THE MYSTERY OF THE DARK MARKET: Keywords: Mercantilism, smuggling and bribery, customs corruption, patriot smugglers, John Hancock, free market, tariffs and customs duties, black market.

Colonial riot against customs, contemporary illustration

 “Mystery creates wonder and wonder

is the basis of man’s desire to understand.”

 Neil Armstrong

 

IX

THE MYSTERIES OF THE MARKET

A meditation about forgotten lessons of American Exceptionalism

By Xuan Quen Santos

THE NINTH MYSTERY

THE DARK MARKET

                If people are free to pursue their happiness, wealth will follow. If they are not free, they will try anyway.

                MERCANTILISM AND THE BORDERS

                Mercantilism was criticized by the French Physiocrats and by the Scottish School scholars, pointedly by Adam Smith. But their arguments and ideas were not strong enough to force changes to the status quo of the late XVIII century. The monarchies had become more powerwul and many of the chartered companies had become quasi-governments in the colonies, with their own armies and police.  Mercantilism had militarized the limits and borders between jurisdictions. Armies and navies grew in number and lethality. Fortified ports of entry and hardened borders were expanded with custom houses, tax collectors, and border police. Chartered monopolies of trade suffocated the local initiatives. Prohibitions and persecutions of colonial enterprises were the rule. Cities naturally divided by a river, suddenly became enemies. What they could trade before with a handshake across the border became illegal. Opportunities that made all the economic logic were lost to satisfy the “managed trade” done from the mother countries.

Lord North, Prime Minister of King George III
the power behind the throne and the custom houses

                The ideas and evidence provided by the early economists that favored free trade gave factual support -the evidence that science demands- to stimulate some political leaders to question the system under new light. The currents opened by “natural rights”, “equality under the law”, and “limited power of governments”, suddenly received new attention. For centuries, that type of discussion happened within the spheres of ethics and political systems, far away from involving the common person. Suddenly, economic ideas made those topics relevant to all people in their pockets. These ideas are expressed clearly in the Declaration of Independence of the United States. But the courage found by the Fathers of the Country was not just supported by those ideas. Many were smugglers and all of them were benefitting from an extensive “dark market”.

                SMUGGLING PREVAILS

                What is smuggling? Trading across jurisdictions in violation of legal restrictions.  In the more advanced countries, smuggling is associated today with illicit drugs and human trafficking.  It does not have to be that serious. Just outside some county lines, in the next county but just some feet away from the border that separates them, many gas stations and bars make their business by selling cheaper gasoline, cheaper cigarettes, or hard liquor. Some may even offer you gambling with “gaming” machines or sell lottery tickets.

Smugglers unloading in the stealth of night

                These simple acts of everyday commerce mean that the laws, ordinances, rules, restrictions, or whatever arbitrary disposition of the sheriff in the first county have made illegal or more expensive for their residents an innocuous activity. Gasoline and cigarrette taxes are higher in the first county that is also “dry”, where hard liquor and maybe even lottery ticket sales are prohibited. People from the first county buy them across the line, save some money and take home what they wanted. The border is open to come and go, thus it is not illegal to buy.

                Several things are clear in this example. The neighboring jurisdictions have different laws and different taxes; that difference has created an opportunity to save money or make some. If you think big, you may buy more beer or cigarettes than what you would personally consume and even buy extra lottery tickets to take home to sell and make more money. If you do that, you will not only be smuggling but also trafficking in illegal goods. What is also evident is that you were denied your freedom of choice and your costs have increased by having to go across the county line. Your freedom to trade in your county has also been denied and criminalized.

                A common phrase used to describe illegal commercial activities is “the black market”. From the example you may agree that describing it as black seems  too exagerated. Even “dark” may not apply to many such activities which often happened in the dark of night. Another term used is “contraband”. There seems to be a difference between re-selling beer, liquor, and cigarettes, and re-selling illicit drugs and smuggling illegal aliens across the international border. In the former cases, the line and the laws are used to interfere in the operation of the economic system. In the latter, the line and the laws are used for reasons of public safety and national security. The instrument is the same, but the purpose is different.

Privilege creates economic opportunity for gain

                   TAX FREE AND LEGAL INDIAN CASINOS

                Think of the proliferation of “Indian Casinos”. The Indian reservations are allowed to make some of their own laws. In states where gambling has been declared illegal and there happens to be a Federally Recognized Indian Tribe, the tribe can now promote and offer gambling within the reservation lands. It is also very common to find that my example of the gas station at the border applies also to the reservations. They profit from the higher costs that exist on the other side of the line. Their customers go for the entertainment that is forbidden at home and buy cheaper gas and cigarettes. Indian Casinos lure visitors with the promise of fun and lower prices that somehow are higher and forbidden on the other side of the line. Different rules lowered the prices on one side and created an opportunity for the customers and the casinos to benefit. It is not contraband because it is legal. In this case, the line and the laws have created an economic advantage for the casino that is denied to people on the other side of the line. This is clearly a “privilege”, which means “a private law”.

