The Dark Age of Money: Milton Friedman and the Rise of Monetary Fascism

[Octafish]

31. Great intellect, hers...

Pegged the Chicago School.

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Milton Friedman in a letter to General Augusto Pinochet, April 21, 1975

If this shock approach were adopted, I believe that it should be announced publicly in great detail, to take effect at a very close date. The more fully the public is informed, the more will its reactions facilitate the adjustment.

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Killing and locking up the government was not enough for Chile's new junta government, however. The generals knew that their hold on power depended on Chileans being truly terrified, as the people had been in Indonesia. In the days that followed, roughly 13,500 civilians were arrested, loaded onto trucks and imprisoned, according to a declassified CIA report. Thousands ended up in the two main football stadiums in Santiago, the Chile Stadium and the huge National Stadium. Inside the National Stadium, death replaced football as the public spectacle. Soldiers prowled the bleachers with hooded collaborators who pointed out "subversives"; the ones who were selected were hauled off to locker rooms and skyboxes transformed into makeshift torture chambers. Hundreds were executed. Lifeless bodies started showing up on the side of major highways or floating in murky urban canals.

... Even though Pinochet's baffle was one-sided, its effects were as real as any civil war or foreign invasion: in all, more than 3,200 people were disappeared or executed, at least 80,000 were imprisoned, and 200,000 fled the country for political reasons.

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For the first year and a half, Pinochet faithfully followed the Chicago rules: he privatized some, though not all, state-owned companies (including several banks); he allowed cutting-edge new forms of speculative finance; he flung open the borders to foreign imports, tearing down the barriers that had long protected Chilean manufacturers; and he cut government spending by 10 percent-except the military, which received a significant increase. He also eliminated price controls -a radical move in a country that had been regulating the cost of necessities such as bread and cooking oil for decades.

The Chicago Boys had confidently assured Pinochet that if he suddenly withdrew government involvement from these areas all at once, the "natural" laws of economics would rediscover their equilibrium, and inflation-which they viewed as a kind of economic fever indicating the presence of unhealthy organisms in the market would magically go down. They were mistaken. In 1974, inflation reached 375 percent-the highest rate in the world and almost twice the top level under Allende. The cost of basics such as bread went through the roof. At the same time, Chileans were being thrown out of work because Pinochet's experiment with "free trade" was flooding the country with cheap imports. Local businesses were closing, unable to compete, unemployment hit record levels and hunger became rampant. The Chicago School's first laboratory was a debacle.

Sergio de Castro and the other Chicago Boys argued (in true Chicago fashion) that the problem didn't lie with their theory but with the fact that it wasn't being applied with sufficient strictness. The economy had failed to correct itself and return to harmonious balance because there were still "distortions" left over from nearly half a century of government interference. For the experiment to work, Pinochet had to strip these distortions away-more cuts, more privatization, more speed.

... Pinochet and de Castro got to work stripping away the welfare state to arrive at their pure capitalist utopia. In 1975, they cut public spending by 27 percent in one blow-and they kept cutting until, by 1980, it was half of what it had been under Allende. Health and education took the heaviest hits. Even The Economist, a free-market cheerleader, called it "an orgy of self-mutilation .1128 De Castro privatized almost five hundred state-owned companies and banks, practically giving many of them away, since the point was to get them as quickly as possible into their rightful place in the economic order. He took no pity on local companies and removed even more trade barriers; the result was the loss of 177,000 industrial jobs between 1973 and 1983.° By the mid-eighties, manufacturing as a percentage of the economy dropped to levels last seen during the Second World War.

CONTINUED...

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What used to happen only overseas is coming to the old homeland.