Key Summary from Books: Red Roulette

RED ROULETTE: AN INSIDER’S STORY OF WEALTH, POWER, CORRUPTION, AND VENGEANCE IN TODAY’S CHINA

by Desmond Shum

Growing up hungry and alone in Shanghai instilled in my dad a fear of forming deep connections with those around him. He hated owing anyone anything and just wanted to rely on himself. That same outlook was instilled in me, and, even today, I’m still uncomfortable feeling indebted. Only later, after I met the woman who’d become my wife, would I learn how isolating this can be. In the ebb and flow of life, if you’re never beholden to anyone, Whitney would say, no one will ever be beholden to you and you’ll never build deeper relationships. Although I spent years fearing my father, I now see him as a lonely figure who battled the world alone.

My mother’s family didn’t suffer under Communist rule. After the 1949 revolution, the Chinese Communist Party used families like my mother’s as a source for foreign currency and to break the Cold War trade embargo that the United States had slapped on China. The Party called these families “patriotic overseas Chinese,” a signal to authorities inside China to go easy on those relatives who’d stayed behind. At one point, the Communists asked my grandfather to run the Hong Kong subsidiary of China’s state-owned oil company, the China National Petroleum Corporation.

At that same time, from an early age I experienced this yawning gap between the world outside my home, where I was recognized as a leader, a raconteur, an athlete, even a nice person, and the world of our tiny flat, where my parents seemed thoroughly disappointed with me. Perhaps this is common among kids from China, where expectations are high and criticism constant, and where parents believe that children learn by failure, not through success. As I matured, the tension grew between these two worlds.

The Chinese Communist Party divided the world into enemies and allies and, to win support internationally, aggressively cultivated “foreign friends” such as left-wing intellectuals, journalists, and politicians. Each time a group of “foreign friends” showed up at my school, the best math students would be trotted out to perform calculations on the blackboard and the best athletes would be summoned for a gym class—all part of a great Communist Chinese tradition of bamboozling incredulous fellow travelers into acknowledging the brilliance of Chinese Socialism.

My mother returned to Shanghai several times to plead with the authorities to let my dad join us. The cost of those trips all but bankrupted her. Thanks to Deng Xiaoping, the authorities in Shanghai were done prosecuting people for having relatives or living overseas. Still, the Chinese government was loath to allow families to leave together, wanting to maintain leverage over people abroad by making family reunification hard. Finally, after two years, my mom succeeded in nagging so tenaciously that the authorities relented. To this day, she remembers the name of the official who let my dad go. I

It took me years to acknowledge it, but witnessing my parents’ labor in Hong Kong to get us back up the ladder affected me profoundly. We were in desperate straits. For three years, we squatted in someone else’s living room. We had no bathroom of our own. We were barely making ends meet. But my parents both knew what life felt like at the other end of the tunnel. They understood what they had to do to make it through. So they went for it. I learned this lesson at their feet.

Crawling up the class rankings at Queen’s College taught me a lot about my capabilities. I’m not lazy per se, but I do have a tendency to slack off. Once accepted at Queen’s College, I took it easy. I only did what was necessary. But that’s because somewhere inside me, I had this innate belief that when I needed to I could step on the accelerator and get the job done. These traits stayed with me throughout my professional life.

China had enacted heavy duties on imported beer—upward of 40 percent—to protect Chinese breweries. Tait Asia brought beer into Hong Kong and resold it to companies that figured out a way to move it into China duty-free. We didn’t want to know how that happened as long as sales and profits increased. It wasn’t just ChinaVest, of course. Anyone doing business in China did it this way, circumventing the rules in search of profit. I quickly learned that in China all rules were bendable as long as you had what we Chinese called guanxi, or a connection into the system. And given that the state changed the rules all the time, no one gave the rules much weight.

We dated and did fun things like hiking and catching a movie. But what set our relationship apart were our discussions. Aligning our goals constituted her idea of romance. I’d never experienced this approach to a relationship, nor had I ever encountered anyone who was so certain that her way was the right way. Early in 2002, we met at the marble-encased coffee shop of Beijing’s Grand Hyatt and talked for three hours. Whitney grilled me on my approach to marriage. She steered me, in a way no one else had in the past, to look clinically at my personal life. I’d never been much of a ladies’ man, but I was more Western in my outlook toward relationships. If things happened, go with the flow. As Hollywood romances say, follow your heart. Whitney had no truck with that approach. “You,” she announced, “need a better approach.” She and I actually did a SWOT analysis, a checklist used to assess a business. Separately, we broke down the Strengths, Weaknesses, Opportunities, and Threats to our emotional ties. Then we compared notes.

Whitney’s argument appealed to my analytical side. She seemed to have a magic formula for success, which was especially intriguing because my formula had clearly lost its mojo. Whitney’s view of passion, love, and sex was that we could grow into them, but it wouldn’t be the glue that would bind us. What would cement the relationship would be its underlying logic—did our personalities match; did we share values, desire the same ends, and agree on the means? If so, everything else would follow. Early on, we both agreed on the ends. We wanted to leave something behind, to make a mark on China and the world. This had been my goal for years and Whitney shared it. As to the means, Whitney exuded confidence that she’d found the ticket to success. I put myself in her hands.

Whitney gave me a crash course in China’s political system. In the West, political parties only wielded power when they won elections and took control of the government. In China, the Chinese Communist Party had no competition. The Party secretary in a county, city, or province outranked the county chief, mayor, or provincial governor. Even China’s military, the People’s Liberation Army, was legally not the army of the Chinese state. It was the Party’s army.

Like Edward Tian at AsiaInfo, Whitney discovered that to unlock the door to success in China she needed two keys. One was political heft. In China, entrepreneurs only succeeded if they pandered to the interests of the Communist Party. Whether it be a shopkeeper in a corner store or a tech genius in China’s Silicon Valley, everyone needed sponsors inside the system. The second requirement was the ability to execute once an opportunity arose. Only by possessing both keys would success be possible. That’s what Whitney set out to do and how I entered the picture.

Wen’s personality saved him. It’s probably going too far to say that at heart he was a political eunuch. However, he was extraordinarily careful; he never insulted or threatened anyone. He managed up and avoided any association with political factions. More so than most officials, he stayed in his lane. To get to his position, he obviously had to have ambition, but it was a restrained type of ambition that didn’t threaten his comrades at the Party’s heights. When Zhu Rongji was termed out as premier in March 2003, Wen became a natural compromise candidate to replace him.

Wen’s strong suit became a weakness. He did seem to possess a vision for a freer, more open China. After his old boss Zhao Ziyang was muzzled under house arrest, Wen was the only Chinese leader to continue to speak publicly about universal values, such as freedom and democracy. Still, Wen very much hewed to the rules of the Chinese power structure, which strictly limited the jurisdiction of the premier. Wen’s job was to run the government. Only Hu Jintao, the Party general secretary, who outranked Wen, could push for political reform. And he never did.

The financial success of Wen Jiabao’s wife and kids is summed up in the Chinese proverb: “When a man attains enlightenment [or in this case the premiership], even his pets ascend to heaven.” That said, neither Whitney nor I believed that Premier Wen was fully aware until very late that his family members had become billionaires. I believed Wen’s daughter charged foreign companies hefty fees for her connections. Winston was running New Horizon and Auntie Zhang was meeting with scores of people hawking opportunities. Meanwhile, each family member was collecting luxury cars. But the premier seemed to have little idea what it meant. When Auntie Zhang came home with a fat rock on her finger, or a priceless jade bracelet, Wen would admire it with the eye of a geologist, not of a seasoned jeweler. Wen had never spent a day in a commercial enterprise. When he was a lowly official, he went to the government canteen and downed whatever food was put in front of him. At home, he ate whatever the cook prepared and had no conception of the cost. He’d never checked out an Hermès store. The only time he ever visited a mall he brought along an entourage. He had no idea that a handbag could cost $10,000 or more. There was something in him that recalled George H. W. Bush’s 1992 visit to a grocery store and his puzzled reaction to a barcode scanner. The day-to-day lives of average people seemed a mystery to Premier Wen.

Our deals required more work. None were sure bets. You needed judgment on two levels. The first was basic due diligence. That was where I came in. I analyzed the industry and had a good sense of the market. I did the legwork, visiting the site and delving into the details. The second type of judgment was an ability to size up a proposal’s political cost.

Peiying made the arrangements for all of China’s Party pooh-bahs flying into Beijing. Each time a political heavyweight landed, Peiying would be in the room. He used this face time to great advantage. As the top honcho at so many airports, Peiying controlled access to monopoly businesses. He sliced them like cake, doling them out to the relatives of top government officials. He helped the family of China’s president Jiang Zemin secure a license to sell duty-free products in Beijing via a firm called Sunrise. This was a model for the type of business the red aristocracy liked. Sunrise shared the duty-free business at the Beijing airport with a state-owned firm, China Duty Free Group. These duopolies were an emblem of China’s economy, with a red family controlling one firm and a state-run entity controlling the other.

Throughout the airport project, I, like all businessmen in China, paid extremely close attention to the macroeconomic policies and the political whims of the central government. Every time we requested an approval, our application had to show how the project aligned with the shifting political and economic priorities of the Chinese Communist Party.

We played a similar game with a vast array of bureaucrats. Each approval was obtained through connections. Each connection meant an investment in a personal relationship, which meant an awful lot of effort and even more Moutai. Forging personal ties and establishing guanxi was the most difficult part. Guanxi wasn’t a contractual relationship per se: it was a human-to-human connection, built painstakingly over time. You had to show genuine concern for the person. The tough part was that I had so many relationships that needed managing, but I also had a project on my back with a deadline. I had to squeeze all of these interactions into a pipe, and the diameter of the pipe was time. Obviously, I had to delegate, but the more I got directly involved in relationship building the more approvals we received.

The whole idea was to reinforce the sense of belonging. This was critical in a system where the rules regarding what was legal and what was proscribed were full of vast areas of gray, and every time you wanted to accomplish anything you had to wade into the gray. In the West, laws are generally clear and courts are independent, so you know where the lines are. But in China, the rules were intentionally fuzzy, constantly changing, and always backdated. And the courts functioned as a tool of Party control. So that’s why building this sense of belonging was so crucial. To convince someone to venture into the gray zone with you, you first had to convince him or her to trust you. Only then could you take the leap together. To do that the two of you would research each other’s background, like Whitney had with Auntie Zhang. You’d talk to former colleagues and you’d spend hours cultivating each other so you could understand who each other really was. Auntie Zhang could vouch for Whitney and me on a macro level. But on the local level, it was up to me.

As early as July 1, 2001, the Party had officially changed its policy on capitalists when then Party boss Jiang Zemin made a speech that welcomed all leading Chinese, including entrepreneurs, into the Party’s ranks. Even though Jiang wrapped this announcement in Party-speak, calling it the “Three Represents,” that word salad couldn’t mask the momentous nature of this change. Communist China’s founder, Mao Zedong, had relegated capitalists like those in my father’s family to the bottom rung of society. Deng Xiaoping had given them a leg up by acknowledging that with economic reforms a small group would “get rich first.” Now, a generation later, Jiang Zemin was inviting entrepreneurs to join the Party and enter at least the margins of political power. It was enough to make you dizzy. Even high up in the Party, the elite seemed to be preparing mentally for a change. In 2004, Chen Shui-bian was reelected as the president of Taiwan, the island of 23 million people that the Communists have long claimed belongs to China. In 2000, Chen had become the first opposition candidate to be elected Taiwan’s president, ending five decades of one-party rule by the Nationalist Party. Taiwan’s democratization process shook Communist Party bigwigs because they saw in it a potential road map for mainland China and thus a threat to the Party’s monopoly on power. After his reelection, Chen announced that it was time to go after the riches of Taiwan’s Nationalist Party. When the Nationalists ran the island, they’d treated its economy as their party’s piggy bank.

At Aspen, I learned how people with money had always participated in the political process. China’s system was the outlier in that sense, denying its capitalist class a say in the direction of the country. But those of us who identified as capitalists wanted a voice. We wanted protection for our property, our investments, and other rights. We wanted, if not an independent judiciary, at least a fair one where judgments were made on the basis of law and not on the whims of the local Party boss. We craved predictability in government policies because only then could we invest with confidence. Whitney, who was a Christian, also wanted more religious freedom. At the very least, she wanted the Chinese government to acknowledge that a Chinese person could love God and love China at the same time.

Startled at the liberal tendencies of my fellow capitalists, the Chinese Communist Party, starting in the mid 2000s, moved to weaken the moneyed class, uproot the sprouts of civil society that we’d planted, and reassert the Party’s ideological and economic control of Chinese society. As part of this effort, the Party sought to bolster state-owned enterprises to the detriment of private firms.

This type of attitude wasn’t confined to our project; it infected the entire economy. “State-owned enterprises march forward, private firms retreat” became the new buzzwords, signaling a shift at the top of the Party. State-owned firms began to carry out forced mergers with successful private companies. Entrepreneurs had been the engines of China’s growth, but we were never trusted. Ever since it had seized power in 1949, the Chinese Communist Party had used elements of society when it needed them and discarded them when it was done.

As part of a campaign to centralize power, the Party began to parachute officials in from other regions. China’s state-run press agitated against what it called “dirt emperors,” local bigwigs who disregarded directives from Beijing. But the new brand of official created new problems because these characters arrived with the intention of staying for only a few years before moving out and up. They searched for quick wins to justify a promotion. For sure, the old system had its drawbacks. There was corruption, and dirt emperors often would run a locality like their private fiefdom. But the local officials also understood their communities and knew what was needed and what wasn’t. Many had feelings for the place because they didn’t want to be cursed when they left power and retired nearby. They worked for the benefit of family and lifelong friends in the locality. They were willing to focus on long-term, legacy projects. And because of their ties to the community, they could get things done.

I came to believe that in China a long-term business model wouldn’t work. I began to understand what some of my entrepreneur friends had been telling me all along: the smart way to do business in China was to build something, sell it, take money off the table, and go back in. If you invest $1 and you make $10, you take $7 out and reinvest $3. But if you keep $10 in, chances are you’ll lose it all. The Communist Party seemed increasingly threatened by entrepreneurs. A segment of society with means was getting more independent. Entrepreneurs like us were pushing for more freedom, more free speech, and in a direction that was less under the Party’s control. The Party was very uncomfortable with us wading into waters that it controlled.

In 2007, Xi Jinping got his big break in an affair that revealed much about China’s political system. A year earlier the Party secretary of Shanghai, Chen Liangyu, had been removed from his post as part of a corruption investigation involving the misuse of hundreds of millions of dollars from the city’s public pension fund. Chen’s downfall really wasn’t about corruption, however. It was a political hit job masquerading as a criminal case. It came because Chen refused to swear allegiance to China’s then Party chief, Hu Jintao. Chen had been a major player in what was known as the Shanghai Gang, led by Hu’s predecessor Jiang Zemin. When Hu had taken over from Jiang in 2002 as Party chief, Jiang had declined to relinquish all of his Party posts, staying on as the chairman of the Central Military Commission for an additional two years. Jiang had also packed the Standing Committee of the Politburo with his cronies; for several years, Jiang’s men held five of its nine seats, preventing Hu from doing anything without Jiang’s approval. So, in 2006, when Hu’s loyalists saw an opportunity to take down Chen Liangyu, a prominent Jiang loyalist, they struck. When Chen was forced from office in September 2006, he was replaced by Shanghai’s mayor, Han Zheng. Han had only been in office for several months, Auntie Zhang told us, before it was discovered that one of his family members had stashed more than $20 million in a bank account in Australia. The Party couldn’t purge Han, too, because it would’ve been bad for the stability of the leading financial center of China to have both its Party secretary and its mayor ousted in swift succession. Auntie Zhang told us that Han Zheng was allowed to return to his old post as mayor while Xi Jinping was appointed Shanghai’s Party chief. Han Zheng, too, would be forgiven his sins; he joined the Politburo’s Standing Committee in 2017 and was appointed a vice-premier, showing that in China political alignment and loyalty trump everything else.

In 2013, about a year after Xi Jinping had launched his anti-corruption campaign and a year after the Times story on the Wen family wealth, Auntie Zhang told us that she and her kids had “donated” all of their assets to the state in exchange for a guarantee that they wouldn’t be prosecuted. She said other red families had done the same. There was another reason behind this action. The Party wanted to rewrite history. In the future, if the Party faced allegations of tolerating systemic corruption, it could claim that these red families, in “donating” their wealth to China, had only been serving the state. All this seemed pretty surreal to Whitney and me. But then again, China’s Communists had a long record of stealing private property and distorting the truth.

In July 2012, as Xi prepared to take power, a document circulated from the Party’s General Office titled “Briefing on the Current Situation in the Ideological Realm.” The report, known as Document Number 9, warned that dangerous Western values, such as freedom of speech and judicial independence, were infecting China and needed to be rooted out. These ideas, the document said, were “extremely malicious” and would, henceforth, be banned from being taught at China’s schools and universities. The document also blasted the move to a more independent media, ordering Party organizations to redouble their efforts to rein in muckraking periodicals.

There’s a hill on the outskirts of Beijing called Xiang, or Fragrant, Mountain that’s dotted with pavilions first built in the twelfth century. Thousands of stone stairs lead to the top and I took a lesson from the mountain into my daily life. Instead of focusing on the peak, I fixed on the step in front of me, knowing that if I did that, I’d get where I needed to go. This lesson remains relevant to me today. Control what you can control. Don’t bother with the rest. You will always, I tell myself, get out of the pool. Still, it was a hard time. A friend of more than two decades was intent on screwing me. And the mother of my son was trying to turn me into a pauper.

That give-no-quarter feature is a function of the Communist system. From an early age, we Chinese are pitted against one another in a rat race and told that only the strong survive. We’re not taught to cooperate, or to be team players. Rather, we learn how to divide the world into enemies and allies—and that alliances are temporary and allies expendable. We’re prepared to inform on our parents, teachers, and friends if the Party tells us to. And we’re instructed that the only thing that matters is winning and that only suckers suffer moral qualms. This is the guiding philosophy that has kept the Party in power since 1949. Machiavelli would have been at home in China because from birth we learn that the end justifies the means. China under the Party is a coldhearted place.

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Key Points from Iran: A Modern History

By Abbas Amanat

Iran perhaps is one of the most invaded and most revolution-prone countries in world history, a debatable merit with lasting consequences. In between the Islamic conquest and the rise of the Safavid state, Iran survived more as a cultural than a unified political entity, in part because of geography and ecology, but also because of the prevalence of the Persian language and high culture.

The name Iran, as is often noted, is derived from the Iranian term Aryanum, the land of the Aryans, the branch of Indo-European pastoralists who settled in the Iranian plateau some four thousand years ago and gave their name to the land.

For many centuries Persia was the name of the country to the outside world, and Persian a reference to its people, language, and culture, while the term Iran was consistently used by Iranians in reference to their country. It was only in 1935 that the Iranian government adopted Iran instead of Persia as the official name of the country, a choice that made uniform the nomenclature but effectively obliterated beyond recovery the historical and cultural memory that the old name invoked.

Crystallized into a stern and exclusionist legal tradition, Islamic law emphatically prohibited playing or listening to music for leisure, and reproducing any images of humans and living things in any form; it denounced any preservation and celebration of “pagan” myths and festivals of the pre-Islamic past; and even more intrusively, it banned, at least in theory, social practices such as wine drinking, singing, mixing of the sexes, same-sex affection, recitation of lyrical poetry, and most, if not all, forms of social leisure. Despite political defeat and the relatively swift conversion to Islam, it can be argued that Iran never was fully won over by the predominant culture of normative Islam, perhaps less even than Egypt, the eastern Mediterranean, and Mesopotamia. It converted to Islam at its own pace and on its own terms, and with paradigms and practices it improvised along the way.

The persistence of messianism as a distinctive feature of Iranian religious culture is most evident in the long list of Persian prophetic and crypto-prophetic figures. The prophetic paradigm stood in contrast to the authority of the religious establishment, which spawned jurisprudence (fiqh) and regulated the life of the faithful. The ulama, the men of religious learning, held sway over interpretation of scripture. The jurists (foqaha; s. faqih) stood at the top of an informal hierarchy in Shi‘i Iran that also included the lower-rank teachers of the madrasa, preachers on the pulpit, reciters of Shi‘i elegies, and even lower, the seminarians, mosque custodians, and presumed descendants of the house of the Prophet. The jurists were distinct for their legal conservatism, scholastic outlook, and elitist demeanor. These jurists were also known by their judicial status as mojtaheds (often inadequately translated as “doctors of law”). They were qualified to issue legal opinions (fatwas) to be abided by their “followers” (moqalleds). In making their opinions, the mojtaheds exercised limited human reasoning (ejtehad; lit. “striving”) to utilize the sources of Islamic law. Since the end of the eighteenth century, the concept of following (taqlid; lit. “emulation”) gave the mojtaheds great legal, moral, and social latitude over the community of believers. What made the ulama especially conscious of themselves as a relatively coherent group was their self-assumed mission to preserve the “kernel of Islam” unmolested against the ever-present threat of heresy. Any sort of nonconformity or innovation contrary to mojtaheds’ understanding of the shari‘a was viewed as reprehensible. They were equipped with weapons of denunciation (takfir) and censure, which they freely used to mobilize the faithful and to call on the government to come to their aid.

The practice of “temporary marriage” (popularly known as siqeh), as sanctioned by Shi‘i law, gave women some agency through their choice of partner, as well as duration and terms of the marriage. Although open to many abuses, such as prostitution, temporary marriage essentially functioned as an accepted form of cohabitation, which offered some security to women and the right of inheritance to their children. For women of lower classes, such as daughters of peasants in the households of landowning families, temporary marriage with men of higher status served as a form of social mobility.

Isma‘il’s ferocity and the atrocities committed by his unruly Qezilbash hordes were followed soon after by a systematic and enduring program of Shi‘i indoctrination.

But no matter how eagerly the Qezilbash chiefs and the Arab ulama resisted the indigenous Persian element’s rise to prominence, they could not evade the dictates of a transforming state. The paradigm shift from a messianic crusade to a bureaucratic state appeared inevitable. The shift did not happen overnight, yet Isma‘il managed to strike a fragile equilibrium among the restive Qezilbash and their Persian rivals.

The Ottoman Sunni jurists considered the massacre legitimate, and even furnished the necessary license for an anti-Safavid campaign. The eternal reward for killing one Shi‘i, a fatwa by the mufti of Istanbul declared, was equal to killing seventy Christian infidels.

Mulla Sadra’s theory of movement of the substance (haraka jawhariyya, often translated as “transubstantiation”), arguably his most significant philosophical contribution, was a novel departure. His theory of substantial movement in part modified the influential Sufi monistic theory of the “unity of being” (wahdat-e wujod). The belief in the essential origin of all beings, celestial and terrestrial, and their ultimate union, had long been opposed by conservative jurists and theologians. Mulla Sadra further advanced the idea of “unity of being” by arguing that in the substance of all things created, of which humanity holds the highest rank, there is an innate cosmic dynamism without which all things cease to exist. This elemental movement transforms the quality of all things at all times from one state to another, without their substance ever changing. As the created being separates itself from its divine origin, in its downward journey toward matter it acquires material contingents, making the world as we see and experience it. The same intrinsic dynamism in an upward movement then transforms the substance of material things until ultimately they reach their original celestial state.

The greatest divergence from the Safavid concept of authority, however, was Nader’s extraordinary—and as it turned out, quite impolitic—call to relinquish Shi‘ism as the religious creed of Iran, at least in the way it was practiced under the Safavids. This was one of three conditions he set forth in Moghan for his acceptance of the crown of Iran. His declaration also called for total loyalty to himself and the abandoning of any sympathy for the house of the Safavids and hope for their future restoration. Instead of the Safavids’ Twelver Shi‘ism, which in his view had long been divisive internally and offensive to Iran’s Sunni neighbors, Nader proposed the relatively improvised Ja‘fari creed (after the Sixth Shi‘i Imam, Ja‘far Sadeq, who died in 765). Devoid of anti-Sunni exclusivity, messianic longing, and juristic tradition, Nader’s Ja‘fari brand seemed to be a diluted form of the Safavids’ state-dominated creed. More than two centuries of religious conflict, which had facilitated the Afghan invasion, must have persuaded Nader, whose own career, oddly enough, had been built on expelling Sunni invaders, to see the ills of an exclusionist form of Shi‘ism. He hoped that declaring the Ja‘fari creed would persuade the Ottomans to comply with the terms of his peace proposal, which called for the establishment in Mecca for the Shi‘i pilgrims of a fifth platform around the Ka’ba (lit. rokn, “pillar”), adjacent to that of the Hanafis, which was to be taken as recognition of Shi‘ism as a legitimate Islamic creed.

The growing volume of foreign imports from industrialized Europe and the export of cash crops, such as tobacco and opium, tilted the economic balance in favor of big merchants, large landowners, and European firms. Less privileged sectors of society, such as guilds, retailers, and peasants, bore the brunt of the changing economy. Chronic visitations of famine and pandemics worsened their lot.

