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Recent Financial Crises Analysis Challenges and Implications 1st edition Edition Klein L.R. (Ed.)

Recent Financial Crises Analysis Challenges and Implications 1st edition Edition Klein L.R. (Ed.) Recent Financial Crises Analysis Challenges and Implications 1st edition Edition Klein L.R. (Ed.) Recent Financial Crises Analysis Challenges and Implications 1st edition Edition Klein L.R. (Ed.)

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Recent Financial Crises Analysis Challenges and Implications 1st edition Edition Klein L.R. (Ed.) Digital Instant Download Author(s): Klein L.R. (ed.), Shabbir T. (ed.) ISBN(s): 9781847203014, 1847203019 Edition: 1st edition File Details: PDF, 1.61 MB Year: 2007 Language: english
Introduction Lawrence R. Klein and Tayyeb Shabbir 1 ABOUT THIS BOOK This volume has been assembled to focus on specific analytical as well as policy-related issues pertaining to recent financial crises, most notably the Asian Financial Crisis of 1997–98 and the ripple effects that translated into uncomfortably close calls in Russia, Brazil and, somewhat later, full-blown crises in Turkey and Argentina. Of course, much has been said and written about the various aspects of these recent crises. However, motivated by the belief that the issues raised by and surrounding these recent crises (in fact, financial crises in general) are of ongoing importance, and despite a perspective gained by scholarly analyses of these crises, there are import- ant lessons to be learned and analytical issues that can be explored even further. It may be noted that the papers included in this volume have been specifically prepared for it and thus have the distinction of being original and not reprints, affording an analysis that the respective authors are sharing for the first time. Thematically, we have divided the chapters into three parts. Besides providing an introduction, Part I addresses the issues of predictability of currency crises; Part II consists of chapters that focus on a set of reforms or ‘cures’ for preventing and/or ameliorating the after-effects of a crisis and, finally, Part III consists of a set of econometric studies that address several issues of analytical interest pertaining to labor market behavior, investment and productivity, exchange rate adjustments and estimation of China’s core inflation rate, as well as the ‘true’ cost of living index for China over the twenty-year period that spans the Asian Financial Crisis. A brief guided tour of the contents of the specific chapters is given in section 3, while in section 2 below we note the important questions raised by the recent financial or currency crises. 1
2 QUESTIONS OF IMPORTANCE RAISED BY THE RECENT FINANCIAL CRISES The last decade or so has been marked by a significant number of major financial crises including the Mexican (‘Tequila’) Crisis (1994–95), the Asian Financial Crisis (1997–98), the Russian Bond Market Default (1998), the Turkish Banking Crisis (2000) and the Currency Crisis that followed (2001) and the Argentinean Financial Crisis (2002). While most of the affected countries, to a lesser or a greater degree, have apparently recovered from the immediate negative consequences of these crises, the outcome could have been much worse in terms of the time to recover and sustainability of crisis-free development. In any event, there exist the rel- atively longer-run effects of these recent crises, which are still in the process of unwinding. These secular after-effects are relevant, both for practical as well as analytical or academic reasons. In practical terms, several of the affected countries are still grappling with the secular after- math of these crises. In addition to the adoption of country-specific eco- nomic and financial sector reforms, these countries are still facing social sector issues, such as income distributional effects and setbacks to trends towards poverty alleviation that so strongly characterized the 1980s and the early 1990s. On the other hand, in analytical terms or broad-based academic terms, we still need to make sure that that the appropriate lessons from these crises have been learned, and more importantly are being instituted, regarding the workings and reform of the global financial system. While much scholarly work focused both on the analyt- ical and policy-oriented issues has already been undertaken, we believe that there are still very important issues that need to be addressed regard- ing the nature of these crises. The following is a selective list of some of these important issues that are of special interest to us. 2.1 Nature and Dynamics of the Crises How much have we learned about the nature and the dynamics of these crises? In particular, are these crises predictable to any appreciable or practical extent – say, enough to be able to allow us to develop an early warning system? What are the factors that make economies vulnerable to financial crises? (Chapter 1 by Klein and Shabbir as well as Chapter 2 by Tinakorn.) Again, can the policy-makers recommend policies that will soften the impact of, if not eliminate such crises? (Chapter 3 by Eichengreen.) 2 Recent financial crises
2.2 Lessons Learned What kinds of specific lessons have we learned, if any, from these episodes? What kinds of economic, fiscal, monetary and perhaps even political reforms will be necessary in order to ameliorate the vulnerability of a country to a financial crisis? In this respect, it is heartening to note that con- siderable progress has already been made in instituting certain reforms of the global financial system that have evidently been inspired by the recent financial crises. Prodded by the IMF and the Bank for International Settlements (BIS), increasingly countries now report the value of non- performing loans (NPLs) as a way of monitoring the commercial banking sector. In addition, there has been a consistent trend towards emphasizing the importance of maintaining transparency and prudent risk management by private financial institutions (such as the hedge funds) as well as the central banks of the respective countries. The latter are now routinely expected to furnish prompt and regular reports regarding the amount as well as the disposition of the international reserves they manage. The occurrences of these recent financial crises have taught us the importance of continuing to strengthen these trends. Since the affected countries have mostly recovered, at least economically, from the recent crises, there is a real danger that, for practical purposes, a significant complacency may set in. Obviously, we must guard against this possibility – revisiting the question of the lessons learned and how best to implement them to minimize recurrence and/or to mitigate the severity of future crises. The description of one very important way to do just that can be found in Chapter 3 by Eichengreen. 2.3 ‘Cures’ for the Crises The next set of issues is often presented under the rubric of ‘cures’ for financial crises – actually they are the generally recommended reforms apparently motivated by the experience of financial crises. We will discuss three such broad categories of the so-called ‘cures’: appropriate exchange rate policy, capital market reforms and private business governance. 2.3.1 Appropriate exchange rate policy Regarding the question of the appropriate exchange rate policy, to many, the appropriate policy is simply to have no deliberate policy at all! ‘Let the market take care of the issue completely’, they declare. While it is true that, in retrospect, the 1997–98 Asian Crisis marked a watershed ‘event’ that has convinced many of the desirability of a completely flexible exchange rate, many subtleties still need attention and the question of the appropriate Introduction 3
choice of an exchange rate system is not an open and shut case, as it is sometimes made out to be. There are questions regarding the desirability and/or feasibility of a single world or wide-area currency, or in general, the extent and the mechanism for managing exchange rates in the context of the new global financial architecture. Increasingly, private capital flows have come to dominate trade flows and have thus lent a historically high level of volatility in price behavior in this important market. The capital mix has changed – there is, for example, more foreign direct investment (FDI) and less capital flow on official account. Again, there are important unresolved issues concerning how best to deal with chronic current account imbalances (surpluses as well as deficits), management of international reserves by the central banks, possibilities of currency contagion, current account-induced flows and debt flows. A par- ticularly vexing question is the appropriate policy response to a trade surplus in the case of a large, fast-growing creditor country such as China. It turns out that an often-recommended solution – appreciation of the yuan relative to the US dollar – may do little to rectify the problem if the under- lying cause of the hugely favorable trade surplus for China is to be found in international wage differentials estimated to be in the range of 20 or 30:1 in favor of China, even though the differential has been narrowing lately (Chapter 8 by McKinnon). 2.3.2 Capital market reforms Besides currency reforms, capital market reforms are also critical for the emerging economies. In this regard, there are two dominant issues and we will refer to them as (a) optimal degree of liberalization and (b) relative completeness of the scope of capital market instruments or institutions. Capital market liberalization is desirable because it increases efficiency through better allocation of resources. However, such efficiency gains may come at a price since liberalization, inter alia, makes the economy more vul- nerable to contagion and a host of other external shocks. Obviously, these two opposing effects need to be balanced, leading naturally to the notion of the ‘optimal capital market liberalization’. There is a related question of what is the ‘safe’ rate at which transition should take place? Such a deter- mination of optimality would depend, in part, on having on hand analyzes of the various policies that can be used to mitigate the downside of capital market liberalization. One such policy, to contain the potential vulnerabil- ity due to openness on account of capital market liberalization, can be the adoption of capital controls. However, such policy needs to be designed precisely and thoughtfully, with assessment of relevant side-effects. There are relatively few studies that undertake such an assessment. However, Klein, Mariano and Özmucur (Chapter 4) introduce an econometric case 4 Recent financial crises
study of Malaysia, which assesses the effects of capital controls, to help manage the financial crisis of 1997–98 in that country and finds that the capital controls there had many positive and desired effects in terms of eco- nomic stabilization. Regarding the other issue that we have termed ‘relative completeness of the scope of capital market’, it has been noted that the emerging economies lack well-functioning bond markets, even when they have fairly well devel- oped equity markets. This is as if one leg is missing, and it makes the country less resilient in the face of a potential financial crisis. However, the study of bond markets in emerging economies is starting to receive increas- ingly greater attention. There is a burgeoning interest in the study of ques- tions such as the role of a viable bond market in improving the efficacy of financial intermediation in these countries as well as how a robust bond market may be a useful buffer to prevent or soften a future crisis. (Chapter 5 by Herring and Chatusripitak is a case study of the Thai bond market in relation to the 1997–98 Asian Financial Crisis; a related, yet independently arrived at, analysis of the importance of a bond market may be found in Chapter 3 by Eichengreen.) 2.3.3 Private business governance Finally, regarding the third aspect of the capital market reforms, we want to note that corporate governance is an important issue in this respect. Indeed, it is one of the host of other emerging issues that pertain (albeit indirectly at times) to the possibility of future financial crises in emerging economies. The question of corporate governance, in part, encompasses concerns about the role of minority shareholders, full disclosure and trans- parency, prudent risk management and the role of the board of directors as independent overseers. It also takes up behavioral issues such as conflict of interest and use of inside information (Chapter 3 by Eichengreen). 2.4 Secular Aftermath of the Asian Financial Crisis 1997–98 While the various economic indicators have shown sustainable and solid improvement in the majority of the affected countries, their respective social indicators are definitely still lagging relative to the pre-crisis trends. The financial crisis in Asia left a deep mark in terms of social upheaval in these countries, many of which were unprepared for such an eventuality. We need to evaluate the income distributional impact in the medium- to the long-run sense as well as to assess the state of the present and future adequacy of the social safety nets in emerging economies that may be espe- cially prone to financial crises (Chapter 1 by Klein and Shabbir). One par- ticularly important question pertains to the behavior of the real wage rate Introduction 5
in the affected countries pre- versus post-Asian Crisis. (Chapter 7 presents a case study of Thailand regarding real wage rate behavior pre- versus post- Asian Crisis.) 2.5 Focus on New Developments in the Asian Region We feel that in any discussion of the recent financial crises, in addition to reflecting on the past, we ought to be forward-looking as well. In this spirit, we want to note the emerging developments in East Asia/or Greater Asia as a region. Our primary interest in this region lies in particularly focusing on countries that were directly affected by the Asian Crisis of 1997–98, such as South Korea and Thailand, as well as China and Japan, which were only indirectly involved in one or the other aspect of the above crisis because they are important actors in the region. Finally, we also want to indulge in a prospective look at India as an emergent regional economic powerhouse and thus see how the future may look in the wake of post-crisis Asia, where China and India have emerged as the relatively fastest-growing dynamic and open economies (at least in the aspects of trade flows), which may be the domi- nant part of the ‘New Asian Miracle’ going forward and thus may stand to gain the most from any valuable lessons that the recent financial crises can teach us. We will, thus, divide the relevant region into three groups: East Asian directly affected countries China and Japan and India (South Asia). 2.5.1 East Asian directly affected countries An important question is, how will the experience of the last crisis trans- form the affected countries? It seems that each of the affected countries has been responding in unique fashion when it comes to the speed of recovery, depth of the commitment to reforms and adoption of longer-run reforms to prevent or mitigate the effect of the ‘next crisis’. There are some initial hints that these countries may no longer represent a monolithic group that seemingly followed a nearly uniform mantra for growth. Also, these coun- tries, albeit in varying degrees, each maintained a peg of their respective currency to the US dollar. Instead, it seems that many of these countries will be following fairly differentiated paths from now on. These idiosyn- crasies in the chosen development strategies are important both from a policy perspective as well as their theoretical perceptions of growth and development. Is a new paradigm of growth emerging that may lessen the future possibility of financial contagion? 2.5.2 China and Japan China’s case is important from many points of view. China of course, has been growing tremendously fast since reform in 1978. It is poised to be a 6 Recent financial crises
dominant part of future economic prosperity of the region – a ‘New Asian Miracle’, if you will. Its openness in terms of trade flows makes it vulner- able to crises. However, it has a longstanding policy of minimal variations in the exchange rate in the face of persistent current account surpluses. This is just the opposite of what Thailand faced on the eve of the crisis in 1997–98, and decidedly is a relatively better situation to be in than Thailand was when it faced shortages of international reserves rather than having to worry about disposal of surplus. However, an imbalance is an imbalance, all the same. Thus, China is also at the center of the debate about the appro- priate exchange rate and the capital controls policies to adopt. These are issues that have been an intimate part of the financial crisis experience. China is also an obviously important player through its trade and direct investment links to the region. Thus focusing on China is only natural. However, we know that some people have expressed a degree of skepti- cism about the veracity of China’s growth statistics. This is an aspect of the Chinese economy that is of interest to us. Besides addressing the question of China’s ‘true’ growth rate, we are also interested in exploring what role China may have played – a stabilizing or a destabilizing one – during the 1997–98 Asian Crisis. Of course, China is a major regional power and thus very strategic. However, the debate about China’s exchange rate posture has captured wide attention. Its policy of nearly fixed parity of yuan per dollar and capital controls in the face of burgeoning current account surpluses has exposed the currency to potentially destabilizing speculative and political pressure because vested interests feel effects of large competition from many countries. While these pressures are of a different nature in compar- ison with those that Thailand had to face in the weeks and months preced- ing the bhat devaluation of 2 July 1997, still, in a fundamental sense, both kinds of such pressures represent essentially two sides of the same coin if the fundamental goal is to avoid exchange rate instability. The major ques- tion, of course, is whether we have learned enough from the previous crises so that we can more confidently determine the optimal degree of openness of a country’s capital and exchange rate markets. The other important regional power, Japan, is currently showing some signs of a nascent recovery from a long slump. However, the question still remains whether Japan has recovered enough to lend a strong helping hand in the event of the next crisis erupting. 2.5.3 India (South Asia) There are historic changes afoot in South Asia as well. India, in particular, has started to emerge as an Asian ‘giant’, side by side with China. Both these countries have enjoyed strong growth in the real sector (GDP) Introduction 7
although they reached high growth in unique fashion – China’s has been a case of growth led now by exports of manufactured goods, while India’s growth has been fueled by growth of service sector activity (especially in the information technology [IT], financial and health sectors). While each of these countries have exhibited impressive rates of GDP growth in recent years, there are significant financial sector issues such as stock and bond market reform, greater transparency and better corporate governance that still need attention. It is clear that going forward, financial sector and capital market reforms will be necessary for the continued success of these countries while keeping in mind some of the important ways – political and structural – in which these countries differ from each other. However, the important point is that, as the new players on the growth playing field so to speak, these countries’ reliance on open trade and foreign direct investment flows makes them vulnerable to financial crises. It is worth watching to see whether lessons from the recent crises were learned well. During the crisis period, neighbors and other competitors blamed China for stealing their export markets. Now they enjoy China’s import appetite. As for India, advanced countries blame ‘white collar’ unemployment problems on India’s burgeoning service sector, but should be benefiting from reduced operating costs in the near future. 3 SALIENT POINTS OF THE CONTRIBUTIONS TO THE VOLUME The following is a brief guided tour of the contents and the themes explored in the various chapters in this volume. Chapter 1: ‘Asia Before and After the Financial Crisis of 1997–98: A Retrospective Essay’ by Lawrence R. Klein and Tayyeb Shabbir Since financial crises can be costly both in economic, as well as, societal terms, it is only natural to inquire whether such crises are predictable. Besides providing a brief introduction, this chapter reviews the various approaches to prediction of currency crises. In this respect, the authors conclude that while econometric predictive models can be very useful in identifying various indicators of ‘vulnerability’, such exercises are not a cure-all. Therefore, exploring the various aspects of the aftermath of a financial crisis is also quite important. In this regard, the authors focus on the income distributional consequences of the Asian Financial Crisis of 1997–98 as well as its impact on the poverty alleviation trends in the affected countries. 8 Recent financial crises
Chapter 2: ‘Indicators and Analysis of Vulnerability to Currency Crisis: Thailand’ by Pranee Tinakorn This chapter by Professor Tinakorn is a case study of Thailand, a country that has the dubious distinction of being the first country in Asia whose currency succumbed to speculative pressures on 2 July 1997, setting off well-known ripple effects, which impacted not only some of the neighbors, but also Russia and Brazil. This series of currency crises (and, in many instances, follow-up banking crises) prompted anew many efforts to ‘predict’ currency crises so as to pre-empt them or, more realistically, decrease the vulnerability to such harmful episodes. In this spirit, Tinakorn’s study is an important attempt to identify an early warning system. Tinakorn uses time-series monthly data from January 1992 to December 2000 for Thailand to estimate a probit model as well as a ‘signals’ model à la Kaminsky et al.1 (1998) to analyze the indicators of a currency crisis in Thailand. Tinakorn defines a currency crisis as when ‘there is an accumu- lated three month depreciation in exchange rate of 15 percent or more; or there is an accumulated three-month depletion in net international reserves, of 15 percent or more’. It is important to consider net interna- tional reserves, which are gross reserves adjusted for swap obligations of the Bank of Thailand (BOT) – a decidedly better measure than just the equat- ing of currency crises to (realized) currency depreciation, since the mone- tary authority may successfully ward off speculative attacks by depleting international reserves. (This is an interesting point since anyone focusing only on gross reserves would have missed the fact that swap obligations had skyrocketed for BOT in 1996–97 during this [ex post] ‘window of vulnera- bility’ for the country.) This study’s main finding is that, in the case of Thailand, there are several early warning indicators of a currency crisis that are worth watching. The following seven are supported simultaneously by the ‘signals’ analysis as well as the estimated probit model for the country: export growth, ratio of current account to GDP, real exchange rate misalignment, growth of M2/international reserves, ratio of fiscal balance to GDP, real GDP growth rate and change in stock prices. Further, the signals analysis identifies the following four indicators in addition to the above seven: terms-of-trade growth, ratio of short-term external debt to international reserves, growth of domestic credit/GDP and inflation rate. Thus, in hindsight, an awareness of the above set of early warning indi- cators by the policy-makers in Thailand would have been helpful in either handling the management of the international reserves better and/or it might have enabled them to negotiate a less contractionary package with Introduction 9
the IMF, thus possibly ameliorating some of the extreme effects of an unanticipated devaluation and the contraction of the economic activity that necessarily followed. However, there is an important issue of trans- parency. A former IMF official has indicated in a lecture at the University of Pennsylvania that Thailand’s international reserve accounts were in trouble prior to the crisis outbreak, but the international institution would not have made that known to the public on its own authority in advance, for an obvious fear of panic in the financial markets. Chapter 3: ‘The Next Financial Crisis’ by Barry Eichengreen In this chapter, Barry Eichengreen contends that, as of spring 2005, the ‘next’ financial crisis for emerging economies may already be brewing but it may or may not materialize since, as a result of some of the lessons learned from the East Asia Crisis of 1997–98, we have a more stable global financial system as well as improved country-specific financial sectors rendering emerging economies less vulnerable to any impending crisis. However, lest we feel tempted to rest on our laurels, the author lists an agenda for future reforms, in addition to providing an excellent assessment of the reforms that have already been put in place. Eichengreen maintains that, as of spring 2005, the following factors con- stitute a ‘potentially fatal cocktail’ that may foretell a crisis in emerging economies: 1. Rising US interest rates as a result of the FED’s (Federal Reserve’s) reversal of its easy monetary policy it had adopted as of spring 2001. In the past, US domestic interest rate increases have been harbingers of financial problems in emerging markets. 2. The ever-increasing US ‘twin deficits’ – the current account deficit as well as the dudget deficit. 3. The international oil price increases, which may lead to a significant slowdown in China’s growth momentum, which will mean a negative ripple effect throughout the emerging economies since China has lately emerged as a significant engine of regional as well as global economic growth. While the above factors may appear to be clouding the horizon for the emerg- ing economies, Eichengreen stresses that ‘no ill effects are evident yet’ perhaps due to the reforms instituted since the last crisis in 1997–98. He singles out ten reforms already instituted as noteworthy, namely, lengthening the maturity structure of emerging economies’ debt, their smaller current account deficits, larger foreign reserve stockpiles, relatively greater flexibility 10 Recent financial crises
