jwithrow, Author at The Phoenician League

The Forgotten Economist Who Argued Capital and Labor Don’t Have to Fight

“In reducing economics to consumption, we forgot production. We measured abundance at the checkout counter rather than the factory gate. We talked about GDP, but not enough about its composition. And we prized low-cost inputs without first asking whether a nation can remain sovereign when it loses command over the things that matter most.

Manufacturing is more than output on a balance sheet. It is a reservoir of practical capability: engineers and welders, tool-and-die makers and logistics networks, plant managers and workers who know how to solve problems on the factory floor.

When that ecosystem is strong, a country can adapt quickly. When it is hollowed out, adaptation becomes slower, more costly, and less certain.”

That’s Treasury Secretary Scott Bessent speaking at the Ronald Reagan Presidential Library over the weekend. Reading through the transcript, it’s quite clear to me that we’ve caught onto something big…

We’ve been exploring the American System in our recent essay series. We traced the story from Alexander Hamilton’s meeting with Thomas Jefferson and James Madison in 1790… to Friedrich List and his theory of productive powers… to America’s first World Fair in 1876.

We’ll look at two more historical figures today who were foundational to fleshing out and propagating the American System. And like we did with List, we’ll analyze their key contributions and assess any gaps and omissions.

And it all comes down to this – the Trump administration is running the American System playbook. That’s become very clear. Indeed, Bessent’s entire speech last weekend espoused the American System’s core economic principles in a way that would resonate with a modern audience.

Bessent never mentioned the American System by name, however. And because it was largely lost to history, I don’t think many analysts have a framework in place to help them understand what’s actually happening… and how seemingly disparate policies are actually linked together in a coherent way.

So let’s continue our journey in exploring the system’s foundations today.

But before we press forward, please don’t take any of this as an explicit endorsement for anything. We’re learning together here, so I’m simply presenting you with my analysis and my takeaways.

My goal is for us to better understand the American System and its origins. Then we may be able to make some educated judgments about how its core principles could be applicable to the modern economy today.

The Economist America Forgot: Friedrich List and the Theory of Productive Powers

In the spring of 1825, a 35-year-old German political exile arrived in the port of New York with little money, no connections, and a prison record.

His name was Friedrich List. He had been a professor of political science at the University of Tübingen, a member of the Württemberg parliament, and one of the most vocal advocates for economic reform in the German states.

Specifically, List had agitated for a customs union that would allow goods to move freely across the patchwork of German territories. But that idea threatened the entrenched interests of local rulers who profited from the existing system of internal tariffs and trade barriers… and they weren’t too keen to give up their fiefdoms.

Tiring of his reform efforts, the German authorities expelled List from parliament. Then they sentenced him to ten months of hard labor in the fortress of Hohenasperg – almost certainly seeking to make an example of him.

Panicking, List escaped to France under the cover of night. Then he spent two years evading German authorities in Alsace, Baden, and Switzerland. But growing tired of living like a fugitive, List returned to Germany in 1824 in hopes of mercy.

He didn’t get it. List was arrested immediately and forced to serve his sentence.

Upon completing nearly a year of hard labor, List was only permitted to leave under the condition that he leave Europe entirely. And that’s how he found himself in America.

So here was a man who had been imprisoned for advocating economic modernization in his own country… arriving in a country that had already implemented many of the ideas he had been jailed for promoting.

The American System: The Blueprint That Turned the Colonies Into a Superpower

On the morning of May 10, 1876, a crowd of nearly 200,000 people gathered in Fairmount Park on the western bank of the Schuylkill River in Philadelphia. It was the opening day of the Centennial International Exhibition — America’s first World’s Fair — and the largest public event the nation had ever staged.

Thirty-seven countries had sent delegations. Two hundred and forty-nine buildings had been constructed across 285 acres of parkland. The exhibition would run for six months and draw nearly ten million visitors — at a time when the entire population of the United States was roughly 45 million.

But the spectacle that people would remember — the image that would travel back to London, Berlin, Tokyo, St. Petersburg and change how the world thought about the United States — was inside a building called Machinery Hall.

Machinery Hall was the largest building in the world at the time. It covered 14 acres. And at its center stood the Corliss Steam Engine — a 700-ton, 1,400-horsepower mechanical colossus that rose forty feet above the exhibition floor.

The engine was connected to every machine in the building by a vast network of belts, shafts, and pulleys. When the Corliss ran, everything ran. When it stopped, everything stopped. It was the mechanical heart of American industry made visible.

President Ulysses S. Grant and Emperor Dom Pedro II of Brazil walked together to the engine’s platform and turned the valves. The Corliss shuddered, caught, and began to turn. Across 14 acres, hundreds of machines came alive simultaneously — looms weaving fabric, lathes cutting metal, printing presses rolling, pumps driving water.

