Tanzi: too high income inequality is bad for growth

From the same paper by Vito Tanzi, a chapter on income distribution. Tanzi underlines that "high income inequality can, over the long run, lead to adverse social and economic consequences. See Alesina and Rodrik, 1994, and Persson and Tabellini, 1994, for empirical support of this plausible thesis." And this comes from the former longest serving director of the IMF's Fiscal Department...

Complexity and the Income Distribution
In democratic countries, to retain legitimacy and political support for its outcome, the private market must (a) allocate resources efficiently, to promote economic growth, and (b) distribute income in a manner that is considered legitimate and fair by the majority of the country’s citizens. When the distribution of income becomes very uneven, and a majority of the citizens comes to consider that distribution as unfair, sooner or later populist politicians will appear proposing economic policies that would damage the market economy. The more the distribution of income comes to be considered unfair, the more votes the populist politicians will get from the electorate. Thus, high income inequality can, over the long run, lead to adverse social and economic consequences. See Alesina and Rodrik, 1994, and Persson and Tabellini, 1994, for empirical support of this plausible thesis.
In the past couple decades the income distribution has become much less even in industrial countries, and especially in the United States. Between 1967 and 1980 there was little change in the U.S. income distribution, as measured by the Gini coefficient. That coefficient remained around 0.40, a not particularly good value by industrial countries’ standards, but a stable one. After 1980, it started rising rapidly and reached 0.47 by 2005. At this level it enjoyed the company of mostly Latin American and African countries. By comparison, the most recent data available give a Gini coefficient that is 0.40 for Russia and 0.44 for China. Other industrial countries have Gini coefficients far below that of the United States.
Another indication of the increasing inequality in the United States can be seen from the comparison between the mean and the median income. In 1967 the median income was 89.4 percent of the mean income. By 2005 the percentage had fallen to 73.1 percent, reflecting the increasing concentration of income at the top. Between 1967 and 2005, while the median income, that reflects mainly the income of workers, had grown by 30.7 percent in nominal terms, the mean income had grown by a remarkable 59.8 percent. Workers have hardly experienced any increase in their real wages over this period. Much of the income growth had gone to those at the top. This deterioration has had an impact on the results of surveys that indicate considerable unhappiness, on the part of a majority of those interviewed, about the economy. This has happened in a period of remarkable economic growth that should have made everyone happy. In its annual “Special Report on the 400 Richest Americans,” Forbes Magazine has concluded that these were billionaires in dollars, with a total combined wealth of $1.25 trillion, that is close to the GDP of Italy. In 1982 there had been only 13 billionaires on the list.
The deterioration in the income distribution has been attributed to various factors and especially to the effects of globalization and technological developments. The question to be raised here is whether complexity, interpreted in a broad sense, might not have been one of these factors. It may not be a coincidence that the very high incomes were received by individuals that were either in sectors characterized by complexity (such as those working in the financial market) or that could themselves create complexity to get larger compensations (such as the CEOs of large corporations). See also Forbes’ list.
We have already reported the earnings of some of the managers of hedge funds. Those working in investment banks did not do so badly either. For example the 25,647 employees working for Goldman Sachs received an average compensation of $521,000 in 2005. The five top executives in that enterprise received a combined $143 million. Compensation in 2006 is expected to be even higher. The CEOs of corporations benefited from a different kind of complexity. They could often select the members of the boards of their corporations, that is the individuals who must approve their compensation package. In large corporations the shareholders hardly play a role. Much of the real power rests with the CEOs who are hired to run the corporations. Their compensation contracts are often complex, and their details are generally kept confidential. The use of stock options and bonuses and the ability of managers to date the options at a time that maximizes earnings can lead to enormous compensation packages. These maneuvers have recently attracted the attention of the Federal Bureau of Investigation (FBI).
Huge salaries have been reported even for heads of corporations that do not do particularly well or lose money. A recent article in the New York Times called attention to this problem. As the article put it, “watching mountains of money go to managers who destroyed value in recent years, stockholders have learned that while their shares may sink, executive pay rarely does”. Italics added. Citing a report by Glass Lewis and Company, the article states that: “At… 25 companies… chief executive pay averaged $16.7 million in 2005. The stock of these companies…fell an average 14 percent while [the companies’] overall net income dropped 25 percent, on average.” Furthermore, “…the average chief executives’ pay totaled 6.4 percent of these entities’ total net income”. This is not an example of an economy in which incomes reflect a person’s contribution to total output. .
What can be the consequences of increasing inequality for market economies? An interesting paper by Glaeser et al., 2002, provide a formal answer to this question. The paper argues that (high) income inequality can be damaging, over the long run, to institutions that are necessary for the good functioning of and especially to institutions that secure property rights, institutions that have been shown to be of great significance for growth. Inequality allows the rich to capture and distort these institutions to their advantage. As they put it, inequality “enables the rich to subvert the political, regulatory, and legal institutions of society for their benefit”. “If political and regulatory institutions can be moved by wealth or influence, they will favor the established, not the efficient”. The rich will be able to do so “…through political contributions, bribes, or just deployment of legal and political resources to get their way” p. 2. Lobbying will be an integral and important part of this process. It is easy to see how, in addition to its initial role in increasing income inequality, complexity could greatly facilitate this subversion process. The subversion of institutions will be made easier by the increasing complexity of laws and regulations. This has clearly happened with the tax system and is happening more and more in the regulatory system. Inequality, assisted by complexity, creates an asymmetry between the power of the rich and that of the masses, an asymmetry that can be exploited to the advantage of the rich but that an also damage the market economy over the long run. To some extent the tax system and the legal system are becoming tools of the super rich in the United States.

