America's Hundred Years' War

The global economic and market impact of America’s war on drugs

March 2010
By: Jim Cypher

It is the longest American “War” and its ravages become more profound over time. Today, the
war on drugs touches just about everyone. It drives global political, economic, military, social,
cultural and criminal activity. Nonetheless, the war on drugs is just sloganeering, with only
piecemeal consideration of the broader, very serious, reality.

History

President Nixon first used the phrase, “war on drugs”, in a speech before congress in 1969.1 The
phrase has taken on different meanings in different contexts ever since. Here, the war on drugs
refers to the legislation that the United States enacted to limit actions of people regarding the
consumption, distribution and sale of certain substances. This legislation includes controlling
people’s behavior within both the United States and other jurisdictions around the world.

Arguably, the war on drugs started in 1791 when congress enacted legislation to impose an
excise tax on distilled spirits. This, of course, became know as the Whiskey Rebellion. A U.S.
government website states, “United States Secretary of the Treasury, Alexander Hamilton,
proposed the bill to help prevent the national debt from growing” (sound familiar?).2 The same
website includes a quotation from noted historian and author Thomas Slaughter calling the
Whiskey Rebellion, "The single largest armed confrontation among American citizens between
the Revolution and the Civil War".2 One can safely conclude that the war on drugs is nothing new
to America.

The incredibly popular, but wrong, notion that alcohol is not a drug, causes almost all writers to
proclaim that the war on drugs began about one hundred years ago (1914) with the enactment of
the Harrison Narcotics Tax Act.3 It is common knowledge that the Act itself was mainly aimed at
ethnic immigrants with cultural traditions that did not embrace America’s fixation with alcohol.4

Prohibition – a Lesson Unlearned

Understanding the war on drugs requires a brief review of Prohibition. After the Harrison Act of
1914, the U.S. economy began to grow with increasing vigor as the great World War ended. The
roaring twenties, interrupted by the seldom-mentioned depression of 1921, came to a crashing
halt in 1929. The financial bubble had burst and an entirely new era of public opinion, political
policy and economic realty suddenly gripped the United States. Partisanship ran amuck. This
fact and the following quotations may also sound hauntingly familiar.

Shortly before election day, Hoover warned that if Roosevelt were elected, then
"the grass will grow in the streets of a hundred cities, a thousand towns; the
weeds will overrun the fields of a thousand farms...."6

In his acceptance speech, Roosevelt warned:

 Throughout the nation men and women, forgotten in the political
philosophy of the Government, look to us here for guidance and for more
equitable opportunity to share in the distribution of national wealth... I
pledge you, I pledge myself to a new deal for the American people... This
is more than a political campaign. It is a call to arms.7

After the election, Roosevelt refused Hoover's requests for a meeting to come up
with a joint program to stop the downward spiral and calm investors, claiming it
would tie his hands.8..

Al Smith, 1928 democratic candidate for president against Hoover, and later the loser in a bitterly
fought democratic primary against Roosevelt in 1932, summed the whole mess up best in a 1932
speech regarding prohibition.

http://www.youtube.com/watch?v=UfXqPO3TQmA

[concluding statements of speech: “It would be very difficult if not impossible to

estimate the benefit that would come to this country from the lessons taught to
the common generations to make it their business to see that no such matter as
this is ever again made the subject of civil constitutional law.”]

Unfortunately, his closing remarks have been unlearned by just about every politician, scholar
and person on the planet over the past 79 years.

The War on Drugs Today

Paraphrasing the opening sentence of this monograph, the damage caused by the so-called war
on drugs is becoming overwhelmingly profound. Some have tipped their toe in the water and
called for medical marijuana use. Some have moved backwards by trying to tax tobacco out of
existence. This creates a thriving industry for organized crime.9

Other nuttier folks, and they are legion, want to pay the Taliban in Afghanistan not to grow
poppies. Chief among these nutcases is President Obama. Obama is fighting a military war
there in large measure because the U.S. has made opium use and cultivation illegal. This drives
the price of the stuff through the roof. The novel notion of supply and demand is at work again. It
is common knowledge, and even the President knows it, that the Taliban are primarily funded by
the crop that the U.S. has made so incredibly valuable to cultivate. It is like growing gold. Obama
is paying the Taliban $300 million this year not to grow poppies.10 Does anyone believe that the
money will actually go to the growers? Might it find its way into the hands of terrorists and tribal
elders in a tribal ‘country’ that is corrupt to the core. Moreover, the Taliban provide a safe haven
for Al Queda. Al Queda, if this author is not delusional, is responsible for “9-11”.

This story becomes even more tangled when one considers the Obama Administration’s
domestic drug policy. The administration has proclaimed that it is going to end the war on
drugs.11 The annoying law of supply and demand raises its ugly head again. If the Federal
Government stops its longstanding policy of reducing the demand for, and availability of, illegal
drugs, this directly suggests that demand will rise. Demand rises and price rises. The Taliban
will enjoy this as much as the tobacco industry. That industry is in a decades-old series of
contradictory governmental policies and programs.

