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Great moments in capitalism

On May 4, 1626 American Indians agreed to sell Manhattan island to European settlers for $24 in cloth & buttons. As with most free market transactions, all parties involved were satisfied with the deal: the settlers got land to homestead, the Indians received exotic manufactured goods that were beyond their ability to produce.

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21 comments to Great moments in capitalism

  • But even free-marketeers sometimes think there are deals we should not be free to agree to, even if we want to.

    Not to say necessarily that I think the sellers of Manhattan woz dun. But it’s not enough to say “the deal was freely entered into”. Laws to prevent high interest rates bordering on usury recognise this problem.

  • I have never understood the logic of usury laws, unless the terms and conditions were misrepresented, in which case the issue is fraud or deception.

  • Toni

    I thought the Dutch had paid in golden coins. What’s more, I had been told that -wonders of the compund interest- today the value of those coins would be higher than the whole of Manhattan!

  • Bill

    You figure the current amount by multiplying $24 x 1.03^377. 1.03 being a reasonable estimate of inflation over all those years. Now divide the result into the number of acers of land, located 6 weeks travel from civilization, which, today would be beyond the orbit of the moon, and see if this doesn’t seem like a fair price.

  • Unfortunately for the Indians, they had not the ingrained notion of private property as practiced by the Europeans, so they really didn’t quite get the full picture during the bargaining and final transaction.

  • John McVey

    Don’t forget that the value that Manhattan has today comes from that it was developed since its purchase. The Indians concerned have not lost out on a value that would have existed had they not sold the land. It is not even like Russians thinking they sold the US a pup in Alaska. Nobody was gipped out of anything. It was a fair and square deal, right down to the present-value of $24 compounded at an ordinary interest rate.

    One could argue that the Indians were later gipped out of equal rights to property and trade etc (ditto for blacks and asians in later centuries as well) However, this can’t be pinned on capitalism as there is nothing in capitalist theory that even remotely hints at racism or justification thereof – quite the opposite, in fact, as proper capitalism points out that all sentient beings are free agents and have the rights to property, free association, free trade, etc, irrespective of any other physical characteristics they possess (eg skin colour). Any moral faults we find in the economic systems of the day can be pinned instead on the lack of full capitalism, not its presence. This includes the Indians’ own need to play theoretical catch-up as MommaBear notes. That being said, though, the particular transaction we are discussing stands okay as all the morally-required elements of contract are present in this case. All concerned knew what they were offering and getting in return.

    As to interest rates, they are prices just like any other (they are the price of credit). As such, the sky is the limit as far as morality is concerned. Perry is right.

  • The issue with usury laws, Perry, is that people who cannot calculate or are overly optimistic about the future or are desperate can be coerced or tricked into signing a deal with such high interest rates they have effectively sold themselves into slavery. That may be a consequence you don’t want from normal contract law.

    Economists recognise that in many deals the two parties do not have the same negotiating strengths or the same amount of information, which is a practical argument for limiting usury.

    On theoretical grounds, I’m a bit dubious about the idea of basic rights, but one straightforward consequence of believing there are rights is that then no kind of contract can sign them away. If rights are inalienable (which I think is roughly one claim of the Bill of Rights and the US Constitution) then individuals are not free to waive them and swap them for something else.

  • homerj

    I’ve read that the Manhattan tribe didn’t actually live on that island, were just passing through. If they sold land they didn’t own then who got robbed in the deal.

  • Selling land they didn’t own. Hmmm…

    Thus starting a long and noble tradition of real estate (and particularly bridge) sales in Manhattan…

  • Here’s a bit on the value of the deal, and on the Indian’s claim to Manhattan in the first place:

    http://www.straightdope.com/classics/a3_156.html

    The key point, it seems to me, is the end: no one felt they were getting ripped off, and all left happy.

  • T. Hartin

    “people who cannot calculate or are overly optimistic about the future or are desperate can be coerced or tricked into signing a deal with such high interest rates they have effectively sold themselves into slavery.”

    This post actually rolls several issues into one.

    First, it is generally not a principle of capitalist or free market economics to protect people against their own ignorance (“cannot calculate”) or exuberant expectations (“overly optimistic about the future”). Sorry, but once you start down that road it is very difficult to stop.