By the middle of the eighteenth century, the Shi‘i ulama had to reinvent themselves to regain the ground they had lost since the fall of the Safavids. They were no longer functionaries of the state, nor were they bookish scholars in the secluded seminaries of Isfahan and Najaf endlessly debating the minute details of Shi‘i hadith and brandishing hefty glosses and commentaries on the works of earlier jurists. The Usuli Shi‘i mojtaheds’ answer to the crisis of the post-Safavid era was to come up with a new legal approach to shari‘a that stressed the methodology of jurisprudence (or roots of jurisprudence, usul al-fiqh) as the key to a broader legal application of the principle of ejtehad. The sole authority to exercise ejtehad, or legal judgment based on sources of Islamic law and through limited use of deductive analogy, distinguished the Shi‘i ulama, and more distinctly the Usuli mojtaheds, from their contemporary Sunni counterparts. For mojtaheds, the study of jurisprudence (fiqh) was the most authentic articulation of Islamic shari‘a, and they, as jurists, were the only experts qualified to interpret Islamic law. The Usuli jurisprudence in effect equipped the mojtaheds with claims for collective representation on behalf of the Hidden Imam. The Hidden Imam, or the Lord of the Age, was the Shi‘a reference to the Islamic Mahdi, whose advent from the world of the invisible according to the Shi‘is was expected to trigger the End of the Time. Such self-assumed authority offered doctrinal grounds for the mojtaheds to demand that their followers, or more specifically, their “emulators,” seek their legal and moral opinion and follow their expert advice in all matters of shari‘a. The doctrine of emulation (taqlid) obliged Shi‘i believers to follow an individual mojtahed of their choice in all issues of Islamic law. Any qualified Shi‘i mojtahed could issue independent legal opinions (fatwas). More important, given their social implications, these opinions were to exert, at least in theory, an unprecedented degree of control over the beliefs and practices of followers.

The Babi doctrine interpreted Resurrection not as an apocalyptic destruction of the material world but as the eclipse of one revelatory cycle and the dawn of the next. Relying on a long history of millennial speculations, the Bab utilized the familiar metaphor of seasonal changes to explain the nature of cyclical progression. The “tree of prophethood,” as he called it, blossoms in the spring, gains strength in the summer, bears fruit in the fall, and dies in winter, only to be reborn in the next seasonal cycle. It is the same tree and yet it is different every year as it grows with time. The sense of historical relativism embedded in this notion of prophetic renewal acknowledged historical change. It allowed for the potential for human innovation and promoted a forward-looking perspective, concepts that defied the essentially regressive worldview of the Shi‘i orthodoxy.

Like most non-Western reform-minded writers of the late nineteenth century, he laments the lack of modern education and Western-style schools and secular curricula, for which he blames the conservative clerical establishment. He held the Qajar elite, along with the ulama, responsible for Iran’s chronic weaknesses and its curse of being subordinate to superior powers. Domestic culprits aside, there was little blame on the Western powers’ territorial and economic exploits. Typically, he does not foresee a chance of the West respecting Iran’s sovereignty or caring for its well-being, so long as the state and the people are in their “deep slumber” and do not wake to care for themselves.

The incident marked the beginning of a popular movement that eventually came to be recognized as the Constitutional Revolution (Enqelab-e Mashruteh), a transformational experience with major consequences for twentieth-century Iran. The previously described episode highlights most, if not all, of the elements that would shape the revolution: merchants and artisans resentful of an inefficient and intrusive state; the lower- and middle-ranking mullahs of various shades calling on the mojtaheds to come out in support of the people; the Qajar state’s desperate reactions to demands for popular participation and eventually for a constitution; and finally, the large size of the urban population (fig. 6.1). To these groups were added in due course the Western-educated elite, who joined the indigenous radical elements and helped shape the parliament (Majles) and frame the modern constitution.

the Constitutional Revolution remained a turning point in the history of Iran above all because it marked a step forward on the path to sociopolitical modernity. Under the veneer of Western liberalism and constitutional order, the revolution tried to offer indigenous answers to a distinctly Perso-Shi‘i problem of social justice that had long been present in the milieu of Iranian dissent. In effect, the revolution sought to secularize Shi‘i millenarian aspirations by incorporating such modern concepts as nationalism, the rule of law, limits to state power, individual rights, and people’s representation. The revolution juxtaposed these principles with the ancient vestiges of kingship and the clerical establishment. The civil war of 1908–1909 between the constitutionalists and the royalists was the climax of a revolutionary struggle, for it weakened Qajar rule and relegated, at least temporarily, the conservative clergy to the political wilderness. The turmoil caused by the revolution, however, was compounded by the European threat of military occupation before and during World War I, which brought an abrupt end to the constitutional experiment and dampened revolutionary aspirations.

Reformist literature of the late Qajar era and the Constitutional Revolution lamented illiteracy and the absence of modern educational institutions and was critical of madrasa curriculum and its deficiencies. It also called for a change in Persian script, one instance of a broader preoccupation shared by reformers in many non-Western societies. The Persian highly stylized shekasteh handwriting common in the Qajar era, though undeniably an art form, was viewed as cumbersome for the demands of public education. The lack of modern sanitation and modern medicine, malnutrition, and the absence of an effective public health system to combat outbreaks such as cholera and to control diseases such as smallpox and trachoma were other sources of grievance. Glaring scientific and industrial shortcomings in comparison with “civilized” countries were the cause of profound concern. Images of decay and deprivation in Iran were contrasted not only with idealized notions of Western material advances but also with an idealized vision of Iran’s ancient past. Only on the model of Western powers, it was argued, and the modern rule of law and constitution could Iran overcome its rampant maladies. The reformist literature of the nineteenth century was generally oblivious to Europe’s colonial ambitions, and when it wasn’t, it often implied that falling under Western imperial might was an inevitable fate of the weaker nations.

A major theme in Akhundzadeh’s works, inspired by the simplicity of Molière’s plays, was the contrast between the hold of old beliefs and practices, the “superstitions,” in Muslim societies and the potency of modern civilizational forces, especially the modern sciences and medicine. More so in his unpublished polemics, Akhundzadeh internalized the positivist critique of Islam and its incompatibility with the demands of the modern world. In fictional correspondence dated 1863 between Kamal al-Dowleh, an Iranian skeptic writing from Tabriz, and his interlocutor, an Indian Shi‘i prince residing in the holy cities of southern Iraq, Akhundzadeh offered a daring criticism of Shi‘i beliefs and institutions. He held Islam, its scripture and doctrine, and more pointedly, the Shi‘i beliefs and teachings responsible for Iran’s current state of affairs and the root cause of the decline of the Persian civilization. In Voltairean fashion he ridiculed the idea of divine inspiration, the tales in the Qur’an, and the force of bigotry and unreason that the Islamic religion and the disastrous Arab conquest of Iran had unleashed on his countrymen. Like Kermani, he also lamented the loss of the great civilization of pre-Islamic Iran. Drawing historical and sociological comparisons with his own time, he chastised Islam for its antirational and unenlightened principles, including the ignorance, arrogance, and superstitions of the religious authorities and for their condoning of slavery, torture, and the mistreatment of women. With lesser intensity he also held the Qajar state responsible for corruption and mismanagement, and he attacked the undeserved privileges of the elite.

To appease detractors within the ulama camp, the constitution stipulated that all laws (qanun) legislated by the Majles were to remain within the bounds of political order, and thus outside the sphere of the shari‘a. In reality, however, it subverted the accepted universality of the shari‘a in some key provisions. In contrast to Islamic law that discriminated between Muslims and non-Muslims, the constitution recognized equal rights for all citizens. It further secured freedom of the press and publication, and freedom of association, so long as they were not against principles of Islam. Freedom of expression in particular was seen by the opposing ulama not only as a clear breach of restraints that Islam placed on individuals but also as sanctioning the spread of un-Islamic ideas and heresies. Article 1 of the 1907 Supplement to the Fundamental Law specifically declared Twelver Shi‘i Islam as the official religion of Iran, and article 2 specified: At no time must any legal enactment of the Sacred National Consultative Assembly [Majles Moqaddas Showra-ye Melli], established by the Imam of the Age and His Majesty the shahanshah of Islam and the whole people of the Iranian nation, be at variance with the sacred principles of Islam or the laws established by His Holiness the Best of Mankind [i.e., Prophet Mohammad].2 This, of course, was not merely lip service; it reflected the framers’ serious dilemma of how to reconcile the will of “the people of the Iranian nation” as a source of the constitution’s legitimacy with the ancient pillars of authority: Shi‘i Islam and Iranian kingship. After much bickering over the language, to appease Nuri and the mashru‘eh opposition who were battering the constitutionalists from their sanctuary near Tehran, the Majles approved, after several drafts, that a committee of five mojtaheds and experts of Islamic law would oversee the compatibility of legislation with preconditions laid out in the shari‘a. Though in reality the committee never convened and was forgotten after 1910, compatibility with the shari‘a remained an issue that would reemerge seven decades later during the Islamic Revolution of 1979.

The press and the telegraph, both modern means of communication in the public space, elevated the Majles in the eyes of the people to a sacred institution, as the epithet “sacred” (moqaddas), attached to the full name of the Consultative National Assembly, denoted. The Majles became the embodiment of lofty goals of the constitution, expected, quite unrealistically, to dispense social justice; to ensure peace, prosperity, and security; and to defend the country against foreign intrusions—all goals far beyond the frugal means of the Majles and the competence of most of its deputies. Yet despite inexperience and inefficiency, the Majles’ record was still impressive enough to alarm its opponents and ensure continued animosity.

In April 1909 a strongly worded Anglo-Russian memorandum warned the shah that unless he restored the constitution and removed its enemies from his court, he stood to lose the two powers’ already-sinking confidence in him—a warning that appeared to the shah’s opposition as a green light to capture Tehran. In reality, it was meant to encourage the shah to restore some semblance of a constitutional regime in order to stop the constitutionalists’ advances.

Despite months of repeated Russian and British warnings that jointly and individually demanded that the nationalists stay away from the capital, a force of nearly three thousand Bakhtiyari and Gilan fighters engaged for two days in a mopping-up operation inside the capital. Colonel Liakhov and his troops surrendered, only to be commissioned, ironically, back into service by the nationalists, even though they momentarily faded out of the revolutionary limelight. Mohammad ‘Ali Shah himself and an entourage of five hundred, including his hated army chief, Hosain Pasha Amir Bahador Jang, negotiated his way to the Russian legation, where he took refuge under the joint protection of the two powers. Conscious of European sensitivities, the nationalists quickly secured diplomatic missions and assured the safety of foreign residents, even before marching to the ruins of the Majles building, where on July 15 they officially announced the abdication of Mohammad ‘Ali Shah from the Qajar throne. With a discipline that impressed even the mostly hostile European press corps, the Bakhtiyari tribesmen and a contingent of the Armenian fighters from Gilan restored order in the capital, set up a rudimentary headquarters, and soon declared Mohammad ‘Ali Shah’s minor son, Sultan Ahmad (1898–1930), as the new shah. The elder of the Qajar tribe, ‘Ali Reza ‘Azod al-Molk (1847–1910), became his regent. By any account, the success of the nationalist forces was impressive. There was no looting, revenge killing, or retaliation. Even more remarkable was the level of cooperation between the heterogeneous rank and file of Gilani and Bakhtiyari fighters, who could barely communicate with one another in Persian.

More symbolic, and more daring, were the trials held shortly after the nationalists’ victory. To the Supreme Council’s credit, a national amnesty was declared, and there were hardly any vengeful killings. Only a handful of reactionaries were arrested and tried. Of the five who were executed by order of a special tribunal on specific charges of murdering constitutionalist protesters in the sanctuary of ‘Abd al-‘Azim during the final days of the old regime, the most prominent was Shaykh Fazlollah Nuri, the relentless opponent of the constitutionalists. The tribunal held as proof of its verdict Nuri’s fatwa to the effect that killing the protesters in the sanctuary was lawful. It hence underscored the new regime’s wishes not to punish anyone for ideological orientation. In the final months of the so-called Minor Tyranny, as the period of the civil war came to be known, Nuri had abandoned his earlier call for mashru‘eh in favor of the old absolutist order and avowed support for Mohammad ‘Ali Shah’s suppression of the constitutionalists. With peculiar zeal he orchestrated clerical petitions from the growing number of clergy in Tehran and elsewhere expressing loyalty to the Qajar regime and warning the shah of any compromise that might result in restoration of the constitution. Hanged by the gallows in Tupkhaneh Square in front of a dazed public witnessing the unprecedented execution of a mojtahed, one of the most prominent Shi‘i jurists of his time, the execution was emblematic of changing times. It seemed as though the kingship and the clergy, the two pillars of the ancient Iranian order, were cracked, if not shattered, by contingencies of a modern revolutionary movement. Another encouraging sign of change was the diversity of voices in the public sphere. The growth of the press and publications, the emergence of parliamentary factions and political parties, the first audible pleas of women protesting society’s misogynistic norms, and a greater sophistication in cultural and political discourse were evident and seemingly irreversible. By the end of 1909 there were half a dozen dailies and a growing number of book titles catering to a larger readership. In the following months and years, despite major upheavals, the number of newspapers multiplied, and although many of them were short-lived, they demonstrated not only a new relish in the freedom of expression—even freedom to slander—but also the potency of the press in fashioning the country’s nascent public opinion.

Fearful of dire consequences, the Iranian government succumbed to the threat of brute force. To appease St. Petersburg, the Iranian minister of foreign affairs arrived in person to the Russian legation and offered a formal apology on behalf of his government. Yet there was no end to the demands of the two powers or their shared desire to dismantle Iran’s young democracy. Almost immediately after the so-called satisfaction was given, on November 29 the Russian government served a second ultimatum to Iran, this time openly backed by Britain. In a rare expression of international bullying, the second ultimatum required Iran to immediately fulfill three conditions or else face Russian military occupation, and in effect an end to its national sovereignty. It demanded that Morgan Shuster be dismissed from his post of treasurer general together with his American colleagues. It also demanded that, in the future, the Iranian government not engage the service of foreign nationals without the consent of the two powers. Most outrageous of all, the ultimatum demanded that the Iranian government pay “indemnity” for the “expense of the present dispatch of troops” to Iran, the amount and manner of which was to be determined later. This demand was made at a time when Russia had landed more troops in Gilan and Azarbaijan provinces to reinforce its so-called zone of influence. The two powers in effect blatantly required that Iran reimburse the cost of the violation of its own sovereignty to an aggressor who, as it turned out, went on a rampage of massacres and maltreatment of defenseless Iranians. The second ultimatum, even more than the first, raised a storm inside and outside the Majles, leading to a nationwide movement of outrage, speeches in mosques and the Majles in support of Shuster, and telegraph messages of solidarity from the provinces. The Shi‘i clerical condemnations of the Europeans’ nefarious designs on the constitutional regime and the oppressed Iranian nation were headed by Mohammad Kazem Khorasani and his colleagues in Najaf . They called for the boycott of Russian and English goods in the bazaar, the revival of armed revolutionary anjomans, and the elimination of the royalists.

In his heart-wrenching account of the suspension of the mashruteh, Shuster himself called the destruction of the democratic experience in Iran “a sordid ending to a gallant struggle for liberty and enlightenment.” Reflecting on his short experience he further wrote: That the Persians were unskillful in the practical politics and in the technique of representative constitutional government no one could deny; but that they had the full right to develop along particular lines of their customs, character, temperament and tendencies is equally obvious. Five years is nothing in the life of a nation; it is not even long as a period for individual reform; yet after a bare five years of effort, during which the Persian people, with all their difficulties and harassed by the so-called friendly powers, succeeded in thwarting a despot’s well-planned effort to wrest from them their hard-earned liberties, the world is told by two European nations that these men were unfit, dangerous and incapable of producing a stable and orderly form of government.5 This was the judgment of an American in 1912, just before the disasters that befell Iran during World War I—before the British attempt to turn Iran into a semi-protectorate in 1919, and years before the Allied occupation of Iran during World War II, before the brazen Soviet attempt to snatch away Iran’s territory and subvert its government, and before Shuster’s own country conspired in 1953 with Britain to deprive Iran of economic sovereignty over its natural resources and its democratic aspirations.

Despite staging an earnest liberal movement with urban support, the Iranian constitutionalists never really succeeded in defining the relationship between the religious and the political spheres. Nor did the geopolitical contingencies of European powers allow for the natural growth and fruition of this experience. From the outset, the Constitutional Revolution faced not only opposition from the Qajar regime and the affiliated clerical conservatives but also the growing hostility of the great powers, which together eventually brought the movement to a standstill.

For some, the experience of the Constitutional Revolution proved that Western powers would not allow the establishment of a free and democratic regime and that domestic political players were incapable of maintaining it. For others, the mashruteh liberal democracy was an imported commodity, even an “ailment” devoid of imagined “authenticity.”

In the seven decades following the Constitutional Revolution, the Pahlavi era (1921–1979) transformed the politics, society, and economy of Iran. In the aftermath of World War I and the upheavals of the postwar period, Reza Shah’s authoritarian rule, boosted by oil revenue and a consolidated military, helped centralize the country, create modern administrative and educational institutions, co-opt the old elite, nurture a nationalist ideology, and conduct a relatively independent course of foreign policy. These were achieved at the expense of democratic aspirations and individual and political freedoms that were at the core of the constitutional experience. Westernization also deepened the rift between the Pahlavi state and the retreating clerical establishment.

The arrested growth of the private sector, the widening gap between living standards in the city versus the countryside, and the rise of the state’s reliance on independent income through monopolies on commodities and oil revenue were the most significant legacies of the first Pahlavi era. While the state became less dependent on its citizens and the meager revenue it could extract through taxation, it sped up military and police spending to safeguard the increasingly unpopular regime. To maintain its presence in nearly all economic sectors meant that the state should become the largest employer in the country by far. These patterns persisted through the whole of the Pahlavi era and beyond, with few exceptions—a curse on the modern Iranian political economy that continues to the present.

By 1928 the oil revenue reserve had reached six million tumans ($3,518,000), a hefty sum that was meant to be devoted to economic development but was instead appropriated by the state to consolidate the military and pay for the growing bureaucracy. The sugar monopoly was imposed in 1927 to pay for the construction of the railroad, followed in 1929 by a monopoly on the sale and export of opium, and thereafter on tobacco and other commodities. As a sign of the changing times, control of the commercial markets faced no resistance from the bazaar, in stark contrast to the Tobacco Protest of 1891–1892 or the protests against government price controls on the eve of the Constitutional Revolution. This was another cause of the bazaar’s reluctance to abandon the small-scale patterns of patronage and networking in favor of investment in modern financial and industrial sectors. A weakened bazaar and the relative worsening of the affairs of the bazaar merchants meant that the middle and lower ranks of traders and guilds suffered. The ensuing growth of conservatism in the bazaar surfaced in a firmer alliance with the conservative clergy, the other losing sector in Pahlavi society.

The schoolchildren who learned geography, history, and Persian literature as well as modern sciences internalized a different perspective of the world from that of their parents, one that gave prominence to secular knowledge and material progress. Yet the shift from instructing elites to a system of public education, part of a trend that revolutionized literacy worldwide, often reinforced uncritical learning. It rewarded uniformity and obedience and punished imagination and diversity. The prevailing pedagogical culture, to the extent perceived by its framers, militated against the body of knowledge in the sciences and humanities that was supposed to open intellectual horizons and change worldviews.

Despite restrictions on preaching in the mosques and donning clerical attire, the state never dismantled the clerical hierarchy or the institution of the madrasa, the waqf, and other means of revenue. Remarkably, in the early Pahlavi era, although the number of madrasas decreased, Qom acquired greater visibility as a clerical center. A majority of moderate ulama succumbed to the diminishing status of their class with a mix of resignation and remorse (the latter for not fighting hard enough for Qajar survival). They viewed Reza Shah and Pahlavi modernizing as an inevitable, even a necessary, evil, so long as the residue of their clerical power remained in place. Unlike the Sunni clerical institutions in other Muslim lands, which for centuries were under the aegis of the Ottoman state, the Shi‘i Iranian ulama had maintained their institutional independence even after the demise of the Qajars. Even if they lost Pahlavi patronage, and the unwritten contract with the state was about to be abrogated, their group solidarity was not entirely lost. As it turned out, the immediate hardships imposed on them added to overall clerical resilience and their rebound after Reza Shah.

The new Pahlavi legal reforms, primarily based on the Napoleonic Code, adopted the French system to reasonable dictates of the Shi‘i shari‘a, and did this perhaps more effectively than many other Muslim countries in the twentieth century. Under Davar’s supervision, a council of legal experts, consisting of middle-ranking mojtaheds and state administrators of madrasa background who were familiar with European law, reviewed the French codes in a relatively short period of time, refashioning them according to Islamic contingencies. The 1927 Penal Code and the subsequent 1931 Civil Code replaced, in stages, the mojtahed-run shari‘a courts. The new codes featured all the deficiencies of a state-dominated bureaucratic system, yet the Islamic provisions in the system proved vital for the state’s legitimacy.

The Allied occupation of Iran in September 1941 was a rude shock to most Iranians. Facing the soldiers of the Red Army, the British Indian army, and soon after American military personnel seemed almost a surreal reversal of two decades of Pahlavi assurances of Iran’s reclaimed sovereignty and the might of Iran’s Imperial Armed Forces. The shock was transient, but the consequences were not. The occupation triggered one of the most eventful episodes in Iran’s modern history and revealed persistent themes in the country’s recent past: the struggle for democracy, foreign intervention, and grave tensions within the polity and between the center and the periphery. Disruption of the economy, political instability, tribal rebellions, secessionist movements, frequent imposition of martial law, and growing hatred toward foreign powers were the darker outcomes. On the other hand, a national movement for nationalizing Iran’s oil industry, the opening up of the political space, greater freedom of the press, parliamentary politics, and a nascent labor movement were promising developments.

The AIOC—the forerunner of today’s British Petroleum (BP)—ran the Iranian oil industry not unlike a colonial plantation, exerting the hierarchy of class-conscious English society and preserving a culture of colonial privilege. Iran’s other major contribution to the workforce was cheap labor, mostly Bakhtiyari herdsmen and the Arabic-speaking population of Khuzestan working under harsh conditions and with exploitative wages and poor living standards.

Furthermore, the AIOC condescendingly viewed Iranian subordinates in its employment as incapable of holding managerial posts and unable to grasp the company’s bookkeeping—which the Iranians viewed as shady and full of dishonest accounting practices. It moreover brazenly defended its treatment of the Iranian workforce. Stubborn and shortsighted—almost cynical—it turned a deaf ear to Razmara’s repeated pleas and to the United States’ mediation efforts behind the scenes. The US interest in the negotiations was perceived by AIOC as likely to allow Americans an eventual foothold in the Iranian oil industry. American oil companies—themselves not models of fairness and integrity—had negotiated new contracts with the government of Venezuela on a fifty-fifty profit sharing basis, and in 1950 they were about to do the same with Saudi Arabia, where ARAMCO, a conglomerate of giant American oil companies, had been operating since 1933. ARAMCO had received, in exchange for the fifty-fifty deal with Saudi Arabia, a 50 percent tax break from US Congress (known as the “golden gimmick”). The AIOC refused to consider any of that and quietly urged the Americans to keep the Saudi deal a secret until the Iranians agreed to their far less favorable terms.

Outraged by the Iranian action, the British government also lodged complaints with the International Court of Justice at The Hague, demanding that Iranian oil nationalization be declared illegal and thus void under international law. In response, Iran lodged its own counterclaims and sent representatives to defend its case. The Iranian oil nationalization thus rapidly developed into an international crisis, with important security and strategic repercussions that soon invited US intervention. At the time, Iran supplied more than 20 percent of the world’s total oil production, and the imminent cutoff of such a vital source threatened to disrupt the Western economies that were coming out of the postwar recession.

Initial impact aside, the long-term effect of the embargo on the British market was minimal. Yet its effect on the Iranian economy was substantial throughout Mosaddeq’s premiership. Issuing national government bonds to compensate for the loss of income could barely avert a financial crisis. A later increase in the volume of currency issued by the Mosaddeq government only intensified the inflationary trend. It became apparent that nationalization, though a brave move expressive of national sentiments, was a formidable task, if not an untenable one. By early 1952, oil production had come to a complete standstill—for the first time since 1909—threatening with bankruptcy the government that aimed to liberate Iran from the yoke of economic hegemony.

The street slogan “We sacrificed our lives, we write with our blood: either death or Mosaddeq,” voiced by ordinary people, saw in Mosaddeq not merely a political leader but a savior of the Iranian nation. Mosaddeq’s victory was a serious blow to British and American hopes to see a compromising premier in his place. Both powers had actively sought out Qavam and backed him as an alternative to a coup or direct military action. Moreover, the July 21 uprising displayed the power of the urban lower and middle classes as a counterforce to the politics of the elite; this was a victory for Mosaddeq, who mustered such sentiments despite the Tudeh Party’s long-standing claims to be the party of the masses. Though Tudeh leadership still criticized Mosaddeq, during the uprising its rank and file embraced the National Movement en masse with Mosaddeq as their leader. If a further providential sign was needed, it came with news of Iran’s victory at The Hague on the same day: July 21, 1952. The ICJ agreed with Iran that the court lacked jurisdiction in the Iranian oil dispute since AIOC was a nonstate entity operating under an Iranian license; therefore, the court could not hear the case, as the British government had urged. This was the position initiated by Karim Sanjabi (1904–1995), a French-educated lawyer and a loyal member of Mosaddeq’s inner circle, who was a member of the delegation representing Iran in the court. The chief lawyer hired by Mosaddeq’s government, the Belgian Henri Rollin, skillfully argued Iran’s case. In June 1952 Mosaddeq himself attended the final court sessions to personally present Iran’s case and offer moral support to the defense team. The vote was perhaps the most constructive international victory for Mosaddeq and his allies, having reversed the International Court of Justice’s earlier injunction and vindicated the position Iran had taken all along.