Hedge funds - do they bring any value?

Just read Vito Tanzi' excellent paper on "Complexity and Systemic Failure" published in "Transition and Beyond. A Tribute to Mario Nuti" edited by Estrin, Kolodko, and Uralic. Tanzi was extremely prescient as to the upcoming financial sector crisis. He argued that the financial sector became so complex that no one could understand it any more let alone assess the risks of crisis. To quote him "Complexity makes it more difficult to anticipate crises, to predict how crises will evolve, what will be their consequences, and what policy tools the policymakers could use in such events". He implicitly calls for much stricter regulation of financial markets. I was most impressed with his note on hedge funds: do they bring any economic value? Are billion dollar payouts for hedge fund managers justified? Read below...

"The hedge fund industry has made it possible for some managers to get enormous incomes. Forbes’ 2006 Report on the 400 richest Americans includes 12 hedge fund managers among them. In 2005, James Simons, of Renaissance Technologies, and T. Boone Pickens Jr., of BP Capital Management, reported incomes of $1.5 billions and $1.4 billions respectively from their hedge fund activities. Each of the top ten hedge fund managers had salaries that exceeded $300 million in 2005. These are incredibly large incomes that raise legitimate questions about what these individuals were contributing to society that deserved such enormous compensation, especially when many economists continue to believe that capital markets are efficient. There are also questions as to whether these funds have not in fact increased the volatility of some markets. Apart from these important questions, there is the problem that the form of contracts used to make investments in hedge funds tend to encourage hedge funds’ managers to take excessive risks. Much of their compensation comes from being able to beat some market indexes. A single good year can make these managers rich for the rest of their life. Thus, the managers have incentives to take large risks. When they lose in these bets, they may close the hedge funds they had been guiding and may open new ones. At times, within days, they go from reporting large gains for a year to reporting enormous losses, and happened to “Amaranth Advisers” between August and September 2006. There are no firm data to indicate that as a group, including those that fail, hedge funds’ earnings systematically beat the market.
The risks associated with the growth of the hedge fund industry are several. Some are mentioned here without much elaboration.
First, as the number of hedge funds rises, it is not likely that there will be enough “market imperfections” in the pricing of financial instruments that can be exploited by them to support their activities. The mathematical models developed are based on the historical behavior of financial variables. This behavior may change suddenly. The models also do not reflect systemic risk. But, as Long Term Financial Management discovered in 1998, historical relationships for specific variables become irrelevant when whole systems fail.
Second, as mentioned above, the contracts that investors have with the managers of the hedge funds invite the taking of excessive risk: the managers gain when they beat the market while the investors in the hedge funds are the main losers when the funds do badly. The investors who lose money often complain that they had not received precise information on the operations of these hedge funds.
Third, as the number of hedge funds increases, and there is mobility of personnel among them, the mathematical models that they use inevitably tend to become more similar thus increasing the probability that herd instinct will guide behavior.
Fourth, the money that investors invest in the hedge funds supports contracts or positions that are a large multiple of that money. For example, by the spring of 1996, Long Term Capital Management had $140 billion in assets, or thirty times the capital that investors had placed with it. Lowenstein, 200, p. 80. This leveraged position forces them to borrow enormous amounts of money from banks which later may claim that they were not fully informed about the fund’s activities. Some reports have indicated that the total value of the derivative contracts entered by hedge funds is now (September 2006) more than 22 times the gross domestic product of the United States. This gives a clear idea of the role of the hedge funds in the financial market and the danger that a systemic crisis involving them could create for the financial system. It should be recalled that the Federal Reserve Bank of New York had to intervene in 1998 to prevent a financial meltdown, after Long Term Capital Management failed as a consequence of the Russian default. Since that time the number of hedge funds and their activities have increased sharply.