A monopoly created by a privilege

                During the XVIII century, by their own accounts, many Indian traders, mainly women of the Iroquois and Mohawk tribes that inhabited the territories of what are the borderlands between today’s Canada (New France) and the United States (New England), chose to trade furs originating on the French side with buyers at the trading posts of the English side. The riverine highway from the Richeliu River to Lake Champlain, to Lake George and to the Hudson River was an active contraband corridor. The Indians preferred the prices and quality of English woolens and other manufactures. Before Europeans began to draw lines and impose their laws, free trade existed on this riverine highway among the tribes.

                This territory was where most of the action of the “French and Indian War” (Seven Years' War, 1754-1763) took place. It involved several Indian tribes in conflicts against each other that would not have happened had there not been conflicts between the European empires. Policing to prevent the trade that had existed among the tribes was one local issue of the war. The trading posts were supplied by the chartered companies. Contraband does not exist until a powerful entity draws a line on a map and enforces a prohibition to trade. For the Indians, those lines did not exist. Commerce along the rivers transmit news and knowledge, creates peaceful  relationships, even family ties and tribal alliances. Managed trade harms or destroys all those common benefits, in addition to adding unnecessary costs.

                MERCANTILISM FOSTERED SMUGGLING

                In order to control the “balance of trade” in favor of the mother country, prohibitions were imposed on what the colonies could manufacture forcing them to import. They were restricted as to whose ships they could use, and also with whom they could trade. British colonies could only buy from British producers and use British ships. All the empires did the same to protect their interests. At times, it was possible for the colonies to import from other authorized sources but they were discouraged by having to pay high duties (import taxes).

                In the case of the British colonies in North America, several circumstances worked to their advantage. They were more distant and less profitable for the king’s treasury than the Caribbean colonies. Historians estimate that it cost the crown four times more for the royal navy to police the Atlantic and the ports of New England than they could collect in duties and tariffs. The English Navigation Acts had existed long before 1765, but had not been effectively enforced. During the previous hundred years, England had undergone major changes in its governance. It went through the English Civil War, the dictatorship of Cromwell, the restoration of the Stuarts, the transfer of the monarchy to a Dutch king, and eventually imposing the German dinasty of the Hanoverians. Parliament and factional politics had become the power of the state. During this time, that historians call of “benign neglect”, the colonies were mostly on their own.

                Much has been written about how this period allowed (better described as “forced”) the colonists to experiment with different schemes of self-governance and military defense. They became free to pursue their happiness, even if it was illegal, and wealth followed. After 1765, the British monarchy began to assert its dominion, but by then, the economy of the colonists had become much less dependent on the “managed trade” imposed by the mother country.

Unloading contraband away from customs control

                The New England colonies that were not suitable for large scale farming, gradually converted to small industry and commerce, with many towns and ports. The North Atlantic fisheries led to ship building. Ships became merchant ships and intercolonial commerce began to compete with the British interests. Colonists ignored the Navigation Acts and their ships transported illegal goods from the French, Dutch and Spanish West Indies. Like the Hudson River, the Mississippi was also a riverine highway for smuggling. All of it was illegal trade under the mercantilist English laws.

                It was inevitable that the other face of smuggling appeared.

                SMUGGLING AND BRIBERY

                Contraband and public corruption go hand in hand. The first one is commerce arbitrarily categorized as illegal. The second one is the result of the economic opportunities that the arbitrary law created.

                All the mercantilist legislation falls under what one of the champions of free trade categorized as “not respectable”. By definition, arbitrary legislation is not respectable. The French economist and politician Frederic Bastiat (1801-1850) was elected to the Constitutional Assembly and later to the Legislative Assembly in the aftermath of the third French revolt of 1848. He had championed the principles of free trade as a journalist and published a summary of his public debates in “The Law”. It is amazing to read it now as it seems that we are debating again what was left behind many generations ago. These are his words about respectable laws: “No society can exist if there is no respect for its laws. But, it must be the case that for the laws to be respected they must be respectable. When the laws and moral principles are in contradiction the citizen is caught in the cruel alternative of choosing between what is right or following the law”. Mercantilist legislation is the concession of arbitrary privileges for the benefit of a few at the expense of the welfare and rights of the many.