Mosaddeq, sensing the changing international climate, offered a conciliatory counterproposal. In exchange for the British government complying, at least in public, with the principle of nationalization, he consented to arbitration by the International Court of Justice on the amount of compensation to be paid for the AIOC’s installations and other investments, but not for future losses of oil revenue. He further offered AIOC partnership with Iran—but not a monopoly—in the production and distribution of Iranian oil, at a percentage negotiable by the two sides. Under normal circumstances, this Iranian counterproposal would have provided viable grounds for an amicable agreement, but this was not to be the case, for the two Western powers obviously were not negotiating in good faith. By March 1953 the new Eisenhower administration was convinced that the only plausible course for the United States was to remove Mosaddeq by means of a military coup. John Foster Dulles and his brother, Allen Dulles (1893–1969), the director of the newly organized Central Intelligence Agency, were architects of a foreign policy that came to be known as the Eisenhower Doctrine. It was designed primarily to contain what seemed to Americans as the impending communist threat. Among countries neighboring the Soviet Union, Iran proved particularly crucial because of its long borders with its northern neighbor, its massive oil reserves, access to the oil-rich Persian Gulf, and its powerful Tudeh Party. The climate of communist phobia in the United States marked by the Red Scare and the hearings of the House Un-American Activities Committee further vindicated in the Americans’ eyes the undertaking of preemptive measures in a contentious case such as Iran.

The downfall of Mosaddeq brought to an end the eventful postwar era, a revolution of sorts that was aborted by familiar forces of conservative opposition and foreign intervention, but also by errors of judgment that proved destructive. In this and other respects, the Mosaddeq era resembled the Constitutional Revolution. In many respects, it was a follow-up to that unfinished revolution, resurfacing a generation later. Mosaddeq’s dilemma, and his tragedy, was that in the outset he tried to fulfill national aspirations while remaining committed to the principles of constitutionalism and democracy. Yet his disturbing display of autocratic conduct toward the end of his premiership may be seen as a conundrum, a vacillation between two modes of constitutional liberalism and radical populism. Mosaddeq and his colleagues also exhibited another dichotomy familiar to the constitutional period: they paid homage to Islam as a source of Iranian identity and courted religious authorities while also hoping to preserve the ideals of a secular society, freedom of the press, and equality before the law—notions that were in contrast to the conservative outlook of the Shi‘i establishment and its radical allies. Mosaddeq’s vision and frame of reference were in part the Shi‘i tradition of Iran. For the greater part, however, he was a man with a secular mind-set that he and his cohorts hailed as a necessary framework for individual rights, division of powers, and liberation from economic hegemony and foreign intrigue. This was a difficult balance to maintain.

In the following years as the CIA’s covert involvement became more apparent, the fall of Mosaddeq came to be seen by most Iranians as a flagrant intrusion by Western powers into Iran’s sovereignty and economic destiny. The shah’s authoritarian rule, evident shortly after the coup, further convinced his opponents of the United States’ malicious designs to impose on Iran a dictator subservient to its strategic interests. The fall of Mosaddeq turned into a traumatic memory that in the coming decades produced a narrative of victimization. It reinforced not only xenophobic suspicions but also pushed the Pahlavi opposition forces toward an anti-Western—more specifically, anti-American—discourse.

The second Pahlavi era was marked by royal politics of self-aggrandizement, especially in the 1970s, and this image was enhanced by the growth of oil revenue, the rise of a subservient technocrat class, and the unprecedented expansion of security forces and the secret police apparatus. Iran’s visibility as a regional power friendly to the United States and the Western world, and episodes of choreographed populism, also contributed. Mohammad Reza Shah’s White Revolution of the early 1960s in reality came to fruition in the mid-1970s with greater industrial growth, infrastructure development, institution building, implementation of a planned economy, greater professional expertise, and educational and legal advances for women. These crucial transformations also triggered contesting visions of modernity. The shah’s image of progress, patterned on a Westernizing model similar to his father’s, was questioned by a small but influential circle of secular dissidents and intellectuals—many with roots in the Tudeh and the National Movement of the postwar era. They began to question wholesale subservience to the West and the regime’s positivistic ideas of progress. With the uprising of June 1963, a turning point in Iran’s shift to Islamic activism, this laymen’s critique of repression, nepotism, and the perceived “moral decline” of society increasingly took on an Islamic veneer. Not only young radical clergy but also revolutionary Marxists and Islamist guerrilla organizations critical of the predominant Westernism began calling for resistance to the Pahlavi regime and eventually for its violent overthrow. Islamic militants, mostly under the aegis of Ayatollah Khomeini, were the ultimate beneficiaries of anti-Pahlavi discourse.

On paper Iran’s nationalization of its oil industry was recognized, and in 1954 the National Iranian Oil Company (NIOC), which had been formed under Mosaddeq, became the partner in a fifty-fifty profit-sharing agreement with a new holding company, Iranian Oil Participants Limited (IOP), which consisted of eight major American, British, and European oil companies. These partners replaced the Anglo-Iranian Oil Company’s monopoly. The pattern roughly resembled the ARAMCO consortium of Saudi Arabia, with a similar sharing arrangement. Although the new agreement was a far cry from the objectives of the National Movement, and was unpopular with the general public, it was a face-saving measure for the shah and for the United States. Known as the “seven sisters,” these oil companies held 60 percent of the newly formed consortium. They were Standard Oil of California (later Chevron), Standard Oil of New Jersey (later Exxon), Standard Oil of New York (later Mobil), Texaco (later Chevron), and Gulf Oil (later Chevron), each holding an 8 percent stake; Royal Dutch Shell, with 14 percent; and Compagnie Française des Pétroles (later Total), with 6 percent. Taking over from AIOC, the newly renamed British Petroleum (BP) held the remaining 40 percent of the consortium’s shares. The consortium was responsible for the exploration, production, and international distribution of Iranian oil and controlled production levels and the pricing structure. Admittedly operating within a smaller area under concession in Khuzestan than had the former AIOC monopoly, Iran nevertheless remained on the receiving end of the production process, with the National Iranian Oil Company in charge of domestic distribution and overall supervision of the operation, a position that proved mostly a formality, at least in the earlier years. IOP held full control over all operations, did not open its books to outsiders, did not allow any AIOC representation on its board, and kept a low political profile while maximizing profits. This was a victory for the big oil companies in tightening their monopoly not only over Iranian oil but also over more than 80 percent of world oil production.

Among the Shi‘i authorities, animosity toward the Baha’is was deep, in part because of doctrinal reasons but also, in the twentieth century, because of a paranoiac fear of Baha’i infiltration of government and society and of their presumed success in converting Muslims over to their “deviant path.” Through intermediaries Borujerdi demanded that because the clergy, with himself at the helm, supported Tudeh purges, in return the shah should repay them by eradicating the Baha’i menace.

Since as early as the Babi persecutions in the Qajar period, Baha’is had been routinely demonized as enemies of Islam. With the new campaign against them, however, the nature of the accusations shifted to a higher level: they were accused not only of doctrinal enmity to Islam but also of being politically disloyal to the country. These claims set the ground, starting in the 1960s, of accusing the Baha’is of being agents of British colonialism, and soon after of being agents of American imperialism and international Zionism, charges that after the 1979 Islamic Revolution had serious repercussions for the Baha’i community in Iran.

A crowd of supporters buoyed by Falsafi’s hate campaign organized a vigilante takeover of the Baha’i center in Tehran. In Shiraz the mob attacked the house of the Bab, the holiest site for the Baha’is and the Azalis in Iran, and all but destroyed it. As a sign of the government’s solidarity with the anti-Baha’i campaign, but in reality a weak attempt to control the situation, in May 1955 General Nader Batmanqlij, chief of staff of the Iranian armed forces, dispatched troops to occupy the Baha’i center in Tehran. The general personally climbed to the roof to strike the first symbolic blow, demolishing the center’s dome (fig. 10.2). Under pressure from Western governments and facing international criticism (and from Baha’i communities worldwide), the shah began to back off, having sensed the looming repercussions of the campaign getting out of hand. By the end of Ramadan, the most egregious persecutions had subsided. Yet the ban on Baha’i communal activities remained in force. They continued to be banned from government employment, at least officially, and the Baha’i center in Tehran was converted into the headquarters of the Tehran military command and army counterintelligence, the nucleus of what later became the Organization for Security and Intelligence, or the Savak.

By the early 1960s Savak, under the shah’s sponsorship, had begun to earn a reputation for efficiency and discipline, but also for fear mongering and ruthlessness, purposefully cultivating an image even darker than its reality. Among Savak’s new targets were independent political figures, the younger generation of intellectuals, members of the former National Front, leaders of student demonstrations, and outspoken clergy. When the shah ousted Teymur Bakhtiar in 1961, Savak was brought even more tightly under his direct control. Accused of conspiring against the Pahlavi regime in the outset of a new episode of anti-Pahlavi resistance, the general was forced into exile in Geneva, where he began organizing an anti-Pahlavi front together with an exiled Tudeh leader and Ayatollah Khomeini, the emerging de facto leader of the antiregime clergy in Qom. Bakhtiar consequently fled to Lebanon, and then to Iraq, where a Savak agent assassinated him in August 1970. The ouster of Bakhtiar was the last significant military hurdle in the shah’s path to absolute power. He was also the first of the top brass to fall victim to the shah.

An attempt against his life in 1949, from which he miraculously escaped, and soon afterward the arduous course that ended with the coup of 1953 transformed the young shah from a reactive maneuverer into a shrewd, even devious, manipulator. Especially after the tumultuous Mosaddeq years he learned to dominate the political stage at the expense of any independent voice within or outside his immediate reach. The bitter experience of the Mosaddeq years washed away whatever faith he might have had in the democratic process or in what his more liberal-minded advisers urged him to adopt. The experience made him suspicious of popular participation at any level and of genuine debate on any political issue. Although he offered his early support for the oil nationalization campaign, after July 1952 he found himself marginalized and unwanted. From his perspective, Mosaddeq’s course not only aimed to overthrow him and eliminate the monarchy but also would bring the country to the brink of chaos and eventually the throes of communism. His flight to Baghdad and then to Rome in August 1953 after the failure of the first coup to oust Mosaddeq, and his return under the shadow of a second coup staged with active help from American and British agents, was a tormenting memory, even though he presented it to his people as a patriotic victory over unspecified enemies.

With the American presidential election campaign under way, and viable prospects for a Democratic victory, there was growing concern in Tehran about what the implications of John F. Kennedy’s presidency would be for the Pahlavi regime. Kennedy was openly critical of the Republicans’ foreign policy in the developing world, and he questioned outright military aid to oppressive regimes that ignored economic development and democracy. He considered economic and political reforms as alternative means of saving non-Western societies from the lure of socialist-inspired revolutions. The collapse in Cuba of the US-backed dictator Fulgencio Batista in early 1959 and Fidel Castro’s rapid shift from a nationalist revolutionary to a committed Marxist made his points all the more glaring. At the time, perhaps no other country besides Iran fit Kennedy’s disapproval of the US granting of unconditional military largesse and moral support. It was therefore quite plausible that beyond Latin America Iran would become a priority for the new administration.

The Shi‘i upper ranks viewed the shah as an imperfect but viable partner, and in the course of the 1953 coup most of the upper and middle ranks, Khomeini included, had sided with Kashani and Borujerdi in their tacit support for the shah, being fearful of the Tudeh takeover. With the introduction of the shah’s reform program, however, that view began to change. The up-and-coming clerics with radical views and their students in Qom clearly were disgruntled with the Pahlavi state on ideological as well as material grounds.

The young Ruhollah (Ruh-Allah means “the Spirit of God,” a Qur’anic title for Jesus and a relatively rare first name for the children of Shi‘i clergy) was brought up by his mother, and after his mother’s premature death, by his paternal aunt, a woman of strong character who left her footprint on the young boy. He received a typical elementary maktab education in Khomein from female and male instructors, including his older brother, but not modern schooling. In the years following the Constitutional Revolution, Khomein, like most small towns, was untouched by modern education, even though the young Ruhollah may have learned rudiments of arithmetic, calligraphy, and some Persian poetry.

A blend of Shi‘i jurisprudence, speculative mysticism (as opposed to mysticism of the Sufis and the Sufi orders), and Islamic ethical and revivalist awareness thus characterized Khomeini’s training. Yet despite his interest in speculative mysticism, he remained loyal to the jurist tradition that carried a certain element of clerical entitlement, especially among high-ranking mojtaheds. He not only inherited this conservative, pedantic, text-oriented legacy but also shared a sense of communal loyalty to fellow jurists that was reinforced by isolation under Pahlavi rule.

In his judgment, attacks on Shi‘i beliefs and rituals were comparable to the attacks the Wahhabi “savages of Arabia” had long leveled against Shi‘ism. Holding nothing back, he was among the first to call upon believers to physically eliminate Kasravi for his blasphemy; it was not mere coincidence that members of Fada’iyan-e Islam assassinated Kasravi in March 1945 shortly after the publication of Khomeini’s book.

In the late 1950s and early 1960s Khomeini began to question a number of issues of domestic and foreign policy. Starting with marginal issues—such as the mingling of Boy Scouts and Girl Scouts and the performing of dances—he soon moved on to more substantive concerns, such as the passing of the first land reform legislation in 1959 and the opening of informal diplomatic relations with Israel and economic collaboration with the Jewish state. In 1962, when the government tried to introduce the elected provincial councils sanctioned by the 1906–1907 Constitution, mostly the shah’s window-dressing to compensate for closing other political channels, Khomeini was at the forefront of clerical opposition, objecting even to the hint of women’s right to vote. He argued that the voting regulations failed to specify the male gender—and hence exclude women—from the electorate. Along with other ayatollahs in Qom, he also objected to dropping the oath of allegiance to the Qur’an for the provincial councils’ delegates, an omission seen in Qom as a concession to the Baha’is and their election to the councils rather than as a symbolic delinking of religion and politics. In his telegram to the premier Asadollah ‘Alam in October 1962, Khomeini further threatened that on these and other issues contrary to shari‘a, he would not remain silent, and that, in response, the government would face severe clerical opposition.

He contrasted these excesses of the regime with the frugal and selfless clergy of Qom. He “advised” the shah, as he put it, in the strongest terms to abandon Israel, to listen to the marja‘s, and not to deviate from the path of Islam so as to avoid the sad fate of his father, whose abdication brought joy to Iranian hearts. Touching upon such sensitive themes in an emotionally charged environment, Khomeini’s speech was repeatedly interrupted by the loud weeping of the mournful audience. For the first time a copy of the recorded tape of his speech soon traveled across Iran and resonated with the people in the bazaars and streets of the poorer neighborhoods. The powerful call for defiance quickly bore results, leading to a bloody uprising in the capital and some provincial cities. In the early hours of June 5, two days after his Fayziyeh speech, Khomeini was arrested by security forces, brought to Tehran, and detained in the Officers’ Club, where Mosaddeq had been detained, before being sent off to jail. On the same day, June 5, as the news of Khomeini’s arrest reached the public, Iranian cities witnessed a violent uprising. As if the crowd had anticipated the arrest, tens of thousands of protesters holding makeshift placards of Khomeini’s portrait and shouting slogans against the shah poured into the streets near the bazaar and other neighborhoods of Tehran, smashing shop windows, burning down banks and cinemas, and attacking bus stations, police stations, and government buildings. Among other places, the Pepsi bottling facility, the Iran-US cultural center, and Iranian broadcasting services were attacked and burned down. The crowd, aroused by devout supporters of Khomeini from among the gang leaders (lutis) of Tehran’s wholesale vegetable market, armed with sticks and knives, began to move in the direction of the Marmar royal palace in central Tehran, where the shah’s office was located.

Khomeini was held in an army barracks in Tehran for nearly two months before being put under house arrest for another eight months. A handful of mojtaheds in major cities, many Khomeini’s supporters and students, were temporarily detained. The gang leaders responsible for the Tehran uprising were tried and hanged, and all physical signs of destruction in Tehran were quickly removed or restored. Yet the psychological wounds inflicted by the revolt remained unhealed. Khomeini, seemingly unrepentant and untarnished, returned to Qom in March 1964. He was spared the death sentence and released from detention after the other marja‘s in Qom, including Ayatollah Shari‘atmadari, pleaded with the shah, cautioning him of the dire consequences of executing a major figure like Khomeini. There was no love lost between Khomeini and the other ayatollahs in Qom. What was at stake, however, was clerical prestige and their glaring display of ineffectiveness before the state were one of their cohort to be detained or eliminated, an unprecedented event, save for the 1909 revolutionary trial and execution of Shaykh Fazlollah Nuri. In March 1964 the coming to office of a more appeasing government under Hasan-‘Ali Mansur (Mansour, 1923–1965) was instrumental in Khomeini’s release. His appointment generated further hope for reconciliation. Khomeini, relying on his growing popular support in and out of the bazaar, was determined to carry on his crusade even if, as he stated, it were to cost him his life. As if retreating from the Fada’iyan-e Islam agenda of the 1950s (whose supporters no doubt were crucial in the June uprising), Qom, under the spell of Khomeini, demanded implementation of Islamic laws and abolition of the White Revolution’s anti-Islamic decrees, which in reality meant reversing the land reform program, and especially returning waqf properties to their trustees. Honoring the demands of the Shi‘i clergy also meant annulling women’s right to vote, the possible enforcement of hijab, and allowance of ta‘ziyeh passion plays and other mourning ceremonies that the regime had deemed superstitious and barbaric. In a speech in Qom a few days after Khomeini’s arrival, Mansur also called for dissolution of the Majles and the Senate, accused the Pahlavi state of being in cahoots with Israel and “the agents of Zionism,” and called for an end to corruption. More vociferously than on earlier occasions, he also accused the Baha’is of perceived charges of occupying positions of power and collaborating with Israel. Most important, the declaration called for the implementation of article 2 of the 1907 Supplement to the Iranian Constitution, which stipulated the creation of a five-member mojtahed body to oversee the legislation of the Majles. The Pahlavi state and its projected reform program could not remotely honor any such demands.

He further condemned the mingling of boys and girls, especially in mixed schools; attacked as distorted the history textbooks portraying the clergy as detrimental to the prosperity of the country; and above all, called on the clergy, the armed forces, statesmen, and businessmen of Iran to beware of the impending decline and loss of Islam. Calling on the Najaf Shi‘i ayatollahs and heads of Islamic nations, including the shah, he warned: “Since we are a weak nation and don’t have dollars, does it mean that we should be pummeled under the American boots? America is worse than Britain and Britain is worse than America and the Soviet Union is worse than both of them; each is worse than the other and each more evil than the other. Yet today we are faced with America.” The focus of this vitriolic attack was the US president Lyndon B. Johnson, whom Khomeini believed to be “the most spiteful toward our nation than any human being because of the wrongs he inflicted on the Islamic nation. The Qur’an is his enemy; the people of Iran are his enemy. The government of the United States should know that in Iran he has been debased and scandalized.”5 This fuming rhetoric left little room for compromise. A week later, coinciding with the ratification in the Majles of the American loan, the Iranian special forces surrounded Khomeini’s house in Qom. He was whisked out of the city directly to Tehran airport and put on an airplane that took him to Turkey, where he spent a year in exile in the city of Bursa, known for its Islamic loyalties. Accompanied by his son, Mostafa, and clad in civilian clothing, he visited mosques and shrines in the ancient city (fig. 10.5). Later on, moving to Najaf, he kept a distance from the city’s clerical politics, although he was by no means isolated. He remained in exile for the following thirteen years, writing and teaching but also preserving his network of supporters and followers throughout Iran. Through his devout students and bazaar contacts he collected religious dues and redistributed funds among his former and current students and for other religious causes

By the mid-1970s Iran had developed a substantial domestic market for cars and related industries, household goods, clothing, food and drinks, furniture, and construction material, and the balance of the public and private sectors promised a viable mixed economy for a developing nation that still was heavily relying on oil revenue for its public investment. The critics on the intellectual left and later the extreme left, some still carrying the incurable Tudeh bug, belittled much of Iran’s industrialization as a mere “assembly” (montage) of useless products that had been imposed by Western consumer culture and were for the benefit of a “dependent bourgeoisie.” Often looking up to the smoke-belching, inefficient, labor-intensive, centralized Soviet and Eastern European industrialization model, such criticism later was picked up by the Islamic radicals and became part of the rhetoric of the 1979 revolution. Yet it is fair to say that in later years, the state industrialization program became overambitious and out of control, leading to waste, corruption, and nepotism—at times it was devoid of any meaningful relation to the state’s preconceived master plan.

The growth of the industrial sector barely satisfied the domestic markets’ growing demand for goods and services. Imports of all sorts from Europe, the United States, and Japan flooded Iran’s markets, mostly at the expense of the bazaar sector and associated small-scale manufactures and wholesalers. As the larger import-export and industrial businesses gradually moved out of the bazaar district into more fashionable areas, the bazaar’s demographics began to change, especially in Tehran but also in larger provincial centers. In due course the bazaar came to house mostly small merchants, distributors, wholesalers, and retailers of small industries catering to the poorer and more traditional sectors of the population. The change in its function was not necessarily detrimental to the bazaar, despite the government’s unfavorable attitude toward the bazaar merchants for harboring antiregime, and particularly pro-Khomeini, sentiments. Undeniably, demographic changes turned these old centers of commerce not merely into bastions of conservatism but also into important components, financially and otherwise, of the growing Islamic activism.

Between 1971 and 1977 Iran’s annual budget further grew sixfold from $8 billon to $48 billion, an upsurge substantially due to direct and indirect oil receipts. Shortly before the October 1973 war between Egypt and Israel that led to the Arab OPEC members’ oil embargo and triggered a rapid rise in oil prices, a barrel of Persian Gulf light crude traded at the exploitatively low price of $1.95, a price that was the outcome of many negotiations in previous years. Soon after the October war, however, the price jump stunned even the oil producers; by 1975 it had reached nearly $11 per barrel in the European spot market and even higher prices in the United States. By not taking part in the Arab embargo against the United States, Iran stood to benefit not only financially but also politically. In contrast to the unfavorable image of Arab oil producers in Western media, which stereotyped the Arab sheiks as greedy plunderers with undeserving riches, Iran was seen, at least by those who could differentiate Iran from its Arab neighbors, as something of a friend—still greedy and unfair, no doubt, but not hostile and uncompromising.

Despite voices of dissent—for instance, George Ball (1901–1994), US undersecretary of state in the Kennedy administration, who criticized the shah’s autocratic rule on a number of occasions—the US polity and public opinion overwhelmingly viewed Iran as America’s indispensable ally in the Middle East and the shah as a modernizing agent for his people. Friendly relations with Israel also contributed to Americans’ favorable attitude toward the shah, especially after 1973. The shah’s affinity with Israel was primarily grounded in common geopolitical and strategic concerns, but undeniably it helped ingratiate the shah to his American allies.

Despite growing publicity in the American press about violations of human rights, Iranian political prisoners, allegations of torture, military tribunals, and press censorship, American envoys to Iran and high-ranking politicians in Washington were, by and large, willing to turn a blind eye to such unpleasant realities. At most, they treated such issues as an unavoidable evil to be tolerated from a loyal and dependable friend. Even if objections were occasionally raised in private to trusted officials, such as the court minister Asadollah ‘Alam, or to the shah himself, they were often on specific issues that directly concerned the United States rather than any cautionary advice about the nature of the shah’s autocratic rule, the excesses of the secret police, the absence of credible elected bodies, press censorship, and the evident disarray in economic policies. These were seen by US administrations as issues related to the internal affairs of a sovereign nation, and hence outside the diplomatic mandate.

By the mid-1970s the shah had been able to carve out a strategic niche in the midst of a superpower divide on which the stability of the Persian Gulf and neighboring countries depended. Contrary to the conventional narrative articulated by his domestic and Western critics, and despite his many blind spots, the shah came to be seen by the two superpowers and by European powers as an experienced statesman and a crucial ally who built up a popular base at home, carried out domestic reforms, averted conservative opposition, thwarted his radical Arab neighbors, and worked toward stability and peace in the region. From the shah’s perspective, his compliance with US foreign policy objectives not only was inevitable, given his country’s perilous geopolitics, but also was beneficial to Iran’s stability and prosperity. Though always anxious to prove his loyalty to the West, he was skillful in appeasing his Soviet neighbor, too, often to his advantage. It could be argued that the shah’s latter years were the most stable in Iran’s foreign policy, considering Iran’s fateful geopolitics since the turn of the nineteenth century. In retrospect the shah’s stabilizing effect may be gauged by the aftershocks that the region witnessed after the collapse of the Pahlavi order and the revolution of 1979: the Soviet invasion of Afghanistan, destabilization of Pakistani politics, the rise of Saddam Hussein and the Ba‘athists as a regional menace, the emergence of Saudi Arabia as a petroleum empire, and subsequent Wahhabi-Salafi militancy.

By the mid-1970s repression at home and shortfalls in economic spheres cast a long shadow over the Pahlavi state, beyond even the reality—an image further blemished by perceptions of compliance with Western interests. The United States, in particular, came to be seen by the Iranian public—even beyond a cluster of liberal and leftist trends and clerical dissidents—as a selfish superpower that exploited Iran’s natural resources, kept the shah in power, and perpetuated repression. The burgeoning anti-Americanism of the 1940s and 1950s was later internalized by a wide spectrum of Iranian dissenters. The image of the United States as a hegemonic superpower was further blemished during the Vietnam War, which received extensive coverage in the Iranian press.