of the exchange rate mechanisms, greater fiscal ‘responsibility’ as well as reduced leverage in international financial systems, greater multilateral sur- veillance of the financial systems, greater financial sector transparency, incorporation of collective action clauses in sovereign debt instruments, and, finally, comparatively greater transparency of the IMF itself. Besides noting the already instituted reforms that have been motivated by the lessons learned from the recent financial crises, Eichengreen also stresses that we need to continue on this path. He stresses five such future reform targets in emerging economies: continuity of earlier reforms, improved credit and bond markets, enhanced exchange rate flexibility, fea- sibility to borrow in own currency on the world capital markets and con- tinued governance reforms at the Bretton Woods Institutions. One unique feature of Eichengreen’s chapter is that while assessing the reforms put in place in the last few years, he also sheds light on the ‘costs’ of such reforms – a hitherto neglected area of research and analysis. In this regard, if one were to add a ‘sixth’ item to the above agenda for future reforms, it could be the goal of maximizing the ‘net [of costs] benefits’ of these reforms that are inspired by a desire to learn from the past crises. Chapter 4: ‘Capital Controls, Financial Crises and Cures: Simulations with an Econometric Model for Malaysia’ by Lawrence R. Klein, Roberto S. Mariano and Süleyman Özmucur Liberalization of capital account is generally favored as a desirable policy as it can lead to greater availability of capital and increased efficiency. These ‘pro-growth’ effects, however, may be tempered by the fact that liberaliza- tion of capital account can render a country more vulnerable to financial crises due to an enhanced exposure to external shocks. In the face of a financial crisis when the domestic policy-makers often experience the feeling of a loss of control of their economy, an imposition of capital controls (at least temporarily) is often advocated as a solution. Such controls, it is argued, can help to bring under control the possibility of panic-driven flight of capital and uncontrolled depletion of international reserves in the wake of a crisis. However, such controls are generally disfa- vored by those who hold the relatively orthodox view that considers any interference whatsoever with the ‘market mechanism’ as counterproductive. On the eve of the 1997–98 crisis, Malaysia imposed capital controls to manage the financial crisis. This chapter by Klein–Mariano–Özmucur is a description of use of a simultaneous equation macroeconometric model – a method to study the possible impact of capital controls while taking account of the various feedback effects. Such a model is estimated for Malaysia. The model is a fairly detailed one with 438 equations and 607 Introduction 11
variables. Such detail allows the authors to supplement a traditional macro- economic model by incorporating a very thorough specification of the exter- nal sector; in particular, the authors specify capital account, foreign direct investment as well as portfolio investment, as endogenous to the model. The major conclusion of this chapter is that capital controls in Malaysia had a number of desirable effects on important macroeconomic indicators such as the real GDP growth rate (the net effect was an increase of 0.07 percent over the post-crisis period, 1998–2001). The GDP deflator (whose rate of change, of course, measures inflation rate) would also have been higher in the absence of capital controls. Thus, generally speaking, in the case of Malaysia, the capital controls helped the policy-makers manage the crisis better and the economy enjoyed many positive stabilization benefits with minimal negative effect on foreign direct investment inflows. It is, however, important to recognize that the success of capital controls seems to be contingent on the particular ‘context’ in which they are imposed, quality of policy intervention and the initial conditions in the economy. Chapter 5: ‘The Case of the Missing Market: The Bond Market and Why It Matters for Financial Development’ by Richard J. Herring and Nathporn Chatusripitak Over the last decade, there has been an increased interest in analyzing the role of financial institutions and financial markets in economic growth and development. However, the main focus has been on equity markets, and bond markets have been almost entirely overlooked. This chapter by Herring–Chatusripitak, concentrating particularly on Asian economies, tries to redress this situation by seeking to explain how the absence of a well-functioning bond market may adversely affect other markets, savers, investors and banks, and, in particular, how it may render the economy more vulnerable to a financial crisis. It concludes with an analysis of recent financial development in Thailand to illustrate both the problems associ- ated with the absence of bond markets and the proposed solutions. The authors assert that absence of well-functioning bond markets can make an otherwise vibrant economy more vulnerable to a financial crisis (as was the case in East Asia during the mid-1990s). One major implication of the absence of a bond market is that the economy lacks a market-determined term structure of interest rates that accurately reflects the opportunity cost of funds. This deficiency can make firms under- or over-invest relative to the societal efficient allocation on whether the firm’s internal rate of discount is too high or too low (the latter was the case in the early to mid-1990s in East Asia). Also, lack of ‘true’ term structure will impede accurate pricing of equity in the stock market as well as pricing of credit risk. Again, in the 12 Recent financial crises
absence of a well-functioning bond market, hedging in the derivatives (including foreign exchange) market will be relatively more expensive, if it is possible at all. As a result, market participants may end up assuming more financial risk than they would choose if there were efficient derivatives markets, just as the Asian Financial Crisis in 1997 showed that many market participants had accepted excessive exposure to foreign exchange risk. The greater risk obviously increases the vulnerability to a financial crisis. Perhaps the most worrisome implication of an underdeveloped bond market is that, in such economies, the banking sector is more vulnerable to inefficiencies, liquidity shocks and falling prey to ‘moral hazards’ of the kind often referred to as ‘crony capitalism’. Lack of competition from the bond market makes banks ‘too big’, leads them to prefer short-term credit, which in turn, leads to biases in firms’ investment policies in favor of short- term assets and away from longer gestation ventures. Also, lack of oppor- tunity for the banks to rely on the bond market to spread their own portfolio risk makes these highly leveraged institutions more vulnerable to a liquidity shock with obvious and often immediate repercussions for the rest of the economy. In Thailand, prior to the 1997 Financial Crisis, the bond market was severely underdeveloped. As a result, Thai firms tended to over-invest, the efficiency of investment was declining and the economy was heavily reliant on bank lending. Consequently, when the banks suffered heavy losses, new lending ceased and firms had to halt investment projects, resulting in pro- longed and painful economic contraction. Since then, the Thai government has begun to implement a number of reforms to stimulate development of both primary and secondary bond markets. These include developing a yield curve for government bonds, efforts to promote risk management and market liquidity, centralizing the clearing and settlement of bonds, upgrad- ing accounting and disclosure standards, and active participation in regional initiatives to strengthen Asian bond markets. These changes have markedly improved the liquidity of the government bond market, and the Thai bond market is more than four times larger, relative to GDP, than before the crisis. The Thai example shows that bond markets do matter for financial development, and that an expanded role for the bond market may be used to rebuild financial systems after the crisis. Chapter 6: ‘Investment, Growth and Productivity during the East Asian Financial Crisis’ by F. Gerard Adams and Tayyeb Shabbir In this chapter, Adams–Shabbir examine the impact of the 1997 East Asian Financial Crisis on real GDP growth and total factor productivity (TFP) of the East Asian countries during and after the crisis. Rather than taking Introduction 13
the more typical approach to analyzing the crisis and its impact in terms of such factors as financial flows, exchange rate misalignment and contagion, the authors approach the crisis from a production input/factor productiv- ity perspective. In the first place, the authors look at the financial crisis and its impact on the growth record of East Asian countries, by comparing a number of growth characteristics pre- and post-crisis. The impact was uneven with apparently minimal effect on China yet with serious recessionary effect on the economies of Thailand, South Korea and Indonesia. In general, real GDP growth rates fell sharply in 1997–98 due to the crisis, and although the post-crisis period shows renewed growth, it is at substantially lower growth rates than in the pre-crisis period. Also, post-crisis relative to pre- crisis, there was a downward trend in labor productivity growth. In add- ition, compared with the exceptionally high values for the investment/GDP ratio, there was a sharp drop in this investment share, and post-crisis recov- ery was of a relatively smaller magnitude. In fact, the downward swing in investment was not matched by a similar swing in domestic saving, hence foreign inflows turned to outflows. Finally, though exports recovered in the post-crisis period, and somewhat offset the lower investment share, the export growth for this period was also lower than its pre-crisis rate. The authors then seek to disentangle growth of output into that attrib- utable to increased inputs and the residual factor, or total factor produc- tivity. This residual represents the difference between the growth of total output and the weighted sum of labor and capital input and includes all ele- ments not taken into account in the computation of growth inputs, includ- ing technological change, economies of scale, the composition of output, the role of exports and the cyclical position of the economy. The authors define unexplained TFP as the change in TFP less the business cycle effect less the industrial/export effect. Statistics show that total labor and capital input growth remain lower post-crisis than pre-crisis. They next undertake a statistical analysis of the factors associated with the growth of TFP. To measure the effect of the 1997 Financial Crisis on TFP, during which there were severe declines in production, they perform regressions linking TFP to a series of dummy variables covering the 1998–2001 periods. They find that declines in production, particularly in 1997 and 1998, have clear impacts on TFP, that the loss in productivity growth associated with this period was not made up in later years, and that the coefficient of a time-trend variable was significantly negative. They also perform regressions linking TFP to other variables such as increasing exports, share of investment, and industrialization, and find that change in industrial output and change in exports make significant contributions to TFP change. Other measured factors, including foreign direct investment, 14 Recent financial crises
did not show up with statistical significance. Unexplained TFP growth is relatively small. Thus the ultimate equation explaining TFP growth indi- cates that productivity growth in East Asia varies considerably with cycles in business activity and depends greatly on the expansion of industrial pro- duction and exports. Chapter 7: ‘What Really Happened to Thai Wage Rates during the East Asian Financial Crisis?’ by Jere R. Behrman, Anil B. Deolalikar and Pranee Tinakorn In their chapter, Behrman, Deolalikar and Tinakorn (BDT) explore what happened to real wage rates during the Asian Financial Crisis of the late 1990s. The most important earning asset of most members of developing countries is their labor, therefore what happens to real wage rates is import- ant because of (a) the implications for the purchasing power of workers’ income and the design of effective anti-poverty and social safety net poli- cies, (b) the impact on time allocations of workers, and (c) the implications for the extent to which labor market adjustments occur through price rather than quantity effects. Conventional wisdom and most of the claims in previous literature indi- cate that real wage rates fell considerably in Thailand due to the crisis. This chapter uses as its benchmark a World Bank (2000) study of the behavior of the aggregate Thai wage rates as a result of the crisis. This World Bank study estimates that the Thai real wage rate fell by 4.6 percent during the crisis. The methodology used was to subtract the percentage change in the number of employed workers between the pre- and post-crisis period from the percentage change in the aggregated real wage earnings between the pre- and post-crisis period. However, BDT argue that the methodology used in the World Bank and other studies is subject to at least four possibly import- ant limitations that may make a considerable difference in understanding what really happened to real wage rates and what the implications are for policy. The chapter then examines these four limitations in detail. First, the World Bank assumes that the number of wage recipients is a fixed share of total employment. But the composition of employment shifted from wage to non-wage workers, and this by itself creates a bias of 2.5 percentage points in World Bank estimates (implying ‘true’ change of ⫺4.6% ⫹ 2.5% ⫽ ⫺2.1%). Second, it assumes that hours worked are con- stant, but, in fact, hours worked did change, which, again by itself, creates a bias of 5.5 percentage points (implying a ‘true’ change of ⫺4.6% ⫹ 5.5% ⫽ 0.9%). Third, the World Bank weights wage recipients proportionately to their hours worked to obtain the mean wage rates across wage recipients; whereas BDT feel that it is more appropriate to weight individuals equally Introduction 15
and estimate that this aspect of the World Bank methodology by itself causes a bias of 1.4 percentage points (implying a ‘true’ change of ⫺4.6% ⫺1.4% ⫽ ⫺6.0%). If all of these first three biases were corrected, the World Bank estimate would change to an increase of 2 percent in Thai real wage rates during the crisis. However, more importantly, BDT contend a fourth issue related to the above World Bank methodology. This issue concerns the World Bank study’s assumption that no change took place in the composition of wage recipients between the pre- and post-crisis periods. Instead the BDT study looks at data for all workers and for subcategories defined by the three observed characteristics of gender, age and schooling and finds that as a result of the crisis, wage employment shifted relatively from females to males, from younger to older workers, and from lower-schooled to higher- schooled individuals – all shifts from lower to higher real wage categories. The failure to account for these important compositional changes in World Bank estimates means that the estimated overall average real wage rate change is biased upwards. The authors’ best estimate of how much real hourly wage rates declined due to the crisis is 7.8 percent (due to the methodology used by BDT, their estimate is free from the first three biases that the World Bank study had to contend with). The major conclusion of the study was that the methodology used by the World Bank presents a misleading picture of what happened to Thai real wage rates during the Asian Financial Crisis. Although the biases in the World Bank study are partially offsetting, the severity of the impact of the crisis on declines in the real wage rate is underestimated by 3.2 percentage points or about 40 percent (comparing a World Bank estimate of a 4.6 percent decline with this study’s preferred estimate of a 7.8 percent decline). This study notes that even the decline of 7.8 percent is probably an under- estimate of the true decline because of the probable compositional changes that occur because of unobserved characteristics such as ability and moti- vation. The authors feel that the best solution would be for longitudinal labor force data to be collected as a matter of routine so that comparisons could be made for the wage rates for the same individuals over time. If these longitudinal surveys are not available, then a second-best solution is to follow the methods in this chapter, in particular controlling for composi- tional changes with respect to observed characteristics such as gender, age and schooling. Besides the above question of computing the ‘true’ magnitude of the decline in the Thai real wage during the 1997 crisis, the BDT study also examined the claim that the poorer and more vulnerable suffered most in the crisis and found some, but limited, support for that claim. Regression estimates showed that youths fared worse than prime-age adults, but that 16 Recent financial crises
some other groups typically characterized as more vulnerable fared rela- tively well: those with primary or less schooling, females and older adults. Chapter 8: ‘Exchange Rate or Wage Changes in International Adjustment? Japan and China versus the United States’ by Ronald I. McKinnon In this chapter, McKinnon puts forth an analysis that concludes that, under the world dollar standard, a discrete appreciation by a dollar creditor country of the United States, such as China or Japan, has no predictable effect on its trade surplus. Currency appreciation by the creditor country will slow its economic growth and eventually cause deflation but cannot compensate for a saving–investment imbalance in the United States. Under a fixed exchange rate, however, differential adjustment in the rate of growth of money wages will more accurately reflect international differences in productivity growth. International competitiveness will be better balanced between high-growth and low-growth economies, as between Japan and the US from 1950 to 1971 and China and the US from 1994 to 2005, when the peripheral country’s dollar exchange rate is fixed so that its wage growth better reflects its higher productivity growth. Also discussed is the qualified case for China moving toward greater flexibility in the form of a very narrow band for the yuan/dollar exchange rate, as a way of decentralizing foreign exchange transacting. One important implication of the McKinnon hypothesis as articulated in this chapter is that even if we made some desirable changes in the yuan/dollar exchange rate, the hope of narrowing the China–US trade surplus may not materialize since the more important determinant of the Chinese advantage is its relatively lower wage rate. According to available data, anecdotal evidence indicates that it may be as high as 20 to 30:1 in China’s favor compared with about 5 to 10:1 in India’s favor when we compare India versus China. However, it is interesting to note that China’s relative advantage in wage competitiveness may already be narrowing and the dynamic implications of this trend towards the exchange rate and trade policy vis-à-vis China should be very instructive and important to watch. Chapter 9: ‘Adjustment to China’s CPI-based Inflation Rate to Account for the “True” Cost of Living, 1993–2004’ by Lawrence R. Klein, Huiqing Gao and Liping Tao In this chapter, the authors Klein, Gao and Tao (KGT), in a pioneering study, adjust China’s Consumer price index (CPI) to account for the ‘true’ cost of living for 1993–2004, a period that covers the Asian Financial Crisis period 1997–98. Introduction 17
Chinese economic growth since 1978 has certainly been spectacular in magnitude, and, as a result, many scholars have drawn the conclusions that the numerical size of Chinese economic growth is overstated. However, that is not the opinion of the authors of this chapter. In order to examine China’s growth rate, they have focused on its rate of price level change as measured by a consumer price index – the inflation rate that can be used to convert nominal GDP to real GDP. They argue that the magnitude of inflation has been overstated, because it does not take into account quality change or lifestyle change. Hence, they estimate an adjustment to China’s CPI by estimating the ‘true’ economic cost of living index, using the linear expenditure system (LES). The true ‘cost’ of living in China can indicate how much the inflation might be lowered, and the real growth rate corres- pondingly increased, for the economy as a whole. The LES equation can be written as: ↕ ↕ ↕ ↕ expenditure on minimum total total minimum ␤i ⫽ marginal the i-th category subsistence income subsistence propensity to expenditure expenditure consume on the i-th on all categories out of category supernumerary income. This equation is expressed in current value prices (nominal). Goods and services are grouped into eight classes: food; clothing; household facilities; medicine and medical services; transportation, post and communication services; educational, cultural and recreation services; residential; and mis- cellaneous commodities and services. Each of these aggregate groups can be treated as a non-inferior good. Engel curves separately relate expendi- ture on each group to total income, and the part of the Engel curves that the authors of this chapter use for parameter estimation is in a linear range. They use cross-section data from family budgets (for both urban and rural populations) to estimate the parameters ␥i, which represent necessary or minimum levels of consumption for each grouping of goods and services, and they use time-series aggregates to estimate the parameters ␤i, which represent marginal propensities to consume. Using these parameter estimates, they evaluate the ‘true’ cost of living index. They find a lower inflation rate across both urban and rural (pitqit ⫺pit␥i) ⫽␤i冢rt ⫺ 兺 n j⫽1 pjt␥j冣;兺 n i⫽1 ␤i ⫽1 18 Recent financial crises
populations on the basis of ‘true’ cost of living, compared with standard CPI calculations, which translates into higher growth rates for real con- sumption. If nominal consumption rates were adjusted using this lower inflation rate, KGT estimate a higher real consumption growth of 9.32 percent on a per capita basis and 9.57 percent on a household basis (versus 7.65 percent and 6.65 percent, respectively without such an adjustment). Because the authors see persistent overestimates of the price deflator for consumption, they conclude that one or two percentage points should be added to the growth rate. Although they determine this for consumption, they argue that close to the same order of magnitude should be considered for GDP as well. In addition, the authors offer another approach to adjusting the official published price indexes, which takes into account a variety of indicators of life quality or lifestyle in a wider sense. Using ten such indicators, they compute an index as a ten-element weighted average, which grows from 100 in 1980 to 115.47 in 2002. This indicates an estimated growth rate of r ⫽ 0.65596 percent, nearly double that for the United States in the period 1980–2000. Thus they conclude that the adjustment to China’s growth rate could be as high as 1 percent or more. The adjustment of the US inflation rate for quality of life and other changes has been broadly accepted, so it seems reasonable to adjust China’s price indexes for the same reasons. In fact, lifestyle changes in China have been much greater than for the United States. Chapter 10: ‘Estimating China’s Core Inflation Rate’ by Deming Wu The premise of this chapter by Deming Wu is to ascertain the ‘core’ inflation rate for China in the same manner as is routinely adopted for other advanced economies such as the United States. This constitutes a very sound and extremely interesting methodological exercise with important policy implications as well. The empirical estimates obtained as a result of this effort are a very important statistic that allows us to characterize prop- erly the stabilization policy in China. This is an important element both domestically as well as in the context of the debate pertaining to China’s perceived role in the Asian Crisis of 1997–98 when, at times, it was criticized for being too ‘deflationary’. One of the main findings of the chapter is that China’s core inflation rate – an idea familiar to the US macro-empiricists – was positive unlike the observed official overall inflation rate, which was negative. This implies that, judged by the same standards as adopted, say, in the US for determining the inherent or underlying true inflation rate by looking at the ‘core’ inflation rate, China pursued a rather expansionary monetary policy during 1997 and 1998. Thus, if anything, China was a Introduction 19
Discovering Diverse Content Through Random Scribd Documents
needs have seen and wondered at the transaction from the boat, I kept down my curiosity until I could satisfy it more privately on board. Then, as the captain and I were watching the extraordinary antics of the Beautiful Man (who had rushed down to the beach and thrown himself into a native canoe, in the impossible hope of overtaking us, alternately paddling and shaking his fist demoniacally in the air), I drew out the package and cut it open with my knife. In a neat little beadwork bag (which still conserved a lurking scent of monkey), and carefully done up in fibre, like a jewel in cotton wool, I found a shining treasure of gold and silver coin. One hundred and thirty-seven dollars! It was Bo’s restitution.
