget, since those who make these miscalculations are likely to end up a charge on taxpayers in one way or another. Today the average retiree receives Social Security, Medicare and Medicaid benefits totalling $21,000 a year. Multiply this by the current 36 million elderly and you see why these programmes already consume such a large proportion of federal tax revenues. And that proportion is bound to rise, not only because the number of retirees is going up but also because the costs of benefits like Medicare are out of control, rising at double the rate of inflation. The 2003 extension of Medicare to cover prescription drugs only made matters worse. According to one projection, by the aptly named Medicare Trustee Thomas R. Saving, the cost of Medicare alone will absorb 24 per cent of all federal income taxes by 2019. Current figures also imply that the federal government has much larger unfunded liabilities than official data imply. The Government Accountability Office's latest estimate of the implicit 'exposures' arising from unfunded future Social Security and Medicare benefits is $34 trillion. This has grave implications for the federal budget, since those who make these miscalculations are likely to end up a charge on taxpayers in one way or another. Today the average retiree receives Social Security, Medicare and Medicaid benefits totalling $21,000 a year. Multiply this by the current 36 million elderly and you see why these programmes already consume such a large proportion of federal tax revenues. And that proportion is bound to rise, not only because the number of retirees is going up but also because the costs of benefits like Medicare are out of control, rising at double the rate of inflation. The 2003 extension of Medicare to cover prescription drugs only made matters worse. According to one projection, by the aptly named Medicare Trustee Thomas R. Saving, the cost of Medicare alone will absorb 24 per cent of all federal income taxes by 2019. Current figures also imply that the federal government has much larger unfunded liabilities than official data imply. The Government Accountability Office's latest estimate of the implicit 'exposures' arising from unfunded future Social Security and Medicare benefits is $34 trillion.73 That is nearly four times the size of the official federal debt. That is nearly four times the size of the official federal debt.

Ironically, there's only one country where the problem of an ageing population has more serious economic implications than the United States. That country is j.a.pan. So successful was the j.a.panese 'welfare superpower' that by the 1970s life expectancy in j.a.pan had become the longest in the world. But that, combined with a falling birth rate, has produced the world's oldest society, with more than 21 per cent of the population already over the age of 65. According to Nakamae International Economic Research, the elderly population will be equal to that of the working population by 2044 .74 As a result, j.a.pan is now grappling with a profound structural crisis of its welfare system, which was not designed to cope with what the j.a.panese call the longevity society ( As a result, j.a.pan is now grappling with a profound structural crisis of its welfare system, which was not designed to cope with what the j.a.panese call the longevity society (choju shakai).75 Despite raising the retirement age, the government has not yet resolved the problems of the state pension system. (Matters are not helped by the fact that many self-employed people and students - not to mention some eminent politicians - are failing to make their required social security contributions.) Public health insurers, meanwhile, have been in deficit since the early 1990s. Despite raising the retirement age, the government has not yet resolved the problems of the state pension system. (Matters are not helped by the fact that many self-employed people and students - not to mention some eminent politicians - are failing to make their required social security contributions.) Public health insurers, meanwhile, have been in deficit since the early 1990s.76 j.a.pan's welfare budget is now equal to three quarters of tax revenues. Its debt exceeds one quadrillion yen, around 170 per cent of GDP . j.a.pan's welfare budget is now equal to three quarters of tax revenues. Its debt exceeds one quadrillion yen, around 170 per cent of GDP .77 Yet private sector inst.i.tutions are in no better shape. Life insurance companies have been struggling since the 1990 stock market crash; three major insurers failed between 1997 and 2000. Pension funds are in equally dire straits. As most countries in the developed world are moving in the same direction, it gives a new meaning to that old 1980s pop song about 'turning j.a.panese'. a.s.sets at the world's largest pension funds (which include the j.a.panese government's own fund, its Dutch counterpart and the California Public Employees' fund) now exceed $10 trillion, having risen by 60 per cent between 2004 and 2007. Yet private sector inst.i.tutions are in no better shape. Life insurance companies have been struggling since the 1990 stock market crash; three major insurers failed between 1997 and 2000. Pension funds are in equally dire straits. As most countries in the developed world are moving in the same direction, it gives a new meaning to that old 1980s pop song about 'turning j.a.panese'. a.s.sets at the world's largest pension funds (which include the j.a.panese government's own fund, its Dutch counterpart and the California Public Employees' fund) now exceed $10 trillion, having risen by 60 per cent between 2004 and 2007.78 But are their liabilities ultimately going to grow so large that perhaps even these huge sums will not suffice? But are their liabilities ultimately going to grow so large that perhaps even these huge sums will not suffice?