Yet aside from the favorable ambience created by the US cultural and educational commitments, the closer US association with the Iranian security and military exposed ordinary Iranians to another aspect of American presence. By the mid-1970s there were tens of thousands of Americans working in Iran, including a substantial number in the service of the government as military advisers, contractors, technicians, and skilled labor. Some were former military personnel of the post-Vietnam era who, in pursuit of handsomely paid jobs, moved to Iran. They were attracted to the country’s burgeoning military industry, such as the US-franchised Bell Helicopter plant in Isfahan operational by 1975. Others were employees of big corporations involved in large-scale construction, oil, communication, and technology projects. As far as the Pahlavi state was concerned, the American and European pool of expertise was a natural resource with which Iran could address shortages in homegrown skilled and technical labor force during the boom years of the Iranian economy. A majority of these military personnel and civilians serving in Iran were employed at far higher salaries than their Iranian counterparts who had mastered comparable skills and had similar experience. In turn, they enjoyed a standard of living higher than their Iranian counterparts. The economic disparity became a source of disgruntlement, soon to be compounded by notions of Americans’ cultural insensitivities. Instances of Americans’ condescending attitude toward Iranians in the workplace and in the street were amplified beyond proportion. Examples of rowdy, heavy-drinking, unrestrained young American men in particular publicized the imprudent Yankee stereotype in such traditional settings as in the city of Isfahan.

Complacency and a disconnection from the realities of Iranian society slowly eroded the foundations of the Pahlavi order. The shah’s all-embracing royal power began to be hollowed, first and foremost, because of his aversion to meaningful modes of pluralism and public participation. The memories of the pre-1953 years seem to have convinced him, as he declared even in public, that in Iran democracy could generate only discord and chaos. His resolve, his vision, and his people’s loyalty and compliance, he insisted, were viable assets for Iran’s progress toward “Great Civilization.” Such a vision, if it was to be believed, served as a potent excuse for applying all means of political control, without respect for contesting views that challenged his positivist vision and the arbitrary means of making it materialize.

Nearly two decades of state patronage had opened a wider and more exciting cultural space in Iran. Media, especially television, artistic venues, the press and book publication, and growing viewership and readership offered intellectuals and artists a broader market and greater recognition. These happened despite the shrinking political horizons and the state’s obsessive efforts to silence all forms of dissent or coopt willing partners. Voices of dissent survived, however veiled, in the state’s broadcasting network, cinema, and various cultural and public institutions. Insofar as giving Iranians a more articulate sense of themselves, the state was able to reap the fruits of a half century of Pahlavi nationalist policies. But as it remained closely identified with a vision of positivist progress and Westernizing modernity, it also set in motion a quest for “authenticity” and cultural sovereignty.

The state’s cultural policies were largely geared to absorb the intellectual left rather than the forces of religious dissent. The former could relay cryptic messages of dissent, as much as possible, and hope for better days. The latter enjoyed fewer forums and had to rely mostly on its own traditional venues. The closure of Hosainiyeh-e Ershad ironically diverted more energies and attention to mosques, Qur’an study classes, and inspirational preaching presided over by activist clergy who were not patronized by the state.

After fourteen years of exile in Najaf, Khomeini once more was about to reemerge as the most relentless critic of the Pahlavi state. He enjoyed support not only from among his clerical and lay followers but also within the general public, who hailed him as a champion of resistance. Yet by no means was he yet viewed as the sole leader of the protest movement, or even as the man at its forefront. Exiled but not forgotten, he patiently had waited out years in the social wilderness, perhaps with little hope of ever going back to Iran, let alone leading a revolution. For younger generations of Iranians, Ayatollah Khomeini was a figure of the opposition from the past who had returned to the political stage. An opportune moment seemed to have miraculously propelled him to the forefront of a powerful movement, and despite his best intentions, his image would soon be surrounded by an aura of sanctity.

Yet during his short stay in Tehran on New Year’s Eve of 1978, President Carter, at a banquet given in his honor, toasted the shah and declared Iran “an island of stability” in the troubled Middle East. A misstatement that was destined to gain some notoriety, it appeared in the official reports along with pictures of President Carter holding a glass of champagne and flanked by Princess Ashraf, who at the time was perhaps the most unpopular member of the Pahlavi family. Only two days prior to President Carter’s arrival (accompanied on the trip by Secretary of State Cyrus Vance and National Security Adviser Zbigniew Brzezinski), the American-Iranian Cultural Center building in Tehran, a hub of American-inspired cultural activities and English-language learning, was bombed by the Fada’iyan-e Khalq guerrillas. The opposition condemned the miscalculated American gesture as an affront to the Iranian people. But the apparent US insensitivity was topped only eight months later by a visit by the premier of the People’s Republic of China. Hua Guofeng’s state visit to Iran in September 1978 came at time when the revolutionary firestorm, of which Iranian Maoists were an integral part, was about to consume the Pahlavi regime. It was as if neither the United States nor the Chinese could yet grasp the force of the revolution in the offing.

That the 1979 revolution was destined to acquire an “Islamic” face is another debatable issue. Islamic, as it became blatantly clear, meant not merely respect for Islamic moral values in a secular constitutional framework. Nor did it mean merely honoring a national icon in the person of Ayatollah Khomeini. As the revolution unfolded and turned into an Islamic republic, it became painfully clear that Islamic meant something more: a radical state with theocratic underpinnings, or more accurately, a hierocracy headed by an authoritarian guardian jurist and buttressed by an oligarchy with militant clergy at its core. Utilizing modern means of ascendency and control, the republic’s clerical elite and subservient lay cohort quickly deployed weapons of intimidation and violence. They added to this concoction a generous dose of anti-Westernism and Islamist idealism,

Khomeini’s novel reading of the notion of guardianship of the jurist as the only legitimate alternative to “unjust” temporal rule was at odds with the traditional Shi‘i aversion toward political power, avoiding government offices, and, for the most part, engaging in state affairs (except the mostly hereditary post of serving as leaders of Friday congregational prayers in major cities). Shi‘i law generally held the position that in the absence of the Imam of the Age, any form of government, presumably even a government led by the jurists, is fundamentally “unjust” and therefore theoretically illegitimate. Only the savior Mahdi—in Twelver Shi‘ism, the Twelfth Imam who is considered to be in occultation—upon his return to the material world at the outset of a process that leads to the End of the Time will, with divine blessing, restore justice and equity to earth and establish the utopian society (or dystopian, if we consider its apocalyptic finale) that was lost with the death of the Prophet of Islam.

In Khomeini’s view the secular rulers are unlikely candidates to enforce Islamic law because: If the ruler is not knowledgeable about [Islamic] legal affairs, he is not fit to rule for if he would just follow ([taqlid] a jurist), his authority will be wrecked. And if he doesn’t follow [a jurist], he cannot enforce the Islamic law. It is an obvious fact [therefore] that “the jurists are rulers over the sultans” [al-fuqaha hukkam ala al-salatin]. If the sultans are obedient to Islam, they must abide by the jurists and ask them about laws and injunctions in order to enforce them. In that case the jurists are the true ruler, and therefore authority to rule [hakemiyat] must officially rest with them and not with those who because of their ignorance of the [Islamic] law must abide by the ruling of the jurists.

The men and women who were motivated through mosques and mourning associations were led to believe that Islam, and especially Shi‘i Islam, packaged as an ideological miracle pill for all of Iran’s ills, was not primarily a set of monotheistic beliefs, devotional acts, and moral principles, nor even loyalty to the House of the Prophet and belief in the coming of the Mahdi, but instead a religion of protest and political action against oppression and exploitation, monarchical power, and its global allies. It was among these awakened multitudes that Khomeini shrewdly managed to harness energies for his revolutionary cause. He repeatedly paid homage to what he called “our valiant Islamic nation” and invariably acted on a presumed mandate on behalf of the disinherited to further the “true” (rastin) objectives of his “dear Islam.”

A little over seven months after the founding of the Islamic Republic, Khomeini dismissed Mahdi Bazargan, the prime minister of the provisional government who had facilitated the birth of the new regime. Less than two years later, hard-line supporters of Khomeini not only forced out the relatively moderate first president of the Republic, Abol-Hasan Banisadr, and his allies but also wiped out nearly all the forces of the left. The republic, moreover, banned or marginalized all moderate clerical and secular voices and purged, jailed, or executed real or imagined supporters of the old regime. It forced hundreds of thousands of members of the middle classes into self-imposed exile. Conducting a “cultural revolution” of its own, the regime purged thousands from universities and research institutes and tried to redefine education and cultural discourse on its own terms. By all accounts, this was an impressive performance, irrespective of how oppressive and violent it turned out to be.

The symbiosis of the mullahs and Revolutionary Guards also worked well in the course of the war with Iraq, whereby the latter served as a parallel force to the regular army, however unprofessionally. In return, a vast treasure trove of “nationalized” industries and confiscated land and properties of the Pahlavi state and its elite soon came under the control of the Revolutionary Guards. The conglomerates of agricultural estates and other economic resources kept them content and in comportment with the wishes of the ruling mullahs. Even after the war, the Guards served as the single most effective guarantor of the regime’s survival. Parallel with the Revolutionary Guards and complementary to their mission of combatting so-called antirevolutionary forces, the Islamic Revolutionary Courts (dadgahha-ye enqelab-e Islami) were established immediately after the victory of February 1979. They were presided over by clerical judges appointed in most cases by Khomeini and functioned under the close supervision of his clerical allies. With singular ferocity the revolutionary courts exercised their version of Islamic justice. “God’s vengeance,” by which they often legitimized their verdicts, was clear and simple, irrespective of the complexity of the cases before them or a complete lack of viable evidence. Independent of Bazargan’s provisional government, the mission of the revolutionary courts was to eliminate the “enemy”: to imprison, confiscate, intimidate, and quash the “antirevolution,” which meant any voice or force deemed to be against the regime’s hegemony.

Article 14 made it a duty to display “noble conduct,” equanimity and justice toward all non-Muslims, and respect for “human rights” (hoquq-e ensani). Likewise, pledges for equal rights of all ethnicities, equal protection before the law, and protection of life and property of all citizens against illegal intrusions of all sorts (articles 19, 20, and 22) proved sheer rhetoric when thousands were illegally arrested and imprisoned on flimsy charges and their properties confiscated by order of the revolutionary courts. The ethnic Kurd, Turkmen, and Arab minorities were harassed, and many were persecuted and fell victim to the regime’s denial of their demands. Rights of women, which received some attention throughout the text, revealed familiar features of male superiority, as evident particularly among the clergy. The preamble to the constitution, which devoted a section to women, promised that “because in the idle-worshiping regime women sustained greater oppression, reclaiming their rights deserves a priority.” It is in the framework of the family, it further specifies, “that women will no longer be objects or tools disseminating consumerism and exploitation.” By “rediscovering their critical and precious duty of motherhood, women will be forebears in the active field of life [giving] so as to produce together with their male fellow warriors ideologically committed [maktabi] humans.” Discharging this duty “in Islamic perspective enjoys the highest value and blessing.” The trendy revolutionary language aside, the clerical framers of the constitution here defined women’s “function” as essentially the same as in traditional Shi‘i jurisprudence, where women primarily were recognized as reproductive units. Article 21 furthermore obliged the state to prepare suitable grounds for realizing all aspects of women’s rights “according to Islamic guidelines.” Among these rights, “qualified” women were granted custodianship of their children only when no other “legal guardian” could be appointed, so as to avoid women’s mental agony. In reality, this invariably meant giving priority to the divorced husband or male relatives of the deceased husband.

More detrimental to a manageable pattern of urban growth were the Islamic Republic’s promises to provide free housing for the poor, a remedy to the sprawling shantytowns that had grown around the capital and major provincial centers in the 1970s. Presided over in the early days of the revolution by two fiery mullahs, two self-styled housing organizations laid their hands on a vast number of privately owned houses, apartments, and plots of land in large cities. The seizure had no legal grounds, having occurred even before any ruling by the revolutionary courts. They invited the disinherited to apply for ownership and subsequently settled hundreds of thousands into confiscated properties. The prospect of free housing proved an incentive for the poor and lower-middle classes to migrate to larger cities. Far more than could have been realistically accommodated, there were so many applicants that the free housing scheme turned into a fiasco. Even the Revolutionary Guards were wary of how to maintain order and security. Multitudes of unlucky applicants had to settle for less in the poor neighborhoods that quickly swelled in the capital and provincial centers. In a short span, overenrolled schools, pressure on utilities, congested traffic, and air pollution became a fact of postrevolutionary urban life. Unregulated building permits granted to speculating building contractors aggravated the sprawl.

Beyond holding to the amenities and vital services, the new regime gradually adopted a haphazard privatization practice, whereby it parceled out some of its profitable assets to people with connections in very favorable terms as a reward for their loyalty—individuals and families the regime considered as its own, the insiders (khodi). The most obvious candidates were ayatollahs’ offspring and their cronies. The closer to the center of power, the better their chances were for building new business empires, ranging from manufactured goods, textiles, and food industries to banking, shipping, heavy industry, auto manufacturing, and import-export. Also favored as insiders were former members of the Revolutionary Guards, veterans of the Iraq-Iran War with notable loyalty to the regime, and families of the war martyrs who became clients of the powerful ayatollahs.

The ten-month-long coup de grace of 1981–1982 can thus justifiably be seen as the third stage of the revolution. While February 1979 brought down the Pahlavi ancien régime and the hostage crisis wiped out the “step-by-step” Bazargan model, the fall of Banisadr and the purging of the opposition—coinciding with mass mobilization for the war with Iraq—brought the greatest concentration of power into the hands of the hard-liner Khomeinists.

June 1981, Khomeini had denounced the National Front leadership as “apostates,” primarily for calling a rally to protest the passage by the Majles of the law of Islamic retribution (qesas). The law, which replaced the penal code of the Pahlavi era, instituted such ancient punishments as stoning married women for extramarital affairs, cutting off limbs for theft and other serious offenses, and determining life or death of murderers and other culprits by the mere consent of relatives of the victim, whom the new law defined as “custodians of the [victim’s] blood” (awliya-e damm). On a broader scheme, the National Front was being punished for holding Khomeini accountable for the climate of intimidation and terror. By the summer of 1982, most leaders of the National Front either had fled the country into permanent exile or had ended up in the prisons of the Islamic Republic. Not entirely devoid of potential middle-class support, the National Front nevertheless found itself in no position to withstand Khomeini’s rage or the terror of the club-wielding Hezbollah and their paymaster in the Islamic Republican Party. The Freedom Movement had been saved only barely by renouncing its old comrades in the National Front. This was a humiliating fate for a movement that had stood for national sovereignty and political freedom for three decades. Khomeini and his turbaned clique never really trusted or cared for the tie-wearing, liberal nationalists. Nor did Khomeini ever acknowledge Mosaddeq as a national leader or subscribe to his path. It was largely the misplaced hopes of the liberal nationalists in the early days of the revolution that made them believe Khomeini was their partner in democracy, an error they quickly began to regret. As Karim Sanjabi, the leader of the National Front, once said: “Now it is the mullahs’ slippers that replaced military boots.” Fearing for his life, in July 1981 Sanjabi went into hiding before leaving for Paris and soon after retiring in the United States.

By the end of 1983 an estimated 120,000 Iranians and 60,000 Iraqis had been killed in battle, stunning losses for both countries. This was also reflective of the Iranian resolve to push ahead at almost any cost. Iraq’s huge advantages included billions of dollars of financial support from conservative Arab states wary of the threat of the Islamic Revolution. Saudi Arabia contributed as much as US$30 billion to Saddam’s war chest, while Kuwait and the United Arab Emirates contributed in excess of $8 billion each. The Iraqi army, moreover, received massive military hardware from the United States, France, Britain, and West Germany. The Ba‘athist regime enjoyed the general blessing of countries of the Western Bloc throughout the war and in contrast to a spirit of belligerence aimed at Iran. A surfeit of financial and military and moral support nevertheless kept the Iraqi positions only barely defensible. By early 1984 Iran had managed to gain the upper hand not merely by fielding greater numbers of troops or superior strategy but also by high morale and sheer sacrifice. Deceived by its momentary successes, however, soon the Iranian leadership, and above all Khomeini, had to face the harsh reality as the Iraqis’ revived spirit of resistance countered Iran’s repeated offensives inside Iraq. Military and civilian casualties, too, were quickly rising. As Iran shifted from defense to the offensive, the war had turned bloodier and the carnage heavier. Early in 1984, for the first time Iraqis began deploying chemical weapons against Iranian troops and later against Kurdish Iraqi civilians in the north. The use of mustard gas and nerve gas were flagrant violations of the 1925 Geneva Protocol that prohibited the deployment of chemical and biological weapons. Yet the countries of the Western world did not condemn Saddam’s criminal act outright. In a ludicrous charade, the US administration and its European allies instead pointed their finger of blame toward Iran, if not as a chief culprit, at least as a co-offender of the chemical ban. Both the Reagan administration and Margaret Thatcher’s Conservative government surreptitiously facilitated, directly or through a third party, the sale to Iraq of material for production of chemical weapons, including a factory for manufacturing chlorine, the chief ingredient in producing chemical weapons. Thousands of Iranian soldiers died a painful death or were permanently injured after exposure to poisonous fumes. Though chemical weapons had limited logistical use, their effect on Iranian morale was lasting and helped slow down troop maneuvers. Gruesome scenes of victims of gas attacks with advanced skin burns, fatal respiratory problems, or total or partial blindness were eerily reminiscent of World War I chemical warfare. Use of deadly gases, however, did not substantially change the Iranians’ resolve to continue their offensive.

The downing of an Iran Air passenger Airbus on July 3, 1988, by the USS Vincennes, a guided missile cruiser, resulting in the loss of 290 civilian lives, was an ominous sign. The incident presumably was caused by the US cruiser mistaking the passenger airliner as an approaching Iranian fighter jet, a questionable judgment, perhaps, given Iran’s poor air force capabilities at the time and the USS Vincennes’s advanced radar and intelligence equipment. The incident, Iran’s first and only direct military engagement with the United States, reflected the growing tension that had built up between the two countries ever since the hostage crisis. The United States barely expressed regret for the incident, blaming it on the roguery of the Iran Air pilot. Eight years later, when the United States agreed to pay only minimal reparations to the victims’ relatives, this was interpreted as a further mark of the United States trying to humiliate Iran.

The humiliating end to the war, moreover, did not bring down the Iranian regime or even sap the revolutionary zeal of its leadership. In part, this can be explained by an effective purge of Iran’s political dissent throughout the war and after. Though never reaching the scale and ferocity of the police state in Saddam’s Iraq, silencing domestic opposition in Iran under the pretext of security and war priorities secured the regime enough synergy to last even after the demeaning final settlement. War, in effect, vastly helped the Islamic Republic consolidate its military, propaganda, and policing apparatuses; close constitutional loopholes; and increase ideological and economic control over society. In this respect, although the war was a net defeat with huge casualties, material ruination, and temporary territorial loss, it was a “blessing” in disguise, as was repeatedly acknowledged by the regime’s clerical leadership. Irrespective of what the regime claimed as its popular mandate, the experience of the war and memories of sacrifice, life in the trenches, bombing of the cities, rationing, and economic hardship were all ingredients for a trial by fire that contributed to shaping postrevolutionary Iran.

Revelations in November 1986 concerning an Iranian arms deal with the United States, using Israel as an intermediary, triggered a full-scale political scandal between August 1985 and March 1987 in Washington, known as the Iran-Contra Affair, with serious repercussions for the Reagan administration. The course of events that shaped the affair exhibited how the United States, despite a history of rancorous relations with Iran, was prepared to engage Iran by supplying it with arms and spare parts, albeit for its own covert operation. Even more troubling was the fact that despite the Islamic Republic’s public denouncement of Israel, it had no compunction in using Israel as an intermediary in the arms deal, all the while persecuting Baha’is in towns and villages of Iran on charges of espionage for the Great Satan and the Zionist entity. In the years leading to Iran-Contra, Iran was listed by the United States among the “rogue” states sponsoring terrorism and subject to an arms embargo and other sanctions. The secret arms deal thus promised to provide Iran with much-needed material in the war with the minor Satan, as Saddam ranked in the demonology of the Islamic Republic. Whatever the Reagan administration’s justifications for the arms deal with Iran, including raising funds needed for a covert operation against Nicaragua, facilitating the release of American hostages who were in the custody of the Hezbollah of Lebanon, and a goodwill gesture with the remote hope of rekindling relations with revolutionary Iran, the initiative eventually backfired. It blew up into a major embarrassment on several counts and received enormous publicity worldwide. In addition to breaching the arms sanctions against Iran, the White House security adviser stood accused of breaking a congressional ban on assistance to Contra forces fighting the Nicaraguan revolutionary regime.

At least three characteristics qualify the Islamic Revolution as a major revolutionary movement in modern times. First, it was based on mass mobilization and large-scale popular participation. It was unprecedented not only in Middle Eastern history but also in the sheer number of participants—perhaps one of the largest in modern history. The revolutionary movement was comprehensive and decisive in ousting the old political order and dismantling its associated political and economic elites. Second, in a remarkably short time, the Islamic Revolution managed to establish a new political order, nurture a new sociopolitical elite, and institutionalize its hierocracy despite serious domestic and external challenges. The incipient Islamic Republic violently surpassed all other real or potential contenders. In this respect it demonstrated a consistent drive toward greater monopoly of power. This was in common with most totalitarian regimes intolerant of dissent even within their own ranks. War in particular greatly contributed to the Islamic Republic’s grassroots support as much as to its ability to crush its opposition. Third, the Islamic Revolution offered a cultural program that included a curious mix of hard-line conservatism, anti-imperialist rhetoric, selective modernity, and conscious antisecularism. In practice, it showed no hesitation in employing modern means of repression, control, and propaganda. Nor did it show hesitation to adopt modern programs of economic development and social welfare, as long as they could be safely Islamicized. In this respect, too, despite many signs of anachronism, the Islamic Republic put into practice a program of social engineering with enduring results.

The steady growth of the Revolutionary Guard Corps in areas of defense, security, and economic activities exemplifies Khamenei’s purposeful patronage. In 1989, in the postwar construction era, a new economic arm of the Revolutionary Guard, known as Qarargah-e Sazandegi-e Khatam al-Anbiya (the Khatam al-Anbiya construction military base), gradually took over the most lucrative state development projects. In the following decades Qarargah, an expanding economic conglomerate with numerous subsidiaries, acquired a near monopoly over major engineering, energy transmission, oil and gas, hydrological, and telecommunications projects. Being an integral part of the Revolutionary Guards’ command structure and operating on a military model, the Qarargah may be compared to similar military-economic conglomerates elsewhere in Egypt, Thailand, and Myanmar. In the Islamic Republic the reciprocal arrangement between the clerical wing of the leadership, headed by the Supreme Leader, and the Revolutionary Guards, as the military guarantor of the regime, cannot be missed. In exchange for noninterference in the political sphere, the Revolutionary Guard is granted extensive economic monopolies to assure its institutional well-being and welfare of its personnel.

Drug addiction, in particular, became more widespread among the urban middle classes. While smoking opium was a declining recreational habit during the Pahlavi era, it gained a new lease on life under the Islamic Republic. More worrying, heroin addiction became dangerously rampant among youth. A ban on the cultivation of opium and the anti-addiction campaigns of the 1950s, one of the success stories of the Pahlavi era, had helped control opium addiction and drug abuse. With the rise of the Islamic Republic, however, it was as though the social stigma had been lifted and all moral barriers had crumbled. Even though the government of the Islamic Republic continued to enforce the ban on drugs and built up a substantial force to fight drug trafficking on its southeastern borders with Afghanistan and Pakistan, opium and purified heroin continued to be smuggled across the Baluchistan border in large quantities, despite the Revolutionary Guards’ routine clashes with armed drug traffickers. By the 1990s heroin, as a cheap and accessible drug, was available not only on the street but also in high schools and at universities. Young victims from both sexes and every social class multiplied in large numbers, turning addiction into a major cause for the growth of underaged prostitution, both male and female, juvenile delinquency, and petty and organized crime. Addiction in Iran had deep historical roots, though perhaps not any more prevalent than in other societies exposed to rapid urban change.

An even more pronounced feature of the silent rejection of the Islamic Republic’s dystopia was a contagious urge among many, and especially among the educated classes, to leave Iran and settle elsewhere. A sense of entrapment in their own country, coupled with an unrealistic, almost philistine, perception of the world beyond, was responsible for the departure from Iran of hundreds of thousands to uncertain futures. Iranian émigrés in increasing numbers were to be found wandering in low-income neighborhoods in Istanbul and Izmir awaiting entry visas to the United States and European countries; in the shopping malls in Dubai and other UAE countries; in Greek port cities near the harbor preparing for crossing to other European destinations; in detention centers as far east as in Malaysia, Indonesia, Australia, and New Guinea; and as undocumented émigrés everywhere and many in detention centers and refugee camps. At no time in Iran’s recent history has there been such a desperate movement of the population. The closest, the immigrant workers to the Baku oil fields in the early decades of the twentieth century or to Kuwait in the 1960s, were temporary guest workers in much smaller numbers and invariably limited to unskilled workers from the Iranian countryside. The Islamic Republic remained altogether indifferent to this massive brain drain. Propelled by the growth in the numbers of university graduates and professional classes who were unable to find gainful employment at home or unwilling to bow to unwelcome social pressures, the by-products of Iran’s demographic revolution were to the regime more of a potential liability than a precious workforce necessary to build Iran’s future. It was as if the boundary lines between the self and the other in the Islamic Republic were drawn in such a fashion as to protect an elite minority, loyal to the regime but inferior in education and skills, at the expense of repelling a far larger segment of the population who were educated and skilled but ideologically uncommitted to the emerging Islamic order. “Commitment [ta’ahhod] over expertise [takhassos]” was a favorite slogan that cost the Iranian economy dearly.