Finally, and a growing concern for the monetary authorities, many of the derivative contracts (or trades) entered by the traders on behalf of the hedge funds that they represent remain unconfirmed for significant periods of time. During this time these contracts are essentially informal and unregistered promises. This means that a major failure on the part of a large enterprise or a country could create major difficulties in determining quickly and precisely who owes and who is owed money. Should such an event occur in connection with a technical failure on the part of a large-value payment system, as happened to a computer at the Bank of New York in 1985, the consequences could be very serious.
The payment systems have been called “the transportation systems of a monetary economy”—because they are the vehicles that carry the enormous and increasing flows of daily payments. Quoting a report of the European Central Bank (ECB): “…credit risks in a net settlement system are extinguished only with the settlement of all net positions in the system…As a result, the failure of one participant to meet its obligations at the time of settlement could lead to the unwinding of payments that other participants had already treated as final”. This could lead to a “domino effect” and to systemic risk. See ECB, p. 73, 2006. See also De Bandt and Hartmann, 2002, especially pages 273-276.
There have been frequent statements on the part of concerned central banks on the need to impose more stringent rules on the hedge funds, including the need for them to register and to better report on their activities. So far the hedge funds have resisted these initiatives on the grounds that these steps would increase costs and slow down technical advances. This reported, potential conflict between safety on one hand and technical progress (and presumably efficiency) on the other is becoming more frequent in market economies and is often used as an argument for resisting controls and regulations.

Brzezinski on Putin's legacy

Very interesting article by Zbigniew Brzezinski. He argues that Russia lacks natural allies and that it needs to have a positive message if it wants to increase its influence.

http://www.twq.com/08spring/index.cfm?id=294

Kagan on new global empires

From the Economist, March 29, book review.

Mr Kagan probably never left his study while preparing “The Return of History and the End of Dreams”. He has written just over 100 pages, the type is large and the spacing generous. Yet his book is subtle and deep where Mr Khanna's is clunky and shallow. His argument is that the short period after the end of the cold war when it was said that ideological conflict was over and that liberal democracy had prevailed was a delusion; we are now, he says, back in a world of clashing national ambitions and interests, one more akin to the 19th century than to the 1990s.
In that world there are no simple formulae for predicting or managing national behaviour. It is not a world in which one power—America—is dominant, though it remains the single most influential and capable country on a global scale, even after its debacle in Iraq. Nor is it a world, on his account, in which just three “empires” hold sway in any sort of triangular balance. It is a world in which many countries and their ruling elites are jostling for position and advantage, some of them keen to prove that today's assumptions about influence and status can and will be overturned. If there is a broad trend to be discerned in recent years it is the revival of autocracy as a sometimes effective and even legitimate form of government. If there is a neat dividing line, it is the line between the democracies and the autocracies. But using that line in the operation of foreign policy is no easier now than it has ever been.