Frederic Bastiat - Defender of free trade

                Smuggling or contraband of what normally would have been plain acts of commerce were declared illegal for the benefit of the kings’ business partners, and the manufacturers and merchants of the mother country. When the colonists realized what the scheme was, and found alternatives that could benefit them, they took them. Smuggling, or buying contraband merchandise would increase their wellbeing, cover the costs of avoiding the high duties or tariffs, or the costs of avoiding prosecution. The difference between the arbitrary prices set by the monopolies and the market prices available in the open market allowed for a profit and for PAYING BRIBES.

                If people are free to pursue their happiness, wealth will follow. If they are not free, they will try anyway.

                Mercantilism came with bureaucracy and abuse. British customs officials, like all customs officials of the other colonial empires, earned a modest salary from the Crown. Before the XIX century, it was common for the high and mid-level officials to have bought their post by paying a bribe to some higher up in the mother country. They soon found that they could earn a bonus by looking the other way as the “dark” shipments came in, by counting less number of items for their ledgers, by changing the description of the imported goods, by lowering the “ad valorem” estimate of value… When smugglers were caught, they were often released by sympathetic colonial judges. Smuggling became commonplace.

Replica of a smuggler's ketch, smaller but faster

                The history of colonial America, the whole continent, cannot be fully understood ignoring the roles that smuggling and customs corruption played. The big difference between Hispanic America and the United States is that after independence from the colonial empires, the United States opted for a transition to free trade backed by free enterprise and a government of limited powers to interfere with commerce. The Hispanic American countries kept their colonial “managed trade” with high tariffs and duties, promoting national monopolies, and keeping the corrupt structures of government intact, ready to line the pockets of the new bosses. The privileges of the king were just passed on to the new “status quo of power”, the bureaucratic state.

                SMUGGLING PATRIOTS

                John Hancock, the guy with the large signature in the Declaration of Independence, was also one of the wealthiest men in America. Part of his income was derived from smuggling. On May 10, 1768, the Liberty, a ship owned by him was inspected because the customs officials suspected Hancock of smuggling. The reason was that the ship only had 25 barrels of Madeira wine listed as cargo, but it had the capacity for much more. They alleged that Hancock must have unloaded the rest of the cargo during the night. Two customs guards had been stationed on the ship during the night and they said nothing was unloaded… at first. On June 10, 1768, his ship was finally taken over by the royal navy after the guards told the truth. A riot broke out in Boston and the homes of several customs officials were destroyed, causing them to flee. Hancock’s ships had a history of encounters with customs officials, and his goods were highly appreciated by the public.

A promoter of revolts against customs abuses,
smuggler and patriot

                Hancock was not alone. Other signers of the declaration suffered worse losses once the war begun. George Clymer from Pennsylvania lost more that one hundred of his merchant ships, either destroyed or taken over by the Royal Navy. Carter Braxton from Virginia saw all his merchant ships sunk or captured by the Royal Navy.

                In general, the many ports and harbors of New England, as well as the former pirate havens of the southern states’ coasts had an active “dark commerce” and their shipping entrepreneurs supplied the many non-British imported goods that were cheaper or unavailable from British suppliers. The colonial shipyards managed to create a fleet of merchant ships equivalent to half of the tonnage of the British merchant fleet of the times.

                Once the War for Independence began, it was the supplies and funds provided by smugglers sent by the Spanish Governor of Louisiana, Don Bernardo de Galvez, that allowed the ragtag militia led by George Washington to survive the first period of hostilities. The Spanish had closed the Mississippi River to the British Navy and sent the smugglers up the river into the Ohio. These routes had been well known to the Indian traders. New Orleans had been a center of smuggling entrepreneurs since it was established. Louis Antoine Juchereau de St. Denis founded the trading post on the Red River to smuggle French goods into New Spain, and Spanish cattle into Louisiana destined to New Orleans. It is interesting to note that his partner in the illegal operation was the Spanish Governor of the Texas territory. Later, the Lafitte brothers became the heroes of the War of 1812, and were pardoned for their well known acts of piracy and smuggling. They are the real founders of the Port of Galveston where they would dump their contraband into the Spanish territory of Texas when it was just a sandy island.

St. Denis, French explorer, trader and smuggler on the Red River in Louisiana

                Within the framework of the non-respectable mercantilist laws that ruled the colonies, the line that separates the criminal from the patriot, or the smuggler from the merchant is hardly noticeable.