Obsession with the human body, especially the female body, had a deep history in the Shi‘i jurisprudence, for it served as the regulatory principle for enforcing hijab, gender segregation, and other controlling practices in the Islamic Republic and in its courts, schools, offices, and prisons. Shi‘i jurisprudence viewed the vagina (rahem) as the primal unit for kinship and family loyalties and legal rights, and henceforth demanded from the male members of the family and clan that they safeguard it. The ayatollahs’ detailed descriptions in their books of “explication of problems” (tawdih al-masa’il), a dissertation-like requirement for acquiring marja‘iyat in the twentieth century, in part spelled out intricate rules conducive to such a defense.

Beyond enforcing a shari‘a-prescribed bodily code, the essentially misogynistic clerical culture of Qom embarked on a systematic rewriting of women’s civil and legal rights in the Islamic Republic. It reversed many of the achievements of the late Pahlavi era. Marriage and family laws were drastically rewritten along old patriarchal lines. Uninhibited polygamy was reintroduced, the age of marriage for females was lowered according to the dictates of the shari‘a, under most circumstances divorce was redefined as the sole prerogative of the husband, and children’s custodianship was primarily granted to the husband and paternal relatives. Compliance (tamkin) with the husband’s sexual desires and abiding by his patriarchal superiority, rules that were endorsed by legislation and backed by the shari‘a, turned women, at least on the surface, into objects of control and instruments of pleasure.

In June 2009 the Green Movement (jonbesh-e sabz) brought to the surface among the urban middle classes these undercurrents of discontent with the Islamic Republic and its devious ways. Triggered by the presidential election campaigns of two opposition candidates, Mir Hosein Musavi (b. 1942) and Mahdi Karrubi (b. 1937), who were running against the incumbent President Ahmadinejad, the Green Movement brought millions to the streets of the capital and provincial centers. They were the largest demonstrations that Iran has seen since the early days of the revolution three decades earlier. Both challenging candidates were among the regime’s insiders—Musavi being the former prime minister between 1981 and 1989, and Karrubi a ranking cleric who served a number of times as speaker of the Majles—they were hailed by the public and welcomed as realistic alternatives to Ahmadinejad’s presidency. What motivated the campaign rallies to transform into a mass protest movement, more than the relative credibility of the opposition candidates, was Ahmadinejad’s disastrous presidency, Khamenei’s flawed judgment, and the Islamic Republic’s fearful elite. The vote rigging in favor of Ahmadinejad that reinstated him in office was followed in succeeding days by the Supreme Leader’s endorsement of the rigged election. His approval, coming after an equally flawed inquiry by the Guardian Council, confirmed the regime’s audacity to enforce a lie. The subsequent clampdown on the rallies, mass arrests of protesters, barbaric torture in detention centers, and secret murders of detainees further displayed a willingness to use whatever means were at the regime’s disposal to crush any voice of opposition. The mass trials in front of television cameras, when large numbers of “leaders of sedition” (saran-e fetneh) were tried and given heavy sentences, were reminiscent of the Soviet-style trials of the Stalin era. The Green Movement, named after the green color adopted by the protesters, above all demonstrated popular demand for liberalization, democracy, and accountability. It revealed to the Islamic regime, to the international community, and to the hundreds of thousands who gathered in Maydan Azadi in Tehran, in Maydan Naqsh-e Jahan in Isfahan, and elsewhere in Iran the existence of popular dissent among the predominantly young middle classes (pl. 17.2). After thirty years of the regime’s Islamification, failed economic policies, international isolation, and ethnic, religious, and cultural repression, people had not sunk into submission. Although the Green Movement was crushed, the hope for change is unabated: there is hope for a more open and more tolerant state that allows for its citizens to flourish, to emerge from deacades of isolation, and for the revolution to bear unspoiled fruits.

The Pahlavi ideology was also facilitated via the discovery of a new source of legitimacy that relied on Iran’s ancient past. Though Iran’s national awareness and its sense of mytho-historical continuity had never faded, the new nationalist narrative of the Pahlavi era was keen to contrast the glories of distant past with the perceived decadence of the Qajar era. These notions of glory and decadence laid the foundation for a national memory that has lasted up to the present. Reza Shah’s resolute personality also contributed to transforming Iran beyond anything it has experienced at least since the rise of the Qajars. The material success of Pahlavi modernity demonstrated the importance of oil revenue as a transformative commodity. But unlike coal in nineteenth-century European industrialization, oil revenue proved a blessing toward the creation of a stronger state with an extracting economy rather than a resource for growth of the national bourgeoisie. Since 1953, oil revenue, irrespective of Iran’s share of the proceeds and its legitimate claims for control of its natural resources, further strengthened the state at the expense of its citizens’ political and civil rights. Undermining old political checks and balances, the monopoly of the oil income, which had sharply increased over decades, gave the Iranian state a unique opportunity to implement top-down modernization projects. It also provided the state with more tools of repression and control.

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Key Points: Has China Won? The Chinese Challenge To American Primacy

The intensifying rivalry between U.S. and China since Donald Trump presidency has brought into the headline many ideological conflicts between Western and Chinese version of capitalism and ideal society. In this book, Kishore Mahbubani laid out thinking process of leaders in the West and in China, each justifying their past actions and future plan, which is useful for investors in thinking the most likely economic and political development of both society.

The big lesson I learned from Singapore’s three exceptional geopolitical masters (Lee Kuan Yew, Goh Keng Swee, and S. Rajaratnam) was that the first step to formulate any long-term strategy is to frame the right questions. If one gets the questions wrong, the answers will be wrong. Most importantly, as Rajaratnam taught me, in formulating such questions, one must always “think the unthinkable.”

Professor Wang Gungwu has observed that while the world has had many ancient civilizations, the only ancient civilization to fall down four times and rise again is China. As a civilization, China is remarkably resilient. The Chinese people are also remarkably talented. As the Chinese look back over two thousand years, they are acutely aware that the past thirty years under CCP rule have been the best thirty years that Chinese civilization has experienced since China was united by Qin Shi Huang in 221 BCE. For most of the past two thousand years, the large pool of brainpower available in the Chinese population was not developed under the imperial Chinese system. During the past thirty years, for the first time in Chinese history, it has been tapped on a massive scale. Cultural confidence, which the Chinese have had for centuries, combined with what China has learned from the West have given Chinese civilization a special vigor today.

Chinese culture values social harmony over individual empowerment. American culture is the opposite. This sense of individual empowerment has enabled American society to produce some of the most powerful individuals on planet earth. In many societies, the tall nail that stands out is hammered down. A Chinese saying is: “A tall tree catches the wind” (shù dà zhāo fēng, )—a person in a high position is liable to be attacked. In America, the tall tree is worshipped. Hence, the most admired and respected Americans are successful individuals like Bill Gates of Microsoft, Steve Jobs of Apple, Jeff Bezos of Amazon. Even Mark Zuckerberg and Elon Musk remain admired figures, even though their companies, Facebook and Tesla, are facing a lot of criticism. No society has as powerful an ecosystem as America for producing strong individuals. Our society cannot replicate this great strength of America. China stood up again after a hundred years because of a towering figure like Mao Zedong. American society produces many Mao Zedongs.

Throughout the long history of humanity, the most successful societies have always been those that fostered diverse schools of thought. In China’s most creative period, many schools of thought emerged simultaneously: Confucian, Taoist, Legalist. Today, America leads the world in fostering diverse views. The American universities have created the most powerful intellectual ecosystems in the world. This culture of challenging and criticizing conventional wisdom in turn generates creativity and innovation. Hence, in field after field, America produces more Nobel Prize winners than any other country.

One big mistake that the central party leadership made in the 2000s was to not check carefully how the provinces and cities were treating foreign investors. Yet, even if Beijing wished to do so, there are limits to how much day-to-day control the center can impose. A well-known Chinese saying is: “The mountains are high, and the emperor is far away” (shān gāo, huáng di yuǎn, ). For millennia, the provinces of China, even under strong emperors, have always had strong local autonomy. Often, even when a problem encountered at the provincial level was raised in Beijing, little could be done.

many Chinese officials are familiar with Marxist literature and its derivatives. Such literature contains many derisive views of businessmen. For example, Lenin once famously remarked that businessmen would happily sell for a profit the rope that would later be used to hang them. As an aside, let me mention that I have actually seen this happen in real life. When I served in Phnom Penh in 1973 to 1974, the government in charge was a pro-American government supported by the American military. The American military would, at great expense, fly in artillery shells to defend the capital city, Phnom Penh. The corrupt generals in the pro-American government would then immediately sell these artillery shells to middlemen who would then sell them to the Khmer Rouge, even though these artillery shells would then be fired into the city and endanger the lives of the families of these pro-American generals. In short, it is true that many businessmen can be opportunistic and corrupt.* Yet, if the Chinese government had held such a one-dimensional Leninist view of business communities, it would have been a major mistake. Businessmen and businesswomen, if they are made to sign agreements under duress, even agreements that are profitable to them, will carry in their hearts deep resentment toward Chinese officials who make them sign such agreements. This may well be true even if all the procedures are perfectly legal. Yukon Huang, a former World Bank economist who served in China for many years, has pointed out that under WTO rules, it is perfectly legitimate for a developing country like China to ask for technology transfer as a condition for investing in China.

Why did the Chinese economy, which was on par with the rest of the world from the year 1 to 1820, fall so far behind? Why couldn’t the brilliant minds in the Chinese emperor’s court discern that the world had changed dramatically? The common cause of the massive blindness of the Chinese officials in the nineteenth century was a huge Chinese philosophical assumption that China was a great self-sufficient Middle Kingdom that did not need to engage the world. As the Chinese emperor Qianlong famously told Lord Macartney, China had everything it needed. It didn’t need the rest of the world.

America would present a formidable challenge to China if it were a united, strong, and self-confident country. Kennan emphasized this dimension in his Mr. X essay, when he argued that American power depended on its ability to “create among the peoples of the world generally the impression of a country which knows what it wants, which is coping successfully with the problems of its internal life and with the responsibilities of a world power, and what has a spiritual vitality capable of holding its own among the major ideological currents of the time.”

In recent decades, this trust has begun to erode because America has occasionally used the privilege of having the global reserve currency as a weapon against other countries. Here are two examples of how the US dollar has been weaponized; both involve American efforts to isolate Iran. In 2012, a British bank, Standard Chartered, was fined $340 million because it had used the US dollar to finance a trade transaction with Iran. This fine clearly represented an extraterritorial application of American domestic laws. As a British bank, Standard Chartered had broken no British laws. Neither had it violated any sanctions imposed by the UN Security Council. Yet, the dominance of the US dollar in international financial transactions enabled America to punish a British firm for breaking American laws—a clear weaponization of the US dollar.*

The US dollar could continue to reign supreme over the coming decades. However, it doesn’t take a strategic genius to figure out that it is not in America’s long-term interest to jeopardize one of its largest global strategic assets (the US dollar) by using it to extract small gains from one relatively small country, Iran. The strategic competition with China is going to be a long-term game, not a short-term one. By creating a dent in global trust in the US dollar, America is putting a pebble in its own running shoe, just as the race with China is about to become more competitive. This is what happens when America fails to develop a comprehensive global strategy to deal with the return of China. As Fareed Zakaria observes, “INSTEX is a warning sign, the canary in the coal mine. The United States’ closest allies are working hard to chip away at a crucial underpinning of U.S. global power.”

Americans fundamentally believe that they should stand for universal values and sincerely believe that the world would be a better place if the rest of humanity absorbed and implemented American values. Hillary Clinton said in a 2016 speech: When we say America is exceptional, it […] means that we recognize America’s unique and unparalleled ability to be a force for peace and progress, a champion for freedom and opportunity. Our power comes with a responsibility to lead, humbly, thoughtfully, and with a fierce commitment to our values. Because, when America fails to lead, we leave a vacuum that either causes chaos or other countries or networks rush in to fill the void.* The Chinese believe the opposite. They believe that only Chinese can be Chinese in culture, values, and aesthetics. I have long lived in a Chinese-majority society of Singapore. None of my Chinese friends would have expected me to become like them, even if I were fluent in the language and adopted Chinese customs habitually.

The Chinese are even more puzzled that America has allowed its involvement in unnecessary Middle East conflicts to undermine its more fundamental national interests. Such involvements have drained resources and taken away the possibility of using the same resources to improve the lives of relatively poor Americans instead. The Chinese are privately delighted because each unnecessary involvement in a Middle Eastern conflict reduces American ability to deploy resources against China. Having seen the folly of wasteful American military involvements, the Chinese have learned one wise lesson: refrain from getting involved in unnecessary fights. It is not an accident that China has not fought a major war in forty years and has not fired a bullet across its borders in thirty years. This lack of military action reflects both a powerful civilizational impulse and a deeply pragmatic view of power.

Having been burnt in Iraq and Afghanistan, the logical response of America, if it were supple, flexible, and rational, would be to walk away from getting involved in unnecessary conflicts in the Islamic world. The inability to make this U-turn demonstrates that, like the old Soviet Union, America has become rigid, inflexible, and doctrinaire. Quite amazingly, the major strategic minds inside the administration and outside continue to support American military intervention in various Islamic countries, including Libya, Syria, Yemen, Somalia, and so on.

One scholar who has tried to provide some intellectual justification for America’s involvement in military conflicts is Robert Kagan. He argues that the world would descend into chaos if America withdrew. His book title, The Jungle Grows Back, says it all. If America withdraws from the world, the world can only regress back toward becoming a jungle, dominated by primitive savagery and chaos. This is what Kagan says: What we liberals call progress has been made possible by the protection afforded liberalism within the geographical and geopolitical space created by American power. […] The question is not what will bring down the liberal order but what can possibly hold it up? If the liberal order is like a garden, artificial and forever threatened by the forces of nature, preserving it requires a persistent, unending struggle against the vines and weeds that are constantly working to undermine it from within and overwhelm it from without.

In Chinese political culture, the biggest fear is of chaos. The Chinese have a word for it: luàn (). Given these many long periods of suffering from chaos—including one as recent as the century of humiliation from the Opium War of 1842 to the creation of the People’s Republic of China in 1949—when the Chinese people are given a choice between strong central control and the chaos of political competition, they have a reflexive tendency to choose strong central control. This long history and political culture may well explain Xi Jinping’s decision to remove term limits. The conventional Western view is that he did so to reap personal rewards by becoming dictator for life. Yet, his decision may have been motivated by the view that China faced a real danger of slipping back into chaos. Two major challenges emerged that could have undermined the strong central control of the CCP. The first was the emergence of factions in the CCP led by Bo Xilai and Zhou Yongkang, two powerful members of the CCP. The second was the explosion of corruption.

It can be argued that strong central control of China by the Chinese Communist Party under Xi Jinping is producing at least three “global public goods” that the world is indeed benefiting from. And if Max Weber were alive today, he would be astonished to see the absence of strong Western voices observing and documenting how the West (and the rest of the world) is benefiting from the stable and rational rule of China by the CCP. The first global public good that the CCP is delivering is to rein in a strong nationalist dragon that is clearly alive and well within the Chinese body politic. There are many reasons for nationalism in China. Most Chinese are aware that China was badly trampled upon and humiliated during the century of humiliation after the Opium War. China’s recovery today has buoyed their national pride. Many in the West were shocked when in 2001 the Taliban destroyed the precious antique Buddhist statues in Bamiyan, which had survived fourteen centuries. Yet, those shocked Westerners, outraged by the Taliban’s behavior in 2001, failed to remember or mention that barely a hundred and fifty years earlier British and French troops had behaved just like the Taliban in Beijing in 1860.

Since the Chinese Communist Party is constantly vilified in the Western media, very few people in the West are aware that the members of this Communist Party have delivered the best governance China has ever enjoyed in its entire history.

There is political oppression in China. Any government that is based on an authoritarian model has no choice but to suppress political dissent. Chinese emperors had to do so for millennia. Yet, if repression were the sole goal and instrument of Chinese government rule, it would not and could not last. A wise Chinese government in the twenty-first century knows that it has to balance three partially contradictory goals to ensure a healthy Chinese society. The three goals are growth, stability, and personal freedom.

Western political theory teaches us that the development of a large middle class leads to demands for greater political participation. If a government ignores their demands, there could be a revolution on the streets, and the government would be overthrown. So now that China has the world’s largest middle class, why has it not revolted against the authoritarian nondemocratic rule of the CCP? The conventional Western answer is that repression has prevented this from happening. Certainly, repression is a factor. Many revolts are nipped in the bud. Yet, every Chinese government has known for millennia that if the vast majority of the Chinese people choose to revolt, no amount of repression can hold them down. This is why in traditional Chinese political theory, when a broad-based revolt breaks out, the Chinese emperor is deemed to have lost “the mandate of heaven.”

So repression is not the sole reason why the Chinese middle classes are basically calm. Most of them accept an implicit social contract between the Chinese people and the Chinese government. As long as the Chinese government continues to deliver economic growth (with improvements in living conditions, including better environmental living conditions) and social and political stability, the Chinese people will accept the rule of the CCP.

John Rawls, the political philosopher, wrote in A Theory of Justice that the most just society is one that one would choose to be born into if one didn’t know whether one would be born among the most or least advantaged in society. A rational choice would be to pick the society where the least advantaged are better off.

The relative comfort of the 1.4 billion people of China with a social and political order that is vastly different from the Western order ought to encourage the West to undertake a deep process of introspection. Is it wise to believe that there is only one road for all societies to travel on if they want to grow and progress? Are we now turning a new corner of human history where alternative models of social and economic development are emerging? It was an Indian political scientist, Pratap Bhanu Mehta, who alerted me to a significant difference between the democratic Indian society and communist Chinese society. He shrewdly observed that India was an open society with a closed mind, whereas China was a closed society with an open mind. The same observation may well apply to American society.

At the same time, in contrast to the bureaucracy of the former Soviet Union, which was rigid and inflexible, the Chinese bureaucracy has become responsive and accountable. This is how Yuen Yuen Ang, a political science professor at the University of Michigan, Ann Arbor, describes the reforms that China has undertaken: Since opening its markets in 1978, China has in fact pursued significant political reforms—just not in the manner that Western observers expected. Instead of instituting multiparty elections, establishing formal protections for individual rights, or allowing free expression, the CCP has made changes below the surface, reforming its vast bureaucracy to realize many of the benefits of democratization—in particular, accountability, competition, and partial limits on power—without giving up single-party control. Although these changes may appear dry and apolitical, in fact, they have created a unique hybrid: autocracy with democratic characteristics. In practice, tweaks to rules and incentives within China’s public administration have quietly transformed an ossified communist bureaucracy into a highly adaptive capitalist machine.

Bert Hofman, the former World Bank Country Director for China, was also quoted as saying: “China has made rapid progress in improving its business climate for domestic small and medium enterprises in the past year. This progress, which now puts China among the top 50 economies in the world, signals the value the government places on nurturing entrepreneurship and private enterprise.”* The World Bank report also observed that “since last year, three procedures were removed and consequently it now takes 9 days to start a business, on par with most OECD high income countries. In addition, Beijing is now one of only two cities in the world where the process of starting a business is completely free.”* An obvious point needs to be emphasized here. No entrepreneurship can happen unless people feel that they have the freedom to take risks and make individual decisions.

So why does America promote the idea of democracy in China? Americans believe that democracies are essentially better than autocracies because they provide freedom to individuals. This freedom in turn enables individuals to thrive and flourish, using all their natural talents to do the fullest. This will result in a society becoming more prosperous and stronger. There is a lot of merit to this belief. Hence, if China does the same, the theory goes that China would emerge as a much more productive society, and its economy would grow even faster. Indeed, if this political experiment works and the average Chinese citizen becomes half as productive as the average American citizen, China would then have an economy that will be twice as large as America’s economy and the potential to become four times as large. But does it really serve US national interests to have a Chinese economy that is twice or four times as large as its own? One key goal of the current American security establishment is to maintain American primacy for as long as possible. So it would then clearly be against America’s national interests to promote democracy in China if democracy was such a growth engine. Since America’s security establishment is full of thoughtful and intelligent people, they might argue that the country should immediately stop exporting democracy to China for fear that it would create an even bigger rival. Yet, the American security establishment continues to promote the export of democracy to China. Why? Because in practice, democracy promotion can have the opposite effect of what the theory suggests. It can destabilize and weaken societies, instead of strengthening them.

Every two to four years Americans go to the polls to elect their congressmen, senators, governors, and state legislative assembly representatives. And yet, under the surface guise of a functioning democracy, with all the rituals of voting, America has become a society run by a moneyed aristocracy that uses its money to make major political and social decisions. As a result, this class has been able to enact the greatest transfer of wealth that has ever taken place in American society.

In the past, the broad middle classes of America had a strong say in determining the fundamental direction of American society. Today, they no longer do. The decisions of the US Congress are not determined by the voters; they are determined by the funders. As a result, America is becoming functionally less and less of a democracy, where all citizens have an equal voice. Instead, it looks more and more like a plutocracy, where a few rich people are disproportionately powerful.

It is a huge irony that Congress passed the Foreign Corrupt Practices Act in 1977, which specifically prohibits the “authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.”* Effectively, this means that if an American corporation uses money to influence an Egyptian or Indonesian legislator, he will be punished under American law. However, if the same American corporation uses money (through campaign and super PAC contributions) to influence American legislators, it is part of the democratic process.

The fact is that the American social contract has come to rest on one ideological pillar, freedom, instead of the traditional two pillars of democracies, freedom and equality. In functional terms, the American political system is moving from being a democracy to becoming a plutocracy, betraying the ideals of its Founding Fathers.

Rawls goes on to emphasize the following point: “All social values—liberty and opportunity, income and wealth, and the social bases of self-respect—are to be distributed equally unless an unequal distribution of any, or all, of these values is to everyone’s advantage.”

The reverse of meritocracy is aristocracy. In a meritocracy, if you are given a decent start in life, your destiny is determined by your performance in life; in an aristocracy, your destiny is determined at birth. Even though the American system has effectively created a new moneyed aristocracy, many Americans cannot see it. Attackers of this system are often labeled “socialists”—implying that they don’t subscribe to the ideals of America’s Founding Fathers, when in fact it is the system itself that has failed those ideals.

cultural affinity cannot overcome geopolitical realities. Many American thinkers don’t understand the importance of geographic realities because America has been blessed with the best geography in the world. Americans are blessed with a large and productive continent, separated from the populous masses in Eurasia and Africa by two vast oceans, and they have only had to worry about the military threats posed by Canada and Mexico. Given such an environment, Americans don’t understand the real meaning of the word geopolitics, a combination of geography and politics, of which geography may be the more important. Europe is cursed with an unlucky geography. In the twenty-first century, Europe will not be threatened by Russian tanks and missiles. The prospect of a direct war with Russia is practically zero, although proxy wars may take place in territories like the former Yugoslavia and Ukraine. However, the prospect of Europe being overwhelmed by millions of migrants coming in from Africa in little boats is very real. There is one demographic statistic that spells out clearly the number one geopolitical threat the European Union will face. In 1950, the EU’s combined population (379 million)* was nearly double that of Africa’s (229 million). Today, Africa’s population (1.2 billion in 2015)* is double that of the EU countries (513 million in 2018).* By 2100, Africa’s population is projected to be almost ten times larger, 4.5 billion* versus 493 million.*

If Europe wants to preserve its own long-term interests, it should make the development of Africa, in partnership with China, an immediate priority. The country that attracts the largest number of African leaders to summit meetings is China. The most sensible thing for European leaders to do is to join, en masse, the next high-level meeting of Chinese and African leaders in Beijing. A massive turnout of European leaders at such a summit would send a powerful market signal. It could catalyze a powerful wave of new investment in Africa. Over time, with a strong African economy, there will be less incentive for widespread African migration to Europe.

Fortunately, it is currently in China’s national interest to see Japan remain an American ally. If America walks away now from its commitment to defend Japan under the Treaty of Mutual Cooperation and Security of 1951 (revised in 1960), which clearly states in Article V that “each Party recognizes that an armed attack against either Party in the territories under the administration of Japan would be dangerous to its own peace and safety and declares that it would act to meet the common danger in accordance with its constitutional provisions and processes,”* Japan would have no choice but to strengthen its capability to defend itself. Japan could be forced to acquire nuclear weapons.

It is almost certain, even as China opens up and integrates itself with the rest of the world, that it will not become a political or social replica of a Western liberal-democratic society. The cultural gap between China and the West is too great for the Chinese to feel comfortable in replicating Western social and political forms. However, the cultural gap between China and Japan is not as wide.

But despite China’s greater sensitivity concerning Taiwan, it could allow pragmatism to trump principles. When China established diplomatic relations with America in January 1979, America dropped its diplomatic recognition of the government in Taipei and switched it to Beijing. Since Jimmy Carter was perceived to have dropped a long-standing ally in Taiwan, the US Congress reacted by passing the Taiwan Relations Act with the intention of defending the government in Taiwan, which China regarded as renegade. Since this was a violation of the spirit, if not of the letter, of the diplomatic agreement signed between America and China, China could have, as a matter of principle, suspended all its economic dealings with America. Instead, China did some careful long-term pragmatic calculations. Having come to realize how backward the Chinese economy had become, the Chinese leaders led by Deng Xiaoping decided to “swallow the bitter pill of humiliation” (a well-known Chinese phrase) and use the massive American economy to boost its own economic growth. Forty years later, we know how wise and shrewd this pragmatic Chinese decision was. The Taiwan Relations Act was passed in 1979. In that year, in PPP terms, the Chinese economy was only about 10 percent that of America’s. By 2014, China’s economy had become larger. This shows the value of being pragmatic over being principled in international relations.