The demographics of a welfare crisis: j.a.pan, 1950-2050 (percentage shares of population by age group)

Longer life is good news for individuals, but it is bad news for the welfare state and the politicians who have to persuade voters to reform it. The even worse news is that, even as the world's population is getting older, the world itself may be getting more dangerous.79 The Hedged and the Unhedged What if international terrorism strikes more frequently and/or lethally, as Al Qaeda continues its quest for weapons of ma.s.s destruction? There is in fact good reason to fear this. Given the relatively limited impact of the 2001 attacks, Al Qaeda has a strong incentive to attempt a 'nuclear 9/11'.80 The organization's spokesmen do not deny this; on the contrary, they openly boast of their ambition 'to kill 4 million Americans - 2 million of them children - and to exile twice as many and wound and cripple hundreds of thousands'. The organization's spokesmen do not deny this; on the contrary, they openly boast of their ambition 'to kill 4 million Americans - 2 million of them children - and to exile twice as many and wound and cripple hundreds of thousands'.81 This cannot be dismissed as mere rhetoric. According to Graham Allison, of Harvard University's Belfer Center, 'if the US and other governments just keep doing what they are doing today, a nuclear terrorist attack in a major city is more likely than not by 2014'. In the view of Richard Garwin, one of the designers of the hydrogen bomb, there is already a '20 per cent per year probability of a nuclear explosion with American cities and European cities included'. Another estimate, by Allison's colleague Matthew Bunn, puts the odds of a nuclear terrorist attack over a ten-year period at 29 per cent. This cannot be dismissed as mere rhetoric. According to Graham Allison, of Harvard University's Belfer Center, 'if the US and other governments just keep doing what they are doing today, a nuclear terrorist attack in a major city is more likely than not by 2014'. In the view of Richard Garwin, one of the designers of the hydrogen bomb, there is already a '20 per cent per year probability of a nuclear explosion with American cities and European cities included'. Another estimate, by Allison's colleague Matthew Bunn, puts the odds of a nuclear terrorist attack over a ten-year period at 29 per cent.82 Even a small 12.5-kiloton nuclear device would kill up to 80,000 people if detonated in an average American city; a 1.0 megaton hydrogen bomb could kill as many as 1.9 million. A successful biological attack using anthrax spores could be nearly as lethal. Even a small 12.5-kiloton nuclear device would kill up to 80,000 people if detonated in an average American city; a 1.0 megaton hydrogen bomb could kill as many as 1.9 million. A successful biological attack using anthrax spores could be nearly as lethal.83 What if global warming is increasing the incidence of natural disasters? Here, too, there are some grounds for unease. According to the scientific experts on the Intergovernmental Panel on Climate Change 'the frequency of heavy precipitation events has increased over most areas' as a result of man-made global warming. There is also 'observational evidence of an increase in intense tropical cyclone activity in the North Atlantic since about 1970'. The rising sea levels forecast by the IPCC would inevitably increase the flood damage caused by storms like Katrina.84 Not all scientists accept the notion that hurricane activity along the US Atlantic coast is on the increase (as claimed by Al Gore in his film Not all scientists accept the notion that hurricane activity along the US Atlantic coast is on the increase (as claimed by Al Gore in his film An Inconvenient Truth An Inconvenient Truth). But it would clearly be a mistake blithely to a.s.sume that this is not the case, especially given the continued growth of residential construction in vulnerable states. For governments that are already tottering under the weight of ever-increasing welfare commitments, an increase in the frequency or scale of catastrophes could be fiscally fatal. The insurance (and reinsurance) losses arising from the 9/11 attacks were in the region of $30-58 billion, close to the insurance losses due to Katrina.85 In both cases, the US federal government had to step in to help private insurers meet their commitments, providing emergency federal terrorism insurance in the aftermath of 9/11, and absorbing the bulk of the costs of emergency relief and reconstruction along the coast of the Gulf of Mexico. In other words, just as happened during the world wars, the welfare state steps in when the insurers are overwhelmed. But this has a perverse result in the case of natural disasters. In effect, taxpayers in relatively safer parts of the country are subsidizing those who choose to live in hurricane-p.r.o.ne regions. One possible way of correcting this imbalance would be to create a federal reinsurance programme to cover mega-catastrophes. Rather than looking to taxpayers to pick up the tab for big disasters, insurers would charge differential premiums (higher for those closest to hurricane zones), laying off the risk of another Katrina by reinsuring the risk through the government. In both cases, the US federal government had to step in to help private insurers meet their commitments, providing emergency federal terrorism insurance in the aftermath of 9/11, and absorbing the bulk of the costs of emergency relief and reconstruction along the coast of the Gulf of Mexico. In other words, just as happened during the world wars, the welfare state steps in when the insurers are overwhelmed. But this has a perverse result in the case of natural disasters. In effect, taxpayers in relatively safer parts of the country are subsidizing those who choose to live in hurricane-p.r.o.ne regions. One possible way of correcting this imbalance would be to create a federal reinsurance programme to cover mega-catastrophes. Rather than looking to taxpayers to pick up the tab for big disasters, insurers would charge differential premiums (higher for those closest to hurricane zones), laying off the risk of another Katrina by reinsuring the risk through the government.86 But there is another way. But there is another way.