Jean Lafitte raiding a merchant ship in the Gulf of America

 A TALE OF TWO LATIN AMERICAN COUNTRIES: KEYWORDS: DONROE Doctrine, Trump and Maduro, Venezuelan revolution, oil economies and inflation, a firestorm for the world, petroleum in a free market economy, state owned monopolies, communism, Venezuelan millionaires.

Maduro and his wife captured for drug trafficking

A TALE OF TWO LATIN

 AMERICAN COUNTRIES

A meditation about forgotten lessons of the failures of American Imperialism

By Xuan Quen Santos

 

"It was the best of times, it was the worst of times,

 it was the age of wisdom, it was the age of foolishness,

 it was the epoch of belief, it was the epoch of incredulity,

 it was the season of Light, it was the season of Darkness,

it was the spring of hope, it was the winter of despair,

we had everything before us, we had nothing before us,

we were all going direct to Heaven, we were all going direct the other way."

 

1812-1870 Victorian Era Best Seller novelist and reformer

Charles Dickens

"A Tale of Two Cities" (1859)

 

                FROM PROSPERITY TO MISERY

                The masterful introductory lines of Charles Dickens novel about the contradictions of the French Revolution were written in hindsight. By then, three violent revolts had taken place in France since the 1780s, kings and royal families had been eliminated, the Reign of Terror took over for a while only to succumb to the installation of Napoleon’s dictatorship who was himself removed to restore another monarchy; another cycle of revolts followed with a republican government that converted into another empire. On the pages of this blog published last June 22, I analyzed the impact of the  political currents involved in the French revolts. I suggest that you review that meditation if you did not catch it before.

                Dickens’  words, out of its historic setting, are aplicable to describe today’s political and economic situations around the world. There are prosperous and peaceful nations, and miserable and violent failed states. The moment is ripe for a narrower comparison of what makes the difference between one group and another using as example two Latin American countries with a similar background and size. They both found oil. One is in heaven, the other one in hell. Why?

                CASE STUDY NO. 1: VENEZUELA

                VENEZUELA’S DICTATOR IS CAPTURED

                On January 3 of this year, US President Donald J. Trump announced the capture of Venezuelan leader Nicolás Maduro, following a successful overnight joint U.S. military extraction in Venezuela's capital of Caracas. The following excerpts are from an official press release of the US Department of War.

                "Last night and early today, at my direction, the United States armed forces conducted an extraordinary military operation in the capital of Venezuela. … It was an operation against a heavily fortified military fortress in the heart of Caracas to bring outlaw dictator Nicolás Maduro to justice, Trump said during a midday news conference from his Mar-a-Lago residence in Palm Beach, Florida.  The president added that both Maduro and his also-captured wife, Cilia Flores de Maduro, will now face criminal court proceedings tied to a 2020 indictment from the U.S. Department of Justice on multiple federal charges, including narco-terrorism and drug trafficking.”

                I personally heard President Trump during an impromptu comment of his presentation say the following: “The U.S. will now run the country until a new leader can be chosen.” He added “We’re going to make sure that country is run properly. We’re not doing this in vain".

                BASIC FACTS ABOUT VENEZUELA

                As of 2025, the population of Venezuela is estimated to be around 28.5 million. Since about 8 million have emigrated as refugees to other countries, its population has been shrinking. The territory covers 353,851 square miles. Its north side is in the Caribbean tropics  and its south side is in the Amazonian jungles, close to the equator. The territory is divided horizontally by the lowland basin of the large Orinoco River, one of the largest in South America. Most of the population and productive activity is on the Caribbean side. The metropolitan area of the capital of Caracas has an estimated 6 million people. The second largest city is Maracaibo with close to 2 million people is a product of the relatively recent development of the petroleum economy. Close to 30% of the population is concentrated in these two urban centers. The rest of the country is largely undeveloped, with some traditional areas devoted to agriculture in ranching, sugar and coffee.

Map of Venezuela's economic activity. Population and production concentrated on the Caribbean shoreline and Colombian border. Untapped oil reserves on the Orinoco River basin

                The economy of Venezuela in 2025 tells the story of decadence of the last two decades. The per capita annual income was only US $ 3,103, ranked 130^th in the world. The total annual domestic production, GDP, is estimated to have been US $ 82.77 billion. 90% of its exports are derived from the oil and gas industry. Local production of all other sectors has dropped. Inflation near the end of 2025 reached and annual rate of 400% per year. Of its declared oil reserves of 303 billion barrel, it produced only 1 million barrels per year, which are largely the only source of government revenue. The official rate of unemployment is declared at over 5%, but international estimates place it twice as much.