Kagan's essay is here: http://www.hoover.org/publications/policyreview/8552512.html

Euro to replace $ as the reserve currency

Yup...

This crisis could bring the euro centre-stage
Wolfgang Münchau
Source: FT.com Date: March 23, 2008
We know the credit crisis is a clear and present threat to the global economy. But its most important long-run legacy may not be economic, but geopolitical.
I was reminded of that possibility when reading a recent analysis by Professors Menzie Chinn at the University of Wisconsin and Jeffrey Frankel of Harvard*. They ran a simulation showing that the euro would replace the dollar as the world's largest reserve currency within the next 10 or 15 years. Their analysis is not based on this crisis. But the crisis could easily accelerate the trends they have identified.

....

The potential geopolitical implications of such a projected shift are immense. For a start, the US will lose its exorbitant privilege - the ability to achieve permanently higher returns on foreign assets than the returns paid to foreigners who invest in the US. The dollar will suddenly cease to be "our currency, and your problem". Influence in international financial institutions will wane. Losing the dollar as the world's leading international currency not only leads to a loss of political power. It constitutes loss of power.

There is little politicians can do to prevent such a seismic shift. I suspect the US political establishment is not yet aware of what is going to hit it. Then again, the same can be said of European political leaders, who have not given us any hint yet that they are ready to deal with the responsibilities that come with running the world's leading currency.

Cited in: J. Frankel, The euro could surpass the dollar within the next 10 years, www.voxeu.org

The end of US global hegemony?

I am wondering whether the US global hegemony isn't just about to be lost, as its economy, and the financial sector in particular, will be incresingly taken over by foreign investors. At the current low prices, due to the self-inflicted losses, buying out most of the jewels of the US financial sector would now cost some $1 trillion, a trifle relative to growing assets of sovereign wealth and private funds... Could a bunch of financial wizards contribute to the shift in the global balance of power? How ironic..

From the FT..

An Ottoman warning for indebted America
By Niall FergusonPublished: January 1 2008 18:37