Insurance and welfare are not the only way of buying protection against future shocks. The smart way to do it is by being hedged. Everyone today has heard of hedge funds like Kenneth C. Griffin's Chicago-based Citadel. As founder of the Citadel Investment Group, now one of the twenty biggest hedge funds in the world, Griffin currently manages around $16 billion in a.s.sets. Among them are many so-called distressed a.s.sets, which Griffin picks up from failed companies like Enron for knock-down prices. It would not be too much to say that Ken Griffin loves risk. He lives and breathes uncertainty. Since he began trading convertible bonds from his Harvard undergraduate dormitory, he has feasted on 'fat tails'. Citadel's main offsh.o.r.e fund has generated annual returns of 21 per cent since 1998.87 In 2007, when other financial inst.i.tutions were losing billions in the credit crunch, he personally made more than a billion dollars. Among the artworks that decorate his penthouse apartment on North Michigan Avenue is Jasper Johns's In 2007, when other financial inst.i.tutions were losing billions in the credit crunch, he personally made more than a billion dollars. Among the artworks that decorate his penthouse apartment on North Michigan Avenue is Jasper Johns's False Start False Start, for which he paid $80 million, and a Cezanne which cost him $60 million. When Griffin got married, the wedding was at Versailles (the French chateau, not the small Illinois town of the same name).88 Hedging is clearly a good business in a risky world. But what exactly does it mean, and where did it come from? Hedging is clearly a good business in a risky world. But what exactly does it mean, and where did it come from?

The origins of hedging, appropriately enough, are agricultural. For a farmer planting a crop, nothing is more crucial than the price it will fetch after it has been harvested and taken to market. But that could be lower than he expects or higher. A futures contract allows him to protect himself by committing a merchant to buy his crop when it comes to market at a price agreed when the seeds are being planted. If the market price on the day of delivery is lower than expected, the farmer is protected; the merchant who sells him the contract naturally hopes it will be higher, leaving him with a profit. As the American prairies were ploughed and planted, and as ca.n.a.ls and railways connected them to the major cities of the industrial Northeast, they became the nation's breadbasket. But supply and demand, and hence prices, fluctuated wildly. Between January 1858 and May 1867, partly as a result of the Civil War, the price of wheat soared from 55 cents to $2.88 per bushel, before plummeting back to 77 cents in March 1870. The earliest forms of protection for farmers were known as forward contracts, which were simply bilateral agreements between seller and buyer. A true futures contract, however, is a standardized instrument issued by a futures exchange and hence tradable. With the development of a standard 'to arrive' futures contract, along with a set of rules to enforce settlement and, finally, an effective clearinghouse, the first true futures market was born. Its birthplace was the Windy City: Chicago. The creation of a permanent futures exchange in 1874 - the Chicago Produce Exchange, the ancestor of today's Chicago Mercantile Exchange - created a home for 'hedging' in the US commodity markets.89 A pure hedge eliminates price risk entirely. It requires a speculator as a counter-party to take on the risk. In practice, however, most hedgers tend to engage in some measure of speculative activity, looking for ways to profit from future price movements. Partly because of public unease about this - the feeling that futures markets were little better than casinos - it was not until the 1970s that futures could also be issued for currencies and interest rates; and not until 1982 that futures contracts on the stock market became possible.