THE DUST OF DEFEAT
T THE DUST OF DEFEAT HEY took their accustomed path beside the strait, walking slowly side by side, each conscious that they would never again be together. The melancholy pines, rising from the water’s edge to the very summit of the mountains, gave that look of desolation which is the salient note of New Caledonian landscape. Across the narrow strait as calm and clear as some sweet English river, the rocky shore rose steep and precipitous, cloaked still in pines. A faint, thrilling roar broke at times upon the ear, and told of Fitzroy’s mine far up on the hill, its long chutes emptying chrome on the beach below. Except for this, there was not a sound that bespoke man’s presence or any sign that betrayed his habitation or handiwork. “This is our last day,” he said. “Do you not once wish to see the little cabin where I have eaten my heart out these dozen years? Do you never mean to ask me what brought me here?” “I would like to know,” she answered; “but I was afraid. I didn’t wish to be—to be—” “Thank you,” he said. “Thank you for that unspoken word. You did not wish to be disillusioned—to be told that the man you have treated with such condescension was a mere vulgar criminal, a garroter perhaps, such a one as you have read of in Gaboriau’s romances. Ah, mademoiselle, when you have heard my unhappy story,—that story which no one has ever listened to save the counsel that defended me,—you will perhaps think better of poor Paul de Charruel.” “You are innocent?” she cried, looking up at him with eyes full of tenderness and curiosity. “You have shielded some one?” M. de Charruel shook his head. “I am not innocent,” he said. “I am no martyr, mademoiselle—not, at least, in the sense you are good
enough to imply. I was fortunate to get transportation for life, doubly fortunate to obtain this modified liberty after only three years. You may, however, congratulate yourself that your friend is a model prisoner; his little farm has been well reported on by the Chef de l’Administration Pénitentiaire; it compares favourably with Leclair’s, the vitriol-thrower of Rue d’Enfer, and his early potatoes are said to rival those of Palitzi the famous poisoner.” His companion shuddered. “Pardon me,” he continued. “God knows, I have no desire to be merry; my heart is heavy enough, in all conscience.” “You will tell me everything,” she said softly. He walked along in silence for several minutes, moody and preoccupied, staring on the ground before him. “I suppose I ought to begin with my father and mother, in the old- fashioned way,” he said at last, with a sudden smile. “There are conventionalities even for convicts! My father (if we are to go so far back) was the Comte de Charruel, one of the old noblesse; my mother an American lady from whom I got the little English I possess, as well as a disposition most rash, nervous, and impulsive. There were two of us children—my sister Berthe and myself, she the younger by six years. My father died when I reached twenty years, just as I entered the Eighty-sixth Hussars as a sub-lieutenant. Had he survived I might perhaps have been saved many miseries and unhappinesses; on the other hand, he, the soul of honour, might have been standing here in my place, condemned as I have been to a lifelong exile. “I was a good officer. Titled, rich, and well born, there was accorded me the friendship of the aristocratic side of the regiment; a good comrade, and free from stupid pride, I stood well with those who had risen from the ranks and the humbler spheres of society. Many a time I was the only officer at home in either camp, and popular in both. When I look back upon my army life, so gay, so animated, so filled with small successes and commendations from my superiors, I
wish that I had been fated to die in what was the very zenith of my happiness and prosperity. “My mother, except for a short time each year at our hôtel in Paris, lived in our old château in Nemours, entertaining, in an unobtrusive fashion, many of the greatest people in France; for the entrée of few houses was more eagerly sought than our own. Though we were not so well born as some, nor so rich as many, my mother contrived to be always in request, and to make her salon the centre of all the gaiety and wit of France. “From her earliest infancy my sister Berthe was counted one of the company at the château, and while I was at the lycée and afterwards at St. Cyr, she was leading the life of a great lady at Nemours. Marshals of France were her cavaliers; famous poets and musicians played with her dolls and shared her confidences; men and women distinguished in a thousand ways paid court to her childish beauty. Beauty, perhaps, I ought not to say, for her charm lay most in the extraordinary liveliness and intrepidity of her character, which captivated every beholder. Indeed, she ought to have been the man of the family, I the girl—so diverse were our tastes and aspirations, our whole outlook on life. “You, of course, cannot recollect the amazing revolution that swept over Europe when I was a young man—that upheaval of everything old, accepted, and conventional, which was confined to no one country, but raged equally throughout them all. Huxley, Darwin, Haeckel, Renan, and Herbert Spencer were names that grew familiar by incessant repetition; young ladies whom one remembered last in boxes at the opera, or surrounded by admirers at balls and great assemblies, now threw themselves passionately into this new Renaissance. One you would find studying higher mathematics; another geology and chemistry; another still, teaching the children of thieves and cut-throats how to read. Girls you had seen at their father’s table, with downcast eyes and blushes when one spoke to them, now demanded separate establishments of their own; worked their way, if necessary, through foreign universities; fought like little
tigers for the privilege of studying till two in the morning and starving with one another in the gloomiest parts of the town. Nor were the young men behind their sisters: to them also had come the new revelation, this self-denying and austere standard of life, this religion of violent intellectual effort. To many it was ennobling to a supreme degree; and while our girls boldly made their way into avenues hitherto closed to women, there were everywhere young men, no less ardent and disinterested, to support them in the mêlée. In every house there was this revolt of the young against the old, this perpetual argument of humanitarianism against apathy and laisser-faire. “To me it all seemed the most frightful madness. I was bewildered to see bright eyes pursuing studies which I knew myself to be so wearisome, taking joy where I had found only vexation and fatigue. Like all my caste, I was old-fashioned and thought a woman’s place at home. You must not go to the army for new ideas. It was no pleasure to me to see delicately nurtured ladies rubbing shoulders with raw medical students or tainting their pretty ears with the unrestrained conversation of men. You must remember how things have changed in eighteen years; you can scarcely conceive the position of those forerunners of your sex in Europe, so much has public opinion altered for the better. In my day we went to extremes on either side, for it was then that the battle was fought. The elders would not give way an inch; the children dashed into a thousand extravagances. To some it looked as though the dissolution of society was at hand. Girls asked men to marry them,—men they had seen perhaps but once,—in order that they might gain the freedom accorded to married women and secure themselves against the intolerable interference of their families. Some of them never saw their husbands again, nor could even recollect their names without an effort. Ah, it was frightful! It was a revolution! “In spite of all her liberal opinions, her unconventional views, her apparent allegiance to the new religion, my mother soon took her place amid the reactionary ranks, while my sister, the mondaine, just as surely joined the rebellion. As I said before, it was the battle of
the young against the old; age, rather than conviction, assigned one’s position in the fight. Our house, hitherto so free from domestic discord, became the theatre of furious quarrels between mother and daughter—quarrels not about gowns, allowances, suitors, or unpaid bills, but involving questions abstract and sublime: one’s liberty of free development; one’s duty to one’s self, to mankind; one’s obligation, in fact, to cast off all shackles and take one’s place in the revolution so auspiciously beginning. “The end of it was that Berthe left Nemours, coming to Paris without my mother’s permission, to study medicine with a Russian friend of hers, a girl as defiant and undaunted as herself. This was Sonia Boremykin, with whose name you must be familiar. Needless to say, I was interdicted from giving any assistance to my sister, my mother imploring me not to supply the means by which Berthe’s ruin might be accomplished. But I could not allow my sister to starve to death in a garret, and if I disobeyed my poor mother, she had at least the satisfaction of knowing that my sympathies were on her side of the quarrel. My greatest distress, indeed, was that Berthe would accept so little, for she was crazy to be a martyr, and was, besides, prompted by a generous feeling not to take a sou more than the meagre earnings of her companion. So they lived and starved together, these two remarkable young women, turning their backs on every luxury and refinement. Either, for the asking, could have received a thousand-franc note within the hour; for each a château stood with open doors; for each there was a dowry of more than respectable dimensions, and lovers who would have been glad to take them for their beaux yeux alone! And yet they chose to live in a garret, to be constantly affronted as they went unescorted through the wickedest parts of Paris, to subsist on food the most unappetising and unwholesome. For what? To cut up dead paupers in the Sorbonne! “I was often there to see them with the self-imposed task of trying to lighten the burden of their sacrifices. I introduced food in paper bags, and surreptitiously dropped napoleons in dark corners—that is, until I was once detected. Afterwards they watched me like hawks.
Sometimes they were so hungry that tears came into their eyes at the sight of what I brought; at others they would appear insulted, and throw it remorselessly out of the window. Though I had no sympathy whatever with their aims, I was profoundly interested, profoundly touched, as one might be at the sight of an heroic enemy. Their convictions were not my convictions; their mode of life I thought detestable: but who could withhold admiration for so much courage, so much self-denial, in two beautiful young women? I used often to bring with me my old colonel, a glorious veteran with whom I was always a favourite, and the girls liked to hear our sabres clank as we mounted the grimy stair, and to see our brilliant uniforms in their garret. It reminded them of the monde they had resigned; besides, they needed an audience of their own caste who could appreciate, as none other, their sacrifices and their fortitude. Mademoiselle Sonia used to look very kindly at me on the occasion of my visits, never growing angry, as my sister did, at my stupidity, or by my failure to understand their high-flown notions of duty. Once, when I was accidentally hurt at the salle d’armes by a button coming off my opponent’s foil, it was she who dressed my wound with the greatest tenderness and skill, converting me for all time as to the medical career for women. Poor Sonia, how her eyes sparkled at her little triumph! “On one of my visits I was thunderstruck to find before me the Marquis de Gonse, a gentleman much older than myself, with whom I had not actual acquaintance, though we had a host of friends in common. Upon his departure I protested vehemently against this outrage of the proprieties. I besought them to show a little more circumspection in their choice of friends, admitting no man to their intimacy who counted not his fifty years. But my protestations were received with laughter; I was told that the marquis was a friend of Sonia’s father, and was trying to effect a reconciliation highly to be desired. Berthe accused me mockingly of wishing to keep the little Russian to myself. Indeed, she said, what could be more demoralising to her companion than the constant presence of a beautiful young hussar? With her saucy tongue she put me
completely to the blush; in vain I pleaded and argued; de Gonse’s footing was assured. Yet, if they had searched all Paris, they could not have found a man more undesirable, or more dangerous for two young women to know. Ardent, generous, and himself full of aspirations for the advancement of humanity, nothing was better calculated to appeal to him than the struggle in which my sister was engaged. His sympathy, his sincere desire to put his own shoulder to the wheel, were more to be feared than the most strenuous protestations of regard. If he had made love to my sister, she was enough a woman of the world to have sent him to the right about; but he adopted, all unconsciously, I am sure, a more subtle plan to win her good opinion: he was converted! “If I shut my eyes I can see him sitting there in that low garret as he appeared on one occasion which particularly imprinted itself on my mind; such a high-bred, such a distinguished figure, with his silk hat and gloves beside the box which had been given him for a chair, and his face full of wonder and sadness! You have read of Marie Antoinette in prison, of her sufferings so uncomplainingly borne, of her nobility and steadfastness in the squalor of her cell! You have revolted, perhaps, at the picture—clinched your little fists and felt a great bursting of the heart? It was thus with M. de Gonse. Berthe he had often seen at our château in Nemours; Sonia’s father he had known in Russia, a general of reputation, standing high in the favour of the Czar. None was better aware than he of what the young ladies had given up. I could see that he was deeply moved. He asked many questions; at times he exclaimed beneath his breath. He insisted on learning everything—the amount of their income, the nature of their studies, all their makeshifts and contrivances. The two beautiful, solitary girls, from whom sympathy and appreciation had so long been withheld, unbared their lives to us without reserve. Berthe told us, amid the passionate interjections of Sonia Boremykin, the story of their struggles at the medical school: the open hostility of the professors; the brutal sneers and innuendoes; the indescribable affronts that had been put upon them. During this terrible recital— for it was terrible to hear of outrages so patiently borne, of insults
which bring the blood to the cheek even to remember after all these years—de Gonse rose more than once from his seat, walking up and down like one possessed, uttering cries of rage and pity. It was no feigned anger, no play-acting to win the regard of these poor women. Let me do the man that justice. “I don’t think my sister was prepared for the effect of her eloquence on the marquis, or could have foreseen, even for a moment, the tempest she had raised within his breast. He swore he would challenge every professor in the school; that he would unloose spadassins on the offending students, whose bones should be broken with clubs; that to blight their careers in after life he would make his business, his pleasure, his joy! It was with difficulty that he was recalled to the realities of every-day existence, my sister telling him frankly that such a course as he proposed might benefit woman in general, but could not fail to destroy the future of herself and Sonia Boremykin. To be everywhere talked about, to get their names into the newspapers, to be pointed at on the street as the victims of frightful insults—what could be more detestable, more ruinous to the careers they hoped to make? De Gonse was reluctantly compelled to withdraw his plans of extermination; for who could controvert the logic with which they were demolished or fail to see the justice of my sister’s contention? Confessing himself beaten on this point, he sought for some other solution of the problem. Private tutors? Intolerably expensive, came the answer; poor substitutes for one of the greatest schools in Europe; unable, besides, to confer the longed-for degree. The University of Geneva, famous for its generous treatment of women? Good, but its diploma would not carry the desired prestige in France. I hazarded boys’ clothes and false mustaches; but my remark was greeted with a shout of laughter and a half-blushing confession from Mademoiselle Sonia that one experiment in this direction had sufficed. It was to the marquis that light finally came. “‘Fool! Idiot!’ he thundered, striking himself on his handsome forehead with his fist. ‘Why did I not think of it before? To-morrow I join the medical school myself—the student de Gonse, cousin of the
marquis, a man tired of the hollowness and the trivialities of high life. I do nothing to show I am acquainted with you, nothing to compromise you in the faintest manner. But de Gonse, the medical student, is a gentleman, a man of honour. A companion ventures on a remark derogatory to the dignity of the young ladies; behold, his head cracks like an egg against his desk! Another opens his mouth, only to discover that le boxe (you know I am quite an Anglais) is driving the teeth down his throat, setting up medical complications of an extraordinary and baffling nature. A professor so far forgets his manhood as to heap insults on the undefended; the strange medical student tweaks his nose in the tribune and challenges him to combat! How simple, how direct!’ “Imagine my surprise a few days later to learn that this had been no idle gasconade on the marquis’s part. True to his word, he had appeared at the school elaborately attired for the part he was to play, even to a detestable cravat and a profusion of cheap jewellery! Unquestionably there must have been others in the plot, for no formalities anywhere tied his hands or opposed the least obstacle to his audacity. As one would have expected from a man so eager and so full of resource, the object for which he came was soon achieved. Mingling with the students as one of themselves, he singled out those who went the farthest in persecuting the women, and insensibly cajoled them into a better way of conduct. The minority, too, those that still kept alive the chivalry of young France, were strengthened and encouraged by the force of his example, so that the crusade, once authoritatively begun, went on magnificently of itself. Not a blow was struck, not a wry word said, and behold, de Gonse had accomplished a miracle! From that time the position of women was assured; protectors arose on every side as though by magic; in a word, gallantry became the fashion. When professors ventured on impertinences, hisses now greeted them in place of cheers; they changed colour, and were at pains to explain away their words. The battle, indeed, was won. “Had de Gonse contented himself with this victory, which saved my sister and Mademoiselle Sonia from countless mortifications, how
much human misery would have been averted, how great a tragedy would have remained unplayed! But evil and good are inexplicably blended in this world, a commonplace of whose truth, mademoiselle, you will have many opportunities of verifying. Having acted so manly a part, one so calculated to earn the gratitude and esteem of these poor girls, he turned from one to the other, wondering with which he should reward himself. I have reason to think his choice first fell on Sonia Boremykin, who had the whitest skin and the prettiest blue eyes in the world. How can I doubt, to judge from her wild, tragic after life, but that he could have persuaded her to her ruin? But he must have paused half-way, struck by the incomparable superiority of my sister. In beauty she was not perhaps the equal of her companion, though to compare blonde and brune is a matter of supererogation. In other ways, at least, there never lived a woman more desirable than Berthe de Charruel. She possessed to a supreme degree the charm that springs from intelligence,—I might say from genius,—which, when found in the person of a young and beautiful woman, is almost irresistible to any man that gains her favour. Jeanne d’Arc was such another as my poor sister, and must have been impelled on her career by something of the same fire, something of the same passionate earnestness. To break a heart like hers seemed to de Gonse the crown to a hundred vulgar intrigues and bonnes fortunes. “Of course, I knew nothing of this gradual undoing of my sister, though during the course of my visits to the little garret I often found the marquis in the society of Berthe and her friend. I disliked to see him there, but I was powerless to interfere. I was often puzzled, indeed, by the ambiguous conduct of Mademoiselle Sonia, who had the queerest way of looking at me, and whose eyes were always meeting mine in singular glances, whether of warning or appeal I was at a loss to tell. Her words, too, often left me uneasy, recurring to me constantly when I was in the saddle at the head of my troop or as I lay awake in bed awaiting the reveille. I wondered if the little Russian were making love to me, for, like all hussars, I was something of a coxcomb, though, to do me justice, neither a lady-
killer nor a pursuer of adventures. It was in my profession that I found my only distraction, my only mistress. I am almost ashamed to tell you how good I was, how innocent—how in me the Puritan stock of my mother seemed to find a fresh recrudescence. Some thought me a hypocrite, others a coward; but I was neither. “I learned the truth late one afternoon from Sonia Boremykin, who came to my quarters closely veiled, in a condition of agitation the most frightful. I could not believe her; I seemed to see only another of her devices to win my regard. My sister! My Berthe! It was impossible! I said to her the crudest things; I was beside myself. She went on her knees; she hid nothing; it was all true. My anger flamed like a blazing fire; I rushed out of the barracks regardless of my duties—of everything except revenge. A lucky rencontre on the street put me on de Gonse’s track, and I ran him down in the salle of the Jockey Club. He was standing under one of the windows, reading a letter by the fading light, a note, as like as not, he had just received from Berthe. I think he changed colour when he saw me; at least, he drew back with a start. “I lifted my glove and struck him square across his handsome face. “‘You will understand what that is for, M. le Marquis de Gonse!’ I cried. “He turned deadly white, and with a quick movement caught my wrists in both his hands. “‘Mon enfant!’ he exclaimed in a loud voice, which he tried to invest with a tone of jocularity, ‘you carry your high spirits beyond all reason; I am too old to enjoy being hit upon the nose.’ Then in a lower key he whispered: ‘Paul, calm thyself; for the love of God, do not force a quarrel. Come outside and let us talk with calmness.’ “But I was in no humour to be cajoled. I fiercely shook off his restraining hands. ‘Messieurs,’ I cried, as the others, detecting a scene, began to close round us, ‘Messieurs, behold how I buffet the face of the Marquis de Gonse!’ And with that I again flicked my glove across his face.
“De Gonse slunk back with a sort of sob. “‘Captain de Charruel and I have had an unfortunate difference of opinion,’ he cried, recovering his aplomb on the instant. ‘It seems we cannot agree upon the Spanish Succession. M. le Comte, my seconds will await on you this evening.’ “I turned and left the club, my head in a whirl, my face so distraught and haggard that I carried consternation through the jostling street, the people making way for me as though I were a madman. To obtain seconds was my immediate preoccupation, a task of no difficulty for a young hussar. My colonel kindly condescended to act, and with him my friend Nicholas van Greef, the military attaché of the Netherlands government. To both I told the same story of the Spanish Succession and the quarrel of which it had been the occasion. But my colonel smiled and laid a meaning finger against his nose; the Dutchman said drily it was well to keep ladies’ names out of such affairs. I am convinced, however, that neither of them had the faintest glimmering of the truth. Having thus arranged matters with my seconds, I attempted next to find my poor sister, hastening up her interminable stairs with an impatience I leave you to imagine. Needless to say, she was not in the garret, which was inhabited by Mademoiselle Sonia alone, her pretty face swollen with weeping, her humour one of extraordinary caprices and contradictions. She blamed me altogether for the catastrophe: I ought not to have given Berthe a sou; I ought to have starved her back into servitude. Women were intended for slaves; to make them free was to give them the rope to hang themselves. For her part, said mademoiselle, she thought a convent the right place for girls, and crochet work the best occupation! At any other time I might have stared to hear such sentiments from my sister’s friend, but for the moment I could think of nothing but Berthe. To find her was my one desire. In this, however, Sonia would afford me no assistance, frankly asking what would be the good. “‘The harm is done, my poor Paul,’ she said, looking at me sorrowfully. ‘Why should I expose you or her to an interview so
unpleasant? How could it profit any one?’ “I could not altogether see the force of this acquiescence in evil. I said that the honour of one of the oldest families in France was at stake; that if my sister did not leave the marquis I should kill her with my own hands and fly the country. I implored Mademoiselle Sonia, with every argument I thought might move her, to betray my sister’s hiding-place. But she kept putting me off, mocked at my impatience, and tried to learn, on her side, whether or not I meant to fight de Gonse. “‘If you really wish to find out where she is,’ she cried at last, ‘why don’t you make me tell you? Why don’t you take me by the throat and pound my head against the wall, as they do down-stairs with such admirable success? Those women positively adore their men.’ As she spoke she threw back her head and exposed her charming neck with a gesture half defiant, half submissive! Upon my soul, I felt like carrying her suggestion into effect and choking her in good earnest, for I had become furious at her contrariety. But, restraining the impulse, I saw there was nothing left for me save to retire. “‘Mademoiselle Boremykin,’ I said, ‘you are heartless and wicked beyond anything I could have imagined possible. You have helped to bring a noble name to dishonour, and in place of remorse your only feelings seem those of levity. I have the honour of wishing you good day.’ “De Gonse and I met the following morning in the Bois de Boulogne. His had been the choice of arms, and he selected rapiers, knowing, like all men of the world, that a pistol has the knack of killing. I ground my teeth at his decision, for he had the reputation of being a fine fencer, while I could boast no more than the average proficiency. He appeared to great advantage on the field; so cool, so handsome, such a grand seigneur—in every way so marked a contrast to myself. It was not unnatural, however: he was there to prick me in the shoulder, I to kill him if I could. Small wonder that my face was livid, that my eyes burned like coals in my head, that I was petulant with my own seconds, insulting towards my
adversary’s. I looked at these with scorn, the supporters of a scoundrel, themselves, no doubt, seducers and libertines like him they served. My dear old colonel chid me for my discourtesy—bade me be a galant homme for his sake, if not for mine. I kissed his wrinkled hand before them all; I said I respected men only who were honourable like himself. Every one laughed at my extravagance, at the poor old man’s embarrassment. It was plain they considered me a coward. They said things I could not help overhearing. But I cared for nothing. My God, no! I was there to kill de Gonse, not to pick quarrels with his friends. “We were placed in position. Everything was en règle. The doctors, of whom there were a couple, lit cigarettes and did not even trouble to open their wallets. They knew it to be an affair of scratches. “The handkerchief fell. We set to, warily, cautiously, looking into each other’s eyes like wild beasts. More than once he could have killed me, so openly did I expose myself to his attack, so unconscionably did I force him back, hoping to give lunge for lunge, my life for his. But in his adventurous past de Gonse must often have crossed swords with men no less desperate than myself; it was no new thing to him to face a determined foe, or to guard himself against thrusts that were meant to kill. His temper was under admirable control; he handled his weapon like a master in the school of arms, and allowed me to tire myself out against what seemed a wall of steel. Suddenly he forced my guard with a stroke like a lightning-flash; I felt my left arm burn as though melted wax had been dropped upon it. Some one seized my sword; some one caught me in his arms! “My dizziness, my bewilderment, were the sensations of a moment, and in a trice I was myself again. The wound was nothing—a nicely calculated stroke through the fleshy part of the arm. I laughed when they talked of honour satisfied and of our return to the barracks. I said I never felt better in my life. It was true, for I was possessed with a berserker rage, as they call it in the old Norse sagas; a bullet through my heart could not have hurt me then. The seconds
demurred; they told me that I was in their hands; that I was overruled; repeated, like parrots, that honour was satisfied. This only made me laugh the more. I went up to the marquis and asked him was it necessary for me to strike him again? I called him a coward, and swore I would post him in every salon and club in Paris. I slapped him in the face with my bare hand—my right, for my left felt numb and strange. There was another scene. De Gonse appeared discomposed for the first time; the seconds were pale and more than perturbed. One had a sense of death being in the air. There were consultations apart; appeals to which I would not listen; expostulations as idle as the wind. De Gonse, trembling with wrath, left himself unreservedly to his seconds, walking up and down at a little distance like a sentinel on duty. I also strolled about to show how strong and fit I was—the angriest, the bitterest man in France. “At length it was decided that we might continue the combat. De Gonse solemnly protested, bidding us all take notice that he had been allowed no alternative. My colonel was almost in tears. Repeatedly, as a favour to himself, he besought me to apologise for that second blow and retire from the field. But I was adamant. ‘Mon colonel,’ I said to him, in a whisper, ‘this is a quarrel in which one of us must fall. Let me assure you it is not about a trifle.’ “Again we ranged ourselves; again we grasped our rapiers, saluted, and stood ready for the game to begin. The marquis’s coolness had somewhat forsaken him. The finest equanimity is ruffled by a buffet in the face; one cannot command calm at will. His friends said afterwards that he showed extraordinary self-control, but I should rather have described it as extraordinary uneasiness. No duellist cares for a berserker foe. De Gonse was, moreover, of a superstitious fancy. There are such things, besides, as presentiments; I think he must have had one then. God knows, perhaps he was struggling with remorse. The handkerchief fell; we crossed swords, and the combat was resumed with the utmost vivacity. The air rang with the shivering steel. The doctors smoked no longer, but looked on with open mouths. A duel in grim earnest is seldom seen in France, though I venture to say there was one that
morning. It lasted only a minute; we had scarcely well begun before I felt a stinging in my side, and saw, as in a dream, my enemy’s triumphant face, red with his exertions. The exasperation of that moment passes the power of words to describe. This was my revenge, this a villain’s punishment on the field of honour! He would leave it without a scratch, to be lionised in salons, to relate in boudoirs the true inwardness of the quarrel! Remember, I felt all this within the confines of a single second, as a drowning man in no more brief a space passes his entire life in review. Imagine, if you can, my rage, my uncontrollable indignation, my unbounded fury. What I did then I would do now,—by God, I would,—if need be, a dozen times! I caught his rapier in my left hand and held it in the aching wound, while with my unimpeded right I stabbed him through the body, again and again, with amazing swiftness—so that he fell pierced in six places. There was a terrible outcry; shouts of ‘Murder!’ ‘Coward!’ ‘Assassin!’ on every side looks of horror and detestation. One of the marquis’s seconds beset me like a maniac with his cane, and I believe I should have killed him too had not the old colonel run between us. “The other second was supporting de Gonse’s head and assisting the surgeons to staunch the pouring blood. But it was labour lost; any one could see that he was doomed. From a little distance I watched them crowding about him where he lay on the grass; for I had drawn apart, sick and dizzy with my own wounds, conscious that I was now an outcast among men. At last one came towards me; it was Clut, the doctor. He said nothing, but drew me gently towards the group he had just quitted. They opened for me to pass as though I were a leper. A second later I stood beside the dying man, gazing down at his face. “‘He wishes to shake hands with you,’ said the other doctor, solemnly, guiding the marquis’s hand upward in his own. ‘Let his death atone, he says; he wishes to part in amity.’ “I folded my arms.