One key message of this book is that while Chinese leaders want to rejuvenate Chinese civilization, they have no missionary impulse to take over the world and make everyone Chinese. China’s role and influence in the world will certainly grow along with the size of its economy. Yet, it will not use its influence to change the ideologies or political practices of other societies. One great paradox about our world today is that even though China has traditionally been a closed society, while America purports to be an open society, the Chinese leaders find it easier than American leaders to deal with a diverse world, as they have no expectation that other societies should become like them. They, unlike Americans, understand that other societies think and behave differently.

Emotions play as important a role as reason in international relations. It would have been easier for America to accept the rise of another power if China had been a fellow Western democratic power, especially a fellow Anglo-Saxon power. This explains why the power transition from the United Kingdom to the United States went relatively smoothly: one Anglo-Saxon power was giving way to another. No dark emotional overtones accompanied this transition. By contrast, China is a very different culture and has always been perceived to be different in the Western imagination. Between America and China, there is a natural and legitimate concern: Will they understand us, our interests and values? Will we understand them? To make matters worse, there has been buried deep in the unconscious of the Western psyche an inchoate but real fear of the “yellow peril.” Since it is buried deep in the unconscious, it seldom surfaces. When senior American policymakers make their decisions on China, they can say with all sincerity that they are driven by rational, not emotional, considerations. Yet, to an external observer, it is manifestly clear that America’s reactions to China’s rise are influenced by deep emotional reactions, too. Just as individual human beings have difficulty unearthing the unconscious motives that drive our behavior, countries and civilizations also have difficulty unearthing their unconscious impulses. It is a fact that the yellow peril has lain buried in Western civilization for centuries. Napoleon famously alluded to it when he said, “Let China sleep; when she awakes she will shake the world.” Why did Napoleon refer to China and not to India, an equally large and populous civilization? Because no hordes of Indians had threatened or ravaged European capitals. By contrast, hordes of Mongols, a “yellow race,” had appeared at Europe’s doorstep in the thirteenth century. As Noreen Giffney recounts: “in 1235, Mongol armies invaded Eastern Europe and the Rus’ principalities between 1236 and 1242. […] The Mongol onslaught was followed by a swift and mysterious withdrawal to the surprise and relief of Westerners.”

the one area where there appears to be a fundamental contradiction between America and China would be in the area of values, especially political values. Americans hold sacrosanct the ideals of freedom of speech, press, assembly, and religion and also believe that every human being is entitled to the same fundamental human rights. The Chinese believe that social needs and social harmony are more important than individual needs and rights and that the prevention of chaos and turbulence is the main goal of governance. In short, America and China clearly believe in two different sets of political values.

The common interest that America and China have in dealing with terrorism and with the troubled parts of the Islamic world reinforces the key message of this book. If America and China were to focus on their core interests of improving the livelihood and well-being of their citizens, they would come to realize that there are no fundamental contradictions in their long-term national interests. In 2010, then prime minister Manmohan Singh and Premier Wen Jiabao captured the positive spirit of Sino-Indian relations in a joint statement: “There is enough space in the world for the development of both India and China and indeed, enough areas for India and China to cooperate.”* Similarly, there is enough space in the world for both America and China to thrive together.

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Key Points from Book – VALUES: BUILDING A BETTER WORLD FOR ALL

Mark Carney is without doubt one of the most respected central banker in the 21st century. His career spanned globally from Canada to Britain, and his breadth of knowledge is not limited to economic and financial world. In his book, Value(s), he outlined the how what we value could become values and invite readers to revisit both concepts in relation to the impact of capitalism and social justice. In the last part of the book, he outlined the case for global cooperation in fighting climate change and to reach the goals under Paris Climate Agreement. Below are some key points I highlighted in the book.

The gold lies pointlessly in our vaults, a vestige of a bygone era when it backed the value of money – a link that became a cross, inspiring booms before triggering busts. Financial markets value gold for its perceived safety not for its revealed beauty. The gold price surges with fears of financial distress or geopolitical conflict. In such times of turbulence, faith in a commodity replaces trust in institutions.

Pope Francis surprised us by joining the lunch and sharing a parable. He observed that: Our meal will be accompanied by wine. Now, wine is many things. It has a bouquet, colour and richness of taste that all complement the food. It has alcohol that can enliven the mind. Wine enriches all our senses. At the end of our feast, we will have grappa. Grappa is one thing: alcohol. Grappa is wine distilled. He continued: Humanity is many things – passionate, curious, rational, altruistic, creative, self-interested. But the market is one thing: self-interest. The market is humanity distilled. And then he challenged us: Your job is to turn the grappa back into wine, to turn the market back into humanity. This isn’t theology. This is reality. This is the truth.

Values and value are related but distinct. In the most general terms, values represent the principles or standards of behaviour; they are judgements of what is important in life. Examples include integrity, fairness, kindness, excellence, sustainability, passion and reason. Value is the regard that something is held to deserve – the importance, worth or usefulness of something. Both value and values are judgements. And therein lies the rub.

market fundamentalism contributed directly to the global credit crisis, in the form of light-touch regulation, a belief that bubbles cannot be identified and a misplaced confidence in a new era. Authorities and market participants fell under the spell of the three lies of finance, believing that ‘this time is different’, that ‘markets are always right’ and that ‘markets are moral’.

Markets are essential to progress, to finding solutions to our most pressing problems, but they don’t exist in a vacuum. Markets are social constructs, whose effectiveness is determined partly by the rules of the state and partly by the values of society. If left unattended they will corrode those values.

But with what does economic value theory properly concern itself? After all, value is also a property of literature, art, education and religion. At their core, economic theories of value seek to explain why goods and services are priced as they are and how to calculate their correct price, if such a value is thought to exist.

Much of historical thinking about economic value concentrates on the process of value creation, with different conceptions of value rooted in the socioeconomic and technological conditions of the time. Many value theorists give heavy consideration to distributional consequences, and distinguish between productive and unproductive activities, with the aim of increasing the ‘wealth of the nation’. In these regards, historical approaches to economic value embody values relating to ‘what is important in life’. The various approaches to value also usually differentiate between value creation and value extraction, or rent seeking. Value creation results from combining different types of resources (human, physical and intangible) to produce new goods and services. Value extraction can be thought of as the product of ‘moving around existing resources and outputs and gaining disproportionately from the resulting trade’.5 ‘Rent’ is the return to this activity, and it has been at best viewed as unearned income or, at worst, theft.

In objective theories of value, value is determined by the production of goods and services. Objective approaches contend that, although the price of a product results from supply and demand, its underlying value is derived from how that product is produced and how that production affects wages, profits and rents. In objective theories, value is tied to the nature of production, including the time required, the quality of labour employed and the influence of new technologies and ways of working. Proponents span Aristotle to Adam Smith and Karl Marx. In contrast, subjective theories of value place greater weight on how exchange value (the price of goods and services in the market) reveals underlying value. In subjective theories, value is in the eyes of the beholder, driven by preferences and to a lesser extent scarcity. This approach is most clearly associated with neo-classical economists of the nineteenth century, such as William Jevons and Alfred Marshall, and it is dominant in our time. This has a variety of consequences, especially the implication that something which is not priced is neither valued nor valuable; it is as if the price of everything is becoming the value of everything.

The fifteenth and sixteenth centuries brought new technologies and modes of organisation that gave rise to commercial society. Maritime trade grew with the new navigational instruments; farming began to lose its feudal characteristics; and the economy moved towards large, organised markets, under guilds and the great trading companies (such as the East India Company) that were monopolistically controlled under official protection. In response, a new economic doctrine – mercantilism – was born. At its heart, mercantilism was the view that maximising net exports was the best route to national prosperity, and that a country’s wealth was measured by gold, the by-product of these surpluses.

According to Petty, ‘natural value’ was determined by the factors of production – land and labour – and the market price (‘actual price’) of any commodity would fluctuate around its natural value (‘natural price’). Petty simplified his theory of value to one based on labour, by solving for a ‘par’ value for land in terms of labour.15 That labour value, in turn, was determined by a form of subsistence wage, which was the unit of measure consisting of ‘The easiest-gotten food of the respective countries of the world’.16 In this respect, Petty foreshadows the labour theories of value of Adam Smith, David Ricardo and Karl Marx.

Quesnay’s Tableau supported farmers against the mercantilists, as it showed that all value arose from the land.21 His classification overturned the mercantilist approach which had placed exchange and what was gained from it – gold – at the centre of value creation. Now value was linked inextricably with production, albeit only agricultural production.22 In Quesnay’s tableau, as long as what is produced is greater than what is consumed, the resulting surplus could be reinvested, and the economy would grow. Conversely, if value extraction by unproductive sectors exceeds value creation by agriculture, the economy would decline. This conception of surplus and reinvestment driving the economy forward would be adopted by the classicists.

The focus of the classicists was political economy, with the study of economics integral to their study of society. Their approach centred on the development of markets and placed the growth and distribution of value squarely in the context of the enormous social and technological changes then underway. They worked during an unprecedented period of growth, urbanisation, industrialisation and globalisation. The classicists would have found profoundly alien the view – widespread today – that economics is a neutral technical discipline which can be pursued in isolation from such dynamics.

Smith, in contrast, was concerned with exchange across the entire economic and social spheres. To Smith, all of human life involved exchange, with the consequence that we can no more extricate his theories of markets and value creation from their broader social context than we could separate the views on value of the canonists from their systems of social philosophy and ecclesiastical jurisprudence.

Smith addressed too the question of what happens when markets go wrong. He was well aware of the damage that monopolies could do, and he viewed a free market as one that was free of rent. He included a searing attack on mercantilists – or what we would now refer to as crony capitalists. Like Quesnay, he argued that mercantilist policies restricted competition and trade, and undercut industry, which was the true source of value creation in the economy.

Smith adopted the same systematic approach to economic growth as the physiocrats, he widened the concept of the productive sphere of the economy from agriculture to include industry. In both systems, growth arises because of surpluses that are reinvested in productive activities (in Smith’s case manufacturing) rather than in unproductive consumption of luxuries or rent seeking.

Smith was wary of the dangers of capture of government by business. He consistently warned of the collusive nature of business interests, including fixing the highest price ‘which can be squeezed out of the buyers’. He cautioned that a business-dominated political system would allow a conspiracy of industry against consumers, with the former scheming to influence politics and legislation.32 Consistent with this view, he promoted free trade to break the power of the mercantilists and increase the share of manufacturers in a competitive market.

Smith acknowledges that differences in labour quality mean that simply measuring the hours of work that went into producing an object is not equivalent to the effort. And he highlights the ways in which a good’s ‘real’ value (determined by labour) can be distinct from the money price of the good, which he calls its ‘nominal’ price: ‘Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price.’34 In a barter economy, Smith argues, goods could be more easily traded at ratios that directly reflect the labour required to produce them, as in his famous example: ‘If among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer.’

Ricardo took Smith’s ideas further. First, he articulated what came to be known as the ‘law of diminishing marginal returns’, one of the most important in economics. It holds that as more and more resources are combined in production with a fixed resource – for example, as more labour and machinery are used on a fixed parcel of land – the incremental increase in output will diminish. Restricting foreign imports would bring more marginal land into production, raising grain prices, increasing rents to landlords, reducing the profits of manufacturers and, as a consequence, lessen their capacity to invest in new production. As we shall see in the next chapter, the analogue on the demand side is diminishing marginal utility, which holds that the more of a good one consumes – such as ice cream on a sunny day – the less the enjoyment derived from each additional scoop.

Ricardo began his most famous work, Principles of Political Economy and Taxation (1817), with his labour theory of value: The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour.37 He distinguished between the price of a good or service and its underlying value. Like Aristotle and Adam Smith, he held that the relative values between two goods are determined by the relative quantities of labour needed to make them.

At a minimum, workers need to work for long enough to regenerate their labour power: receiving an amount equivalent to a subsistence wage. But their labour power is such that they can work longer and, if they do, surplus value is created. The genius of capitalism is to make this happen, and for capitalists to then pocket the vast majority of the associated surplus value, paying workers only a wage sufficient for workers to buy commodities like food and housing to restore their strength to work.

Marx also saw that the growing general commercialisation and financialisation of the economy could ultimately undermine the growth of production. In his view, commercial and speculative financial firms do not add value to capitalist production. By capturing an increasing share of the surplus, they diminished the profit in the economy available for reinvestment. Finally, the social dimension of capital would feed instability. Capital gives capitalists their power over workers who cannot realise their labour power in isolation from the means of production. Workers become alienated from their work because they do not own the means of production, and the surplus they create is taken away from them. For Marx as for Aristotle and Aquinas, the exchange of value, or more appropriately the exchange of ‘just’ value, had moral as well as economic implications.

As we have seen, in objective theories of value, the value of the inputs, such as labour, determines the value of the output. With the neo-classicists, that causality is reversed. People value final goods that satisfy specific wants, and it is because those final goods are valued that the inputs that went into making them also have value. Labour does not give goods value; labour is valued because the final good it helps create is valuable. In its simplest variant, value flows from consumption to production, not in the opposite direction. The value of inputs is derived from the value we attribute to the outputs.

Take for example, a consumer who is willing to buy a pair of shoes to wear to work for $100 even though the retail price is only $60. In addition, they are willing to buy an extra pair of the same shoes to wear on the weekend, but are only willing to pay $80 for this second pair because overall they offer less additional benefit given they already have one pair. This consumer receives a total utility of $180 from the two purchases but only pays $120. This $60 difference is considered the ‘consumer surplus’. If the consumer was willing to buy a third pair of shoes (as a back up for when one wears out) but valued this pair at only $60, the total value of the shopping spree would rise to $240 and payment would rise to $180. Consumer surplus, however, would remain at $60 as the third pair was purchased for the exact amount at which the consumer valued them. The value of each subsequent pair of shoes is its ‘marginal value’ and is different from the average total value of the purchases as each pair of shoes is valued differently. Subjectivism says that utility is based on the preferences of the consumer at a given time and place. And diminishing marginal utility means that additional utility decreases with the additional amount consumed or held.

Marshall divided his analysis into four time periods. First, in the market period where time is short and supply is therefore fixed, the value of a good is determined solely by demand. Second, in the short run when firms can change their production runs but not their plant size, supply and demand jointly determine value. Third, in the medium term, where plant size itself can be altered, the effects of supply on value depend on whether the industry of a particular good has constant, increasing or decreasing costs to scale. Finally, in the long run in which technology and population vary, the supply-side conditions dominate.

First, with basically everything priced counted as GDP16 – the shorthand widely used as a measure of national prosperity – there is a risk that the relative value of the future drivers of prosperity is obscured. Objective-based theories of value were careful to make the judgements concerning what was productive. But all that is valued today – that is, what has a market price – is not equally productive or important to future value creation. Moreover, what is considered productive versus unproductive becomes self-fulfilling, as being included in GDP is a marker of productiveness itself. For example, the economist Diane Coyle notes that the view that finance is a strategically important sector of the economy developed alongside changes in statistical methodology that designated it part of national production.

extensive research on the science of wellbeing finds that a wide range of determinants of human happiness (I will use these terms wellbeing and happiness interchangeably) are not priced. These include mental and physical health, human relationships, community and general social climate. This reality means that, even if markets were perfectly competitive and complete, information were equally shared, there were no transaction costs and people were rational, then the sum of their individual utility-maximising transactions would not maximise welfare.

The allocation (or ‘incidence’) of costs and benefits matters, and even ‘if losers lose more than gainers gain in monetary terms, we cannot exclude the possibility that the losers lose less than the gainers gain in welfare terms’. Or in other words, an extra £1,000 means less to Mark Zuckerberg than £500 does to someone on the dole. In part, this can be explained by the diminishing marginal utility of money. There is widespread evidence that, above certain thresholds, small additional monetary gains or losses are relatively immaterial from a welfare perspective, whereas for the least well off they are material.

In the modern financial system, the private financial sector creates most of the money in circulation. The reality of how that happens is different from the standard textbook depictions in ways that are important to maintaining money’s value. Textbooks often state that money is created by new deposits. In this world, the ‘saving’ decision of households creates new money, which banks then lend out. But these deposits have to come from somewhere, and when a household chooses to deposit at a bank, those savings come at the expense of purchases of goods and services of companies (who would then in turn deposit the money in their bank, meaning no net money creation).8 The principal way banks create money is by making a loan. When the bank decides a borrower is creditworthy (that they are likely to pay the loan back), it credits their deposit account for the amount of the loan and new money enters circulation. In making that lending decision, the bank relies on a degree of trust, which after all is the meaning of the Latin credere, the root of our word for credit. Supplementing that trust is the bank’s due diligence of the borrower’s information as well as prudent assessment of the risk. In the words of Mikhail Gorbachev, ‘Trust, but verify.’

Over the ages, the various forms of private money, such as the notes issued by European banks and American banks in the eighteenth and nineteenth centuries, have inevitably succumbed to oversupply and eventual collapse. Initially strong commitments to back their value, by pledging assets and establishing ‘binding’ rules for their issuance, have given in to temptations to increase profits by relaxing these strictures and drawing on credibility built up over time. The decline in public trust and with it the value of the private currency comes, as Hemingway once wrote about bankruptcy, ‘gradually and then suddenly’.

Given the experiences of private banks issuing notes on the basis of ‘their good name’, most observers would agree that laissez-faire is not a good foundation for sound money. There have been two approaches to maintaining public confidence in money and guarding against debasement: i) backing by a commodity, principally gold (and occasionally land or oil) and ii) backing by institutions led by independent central banks.

The system of metal-backed money was plagued by reliance on the unpredictable supply of precious metal. Shortages of silver helped explain why the Roman system of coinage endured to outlive the Roman Empire so that prices were still quoted in denarii in Charlemagne’s time at the beginning of the ninth century. The Spanish conquest of the New World led to the opposite problem. Such was the plunder of gold and silver that the sixteenth century saw a huge monetary stimulus that spread across Europe, pushing up prices sevenfold between the 1540s and the 1640s during the so-called ‘price revolution’.19 The Spanish learned the hard way that acquiring money did not make you rich; the value of precious metals was not absolute. If its supply increased, its purchasing power would fall.

Throughout the period of the Napoleonic Wars, a robust dispute raged over the merits of reinstating convertibility. The Bullionist group – led by David Ricardo and Sir Henry Parnell – argued that if banks were not required to convert into gold, they would issue too many notes, causing inflation and the debasement of money. These arguments anticipated many of those of the monetarist school of economics. The opposing side appealed to the ‘Real Bills Doctrine’, associated with John Law, Adam Smith and James Stuart. They argued that the banknotes would be credible provided the assets that backed them were creditworthy. At this time, those assets were largely gold and bills of exchange (which were used by companies for trade). Since the demand for bills of exchange would be dictated by the activities of commercial firms, it was contended that there would not be excess note issuance, and if any temporary one occurred it would be quickly mopped up. Conversely, if the money supply were restricted to the available gold, it could prove too meagre for commercial activity.

David Hume first described the workings of the gold standard more than a century before it fully came into being. Each time goods were exported, the exporter received payment in gold, which was brought to the mint to be coined. Each time an importer bought a good, they made a payment by exporting gold. For a country with a trade deficit, gold flowed out on net, setting in train a self-correcting mechanism of falling domestic prices because less gold was chasing the same amount of goods. In the foreign country, prices rose because there was more gold chasing the same amount of goods. With imports more expensive, people would consume less of them and more of the now cheaper domestic produce. The trade deficit would shrink and balance would be restored.

By the end of the nineteenth century, global economic power was becoming more dispersed and the gold standard therefore tougher to manage. As international trade and financial integration steadily grew, the UK economy became relatively less important. At the same time, an inherent flaw of the system – its dependence on new supplies of gold – exerted a renewed deflationary bias that put pressure on domestic wages, prices and banks across the membership of the international gold standard. When the supply of gold grew more slowly than the economy, the price level needed to fall to restore equilibrium in purchasing power. This was starkly illustrated when a number of countries adopted the gold standard in quick succession in the 1870s. With less money chasing more goods, the system was highly deflationary, with the British price level falling by more than one-third between 1873 and the end of the century.29 An environment of sharply falling prices and wages would increase the real burden of debts and make it more difficult for banks to remain solvent.

Political pressures began to emerge as suffrage was extended, labour began to organise and political parties representing the working classes began to gain popularity. A single-minded focus on convertibility to the exclusion of the impacts on the domestic economy, particularly on wages and employment, became increasingly untenable. This undermined the credibility of the system, emphasising that the gold standard was ‘a socially constructed institution whose viability hinged on the context within which it operated’.

The value of money requires not just the belief of the public at a point in time but, critically, the consent of the public at all times. That dictates not just what the central bank does to maintain the value of money but how it does it, how it accounts for its actions and how it takes responsibility for any mistakes. In just this way, the effectiveness of the gold standard was ultimately determined by how long it was accepted. When it comes to money, the consent and trust of the public must be nurtured and maintained.

Even to a thirteenth-century Englishman, global monetary conditions mattered. Would Britain’s constitutional history have been different had King John lamented, ‘A central bank! A central bank! My kingdom for a central bank!’? He needed one because other factors reinforced monetary developments, including the usual suspect – financial innovation. Specifically, developments in the common law made land an increasingly liquid asset, and therefore one capable for the first time of being used as a store of wealth.13 This set a medieval financial accelerator in train (about 750 years before Ben Bernanke coined the term)14 by providing an alternative to storing one’s wealth in silver coin (prone to being whisked away by the King). This led to a reduction in the demand for silver money balances. An increase in money velocity would have followed and with it, all else being equal, price inflation until the transactions demand for silver had risen sufficiently to equal its supply. At the very least, the existence of an alternative store of wealth provided an environment in which money velocity could take off, were it to be nudged in that direction.

Magna Carta has become the icon of the principle that the exercise of authority requires permission from those subject to that authority – and that, once granted, this permission can just as easily be withdrawn.

Modern money is not backed by gold, land or some other ‘hard’ asset. Modern money is all about confidence. Confidence that: – the banknotes that people use are real not counterfeit; – money will hold its value and that it will not be eroded away by high inflation; – the burden of debt won’t skyrocket because prices and wages fall in a deflation; – money will be safe in banks and insurance companies, and that it won’t disappear even if there’s a depression, a financial crisis or a pandemic.

The global financial crisis was a powerful reminder of the imperative of financial stability. Advanced economies were in the midst of an era known as the Great Moderation: a long period of uninterrupted growth combined with low, stable and predictable inflation. The crisis made it obvious that central banks had won the war against inflation during this time only to lose the peace.

Conversely, there are no obvious or immediate rewards to the tough decisions necessary to avoid future crises. The costs of macroprudential interventions can be felt today but their benefits are often realised far into the future. These benefits – moderating downturns and avoiding crises – are not directly observable. The bad outcomes that macroprudential policies prevent have to be estimated. But counterfactuals are difficult to sell: ‘it could have been worse’ doesn’t quite have the ring of ‘you’ve never had it so good’.

Just as the gold standard failed when it lost public confidence, the effectiveness of independent central banks will not stand the test of time without continual public support.

Today, this economic approach to value has spread widely. Market value is taken to represent intrinsic value. And if a good or activity is not in the market, it is not valued. We are approaching the extremes of commodification as commerce expands deep into the personal and civic realms. The price of everything is becoming the value of everything.

there is growing evidence that relative equality is good for growth. More equal societies are more resilient, they are more likely to invest for the many not the few, and to have robust political institutions and consistent policies.6 And few would disagree that a society that provides opportunity to all of its citizens is more likely to thrive than one which favours an elite, however defined.

While some studies have found a short-term positive relationship between economic growth and inequality,11 a wide range of research has found that inequality is associated with both slower and less durable growth particularly over the long term.12 This holds for rates of growth over long periods of time,13 the level of income across countries and the duration of growth spells.

The evidence backs the intuition that greater inequality can be self-reinforcing and growth limiting, with fewer investments in their skills by those who are less well-off and less public investment in education and infrastructure to benefit the many.15 Moreover, these negative effects of inequality on growth are self-reinforcing. Income inequality exerts a greater drag on growth in economies characterised by low equality of opportunity (as measured by intergenerational mobility).

There has certainly been no improvement in happiness alongside the spread of markets into more walks of human interaction, and there is no definitive relationship between growth and happiness.20 While there is a variety of potential explanations for these results, one plausible candidate is the steady expansion of the competitive sphere into our lives. Richard Layard bemoans the increasing prevalence of the testing of children and the ranking of education and health professionals. These are approaches that make success personal and individualistic rather than the result of improving the happiness and welfare of others. Evidence suggests that it breeds stress and dissatisfaction, even among the ‘winners’.

Sunstein underscores the importance of a broad concept of welfare: ‘People care about other things, including a sense of meaning or purpose. A good life is not merely “happy”.’25 He uses a series of real-world examples to demonstrate how a simple but common economic application of utilitarianism that focuses on maximising net monetary benefits (and thereby equating money with value) may be inconsistent with net welfare benefits, as a result, for example, of: – the distribution (or incidence) of the gains and losses (recall the non-linear contribution of income to happiness), or – unpriced benefits and costs related to the dignity of life, the avoidance of mental anguish and the hedonic benefits of increased convenience.

The genius of the market rests on a series of attributes that share what John Kay calls the disciplined pluralism of capitalism. This starts with the familiar invisible hand with prices as signals acting as far superior guides to resource allocation than central planning. And it extends to two other key, but less widely acknowledged, qualities. First, markets are forces of discovery via the chaotic process of experimentation through which the market adapts to change. Markets facilitate a process of trial and error where the successful ventures thrive and the unsuccessful are terminated. Second, markets diffuse political and economic power such that entrepreneurial energy is focused on the creation of wealth rather than its appropriation from others.