At Citadel, Griffin has brought together mathematicians, physicists, engineers, investment a.n.a.lysts and advanced computer technology. Some of what they do is truly the financial equivalent of rocket science. But the underlying principles are simple. Because they are all derived from the value of underlying a.s.sets, all futures contracts are forms of 'derivative'. Closely related, though distinct from futures, are the financial contracts known as options. In essence, the buyer of a call option has the right, but not the obligation, to buy an agreed quant.i.ty of a particular commodity or financial a.s.set from the seller ('writer') of the option at a certain time (the expiration date) for a certain price (known as the strike price). Clearly, the buyer of a call option expects the price of the commodity or underlying instrument to rise in the future. When the price pa.s.ses the agreed strike price, the option is 'in the money' - and so is the smart guy who bought it. A put option is just the opposite: the buyer has the right, but not the obligation, to sell an agreed quant.i.ty of something to the seller of the option. A third kind of derivative is the swap, which is effectively a bet between two parties on, for example, the future path of interest rates. A pure interest rate swap allows two parties already receiving interest payments literally to swap them, allowing someone receiving a variable rate of interest to exchange it for a fixed rate, in case interest rates decline. A credit default swap, meanwhile, offers protection against a company's defaulting on its bonds. Perhaps the most intriguing kind of derivative, however, are the weather derivatives like natural catastrophe bonds, which allow insurance companies and others to offset the effects of extreme temperatures or natural disasters by selling the so-called tail risk to hedge funds like Fermat Capital. In effect, the buyer of a 'cat bond' is selling insurance; if the disaster specified in the bond happens, the buyer has to pay out an agreed sum or forfeit his princ.i.p.al. In return, the seller pays an attractive rate of interest. In 2006 the total notional value of weather-risk derivatives was around $45 billion.

There was a time when most such derivatives were standardized instruments produced by exchanges like the Chicago Mercantile, which has pioneered the market for weather derivatives. Now, however, the vast proportion are custom-made and sold 'over-the-counter' (OTC), often by banks which charge attractive commissions for their services. According to the Bank for International Settlements, the total notional amounts outstanding of OTC derivative contracts - arranged on an ad hoc basis between two parties - reached a staggering $596 trillion in December 2007, with a gross market value of just over $14.5 trillion.ak Though they have famously been called financial weapons of ma.s.s destruction by more traditional investors like Warren Buffett (who has, nonetheless, made use of them), the view in Chicago is that the world's economic system has never been better protected against the unexpected. Though they have famously been called financial weapons of ma.s.s destruction by more traditional investors like Warren Buffett (who has, nonetheless, made use of them), the view in Chicago is that the world's economic system has never been better protected against the unexpected.

The fact nevertheless remains that this financial revolution has effectively divided the world in two: those who are (or can be) hedged, and those who are not (or cannot be). You need money to be hedged. Hedge funds typically ask for a minimum six- or seven-figure investment and charge a management fee of at least 2 per cent of your money (Citadel charges four times that) and 20 per cent of the profits. That means that most big corporations can afford to be hedged against unexpected increases in interest rates, exchange rates or commodity prices. If they want to, they can also hedge against future hurricanes or terrorist attacks by selling cat bonds and other derivatives. By comparison, most ordinary households cannot afford to hedge at all and would not know how to even if they could. We lesser mortals still have to rely on the relatively blunt and often expensive instrument of insurance policies to protect us against life's nasty surprises; or hope for the welfare state to ride to the rescue.

There is, of course, a third and much simpler strategy: the old one of simply saving for that rainy day. Or, rather, borrowing to buy a.s.sets whose future appreciation in value will supposedly afford a cushion against calamity. For many families in recent years, making provision for an uncertain future has taken the very simple form of an investment (usually leveraged, that is debt-financed) in a house, the value of which is supposed to keep increasing until the day the breadwinners need to retire. If the pension plan falls short, never mind. If you run out of health insurance, don't panic. There is always home, sweet home.