                The political history of Venezuela tells part of the story. For 300 years is was a province of what eventually became the Viceroyalty of New Granada, ruled from Bogota. The first efforts to gain independence from Spain began in New York, in 1806. The revolutionary Francisco Miranda, who had participated as a Spanish officer during the American Revolutionary War in the aid of George Washington’s army, and later as a soldier of fortune in the French Revolution, led to private “invasions” with small armies to the coasts of the future Venezuela. He was unsuccesful in animating the locals, who at the time were more concerned about Napoleon’s takeover of the Spanish throne. Simon Bolivar, who surrendered Miranda to die in Spain, by 1810 changed his mind and led the local Spanish army in a rebellion against the restored Spanish monarchy. Venezuela became a province of “La Gran Colombia” until 1830, when if became an independent republic with the territory it occupies now. Since then, it has had 26 new constitutions, multiple long-term dictators, multiple term re-elected presidents in dubious elections, seven coup d’etats only in the XX century, and only twice there have been peaceful electoral transitions. Oil was discovered in 1914 and initially developed by international companies until they were taken over by the state. Venezuela has the largest declared oil reserves in the world, claimed to be at 303 billion barrels.

Carlos Andres Perez, President of Venezuela; Fidel Castro, Prime Minister of Cuba; Felipe Gonzalez, Prime Minister of Spain. Marxist Communist Castro between two prominent members of the Socialist International during a meeting in Brazil

                THE NATIONALIZATION OF THE OIL INDUSTRY

                Venezuela nationalized its oil industry on January 1, 1976, seizing control from foreign companies and establishing Petróleos de Venezuela S.A. (PDVSA) as the state-owned oil company monopoly. Venezuela was not the first nor the last country to follow the trend. It came with the process of de-colonization and nationalism that spread over the world as the wasted imperial powers of Europe could not afford to sustain their mercantilist colonies or client-states. The Middle East came first. In Venezuela, the political movement favoring the total control of the main natural resource of the country began in the early 1970s influenced by events in Iran, Lybia, Algeria and Iraq. There were also two antecedents in Latin America: Mexico (1938) and Peru (1968), then governed by Soviet supported regimes during vulnerable periods in the US. Then, there were the oil wars and the world petroleum crisis (1973) that caused worldwide spiraling inflation.

Lake Maracaibo oil field in operation

                The last of many military dictators of Venezuela had been ousted in 1958. Two things changed then. The name of the country had been a fictitious United States of Venezuela when in fact was never a federal system; it became the Republic of Venezuela. From then on, the centralized republican period had electoral processes dominated by two branches of socialism. One was sponsored and funded by the German Christian Democrats (COPEI), and the other was a member of the Socialist International (AD, Accion Democratica). Under the second term of President Carlos Andrés Pérez, a prominent member of the Socialist International, Venezuela formally proceeded with the takeover of the petroleum industry, greatly supported and assured by the trained Venezuelan engineers and administrators that trained and worked in the foreign companies developing and operating the oil and gas sector.

                Of course, there was resistance, but the takeover was not a surprise. During this same period, the US was going through its own internal crisis. President Ford was having to manage the post-Nixon debacle and President Carter was not only a pious socialist himself, but his foreign affairs cabinet was a failure around the world. Anti-American Imperialism was a popular banner in Latin America at the time, and nationalization was also popular among Venezuelans. The oil companies accepted a one billion dollars compensation, accepted minority positions as shareholders in new “mixed” corporations and quickly signed service and technology agreements with PDVSA. They became the first buyers of the nationalized Venezuelan petroleum. Although I can’t be certain, two other sources were likely used to cover any losses beyond the compensation accepted. One is OPIC, the Overseas Private Investment Corporation operational since 1971, which works as an insurance of US investments abroad. The second one is the amortization of losses available in the income tax codes. The risks had been obvious and were likely considered ahead of time.

President of Venezuela Hugo Chavez and Prime Minister of Cuba Fidel Castro
After the collapse of the Soviet Union, Cuba was sustained by Venezuela's oil

                The new cashflow coming into the Venezuelan treasury allowed the government to buy CITGO in the United States. Fifty percent was bought by the state monopoly PDVSA in 1986, which acquired the remainder in 1990. Administered from Venezuela, the US company began a spiral down since President Hugo Chavez took over. It owned three massive coastal refineries, 43 oil terminals, and more than 4,000 gas stations throughout the United States. It attempted to transfer the assets to Russia in exchange for economic assistance, but the operation was blocked by the US government. PDVSA then issued bonds in the financial market to send funds to Chavez, and eventually defaulted. It ended in litigation, and just weeks ago, after US courts’ decisions, CITGO was taken over by new private owners at a “major discount” because of its distressed status.

