Bermuda: a friend indeed
This is the sixth in an eight-part series that takes an incisive look at the Bermuda economy, historically from our humble beginnings to the 21st century and the challenges faced by the Progressive Labour Party government
War continued to influence the direction of the Bermudian economy in the latter part of the 20th century. When the American bases were established, the population expanded by 20 per cent to 25 per cent. When they closed in 1995, it is estimated that gross national product shrunk by 20 per cent.
The building of the bases made Bermuda a US dollar surplus earner. England was desperate for US dollars so that she could purchase war supplies. Thus, the Bermuda banks were able to sell their dollars to England at a premium.
Bermudians realised that there was money to be made in international finance. American International set up in Bermuda in 1940, having followed one or two other companies that had come to Bermuda for their own business reasons. More than 1,000 companies have followed suit since then.
American neutrality law required that England purchase its war materials on the basis of “cash and carry”. England had already defaulted on its First World War debt.
England’s desperation for US dollars was amplified in the summer of 1940 when the English Cabinet discussed ending the war. In the end, the English strategised in August 1940 to continue placing orders for materials in the expectation that America would see that its only hope of recovering payment would be for the English to win the war, as there would be no hope of recovery if the Germans won — in which case the Americans were forced to continue fulfilling the orders.
On December 8, 1940, Sir Winston Churchill wrote to Franklin D. Roosevelt frankly stating that England had come to the end of her rope for military materials and begged Roosevelt to “find ways to help Britain in their common cause”. Both Roosevelt and Henry Morgenthau Jr, the Secretary of the Treasury, were personally opposed to the idea of Germany winning the war. They demanded that England demonstrate that she was bankrupt by selling off her American assets.
Morgan Stanley had its eyes on the largest asset that England owned in the United States — American Viscose Corporation — which in the end it was able to purchase for less than half price. The White House was then able to get the Land/Lease Bill through Congress.
After the war, John Keynes expected the Americans to cancel the debt, seeing as how England was left to fight the war alone before America joined the effort. The best he could negotiate was a 50-year loan at 2 per cent interest. The more long- term solution was the Marshall Plan, which was owing more to Joseph Stalin than England’s special relationship with the Americans. When Stalin took over Eastern Europe, the Americans concluded that he would take over the whole of Europe if more of its help was not forthcoming.
Bermuda also made a contribution to the war effort. When the Americans departed Bermuda, they left behind a $100 million environmental clean-up bill. Both the Americans and the British insisted that they were not going to pay for the clean-up.
As the military bases were downsizing, primarily the Americans, but also the smaller Nato contingents of English and Canadians, international business was expanding. By 1990, international business had taken over from tourism as the leading sector of the Bermuda economy.
Bermuda’s location has always been one of her main selling points. Apart from travel by ships and aircraft, as early as 1890 the island was connected to Halifax by underwater cable. Less than two days by ship and less than two hours by flight, Bermuda is next door to New York, one of the largest commercial centres in the world. It is in a time zone one hour ahead of New York and four hours behind London. With its pristine beauty and friendly but sophisticated population, it is an extremely hospitable place from which to do business.
The island is politically and socially stable, which makes the life of the businessman predictable and free from guesswork. It has a Westminster political system with an independent judiciary for which the English Privy Council is the final court of appeal. The small size of the island and relatively small size of the population make internal communications personal and free from cumbersome bureaucracies. The regulatory environment provides safety without being unnecessarily restrictive. It is tax-neutral and free from ideological confrontations.
Being the first of the smaller financial jurisdictions, Bermuda has been responsive to new financial technologies and developed special expertise in certain areas such as insurance. She is the world leader in captive insurance and reinsurance companies. The captive insurance companies alone have more than $85 billion in assets. She manages innumerable investment funds, trusts and cutting-edge, insurance-linked securities. Bermuda has gone to the forefront of Solvency II regulations, thereby promoting investments from European pension funds.
The Bermuda Stock Exchange is fully electronic, offering a full range of listings, and is a member of the World Federation of Exchanges. The Bermuda Development Agency is a government-supported marketing agency that seeks to give personalised assistance to companies contemplating setting up in Bermuda.
Most Bermudians believe that Bermuda is another world whose sound economic and social policies can become an example for the rest of the world. This is consistent with Acts 17:26-27 where we are told that the purpose of God in dividing up people into nations was so that one of them would seek after Him. He deliberately chose Israel because Israel was small, as is Bermuda.
Contrary to the above Bermudians then go on to limit themselves. But for our political leaders, the average Bermudian is sufficiently self-confident to believe that we are able to produce our own “experts”. There is no other country that Bermudians believe we should model. What Bermudians lack is the courage to select leaders who believe as they do.
What is the impact of government on the economic system; both in making the laws and the administration of those laws?
The Judaic system recognised the role of Moses and the priests in making and administering the rules of their society. They may be equated to today’s Cabinet and civil servants. The Priest of Israel had a right to be supported, but it was not based on a coercive system of taxation but on voluntary sacrifices. This was a tremendous incentive for them, acting as civil servants to give good service.