When our discussion shifted to exchange rates and Tommaso held forth on how the dollar was misaligned, a colleague interrupted, ‘Misaligned to what? The dollar is priced in the world’s deepest market.’ Tommaso drew in a short breath and lamented how far the received wisdom of market efficiency had come. The doctrine held that if a market is deep and liquid, it should always move towards equilibrium, or, said another way, ‘it was always right’. The policymakers have nothing to tell the market, they had only to listen and learn. If markets move sharply away from a range that seems appropriate, the policymakers must humbly admit that there must be something they are missing that causes the market ‘in its infinite wisdom’ to behave the way that it does. But as Tommaso observed, ‘when we grant an entity infinite wisdom, we enter the realm of faith’.

There has been a steady commodification of assets and activities – putting them up for sale – including of our free time.36 Activities as diverse as cooking, essay writing, gardening and child-rearing can now be hired in the gig economy. This is the latest phase in the historical progression of commodification: first agriculture through the commercialisation of surplus production, then manufacturing, then industry and now services, with many people encouraged to do many jobs flexibly. The logical extreme predicted by Paul Mason, in his book Postcapitalism, is that the whole of society becomes the factory.

An essential point is that, just as any revolution eats its children, unchecked market fundamentalism devours the social capital essential for the long-term dynamism of capitalism itself. All ideologies are prone to extremes, and capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith. In the decades prior to the crisis, such radicalism came to dominate economic ideas and became a pattern of social behaviour.

Yet when the means – money – become the ends, society suffers. Marx saw greed as a stage of social development. In other words, it was neither intrinsic nor natural. Money is an accelerant giving greed an abstract hedonism because the pursuit of its accumulation ‘possesses all pleasures in potentiality’.45 Greed itself is reinforced by the commodification of life as there is more and more that money can buy. Milanović observes that when money becomes the sole criterion by which success is judged, society sends the message that ‘being rich is glorious’ and ‘the means used to achieve glory are largely immaterial – as long as one is not caught doing something illegal’.46

For thousands of years, religion was able to preserve the entrepreneurial spirit necessary for the flourishing of commercial society while internalising certain forms of acceptable behaviour. Protestantism eschewed ostentation, limiting the consumption of the elites and their displays of wealth.47 This in turn encouraged the necessary reinvestment in social and economic capital, as profits were to be used for God and the community or to pursue further gain as was God’s will. To quote Weber: ‘the inevitable practical result is obvious: accumulation of capital through ascetic compulsion to save. The restraints which were imposed upon the consumption of wealth naturally served to increase it by making possible the productive investment of capital.’48 This moderating force was complemented by what Rawls termed a tacit social contract which reaffirms in its daily actions the main beliefs of society.49 Neither of these constraints binds today. The steady decline of religion in the west is well documented. From a commercial perspective, it has reached the point that the Archbishop of Canterbury, the Pope and Rabbi Jonathan Sacks have all sought to reinforce ethical considerations in business life.

As markets reach into spheres of life traditionally governed by non-market norms, the notion that markets never taint the goods or activities they touch becomes increasingly implausible. Consider three examples with respect to children. The first is the famous case of a day-care centre in Israel, where it was decided to introduce fines for parents who were picking up their children late and inconveniencing the day-care staff who had to stay late.56 In response, the incidence of late pick-ups rose sharply. The fine was viewed as a fee, removing the social stigma of making teachers wait. Instead, parents were covering the cost and optimised their time accordingly. The second (referenced by Sandel) is giving in to the temptation to pay a child to read a book. This not only puts a relative price on reading compared to staying on their mobile phone but also signals that reading is a chore that must be compensated for rather than an intrinsic good to be enjoyed. When everything becomes relative, nothing is immutable. The third is paying children to raise money for charity. Building on their observations at the day-care centre, the economists Uri Gneezy and Aldo Rustichini conducted an experiment to determine the impact of financial incentives on student motivations.57 They divided high-school students into three groups. The first was given a motivational speech about the good cause they would be supporting as they canvassed their neighbourhood for money. The second and third received the same speech but were offered incentives (paid by a third party, so with no impact on net proceeds) of 1 per cent and 10 per cent of proceeds raised, respectively. Not surprisingly, the group with the higher incentive was more motivated and raised more money than the lower-paid cohort. But the group that responded only to charitable and civic virtue raised the most. Money had crowded out civic norms. These examples suggest that, before putting a price on a good, consideration should be given to whether this will alter its meaning.

when bankers became detached from the end users of financial products, their only reward was money. But purely financial remuneration ignores the non-pecuniary value of employment, such as satisfaction from helping a client or colleague succeed. This reductionist view of the human condition is a poor foundation for ethical financial institutions needed to support long-term prosperity. The global financial crisis was as much a crisis of culture as of capital.

Early on in my career in finance, I was taught an invaluable rule by Bob Hirst, one of the partners at Goldman Sachs: ‘If something doesn’t make sense, it doesn’t make sense.’ Beneath the Popeye-esque tautology was real wisdom. Bob’s point was that if someone explains something to you in finance – such as a flashy new product or why a company’s valuation should be orders of magnitude higher than others in their sector – and it doesn’t make sense, ask the person to repeat the rationale. And if following that response, it still doesn’t make sense, you should run. Run because in finance you should never buy simply on trust, just to go along with the crowd, or least of all to pretend that you understand something for fear of looking foolish. Run because there are really only two possibilities. The first is that you’re being sold something that really doesn’t make sense. It’s merely a form of financial alchemy in which debt is being turned into equity, the newest version of the mythical risk-free return, or the latest variant of the four most expensive words in the English language, ‘This time is different.’

Whether it made sense for investors to buy ABCP boiled down to two risks. The first, liquidity risk, refers to the ability to sell an asset or to borrow against its value. In deep markets, sales by individual investors will have a minimal impact on the asset’s price, and in many cases the asset can even be turned into cash by borrowing against its value. But when markets are thin or shallow, it can be tough for investors to realise cash when they need it. In the extreme, liquidity risk is the market analogue of a bank run, except that in markets there are no lenders of last resort like central banks and investors aren’t protected by a safety net, whereas retail depositors in banks benefit both directly from deposit insurance and indirectly from central bank facilities that help banks to weather storms.

the lifeblood of markets is transactions. Markets act as intermediaries between savers and borrowers but maintain relationships with neither. Consequently, market instruments are more robust when the underlying product is more standardised. Determining whether an activity is best financed through a bank or a market depends on the relative benefits to that activity of specialisation versus standardisation. In response to rising competitive pressures from markets, banks increasingly became direct participants in them, in ways that ultimately sowed the seeds of the crisis. First, banks relied more and more on short-term markets to fund their activities and, in the process, substantially boosted their leverage. This made banks dependent on continuous access to liquidity in money and capital markets. That reliance was brutally exposed when markets turned in the autumn of 2007. Second, banks used securitisation markets, like ABCP, to straddle relationship banking and transactional market-based finance. Under the originate-to-distribute business model, banks originated a set of loans, repackaged them as securities and sold them to investors. In essence, banks took specialised loans and sold them in standardised packages. While securitisation promised to diversify risks for banks, this risk transfer was frequently incomplete. Banks often sold securities to arm’s-length conduits, like SIVs, that they were later forced to re-intermediate or they held on to AAA tranches of complex structures that proved far from risk-free.

the market can be wrong longer than you can stay solvent. Appeals to fundamental values in a panic fall on deaf ears. Not least because people find it tough to hear when they’re screaming. This causes a number of challenges. When markets collapsed in the autumn of 2008, markets were hoist on their subjective value petards. If the market was always right and the market said subprime was worth one-third of its former value, then the balance sheets of many US and European banks were insolvent, even if most of the mortgagees were making their payments. The big institutions that lent to banks in the capital markets began to perform such mark-to-market calculations, and then withdrew their funding, turning liquidity problems into solvency ones overnight.

This leads to the final lesson I learned about managing crises: the importance of overwhelming force. Fighting a financial fire with half-measures is futile. Whether it was Hank Paulson’s $750 billion bazooka in 2008, or Mario Draghi’s ‘whatever it takes’ pledge a few years later at the height of the euro crisis, effective crisis-fighting measures need to be massive, institutionally grounded and credible. Ultimately, overwhelming force can only come from the state. This is when public values come into their own. Resilience, responsibility and solidarity. Taking tough action in the public interest was essential to restoring confidence.

some of the mistrust in globalisation arises from what Dani Rodrik termed an impossible trinity – a trilemma – between economic integration, democracy and sovereignty.

A major bank CEO once told his daughter a financial crisis is ‘something that happens every five to seven years’.7 In no other aspect of human endeavour do people not strive to learn and improve. And in no other industry would such weary fatalism be tolerated. This depressing cycle of prudence, confidence, complacency, euphoria and despair reflects the power of the three lies of finance: this time is different, markets always clear, and markets are moral. To break their seductive power, we need to reinforce the underlying values required for the financial system to fulfil its role as a servant, rather than master, of society.

The second lie is the belief that ‘markets always clear’. That is, the supply of whatever is traded will always equal demand for it, and at the ‘right price’ there will never be excess supply or demand. This belief that markets always clear has two dangerous consequences. First, if markets always clear, they can be assumed to be in equilibrium – or, said differently, ‘to be always right’. If markets are efficient, then bubbles cannot be identified nor can their potential causes be addressed. Second, if markets always clear, they should possess a natural stability. Evidence to the contrary must be the product of either market distortions or incomplete markets.12 Such thinking dominated the practical indifference of policymakers to the housing and credit booms before the crisis.

A truth of finance is that the riskiness of an asset depends on who owns it. When markets don’t clear, agents may be surprised to find what they own and for how long. When those surprises are – or are thought to be – widespread, panic ensues.

Cass Sunstein’s work on social movements could help explain why (what appear to have been) widely held beliefs can be subject to sudden reappraisals. There is considerable evidence that changes in social norms, like reported attitudes to same-sex marriage or even political revolutions, often happen suddenly. Sunstein identifies several factors that explain this phenomenon. These include preference falsification, which is when what we are willing to say publicly diverges from what’s inside our heads, and interdependencies, which is when what we are willing to say or do depends on others. These characteristics mean that once conditions ripen, a critical mass of new opinions can form quickly, sometimes with brutal consequences. And so it is with financial markets.

As the old fault lines close in advanced economies, however, they are widening in some emerging market economies. For example, while China’s economic miracle over the past three decades has been extraordinary, its post-crisis performance has relied heavily on a large build-up of debt and an associated explosion of shadow banking. The non-bank finance sector has increased from around 10 per cent of GDP a decade ago to over 100 per cent now, with developments echoing those in the pre-crisis US such as off-balance-sheet vehicles with large maturity mismatches, sharp increases in repo financing and large contingent liabilities of borrowers and banks.

Under the SMR, the most senior decision makers of banks, insurers and major investment firms are now held individually accountable if they fail to take reasonable steps (including training or proper oversight) to prevent regulatory breaches in their areas of responsibility. Whether actions taken by a senior manager were reasonable can be determined by reference to select voluntary codes that the FCA has publicly recognised. And under the related Certification Regime firms must annually assess and certify the fitness and propriety of a wide range of risk-taking employees.

The most fundamental duty of the state is to protect its citizens. In his classic text, Leviathan, Thomas Hobbes (1588–1679) described how citizens give up certain liberties in exchange for state protection ‘from the invasion of foreigners, and the injuries of one another, and thereby to secure them in such sort as that by their own industry and by the fruits of the earth they may nourish themselves and live contentedly’.

Our brains often work against us when it comes to making the longer-term investments necessary to withstand catastrophes when they strike. Research in behavioural psychology has established that humans have a host of cognitive biases that mean we undervalue resiliency. We display a present bias and discount problems and benefits that will occur in the future, preferring immediate rewards even if they are lesser in overall value.

First, unlike most consumer goods, life is what some economists term a non-positional good. That means that no part of a life’s value stems from the ownership of comparable goods by others. We do not feel any better off when those around us have less life, though we may feel better off when we have a nicer car. In contrast, drawing on a host of evidence from behavioural trials, Robert Frank posits that the value of many consumption goods is partly based on how they affect the person’s actual or perceived position.

The role and duties of government are formulated by citizens, yet we increasingly rely on market-based metrics of value to dictate policy instead of societal values driving government action. At the heart of Covid policy decisions have been forms of valuation of life, quality of life and dignity in death, even if those determinations have been implicit. Framing these in terms of cost–benefit analysis immediately brings challenges with estimating monetary values for these sacred values. Policy decisions must also weigh fundamental issues of fairness including the incidence of the disease and of economic hardship as well as the importance of preserving economic dynamism.

state’s actions are judged for their proportionality and against a standard in which trustworthiness, solidarity and a sense of fairness form the basis of an effective response. States embodying these values can weather crises not by threatening punishment but by relying on the voluntary contributions of their citizens. This is where the soft powers of the state such as legitimacy and reciprocity, as well as broader social capital, matter most, and where the values of government and citizens take on a life-and-death importance.

A state’s legitimacy derives from the beliefs its citizens hold about the structure of government, its officials and processes. Whether a state’s rules and regulations merit compliance depend on how those rules were decided upon and by whom.8 Behavioural compliance by citizens stems from their sense of obligation and willingness to obey authorities, particularly in cases where compliance is against the citizen’s immediate self-interest. This value-based legitimacy stems in turn from judgements and perceptions of the extent of procedural justice present and the general trustworthiness of government, with trustworthiness in government formed by views on government performance, leadership motivations and administrative competence.

First, the crisis will likely accelerate the fragmentation of the global economy. Until a vaccine has been widely applied, travel restrictions will remain. Even afterwards, local resilience will be prized over global efficiency. Second, much of the enterprise value of companies will be taken up by lost cash flows and extraordinary financial support. This higher debt – unless it is restructured, extended on concessional terms or forgiven – will increase the riskiness of the underlying equity and weigh on capacity for growth. More profoundly, the financial relationship between the state and the private sector has already expanded dramatically. How smooth will be the exit? Or will the state remain enmeshed in commerce, restraining private dynamism? Third, the searing experience of the twin health and economic crises will change how companies balance risk and resilience. We are entering a world where businesses will be expected to prepare for black swans by valuing anti-fragility and planning for failure. The financial sector learned these lessons the hard way during the global financial crisis, which is why banks can now be part of the solution. Going forward, which company will operate with minimal liquidity, stretched supply chains and token contingency plans? Which governments will rely on global markets to address local crises? Fourth, people’s economic narratives will change. After decades of risk being steadily downloaded on to individuals, the bill has arrived, and people cannot even begin to pay it. Entire populations are experiencing the fears of the unemployed and sensing the anxiety that comes with inadequate or inaccessible healthcare. These lessons will not be forgotten quickly. This will have lasting consequences for sectors that rely on levered consumption, a booming housing market and a vibrant gig economy. This points to a final, deeper issue. In recent decades, subtly but relentlessly, we have been moving from a market economy to a market society. Increasingly, to be valued, an asset or activity has to be in a market; the price of everything is becoming the value of everything. This crisis could help reverse that causality, so that public values help shape private value. When pushed, societies have prioritised health first and foremost, and then looked to address the economic consequences. We have acted as Rawlsians and communitarians not utilitarians or libertarians. Cost–benefit analyses, steeped in calculations of the Value of Statistical Lives, have mercifully been overruled, as the values of economic dynamism and efficiency have been joined by those of solidarity, fairness, responsibility and compassion.

Among the greenhouse gases (including methane, nitrous oxide and fluorinated gases), CO2 is the most problematic. It accounts for three-quarters of the warming impact of emissions, and it is the most persistent of the greenhouse gases, with a significant proportion of the carbon emitted today remaining in the atmosphere for centuries.

The size of the carbon budget depends on (i) the temperature outcome, and (ii) the degree of uncertainty (that is, probability assumed to the outcome). The IPCC reports are the most well-respected and commonly cited source on carbon budgets. In 2018, the IPCC estimated a range from 420 Gt (to achieve 1.5°C with 66 per cent probability; this would be exhausted in less than a decade at current emissions) to 1,500 Gt (to achieve 2°C with 50 per cent probability; this would be exhausted in about three and a half decades at current emissions). Limiting temperature increases to 1.5°C from pre-industrial levels keeps the earth’s climatic and natural systems from tipping into a dangerous feedback loop. For example, the IPCC projects that if temperatures increase even by 2°C, 1.7 billion people could experience more severe heatwaves, sea levels could rise another 10 centimetres, coral reefs could decline by as much as 99 per cent.

The biggest contributors to emissions and those with the most distance to travel to get to net zero are: – Industrial process (32 per cent of current emissions), such as the production of manufactured goods, chemicals and cement. These emissions have increased 174 per cent since 1990. – Buildings (18 per cent of current emissions), which use energy for electricity and heat generation. – Transport (16 per cent of current emissions), which includes energy used by cars, heavy goods vehicles and the shipping and aviation industry. Transport emissions alone have grown by 70 per cent in the past two decades. – Energy generation (11 per cent of current emissions) – the production and supply of energy, not its end use. – Food and agriculture/nature-based sources (10 per cent of current emissions), of both crops and livestock.

The entrepreneur and engineer Saul Griffith argues that the carbon-emitting properties of our committed physical capital mean that we are locked in to use up the residual carbon budget, even if no one buys another car with an internal combustion engine, installs a new gas-fired hot-water heater or, at a larger scale, constructs a new coal power plant.12 That’s because, just as we expect a new car to run for a decade or more, we expect our machines to be used until they are fully depreciated. If the committed emissions of all the machines over their useful lives will largely exhaust the 1.5°C carbon budget, going forward we will need almost all new machines, like cars, to be zero carbon. Currently, electric car sales, despite being one of the hottest segments of the market, are as a percentage in single digits. This implies that, if we are to meet society’s objectives, there will be scrappage and stranded assets.

Climate change creates both physical and transition risks. Physical risks arise from the increased frequency and severity of climate- and weather-related events (such as fires, floods and storms) that damage property, destroy crops and disrupt trade. When physical risk crystallises it can damage real property, disrupt human and natural systems and impair financial values.

Although few outside the industry know it, the Bank of England regulates the world’s fourth-largest insurance industry. When I became Governor, I soon realised that insurers are on the front line of climate change. With their motives as global citizens sharpened by commercial concerns, insurers have some of the greatest incentives to understand and tackle climate change in the short term. For example, Lloyd’s of London underwriters are required to consider climate change explicitly in their business plans and underwriting models. Their genius has been to recognise that past is not prologue and that the catastrophic norms of the future are in the tail risks of today. With such insights, it is perhaps not surprising that the insurance sector has been particularly active in organising itself to address these existential issues.

The second category of climate-related financial risk is transition risk. These risks arise as the result of the adjustment towards a lower-carbon economy. Changes in policies, technologies and physical risks will prompt reassessments of the value of a large range of assets as the costs and opportunities of the transition become apparent. The longer meaningful adjustment is delayed, the more transition risks will increase. The speed at which the adjustment to a net-zero economy occurs is uncertain and could be decisive for financial stability. There have already been a few high-profile examples of jump-to-distress pricing because of shifts in environmental policy or performance. The combined market capitalisation of the top four US coal producers has fallen by over 99 per cent since the end of 2010, with multiple bankruptcies. To meet the 1.5°C target, more than 80 per cent of current fossil fuel reserves (including three-quarters of coal, half of gas, one-third of oil) would need to stay in the ground, stranding these assets. The equivalent for less than 2°C is about 60 per cent of fossil fuel assets staying in the ground (where they would no longer be assets).

Importantly, current estimates are incomplete as the impact of climate change on numerous important issues – water resources, transport, migration, violent conflict, energy supply, labour productivity, tourism and recreation – has received limited attention, and no estimate includes them all. These omissions bias downwards the estimates and strengthen the case for GhG emissions reductions.

The classic problem in environmental economics is the tragedy of the commons. This arises when individuals, acting independently in their own self-interest, behave contrary to the common good of all users by depleting or spoiling the shared resource through their collective action. There are many examples, including overfishing, deforestation and the original unregulated grazing on the common lands of England and Ireland in the early nineteenth century. The tragedy of the commons is an extreme example of negative externalities: when an action affects third parties who did not directly participate in (nor benefit from) that action. Such is the case with the ultimate global commons – our climate and biosphere, where producers generally do not pay for the carbon dioxide they emit nor consumers for the carbon they consume. There are three solutions to the tragedy of the commons: pricing the externality, privatisation (through the assignment of property rights) and supply management by the community that uses the commons.

In a net-zero-carbon economy, electricity’s share of total final energy demand could rise from today’s 20 per cent to over 60 per cent by 2060. That means total global electricity generation must increase almost fivefold by mid-century, while ensuring it is generated by renewables.

These developments suggest that, in a number of societies, demands for sustainability are reaching tipping points that, while not predestined, can be achieved. Research into social movements shows how they can lead to multiple equilibria. Many social movements that had seemed improbable unexpectedly gain traction due to a combination of factors including preference falsification (what we say publicly diverges from what is inside our heads), diverse thresholds (different people are more willing to speak out before others), interdependencies (what we are willing to say depends on others) and group polarisation (people tend to become more extreme when they come together with like-minded people).14 Within a few years, views that were publicly on the fringe become mainstream. Just as de Tocqueville believed that ‘no one foresaw the French revolution’, John Adams and Thomas Payne were surprised when the American colonies revolted. Yet diary writings at the time in both countries reveal the breadth of private dissatisfaction.15 What people thought and said were very different, until a focal point emerged and the private became public and was radicalised. Interdependencies – once a critical mass had formed – fanned the rapid spread of the Me Too movement, so that a host of crimes long concealed suddenly came to light. Behavioural science has also shown that, if people learn about a new or emerging social norm, they are more likely to adopt it (for example, the current spread of veganism in some countries).

The precise combination of physical or transition risks that materialises depends largely on the policy responses to climate change. For example, a decisive shift in policy will limit the size of physical risks but create some transition risks, while a business-as-usual scenario will be dominated by more severe physical risks.

In order to support an efficient global response to climate change, the level of ambition of national strategies will need to converge over time. In the meantime, carbon border adjustments (a form of tariff linked to relative climate effort) would allow leading countries to pursue more ambitious targets, while avoiding carbon leakage. These adjustments should be designed in a way that is fully consistent with World Trade Organisation rules.

Credible policy frameworks reduce the risk that businesses form wrong expectations about future policies and continue to invest in obsolete technologies. By setting out clear strategies, politicians can provide forward guidance on the policies they plan to put in place. Such predictability of climate policy helps companies start adjusting to the reality of a net-zero world today, and ensures that this adjustment is orderly.

Bernard Bass identified four components of transformational leadership: 1) Intellectual stimulation. Transformational leaders not only challenge the status quo; they also encourage creativity among colleagues. 2) Individualised consideration. Transformational leaders support and encourage individual followers by keeping lines of communication open so that colleagues feel free to share ideas and receive direct recognition of their unique contributions. 3) Inspirational motivation. Transformational leaders articulate a clear vision and inspire passion to fulfil these goals. 4) Idealised influence. The transformational leader serves as a role model, encouraging colleagues to emulate and internalise the leader’s ideals.

So, rather than professing false certainty and risk being wrong, it is argued that being candid about uncertainty could build the credibility of experts over the long term. As André Gide said, ‘Trust those who seek the truth but doubt those who say they have found it.’

Many of the ways to rebuild trust in experts resonate with what is required of effective leaders. Humility, candour about the limits of expertise, effective transparency and clearer communication. Engaging widely and seeing issues from the perspectives of others.

True leadership is not an end in itself but rather a means to accomplishing a worthwhile goal.

During the global financial crisis, some fretted that actions to save a crumbling system would encourage reckless behaviour in the future. But Ben Bernanke was clear that invoking moral hazard in the middle of the US financial crisis was misguided and dangerous. Using the power of narrative, he challenged the arguments of the ‘moral hazard fundamentalists’ in his oft cited and simple hypothetical example: do you let the man who smoked in bed die in the burning house to teach him a lesson? Or do you save him, stop the risk of surrounding houses catching fire and then reprimand him for reckless behaviour?

Now authorities need to apply these lessons to the climate crisis by stress-testing banks and insurers against different climate pathways from a smooth transition to net zero to the catastrophic business as usual. Critically, this will help banks think through potential risks associated with both the transition to net zero and continuing business as usual. With three-quarters of the world’s known coal reserves, half of gas reserves and one-third of oil unburnable if we want to keep emissions below 2°C,8 uncovering information about company exposures to stranded assets will be critical. Climate stress-testing will reveal the financial firms – and by extension the companies – that are preparing for the transition. And it will expose those that have not.

Shareholders may not be owners in the classic sense but they are the residual claimants in a company. Simply put, they get paid after everyone else – creditors, employees, suppliers and governments (in the form of taxes). This position in the hierarchy has underpinned much of the legal approach to entrenching shareholder primacy. Whether the shareholders take the most risk is a more open question. As Martin Wolf has argued, employees cannot diversify their exposure to a company.13 The same truth can hold for key suppliers or communities in which a company is dominant. When this is combined with the doctrine of shareholder primacy, there are incentives for firms and management (if their compensation is heavily weighted towards short-term equity incentives) to take excessive risks.14 There is an incentive for shareholders to take on greater risk since their downside is limited (they cannot lose more than all of their money under limited liability), but their upside is unlimited. This shifts risk to other claimants, notably employees and creditors.15 A similar dynamic holds for externalities, such as pollution.

Corporations own themselves, and central to British company law (since the nineteenth century) and American company law is the doctrine of corporate personality. The company is an entity independent of its managers, shareholders, employees and creditors. Its directors thus serve its interests; they are not merely agents working on behalf of shareholders.