“‘No, monsieur,’ I said. ‘What you ask is impossible.’ With that I walked away, not daring to look back lest I might falter in my resolution. I can say honestly that de Gonse’s death weighs on me very little; yet I would give ten years of my life to unsay those final words—to recall that last brutality. In my dreams I often see him so, holding out the hand, which I try to grasp. I hear the doctor saying, ‘He wishes to part in amity.’ “I fainted soon after leaving my opponent’s side. I lay on the ground where I fell, no one caring to come to my assistance. When consciousness returned I saw them lifting the marquis’s body into a carriage, and I needed no telling to learn that he was dead. My colonel and Van Greef assisted me into another cab, neither of them saying a word nor showing me the least compassion. I suppose I should have been thankful they did so much. Was not I accursed? Were they not involved in my dishonour? They abandoned me, wounded, faint, and parching with thirst, to find my own way to Paris. Alone? No, not altogether. On the seat beside me my colonel laid a flask of brandy and a loaded pistol. The first I drank; the revolver I pitched out of window. I never thought to kill myself. For cheating at cards, for several varieties of dishonour, yes. But not for what I had done—never in all the world. My conscience was as undisturbed as that of a little child; excepting always that—why had I not taken his hand! “I was arrested, of course, and tried—tried for murder. You see, there were too many in the secret for it to be long kept. It was a cause célèbre, attracting universal attention. The quarrel concerned the Spanish Succession; as to that they could not shake me. There were many surmises, many suspicions, but no one stumbled on the truth. To a single man only was it told—Maître Le Roux, my counsel. Him I had to tell, for at first he would not take up my case at all. There was a great popular outcry against me, the army furious and ashamed, the bourgeoisie in hysterics. I was condemned; sentenced to death; reprieved at the particular intercession of the Marquise de Gonse, the dead man’s mother, who threw herself on her knees before the Chief Executive—reprieved to transportation for life!
“You will be surprised I mention not my mother. Ah, mademoiselle, there are some things which will not permit themselves to be told— even to you. She went mad. She died. My military degradation is another of those things unspeakable. The epaulets were torn from my shoulders, the galons from my sleeves, my sword broken in two; all this in public before my regiment in hollow square. Picture for yourself, on every side, those walls of faces, scarcely one not familiar; my colonel, choking on his charger, the agitated master of ceremonies; my former friends and comrades trying not to meet my eye; in the ranks many of my own troopers crying, and the officers swearing at them below their breath. My God, it was another Calvary! “At Havre they kept me long in prison, waiting for the transport to carry me to New Caledonia. It was there I heard of my sister’s death, the news being brought to me by a young French lady, a friend of Berthe’s. My sister had poisoned herself, appalled at what she had done. There was no scandal, however, no sensational inquiry. She was too clever for that, too scientific; it was by no vulgar means that she sought her end. Assembling her friends, she bade them good-bye in turn, and divided among them her little property, her money, jewels, and clothes. She died in the typhus hospital to which she had volunteered her services—a victim to her own imprudence, said the doctors; a martyr to duty, proclaimed the world. She was accorded the honour of a municipal funeral (though her actual body was thrown into a pit of lime): the maire and council in carriages, the charity children on foot, the pompiers with their engine, a battalion of the National Guard, and the band of the Ninth Marine Infantry! What mockery! What horror! “Here in New Caledonia I looked forward to endure frightful sufferings, to be herded with the dregs of mankind in a squalor unspeakable. But, on the contrary, I was received everywhere with kindness. The rigours of imprisonment were relieved by countless exemptions. I found, as I had read before in books, that the sight of a great gentleman in misfortune is one very moving to common minds; and if he bears his sorrows with manly fortitude and dignity,
he need not fear for friends. To my jailers I was invariably ‘Monsieur’; they apologised for intruding on my privacy, for setting me the daily task; they would have looked the other way had I been backward or disinclined. I was neither, for I was not only ready to conform to the regulations, but something within me revolted at being unduly favoured. “At the earliest moment permissible by law I left the prison to become a serf, the initial stage of freedom, hired out at twelve francs a month to any one who required my services. I fell into the hands of Fitzroy, here, the mine-owner, who treated me with a consideration so distinguished, so entirely generous, that when I earned my right to a little farm of my own I begged and received permission to settle near him. The government gave me these few acres on the hill, rations for a year, and a modest complement of tools and appliances, exacting only one condition: my parole d’honneur. It is only Frenchmen who could ask such a thing of a convict, but, as I told you before, I was regarded as an exception, a man whose word might safely be taken. “Never was one less inclined to escape than myself; my estates, which are extensive and valuable, would have instantly paid the forfeit; and though I am prohibited from receiving a sou of their revenues, I am not disallowed to direct how my money shall be used. You will wonder why I weigh possessions so intangible against a benefit which would be so real. But the traditions of an old family become almost a religion. To jeopardise our lands would be a sacrilege of which I am incapable; we phantoms come and go, but the race must continue on its ancestral acres; the noble line must be maintained unbroken. So peremptory is this feeling that you will see it at work in families that boast no more than three generations. The father’s château is dear; the grandfather’s precious; the great- grandfather’s a thing to die for! Think what it is among those, like ourselves, whose lineage and lands go back to Charlemagne! Though I can never return to France myself, though I shall die on my little hillside farm and be buried by strangers, still, it is much to me that the estates will pass to those of my blood. I have cousins,
children of my uncle, who will succeed me—manly, handsome boys, whose careers are my especial care. Their children will often ask,— their children’s children, perhaps,—of that portrait of a man in chains, in the stripes of a convict, that hangs in our great picture- gallery at Nemours, beneath it this legend: ‘Paul de Charruel, painted in prison at his own request.’ At the prompting of vanity, of humility,—I scarcely know which to call it,—I had this done before I quitted France for ever, the artist coming daily to study me through the bars; and ordered it hung amid the effigies of my race. I suppose it hangs there now, slowly darkening in that empty house. It shall be my only plea to posterity, my only cry. “It is nearly sixteen years ago since these events took place. For more than twelve I have lived like a peasant on my little farm, the busiest of the busy; up at dawn, to bed by nine o’clock. Blossoming under a care so sedulous and undivided, it has yielded me a rich return for my labour. My heart it has kept from breaking; my hands it has never left empty of a task to fill. There is a charm in freedom and solitude, a solace to be found in the society of plants, beyond the power of words to adequately express. Our government is right when it gives the convict a piece of land and a spade, leaving him to work out his own salvation. I took their spade; I found their salvation. On that hillside there I have passed from youth to middle age; my hair has turned to grey; my talents, my strength, all that I have inherited or acquired in mind or body, have been expended in hoeing cabbages, in weeding garden-beds, in felling the forest-trees which encumbered my little estate. Yet I have not been unhappy, if you except one day each year, a day I should gladly see expunged from my calendar. Once a year I receive from the Marquise de Gonse a letter in terms the most touching and devout, written in mingled vitriol and tears. This annual letter is to her, I know, a supreme sacrifice; every line of it breathes anguish and revolt. To forgive me has become the touchstone of her religion, a test to which she
submits herself with agony. I cannot—I do not—blame her for hating me; I would not have her learn the truth for anything on earth: but is it a pleasure for me to be turned the other cheek? Is it any consolation to be forgiven in terms so scathing? It is terrible, that piety which deceives itself, which attempts to achieve what is impossible. And she not only forgives me: she sends me little religious books, texts to put upon my walls, special tracts addressed to those in prison. She asks about my soul, and tells me she wearies the President with intercessions for my release. Poor, lonely old woman, bereft of her only son! In the bottom of her heart, does she not wish me torn limb from limb? Would she not love to see me in the fires of hell? “This, mademoiselle, concludes my story. To-morrow, in your father’s beautiful yacht, you leave our waters, never to return. You will pursue your adventurous voyage, encircling the world, to reach at last that far American home, receiving on the way countless new impressions that will each obliterate the old. Somewhere there awaits you a husband, a man of untarnished name and honour. In his love you will forget still more; your memories will fade into dreams. Will you ever recall this land of desolation? Will you ever recall de Charruel the convict?” He had not looked at the girl once during the course of his long narrative. He felt that she had been affected—how much or how little, he did not know, a certain delicacy, a certain fear, withholding him. When at last he sought her face he saw that she had been crying. “I shall never forget,” she said. They walked in silence until, at a parting of the paths, he said: “This one leads to my little cabin. Come; it will interest you, perhaps—the roof that has sheltered me for twelve irrevocable years. You are not afraid?” he asked. She made a motion of dissent, drawing closer to him as though to express her confidence.
A few hundred yards brought them to a grassy paddock fenced with limes, through which they passed to reach a grove of breadfruit and orange trees beyond. On the farther side the house itself could be seen, a wooden hut embowered in a bougainvillea of enormous size. It looked damp, dark, and uninviting. Not a breath stirred the tree- tops above nor penetrated into the deep shade below; except for the drone of bees and a sound of falling water in the distance, the intense quiet was untroubled by a sound. De Charruel led the way in silence, with the preoccupation of a man who had too often trod that path before to need his wits to guide him. Reaching the hut, he threw open the door and stood back to allow his companion to enter before him. The little room was bare and clean; a table, a book- shelf, a couple of chairs, the only furniture; the only ornaments a shining lamp and a vase of roses. Miss Amy Coulstoun took a seat in the long canvas chair which the convict drew out for her. The air seemed hot and suffocating, the perfume of the orange-blossoms almost insupportable. She was possessed, besides, with a thought, a fancy, that bewildered her; that made her feel half ashamed, half triumphant; that brought the tears to her eyes repeatedly. De Charruel did not speak. He was standing in the doorway, looking down at her with a sort of awe, as though at something sacred, something he wished to imprint for ever in his mind. “I wish to remember you as you are now!” he exclaimed—“lying back in my chair, your face a little in profile, your eyes sad and compassionate. When you are gone I shall keep this memory in my heart; I shall cherish it; it shall live with me here in my solitude.” “I must go,” she said, with a little thrill of anger or agitation in her voice. “I have stayed too long already.” He came towards her. “I want first to show you this,” he said, drawing from his pocket a jewel-case, which he almost forced into her hands. “You will not refuse me a last favour—you who have accorded me so many?”
She avoided his glance, and opened the box, giving, as she did so, an exclamation of astonishment. It was full of rings. “They were my poor mother’s,” he explained. “By special permission I was allowed to receive them here; I feared they might go astray.” There were, perhaps, ten rings in all, every one the choice of a woman of refinement and great wealth—diamonds, rubies, pearls, and opals, sparkling and burning in the hollow of the girl’s hand. No wonder she cried out at the sight of them, and turned them over and over and over with fascinated curiosity. “Each one has its history,” said de Charruel. “This and this are heirlooms. This was a peace-offering from my father after a terrible quarrel, the particulars of which I never learned. This he gave her after my birth—are the diamonds not superb? This ruby was my mother’s favourite, for it was her engagement ring, and endeared to her by innumerable recollections. She used to tell me that at her death she wished my wife to wear it always, saying it was so charged with love that she counted it a talisman.” Miss Coulstoun held it up to the light, turning it from side to side. “It is like a pool of fire,” she said. “Won’t you try it on?” he asked. She did so, and held out her hand for him to see. The ring might have been made to the measure of her finger. “You will never take it off again,” he said. “You will keep it for a souvenir—for a remembrance.” She shook her head. “Indeed, I will not,” she returned, with a smile. “Besides, is it not to be preserved for your fiancée? You cannot disregard your mother’s wish.” “Why should we pretend to one another?” he broke out. “You know why I offer it to you, mademoiselle. It would be an insult for me to say I love you—I, a convict, a man disgraced and ruined past
redemption. But I can ask you to keep my poor ring. Wear it as you might that of some one dead, some one of whom you once thought with kindness, some one who had greatly suffered.” The girl looked away. “What you ask is impossible,” she said at length, in a voice so low and sweet that it was like a caress. “I don’t think you understand.” “It is your pride that prevents!” he cried. “I understand very well. If I left it you in a testament you would not scruple to take it; you would see a difference! Yet, am I not dead? Is this not my grave you see around me? Am I not the corpse of the man I once was? Trample on your pride for once, for the sake of one that loves the very ground you tread upon. Take my ring, although it is worth much money, although the convenances forbid. If questions are asked, say that it belonged to a man long ago passed away, whose last wish it was that you should wear it.” “I shall say it was given me by the bravest and most eloquent of men, the Comte de Charruel!” she exclaimed, with a deep blush. “You have convinced me against my will.” He cried out in protest, but even as he did so he heard the sounds of footsteps on the porch, and turned in time to see the door flung open by Fitzroy. Behind the Irishman strode the tall figure of General Coulstoun, his face overcast with anxiety. “Thank God!” he cried when he saw his daughter. “You’ve been gone an age, my dear, and I’ve been uneasy in spite of Fitzroy, here. It’s very well to say ‘It’s all right, it’s all right’; but in an island full of con —” “I felt quite safe under M. de Charruel’s protection,” interrupted Amy, striking that dreadful word full in the middle. “I thought you knew I was with this gentleman.” “I don’t know that that made me feel any more—” began the general, recollecting himself in the nick of time. “Why, Amy, child, what are you doing with that ring?”
“M. de Charruel has just presented it to me, papa,” she returned. “Is it not beautiful?” “Good God!” cried the general, “it is a ruby! I could swear it is a ruby! It must be worth a fortune!” Between each of these remarks he stared de Charruel in the face with mingled suspicion, anger, and surprise. “I am told that it is worth about twelve thousand francs,” said the Frenchman. The general started. Fitzroy hurriedly whispered something into his ear. “You don’t say so!” the former was overheard to say. “In a duel, was it? I didn’t know anybody was ever killed in a French—Oh, I see —yes—lost his head—” This little aside finished, the general came back again to the attack, more civil, however, and more conciliatory in his tone. “You must be aware,” he said, addressing de Charruel, “that no young lady can accept such a present as this from any one save a member of her family or the man to whom she is engaged. I can only think that my daughter has taken your ring in ignorance of its real value, forgetful for the moment that the conventionalities are the same whether in New Caledonia or New York. You will pardon me, therefore, if I feel constrained to ask you to take back your gift.” “It rests entirely with Miss Coulstoun,” returned de Charruel. “In that case, there can certainly be no question,” said the general. “I shall not give it back, papa,” said Amy. Her father stared at her in amazement, and from her distrustfully to de Charruel. “Is he not a—convict?” he asked. “Yes.” “And you are going to accept a present from a convict?” “Yes.”
“A present said to be worth twelve thousand francs?” “Yes.” “My God!” he cried, “I could not have believed it possible.” At this she burst out crying. The general put his arm round her. “Come away, my daughter,” he said. “For once in my life I am ashamed of you.” “I must first say good-bye to M. de Charruel,” she said through her tears, holding out her hand—the left hand, on which the ruby glowed like a drop of blood. The convict raised it slowly to his lips. Their eyes met for the last time. “Good-bye,” he said. The next day, from a rocky cliff above his house, de Charruel saw the yacht hoist her white sails and steal out to sea. He watched her as long as she remained in sight, and when at last she sank over the horizon, he threw himself on the ground in a paroxysm of despair. For an hour he lay in a sort of stupor, rising only at the insistent whistle from the mine. This told him that it was twelve o’clock, and brought him back to the realities and obligations of life. Descending to the farm, he once more took up the threads of his existence, for the habits of twelve years are not to be lightly disregarded. But it was with difficulty that he brought himself to perform his usual tasks. His heart seemed dead within his breast. He wondered miserably at his former patience and industry as he saw on every side the exemplification of both. How could he ever have found contentment in such drudgery, in such pitiful digging and toiling in the dirt! What a way for a man to pass his days—an earth-stained peasant, ignobly sweating among his cabbages! Oh, the intolerable
loneliness of those years! How grim they seemed as he looked back at them, those tragic, wasted years! Tortured by the stillness and emptiness of his hut, he spent the night at Fitzroy’s, lying on the bare verandah boards till daylight. But he returned home before the household was astir, lest he should be invited to breakfast and be expected to talk. He shrank from the thought of meeting any one, and for days afterwards kept close within the limits of his little farm, shunning every human being near him. Every convict has such phases, such mutinies of the soul. The malady runs its course like a fever, and if it does not kill or impair the victim’s reason, it leaves him at last too often a hopeless sot. But, fortunately for himself, it was work, not cognac, that cured Paul de Charruel. He came to himself one day in his garden, as he was digging potatoes. He stood up, drew his hand across his face, and realised that the brain-sickness had left him. He went into the house and looked at himself in the glass, shuddering at the scarecrow he saw reflected there. He examined his clothes, his rooms, his calloused hands, with a strange, new curiosity, studying them all with the same speculation, the same surprise. He stood off, as it were, and looked at himself from a distance. He walked about his tangled, weedy farm, and wondered what had come over him these past weeks. He had been starving, he said to himself many times over—starving for companionship. He sought out Fitzroy at the mine. It was good again to hear the Irishman’s honest laugh, to clasp his honest hand, to think there was one person, at least, that cared for him. He hung about Fitzroy all that day, as though it would be death to lose sight of him—Fitzroy, his friend. He repeated that last word a dozen times. His friend! He talked wildly and extravagantly for the mere pleasure of hearing himself speak. He was convulsed with laughter when an accident happened to a truck, and could scarcely contain himself when Fitzroy had a mock altercation with the engineer. No one could be more humourous than Fitzroy, and the engineer was a man of admirable wit! What a fool he had been to sulk these weeks on his farm. His farm! It made him tremble to think of it, so unendurably lonely and
silent it had become. It was horrible that he must return to it,—his green prison,—with its ghosts and memories. He went back late, but not to sleep. He sat on the dark porch of his hut and thought of the woman he had lost. Like a shadow she seemed to pass beside him, and if he shut his eyes he could feel her breath against his cheek and almost hear the beating of her heart. He closed his arms on the empty air and called her name aloud, half hoping that she might come to him. But she was a thousand miles at sea, and every minute was widening the distance between them. The folly and uselessness of these repinings suddenly came over him. She was a most charming girl, but would not any charming girl have captivated him after the life he had been leading? Was he not hungry for affection? Was he not in love with love? He rose and walked up and down the porch, greatly stirred by the new current of his thoughts. Yes; he was dying for something to love—something, were it only a dog. For twelve years he had sufficed for himself, but he could do so no more. By dawn he was at Fitzroy’s, begging the Irishman for a black boy and a horse. A little later his messenger was galloping along the Noumea road, charged with a letter to the Chef de l’Administration Pénitentiaire to request that “le nommé de Charruel” be permitted to leave his farm for seven days. The permission was accorded almost as a matter of form, for it was not the custom to refuse anything to “le nommé de Charruel.” The count went straight to the convent and asked to see the Mother Superior. She was a stately old lady, with silvery hair, an aristocratic profile, and a voice like an ancient bell. She at once cut short his explanations, closing her ears to his official number and other particulars of his convict life. “M. le Comte,” she said, “I knew your mother very well, and your father also, whom you favour not a little. I have often thought of you out there by the strait—ah, monsieur, believe me, often.” De Charruel thanked her with ceremony.
“Your errand cannot be the same as that which brings the others,” she went on, half smiling. “Mon Dieu!” she exclaimed, as she saw the truth in his reddening face. “You, a noble! a chef de famille! It is impossible.” “I am only the convict de Charruel,” he answered. The old woman looked at him with keen displeasure. “You know the rules?” she said in an altered voice. “You know, I suppose, that you can take your choice of three. If you are not satisfied you can return in six months.” “Oh, madame,” he said, “spare me such a trial. I stipulate for two things only: give me not a poisoner nor a thief; but give me, if you can, some poor girl whose very honesty and innocence has been her ruin.” “I can very easily supply you with such a one,” said the Mother Superior. “Your words apply to half the female criminals the government sends me to marry to the convicts. When I weigh their relative demerits I almost feel I am giving angels to devils, so heavy is the scale in favour of my sex. I have several young women of unusual gentleness and refinement, who could satisfy requirements the most exacting. If you like,” she went on, “I shall introduce you first to a poor girl named Suzanne. In the beginning it was like caging a bird to keep her here, but insensibly she has given her heart to God and has ceased to beat her wings against the bars.” “Does she fulfil my conditions?” asked the count. “Yes; a thousand times, yes!” exclaimed the Mother Superior. “Shall I give orders for her to be brought?” “If you would have the kindness,” said de Charruel. There was a long waiting after the command had gone forth. All the womanliness and latent coquetry of the nuns came out in this business of making ready their charges for the ordeal; and when it was whispered that the wooer was the Comte de Charruel himself, a personage with whose romantic history there was not a soul
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Recent Financial Crises Analysis Challenges and Implications 1st edition Edition Klein L.R. (Ed.)

  • 1.