As an insurance policy or a pension plan, however, this strategy has one very obvious flaw. It represents a one-way, totally unhedged bet on one market: the property market. Unfortunately, as we shall see in the next chapter, a bet on bricks and mortar is very far from being as safe as houses. And you do not need to live in New Orleans to find that out the hard way.

5.

Safe as Houses It is the English-speaking world's favourite economic game: property. No other facet of financial life has such a hold on the popular imagination. No other a.s.set-allocation decision has inspired so many dinner-party conversations. The real estate market is unique. Every adult, no matter how economically illiterate, has a view on its future prospects. Even children are taught how to climb the property ladder, long before they have money of their own.al And the way we teach them is literally to play a property game. And the way we teach them is literally to play a property game.

The game we know today as Monopoly was first devised in 1903 by an American woman, Elizabeth ('Lizzie') Phillips, a devotee of the radical economist Henry George. Her Utopian dream was of a world in which the only tax would be a levy on land values. The game's intended purpose was to expose the iniquity of a social system in which a small minority of landlords profited from the rents they collected from tenants. Originally known as The Landlord's Game, this proto-Monopoly had a number of familiar features - the continuous rectangular path, the Go to Jail corner - but it appeared too complex and didactic to have ma.s.s appeal. Indeed, its early adopters included a couple of eccentric university professors, Scott Nearing at Wharton and Guy Tugwell at Columbia, who modified it for cla.s.sroom use. It was an unemployed plumbing engineer named Charles Darrow who saw the game's commercial potential after he was introduced by friends to a version based on the streets of Atlantic City, the New Jersey seaside resort. Darrow redesigned the board so that each property square had a brightly coloured band across it and hand-carved the little houses and hotels that players could 'build' on the squares they acquired. Darrow was good with his hands (he could turn out a single game in eight hours), but he also had the salesman's 'moxie', persuading the Philadelphia department store John Wanamaker and the toy retailer F. A. O. Schwartz to buy his game for the 1934 Christmas season. Soon he was selling more than he could make by himself. In 1935 the board-games company Parker Brothers (which had pa.s.sed on the earlier Landlord's Game) bought him out.1 The Great Depression might have seemed an unpropitious time to launch what had by now mutated into a game for would-be property owners. But perhaps all that fake multicoloured money was part of Monopoly's appeal. 'As the name of the game suggests, ' announced Parker Brothers in April 1935:

the players deal in real estate, railroads and public utilities in an endeavor to obtain a monopoly on a piece of property so as to obtain rent from the other players. Excitement runs high when such familiar problems are encountered as mortgages, taxes, a Community Chest, options, rentals, interest money, undeveloped real estate, hotels, apartment houses, power companies and other transactions, for which scrip money is supplied.2

The game was a phenomenal success. By the end of 1935 a quarter of a million sets had been sold. Within four years, versions had been created in Britain (where Waddington's created the London version that I first played), France, Germany, Italy and Austria - though fascist governments were at best ambivalent about its now unapologetically capitalist character.3 By the time of the Second World War, the game was so ubiquitous that British intelligence could use Monopoly boards supplied by the Red Cross to smuggle escape kits - including maps and genuine European currencies - to British prisoners of war in German camps. By the time of the Second World War, the game was so ubiquitous that British intelligence could use Monopoly boards supplied by the Red Cross to smuggle escape kits - including maps and genuine European currencies - to British prisoners of war in German camps.4 Unemployed Americans and captive Britons enjoyed Monopoly for the same reason. In real life, times may be hard, but when we play Monopoly we can dream of buying whole streets. What the game tells us, in complete contradiction to its original inventor's intention, is that it's smart to own property. The more you own, the more money you make. In the English-speaking world particularly, it has become a truth universally acknowledged that nothing beats bricks and mortar as an investment. Unemployed Americans and captive Britons enjoyed Monopoly for the same reason. In real life, times may be hard, but when we play Monopoly we can dream of buying whole streets. What the game tells us, in complete contradiction to its original inventor's intention, is that it's smart to own property. The more you own, the more money you make. In the English-speaking world particularly, it has become a truth universally acknowledged that nothing beats bricks and mortar as an investment.