Thus purpose operates on a number of planes. First, internally, it creates the necessary social capital within the firm to underwrite foundations of value creation: tightly functioning teams, and high employee participation and engagement. Second, externally, it operates as a means of generating focus on customer service and alignment. The company’s external focus relates to the traditional purpose of a company: to serve its customers.50 If a firm does this well, it generates customer loyalty, and with time the consumer will become a stakeholder, reinforcing trust, good faith and fair dealing. Third, purpose operates as a social narrative, in communities and societies beyond the firm, helping to create and sustain the firm’s social licence to operate. At the highest level, purpose captures the moral contribution of companies to the betterment of the world now and in the future.

The vast majority of ESG assets seek to ‘do well by doing good’ by using ESG criteria to identify common factors that support risk management and value creation in order to enhance long-term risk-adjusted returns in a form of divine coincidence. These strategies encompass both responsible investing, which largely uses ESG for risk mitigation, and sustainable investing, which adopts progressive ESG practices that are expected to enhance long-term economic value. Impact investing seeks to support positive social or environmental benefits alongside financial returns. It is distinguished by measuring social and environmental outcomes as rigorously as financial outcomes, and by pursuing additionality which means concentrating on investments that catalyse social or environmental change. So an impact strategy focused on accelerating the transition to a net-zero economy would not simply invest in existing green assets but rather develop new renewables projects or help companies invest to reduce their carbon footprint.

In order to achieve their objectives, investors pursue different strategies such as positive screening for best-in-class performance on ESG factors; negative screening for those that perform poorly; and momentum investing in companies that are improving aspects of their ESG performance. Deeper analytics can support systematic approaches to shared value that identify the social impacts that are closely tied to a company’s competitive advantage. Within these strategies, there are three main approaches to applying ESG factors: – ratings-based where assessments of ESG performance are outsourced to a third-party provider; – fundamental value in which raw ESG data is analysed, as part of an integrated assessment of the relationship between the creation of sustainable and enterprise value; and – impact assessments which measure and report the wider impacts on society while targeting specific positive social impacts alongside financial returns.

The rating systems of data vendors can vary dramatically, leading to substantially different ratings of the same company. For example, a 2020 study found that the correlation between the overall ESG ratings of six rating providers is about 0.46, so only about half the time would a rating provider come up with the same assessment.24 The average correlation is lowest for the governance (0.19) and highest for the environmental factors (0.43). More profitable firms are subject to lower ESG rating disagreements, while firms without a credit rating have higher disagreements. A 2019 study found the level of ESG disagreement for a given firm has increased over the same period.

Shared-value companies make a different set of choices from their competitors, building a distinctive social impact into their business models. Shared value can affect strategy on three mutually reinforcing levels: (1) creating new products that address emerging social needs or open currently unserved customer segments; (2) enhancing productivity in the value chain, whether by finding new efficiencies or by increasing the productivity of employees and suppliers; and (3) investing to improve the business environment or industry cluster in the regions where the company operates.27 Note the contrast to a ratings-based approach which leads many investors either to adopt a mechanistic index strategy or to use a company’s overall ESG performance as a final screen to reduce risk.

The ten years following the global financial crisis marked the first lost decade for real incomes in the UK since the middle of the nineteenth century. Substitute platforms for textile mills, machine learning for the steam engine, and Twitter for the telegraph, and current dynamics echo those of that era. Then, Karl Marx was scribbling the Communist Manifesto in the reading room of the British Library. Today, radical viral blogs and tweets voice similar outrage.

We are living Lenin’s observation that there are ‘decades when nothing happens and weeks when decades happen’.

The following conclusions of Tharman Shanmugaratnam, Singapore’s Senior Minister, put fiscal trends into a disturbing longer-term context: There has been a drift in fiscal policy, in a whole range of countries, towards individuals rather than public goods and towards the short term or the next electoral cycle rather than the long term. For instance, in the 1960s 75% of the US budget went into public goods of one form or another – infrastructure, schools, hospitals, transport and so on. And 25% went in some form of benefits to individuals. Today it’s exactly the other way around – 75% to individuals, and 25% on public goods. That is inherently short term. It sometimes solves immediate problems – but it doesn’t lead to a better long-term future and it doesn’t lead to optimism. If you don’t invest in public goods, and people can’t see that you’re investing for the long term, then it’s very hard to get a more optimistic society. You get a society where people are constantly concerned about ‘how much do I get compared to someone else’.

At the same time, authorities need to recognise that inflation will return, particularly because Covid represents a major negative supply shock. Significant capacity has been destroyed, and a tough adjustment is underway. The twin risks of fiscal dominance – where central bank policies are dictated by the spending priorities of the state – and financial dominance – when central bank policies are driven by a perceived need to support financial markets – will rise over coming years. In this environment, it is more important than ever that independent authorities assess and address risks to monetary and financial stability. In an environment where many assume that interest rates will stay low forever and that authorities will always bail out markets under stress, a more active and holistic approach to managing risks in market-based finance is imperative.

Institutions have been found to be more important than either geography or international trade in explaining economic growth.17 Good institutions encourage productive activity, lower transaction costs by establishing norms, reduce uncertainties and discourage behaviours that impair economic growth. Bad institutions lead to a culture of corruption and rent seeking.

stagnation in western nations can be attributed to institutions that protect the status quo and inhibit growth.24 His examples include banks that were overregulated and too big to fail, and US public schools captured by teachers’ unions. To Ferguson, western businesses suffer not from a culture of unofficial rent seeking but from onerous regulation and expensive legal fees that restrict economic activity.

There is reason to worry that leading technology companies could decide how institutions evolve, thereby locking in their advantages and discouraging creative destruction. Nations – not companies – must set these ground rules for markets to be fair and for market participants to take their responsibilities. States need fair rules enacted and maintained by fair processes, held together by both formal structures and informal conventions, resistant to capture and adaptable to changing circumstances.

Financial markets can be particularly vulnerable because of the temptations of liquidity illusion and the reliance on a strategy of being able to get out before the greater fool. For example, asset-management vehicles that promise daily liquidity to their clients while investing in fundamentally illiquid assets (like corporate loans) were prone to fire sale risk and were saved only by the prospect of massive Fed intervention in the spring of 2020. I know from experience that a booming economy can give the illusion of lower risk, feeding beliefs that potential growth is both stronger and more sustainable than it is. Risks are often the greatest when they seem the least.

The green investment opportunity – amounting to tens of trillions of dollars over the next decade – brings together a unique combination of factors: – potential consumer caution, pressures on employment and weaker export markets could all mean that investment will determine the strength of most economic recoveries; – the low-for-long interest rate environment means large-scale public investment is possible, despite record fiscal expenditures to fight the Covid crisis (provided the transition from Covid to Capital begins soon); – the largest investment opportunities for the next decade all involve accelerating the transition to a net-zero economy; in parallel, these investments will create high-paying jobs across the country while advancing competitiveness in the industries of the future; and – the global private financial sector increasingly sees the transition to net zero as the future of finance.

Many remember Schumpeter’s phrase ‘creative destruction’ but forget its context. The core of his voluminous writings was his view that capitalism was prone to ossification. In ‘the treason of the clerks’, large companies tend to become self-perpetuating bureaucracies. When coupled with the natural tendencies of incumbents towards rent seeking – seeking the rewards of value created by other people – the treason of the clerks can quell the creative gale. This is more likely to happen if public policy is pro-business rather than pro-market – that is, if it concentrates on the needs of incumbent firms to the detriment of new entrants. The more decentralised an economy is, the more dynamic it can be, and, by definition, the more the leaders in economic sectors change as good new ideas come to market. In contrast, concentration leads to rent seeking and efforts to entrench existing advantages.

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Summer Trip to Gaspesie and Tadoussac, Quebec

The pandemic has prevented most people from travelling abroad over the past year and a half, with most of us caged in our home and varying restrictions imposed depending on the virus spread. After undergoing through multiple lockdowns, the healthcare situation in Canada has finally started to improve dramatically in June (2021) and the region is classified as “green” – meaning that only indoor mask wearing is being enforced and travelling across provinces is now allowed. Our last trip was in October 2020, when we went camping in the Parc National du Bic on the North of Quebec City, and we felt another vacation was due.

Since travelling overseas is out of the question – due to mandatory quarantine requirement, still poor pandemic situation in South American countries, and us waiting for the second vaccination dose – my girlfriend and I decided to take a trip to the North-East of Quebec’s Gaspesie Peninsula, part of Canada that my French professor once said is the most beautiful place she has ever been. Intrigued, we planned our trip 1.5 month in advance and took the trip at the end of June to early July to benefit from the multiple public holidays during the period.

Day 1: Montreal – Quebec City – Rimouski

We began driving from Montreal at around 9am heading to Quebec City on the Quebec day, expecting the city to be lively and crowded amid the long weekend – which was confirmed when we had our brunch in La Buche, a restaurant in the old city nearby the Fairmount Hotel. We took a relaxing walk after the meal to see the city for the first time after the pandemic and were happy to find some of our favorite restaurants still operating, which we plan to visit at the end of our trip.

Quebec City in the Summer

Feeling full and ready to drive again, we walked back uphill to our parking spot nearby Abraham Plain and hit the road for another 3 hours before arriving in Rimouski. One thing that we would recommend before going to Rimouski is to book a restaurant in advance when planning to have a nice dinner, as there are few decent restaurants in the city that has table for walk-ins. We tried walking in to Arlequin and Narval only to found both restaurants are fully booked for the night. Hungry and tired, we went to a restaurant we dined a year earlier, Pacini, and had some pasta and wine to close our first day.

The City is Lively Despite of the Pandemic

Day 2: Rimouski – Jardin Metis – Saint Anne des Monts

I woke up early today to catch the sunrise and was planning to fly my drone alongside the city’s boardwalk only to find that almost 75% of the downtown area is restricted due to its proximity to the airport, so I headed back to the room and read my emails until my girlfriend woke up. For our breakfast, we found a nice bakery called Pâtisseries & Gourmandises d’Olivier in the downtown area, which I would rate as on par with the quality of bakery in Montreal – based on their chocolatine.

Our first stop of the day is Jardin Metis, a private-run garden complex that is also hosting Festival International du Jardin in the Summer months. The entrance fee at CAD$22/person is quite steep but fair considering the size and maintenance they did on the area. Although not a botanist myself, I did enjoy walking around the garden and see the variety of flowers displayed. Going through the whole garden at a leisure pace took us a bit less than 3 hours, but it was already noon, so we decided to eat at the café (not restaurant, which is hosted at a different place) inside the complex. But be warned that the choice of meal they offer might not be to your liking and the portion is rather small – the food quality is indeed very good, but probably better served in a 4–5-star hotel rather than in a tourist area.

A Gardener in Jardin Metis
A patio on the Backyard in Jardin Metis

We drove for another 2 hours to Saint Anne des Monts, initially thinking that we could do a short hiking on the Gaspesie National Park. But we felt tired already and the weather was a bit cloudy, so we did an early check in instead. This time our hotel, Village Grande Nature Chic-Chocs, is located not in the city/town but is on the mountain, which requires another twenty minutes drive on an unpaved road to reach. It is located on top of a hill facing the big mountain, which is perfect for me to fly my drone, and the air is much cooler than in Rimouski. There is very little signal/wi-fi coverage in the area, leaving us with few options but to have a pleasantly long 3-course dinner with a wine until the sunset at the hotel’s restaurant. Surprisingly, despite being the only restaurant in 5 Km radius, the food is decent and well-priced.

An Aerial View of Our Hotel in Saint Anne des Monts
Gaspesie National Park, Saint Anne des Monts

Day 3: Saint Anne des Monts – Forillon National Park – Gaspe

Today is the beginning of our trip in the Gaspesie peninsula and we were excited to finally be on the oceanside of Gulf of St. Lawrence. Trailing the unpaved road passed yesterday, we found ourselves back on the road to Forillon National Park – probably the only national park located next to an ocean in Quebec. We did few stops in between and took pictures on the landscape before stopping for an early lunch at Cantine du Pecheur, a small seafood stores recommended by my girlfriend’s colleague.

On the Road to Forillon, Gaspesie
Cantine du Pecheur, Our Lunch Spot

There is a large building worth visiting on the entrance to Forillon National Park where we did a toilet stop and bought our tickets and few souvenirs. But more importantly, there is a short walking trail behind the building with beautiful landscape of the ocean and peninsula that should not be missed. Our guide at the ticket booth recommended two hiking options for us, Mont Saint-Alban and Les Graves trail. The former will end up with the peninsula view at the top and the later is the trail alongside the coast; we chose the later and did not regret it.

Due to its proximity to water and nice weather, it was probably one of the most pleasant hiking experiences in Quebec we did so far. After reaching the end of the big trail where a lighthouse is located, there is a smaller trail to go down to the bout du monde about 15 minutes away. I flew my drone there to capture the surrounding landscape.

For sunset, we drove to a beach and hiking trail still inside the national park called La Taiga. From there, we could see the downtown area of Gaspe across the bay. That, in retrospect, was not a good decision. Initially the trail was nice and paved with a giant wooden bridge crossing the swamp area. But as we walked further, not only there are more worms hanging from the tree on the hiking path, but there are also significantly more mosquitos! My girlfriend and I are two large meats there for their dinner. We ran our way to the end of the trail and back, but still found numbers of mosquito bites afterwards. The bottom line is to wear long-sleeve shirt and trousers when visiting.

Tourist Centre at Forillon National Park
A Short Trail on the Back of the Tourist Centre
Les Graves Hiking Trail at Forillon National Park

It took us less than 30 minutes drive from La Taiga trail to downtown Gaspe, but on our way there we found that many of the restaurants are closed before 10pm, so we have only 2-3 hours to find one if we want to avoid eating instant noodles in our hotel room. As we checked in our hotel, we found good and bad news. The good news is that there is a very nice restaurant facing the canal called Tetu in our hotel. The bad news is they are fully booked until 9pm, which we took on the spot. Again, we found ourselves regretting not booking any of the restaurants in advance, preferring more flexibility on our schedule.

It was Saturday night, which explains why so many locals are also dining there and when our reservation time comes none of the waitresses are available to seat us despite having many empty tables – everybody was busy serving seated clients and the waiting line was getting longer and longer. We were told to come back in 15 minutes, but when we did it is only after we got slightly mad that we got seated. Luckily, the service becomes much better once we ordered our food. The food was amazing and the beer choice was equally interesting. Despite earlier trouble, we both agreed that it is the best meal we had during the trip. It was so good that plan to find similar short beef brisket in Montreal once we got back home.

Day 4 : Gaspe – Perce

Our comfortable hotel room does not stop us from waking up early. Since there is no use staying in bed and the sun is already high at 6am in the summer months, we decided to take a morning walk and stumbled on McDonalds just five minutes away by foot. The cool but nice weather, cloudy sky, and canal on the city center remined us both to a city 5.200 Km away – Zurich. When we tried to buy our McMuffin we found that the store was closed but the drive-through is open, so we waited in line between cars and then walked across the street to the “Birthplace of Canada” landmark and have our breakfast there facing the canal. After a short walk alongside the canal we were back in our hotel and showered, ready to begin our short drive to Perce, a small coastal town that becomes the highlight of our trip.

Foggy Weather in Perce
Rocher Perce Behind the Fog

Pro Tips: you might want to fill your gas full tank in Gaspe, since there are only limited options for higher octane gasoline nearby Perce.

The weather in Perce was extremely foggy and windy when we arrived, which leaves us with few options but to go from stores to stores. One thing that surprises us is how touristy the place feels. The town has only one main road and on the left and right side is full of either restaurants, souvenir shops, or hotels. We parked our car on a large parking lot belonging to the Geopark building and headed to the pier to only see the famous Rocher Perce covered in fog, passing a very nice restaurant named Maison du Pecheur where we have our lunch after and wait for the foggy weather to pass. I would recommend trying their seafood chowder while in town.

Maison du Pecheur, Perce

Unfortunately, the fog proved to be stickier than anticipated, hence our decision to go to our hotel – Hotel La Cote Surprise – and rest. The next four hours was spent on unpacking our luggage, taking shower, and enjoying the ocean view from our balcony. Once the sun sets, we went back to town and bought some meal and wine to enjoy for the night. It is truly a day to remember.

Sunset in Perce From Our Hotel’s Balcony
Flying My Drone During the Sunset in Perce

Day 5 : Exploring Perce, Hiking, and Kayaking in Mal Baie

Our plan for the day was to catch the sunrise, go back to sleep, and explore the city before our appointment for sea kayaking later in the afternoon. In short, it is going to be a long day for us. Our alarm woke us at 3.45 am. Fogs were covering the waves, but we could hear water crashing against rocks from below. As the fog is gradually blown away by the morning breeze, birds are flying towards the bushes in front of our balcony. Once the sun rises high enough, we made a cup of tea for ourselves and played with our phones.

Sunrise in Perce, Ile Bonaventure on the Right Side

At 9 am sharp, we were already in the front door of Geopark building alongside other early birds to hike Mont Sainte-Anne and see the suspended glass platform ($15/person). The day before, we learned that there is a shuttle bus to go to the top and due to our time constraint we took that option, costing us our dignity and an extra $6 per person. The platform allows us to see the whole town, Rocher Perce, and Ile Bonaventure from higher perspective. The windless and sunny weather is also supportive for me to fly my drone and make some nice footage. To salvage some of our hurt ego, we decided to walk down the hiking trail instead of taking the shuttle back to town.

Suspended Platform at Mont Sainte-Anne, Perce
Rocher Perce from Mont Sainte-Anne

Another restaurant we recommend visiting in Perce is Buvette Therese, located in front of Maison du Pecheur where we ate yesterday. The restaurant has a big-city vibe indoor, and a large terrace facing green lawn. My girlfriend had a tasty duck-confit omelette for brunch while I had a smoked salmon omelette, both priced similarly to in Montreal.

Our appointment for sea kayaking is at 2pm, but we have to drive 30 minutes back to Gaspe direction to reach the rendezvous point. We use a guide from Avolo Plein Air for the excursion, and she did a wonderful job educating and navigating us through the whole period. Since we never did a sea kayaking before and only few times experience kayaking in Montreal’s Iles de Boucherville, we were quite surprised when asked to wear a whole diving suit alongside the shoes. After one and a half hour on the sea, four out of eight participants (including me and my girlfriend) were feeling seasick and dizzy, probably due to the heat and waves, so we took a break at a beach near St. Pierre for about 15 minutes.

Sea Kayaking Near Perce

On our way paddling back to the starting point we saw a seal and couple of whales from about 50 meters distance. It was a cool experience to have, despite being seasick. We were somehow relieved once we touched the ground – and feeling somewhat smelly from top to bottom. My running shoes that I wore were so damp and smelly that I ended up throwing it away after.

Although we were desperate to take a shower and hungry, we first have to drive for 30 minutes to Gaspe to fill our gas before heading back. There we bought some fries and chicken nuggets from McDonalds for our drive back to Perce. We took a very long shower and cleanse ourselves multiple times in the hotel, then with a tired and sleepy eye we went back to Buvette Therese to have our dinner and crashed on the bed after.

Day 6: Perce – Matane

Today is another long-drive day for us, with 350 Km distance from Perce to Matane that took around five hours fully on the road. Instead of going through Carleton sur Mer, we decided to use the same coastal route that we took on the way to Perce on Highway 132 to enjoy the ocean scenery. Although we are aware of our recent high junk food intake, we could not pass the opportunity to have another McMuffin breakfast with a view in Gaspe on our way. My girlfriend also sent a postcard to her friend in U.S.

And for lunch in Matane, believe it or not, we have KFC. Yes, Kentucky Fried Chicken, because I have been craving for it since our departure from Montreal. We passed the opportunity first on our way from Quebec City, second in Rimouski, and I do not want to miss this one again. In Montreal, KFC is not available in downtown, and I have to take 20 minutes trip with metro to buy one.

On the Road Back to Matane, Highway 132
We Saw Plenty of Caravan Along the Way, Perce-Matane

It was around 3pm when we are done with our meal. Four days ago, on our visit to Jardin Metis we missed the Festival International du Jardin, so my girlfriend wanted to go back. I relented since we have nothing better to do anyway in the city. Surprisingly, we saw new exhibitions, and even some still being built! We even went back to the café and ate a wild strawberry popsicle to close our visit.

Festival International du Jardin, Jardin Metis
Festival International du Jardin, Jardin Metis

We stayed at Riotel Matane for the night, expecting they would have a table for us at the hotel’s Restaurant Cargo, and since the city does not seem to be too touristy, we did not book for one. Again, for the third time, we regretted not booking restaurant in advance. The hotel’s receptionist recommends us to go to La Fabrique – another well-rated restaurants 5 minutes drive away. Apparently, he has been dispensing the same recommendation to other guests, which we saw while waiting for our table. We had a pint of beer each, pork ribs, and poutine.

That day in Matane, we saw the most colorful sunset from the beach on the back of our hotel’s room. I flew my drone while my girlfriend is making a timelapse with her GoPro, before heading back to our room and prepare for an early rise the next day.

Sunset in Matane

Day 7: Crossing Saint Laurent River – Whale Watching in Tadoussac

Having been on the Eastern side of Saint Lawrence River for the past six days, today we are crossing to the Western side of the river by a ferry. STQ, a government-run transport company offers two and a half hours cruise from Matane to Baie Comeau, departing at 8 am sharp. If you are planning to take this ferry, it is highly recommended to book in advance, since they could not guarantee a space is available during peak season.

We arrived around 7.20am at the port and waited in line inside our car to get into the ferry. There are two levels of vehicles deck inside, the lower one for large truck and commercial vehicles, and the higher one for passenger vehicles. Once we parked our car, we were routed to a stair that leads to the ticket booth and passenger area. My first impression going around is that the ship is big! There is plenty of seating space across the main deck, and there is also a section for kids playing room and a restaurant. Taking a stair to the upper level brings us to the open-space area where one could smoke or simply get some air.

Passenger Space Inside the Ferry, Matane-Baie Comeau

We were in a bit of rush in the morning to avoid being late for the ferry, so we have not had our breakfast and decided to try the restaurant’s breakfast menu – toasts, potato, eggs, and bacon. The food is okay but is priced on the higher price range for such meal. There is free wi-fi available during the crossing, but I found the internet access only works 20-30 minutes after departure and before arrival, while my phone’s signal is also out of service in the middle of the crossing. Most of the time, I was reading my book and catching up with emails.

The drive from Baie Comeau to Tadoussac took around slightly over two hours, which allows us to arrive early in the city before our excursion at 4pm. After finding a parking across Café l’Abri Côtier, we went inside and had a small cake each. Since it was raining, there is not much we could do but to visit one of the souvenir shops.

For some unknown reasons, we were confusing the meeting point for the whale watching excursion, which forces us to run from one place to another to avoid being left by the group. But eventually, we made it to the spot and were given set of outer layer clothing to wear while other guests are getting ready as well. Due to the rainy and poor weather condition, the whale watching experience was not a pleasant one for both of us. We were all so wet – especially the shoes – and cold that the only thing we want is to go back and be somewhere warm. Fortunately, we saw the three or four whales from about 10-20 meters distance.

Whale Watching Excursion in Tadoussac
My Girlfriend All Wet and Unhappy With the Weather

Our hotel for the night is located on the other side of Saguenay River, which requires us to take another 10 minutes (free) ferry to cross. Luckily, there is a small restaurant on our hotel, so we do not need to drive around to find our dinner before going to sleep.

Pro Tips: many of the restaurants are closed at 9 pm in Tadoussac, an earlier booking is suggested.

Day 8: Tadoussac – Quebec City

After a week in travelling on the coastal side of Quebec, we were happy that today we are going back to a city. Due to lack of attractions in the Baie Saint Catherine, we packed up early and drove for three hours to Quebec City, aiming to arrive there around noon to have our lunch.

Going back to a city also means facing the regular problem of trying to find a parking spot. Our hotel, Manoir Morgan, which is in the old town area does not have one, so we took a $20/day option for few minutes walk away under Hotel de Ville. At this point, I was literally walking around in a slipper, as my shoes are all wet from yesterday’s whale watching. So before heading to Restaurant Portofino on the lower plane of the town, we headed to a shoe store next to Simons and I bought a pair of running shoes.

Our lunch at Portofino was fantastic, as usual. We stumbled on this restaurant two years ago, early in our relationship, and rate it highly in our list. This time, we tried their pasta with duck confit and found the taste to be heavenly and the portion generous. I have a feeling that we will visit the restaurant every time we are in the city.

Rue du Petit Champlain, Quebec City

After the meal, we walked down to Rue du Petit Champlain to do our shopping. I bought another flat cap at the same store where I bought one years ago. Next, we visited several antique shops (one of our hobby in Montreal) and my eyes caught on a vintage Omega watch, which I eventually bought for decent price.

We took a rest at our hotel’s room after walking for few hours around the city. Our dinner was at 9pm at Chez Boulay, an upscale French bistro we also ate in two years ago. Both of us were tired after the meal, so we decided to head back and sleep after.

Day 9: Quebec City – Montreal

We naturally woke up around 7am today. Instead of sleeping through the morning on our last day, we went for a walk and have our breakfast at Paillard, a local bakery with decent choice of pastries. Today is our museum day. My girlfriend has been eyeing for a limited-period exhibition of Picasso’s painting that is exclusive in Quebec City’s Musée National des Beaux-arts. We dined on the café inside the museum after and continued venturing to the regular exhibition building of the museum.

At around 3pm we started driving to Montreal, thinking of what we would eat for dinner (Chinese food) and things to do on the weekend (washing our clothes and car). It has been a joyful 9-day vacation for us and although we did not go outside Quebec, it sure feels like another world!

Musee des Beaux-arts, Quebec City
Musee des Beaux-arts, Quebec City
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