    Recent Financial CrisesAnalysis Challenges and Implications 1st edition Edition Klein L.R. (Ed.) pdf download https://ebookfinal.com/download/recent-financial-crises-analysis- challenges-and-implications-1st-edition-edition-klein-l-r-ed/ Explore and download more ebooks or textbooks at ebookfinal.com
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    Recent Financial CrisesAnalysis Challenges and Implications 1st edition Edition Klein L.R. (Ed.) Digital Instant Download Author(s): Klein L.R. (ed.), Shabbir T. (ed.) ISBN(s): 9781847203014, 1847203019 Edition: 1st edition File Details: PDF, 1.61 MB Year: 2007 Language: english
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    Introduction Lawrence R. Kleinand Tayyeb Shabbir 1 ABOUT THIS BOOK This volume has been assembled to focus on specific analytical as well as policy-related issues pertaining to recent financial crises, most notably the Asian Financial Crisis of 1997–98 and the ripple effects that translated into uncomfortably close calls in Russia, Brazil and, somewhat later, full-blown crises in Turkey and Argentina. Of course, much has been said and written about the various aspects of these recent crises. However, motivated by the belief that the issues raised by and surrounding these recent crises (in fact, financial crises in general) are of ongoing importance, and despite a perspective gained by scholarly analyses of these crises, there are import- ant lessons to be learned and analytical issues that can be explored even further. It may be noted that the papers included in this volume have been specifically prepared for it and thus have the distinction of being original and not reprints, affording an analysis that the respective authors are sharing for the first time. Thematically, we have divided the chapters into three parts. Besides providing an introduction, Part I addresses the issues of predictability of currency crises; Part II consists of chapters that focus on a set of reforms or ‘cures’ for preventing and/or ameliorating the after-effects of a crisis and, finally, Part III consists of a set of econometric studies that address several issues of analytical interest pertaining to labor market behavior, investment and productivity, exchange rate adjustments and estimation of China’s core inflation rate, as well as the ‘true’ cost of living index for China over the twenty-year period that spans the Asian Financial Crisis. A brief guided tour of the contents of the specific chapters is given in section 3, while in section 2 below we note the important questions raised by the recent financial or currency crises. 1
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    2 QUESTIONS OFIMPORTANCE RAISED BY THE RECENT FINANCIAL CRISES The last decade or so has been marked by a significant number of major financial crises including the Mexican (‘Tequila’) Crisis (1994–95), the Asian Financial Crisis (1997–98), the Russian Bond Market Default (1998), the Turkish Banking Crisis (2000) and the Currency Crisis that followed (2001) and the Argentinean Financial Crisis (2002). While most of the affected countries, to a lesser or a greater degree, have apparently recovered from the immediate negative consequences of these crises, the outcome could have been much worse in terms of the time to recover and sustainability of crisis-free development. In any event, there exist the rel- atively longer-run effects of these recent crises, which are still in the process of unwinding. These secular after-effects are relevant, both for practical as well as analytical or academic reasons. In practical terms, several of the affected countries are still grappling with the secular after- math of these crises. In addition to the adoption of country-specific eco- nomic and financial sector reforms, these countries are still facing social sector issues, such as income distributional effects and setbacks to trends towards poverty alleviation that so strongly characterized the 1980s and the early 1990s. On the other hand, in analytical terms or broad-based academic terms, we still need to make sure that that the appropriate lessons from these crises have been learned, and more importantly are being instituted, regarding the workings and reform of the global financial system. While much scholarly work focused both on the analyt- ical and policy-oriented issues has already been undertaken, we believe that there are still very important issues that need to be addressed regard- ing the nature of these crises. The following is a selective list of some of these important issues that are of special interest to us. 2.1 Nature and Dynamics of the Crises How much have we learned about the nature and the dynamics of these crises? In particular, are these crises predictable to any appreciable or practical extent – say, enough to be able to allow us to develop an early warning system? What are the factors that make economies vulnerable to financial crises? (Chapter 1 by Klein and Shabbir as well as Chapter 2 by Tinakorn.) Again, can the policy-makers recommend policies that will soften the impact of, if not eliminate such crises? (Chapter 3 by Eichengreen.) 2 Recent financial crises
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    2.2 Lessons Learned Whatkinds of specific lessons have we learned, if any, from these episodes? What kinds of economic, fiscal, monetary and perhaps even political reforms will be necessary in order to ameliorate the vulnerability of a country to a financial crisis? In this respect, it is heartening to note that con- siderable progress has already been made in instituting certain reforms of the global financial system that have evidently been inspired by the recent financial crises. Prodded by the IMF and the Bank for International Settlements (BIS), increasingly countries now report the value of non- performing loans (NPLs) as a way of monitoring the commercial banking sector. In addition, there has been a consistent trend towards emphasizing the importance of maintaining transparency and prudent risk management by private financial institutions (such as the hedge funds) as well as the central banks of the respective countries. The latter are now routinely expected to furnish prompt and regular reports regarding the amount as well as the disposition of the international reserves they manage. The occurrences of these recent financial crises have taught us the importance of continuing to strengthen these trends. Since the affected countries have mostly recovered, at least economically, from the recent crises, there is a real danger that, for practical purposes, a significant complacency may set in. Obviously, we must guard against this possibility – revisiting the question of the lessons learned and how best to implement them to minimize recurrence and/or to mitigate the severity of future crises. The description of one very important way to do just that can be found in Chapter 3 by Eichengreen. 2.3 ‘Cures’ for the Crises The next set of issues is often presented under the rubric of ‘cures’ for financial crises – actually they are the generally recommended reforms apparently motivated by the experience of financial crises. We will discuss three such broad categories of the so-called ‘cures’: appropriate exchange rate policy, capital market reforms and private business governance. 2.3.1 Appropriate exchange rate policy Regarding the question of the appropriate exchange rate policy, to many, the appropriate policy is simply to have no deliberate policy at all! ‘Let the market take care of the issue completely’, they declare. While it is true that, in retrospect, the 1997–98 Asian Crisis marked a watershed ‘event’ that has convinced many of the desirability of a completely flexible exchange rate, many subtleties still need attention and the question of the appropriate Introduction 3
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    choice of anexchange rate system is not an open and shut case, as it is sometimes made out to be. There are questions regarding the desirability and/or feasibility of a single world or wide-area currency, or in general, the extent and the mechanism for managing exchange rates in the context of the new global financial architecture. Increasingly, private capital flows have come to dominate trade flows and have thus lent a historically high level of volatility in price behavior in this important market. The capital mix has changed – there is, for example, more foreign direct investment (FDI) and less capital flow on official account. Again, there are important unresolved issues concerning how best to deal with chronic current account imbalances (surpluses as well as deficits), management of international reserves by the central banks, possibilities of currency contagion, current account-induced flows and debt flows. A par- ticularly vexing question is the appropriate policy response to a trade surplus in the case of a large, fast-growing creditor country such as China. It turns out that an often-recommended solution – appreciation of the yuan relative to the US dollar – may do little to rectify the problem if the under- lying cause of the hugely favorable trade surplus for China is to be found in international wage differentials estimated to be in the range of 20 or 30:1 in favor of China, even though the differential has been narrowing lately (Chapter 8 by McKinnon). 2.3.2 Capital market reforms Besides currency reforms, capital market reforms are also critical for the emerging economies. In this regard, there are two dominant issues and we will refer to them as (a) optimal degree of liberalization and (b) relative completeness of the scope of capital market instruments or institutions. Capital market liberalization is desirable because it increases efficiency through better allocation of resources. However, such efficiency gains may come at a price since liberalization, inter alia, makes the economy more vul- nerable to contagion and a host of other external shocks. Obviously, these two opposing effects need to be balanced, leading naturally to the notion of the ‘optimal capital market liberalization’. There is a related question of what is the ‘safe’ rate at which transition should take place? Such a deter- mination of optimality would depend, in part, on having on hand analyzes of the various policies that can be used to mitigate the downside of capital market liberalization. One such policy, to contain the potential vulnerabil- ity due to openness on account of capital market liberalization, can be the adoption of capital controls. However, such policy needs to be designed precisely and thoughtfully, with assessment of relevant side-effects. There are relatively few studies that undertake such an assessment. However, Klein, Mariano and Özmucur (Chapter 4) introduce an econometric case 4 Recent financial crises
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    study of Malaysia,which assesses the effects of capital controls, to help manage the financial crisis of 1997–98 in that country and finds that the capital controls there had many positive and desired effects in terms of eco- nomic stabilization. Regarding the other issue that we have termed ‘relative completeness of the scope of capital market’, it has been noted that the emerging economies lack well-functioning bond markets, even when they have fairly well devel- oped equity markets. This is as if one leg is missing, and it makes the country less resilient in the face of a potential financial crisis. However, the study of bond markets in emerging economies is starting to receive increas- ingly greater attention. There is a burgeoning interest in the study of ques- tions such as the role of a viable bond market in improving the efficacy of financial intermediation in these countries as well as how a robust bond market may be a useful buffer to prevent or soften a future crisis. (Chapter 5 by Herring and Chatusripitak is a case study of the Thai bond market in relation to the 1997–98 Asian Financial Crisis; a related, yet independently arrived at, analysis of the importance of a bond market may be found in Chapter 3 by Eichengreen.) 2.3.3 Private business governance Finally, regarding the third aspect of the capital market reforms, we want to note that corporate governance is an important issue in this respect. Indeed, it is one of the host of other emerging issues that pertain (albeit indirectly at times) to the possibility of future financial crises in emerging economies. The question of corporate governance, in part, encompasses concerns about the role of minority shareholders, full disclosure and trans- parency, prudent risk management and the role of the board of directors as independent overseers. It also takes up behavioral issues such as conflict of interest and use of inside information (Chapter 3 by Eichengreen). 2.4 Secular Aftermath of the Asian Financial Crisis 1997–98 While the various economic indicators have shown sustainable and solid improvement in the majority of the affected countries, their respective social indicators are definitely still lagging relative to the pre-crisis trends. The financial crisis in Asia left a deep mark in terms of social upheaval in these countries, many of which were unprepared for such an eventuality. We need to evaluate the income distributional impact in the medium- to the long-run sense as well as to assess the state of the present and future adequacy of the social safety nets in emerging economies that may be espe- cially prone to financial crises (Chapter 1 by Klein and Shabbir). One par- ticularly important question pertains to the behavior of the real wage rate Introduction 5
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    in the affectedcountries pre- versus post-Asian Crisis. (Chapter 7 presents a case study of Thailand regarding real wage rate behavior pre- versus post- Asian Crisis.) 2.5 Focus on New Developments in the Asian Region We feel that in any discussion of the recent financial crises, in addition to reflecting on the past, we ought to be forward-looking as well. In this spirit, we want to note the emerging developments in East Asia/or Greater Asia as a region. Our primary interest in this region lies in particularly focusing on countries that were directly affected by the Asian Crisis of 1997–98, such as South Korea and Thailand, as well as China and Japan, which were only indirectly involved in one or the other aspect of the above crisis because they are important actors in the region. Finally, we also want to indulge in a prospective look at India as an emergent regional economic powerhouse and thus see how the future may look in the wake of post-crisis Asia, where China and India have emerged as the relatively fastest-growing dynamic and open economies (at least in the aspects of trade flows), which may be the domi- nant part of the ‘New Asian Miracle’ going forward and thus may stand to gain the most from any valuable lessons that the recent financial crises can teach us. We will, thus, divide the relevant region into three groups: East Asian directly affected countries China and Japan and India (South Asia). 2.5.1 East Asian directly affected countries An important question is, how will the experience of the last crisis trans- form the affected countries? It seems that each of the affected countries has been responding in unique fashion when it comes to the speed of recovery, depth of the commitment to reforms and adoption of longer-run reforms to prevent or mitigate the effect of the ‘next crisis’. There are some initial hints that these countries may no longer represent a monolithic group that seemingly followed a nearly uniform mantra for growth. Also, these coun- tries, albeit in varying degrees, each maintained a peg of their respective currency to the US dollar. Instead, it seems that many of these countries will be following fairly differentiated paths from now on. These idiosyn- crasies in the chosen development strategies are important both from a policy perspective as well as their theoretical perceptions of growth and development. Is a new paradigm of growth emerging that may lessen the future possibility of financial contagion? 2.5.2 China and Japan China’s case is important from many points of view. China of course, has been growing tremendously fast since reform in 1978. It is poised to be a 6 Recent financial crises
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    dominant part offuture economic prosperity of the region – a ‘New Asian Miracle’, if you will. Its openness in terms of trade flows makes it vulner- able to crises. However, it has a longstanding policy of minimal variations in the exchange rate in the face of persistent current account surpluses. This is just the opposite of what Thailand faced on the eve of the crisis in 1997–98, and decidedly is a relatively better situation to be in than Thailand was when it faced shortages of international reserves rather than having to worry about disposal of surplus. However, an imbalance is an imbalance, all the same. Thus, China is also at the center of the debate about the appro- priate exchange rate and the capital controls policies to adopt. These are issues that have been an intimate part of the financial crisis experience. China is also an obviously important player through its trade and direct investment links to the region. Thus focusing on China is only natural. However, we know that some people have expressed a degree of skepti- cism about the veracity of China’s growth statistics. This is an aspect of the Chinese economy that is of interest to us. Besides addressing the question of China’s ‘true’ growth rate, we are also interested in exploring what role China may have played – a stabilizing or a destabilizing one – during the 1997–98 Asian Crisis. Of course, China is a major regional power and thus very strategic. However, the debate about China’s exchange rate posture has captured wide attention. Its policy of nearly fixed parity of yuan per dollar and capital controls in the face of burgeoning current account surpluses has exposed the currency to potentially destabilizing speculative and political pressure because vested interests feel effects of large competition from many countries. While these pressures are of a different nature in compar- ison with those that Thailand had to face in the weeks and months preced- ing the bhat devaluation of 2 July 1997, still, in a fundamental sense, both kinds of such pressures represent essentially two sides of the same coin if the fundamental goal is to avoid exchange rate instability. The major ques- tion, of course, is whether we have learned enough from the previous crises so that we can more confidently determine the optimal degree of openness of a country’s capital and exchange rate markets. The other important regional power, Japan, is currently showing some signs of a nascent recovery from a long slump. However, the question still remains whether Japan has recovered enough to lend a strong helping hand in the event of the next crisis erupting. 2.5.3 India (South Asia) There are historic changes afoot in South Asia as well. India, in particular, has started to emerge as an Asian ‘giant’, side by side with China. Both these countries have enjoyed strong growth in the real sector (GDP) Introduction 7
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    although they reachedhigh growth in unique fashion – China’s has been a case of growth led now by exports of manufactured goods, while India’s growth has been fueled by growth of service sector activity (especially in the information technology [IT], financial and health sectors). While each of these countries have exhibited impressive rates of GDP growth in recent years, there are significant financial sector issues such as stock and bond market reform, greater transparency and better corporate governance that still need attention. It is clear that going forward, financial sector and capital market reforms will be necessary for the continued success of these countries while keeping in mind some of the important ways – political and structural – in which these countries differ from each other. However, the important point is that, as the new players on the growth playing field so to speak, these countries’ reliance on open trade and foreign direct investment flows makes them vulnerable to financial crises. It is worth watching to see whether lessons from the recent crises were learned well. During the crisis period, neighbors and other competitors blamed China for stealing their export markets. Now they enjoy China’s import appetite. As for India, advanced countries blame ‘white collar’ unemployment problems on India’s burgeoning service sector, but should be benefiting from reduced operating costs in the near future. 3 SALIENT POINTS OF THE CONTRIBUTIONS TO THE VOLUME The following is a brief guided tour of the contents and the themes explored in the various chapters in this volume. Chapter 1: ‘Asia Before and After the Financial Crisis of 1997–98: A Retrospective Essay’ by Lawrence R. Klein and Tayyeb Shabbir Since financial crises can be costly both in economic, as well as, societal terms, it is only natural to inquire whether such crises are predictable. Besides providing a brief introduction, this chapter reviews the various approaches to prediction of currency crises. In this respect, the authors conclude that while econometric predictive models can be very useful in identifying various indicators of ‘vulnerability’, such exercises are not a cure-all. Therefore, exploring the various aspects of the aftermath of a financial crisis is also quite important. In this regard, the authors focus on the income distributional consequences of the Asian Financial Crisis of 1997–98 as well as its impact on the poverty alleviation trends in the affected countries. 8 Recent financial crises
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    Chapter 2: ‘Indicatorsand Analysis of Vulnerability to Currency Crisis: Thailand’ by Pranee Tinakorn This chapter by Professor Tinakorn is a case study of Thailand, a country that has the dubious distinction of being the first country in Asia whose currency succumbed to speculative pressures on 2 July 1997, setting off well-known ripple effects, which impacted not only some of the neighbors, but also Russia and Brazil. This series of currency crises (and, in many instances, follow-up banking crises) prompted anew many efforts to ‘predict’ currency crises so as to pre-empt them or, more realistically, decrease the vulnerability to such harmful episodes. In this spirit, Tinakorn’s study is an important attempt to identify an early warning system. Tinakorn uses time-series monthly data from January 1992 to December 2000 for Thailand to estimate a probit model as well as a ‘signals’ model à la Kaminsky et al.1 (1998) to analyze the indicators of a currency crisis in Thailand. Tinakorn defines a currency crisis as when ‘there is an accumu- lated three month depreciation in exchange rate of 15 percent or more; or there is an accumulated three-month depletion in net international reserves, of 15 percent or more’. It is important to consider net interna- tional reserves, which are gross reserves adjusted for swap obligations of the Bank of Thailand (BOT) – a decidedly better measure than just the equat- ing of currency crises to (realized) currency depreciation, since the mone- tary authority may successfully ward off speculative attacks by depleting international reserves. (This is an interesting point since anyone focusing only on gross reserves would have missed the fact that swap obligations had skyrocketed for BOT in 1996–97 during this [ex post] ‘window of vulnera- bility’ for the country.) This study’s main finding is that, in the case of Thailand, there are several early warning indicators of a currency crisis that are worth watching. The following seven are supported simultaneously by the ‘signals’ analysis as well as the estimated probit model for the country: export growth, ratio of current account to GDP, real exchange rate misalignment, growth of M2/international reserves, ratio of fiscal balance to GDP, real GDP growth rate and change in stock prices. Further, the signals analysis identifies the following four indicators in addition to the above seven: terms-of-trade growth, ratio of short-term external debt to international reserves, growth of domestic credit/GDP and inflation rate. Thus, in hindsight, an awareness of the above set of early warning indi- cators by the policy-makers in Thailand would have been helpful in either handling the management of the international reserves better and/or it might have enabled them to negotiate a less contractionary package with Introduction 9
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    the IMF, thuspossibly ameliorating some of the extreme effects of an unanticipated devaluation and the contraction of the economic activity that necessarily followed. However, there is an important issue of trans- parency. A former IMF official has indicated in a lecture at the University of Pennsylvania that Thailand’s international reserve accounts were in trouble prior to the crisis outbreak, but the international institution would not have made that known to the public on its own authority in advance, for an obvious fear of panic in the financial markets. Chapter 3: ‘The Next Financial Crisis’ by Barry Eichengreen In this chapter, Barry Eichengreen contends that, as of spring 2005, the ‘next’ financial crisis for emerging economies may already be brewing but it may or may not materialize since, as a result of some of the lessons learned from the East Asia Crisis of 1997–98, we have a more stable global financial system as well as improved country-specific financial sectors rendering emerging economies less vulnerable to any impending crisis. However, lest we feel tempted to rest on our laurels, the author lists an agenda for future reforms, in addition to providing an excellent assessment of the reforms that have already been put in place. Eichengreen maintains that, as of spring 2005, the following factors con- stitute a ‘potentially fatal cocktail’ that may foretell a crisis in emerging economies: 1. Rising US interest rates as a result of the FED’s (Federal Reserve’s) reversal of its easy monetary policy it had adopted as of spring 2001. In the past, US domestic interest rate increases have been harbingers of financial problems in emerging markets. 2. The ever-increasing US ‘twin deficits’ – the current account deficit as well as the dudget deficit. 3. The international oil price increases, which may lead to a significant slowdown in China’s growth momentum, which will mean a negative ripple effect throughout the emerging economies since China has lately emerged as a significant engine of regional as well as global economic growth. While the above factors may appear to be clouding the horizon for the emerg- ing economies, Eichengreen stresses that ‘no ill effects are evident yet’ perhaps due to the reforms instituted since the last crisis in 1997–98. He singles out ten reforms already instituted as noteworthy, namely, lengthening the maturity structure of emerging economies’ debt, their smaller current account deficits, larger foreign reserve stockpiles, relatively greater flexibility 10 Recent financial crises
  • 17.
    of the exchangerate mechanisms, greater fiscal ‘responsibility’ as well as reduced leverage in international financial systems, greater multilateral sur- veillance of the financial systems, greater financial sector transparency, incorporation of collective action clauses in sovereign debt instruments, and, finally, comparatively greater transparency of the IMF itself. Besides noting the already instituted reforms that have been motivated by the lessons learned from the recent financial crises, Eichengreen also stresses that we need to continue on this path. He stresses five such future reform targets in emerging economies: continuity of earlier reforms, improved credit and bond markets, enhanced exchange rate flexibility, fea- sibility to borrow in own currency on the world capital markets and con- tinued governance reforms at the Bretton Woods Institutions. One unique feature of Eichengreen’s chapter is that while assessing the reforms put in place in the last few years, he also sheds light on the ‘costs’ of such reforms – a hitherto neglected area of research and analysis. In this regard, if one were to add a ‘sixth’ item to the above agenda for future reforms, it could be the goal of maximizing the ‘net [of costs] benefits’ of these reforms that are inspired by a desire to learn from the past crises. Chapter 4: ‘Capital Controls, Financial Crises and Cures: Simulations with an Econometric Model for Malaysia’ by Lawrence R. Klein, Roberto S. Mariano and Süleyman Özmucur Liberalization of capital account is generally favored as a desirable policy as it can lead to greater availability of capital and increased efficiency. These ‘pro-growth’ effects, however, may be tempered by the fact that liberaliza- tion of capital account can render a country more vulnerable to financial crises due to an enhanced exposure to external shocks. In the face of a financial crisis when the domestic policy-makers often experience the feeling of a loss of control of their economy, an imposition of capital controls (at least temporarily) is often advocated as a solution. Such controls, it is argued, can help to bring under control the possibility of panic-driven flight of capital and uncontrolled depletion of international reserves in the wake of a crisis. However, such controls are generally disfa- vored by those who hold the relatively orthodox view that considers any interference whatsoever with the ‘market mechanism’ as counterproductive. On the eve of the 1997–98 crisis, Malaysia imposed capital controls to manage the financial crisis. This chapter by Klein–Mariano–Özmucur is a description of use of a simultaneous equation macroeconometric model – a method to study the possible impact of capital controls while taking account of the various feedback effects. Such a model is estimated for Malaysia. The model is a fairly detailed one with 438 equations and 607 Introduction 11
  • 18.
