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Welcome to Thoughts on the Market. I'm Andrew Sheets, global head of Fixed Income research at Morgan Stanley. Today, markets are closed for the observance of Fourth of July. As America approaches its 250th anniversary, we take a look back to look forward at early America as a frontier market. It's Friday, July 3rd at 9am in Seattle. If you were a global investor at the end of the 18th century looking for a stable, low risk home for your capital, it would have been entirely reasonable to avoid the newly minted United States of America. By the standards of modern finance, the young republic was not a developed market in waiting. It was a frontier economy, volatile, debt burdened, institutionally fragile, resource rich, politically combustible, and astonishingly unequal. Its currency had collapsed, its public finances were suspect, its citizens resisted taxation, and its growth prospects were extraordinary. In 1810, 70% of the country was under the age of 25. That is one of the revelations of Gordon Woods Empire of Liberty, which focuses on the early days of the new country from 1789 to 1815. Wood's America is not the marbled republic of statues and myths. It is speculative, messy, and full of motion. The United States succeeded not by escaping the dysfunctions that we associate with emerging or frontier markets, but by turning them into sources of strength. Start with capital. Early America needed it desperately. Roads, canals, land purchases, and government all required credit, and there was never enough of it. The country was rich in land and poor in liquidity, a classic emerging market mismatch. And what the young country couldn't borrow or event it misappropriated, lifting intellectual property from its former masters in Britain. What Alexander Hamilton understood was the importance of confidence, given this challenge, that debts would be honored, contracts enforced, and taxes, however unpopular, collected. His financial program was an attempt to solve the emerging market problem before the phrase existed. How to persuade investors that a new state, born born in revolution and nearly bankrupted by war, could be trusted. To Hamilton, public credit was the foundation of independence. To many Jeffersonians, however, this system looked like an attempt to smuggle a British financial order back into the country that had just fought to expel it. The early republic's debates over debt, banks, speculation and taxation sound contemporary because the underlying question is perennial in frontier markets. Can a society embrace credit and foreign capital without being captured by it? The US Was not starting from zero. It inherited legal traditions, habits of self government, and a culture of contract and property. Those foundations gave confidence that disputes could be adjudicated, debts pursued, and rules would not be arbitrary. Early America was risky, but it was not lawless. And still it did not go smoothly. There was no Federal Reserve, fdic, or even a uniform national currency. Business was conducted with foreign coins, notes issued by private banks, IOUs, and blind optimism. Bank failures were common. In 1808, the Farmers Exchange bank of Rhode island issued over $600,000 of notes against less than $90 of gold in its vaults. You almost have to admire the audacity. Yet the same instability that made early America risky also made it unusually open. Land was the country's great asset class, a source of migration, ambition, speculation and opportunity, at least for white settlers. It also produced bubbles, administrative strain, the expansion of slavery, and the violent dispossession of native peoples. The Louisiana Purchase in 1803 was a risky leveraged acquisition of distressed real estate, doubling the scale of the American experiment before anyone had quite figured out how the original version was supposed to work. Wood is especially good on the familiar energy unleashed by this world. The engine of US Growth was not an aristocracy of Polish grandees, but the middling sort. Shopkeepers, artisans, tavern owners, mechanics, farmers, merchants and speculators, many convinced that in America, birthright mattered less than hustle. Commentators of the time complained about the degraded press, political polarization, hostility to expertise, and the vulgarity of a society obsessed with getting ahead. None of this sounds especially distant. What saved America from the usual traps of frontier economies was not immaculate stability. It was adaptability. Its constitution was amended. Political power changed hands. Despite animosity, bankruptcy laws allowed for failure, competition was ferocious, and economic power was generally too diffuse to be easily monopolized. The early republic's genius lay less in solving its contradictions than in creating ways to fight over them without destroying the whole. That is a useful lesson for America. At 250, we tend to look backwards for reassurance, Imagining that the country once possessed a unity, prudence and institutional solidity that we have since lost would suggest something different. That the United States was turbulent from the start. Its legacy was contested, its finances distrusted, its politics venomous, its expansion intertwined with slavery and native dispossession, and its future uncertain. Emerging markets become developed markets not because they stop having crises, but because they build credibility. Through them, they learn which institutions matter which which bargains endure, which debts must be paid, and which moral liabilities compound when deferred. America was not born orderly, rich or secure. It was born in the mud, financed on fragile credit, driven by speculation, and sustained by an almost irrational confidence in the future. So enjoy the fireworks and let them be a reminder that national maturity is not the absence of volatility. It's the capacity to turn that volatility into renewal. A Postscript Gordon S. Wood died in early June of this year. As a professor, author, and one of the preeminent scholars of the American Revolution, he brought fresh insight and deep humanization to the country's founding. For anyone looking for a better understanding of America as it celebrates a big anniversary, we'd wholeheartedly recommend his work. Thank you, as always for your time. If you find thoughts of the market useful, let us know by leaving a review wherever you listen and also tell a friend or colleague about us today.
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