Last updated: January 2 2008 08:07Future historians will look back on the current decade as a turning point comparable with that of the Seventies. No, not the 1970s. This is not going to be another piece pointing out the coincidence of an unpopular Republican president, soaring oil prices, a sagging dollar and an unwinnable faraway war. I am talking about the 1870s.At first sight, the resemblances across 130 years may not seem obvious. The 1870s were a time when conservative leaders such as Benjamin Disraeli, British prime minister, were powerful and popular. It was a time of falling commodity prices, after the financial crash of 1873 and the opening up of the American plains to agriculture. And it was an era of currency stability, as one country after another followed the British lead by pegging to gold.Yet, on closer inspection, we are indeed living through a global shift in the balance of power very similar to that which occurred in the 1870s. This is the story of how an over-extended empire sought to cope with an external debt crisis by selling off revenue streams to foreign investors. The empire that suffered these setbacks in the 1870s was the Ottoman empire. Today it is the US.In the aftermath of the Crimean war, both the sultan in Constantinople and his Egyptian vassal, the khedive, had begun to accumulate huge domestic and foreign debts. Between 1855 and 1875, the Ottoman debt increased by a factor of 28. As a percentage of expenditure, interest payments and amortisation rose from 15 per cent in 1860 to 50 per cent in 1875. The Egyptian case was similar: between 1862 and 1876, the total public debt rose from E£3.3m to E£76m. The 1876 budget showed debt charges accounting for more than half of all expenditure.The loans had been made for both military and economic reasons: to support the Ottoman military position during and after the Crimean war and to finance railway and canal construction, including the building of the Suez canal, which had opened in 1869. But a dangerously high proportion of the proceeds had been squandered on conspicuous consumption, symbolised by Sultan Abdul Mejid’s luxurious Dolmabahçe palace and the spectacular world premiere of Aïda at the Cairo Opera House in 1871. In the wake of the financial crisis that struck the European and American stock markets in 1873, a Middle Eastern debt crisis was inevitable. In October 1875 the Ottoman government declared bankruptcy.The crisis had two distinct financial consequences: the sale of the khedive’s shares in the Suez canal to the British government (for £4m, famously advanced to Disraeli by the Rothschilds) and the hypothecation of certain Ottoman tax revenues for debt service under the auspices of an international Administration of the Ottoman Public Debt, on which European bondholders were represented. The critical point is that the debt crisis necessitated the sale or transfer of Middle Eastern revenue streams to Europeans.The US debt crisis has taken a different form, to be sure. External liabilities have been run up by a combination of government and household dis-saving. It is not the public sector that is defaulting but subprime mortgage borrowers.As in the 1870s, though, the upshot of this debt crisis is the sale of assets and revenue streams to foreign creditors. This time, however, creditors are buying bank shares not canal shares. And the resulting shift of power is from west to east.Since September, Middle Eastern and east Asian sovereign wealth funds have made a succession of investments in four US banks: Bear Stearns <http://markets.ft.com/tearsheets/performance.asp?s=us:BSC> , Citigroup <http://markets.ft.com/tearsheets/performance.asp?s=us:C> , Morgan Stanley <http://markets.ft.com/tearsheets/performance.asp?s=us:MS> and Merrill Lynch <http://markets.ft.com/tearsheets/performance.asp?s=us:MER> . Most commentators have been inclined to welcome this global bail-out <http://www.ft.com/cms/s/0/294ed78a-ae3a-11dc-97aa-0000779fd2ac.html> : better to bring in foreign capital than to shrink balance sheets by reducing lending. Yet we need to recognise that these “capital injections” represent a transfer of the revenues from the US financial services industry into the hands of foreign governments. This is happening at a time when the gap between eastern and western incomes is narrowing at an unprecedented pace.In other words, as in the 1870s the balance of financial power is shifting. Then, the move was from the ancient oriental empires (not only the Ottoman but also the Persian and Chinese) to western Europe. Today the shift is from the US – and other western financial centres – to the autocracies of the Middle East and east Asia.In Disraeli’s day, the debt crisis turned out to have political as well as financial implications, presaging a reduction not just in income but also in sovereignty.In the case of Egypt, what began with asset sales continued with the creation of a foreign commission to manage the public debt, the installation of an “international” government and finally, in 1882, to British military intervention and the country’s transformation into a de facto colony. In the case of Turkey, the debt crisis was followed by the sultan’s abdication and Russian military intervention, which dealt a lethal blow to the Ottoman position in the Balkans.It remains to be seen how quickly today’s financial shift will be followed by a comparable geopolitical shift in favour of the new export and energy empires of the east. Suffice to say that the historical analogy does not bode well for America’s quasi-imperial network of bases and allies across the Middle East and Asia. Debtor empires sooner or later have to do more than just sell shares to satisfy their creditors.

The writer is a professor at Harvard University and Harvard Business School and a senior fellow of the Hoover Institution, Stanford

Bankers anyone?

A very interesting article below from the Washington Post. How would anyone not want to become an investment banker? In booms, you win millions in bonuses, in busts, you get bailed out by the government (OK, Bear Stearn's shareholders are mostly an exception)

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/23/AR2008032301416.html?wpisrc=newsletter