CITGO, a former US company purchased by Venezuela's state-owned PDVSA was recently sold at auction to pay the creditors and some of the expropriated operators

                In 2007, Chavez repeated the process of nationalization, this time of the minority-share foreign interests in the previously nationalized assets and service contracts, which were what remained. Some companies accepted the compensation, others litigated and many cases are still in the courts. This round of nationalizations was largely aimed directly at gold mining and other strategic mineral reserves like iron, not just the oil industry. The nationalizations did not affect just international interests. Many Venezuelan established and owned properties were taken over, including utilities, communications and media, banks, developed land, and commercial services. Emigration and capital flight accelerated.

                Almost everybody still left in Venezuela seemed happy as the public payroll and subsidies increased, until the predictable end of the operations of government-controlled monopolies began. Maduro managed to make everybody in Venezuela a millionaire. At today’s rate of exchange in the free currency market of Caracas, at more than 400 Bolivars for one US Dollar, the average Venezuelan that makes US $ 3,100.00 per year, now earns 1,240,000.00 Bolivars a year. The reality of any worker’s paradise is now realized!

For a time, Venezuelan oil allowed an affluent middle-class access to the luxury brands

                THE CONSPICUOUS CONSUMPTION

                Before the takeover by the state, the private foreign petroleum companies paid generous royalties and taxes to the government. They also spent in the local economies for the local goods and services they consumed, and paid the highest salaries in the country. The local economic activities were increased as the wealth originated by the oil and gas industry dispersed throughout merchants and households. Foreign reserves increased, which allowed for more imported goods. Real income increased as inflation remained under control. The government had to rely on collecting taxes in addition to the payments of the foreign operators. Venezuelans began to enjoy a new level of wealth and the local investments increased in the non-oil and gas sectors promoting real business development. Venezuelans began to be recognized as conspicuous consumers in the tourist market of Florida.

Conspicuous consumption characterized the oil driven economy

                After the takeover happened, the abundance of resources immediately increased public spending in the “social sectors” with more entitlements, investments in public works, subsidies, a larger bureaucracy and army, and corruption appeared. The wealthy Venezuelans also enjoyed the tide of new money that flowed. For several decades they travelled around the world. The very rich spent time and bought real estate in Madrid after shopping in London and Paris.  The new affluent middle-class went shopping in Miami and became known as the “deme dos” people, meaning “give me two”; two Mercedes, two Rolex, two Hermes bags, two pairs of Ferragamos, two condos in Brickell Avenue…The real estate market in Florida boomed, the Cuban maffia introduced them to the financial and real estate markets, to the underworld of the ports, and the new opportunities of South Beach. Inflation began to creep, and the average worker, particularly in agriculture, decided that working was too hard since they would continue to receive benefits either way. As the country began the path of consuming more than what they produced, they should have realized that the monetization of oil revenues spent locally means more consumption with less and less local goods. When the source of the new purchasing power disappears, there is no wealth to spend, and the productive apparatus has ceased to exist. Only inflation is left. In Venezuela nobody knows what happens to the income the state receives from oil, but everybody suspects it. We will soon find out where their retirement properties and their bank accounts are.

The Miss Venezuela Beauty Pageant, symbol of the oil-boom

                The wealth of oil in the hands of the political leaders is a curse, if not just a temporary illusion, confirmed by the economic facts of 2025 I described before. From richness to poverty in three generations is nothing to be proud of.

                Some economic historians have described an antecedent. Between the XVI and XVII centuries, the gold of the Americas flowed to Spain. The king, the court and the monopolist merchants of Seville became rich and spent and spent. The dispersion of the purchasing power trickled down to the rest of the people, but soon inflation came. The gold left to the other European countries that supplied goods to Spain as its own industry and agriculture began to dissapear.  The poor people migrated to the American colonies because their wealth and opportunities had vanished. In the XXI century, we still find Spain near the end of the list of nations of Europe in personal wealth, with a regime that still controls the economy, but now with the label of socialism. Spain has one of the highest unemployment rates in Europe; the youth is leaving, and they still have a puppet king. The gold of the Aztecs, the Incas, and of the veins of the mountains dug by Indians was a mirage as the source of wealth.

"It was the best of times, it is now the worst of times,

we had everything before us, we have nothing now”

we have arrived at the gates of hell.”