    Second, I am not sure what it means to say that someone is “desperate.” Does this mean they will starve without a usurious loan? That their lifestyle, heretofore supported by borrowing, will come to an end causing them inconvenience and humiliation? Regardless, like optimism and ignorance, desperation is not a condition generally protected by free market economics, for much the same reason.

    Now, it is illegal to coerce or trick someone into any business deal, regardless of the interest rates or their ignorance, optimism, or desperation. If someone has beem defrauded or strongarmed, they have recourse regardless of whether the rates to which they agreed were legal or not.

    As a historical matter, I believe usury laws are a holdover from the days when the Church informed us that ANY interest rates were sinful and usurious, but I have not tracked this one down.

  • I wasn’t saying what anything should be like, T! Just noting those are practical and theoretical objections many economists make to allowing complete primacy to contracts. Usury and slavery were just examples.

    Most jurisdictions, rightly or wrongly, have a category of contract people can be prevented from binding themselves to, not necessarily to protect them from their own stupidity as to protect us from their own stupidity. And countries like the US have notions of rights, which are themselves things individuals are stopped from signing away — or, if they agree to sign them away, are not held to since the contract is not viewed as binding.

    The deal for Manhattan is an interesting case, since the Indians would not have made it into a vast city – and the Dutch founders might themselves have been surprised at how New York turned out. Buttons and cloth in the terms the Indians of the time probably understood it, sounds more like it was seen as a courtesy gift from a new tribe of foreigners, a piece of etiquette to assure the locals they meant no harm by setting up on the island. The idea of buying or selling land probably made little sense to them, and as other posters have pointed out, Indian beliefs would have meant they would not have really seen any land as theirs – or anyone else’s – to sell.

    They were perhaps being tactfully polite to the Europeans in the way you keep reassuring your aunt that an orange and scarlet tie was very much what you were hoping for on your birthday.

    Indian groups demanding compensation are also reading backwards from the very system of contracts that Europeans introduced them to. Indians present at that meeting who were still alive to see New Amsterdam flourish into a city, say fifty years later, probably felt not so much that the new foreigners were swindlers as puzzling types who worked too much and didn’t know how to really enjoy themselves [i.e. by wandering around, hunting, relaxing].

    That said, the view that every contract is sacred, no matter what, and takes precedent over any other principle, is an odd view, which very few people really hold once they think about it a bit.

  • Zhang Fei

    We have to use the nominal interest rate, since we buy goods at the grocery store with nominal and not real dollars. Taking a nominal interest rate of 5% per annum compounded over 377 years, the price paid for Manhattan works out to 2.33 trillion dollars, which is probably more money than all the billionaires in this country combined will ever own in their lifetimes. And it’s certainly more than Manhattan is worth today…

  • T. Hartin

    >Most jurisdictions, rightly or wrongly, have a category of contract people can be prevented from binding themselves to, not necessarily to protect them from their own stupidity as to protect us from their own stupidity.

    Maybe so. I am not aware of any law that allows you to void a contract because you are stupid or optimistic. Desperation may be a special case, depending on the circumstances. My point was that, to the extent that a law exists allowing someone to void a contract on the ground of their own ignorance, desperation, or exuberant optimism, or prosecute the other party to the contract, it is a bad law that is inconsistent with capitalism and free market economics.

    >And countries like the US have notions of rights, which are themselves things individuals are stopped from signing away — or, if they agree to sign them away, are not held to since the contract is not viewed as binding.

    Not true at all. We all sign away rights in contracts all the time, and the contracts are not thereby voidable. If I go to work for a company that has a policy of not allowing its workers to carry concealed weapons on the premises, I have signed away my right to do so and can be fired for violating the policy, but cannot void the contract because it “infringes” my rights.

    You must be thinking of inalienable rights, which are a small subcategory of my rights.

  • Zhang Fei

    Whoops! My bad. The result should have been 2.33 billion dollars, or about the cost of the World Trade Center complex in 2001 dollars. OK – I guess the Dutch got a pretty good deal.

  • Zhang Fei

    Note, however, that the most of the cost of the World Trade Center complex is the cost of the skyscrapers. I’m not sure the land on which the towers stood would have been been worth $2.33 billion dollars. Leaving aside the building costs, the WTC complex also features convenient access to transportation, which includes subway stations below ground and airports within 10 miles in 3 directions, none of which would have existed if the native Indian tribes had held on to the continental United States.

