Elisabeth Dellinger
Into Perspective

Thank Some Angry English Barons for Your Portfolio

By, 06/15/2015
Ratings624.387097

One of the remaining Magna Carta manuscripts from 1215, displayed at the British Library. Photo by Dan Kitwood/Getty Images.

800 years ago today, a bunch of brassed-off English barons and King John signed their names to the words that would forever change the world: “There shall be standard measures of wine, ale, and corn (the London quarter), throughout the kingdom.”

Kidding! That clause is indeed in the Magna Carta, which established the rule of law in England and celebrates its 800th anniversary today. And many will surely hoist a pint—the near-universal measure of ale—to the Great Charter’s birthday. But the clause establishing property rights probably has a wee bit more significance: “No free man shall be seized or imprisoned, or stripped of his rights or possessions, or outlawed or exiled, or deprived of his standing in any way, nor will we proceed with force against him, or send others to do so, except by the lawful judgment of his equals or by the law of the land.”

That is one of the three (of 63) Magna Carta clauses remaining on the UK’s rulebook in its original form. It underpins the US Bill of Rights, the Universal Declaration of Human Rights, and the Constitutions of most former British colonies (e.g., Australia, New Zealand and Canada). It is also the original investor protection.

Magna Carta placed the rule of law above the rule of man, forever limiting the English Crown’s power. Technically, it was a peace treaty between King John and rebel barons who were tired of property seizures, ad hoc taxes, forced marriages and, um, the King’s fish traps in the Thames. Magna Carta enumerated their grievances and demands, and in signing it, the King begrudgingly submitted to the law—divine right or none, for the first time and forever after, the English sovereign had to follow the law just like anyone else. Of course, John didn’t follow it (and actually had the Pope invalidate it), but he died in 1216. His son, Henry III, stuck with Magna Carta, and Edward I made it the law of the land in 1297.

Most of Magna Carta is a relic, as Henry III rewrote the Charter in 1225, and Parliament amended or repealed most of the statutes in the intervening 800 years as they shaped the realm’s common law. For example, basic principles like no taxation without “general consent” of the realm evolved into Parliament writing tax policy—and underpinned the American Colonists’ “no taxation without representation” gripes. It also took centuries for the basic rights to expand from male landowners to every citizen, a change the gentry and Crown fought against tooth and nail. When the mid-19th century Chartist movement sought simple freedoms like allowing working classes to vote and stand for Parliament, Welsh and English workers died for the cause.[i] Nearly 30 years passed between their “People’s Charter” in 1838—Magna Carta for the masses—and the Reform Act of 1867, which gave urban workers the vote. Another 60 years passed before full, universal suffrage.[ii]

In other words, don’t take it all literally—the spirit is what matters, and Magna Carta established property rights in statute and in spirit. The genius is in its careful wording. Instead of listing out what citizens can do, it enumerates what the government can’t. As UK politico Dan Hannan wrote in a recent (and most excellent) Wall Street Journal op-ed, the small difference explains why Constitutions based on Magna Carta have protected property rights far better than those that aren’t:

The potency of a charter is not in its parchment but in the authority of its interpretation. The constitution of the U.S.S.R., to pluck an example more or less at random, promised all sorts of entitlements: free speech, free worship, free association. But as Soviet citizens learned, paper rights are worthless in the absence of mechanisms to hold rulers to account. … The idea of the law coming up from the people, rather than down from the government, is a peculiar feature of the Anglosphere. Common law is an anomaly, a beautiful, miraculous anomaly. In the rest of the world, laws are written down from first principles and then applied to specific disputes, but the common law grows like a coral, case by case, each judgment serving as the starting point for the next dispute. In consequence, it is an ally of freedom rather than an instrument of state control. It implicitly assumes residual rights. And indeed, Magna Carta conceives rights in negative terms, as guarantees against state coercion.

In other words, it is 63 bullet points listing what the state can’t do.

This is huge. A statute saying “you can invest freely” isn’t as powerful as one saying, “the government can’t seize your investments or money.” A statute saying “you can start a business” isn’t as useful as one saying, “the state can’t seize your business.”

Property rights are the lifeblood not just of capital markets, but of every business in the free world and every penny in your name. Protection from asset seizure is what separates America, Britain and the rest of the developed world from kleptocracies like Russia. With precious few exceptions (ahem, Fannie and Freddie), we can invest safe in the knowledge that the government can’t say “hey that’s ours now.”[iii] They can’t zap our shares overnight, without due process. Vladimir Putin’s seizure of Yukos Oil Company could never happen here. Nor can the government expropriate anyone’s investments the way you might see in Communist countries or when an oligarch gets on Putin’s bad side. Entrepreneurs can start businesses with little fear of the state taking over and booting them as soon as they’re on to something. Absent a coup, the US government cannot nationalize your 401(k) to fund itself, no matter how much fear-mongering you might read to the contrary.

Property rights don’t make investing in the developed world risk-free. Not even political risk-free! Risk-free doesn’t exist. But they do greatly mitigate one giant potential negative. Investors in, say, Chevron or Exxon needn’t worry about Uncle Sam pronouncing the company his one day—unlike in Argentina, which decided Spain’s Repsol no longer owned part of its state-run oil company in 2012.[iv] It is one less thing to have to contend with. Countries without strict property rights can have fine investments, too, but an extra layer of caution must always apply.

So thank you, angry barons of 800 years ago, for making it so we all can invest in America, the UK, and any other Magna Carta-inspired country with few realistic worries the government could make our shares or money go poof. Poof-free markets aren’t risk-free, but they are as good as it gets.
 


[i] I’m referring here to the largest, bloodiest conflict of the Chartist movement: the Newport Rising, when soldiers opened fire on Chartists who had marched southward, through the Welsh valleys, into the city of Newport, to free colleagues they believed were imprisoned in the Westgate Hotel. The building still stands, with bullet holes, though a mural commemorating the movement was demolished to make way for a retail development in 2013.  

[ii] Raise a glass to Emmeline Pankhurst, the forgotten suffragette. 

[iii] In a twist of fate, today—June 15, 2015—a Federal court finally ruled in former AIG CEO Maurice “Hank” Greenberg’s case against the government over its 2008 nationalization of AIG in 2008. Greenberg has long argued the government’s demand of a 79.9% equity stake, which mostly wiped out shareholders, was improper. Today, the court agreed: “The government’s unduly harsh treatment of AIG in comparison to other institutions seemingly was misguided and had no legitimate purpose,” the opinion stated. They awarded no money but affirmed shareholder—property—rights, setting a precedent. Happy Birthday Magna Carta, indeed.

[iv] The government eventually compensated Repsol, at below-market rates, after two years of fighting.

 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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