The crowd, according to contemporary accounts, fell silent in a hushed awe. Then it erupted with cheers.

The 1790 Dinner That Started a 250-Year Economic War

The candles were already lit when Alexander Hamilton arrived at Thomas Jefferson’s townhouse on Maiden Lane in lower Manhattan. It was a warm evening in June of 1790, and the new republic was fifteen months old.

Jefferson had not originally planned to host this dinner. The day before, he had encountered Hamilton in the street outside President Washington’s office, and Hamilton had made an impression on him. He had looked, Jefferson would later recall, “dejected and haggard.”

America’s first Treasury Secretary had been locked in a losing battle in Congress for months… and it showed. Jefferson, moved by what he saw, invited Hamilton to dine with him the following evening. He also sent an invitation to James Madison.

Jefferson had been back in America for barely six months, having spent the previous five years in Paris as minister to France. He was excited to be home and engage directly in the prospects of building his “empire of liberty”.

In his time abroad, Jefferson had watched the French Revolution begin from the windows of the Hôtel de Langeac, where he stayed. He had dined with Lafayette… and at first he was optimistic. But then he saw what happened when a nation’s finances fell into the hands of men who understood leverage better than liberty.

Now Jefferson was Secretary of State in a government that was tearing itself apart over a question most Americans couldn’t articulate, but all of them could feel: who would control the money?

America’s Hidden Economic War

I’d like to tell you a story – one that may bring clarity to the current moment in history that we find ourselves in.

This is a story that I’ve only recently learned… and I’m still fleshing out the nuances. But the heart of the story is this:

America is actively engaged in a hidden economic war that began 250 years ago and never ended. This is a real war, fought between real people who comprise overlapping networks of institutions across the Western world.

Yet, this war is completely unspoken. Nobody talks about it.

Thus, very few people realize it’s happening. All they can see is the war’s effects, which they can only attribute to other causes… because they have no concept of the hidden economic war itself. All they see are the shadows on the wall.

Have you observed any current events recently and had the feeling that they seemed completely out of place? Like they didn’t match what you thought you knew about how American politics or geopolitical relations worked?

I certainly have… and that’s how I came to see beyond the shadows.

The reason this story brought clarity for me is that I’ve been conditioned to view both history and current events through the lens of a somewhat binary framework. Humans are wired this way.

Our mind naturally seeks to break complex observations into a simple, easy-to-understand framework. When we observe something, our natural instinct is to try to determine whether it is “good” or “bad” as quickly as possible. I tend to think this is a healthy defense mechanism.

However, this urge to break complex observations down into a binary framework creates a situation where we necessarily lose nuance and context.

What’s more, it limits our ability to recognize when something might exist outside of our innately understood framework altogether… and that’s where our conditioning can be a major limiting factor.

Why the Age of Paper Wealth Ended in 2022 And What’s Replacing It

Yesterday we walked through the forty-year era of falling interest rates and cheap credit that shaped the American economy from the ground up.

It was the era of debt, deficits, offshoring, and mass-financialization. I call it the Age of Paper Wealth.

Today I want to talk about why I believe that era ended in 2022… and what the reversal looks like in real time.

After more than a decade of near-zero interest rates, quantitative easing (QE), and then two rounds of extraordinary money creation during the Covid hysteria, consumer price inflation came roaring back to life in 2021.

Suddenly, we saw our grocery bills and other daily necessities start to skyrocket in price… and that gave Federal Reserve (Fed) Chairman Jerome Powell the cover he needed to pave the way for the greatest economic reorganization in a century.

In 2022, Powell’s Fed began raising the Federal Funds Rate at the most aggressive pace in its history. The Fed’s target rate went from effectively zero to over 5% in just eighteen months.

But that’s only part of the story… because the Fed only controls short-term interest rates.

What Is the Age of Paper Wealth?

Friends,

Spring is in full bloom up here in the mountains of Virginia. The trees have come to life, the wildflowers stand tall, and a majestic green covers the landscape.

I always reflect on how Spring represents the blossoming of new life and the celebration of youth… and I think there are parallels throughout our civilization as well.

And speaking of celebrating youth, our local homeschool co-op held its closing ceremony for this year’s first semester yesterday. All the families gathered for some light refreshments, and each homeschool class gave everyone a brief overview of what they’ve been doing for the past several months.

Then the kids had the opportunity to stand up and share their favorite moments and show off a little bit.