'Safe as houses': the phrase tells you all you need to know about why people all over the world yearn to own their own homes. But that phrase means something more precise in the world of finance. It means that there is nothing safer than lending money to people with property. Why? Because if they default on the loan, you can repossess the house. Even if they run away, the house can't. As the Germans say, land and buildings are 'immobile' property. So it is no coincidence that the single most important source of funds for a new business in the United States is a mortgage on the entrepreneur's house. Correspondingly, financial inst.i.tutions have become ever less inhibited about lending money to people who want to buy property. Since 1959, the total mortgage debt outstanding in the US has risen seventy-five fold. Altogether, American owner-occupiers owed a sum equivalent to 99 per cent of US gross domestic product by the end of 2006, compared with just 38 per cent fifty years before. This upsurge in borrowing helped to finance a boom in residential investment, which reached a fifty-year peak in 2005. For a time, the supply of new housing seemed unable to keep pace with accelerating demand. About half of all the growth in US GDP in the first half of 2005 was housing related.

The English-speaking world's pa.s.sion for property has also been the foundation for a political experiment: the creation of the world's first true property-owning democracies, with between 65 and 83 per cent of households owning the home they live in.am A majority of voters, in other words, are also property owners. Some say this is a model the whole world should adopt. Indeed, in recent years it has been spreading fast, with house price booms not only in the 'Anglosphere' (Australia, Canada, Ireland, the United Kingdom and the United States), but also in China, France, India, Italy, Russia, South Korea and Spain. In 2006 nominal house price inflation exceeded 10 per cent in eight out of eighteen countries in the Organization for Economic Cooperation and Development. The United States did not in fact experience an exceptional housing bubble between 2000 and 2007; prices rose further in the Netherlands and Norway. A majority of voters, in other words, are also property owners. Some say this is a model the whole world should adopt. Indeed, in recent years it has been spreading fast, with house price booms not only in the 'Anglosphere' (Australia, Canada, Ireland, the United Kingdom and the United States), but also in China, France, India, Italy, Russia, South Korea and Spain. In 2006 nominal house price inflation exceeded 10 per cent in eight out of eighteen countries in the Organization for Economic Cooperation and Development. The United States did not in fact experience an exceptional housing bubble between 2000 and 2007; prices rose further in the Netherlands and Norway.5 But is property really as safe as houses? Or is the real estate game more like a house of cards?

The Property-owning Aristocracy Home ownership is now the exception only in the poorest parts of Britain and the United States, like the East End of Glasgow or the East Side of Detroit. For most of history, however, it was the exclusive privilege of an aristocratic elite. Estates were pa.s.sed down from father to son, along with honorific t.i.tles and political privileges. Everyone else was a mere tenant, paying rent to their landlord. Even the right to vote in elections was originally a function of property ownership. In rural England before 1832, according to statutes pa.s.sed in the fifteenth century, only men who owned freehold property worth at least forty shillings a year in a particular county were ent.i.tled to vote there. That meant, at most, 435,000 people in England and Wales - the majority of whom were bound to the wealthiest landowners by an intricate web of patronage. Of the 514 Members of Parliament representing England and Wales in the House of Commons in the early 1800s, about 370 were selected by nearly 180 land-owning patrons. More than a fifth of MPs were the sons of peers.

In one respect, not much has changed in Britain since those days. Around forty million acres out of sixty million are owned by just 189,000 families.6 The Duke of Westminster remains the third-richest man in the UK, with estimated a.s.sets of 7 billion; also in the top fifty of the 'rich list' are Earl Cadogan (2.6 billion) and Baroness Howard de Walden (1.6 billion). The difference is that the aristocracy no longer monopolizes the political system. The last aristocrat to serve as Prime Minister was Alec Douglas-Home, the 14th Earl of Home, who left office in 1964 (defeated by, as he put it, 'the 14th Mr Wilson'). Indeed, thanks to the reform of the House of Lords, the hereditary peerage is in the process of finally being phased out of the British parliamentary system. The Duke of Westminster remains the third-richest man in the UK, with estimated a.s.sets of 7 billion; also in the top fifty of the 'rich list' are Earl Cadogan (2.6 billion) and Baroness Howard de Walden (1.6 billion). The difference is that the aristocracy no longer monopolizes the political system. The last aristocrat to serve as Prime Minister was Alec Douglas-Home, the 14th Earl of Home, who left office in 1964 (defeated by, as he put it, 'the 14th Mr Wilson'). Indeed, thanks to the reform of the House of Lords, the hereditary peerage is in the process of finally being phased out of the British parliamentary system.