Ancient Judaic law is not quite so remote as one is tempted to think. If you incur a debt today it cannot be enforced after six years. This idea came straight out of Ancient Judaic law. This is worth mentioning for the sake of those who think that Judaic law is too ancient to be relevant. Many aspects of Judaic thinking on the subject of the economy continues with us today. The Judaic economic system underpinned serfdom, mercantilism, free enterprise, and socialism. It is the Judaic system which Moses gave to the Nation of Israel when they first occupied present day Palestine.
Israel at that time was a society of farmers as was the case of Europe in the Middle Ages. In Israel the ownership of the land was in the hands of families as was the case during the period of serfdom. But unlike serfdom, in Israel a man’s freedom to sell his land was limited: In Israel the land came back to the family in the year of jubilee; thus the system contained elements of serfdom as well as elements of the free enterprise system. A land transaction was limited; it was more in the nature of a lease equal to possession for 50 years.
Of course productivity requires labour. But the circumstances in which labour is acquired is crucial. All workers are not the same.
For example, in Bermuda at its beginning labour was drawn from slavery. The conditions of slavery have left an imprint on black Bermuda society that makes it very different from white Bermuda society.
Even within Bermuda’s white society there are differences. These differences are more than individual; the differences become characteristic of large groups within the labour market.
In any system of productivity it is important to have access to capital. This is so whether you are living in Judaic times or Serfdom times even though capital is far more important today than it was in either of those historic periods.
Of equal importance is specialisation and having the right to engage in trade. Even though this right may be taken for granted today, it is not a right that was always extended to all. Critical to the mercantile system was the exclusive right given to some, allowing them to trade. Adam Smith’s main criticism of the mercantile system was the inability of those without a licence to trade in foreign lands.
All of which brings us to the question: What do you think are the ideas that should be incorporated in what could be sound economic rules for a new Bermuda for the long run?
Perhaps that question should really be prefaced by another question: do Bermudians think they can do better than they have done in the past and do they think that they can do better than the rest of the world?
If the answer to those questions is no, then of course there is nothing to be done except follow the rest of the world.
What then are some of the directions in which we can move?
The scarcest thing that the underprivileged needs is wealth/capital. Without wealth the only thing that stands between an income and unemployment is financial assistance. As a matter of fact, the policy of the Department of Financial Assistance is to ensure that a person has no wealth at all before they can claim financial assistance. Every family in Bermuda should be encouraged to accumulate some level of wealth. The Government should have a policy to encourage the accumulation of wealth.
The usual way in which wealth is accumulated is through savings programmes, which is unlikely since those who need it most have the most difficulty in doing it. Thus it will be necessary to find some kind of coercive means to force people to save in much the same way that the pension fund is operated.
The manner in which land was used by the ancient Israelis was a good example of a compromise between allowing some degree of freedom of choice but not so much that a family could become trapped in poverty for generations.
For example, Belco and other utilities such as banks could have a billing programme that requires the consumer to acquire shares in the company. Dealing with these specially acquired shares should be limited to sale and purchase of other such shares of what may be called “heritage” products.
The law could limit dealings in heritage shares in much the same way that trustees are limited by law in the way they can deal with trust funds. Any alienation of the capital could also be limited in terms of time. Living accommodation may be regarded as a consumption item or it may be viewed as an investment item.
In any event the Government has already taken steps to ensure the availability of housing; it simply has to be refined and expanded. Bermuda has also developed a policy where homeowners are encouraged to build an apartment, which is definitely an item of wealth, incorporated into their home. The need now is to develop a method whereby such apartments can be treated legally as a separate entity to the home.
Financial institutions can fulfil the needs of what has been called heritage projects, but also venture projects for the small and middle-sized businesses in much the same way that the Government intervened to assist the Bermuda Development Company not only in 1920 when they began, but also in the 1990s when Tucker’s Point was being redeveloped.
Bermuda should also explore the possibilities existing with the Caribbean Reparations Commission. This is a regional body created to establish the moral, ethical and legal case for the payment of reparations by the governments of all the former colonial powers and the relevant institutions of those countries, to the nations and people of the Caribbean community for the crimes against humanity of native genocide, the transatlantic slave trade and a racialised system of chattel slavery.
In the past, government has been a source of capital, for both “heritage” projects as well as venture projects, but as a source of such capital it has operated in favour only of those who don’t need it.
For example, the Government invested very heavily in the Bermuda Development Company at its inception in 1920 and again at its point or redevelopment in the 1990s.
There is no business reason why the millions of dollars that were invested could not represent equity held in some form by Bermuda families.
Of course, there are many government and institutional funds that can be used, within the limits of wise financial management.
• Arthur Hodgson is a former Cabinet minister, Rhodes scholar and graduate of Oxford University in England, where he studied philosophy, politics and economics