The drama class performed several short skits. The journalism class showed off the podcast they developed. The trades class demonstrated the wall they wired with electrical wiring, switches, and outlets. One kid – maybe 10 years old – hammered out a piano rendition for us. Another played the ukulele. And then my daughter sang a song acapella for the group. Here she is:

I’m amazed at how talented and independent-minded these kids are. And the fact that they are learning real-world skills with no emphasis placed on meaningless memorization gives me hope for their future… which will take place in an economy much different from the one we have known.

To that end, a core thesis that we’ve been building on here at The Phoenician League, and the thesis that informs much of our investment strategy, is the observation that the Age of Paper Wealth is over.

I’ve spilled tons of ink fleshing out this theme in the monthly newsletter that goes out to Phoenician League members. And I’ve attempted to explain it in some degree of detail in these e-letters as well, though it occurred to me that I haven’t done so in a while.

I know some may hear me talk about the Age of Paper Wealth ending, and they think I’m referring to paper money being phased out. But that’s not at all the case. This story is much bigger than that.

I’ll explain by starting at the beginning…

Gold Remonetization and Real Asset Investing: The New Financial Era

Yesterday we discussed the structural shift within the financial markets at the central bank level… but noted that it hasn’t received much attention in the private markets.

The world’s central banks have spent years systematically accumulating gold – even after the Keynesians running these institutions spent decades telling us that gold was a pet rock.

Well, the scope of their accumulation is now clear in the aggregate data — gold has overtaken Treasuries as the top central bank reserve for the first time in thirty years. This speaks volumes… but private investors are largely unaware of this new financial era.

Today I want to walk you through what it means for us — specifically, how the themes we are plugged into at The Phoenician League are positioned to benefit from exactly this kind of environment.

Gold Overtakes Treasuries… and What It Means

Something big happened last week…

Last Friday – Good Friday – was a relatively quiet day with the US equity markets closed and most investors away from their screens for a long holiday weekend. In this cover of silence, a striking data point surfaced.

For the first time in thirty years, global central bank gold reserves overtook US Treasury securities in total valuation. This is telling.

As I write, the world’s central banks collectively hold approximately $4 trillion worth of gold. That’s compared to $3.9 trillion in US Treasuries (bills/notes/bonds). Let’s think about what this means…

For the past several decades, the US dollar and US Treasuries were the two central pillars of the global monetary architecture. Everything else was secondary.

That arrangement just changed. Not dramatically, and not in a way that will drastically impact asset values this week or this month. But this is a key structural shift in the global financial system – one that CNBC is unlikely to ever mention.

Gold surpassing US Treasuries as central bank reserves didn’t happen overnight. This is the result of a long-term trend that we’ve been covering in these pages for three years now. I call it gold remonetization.

The End of Paper Wealth and the Rise of Real Assets

Here at The Phoenician League, we’ve been making the case for real assets for years now. And for most of that time, the polite response from mainstream financial circles was a kind of patient skepticism — the sort of smile that says “that’s amusing, but we don’t do those quirky things here”.

And I understand why.

For those who came up during the Age of Paper Wealth, gold was a “barbarous relic”. John Maynard Keynes said so. So did Warren Buffett, in so many words.

Meanwhile, Bitcoin was just a silly speculation for libertarians and tech geeks… Uranium was irrelevant because nuclear was dead… And royalty companies were massively risky. To the mainstream view, the serious money was in the stocks that you could find covered in the Wall Street Journal and on CNBC. And the best way to own those stocks was through some kind of financially engineered fund.

That consensus in mainstream circles lasted for decades… but it’s now breaking down.

To me, this is one of the most important investment stories of the decade. The era of maximum financialization is over. The Age of Paper Wealth has ended.

What the Age of Paper Wealth Cost Us

For roughly four decades, the global economy ran an experiment.

The experiment was simple: what happens if you make finance the dominant force in economic life? What happens when the most talented people go to Wall Street instead of building things? What happens when corporate strategy is driven by buybacks and multiple expansion rather than investment in productive capacity?

Granted, I don’t think they saw this as an experiment. I think there were a lot of true believers out there. The story of Jack Welch’s rise at General Electric (GE) is a great example.

Regardless, we now know what the financialization experiment has reaped.

Asset prices went up — dramatically, in many cases. The people who owned financial assets got wealthy. But the underlying economy — the physical, productive, tangible economy — was hollowed out in the process. That wrecked the middle class.

Manufacturing left. Infrastructure aged. The skills required to build and maintain real things became scarce. And the financial system became dependent on an ever-expanding supply of cheap money to keep the whole structure from contracting.

That era is over. And we’re now seeing the assets that were ignored for forty years begin to reassert their value.

End of the Age of Paper Wealth and the rise of a high-tech productive economy

And here’s the thing…