The decline of the aristocracy as a political force has been explained in many ways. At its heart, however, was finance. Until the 1830s fortune smiled on the elite, the thirty or so families with gross annual income from their lands above 60,000 a year. Land values had soared during the Napoleonic Wars, as the combination of demographic pressure and wartime inflation caused the price of wheat to double. Thereafter, industrialization brought windfalls to those who happened to be sitting on coalfields or urban real estate, while the aristocratic dominance of the political system ensured a steady stream of remuneration from the public purse. As if that were not enough, the great magnates took full advantage of their ability to borrow to the hilt. Some did so to 'improve' their estates, draining fields and enclosing common land. Others borrowed to finance a lifestyle of conspicuous consumption. The Dukes of Devonshire, for example, spent between 40 and 55 per cent of their annual income on interest payments, so enormous were their borrowings during the nineteenth century. 'All that you want,' complained one of their solicitors, 'is the power of self-restraint.'7 The trouble is that property, no matter how much you own, is a security only to the person who lends you money. As Miss Demolines says in Trollope's Last Chronicle of Ba.r.s.et Last Chronicle of Ba.r.s.et, 'the land can't run away'.an This was why so many nineteenth-century investors - local solicitors, private banks and insurance companies - were attracted to mortgages as a seemingly risk-free investment. By contrast, the borrower's sole security against the loss of his property to such creditors is his income. Unfortunately for the great landowners of Victorian Britain, that suddenly fell away. From the late 1840s onwards, the combination of increasing grain production around the world, plummeting transport costs and falling tariff barriers - exemplified by the repeal of the Corn Laws in 1846 - eroded the economic position of landowners. As grain prices slid from a peak of $3 a bushel in 1847 to a nadir of 50 cents in 1894, so did the income from agricultural land. Rates of return on rural property slumped from 3.65 per cent in 1845 to just 2.51 per cent in 1885. This was why so many nineteenth-century investors - local solicitors, private banks and insurance companies - were attracted to mortgages as a seemingly risk-free investment. By contrast, the borrower's sole security against the loss of his property to such creditors is his income. Unfortunately for the great landowners of Victorian Britain, that suddenly fell away. From the late 1840s onwards, the combination of increasing grain production around the world, plummeting transport costs and falling tariff barriers - exemplified by the repeal of the Corn Laws in 1846 - eroded the economic position of landowners. As grain prices slid from a peak of $3 a bushel in 1847 to a nadir of 50 cents in 1894, so did the income from agricultural land. Rates of return on rural property slumped from 3.65 per cent in 1845 to just 2.51 per cent in 1885.8 As As The Economist The Economist put it: 'No security was ever relied upon with more implicit faith, and few have lately been found more sadly wanting than English land.' For those with estates in Ireland, the problem was compounded by mounting political unrest. This economic decline and fall was exemplified by the fortunes of the family that built Stowe House, in Buckinghamshire. put it: 'No security was ever relied upon with more implicit faith, and few have lately been found more sadly wanting than English land.' For those with estates in Ireland, the problem was compounded by mounting political unrest. This economic decline and fall was exemplified by the fortunes of the family that built Stowe House, in Buckinghamshire.

There is something undeniably magnificent about Stowe House. With its sweeping colonnades, its impressive Vanbrugh portico and its delightful 'Capability' Brown gardens, it is one of the finest surviving examples of eighteenth-century aristocratic architecture. Yet there is something missing from Stowe today - or rather many things. In each of the alcoves of the elliptical Marble Saloon, there was once a Romanesque statue. The splendid Georgian fireplaces in the State Rooms have been replaced by cheap and diminutive Victorian subst.i.tutes. Rooms that were once crammed full of the finest furniture now lie empty. Why? The answer is that this house once belonged to the most distinguished victim of the first modern property crash, Richard Plantagenet Temple-Nugent-Brydges-Chandos-Grenville, 6th Viscount Cobham and 2nd Duke of Buckingham.