                CASE STUDY NO. 2: THE REBEL STATE

                There is another Latin American country that has a similar starting history and size, but a completely different present condition. After 300 years of Spanish colonial rule, it started its political life as an independent republic in 1836. It occupies a territory of 268,820 square miles, slightly smaller than Venezuela. A substantial part of its land is semi-arid but its coastline is a semi-tropical plain with plenty of rain. Its rivers are long, but not consistent. Irrigated agriculture, farm and ranching lands, and forestry were historically important. During the colony, it was sparsely populated by less than 5,000 people, mainly natives. It remained at a great disadvantage compared to Venezuela. The reason was simple; the Spanish did not find it interesting as the minerals  or large populations they were searching for were never found. After independence, several factors changed, but its political development was stable. With the exception of a short period of civil war that spilled from the neighboring countries during the 1860s, it has been at peace, with frequent and periodic elections without interruption. The first constitution was adopted in 1836, substituted in 1845, and changed three more times until the adoption of the current one in 1876. Since then, constitutional amendments have been approved by public referendum.

                The population is now 31.85 million people, similar to Venezuela’s. It increased 4.3 million during the last ten years. It also includes 110,000 legal immigrants from Venezuela, and an unknown number that are not accounted for.  This country has two metro areas larger that 7 million each, and three larger than 2 million. The per capita income today is US $ 68,100, which is more than 20 times the income of Venezuelans, and comparable to those of Saudi Arabia and Sweden. The GDP is US 2,800 billion. Annual Inflation rate is 2.7% at the present. Oil was found in 1894, just a few years before Venezuela. It now produces 2 billion barrels per year, and its proven reserves are just 20.2 billion barrels. This country is now the largest producer in North America, not only in petroleum, but also in gas, and in the petrochemical industry as a whole. It is also the world’s leader in oil and gas technological development. This country is home to the largest number of headquarters of oil and gas related corporations in the world.

                This country’s government receives large sums from the oil and gas industry, but it does not depend on them. The economic impact of the oil industry in the government’s finances is not even the main source or revenue. Sales tax from the public’s consumption is close to 60% of its budget. Nevertheless, the contribution of oil and gas is spread across the whole country, not jus the capital. Government reports indicate that, “More than $28 billion in state and local tax revenue and state royalties from the oil and natural gas industry translates to an extraordinary $75 million every day that pays for public schools, universities, roads, first responders and other essential services. Additionally, school districts received more than $ 3 billion dollars in property taxes from mineral properties producing oil and natural gas, pipelines, and gas utilities. Counties received an additional $1.2 billion dollars in these property taxes.” This former Spanish colony has also created a “Rainy Day Fund” for emergencies. Since 1987, the fund has received over $33.9 billion dollars from oil and natural gas production taxes. This country is a “destination” for foreign investment from all over the free world. It has several highly world-ranked universities and the most prestigious medical hospital and research center in the world.

"It is the best of times, it is the age of wisdom,

 it is the epoch of belief, it is the season of Light

it is the spring of hope, we have everything before us!”

                WHAT MADE THE DIFFERENCE BETWEEN

                VENEZUELA AND THE REBEL STATE?

                The difference can be explained in the words of Juan Bautista Alberdi (1810-1884), a notable Argentinian intellectual, professor or law, diplomat and proponent of what became The Constitution of Argentina of 1853. He has been compared to James Madison; he opposed the many initial despots that plagued Argentina’s early history, which is much like Venezuela’s. His Constitution is what made Argentinians the richest people in the world at the beginning of the XX century. His conclusion as to why Latin American states had failed since their independence continues to be valid today. In his words: “Our countries became independent from the moment they did not depend from the power of Spain, or any other country. But, the sons of our countries, the individuals, the citizens, continued to be oppressed by the omnipotence of the new States, just like they had been under the omnipotent Colonial State”. Independence of the state did not become liberty for the regular citizens. Argentinians forgot Alberdi’s warning. At least three times in their modern history, Argentina’s economy has collapsed for the same reason.

Juan Bautista Alberdi, the "Madison" of Argentina
Alerted about the omnipotent powers emerging out of the Independence from Spain

                Nothing illustrates this point more than how the Spanish King’s property rights of the mineral wealth were treated in the constitutional documents of all the Latin American countries. The king’s mineral rights have a long history.

                THE TAKEOVER OF MINERAL RESOURCES

                The takeover of the mineral wealth, mainly precious metals and related minerals (gold, silver, copper and mercury) happened in the city of Sardis in ancient Lydia (Turkey), some 2,600 years ago. A mining tribe standardized their units of melted Electrum using stone molds in a cylindrical form. They produced standard disks or medals of the naturally found alloy that contains gold, silver and copper. They became widely purchased, and slowly, they became coins used as money. The last king of Sardis named Croesus had the coins hammered-stamped with the efigy of a lion as his brand. The Persian Emperor Cyrus The Great, on his way to conquer Athens, subdued Croesus, took over his kingdom, his mines and his idea of coins used as money. Since then, the faces of kings get stamped on coins.