    variables. Such detailallows the authors to supplement a traditional macro- economic model by incorporating a very thorough specification of the exter- nal sector; in particular, the authors specify capital account, foreign direct investment as well as portfolio investment, as endogenous to the model. The major conclusion of this chapter is that capital controls in Malaysia had a number of desirable effects on important macroeconomic indicators such as the real GDP growth rate (the net effect was an increase of 0.07 percent over the post-crisis period, 1998–2001). The GDP deflator (whose rate of change, of course, measures inflation rate) would also have been higher in the absence of capital controls. Thus, generally speaking, in the case of Malaysia, the capital controls helped the policy-makers manage the crisis better and the economy enjoyed many positive stabilization benefits with minimal negative effect on foreign direct investment inflows. It is, however, important to recognize that the success of capital controls seems to be contingent on the particular ‘context’ in which they are imposed, quality of policy intervention and the initial conditions in the economy. Chapter 5: ‘The Case of the Missing Market: The Bond Market and Why It Matters for Financial Development’ by Richard J. Herring and Nathporn Chatusripitak Over the last decade, there has been an increased interest in analyzing the role of financial institutions and financial markets in economic growth and development. However, the main focus has been on equity markets, and bond markets have been almost entirely overlooked. This chapter by Herring–Chatusripitak, concentrating particularly on Asian economies, tries to redress this situation by seeking to explain how the absence of a well-functioning bond market may adversely affect other markets, savers, investors and banks, and, in particular, how it may render the economy more vulnerable to a financial crisis. It concludes with an analysis of recent financial development in Thailand to illustrate both the problems associ- ated with the absence of bond markets and the proposed solutions. The authors assert that absence of well-functioning bond markets can make an otherwise vibrant economy more vulnerable to a financial crisis (as was the case in East Asia during the mid-1990s). One major implication of the absence of a bond market is that the economy lacks a market-determined term structure of interest rates that accurately reflects the opportunity cost of funds. This deficiency can make firms under- or over-invest relative to the societal efficient allocation on whether the firm’s internal rate of discount is too high or too low (the latter was the case in the early to mid-1990s in East Asia). Also, lack of ‘true’ term structure will impede accurate pricing of equity in the stock market as well as pricing of credit risk. Again, in the 12 Recent financial crises
  • 19.
    absence of awell-functioning bond market, hedging in the derivatives (including foreign exchange) market will be relatively more expensive, if it is possible at all. As a result, market participants may end up assuming more financial risk than they would choose if there were efficient derivatives markets, just as the Asian Financial Crisis in 1997 showed that many market participants had accepted excessive exposure to foreign exchange risk. The greater risk obviously increases the vulnerability to a financial crisis. Perhaps the most worrisome implication of an underdeveloped bond market is that, in such economies, the banking sector is more vulnerable to inefficiencies, liquidity shocks and falling prey to ‘moral hazards’ of the kind often referred to as ‘crony capitalism’. Lack of competition from the bond market makes banks ‘too big’, leads them to prefer short-term credit, which in turn, leads to biases in firms’ investment policies in favor of short- term assets and away from longer gestation ventures. Also, lack of oppor- tunity for the banks to rely on the bond market to spread their own portfolio risk makes these highly leveraged institutions more vulnerable to a liquidity shock with obvious and often immediate repercussions for the rest of the economy. In Thailand, prior to the 1997 Financial Crisis, the bond market was severely underdeveloped. As a result, Thai firms tended to over-invest, the efficiency of investment was declining and the economy was heavily reliant on bank lending. Consequently, when the banks suffered heavy losses, new lending ceased and firms had to halt investment projects, resulting in pro- longed and painful economic contraction. Since then, the Thai government has begun to implement a number of reforms to stimulate development of both primary and secondary bond markets. These include developing a yield curve for government bonds, efforts to promote risk management and market liquidity, centralizing the clearing and settlement of bonds, upgrad- ing accounting and disclosure standards, and active participation in regional initiatives to strengthen Asian bond markets. These changes have markedly improved the liquidity of the government bond market, and the Thai bond market is more than four times larger, relative to GDP, than before the crisis. The Thai example shows that bond markets do matter for financial development, and that an expanded role for the bond market may be used to rebuild financial systems after the crisis. Chapter 6: ‘Investment, Growth and Productivity during the East Asian Financial Crisis’ by F. Gerard Adams and Tayyeb Shabbir In this chapter, Adams–Shabbir examine the impact of the 1997 East Asian Financial Crisis on real GDP growth and total factor productivity (TFP) of the East Asian countries during and after the crisis. Rather than taking Introduction 13
  • 20.
    the more typicalapproach to analyzing the crisis and its impact in terms of such factors as financial flows, exchange rate misalignment and contagion, the authors approach the crisis from a production input/factor productiv- ity perspective. In the first place, the authors look at the financial crisis and its impact on the growth record of East Asian countries, by comparing a number of growth characteristics pre- and post-crisis. The impact was uneven with apparently minimal effect on China yet with serious recessionary effect on the economies of Thailand, South Korea and Indonesia. In general, real GDP growth rates fell sharply in 1997–98 due to the crisis, and although the post-crisis period shows renewed growth, it is at substantially lower growth rates than in the pre-crisis period. Also, post-crisis relative to pre- crisis, there was a downward trend in labor productivity growth. In add- ition, compared with the exceptionally high values for the investment/GDP ratio, there was a sharp drop in this investment share, and post-crisis recov- ery was of a relatively smaller magnitude. In fact, the downward swing in investment was not matched by a similar swing in domestic saving, hence foreign inflows turned to outflows. Finally, though exports recovered in the post-crisis period, and somewhat offset the lower investment share, the export growth for this period was also lower than its pre-crisis rate. The authors then seek to disentangle growth of output into that attrib- utable to increased inputs and the residual factor, or total factor produc- tivity. This residual represents the difference between the growth of total output and the weighted sum of labor and capital input and includes all ele- ments not taken into account in the computation of growth inputs, includ- ing technological change, economies of scale, the composition of output, the role of exports and the cyclical position of the economy. The authors define unexplained TFP as the change in TFP less the business cycle effect less the industrial/export effect. Statistics show that total labor and capital input growth remain lower post-crisis than pre-crisis. They next undertake a statistical analysis of the factors associated with the growth of TFP. To measure the effect of the 1997 Financial Crisis on TFP, during which there were severe declines in production, they perform regressions linking TFP to a series of dummy variables covering the 1998–2001 periods. They find that declines in production, particularly in 1997 and 1998, have clear impacts on TFP, that the loss in productivity growth associated with this period was not made up in later years, and that the coefficient of a time-trend variable was significantly negative. They also perform regressions linking TFP to other variables such as increasing exports, share of investment, and industrialization, and find that change in industrial output and change in exports make significant contributions to TFP change. Other measured factors, including foreign direct investment, 14 Recent financial crises
  • 21.
    did not showup with statistical significance. Unexplained TFP growth is relatively small. Thus the ultimate equation explaining TFP growth indi- cates that productivity growth in East Asia varies considerably with cycles in business activity and depends greatly on the expansion of industrial pro- duction and exports. Chapter 7: ‘What Really Happened to Thai Wage Rates during the East Asian Financial Crisis?’ by Jere R. Behrman, Anil B. Deolalikar and Pranee Tinakorn In their chapter, Behrman, Deolalikar and Tinakorn (BDT) explore what happened to real wage rates during the Asian Financial Crisis of the late 1990s. The most important earning asset of most members of developing countries is their labor, therefore what happens to real wage rates is import- ant because of (a) the implications for the purchasing power of workers’ income and the design of effective anti-poverty and social safety net poli- cies, (b) the impact on time allocations of workers, and (c) the implications for the extent to which labor market adjustments occur through price rather than quantity effects. Conventional wisdom and most of the claims in previous literature indi- cate that real wage rates fell considerably in Thailand due to the crisis. This chapter uses as its benchmark a World Bank (2000) study of the behavior of the aggregate Thai wage rates as a result of the crisis. This World Bank study estimates that the Thai real wage rate fell by 4.6 percent during the crisis. The methodology used was to subtract the percentage change in the number of employed workers between the pre- and post-crisis period from the percentage change in the aggregated real wage earnings between the pre- and post-crisis period. However, BDT argue that the methodology used in the World Bank and other studies is subject to at least four possibly import- ant limitations that may make a considerable difference in understanding what really happened to real wage rates and what the implications are for policy. The chapter then examines these four limitations in detail. First, the World Bank assumes that the number of wage recipients is a fixed share of total employment. But the composition of employment shifted from wage to non-wage workers, and this by itself creates a bias of 2.5 percentage points in World Bank estimates (implying ‘true’ change of ⫺4.6% ⫹ 2.5% ⫽ ⫺2.1%). Second, it assumes that hours worked are con- stant, but, in fact, hours worked did change, which, again by itself, creates a bias of 5.5 percentage points (implying a ‘true’ change of ⫺4.6% ⫹ 5.5% ⫽ 0.9%). Third, the World Bank weights wage recipients proportionately to their hours worked to obtain the mean wage rates across wage recipients; whereas BDT feel that it is more appropriate to weight individuals equally Introduction 15
  • 22.
    and estimate thatthis aspect of the World Bank methodology by itself causes a bias of 1.4 percentage points (implying a ‘true’ change of ⫺4.6% ⫺1.4% ⫽ ⫺6.0%). If all of these first three biases were corrected, the World Bank estimate would change to an increase of 2 percent in Thai real wage rates during the crisis. However, more importantly, BDT contend a fourth issue related to the above World Bank methodology. This issue concerns the World Bank study’s assumption that no change took place in the composition of wage recipients between the pre- and post-crisis periods. Instead the BDT study looks at data for all workers and for subcategories defined by the three observed characteristics of gender, age and schooling and finds that as a result of the crisis, wage employment shifted relatively from females to males, from younger to older workers, and from lower-schooled to higher- schooled individuals – all shifts from lower to higher real wage categories. The failure to account for these important compositional changes in World Bank estimates means that the estimated overall average real wage rate change is biased upwards. The authors’ best estimate of how much real hourly wage rates declined due to the crisis is 7.8 percent (due to the methodology used by BDT, their estimate is free from the first three biases that the World Bank study had to contend with). The major conclusion of the study was that the methodology used by the World Bank presents a misleading picture of what happened to Thai real wage rates during the Asian Financial Crisis. Although the biases in the World Bank study are partially offsetting, the severity of the impact of the crisis on declines in the real wage rate is underestimated by 3.2 percentage points or about 40 percent (comparing a World Bank estimate of a 4.6 percent decline with this study’s preferred estimate of a 7.8 percent decline). This study notes that even the decline of 7.8 percent is probably an under- estimate of the true decline because of the probable compositional changes that occur because of unobserved characteristics such as ability and moti- vation. The authors feel that the best solution would be for longitudinal labor force data to be collected as a matter of routine so that comparisons could be made for the wage rates for the same individuals over time. If these longitudinal surveys are not available, then a second-best solution is to follow the methods in this chapter, in particular controlling for composi- tional changes with respect to observed characteristics such as gender, age and schooling. Besides the above question of computing the ‘true’ magnitude of the decline in the Thai real wage during the 1997 crisis, the BDT study also examined the claim that the poorer and more vulnerable suffered most in the crisis and found some, but limited, support for that claim. Regression estimates showed that youths fared worse than prime-age adults, but that 16 Recent financial crises
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    some other groupstypically characterized as more vulnerable fared rela- tively well: those with primary or less schooling, females and older adults. Chapter 8: ‘Exchange Rate or Wage Changes in International Adjustment? Japan and China versus the United States’ by Ronald I. McKinnon In this chapter, McKinnon puts forth an analysis that concludes that, under the world dollar standard, a discrete appreciation by a dollar creditor country of the United States, such as China or Japan, has no predictable effect on its trade surplus. Currency appreciation by the creditor country will slow its economic growth and eventually cause deflation but cannot compensate for a saving–investment imbalance in the United States. Under a fixed exchange rate, however, differential adjustment in the rate of growth of money wages will more accurately reflect international differences in productivity growth. International competitiveness will be better balanced between high-growth and low-growth economies, as between Japan and the US from 1950 to 1971 and China and the US from 1994 to 2005, when the peripheral country’s dollar exchange rate is fixed so that its wage growth better reflects its higher productivity growth. Also discussed is the qualified case for China moving toward greater flexibility in the form of a very narrow band for the yuan/dollar exchange rate, as a way of decentralizing foreign exchange transacting. One important implication of the McKinnon hypothesis as articulated in this chapter is that even if we made some desirable changes in the yuan/dollar exchange rate, the hope of narrowing the China–US trade surplus may not materialize since the more important determinant of the Chinese advantage is its relatively lower wage rate. According to available data, anecdotal evidence indicates that it may be as high as 20 to 30:1 in China’s favor compared with about 5 to 10:1 in India’s favor when we compare India versus China. However, it is interesting to note that China’s relative advantage in wage competitiveness may already be narrowing and the dynamic implications of this trend towards the exchange rate and trade policy vis-à-vis China should be very instructive and important to watch. Chapter 9: ‘Adjustment to China’s CPI-based Inflation Rate to Account for the “True” Cost of Living, 1993–2004’ by Lawrence R. Klein, Huiqing Gao and Liping Tao In this chapter, the authors Klein, Gao and Tao (KGT), in a pioneering study, adjust China’s Consumer price index (CPI) to account for the ‘true’ cost of living for 1993–2004, a period that covers the Asian Financial Crisis period 1997–98. Introduction 17
  • 24.
    Chinese economic growthsince 1978 has certainly been spectacular in magnitude, and, as a result, many scholars have drawn the conclusions that the numerical size of Chinese economic growth is overstated. However, that is not the opinion of the authors of this chapter. In order to examine China’s growth rate, they have focused on its rate of price level change as measured by a consumer price index – the inflation rate that can be used to convert nominal GDP to real GDP. They argue that the magnitude of inflation has been overstated, because it does not take into account quality change or lifestyle change. Hence, they estimate an adjustment to China’s CPI by estimating the ‘true’ economic cost of living index, using the linear expenditure system (LES). The true ‘cost’ of living in China can indicate how much the inflation might be lowered, and the real growth rate corres- pondingly increased, for the economy as a whole. The LES equation can be written as: ↕ ↕ ↕ ↕ expenditure on minimum total total minimum ␤i ⫽ marginal the i-th category subsistence income subsistence propensity to expenditure expenditure consume on the i-th on all categories out of category supernumerary income. This equation is expressed in current value prices (nominal). Goods and services are grouped into eight classes: food; clothing; household facilities; medicine and medical services; transportation, post and communication services; educational, cultural and recreation services; residential; and mis- cellaneous commodities and services. Each of these aggregate groups can be treated as a non-inferior good. Engel curves separately relate expendi- ture on each group to total income, and the part of the Engel curves that the authors of this chapter use for parameter estimation is in a linear range. They use cross-section data from family budgets (for both urban and rural populations) to estimate the parameters ␥i, which represent necessary or minimum levels of consumption for each grouping of goods and services, and they use time-series aggregates to estimate the parameters ␤i, which represent marginal propensities to consume. Using these parameter estimates, they evaluate the ‘true’ cost of living index. They find a lower inflation rate across both urban and rural (pitqit ⫺pit␥i) ⫽␤i冢rt ⫺ 兺 n j⫽1 pjt␥j冣;兺 n i⫽1 ␤i ⫽1 18 Recent financial crises
  • 25.
    populations on thebasis of ‘true’ cost of living, compared with standard CPI calculations, which translates into higher growth rates for real con- sumption. If nominal consumption rates were adjusted using this lower inflation rate, KGT estimate a higher real consumption growth of 9.32 percent on a per capita basis and 9.57 percent on a household basis (versus 7.65 percent and 6.65 percent, respectively without such an adjustment). Because the authors see persistent overestimates of the price deflator for consumption, they conclude that one or two percentage points should be added to the growth rate. Although they determine this for consumption, they argue that close to the same order of magnitude should be considered for GDP as well. In addition, the authors offer another approach to adjusting the official published price indexes, which takes into account a variety of indicators of life quality or lifestyle in a wider sense. Using ten such indicators, they compute an index as a ten-element weighted average, which grows from 100 in 1980 to 115.47 in 2002. This indicates an estimated growth rate of r ⫽ 0.65596 percent, nearly double that for the United States in the period 1980–2000. Thus they conclude that the adjustment to China’s growth rate could be as high as 1 percent or more. The adjustment of the US inflation rate for quality of life and other changes has been broadly accepted, so it seems reasonable to adjust China’s price indexes for the same reasons. In fact, lifestyle changes in China have been much greater than for the United States. Chapter 10: ‘Estimating China’s Core Inflation Rate’ by Deming Wu The premise of this chapter by Deming Wu is to ascertain the ‘core’ inflation rate for China in the same manner as is routinely adopted for other advanced economies such as the United States. This constitutes a very sound and extremely interesting methodological exercise with important policy implications as well. The empirical estimates obtained as a result of this effort are a very important statistic that allows us to characterize prop- erly the stabilization policy in China. This is an important element both domestically as well as in the context of the debate pertaining to China’s perceived role in the Asian Crisis of 1997–98 when, at times, it was criticized for being too ‘deflationary’. One of the main findings of the chapter is that China’s core inflation rate – an idea familiar to the US macro-empiricists – was positive unlike the observed official overall inflation rate, which was negative. This implies that, judged by the same standards as adopted, say, in the US for determining the inherent or underlying true inflation rate by looking at the ‘core’ inflation rate, China pursued a rather expansionary monetary policy during 1997 and 1998. Thus, if anything, China was a Introduction 19
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    Discovering Diverse ContentThrough Random Scribd Documents
  • 27.
    needs have seenand wondered at the transaction from the boat, I kept down my curiosity until I could satisfy it more privately on board. Then, as the captain and I were watching the extraordinary antics of the Beautiful Man (who had rushed down to the beach and thrown himself into a native canoe, in the impossible hope of overtaking us, alternately paddling and shaking his fist demoniacally in the air), I drew out the package and cut it open with my knife. In a neat little beadwork bag (which still conserved a lurking scent of monkey), and carefully done up in fibre, like a jewel in cotton wool, I found a shining treasure of gold and silver coin. One hundred and thirty-seven dollars! It was Bo’s restitution.
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  • 29.
    T THE DUST OFDEFEAT HEY took their accustomed path beside the strait, walking slowly side by side, each conscious that they would never again be together. The melancholy pines, rising from the water’s edge to the very summit of the mountains, gave that look of desolation which is the salient note of New Caledonian landscape. Across the narrow strait as calm and clear as some sweet English river, the rocky shore rose steep and precipitous, cloaked still in pines. A faint, thrilling roar broke at times upon the ear, and told of Fitzroy’s mine far up on the hill, its long chutes emptying chrome on the beach below. Except for this, there was not a sound that bespoke man’s presence or any sign that betrayed his habitation or handiwork. “This is our last day,” he said. “Do you not once wish to see the little cabin where I have eaten my heart out these dozen years? Do you never mean to ask me what brought me here?” “I would like to know,” she answered; “but I was afraid. I didn’t wish to be—to be—” “Thank you,” he said. “Thank you for that unspoken word. You did not wish to be disillusioned—to be told that the man you have treated with such condescension was a mere vulgar criminal, a garroter perhaps, such a one as you have read of in Gaboriau’s romances. Ah, mademoiselle, when you have heard my unhappy story,—that story which no one has ever listened to save the counsel that defended me,—you will perhaps think better of poor Paul de Charruel.” “You are innocent?” she cried, looking up at him with eyes full of tenderness and curiosity. “You have shielded some one?” M. de Charruel shook his head. “I am not innocent,” he said. “I am no martyr, mademoiselle—not, at least, in the sense you are good
  • 30.
    enough to imply.I was fortunate to get transportation for life, doubly fortunate to obtain this modified liberty after only three years. You may, however, congratulate yourself that your friend is a model prisoner; his little farm has been well reported on by the Chef de l’Administration Pénitentiaire; it compares favourably with Leclair’s, the vitriol-thrower of Rue d’Enfer, and his early potatoes are said to rival those of Palitzi the famous poisoner.” His companion shuddered. “Pardon me,” he continued. “God knows, I have no desire to be merry; my heart is heavy enough, in all conscience.” “You will tell me everything,” she said softly. He walked along in silence for several minutes, moody and preoccupied, staring on the ground before him. “I suppose I ought to begin with my father and mother, in the old- fashioned way,” he said at last, with a sudden smile. “There are conventionalities even for convicts! My father (if we are to go so far back) was the Comte de Charruel, one of the old noblesse; my mother an American lady from whom I got the little English I possess, as well as a disposition most rash, nervous, and impulsive. There were two of us children—my sister Berthe and myself, she the younger by six years. My father died when I reached twenty years, just as I entered the Eighty-sixth Hussars as a sub-lieutenant. Had he survived I might perhaps have been saved many miseries and unhappinesses; on the other hand, he, the soul of honour, might have been standing here in my place, condemned as I have been to a lifelong exile. “I was a good officer. Titled, rich, and well born, there was accorded me the friendship of the aristocratic side of the regiment; a good comrade, and free from stupid pride, I stood well with those who had risen from the ranks and the humbler spheres of society. Many a time I was the only officer at home in either camp, and popular in both. When I look back upon my army life, so gay, so animated, so filled with small successes and commendations from my superiors, I
  • 31.