Stowe was only part of the vast empire of real estate acquired by the Duke of Buckingham and his ancestors, who had propelled themselves from a barony to a dukedom in the s.p.a.ce of 125 years by a combination of political patronage and strategic marriage.9 In all, the Duke owned around 67,000 acres in England, Ireland and Jamaica. It seemed a more than adequate basis for his extravagant lifestyle. He spent money as if it might go out of fashion: on mistresses, on illegitimate children, on suing his father-in-law's executors, on buying his way into the Order of the Garter, on opposing the Great Reform Bill and the Repeal of the Corn Laws - on anything he felt was compatible with his standing as a duke of the realm and the living embodiment of The Land. He prided himself on 'resisting any measure injurious to the agricultural interests, no matter by what Government it should be brought forward'. Indeed, he resigned as Lord Privy Seal in Sir Robert Peel's government rather than support Corn Law Repeal. In all, the Duke owned around 67,000 acres in England, Ireland and Jamaica. It seemed a more than adequate basis for his extravagant lifestyle. He spent money as if it might go out of fashion: on mistresses, on illegitimate children, on suing his father-in-law's executors, on buying his way into the Order of the Garter, on opposing the Great Reform Bill and the Repeal of the Corn Laws - on anything he felt was compatible with his standing as a duke of the realm and the living embodiment of The Land. He prided himself on 'resisting any measure injurious to the agricultural interests, no matter by what Government it should be brought forward'. Indeed, he resigned as Lord Privy Seal in Sir Robert Peel's government rather than support Corn Law Repeal.10 By 1845, however - even before the mid-century slump in grain prices, in other words - his debts were close to overwhelming him. With a gross annual income of 72,000, he was spending 109,140 a year and had acc.u.mulated debts of 1,027,282. By 1845, however - even before the mid-century slump in grain prices, in other words - his debts were close to overwhelming him. With a gross annual income of 72,000, he was spending 109,140 a year and had acc.u.mulated debts of 1,027,282.11 Most of his income was absorbed by interest payments (with rates on some of his debts as high as 15 per cent) and life insurance premiums on a policy that was probably his creditors' best hope of seeing their money. Most of his income was absorbed by interest payments (with rates on some of his debts as high as 15 per cent) and life insurance premiums on a policy that was probably his creditors' best hope of seeing their money.12 Yet there was to be one final folly. Yet there was to be one final folly.

Stowe House: aristocratic grandeur, mortgaged to the hilt In preparation for a much-sought-after visit by Queen Victoria and Prince Albert in January 1845, the Duke refurbished Stowe House from top to bottom. The entire house was filled with the very latest in luxury furniture. There were even tiger skins in the royal bathroom. Queen Victoria remarked waspishly: 'I have no such splendour in either of my two palaces.' As if that were not enough, the Duke called out the entire Regiment of Yeomanry (at his own expense) to fire welcoming salvoes of artillery as the Queen and her Consort entered his estate. Four hundred tenants lined up on horseback to greet them, as well as several hundred smartly dressed labourers, three bra.s.s bands and a special detachment of police brought down from London for the day.13 It was the last straw for the ducal finances. To avert the complete ruin of the family, Buckingham's son, the Marquis of Chandos, was advised to take control of his father's estates as soon as he came of age. After painful legal wrangles, the son won the upper hand. It was the last straw for the ducal finances. To avert the complete ruin of the family, Buckingham's son, the Marquis of Chandos, was advised to take control of his father's estates as soon as he came of age. After painful legal wrangles, the son won the upper hand. 14 14 In August 1848, to the Duke's horror, the entire contents of Stowe House were auctioned off. Now his ancestral stately home was thrown open for throngs of bargain hunters to bid for the plate, the wine, the china, the works of art and the rare books, for all the world (as In August 1848, to the Duke's horror, the entire contents of Stowe House were auctioned off. Now his ancestral stately home was thrown open for throngs of bargain hunters to bid for the plate, the wine, the china, the works of art and the rare books, for all the world (as The Economist The Economist sneered) as if the Duke were 'a bankrupt earthenware dealer'. sneered) as if th