Demons On Wall Street


By Sebastian MallabyMonday, March 24, 2008; Page A13
One year ago, with spectacular timing, a Wall Streeter named Richard Bookstaber published a book on financial engineering. He called it "A Demon of Our Own Design," and his argument was that a new breed of "quants" -- or "quantitative" number-crunchers like him -- had created a system too complex to be manageable. The risks embedded in swaps and options were understood by only a handful of math geeks, and a miscalculation in one corner of the markets could send shock waves globally. Until a week ago, Bookstaber seemed unduly glum. But in the wake of Bear Stearns, modern financial engineering has become harder to defend.
Bookstaber seemed too pessimistic because he understated the ability of Wall Street players to check and balance one another. Yes, modern finance had an alarming tendency to load debt upon debt, so the effect of a mistake was magnified. But the financial engineers who created these tottering cash towers had an incentive to stop building before the whole thing keeled over. If a bank borrowed too much, lenders would shut off the taps and clients would refuse to buy its swaps, options and synthetic bonds: Nobody wants to do business with a bank that is one shock away from bankruptcy. So financial engineers would certainly take risks. But scrutiny from fellow engineers at other firms would prevent them from overdoing it.
Even a year ago, reasonable people disagreed about whether these checks and balances were sufficient. After all, they failed periodically. A decade ago, a hedge fund named Long-Term Capital Management borrowed so much that it could not withstand the shock of Russia's default, and the Federal Reserve had to organize the fund's fire sale to its bankers. Two decades ago, a fancy new product known as portfolio insurance promised investors protection from a crash. But when the crash came in 1987, the insurance not only failed but also contributed to its severity.
So the case for financial engineering depended on a fine balancing of risk and reward. The risk was that Bookstaber's demons could wreak serious chaos. Mercifully, the economy had recovered rapidly after Long-Term Capital and the '87 crash, and neither episode cost taxpayers a dime -- in contrast to disasters involving little or no financial engineering, to wit, the savings and loan crisis. But perhaps the next time would be nastier. Bookstaber was reporting from inside the laboratory, and he was yelling that something was about to blow. It seemed crazy not to listen.
On the other hand, financial innovation also yielded rewards. Most of the time it controlled risk, reduced the cost of capital, and helped businesses and consumers. Securitized mortgages allowed banks to spread the risk of lending and therefore to charge less for loans, lowering barriers to homeownership. Swaps could make certain types of risk virtually disappear. In a financially primitive world, an American exporter to Europe and a European exporter to the United States each shoulders exchange-rate risk. But thanks to swaps organized by banks such as Bear Stearns, the two can trade their currency exposures so that they can lock in future profits in their home currencies.
But whatever the balance of risk and reward was a year ago, it is now a couple of shades gloomier. It's not so much that we face a property bust and a recession: Put that down to excessively loose monetary policy from 2002 to 2004 and a failure to regulate low-tech abuses such as no-doc loans with no down payments. Rather, the blow to the case for financial engineering comes from the implosion of Bear Stearns -- and from the Fed's necessary response. Those crucial checks and balances have been weakened.
This may sound odd, because two types of stakeholders in Bear Stearns were made to pay for their excessive risk taking. Shareholders have lost their shirts and thousands of employees will lose their jobs, which should teach Wall Street a grim lesson. But two other types of stakeholders have been given a huge break. As of 10 days ago, Bear's lenders did not expect to get their money back in full; thanks to a $30 billion credit line from the Fed, the lenders now look comfortable. Equally, Bear clients who had bought swaps and other derivatives faced the prospect of their contracts being rendered worthless; that danger has receded. Moreover, the Fed has announced that it is ready to provide emergency loans to other investment banks. The incentive for private lenders and buyers of derivatives to monitor banks' risk has to some extent been blunted.
This is a subtle shift, not a dramatic revolution. Lenders and derivatives traders have been bludgeoned in recent months; it's not as though they have zero reasons to be cautious. But the shift is disturbing nonetheless. The case for financial engineering was questioned by serious people even before we landed in this mess. And we have no good way of turning back the clock.
smallaby@cfr.org

European history has a habit of forgetting Poland.