  • MS

    Can the “fairness” of a business deal be measured by information that requires hundreds of years to mature? In 1957, I could have bought a Sandy Koufax rookie card for ten cents. It is now priced at $400. Was I stealing from the grocer who sold me the card in 1957? If I decide to buy a chair, do the seller and I have to have exact knowledge of its value in 2150 to arrive at a fair price?

  • I was thinking of inalienable rights (the kind where contract say “this agreement does not affect your statutory rights”), T, yes, but I think we agree overall that native Americans shouldn’t bleat about having sold Manhattan for a song – always supposing that selling it was what they were doing.

    MS puts it very well: for most deals we agree a fair price is no more or less than the two parties’ assessment of the future value. Mind you, I think real-estate bubbles could be defused to everyone’s benefit if buyers of buildings would agree to share future markup with the original seller they met (so you give me a cheaper price on your house if I sign a contract agreeing to give you a quarter or a half of my profit on the next sale within twenty years, let’s say). I would certainly like to buy under those terms, and share future profits in order to get a cheaper property now — but that’s just a more sophisticated kind of contract, and not the kind anyone in 17th-century Manhattan was signing!

  • Fabian Wallen

    Looking at a time span of close to 400 years, and taking into account the relative scarcity of banks on the Lower East Side back in the 17th century, it is misleading to calculate the real value of the gold coins by deflating with a 3 percent annual inflation rate or by approximating a 5 percent nominal interest rate.

    First of all, around the time of the industrial revolution the world was actually experiencing deflation. An inflation rate of 3 percent is a highly modern phenomenon, very much based on the modern central bank systems with inflation targets, etc.

    Secondly, when estimating today’s value of a handful of 377-year-old gold coins, or cloth and buttons for that matter, it is somewhat of an over-simplification to assume that the gold coins could/should have been invested back in 1626. Besides, lending the money to a bank is only one way of making an investment, most likely unknown to the American Indians back in 1626. Buying the Manhattan Island is another way of making an investment. Even if we assume the money could/should have been invested, what is the rationale of assuming a 5 percent nominal interest rate. There is no objective, static value of time. Waiting 10 minutes for the subway seems like forever, while 10 minutes of watching a great movie seems like nothing. I doubt my valuation of 10 minutes equals the American Indians of the 17th century’s valuation of 10 minutes.

    Following the Austrian School’s theory of subjective value, we need to ask ourselves how much anyone on the global market is willing to pay for these very old gold coins today. I guess they would have an enormous collector’s value. Or perhaps some local museum would be interested. However, I doubt any rational human, nor private or public museum for that matter, would be willing to pay 2.33 billion USD. To put the numbers into perspective, last year Bill Gates had a fortune of around 40 billion USD.

    Nevertheless, all that is relevant in this case is to ask whether or not the transaction was justified back in 1626. The natural answer would of course be yes. I have no idea what the value of these gold coins would be today and I have no clue whatsoever about today’s value of Manhattan. But one thing is for certain, back in 1626 a group of American Indians and a group of European settlers put their subjective values together and came up with a pretty accurate valuation of both items, which resulted in an efficient market exchange rate and a just transaction.

  • “I thought the Dutch had paid in golden coins. What’s more, I had been told that -wonders of the compund interest- today the value of those coins would be higher than the whole of Manhattan!”

    The thing about gold coins is that they yield no compound interest….

  • David Mercer

    I’m not aware of many rights in the US that aren’t waivable. Plea bargains all involve waiving the right to trial, etc. Opening your mouth without your attorney there after you’ve been informed of your right to counsel waives that right, etc.

    On the topic of usury, Payday Advance services in the US charge over 400% APR for a loan against your next paycheck (15% for every 2 weeks). But it’s not constured as a loan, you write them a postdated check, and if it bounces, the District Attorney is their collection agent, which no other lender has the advantage of (you violated the bad check laws). Arizona has a usury law on the books, they had to specially allow these guys to operate.

    The only attempt by Congress I’m aware of to address the situation is that they must now post the APR on the wall in these places.

    Those that patronize them would fall under the category of ‘desperate’, I’d imagine.

    Legal loan sharking where the State breaks your legs!