    wish that Ihad been fated to die in what was the very zenith of my happiness and prosperity. “My mother, except for a short time each year at our hôtel in Paris, lived in our old château in Nemours, entertaining, in an unobtrusive fashion, many of the greatest people in France; for the entrée of few houses was more eagerly sought than our own. Though we were not so well born as some, nor so rich as many, my mother contrived to be always in request, and to make her salon the centre of all the gaiety and wit of France. “From her earliest infancy my sister Berthe was counted one of the company at the château, and while I was at the lycée and afterwards at St. Cyr, she was leading the life of a great lady at Nemours. Marshals of France were her cavaliers; famous poets and musicians played with her dolls and shared her confidences; men and women distinguished in a thousand ways paid court to her childish beauty. Beauty, perhaps, I ought not to say, for her charm lay most in the extraordinary liveliness and intrepidity of her character, which captivated every beholder. Indeed, she ought to have been the man of the family, I the girl—so diverse were our tastes and aspirations, our whole outlook on life. “You, of course, cannot recollect the amazing revolution that swept over Europe when I was a young man—that upheaval of everything old, accepted, and conventional, which was confined to no one country, but raged equally throughout them all. Huxley, Darwin, Haeckel, Renan, and Herbert Spencer were names that grew familiar by incessant repetition; young ladies whom one remembered last in boxes at the opera, or surrounded by admirers at balls and great assemblies, now threw themselves passionately into this new Renaissance. One you would find studying higher mathematics; another geology and chemistry; another still, teaching the children of thieves and cut-throats how to read. Girls you had seen at their father’s table, with downcast eyes and blushes when one spoke to them, now demanded separate establishments of their own; worked their way, if necessary, through foreign universities; fought like little
  • 32.
    tigers for theprivilege of studying till two in the morning and starving with one another in the gloomiest parts of the town. Nor were the young men behind their sisters: to them also had come the new revelation, this self-denying and austere standard of life, this religion of violent intellectual effort. To many it was ennobling to a supreme degree; and while our girls boldly made their way into avenues hitherto closed to women, there were everywhere young men, no less ardent and disinterested, to support them in the mêlée. In every house there was this revolt of the young against the old, this perpetual argument of humanitarianism against apathy and laisser-faire. “To me it all seemed the most frightful madness. I was bewildered to see bright eyes pursuing studies which I knew myself to be so wearisome, taking joy where I had found only vexation and fatigue. Like all my caste, I was old-fashioned and thought a woman’s place at home. You must not go to the army for new ideas. It was no pleasure to me to see delicately nurtured ladies rubbing shoulders with raw medical students or tainting their pretty ears with the unrestrained conversation of men. You must remember how things have changed in eighteen years; you can scarcely conceive the position of those forerunners of your sex in Europe, so much has public opinion altered for the better. In my day we went to extremes on either side, for it was then that the battle was fought. The elders would not give way an inch; the children dashed into a thousand extravagances. To some it looked as though the dissolution of society was at hand. Girls asked men to marry them,—men they had seen perhaps but once,—in order that they might gain the freedom accorded to married women and secure themselves against the intolerable interference of their families. Some of them never saw their husbands again, nor could even recollect their names without an effort. Ah, it was frightful! It was a revolution! “In spite of all her liberal opinions, her unconventional views, her apparent allegiance to the new religion, my mother soon took her place amid the reactionary ranks, while my sister, the mondaine, just as surely joined the rebellion. As I said before, it was the battle of
  • 33.
    the young againstthe old; age, rather than conviction, assigned one’s position in the fight. Our house, hitherto so free from domestic discord, became the theatre of furious quarrels between mother and daughter—quarrels not about gowns, allowances, suitors, or unpaid bills, but involving questions abstract and sublime: one’s liberty of free development; one’s duty to one’s self, to mankind; one’s obligation, in fact, to cast off all shackles and take one’s place in the revolution so auspiciously beginning. “The end of it was that Berthe left Nemours, coming to Paris without my mother’s permission, to study medicine with a Russian friend of hers, a girl as defiant and undaunted as herself. This was Sonia Boremykin, with whose name you must be familiar. Needless to say, I was interdicted from giving any assistance to my sister, my mother imploring me not to supply the means by which Berthe’s ruin might be accomplished. But I could not allow my sister to starve to death in a garret, and if I disobeyed my poor mother, she had at least the satisfaction of knowing that my sympathies were on her side of the quarrel. My greatest distress, indeed, was that Berthe would accept so little, for she was crazy to be a martyr, and was, besides, prompted by a generous feeling not to take a sou more than the meagre earnings of her companion. So they lived and starved together, these two remarkable young women, turning their backs on every luxury and refinement. Either, for the asking, could have received a thousand-franc note within the hour; for each a château stood with open doors; for each there was a dowry of more than respectable dimensions, and lovers who would have been glad to take them for their beaux yeux alone! And yet they chose to live in a garret, to be constantly affronted as they went unescorted through the wickedest parts of Paris, to subsist on food the most unappetising and unwholesome. For what? To cut up dead paupers in the Sorbonne! “I was often there to see them with the self-imposed task of trying to lighten the burden of their sacrifices. I introduced food in paper bags, and surreptitiously dropped napoleons in dark corners—that is, until I was once detected. Afterwards they watched me like hawks.
  • 34.
    Sometimes they wereso hungry that tears came into their eyes at the sight of what I brought; at others they would appear insulted, and throw it remorselessly out of the window. Though I had no sympathy whatever with their aims, I was profoundly interested, profoundly touched, as one might be at the sight of an heroic enemy. Their convictions were not my convictions; their mode of life I thought detestable: but who could withhold admiration for so much courage, so much self-denial, in two beautiful young women? I used often to bring with me my old colonel, a glorious veteran with whom I was always a favourite, and the girls liked to hear our sabres clank as we mounted the grimy stair, and to see our brilliant uniforms in their garret. It reminded them of the monde they had resigned; besides, they needed an audience of their own caste who could appreciate, as none other, their sacrifices and their fortitude. Mademoiselle Sonia used to look very kindly at me on the occasion of my visits, never growing angry, as my sister did, at my stupidity, or by my failure to understand their high-flown notions of duty. Once, when I was accidentally hurt at the salle d’armes by a button coming off my opponent’s foil, it was she who dressed my wound with the greatest tenderness and skill, converting me for all time as to the medical career for women. Poor Sonia, how her eyes sparkled at her little triumph! “On one of my visits I was thunderstruck to find before me the Marquis de Gonse, a gentleman much older than myself, with whom I had not actual acquaintance, though we had a host of friends in common. Upon his departure I protested vehemently against this outrage of the proprieties. I besought them to show a little more circumspection in their choice of friends, admitting no man to their intimacy who counted not his fifty years. But my protestations were received with laughter; I was told that the marquis was a friend of Sonia’s father, and was trying to effect a reconciliation highly to be desired. Berthe accused me mockingly of wishing to keep the little Russian to myself. Indeed, she said, what could be more demoralising to her companion than the constant presence of a beautiful young hussar? With her saucy tongue she put me
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    completely to theblush; in vain I pleaded and argued; de Gonse’s footing was assured. Yet, if they had searched all Paris, they could not have found a man more undesirable, or more dangerous for two young women to know. Ardent, generous, and himself full of aspirations for the advancement of humanity, nothing was better calculated to appeal to him than the struggle in which my sister was engaged. His sympathy, his sincere desire to put his own shoulder to the wheel, were more to be feared than the most strenuous protestations of regard. If he had made love to my sister, she was enough a woman of the world to have sent him to the right about; but he adopted, all unconsciously, I am sure, a more subtle plan to win her good opinion: he was converted! “If I shut my eyes I can see him sitting there in that low garret as he appeared on one occasion which particularly imprinted itself on my mind; such a high-bred, such a distinguished figure, with his silk hat and gloves beside the box which had been given him for a chair, and his face full of wonder and sadness! You have read of Marie Antoinette in prison, of her sufferings so uncomplainingly borne, of her nobility and steadfastness in the squalor of her cell! You have revolted, perhaps, at the picture—clinched your little fists and felt a great bursting of the heart? It was thus with M. de Gonse. Berthe he had often seen at our château in Nemours; Sonia’s father he had known in Russia, a general of reputation, standing high in the favour of the Czar. None was better aware than he of what the young ladies had given up. I could see that he was deeply moved. He asked many questions; at times he exclaimed beneath his breath. He insisted on learning everything—the amount of their income, the nature of their studies, all their makeshifts and contrivances. The two beautiful, solitary girls, from whom sympathy and appreciation had so long been withheld, unbared their lives to us without reserve. Berthe told us, amid the passionate interjections of Sonia Boremykin, the story of their struggles at the medical school: the open hostility of the professors; the brutal sneers and innuendoes; the indescribable affronts that had been put upon them. During this terrible recital— for it was terrible to hear of outrages so patiently borne, of insults
  • 36.
    which bring theblood to the cheek even to remember after all these years—de Gonse rose more than once from his seat, walking up and down like one possessed, uttering cries of rage and pity. It was no feigned anger, no play-acting to win the regard of these poor women. Let me do the man that justice. “I don’t think my sister was prepared for the effect of her eloquence on the marquis, or could have foreseen, even for a moment, the tempest she had raised within his breast. He swore he would challenge every professor in the school; that he would unloose spadassins on the offending students, whose bones should be broken with clubs; that to blight their careers in after life he would make his business, his pleasure, his joy! It was with difficulty that he was recalled to the realities of every-day existence, my sister telling him frankly that such a course as he proposed might benefit woman in general, but could not fail to destroy the future of herself and Sonia Boremykin. To be everywhere talked about, to get their names into the newspapers, to be pointed at on the street as the victims of frightful insults—what could be more detestable, more ruinous to the careers they hoped to make? De Gonse was reluctantly compelled to withdraw his plans of extermination; for who could controvert the logic with which they were demolished or fail to see the justice of my sister’s contention? Confessing himself beaten on this point, he sought for some other solution of the problem. Private tutors? Intolerably expensive, came the answer; poor substitutes for one of the greatest schools in Europe; unable, besides, to confer the longed-for degree. The University of Geneva, famous for its generous treatment of women? Good, but its diploma would not carry the desired prestige in France. I hazarded boys’ clothes and false mustaches; but my remark was greeted with a shout of laughter and a half-blushing confession from Mademoiselle Sonia that one experiment in this direction had sufficed. It was to the marquis that light finally came. “‘Fool! Idiot!’ he thundered, striking himself on his handsome forehead with his fist. ‘Why did I not think of it before? To-morrow I join the medical school myself—the student de Gonse, cousin of the
  • 37.
    marquis, a mantired of the hollowness and the trivialities of high life. I do nothing to show I am acquainted with you, nothing to compromise you in the faintest manner. But de Gonse, the medical student, is a gentleman, a man of honour. A companion ventures on a remark derogatory to the dignity of the young ladies; behold, his head cracks like an egg against his desk! Another opens his mouth, only to discover that le boxe (you know I am quite an Anglais) is driving the teeth down his throat, setting up medical complications of an extraordinary and baffling nature. A professor so far forgets his manhood as to heap insults on the undefended; the strange medical student tweaks his nose in the tribune and challenges him to combat! How simple, how direct!’ “Imagine my surprise a few days later to learn that this had been no idle gasconade on the marquis’s part. True to his word, he had appeared at the school elaborately attired for the part he was to play, even to a detestable cravat and a profusion of cheap jewellery! Unquestionably there must have been others in the plot, for no formalities anywhere tied his hands or opposed the least obstacle to his audacity. As one would have expected from a man so eager and so full of resource, the object for which he came was soon achieved. Mingling with the students as one of themselves, he singled out those who went the farthest in persecuting the women, and insensibly cajoled them into a better way of conduct. The minority, too, those that still kept alive the chivalry of young France, were strengthened and encouraged by the force of his example, so that the crusade, once authoritatively begun, went on magnificently of itself. Not a blow was struck, not a wry word said, and behold, de Gonse had accomplished a miracle! From that time the position of women was assured; protectors arose on every side as though by magic; in a word, gallantry became the fashion. When professors ventured on impertinences, hisses now greeted them in place of cheers; they changed colour, and were at pains to explain away their words. The battle, indeed, was won. “Had de Gonse contented himself with this victory, which saved my sister and Mademoiselle Sonia from countless mortifications, how
  • 38.
    much human miserywould have been averted, how great a tragedy would have remained unplayed! But evil and good are inexplicably blended in this world, a commonplace of whose truth, mademoiselle, you will have many opportunities of verifying. Having acted so manly a part, one so calculated to earn the gratitude and esteem of these poor girls, he turned from one to the other, wondering with which he should reward himself. I have reason to think his choice first fell on Sonia Boremykin, who had the whitest skin and the prettiest blue eyes in the world. How can I doubt, to judge from her wild, tragic after life, but that he could have persuaded her to her ruin? But he must have paused half-way, struck by the incomparable superiority of my sister. In beauty she was not perhaps the equal of her companion, though to compare blonde and brune is a matter of supererogation. In other ways, at least, there never lived a woman more desirable than Berthe de Charruel. She possessed to a supreme degree the charm that springs from intelligence,—I might say from genius,—which, when found in the person of a young and beautiful woman, is almost irresistible to any man that gains her favour. Jeanne d’Arc was such another as my poor sister, and must have been impelled on her career by something of the same fire, something of the same passionate earnestness. To break a heart like hers seemed to de Gonse the crown to a hundred vulgar intrigues and bonnes fortunes. “Of course, I knew nothing of this gradual undoing of my sister, though during the course of my visits to the little garret I often found the marquis in the society of Berthe and her friend. I disliked to see him there, but I was powerless to interfere. I was often puzzled, indeed, by the ambiguous conduct of Mademoiselle Sonia, who had the queerest way of looking at me, and whose eyes were always meeting mine in singular glances, whether of warning or appeal I was at a loss to tell. Her words, too, often left me uneasy, recurring to me constantly when I was in the saddle at the head of my troop or as I lay awake in bed awaiting the reveille. I wondered if the little Russian were making love to me, for, like all hussars, I was something of a coxcomb, though, to do me justice, neither a lady-
  • 39.
    killer nor apursuer of adventures. It was in my profession that I found my only distraction, my only mistress. I am almost ashamed to tell you how good I was, how innocent—how in me the Puritan stock of my mother seemed to find a fresh recrudescence. Some thought me a hypocrite, others a coward; but I was neither. “I learned the truth late one afternoon from Sonia Boremykin, who came to my quarters closely veiled, in a condition of agitation the most frightful. I could not believe her; I seemed to see only another of her devices to win my regard. My sister! My Berthe! It was impossible! I said to her the crudest things; I was beside myself. She went on her knees; she hid nothing; it was all true. My anger flamed like a blazing fire; I rushed out of the barracks regardless of my duties—of everything except revenge. A lucky rencontre on the street put me on de Gonse’s track, and I ran him down in the salle of the Jockey Club. He was standing under one of the windows, reading a letter by the fading light, a note, as like as not, he had just received from Berthe. I think he changed colour when he saw me; at least, he drew back with a start. “I lifted my glove and struck him square across his handsome face. “‘You will understand what that is for, M. le Marquis de Gonse!’ I cried. “He turned deadly white, and with a quick movement caught my wrists in both his hands. “‘Mon enfant!’ he exclaimed in a loud voice, which he tried to invest with a tone of jocularity, ‘you carry your high spirits beyond all reason; I am too old to enjoy being hit upon the nose.’ Then in a lower key he whispered: ‘Paul, calm thyself; for the love of God, do not force a quarrel. Come outside and let us talk with calmness.’ “But I was in no humour to be cajoled. I fiercely shook off his restraining hands. ‘Messieurs,’ I cried, as the others, detecting a scene, began to close round us, ‘Messieurs, behold how I buffet the face of the Marquis de Gonse!’ And with that I again flicked my glove across his face.
  • 40.
    “De Gonse slunkback with a sort of sob. “‘Captain de Charruel and I have had an unfortunate difference of opinion,’ he cried, recovering his aplomb on the instant. ‘It seems we cannot agree upon the Spanish Succession. M. le Comte, my seconds will await on you this evening.’ “I turned and left the club, my head in a whirl, my face so distraught and haggard that I carried consternation through the jostling street, the people making way for me as though I were a madman. To obtain seconds was my immediate preoccupation, a task of no difficulty for a young hussar. My colonel kindly condescended to act, and with him my friend Nicholas van Greef, the military attaché of the Netherlands government. To both I told the same story of the Spanish Succession and the quarrel of which it had been the occasion. But my colonel smiled and laid a meaning finger against his nose; the Dutchman said drily it was well to keep ladies’ names out of such affairs. I am convinced, however, that neither of them had the faintest glimmering of the truth. Having thus arranged matters with my seconds, I attempted next to find my poor sister, hastening up her interminable stairs with an impatience I leave you to imagine. Needless to say, she was not in the garret, which was inhabited by Mademoiselle Sonia alone, her pretty face swollen with weeping, her humour one of extraordinary caprices and contradictions. She blamed me altogether for the catastrophe: I ought not to have given Berthe a sou; I ought to have starved her back into servitude. Women were intended for slaves; to make them free was to give them the rope to hang themselves. For her part, said mademoiselle, she thought a convent the right place for girls, and crochet work the best occupation! At any other time I might have stared to hear such sentiments from my sister’s friend, but for the moment I could think of nothing but Berthe. To find her was my one desire. In this, however, Sonia would afford me no assistance, frankly asking what would be the good. “‘The harm is done, my poor Paul,’ she said, looking at me sorrowfully. ‘Why should I expose you or her to an interview so
  • 41.
    unpleasant? How couldit profit any one?’ “I could not altogether see the force of this acquiescence in evil. I said that the honour of one of the oldest families in France was at stake; that if my sister did not leave the marquis I should kill her with my own hands and fly the country. I implored Mademoiselle Sonia, with every argument I thought might move her, to betray my sister’s hiding-place. But she kept putting me off, mocked at my impatience, and tried to learn, on her side, whether or not I meant to fight de Gonse. “‘If you really wish to find out where she is,’ she cried at last, ‘why don’t you make me tell you? Why don’t you take me by the throat and pound my head against the wall, as they do down-stairs with such admirable success? Those women positively adore their men.’ As she spoke she threw back her head and exposed her charming neck with a gesture half defiant, half submissive! Upon my soul, I felt like carrying her suggestion into effect and choking her in good earnest, for I had become furious at her contrariety. But, restraining the impulse, I saw there was nothing left for me save to retire. “‘Mademoiselle Boremykin,’ I said, ‘you are heartless and wicked beyond anything I could have imagined possible. You have helped to bring a noble name to dishonour, and in place of remorse your only feelings seem those of levity. I have the honour of wishing you good day.’ “De Gonse and I met the following morning in the Bois de Boulogne. His had been the choice of arms, and he selected rapiers, knowing, like all men of the world, that a pistol has the knack of killing. I ground my teeth at his decision, for he had the reputation of being a fine fencer, while I could boast no more than the average proficiency. He appeared to great advantage on the field; so cool, so handsome, such a grand seigneur—in every way so marked a contrast to myself. It was not unnatural, however: he was there to prick me in the shoulder, I to kill him if I could. Small wonder that my face was livid, that my eyes burned like coals in my head, that I was petulant with my own seconds, insulting towards my
  • 42.
    adversary’s. I lookedat these with scorn, the supporters of a scoundrel, themselves, no doubt, seducers and libertines like him they served. My dear old colonel chid me for my discourtesy—bade me be a galant homme for his sake, if not for mine. I kissed his wrinkled hand before them all; I said I respected men only who were honourable like himself. Every one laughed at my extravagance, at the poor old man’s embarrassment. It was plain they considered me a coward. They said things I could not help overhearing. But I cared for nothing. My God, no! I was there to kill de Gonse, not to pick quarrels with his friends. “We were placed in position. Everything was en règle. The doctors, of whom there were a couple, lit cigarettes and did not even trouble to open their wallets. They knew it to be an affair of scratches. “The handkerchief fell. We set to, warily, cautiously, looking into each other’s eyes like wild beasts. More than once he could have killed me, so openly did I expose myself to his attack, so unconscionably did I force him back, hoping to give lunge for lunge, my life for his. But in his adventurous past de Gonse must often have crossed swords with men no less desperate than myself; it was no new thing to him to face a determined foe, or to guard himself against thrusts that were meant to kill. His temper was under admirable control; he handled his weapon like a master in the school of arms, and allowed me to tire myself out against what seemed a wall of steel. Suddenly he forced my guard with a stroke like a lightning-flash; I felt my left arm burn as though melted wax had been dropped upon it. Some one seized my sword; some one caught me in his arms! “My dizziness, my bewilderment, were the sensations of a moment, and in a trice I was myself again. The wound was nothing—a nicely calculated stroke through the fleshy part of the arm. I laughed when they talked of honour satisfied and of our return to the barracks. I said I never felt better in my life. It was true, for I was possessed with a berserker rage, as they call it in the old Norse sagas; a bullet through my heart could not have hurt me then. The seconds
  • 43.
    demurred; they toldme that I was in their hands; that I was overruled; repeated, like parrots, that honour was satisfied. This only made me laugh the more. I went up to the marquis and asked him was it necessary for me to strike him again? I called him a coward, and swore I would post him in every salon and club in Paris. I slapped him in the face with my bare hand—my right, for my left felt numb and strange. There was another scene. De Gonse appeared discomposed for the first time; the seconds were pale and more than perturbed. One had a sense of death being in the air. There were consultations apart; appeals to which I would not listen; expostulations as idle as the wind. De Gonse, trembling with wrath, left himself unreservedly to his seconds, walking up and down at a little distance like a sentinel on duty. I also strolled about to show how strong and fit I was—the angriest, the bitterest man in France. “At length it was decided that we might continue the combat. De Gonse solemnly protested, bidding us all take notice that he had been allowed no alternative. My colonel was almost in tears. Repeatedly, as a favour to himself, he besought me to apologise for that second blow and retire from the field. But I was adamant. ‘Mon colonel,’ I said to him, in a whisper, ‘this is a quarrel in which one of us must fall. Let me assure you it is not about a trifle.’ “Again we ranged ourselves; again we grasped our rapiers, saluted, and stood ready for the game to begin. The marquis’s coolness had somewhat forsaken him. The finest equanimity is ruffled by a buffet in the face; one cannot command calm at will. His friends said afterwards that he showed extraordinary self-control, but I should rather have described it as extraordinary uneasiness. No duellist cares for a berserker foe. De Gonse was, moreover, of a superstitious fancy. There are such things, besides, as presentiments; I think he must have had one then. God knows, perhaps he was struggling with remorse. The handkerchief fell; we crossed swords, and the combat was resumed with the utmost vivacity. The air rang with the shivering steel. The doctors smoked no longer, but looked on with open mouths. A duel in grim earnest is seldom seen in France, though I venture to say there was one that
  • 44.
    morning. It lastedonly a minute; we had scarcely well begun before I felt a stinging in my side, and saw, as in a dream, my enemy’s triumphant face, red with his exertions. The exasperation of that moment passes the power of words to describe. This was my revenge, this a villain’s punishment on the field of honour! He would leave it without a scratch, to be lionised in salons, to relate in boudoirs the true inwardness of the quarrel! Remember, I felt all this within the confines of a single second, as a drowning man in no more brief a space passes his entire life in review. Imagine, if you can, my rage, my uncontrollable indignation, my unbounded fury. What I did then I would do now,—by God, I would,—if need be, a dozen times! I caught his rapier in my left hand and held it in the aching wound, while with my unimpeded right I stabbed him through the body, again and again, with amazing swiftness—so that he fell pierced in six places. There was a terrible outcry; shouts of ‘Murder!’ ‘Coward!’ ‘Assassin!’ on every side looks of horror and detestation. One of the marquis’s seconds beset me like a maniac with his cane, and I believe I should have killed him too had not the old colonel run between us. “The other second was supporting de Gonse’s head and assisting the surgeons to staunch the pouring blood. But it was labour lost; any one could see that he was doomed. From a little distance I watched them crowding about him where he lay on the grass; for I had drawn apart, sick and dizzy with my own wounds, conscious that I was now an outcast among men. At last one came towards me; it was Clut, the doctor. He said nothing, but drew me gently towards the group he had just quitted. They opened for me to pass as though I were a leper. A second later I stood beside the dying man, gazing down at his face. “‘He wishes to shake hands with you,’ said the other doctor, solemnly, guiding the marquis’s hand upward in his own. ‘Let his death atone, he says; he wishes to part in amity.’ “I folded my arms.
