The Impossible Republic

And the Money the World cannot Leave

LETTER TO READERS

This paper is a departure, and I want to say so up front rather than let you discover it three pages in and wonder whether you subscribed to the wrong publication. We typically write about the dollar system, capital markets, the great power contest, and the machinery underneath them all.

This one is about 1776. It is not unrelated, and I will get to why, but I am not going to pretend the connection is the reason I wrote it.

The reason I wrote it is that I just came back from the Fourth of July weekend, the 250th, and I could not stop thinking about it. That is an honest answer, and I would rather give it to you straight than construct a thesis-shaped excuse.

And here is what kept nagging at me. The American Revolution is the most thoroughly told story in our national life, and it has been told, as these things always are, by the winners. But we have flattened it into a pageant. Powdered wigs, a bell, a few signatures, some snow at Valley Forge, and then everybody goes home free.

What that telling loses, almost completely, is how absurdly improbable the actual sequence of events was, and how thin the margin was at every single step.

Just consider the accounting.

Nine thousand men are ferried across a mile of open river on the night of August 29, 1776, with the entire Continental Army facing capture, and a fog so dense the men cannot see six feet in front of them descends at dawn and covers the last boats.

In December of that year the enlistments of most of the army expire on the 31st, meaning the war has an expiration date five days out, and Washington crosses the Delaware on the 26th and beats it by five.

In October 1777 a British general surrenders at Saratoga, and the news reaches Franklin in Paris on December 4, and two days later the King of France agrees to negotiate, and that one battle converts a colonial tax revolt into a great power war.

In September 1781 a French admiral fights a British fleet to a stalemate off the Virginia Capes, and the stalemate is the victory, because Cornwallis loses the sea. Yorktown is won by a Frenchman in a naval action Washington was not present for.

If you brought that script to a movie studio, they would laugh you out of the room. Too many coincidences. Too many miracles. Too much weather. The fog alone would get cut. And then there is the part that I think is the most remarkable of all, and the part we have gotten so used to that we no longer see it.

The United States declared independence at the beginning of the war.

Not at the end, when they had something to show for it. At the beginning, when they had nothing, when a professional army was landing at Staten Island and the outcome was not merely uncertain but genuinely lopsided against them. They announced the result before the contest.

It is the single cockiest act in the history of statecraft, and it remains, to this day, quintessentially American.

Which brings me to George Washington.

In March 1783 his own officers were on the edge of turning the army against the Congress, and he stopped it by reaching for his spectacles and saying he had grown gray in service to his country and now found himself going blind.

And then in December of that same year, the man who could have been a god handed his commission back to the Congress. Every incentive, almost every precedent in human history, and virtually all the men around him would have supported the opposite decision.

Yet he chose to remain a man, and that choice is the reason the thing held.

The connection to what we normally write about is real and it is not just decorative, and you will find it in the pages that follow. The credit of the United States, the thing that every report in our catalog ultimately rests upon, was manufactured out of a dead currency and a mountain of unpayable debt in the space of a few months in 1790, and it worked only because of what Washington had done in 1783.

Trust was the collateral that got it started. What holds the thing up now is much colder and more durable than trust, and regular readers will already know what it is.

But mostly I wrote this because it is an incredible story, and it deserves better than the pageant. Let’s dig in.

EXECUTIVE SUMMARY

A competent analyst in Philadelphia in July of 1776, looking honestly at the observables, would have concluded that the rebellion fails. No navy, no treasury, no power to tax, a professional army landing against a force that had never won a battle, and an army of its own whose contracts expired in December. And he would have been right about every fact except the only one that mattered.

That gap, between being right about all of the evidence and wrong about the conclusion, is the subject of this paper. It is the most expensive analytical error in finance, it is being committed at scale right now, but the direction it is being committed in has flipped.

We lay the 1776 case out in full in the body of the report.

The 250th anniversary of the Declaration is the occasion for writing this. But it is not the reason. The reason is that the American founding is the cleanest available demonstration of a problem every investor has and almost none can solve, which is that we read history backwards from the outcome and then mistake the surviving path for the likely path.