While the government was giving money to tobacco farmers, in 1998 they also
passed a law forcing cigarette manufacturers to pay billions to help cover
expenses for tobacco-related illnesses (McCuen 2000). The settlement requires
tobacco companies to pay $246 billion over the next 25 years (Lauterstein 2008).
Instead of providing funding to help these farmers transition to a crop that is less
harmful to human health, the government is both helping and penalizing farmers
 for their production of tobacco (McCuen 2000). Interestingly, 50 percent of the
settlement was allocated to tobacco farmers. Only 10 percent was set aside for
anti-smoking efforts and the remaining 40 percent was distributed for roads,
education, and other undetermined initiatives (Lauterstein 2008).12

Tobacco is a drug, opium is a drug and the government, as always, wants to control everything
about every drug. It is a shame that their policies are always contradictory and inevitably damage
people everywhere. If they would just keep there hands off, people could use their own judgment
and common sense in order to pursue free and happy lives.

The War on Drugs: A Broad Perspective

If one stands back, way back, and attempts to view the war on drugs from a rational perspective,
two things stand out. First, it is fiercely entangled in virtually every aspect of our lives. Second, if
people do not see the reality, just the emotion, the consequences of the war on drugs will become
extraordinarily grave because we will fail to change our approach.

The war on drugs is solely caused by governmental actions. Governments use the coercive
power of the state to ensnare everyone in an impossibly complex maze. For example, there is
the left-leaning person who wants to help everyone live a healthier life by providing universal
heath care. He also wants to tax tobacco companies because tobacco is bad. Additionally, he
lives in California where the state economy is almost bankrupt and he wants to see that fixed. He
supports legalizing marijuana and taxing it to help close the state’s huge budget shortfall. After
all, marijuana is the state’s number one cash crop.13 He is confused, however, because
marijuana is loaded with tars that cannot be good to smoke. Oh, and that would raise the cost of
universal healthcare and it does not agree with his position on tobacco.

In his efforts to do good things for people he behaves as a man chasing a rat around a table, until
the rat catches up with him and bites him. Maybe he should just leave the country and go down
to Mexico. But, the Mexican drug gangs are causing so much bloodshed along the border with
the U.S., he is afraid to go. Even if he wanted to risk it, he could not take more than ten thousand
dollars with him because that would violate the U.S. money laundering statutes that were
designed to help prosecute the war on drugs. Maybe he should just have a beer and watch
television.

To illustrate the second point, emotion trumps reality when it comes to the war on drugs, consider
a nice woman in Ohio who also wants to help people. She knows drugs are dangerous. She
believes it is a sin to even consume legal drugs, such as alcohol. She is a good Christian and
takes the Holy Eucharist every Sunday at church. After all, it is the “body and blood of Christ”,
represented by a wafer and some wine.

Maybe we should all take a step back and remember what Al Smith learned from prohibition.

Author’s note

The preceding comments represent a tiny fraction of the examples that can be enumerated.
Additionally, there is a huge literature on taxation, regulation and economic dislocation that has
not been mentioned here. Commentary on the latter can be found at: http://cafehayek.com/
Citations:

1) “UNITED STATES 14 Jul 2009 Nixon war on drugs 40 years ago”, World News Forecast, July
14, 2009. http://www.newsahead.com/preview/2009/07/14/united-states-14-jul-2009-nixon-war-
on-drugs-40-years-ago/index.php

2) The National Park Service, U.S. Government Archive, January 4, 2005.

http://www.nps.gov/archive/frhi/whiskreb.htm

3) Case reference-United States Court of Appeals, First Circuit, March 9, 1970.

http://bulk.resource.org/courts.gov/c/F2/428/428.F2d.211.7395.7433.7439_1.html

4) Steve Whitten, The Minnesota Daily, October 20, 2009.

http://www.mndaily.com/2009/10/20/thank-you-nancy-reagan

5) Ross Nordeen, America’s Great Depression - Recessions, Depressions, and Business Cycles.
December 28, 2007.
http://www.amatecon.com/gd/gdoverview.html

6) “Elections”, Travel & History, 2010. http://www.u-s-history.com/pages/h894.html

7) “1932 presidential election”, Wikipedia http://en.wikipedia.org/wiki/Franklin_D._Roosevelt .

With further citation: The Franklin and Eleanor Institution.
http://www.rooseveltinstitute.org/common/news/info_detail.cfm?QID=3332&ClientID=11005

8) Gibbs, Nancy (November 10, 2008). "When New President Meets Old, It's Not Always
Pretty", TIME. http://www.time.com/time/politics/article/0,8599,1857862,00.html . With further
citation: The Franklin and Eleanor Institution.

9) Bruce Bartlett, The National Center for Policy Analysis, Wednesday, October 30, 2002.
http://www.ncpa.org/pub/ba423

10) YOCHI J. DREAZEN, “U.S. Seeds New Crops to Supplant Afghan Poppies”, Wall Street
Journal Online, August 14, 2009.
http://online.wsj.com/article/SB125021357982431177.html

11) “White House Czar Calls for End to 'War on Drugs'”, Wall Street Journal Online, May 14,
2009. http://online.wsj.com/article/SB124225891527617397.html

12) “Tobacco Subsidies in the US Fa 08”, Dickinson College, Carlisle, Pennsylvania.

http://wiki.dickinson.edu/index.php/Tobacco_Subsidies_in_the_US_Fa_08

13) Eric Bailey, Los Angeles Times, Tuesday 24 February 2009.

http://articles.latimes.com/2009/feb/24/local/me-pottax24

The Author:

Jim Cypher has been involved with fundamental global-macro analysis and futures markets for
over 25 years. He holds a BA degree from Stanford in economics and an MBA in finance from
the Wharton School.

© COPYRIGHT BY JAMES M. CYPHER 2010.

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