  • 45.
    “‘No, monsieur,’ Isaid. ‘What you ask is impossible.’ With that I walked away, not daring to look back lest I might falter in my resolution. I can say honestly that de Gonse’s death weighs on me very little; yet I would give ten years of my life to unsay those final words—to recall that last brutality. In my dreams I often see him so, holding out the hand, which I try to grasp. I hear the doctor saying, ‘He wishes to part in amity.’ “I fainted soon after leaving my opponent’s side. I lay on the ground where I fell, no one caring to come to my assistance. When consciousness returned I saw them lifting the marquis’s body into a carriage, and I needed no telling to learn that he was dead. My colonel and Van Greef assisted me into another cab, neither of them saying a word nor showing me the least compassion. I suppose I should have been thankful they did so much. Was not I accursed? Were they not involved in my dishonour? They abandoned me, wounded, faint, and parching with thirst, to find my own way to Paris. Alone? No, not altogether. On the seat beside me my colonel laid a flask of brandy and a loaded pistol. The first I drank; the revolver I pitched out of window. I never thought to kill myself. For cheating at cards, for several varieties of dishonour, yes. But not for what I had done—never in all the world. My conscience was as undisturbed as that of a little child; excepting always that—why had I not taken his hand! “I was arrested, of course, and tried—tried for murder. You see, there were too many in the secret for it to be long kept. It was a cause célèbre, attracting universal attention. The quarrel concerned the Spanish Succession; as to that they could not shake me. There were many surmises, many suspicions, but no one stumbled on the truth. To a single man only was it told—Maître Le Roux, my counsel. Him I had to tell, for at first he would not take up my case at all. There was a great popular outcry against me, the army furious and ashamed, the bourgeoisie in hysterics. I was condemned; sentenced to death; reprieved at the particular intercession of the Marquise de Gonse, the dead man’s mother, who threw herself on her knees before the Chief Executive—reprieved to transportation for life!
  • 46.
    “You will besurprised I mention not my mother. Ah, mademoiselle, there are some things which will not permit themselves to be told— even to you. She went mad. She died. My military degradation is another of those things unspeakable. The epaulets were torn from my shoulders, the galons from my sleeves, my sword broken in two; all this in public before my regiment in hollow square. Picture for yourself, on every side, those walls of faces, scarcely one not familiar; my colonel, choking on his charger, the agitated master of ceremonies; my former friends and comrades trying not to meet my eye; in the ranks many of my own troopers crying, and the officers swearing at them below their breath. My God, it was another Calvary! “At Havre they kept me long in prison, waiting for the transport to carry me to New Caledonia. It was there I heard of my sister’s death, the news being brought to me by a young French lady, a friend of Berthe’s. My sister had poisoned herself, appalled at what she had done. There was no scandal, however, no sensational inquiry. She was too clever for that, too scientific; it was by no vulgar means that she sought her end. Assembling her friends, she bade them good-bye in turn, and divided among them her little property, her money, jewels, and clothes. She died in the typhus hospital to which she had volunteered her services—a victim to her own imprudence, said the doctors; a martyr to duty, proclaimed the world. She was accorded the honour of a municipal funeral (though her actual body was thrown into a pit of lime): the maire and council in carriages, the charity children on foot, the pompiers with their engine, a battalion of the National Guard, and the band of the Ninth Marine Infantry! What mockery! What horror! “Here in New Caledonia I looked forward to endure frightful sufferings, to be herded with the dregs of mankind in a squalor unspeakable. But, on the contrary, I was received everywhere with kindness. The rigours of imprisonment were relieved by countless exemptions. I found, as I had read before in books, that the sight of a great gentleman in misfortune is one very moving to common minds; and if he bears his sorrows with manly fortitude and dignity,
  • 47.
    he need notfear for friends. To my jailers I was invariably ‘Monsieur’; they apologised for intruding on my privacy, for setting me the daily task; they would have looked the other way had I been backward or disinclined. I was neither, for I was not only ready to conform to the regulations, but something within me revolted at being unduly favoured. “At the earliest moment permissible by law I left the prison to become a serf, the initial stage of freedom, hired out at twelve francs a month to any one who required my services. I fell into the hands of Fitzroy, here, the mine-owner, who treated me with a consideration so distinguished, so entirely generous, that when I earned my right to a little farm of my own I begged and received permission to settle near him. The government gave me these few acres on the hill, rations for a year, and a modest complement of tools and appliances, exacting only one condition: my parole d’honneur. It is only Frenchmen who could ask such a thing of a convict, but, as I told you before, I was regarded as an exception, a man whose word might safely be taken. “Never was one less inclined to escape than myself; my estates, which are extensive and valuable, would have instantly paid the forfeit; and though I am prohibited from receiving a sou of their revenues, I am not disallowed to direct how my money shall be used. You will wonder why I weigh possessions so intangible against a benefit which would be so real. But the traditions of an old family become almost a religion. To jeopardise our lands would be a sacrilege of which I am incapable; we phantoms come and go, but the race must continue on its ancestral acres; the noble line must be maintained unbroken. So peremptory is this feeling that you will see it at work in families that boast no more than three generations. The father’s château is dear; the grandfather’s precious; the great- grandfather’s a thing to die for! Think what it is among those, like ourselves, whose lineage and lands go back to Charlemagne! Though I can never return to France myself, though I shall die on my little hillside farm and be buried by strangers, still, it is much to me that the estates will pass to those of my blood. I have cousins,
  • 48.
    children of myuncle, who will succeed me—manly, handsome boys, whose careers are my especial care. Their children will often ask,— their children’s children, perhaps,—of that portrait of a man in chains, in the stripes of a convict, that hangs in our great picture- gallery at Nemours, beneath it this legend: ‘Paul de Charruel, painted in prison at his own request.’ At the prompting of vanity, of humility,—I scarcely know which to call it,—I had this done before I quitted France for ever, the artist coming daily to study me through the bars; and ordered it hung amid the effigies of my race. I suppose it hangs there now, slowly darkening in that empty house. It shall be my only plea to posterity, my only cry. “It is nearly sixteen years ago since these events took place. For more than twelve I have lived like a peasant on my little farm, the busiest of the busy; up at dawn, to bed by nine o’clock. Blossoming under a care so sedulous and undivided, it has yielded me a rich return for my labour. My heart it has kept from breaking; my hands it has never left empty of a task to fill. There is a charm in freedom and solitude, a solace to be found in the society of plants, beyond the power of words to adequately express. Our government is right when it gives the convict a piece of land and a spade, leaving him to work out his own salvation. I took their spade; I found their salvation. On that hillside there I have passed from youth to middle age; my hair has turned to grey; my talents, my strength, all that I have inherited or acquired in mind or body, have been expended in hoeing cabbages, in weeding garden-beds, in felling the forest-trees which encumbered my little estate. Yet I have not been unhappy, if you except one day each year, a day I should gladly see expunged from my calendar. Once a year I receive from the Marquise de Gonse a letter in terms the most touching and devout, written in mingled vitriol and tears. This annual letter is to her, I know, a supreme sacrifice; every line of it breathes anguish and revolt. To forgive me has become the touchstone of her religion, a test to which she
  • 49.
    submits herself withagony. I cannot—I do not—blame her for hating me; I would not have her learn the truth for anything on earth: but is it a pleasure for me to be turned the other cheek? Is it any consolation to be forgiven in terms so scathing? It is terrible, that piety which deceives itself, which attempts to achieve what is impossible. And she not only forgives me: she sends me little religious books, texts to put upon my walls, special tracts addressed to those in prison. She asks about my soul, and tells me she wearies the President with intercessions for my release. Poor, lonely old woman, bereft of her only son! In the bottom of her heart, does she not wish me torn limb from limb? Would she not love to see me in the fires of hell? “This, mademoiselle, concludes my story. To-morrow, in your father’s beautiful yacht, you leave our waters, never to return. You will pursue your adventurous voyage, encircling the world, to reach at last that far American home, receiving on the way countless new impressions that will each obliterate the old. Somewhere there awaits you a husband, a man of untarnished name and honour. In his love you will forget still more; your memories will fade into dreams. Will you ever recall this land of desolation? Will you ever recall de Charruel the convict?” He had not looked at the girl once during the course of his long narrative. He felt that she had been affected—how much or how little, he did not know, a certain delicacy, a certain fear, withholding him. When at last he sought her face he saw that she had been crying. “I shall never forget,” she said. They walked in silence until, at a parting of the paths, he said: “This one leads to my little cabin. Come; it will interest you, perhaps—the roof that has sheltered me for twelve irrevocable years. You are not afraid?” he asked. She made a motion of dissent, drawing closer to him as though to express her confidence.
  • 50.
    A few hundredyards brought them to a grassy paddock fenced with limes, through which they passed to reach a grove of breadfruit and orange trees beyond. On the farther side the house itself could be seen, a wooden hut embowered in a bougainvillea of enormous size. It looked damp, dark, and uninviting. Not a breath stirred the tree- tops above nor penetrated into the deep shade below; except for the drone of bees and a sound of falling water in the distance, the intense quiet was untroubled by a sound. De Charruel led the way in silence, with the preoccupation of a man who had too often trod that path before to need his wits to guide him. Reaching the hut, he threw open the door and stood back to allow his companion to enter before him. The little room was bare and clean; a table, a book- shelf, a couple of chairs, the only furniture; the only ornaments a shining lamp and a vase of roses. Miss Amy Coulstoun took a seat in the long canvas chair which the convict drew out for her. The air seemed hot and suffocating, the perfume of the orange-blossoms almost insupportable. She was possessed, besides, with a thought, a fancy, that bewildered her; that made her feel half ashamed, half triumphant; that brought the tears to her eyes repeatedly. De Charruel did not speak. He was standing in the doorway, looking down at her with a sort of awe, as though at something sacred, something he wished to imprint for ever in his mind. “I wish to remember you as you are now!” he exclaimed—“lying back in my chair, your face a little in profile, your eyes sad and compassionate. When you are gone I shall keep this memory in my heart; I shall cherish it; it shall live with me here in my solitude.” “I must go,” she said, with a little thrill of anger or agitation in her voice. “I have stayed too long already.” He came towards her. “I want first to show you this,” he said, drawing from his pocket a jewel-case, which he almost forced into her hands. “You will not refuse me a last favour—you who have accorded me so many?”
  • 51.
    She avoided hisglance, and opened the box, giving, as she did so, an exclamation of astonishment. It was full of rings. “They were my poor mother’s,” he explained. “By special permission I was allowed to receive them here; I feared they might go astray.” There were, perhaps, ten rings in all, every one the choice of a woman of refinement and great wealth—diamonds, rubies, pearls, and opals, sparkling and burning in the hollow of the girl’s hand. No wonder she cried out at the sight of them, and turned them over and over and over with fascinated curiosity. “Each one has its history,” said de Charruel. “This and this are heirlooms. This was a peace-offering from my father after a terrible quarrel, the particulars of which I never learned. This he gave her after my birth—are the diamonds not superb? This ruby was my mother’s favourite, for it was her engagement ring, and endeared to her by innumerable recollections. She used to tell me that at her death she wished my wife to wear it always, saying it was so charged with love that she counted it a talisman.” Miss Coulstoun held it up to the light, turning it from side to side. “It is like a pool of fire,” she said. “Won’t you try it on?” he asked. She did so, and held out her hand for him to see. The ring might have been made to the measure of her finger. “You will never take it off again,” he said. “You will keep it for a souvenir—for a remembrance.” She shook her head. “Indeed, I will not,” she returned, with a smile. “Besides, is it not to be preserved for your fiancée? You cannot disregard your mother’s wish.” “Why should we pretend to one another?” he broke out. “You know why I offer it to you, mademoiselle. It would be an insult for me to say I love you—I, a convict, a man disgraced and ruined past
  • 52.
    redemption. But Ican ask you to keep my poor ring. Wear it as you might that of some one dead, some one of whom you once thought with kindness, some one who had greatly suffered.” The girl looked away. “What you ask is impossible,” she said at length, in a voice so low and sweet that it was like a caress. “I don’t think you understand.” “It is your pride that prevents!” he cried. “I understand very well. If I left it you in a testament you would not scruple to take it; you would see a difference! Yet, am I not dead? Is this not my grave you see around me? Am I not the corpse of the man I once was? Trample on your pride for once, for the sake of one that loves the very ground you tread upon. Take my ring, although it is worth much money, although the convenances forbid. If questions are asked, say that it belonged to a man long ago passed away, whose last wish it was that you should wear it.” “I shall say it was given me by the bravest and most eloquent of men, the Comte de Charruel!” she exclaimed, with a deep blush. “You have convinced me against my will.” He cried out in protest, but even as he did so he heard the sounds of footsteps on the porch, and turned in time to see the door flung open by Fitzroy. Behind the Irishman strode the tall figure of General Coulstoun, his face overcast with anxiety. “Thank God!” he cried when he saw his daughter. “You’ve been gone an age, my dear, and I’ve been uneasy in spite of Fitzroy, here. It’s very well to say ‘It’s all right, it’s all right’; but in an island full of con —” “I felt quite safe under M. de Charruel’s protection,” interrupted Amy, striking that dreadful word full in the middle. “I thought you knew I was with this gentleman.” “I don’t know that that made me feel any more—” began the general, recollecting himself in the nick of time. “Why, Amy, child, what are you doing with that ring?”
  • 53.
    “M. de Charruelhas just presented it to me, papa,” she returned. “Is it not beautiful?” “Good God!” cried the general, “it is a ruby! I could swear it is a ruby! It must be worth a fortune!” Between each of these remarks he stared de Charruel in the face with mingled suspicion, anger, and surprise. “I am told that it is worth about twelve thousand francs,” said the Frenchman. The general started. Fitzroy hurriedly whispered something into his ear. “You don’t say so!” the former was overheard to say. “In a duel, was it? I didn’t know anybody was ever killed in a French—Oh, I see —yes—lost his head—” This little aside finished, the general came back again to the attack, more civil, however, and more conciliatory in his tone. “You must be aware,” he said, addressing de Charruel, “that no young lady can accept such a present as this from any one save a member of her family or the man to whom she is engaged. I can only think that my daughter has taken your ring in ignorance of its real value, forgetful for the moment that the conventionalities are the same whether in New Caledonia or New York. You will pardon me, therefore, if I feel constrained to ask you to take back your gift.” “It rests entirely with Miss Coulstoun,” returned de Charruel. “In that case, there can certainly be no question,” said the general. “I shall not give it back, papa,” said Amy. Her father stared at her in amazement, and from her distrustfully to de Charruel. “Is he not a—convict?” he asked. “Yes.” “And you are going to accept a present from a convict?” “Yes.”
  • 54.
    “A present saidto be worth twelve thousand francs?” “Yes.” “My God!” he cried, “I could not have believed it possible.” At this she burst out crying. The general put his arm round her. “Come away, my daughter,” he said. “For once in my life I am ashamed of you.” “I must first say good-bye to M. de Charruel,” she said through her tears, holding out her hand—the left hand, on which the ruby glowed like a drop of blood. The convict raised it slowly to his lips. Their eyes met for the last time. “Good-bye,” he said. The next day, from a rocky cliff above his house, de Charruel saw the yacht hoist her white sails and steal out to sea. He watched her as long as she remained in sight, and when at last she sank over the horizon, he threw himself on the ground in a paroxysm of despair. For an hour he lay in a sort of stupor, rising only at the insistent whistle from the mine. This told him that it was twelve o’clock, and brought him back to the realities and obligations of life. Descending to the farm, he once more took up the threads of his existence, for the habits of twelve years are not to be lightly disregarded. But it was with difficulty that he brought himself to perform his usual tasks. His heart seemed dead within his breast. He wondered miserably at his former patience and industry as he saw on every side the exemplification of both. How could he ever have found contentment in such drudgery, in such pitiful digging and toiling in the dirt! What a way for a man to pass his days—an earth-stained peasant, ignobly sweating among his cabbages! Oh, the intolerable
  • 55.
    loneliness of thoseyears! How grim they seemed as he looked back at them, those tragic, wasted years! Tortured by the stillness and emptiness of his hut, he spent the night at Fitzroy’s, lying on the bare verandah boards till daylight. But he returned home before the household was astir, lest he should be invited to breakfast and be expected to talk. He shrank from the thought of meeting any one, and for days afterwards kept close within the limits of his little farm, shunning every human being near him. Every convict has such phases, such mutinies of the soul. The malady runs its course like a fever, and if it does not kill or impair the victim’s reason, it leaves him at last too often a hopeless sot. But, fortunately for himself, it was work, not cognac, that cured Paul de Charruel. He came to himself one day in his garden, as he was digging potatoes. He stood up, drew his hand across his face, and realised that the brain-sickness had left him. He went into the house and looked at himself in the glass, shuddering at the scarecrow he saw reflected there. He examined his clothes, his rooms, his calloused hands, with a strange, new curiosity, studying them all with the same speculation, the same surprise. He stood off, as it were, and looked at himself from a distance. He walked about his tangled, weedy farm, and wondered what had come over him these past weeks. He had been starving, he said to himself many times over—starving for companionship. He sought out Fitzroy at the mine. It was good again to hear the Irishman’s honest laugh, to clasp his honest hand, to think there was one person, at least, that cared for him. He hung about Fitzroy all that day, as though it would be death to lose sight of him—Fitzroy, his friend. He repeated that last word a dozen times. His friend! He talked wildly and extravagantly for the mere pleasure of hearing himself speak. He was convulsed with laughter when an accident happened to a truck, and could scarcely contain himself when Fitzroy had a mock altercation with the engineer. No one could be more humourous than Fitzroy, and the engineer was a man of admirable wit! What a fool he had been to sulk these weeks on his farm. His farm! It made him tremble to think of it, so unendurably lonely and
  • 56.
    silent it hadbecome. It was horrible that he must return to it,—his green prison,—with its ghosts and memories. He went back late, but not to sleep. He sat on the dark porch of his hut and thought of the woman he had lost. Like a shadow she seemed to pass beside him, and if he shut his eyes he could feel her breath against his cheek and almost hear the beating of her heart. He closed his arms on the empty air and called her name aloud, half hoping that she might come to him. But she was a thousand miles at sea, and every minute was widening the distance between them. The folly and uselessness of these repinings suddenly came over him. She was a most charming girl, but would not any charming girl have captivated him after the life he had been leading? Was he not hungry for affection? Was he not in love with love? He rose and walked up and down the porch, greatly stirred by the new current of his thoughts. Yes; he was dying for something to love—something, were it only a dog. For twelve years he had sufficed for himself, but he could do so no more. By dawn he was at Fitzroy’s, begging the Irishman for a black boy and a horse. A little later his messenger was galloping along the Noumea road, charged with a letter to the Chef de l’Administration Pénitentiaire to request that “le nommé de Charruel” be permitted to leave his farm for seven days. The permission was accorded almost as a matter of form, for it was not the custom to refuse anything to “le nommé de Charruel.” The count went straight to the convent and asked to see the Mother Superior. She was a stately old lady, with silvery hair, an aristocratic profile, and a voice like an ancient bell. She at once cut short his explanations, closing her ears to his official number and other particulars of his convict life. “M. le Comte,” she said, “I knew your mother very well, and your father also, whom you favour not a little. I have often thought of you out there by the strait—ah, monsieur, believe me, often.” De Charruel thanked her with ceremony.
  • 57.
    “Your errand cannotbe the same as that which brings the others,” she went on, half smiling. “Mon Dieu!” she exclaimed, as she saw the truth in his reddening face. “You, a noble! a chef de famille! It is impossible.” “I am only the convict de Charruel,” he answered. The old woman looked at him with keen displeasure. “You know the rules?” she said in an altered voice. “You know, I suppose, that you can take your choice of three. If you are not satisfied you can return in six months.” “Oh, madame,” he said, “spare me such a trial. I stipulate for two things only: give me not a poisoner nor a thief; but give me, if you can, some poor girl whose very honesty and innocence has been her ruin.” “I can very easily supply you with such a one,” said the Mother Superior. “Your words apply to half the female criminals the government sends me to marry to the convicts. When I weigh their relative demerits I almost feel I am giving angels to devils, so heavy is the scale in favour of my sex. I have several young women of unusual gentleness and refinement, who could satisfy requirements the most exacting. If you like,” she went on, “I shall introduce you first to a poor girl named Suzanne. In the beginning it was like caging a bird to keep her here, but insensibly she has given her heart to God and has ceased to beat her wings against the bars.” “Does she fulfil my conditions?” asked the count. “Yes; a thousand times, yes!” exclaimed the Mother Superior. “Shall I give orders for her to be brought?” “If you would have the kindness,” said de Charruel. There was a long waiting after the command had gone forth. All the womanliness and latent coquetry of the nuns came out in this business of making ready their charges for the ordeal; and when it was whispered that the wooer was the Comte de Charruel himself, a personage with whose romantic history there was not a soul
  • 58.
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