How true... Below an interesting review of Adam Zamoyski's book. Can't wait to see a major movie about it, something akin to "Saving Private Ryan". It would make a lot of sense, given that, unbeknowst to many, "the Vistula Miracle" had a much stronger impact on the history of the world than that of, for instance, D-Day invasion (which Norman Davies in "No Simple Victory" appropriately cuts to size)

http://entertainment.timesonline.co.uk/tol/arts_and_entertainment/books/history/article3592459.ece

Warsaw 1920: Lenin's Failed Conquest of Europe by Adam Zamoyski

European history has a habit of forgetting Poland. This is unfortunate, because the Poles have more than once played a crucial role in shaping Europe's fortunes. In 1683, the Polish king Jan III Sobieski checked the Ottoman armies before the gates of Vienna, earning among the Turks the sobriquet “Lion of Lechistan”. And in 1920, as Adam Zamoyski relates in this elegant and fascinating book, it was Poland that checked the westward expansion of Bolshevik Russia.
The two sides were in many respects ill-matched: the Red Army was a determined and experienced fighting force, hardened by a cruel civil war against anti-Bolshevik forces. Russia's manpower reserves dwarfed those of an exhausted post-war Poland ravaged by warfare, malnutrition and epidemic. The Polish army scarcely amounted to a cohesive force, consisting as it did of variously armed contingents that had served with the Germans, the Austrians and the Russians during the first world war, along with a colourful assembly of Lithuanian, Tatar, Cossack, German, Hungarian and Russian auxiliaries, not to mention a squadron of US volunteer pilots led by Major Cedric E Fauntleroy and Captain Merian C Cooper - later famous for co-directing King Kong and flying one of the planes that harass the ape on the Empire State Building.
The bulk of the book is given over to a deft and gripping battle narrative. Initially it was the Poles who had the upper hand, turning the spearheads of the Bolshevik advance, breaking their lines and pushing hundreds of miles eastwards into the Ukraine. But within two weeks, the Russians had mounted a successful counteroffensive, rolling the Poles back until they stood before Warsaw on the River Vistula. It was here, in August 1920, that Polish forces under the command of Jozef Pilsudski counterattacked from the south, checking and turning the offensive and driving the Russians back to the River Niemen.
Warsaw 1920 is battle history of the best kind. The international setting and the political context are gracefully sketched in, and Zamoyski integrates the voices of contemporaries to create a symphonic, three- dimensional chronicle. He conveys with consummate skill the movement of men across terrain, showing how the balance of forces shifted from one week to the next. His account of the two armies is highly textured and enlivened by evocative portraits of the most important personalities, from the Polish supreme commander Pilsudski, who possessed, in the words of one British diplomat, “none of the amenities of civilised intercourse, but all the apparatus of sombre genius”, to the Soviet commander, the melancholic, nihilist and anti-semitic former nobleman Mikhail Nikolayevich Tukhachevsky.
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This was a war between the ages: massed cavalry played a crucial role in a flat, open land where men on horses with revolvers and raised sabres could still deliver pulverising blows against advancing infantry. Some engagements were preceded by formalised duels, in which individual cavalrymen issued formulaic challenges and hacked at each other in the no-man's-land between two armies. The most effective Russian weapon was the tachanka, a machinegun mounted onto a light carriage that could be galloped into battle, turned and deployed against the enemy. Much of the manoeuvring consisted of old-fashioned wheeling movements designed to cut the enemy's supply lines.
And yet, as Zamoyski shows, the Soviet-Polish war of 1920 also carried the seeds of a terrible future. There was an escalation of atrocities on both sides. Captured officers were routinely tortured to death, and Jews were singled out for reprisals by Russians and Poles alike. Stalin never forgave the Poles for the bitter resistance of 1920, a fact that may help to account for the brutality of the Soviet occupation of eastern Poland in 1940, when army officers, priests, land- owners, doctors, veterinary surgeons and other members of the national intelligentsia were subjected to a campaign of extermination. Few of the commanders, Russian or Polish, who played a role in 1920 died peacefully in their beds - most were caught up in the machinery of terror. And even as they recalled the cavalry movements of the 17th century, the engagements of 1920 also anticipated a new world of mobile warfare, in which battles would be won by deep thrusts and pincer movements - not by horsemen, of course, but by a new generation of mobile armour.
Warsaw 1920: Lenin's Failed Conquest of Europe by Adam Zamoyski HarperCollins £14.99 pp160