                For 2,600 years, humanity has been under the erroneous impression that precious metals, the minting of money, and the control of prices and market transactions are a legitimate function of government. Big mistake! Abuse in public spending, accompanied by inflation and corruption are inevitable with that scheme. Political economists have reinforced that idea and have come up with abusive ways to do it. The monopoly of money to guarantee the stability of prices is used as a mask to hide their responsibility in causing the opposite. Price fixing, price controls and persecution of the merchants have been their solutions. They supported their ideas by feeding the vanity of the kings. All the old coins have their efigies stamped on one side. One of the first acts of the new king of England Charlie The Last, was to issue a new coinage series with his long nose on one side.

The new coins of England with the effigy of King Charles III

                ROMAN LAW

                After conquering what we call the Middle East, North Africa and most of Western Europe, the Romans were able to create a long period of stability called The Pax Romana. It began around 27 b.C and lasted for over two centuries. The Romans extended their institutions and left their influence that is still present today. Obviously, the Roman Army was the key, but it was supported by Two codes of Law: the Roman Law and the Ius Gentium. The latter concept is the birth of international law as it means “the gentiles law”, meaning “the non-Roman citizens” law. It basically stated that the conquered kingdoms and empires could have limited self-rule and apply their own laws as long as they did not violate Roman Law, paid their taxes and did not wage war. The Romans also instituted the use of their coinage and units of measure, affirming their control of the mineral wealth. They spread their technological knowledge in urban sanitation and construction. They connected their empire with roads, some still in use, and most were improved into the present major highways. This era was characterized by increased prosperity, territorial expansion, and a reduction in internal revolts and external wars.

                With economic theory the results can be explained by the creation of an unprecedented large market open for trade, stable rules, stable and uniform money, and political continuity. Of course, there were frequent revolts. After two centuries, the Pax Romana was followed by a gradual process of degradation, greatly influenced by the growing taxes to the conquered nations to subsidize Rome’s growing population that demanded different forms of welfare. With over one million people from all over their known world, public life was plagued by increased corruption, particularly in the army. The debasement of the currency became frequent, and violent transitions of power begun by the army leaders created instability. The empire split and the European side fell apart.  By the VI century AD, Roman Law had become the foundation for what in Europe became the Feudal period. One of the Roman colonies was Hispania. It broke into many kingdoms and for seven centuries half of it was part of the Islamic domain, until 1492. The Islamic invaders were expelled, the kingdoms were unified, and a new continent became part of the Spanish main.

                THE FIRST MINING LAWS IN THE NEW WORLD

                The Spanish kingdoms, as most other European domains, had their codes of law with the basic principles rooted in Roman jurisprudence. The legal precept that recognized the sovereign patrimony of the king over the mineral wealth was well established. On open lands (we call them public today), the king had all rights. A discoverer of a mine on those lands was obliged to pay one third of the value of the mineral as royalty. On private lands within the kingdom, the king was to receive one tenth of the minerals extracted, to be collected by the local authorities.

                For the newly discovered lands, beginning with the gold mines found in Hispaniola (Dominican Republic and Haiti), as early as 1501, the first permits were emitted conditioned to the payment of one fifth of the minerals found. This became known as the Royal Fifth (El Quinto Real), a base royalty of 20%. The word “royalty” means “of the king”. By 1618, the first compilation of mining regulations were included in the first Laws of the Indies. At times, and for specific conditions, the royalty could be reduced or increased, such as to stimulate the private investment in a new area, or to collect a higher share for a specific need, such as times of war. All the new lands discovered were the private estate of the King. Under these rules, the way was paved for the development of new chapters in history. The abundance of minerals from the Americas flowing back to Europe, not only of precious metals, eventually developed the erroneous economic theories of “bullionism” and “mercantilism” that have not ended yet. It also promoted the technologies of mining, and metallurgy to new levels. Finally, these principles were transferred to all the constitutions of the newly created Latin American states that emerged after the wars of independence from Spain between 1810 and 1823, and of Cuba in 1898, since Puerto Rico never became independent and autonomous.

A Spanish gold doubloon of 1788 with the effigy of King Charles III

                    THE ROAD NOT TAKEN

                Venezuelans began their efforts to gain independence from Spain in 1806 and failed. Again tried in 1810 when independence was declared, only to find Venezuela as part of the new country of Gran Colombia. It finally obtained its autonomy in 1830. The first constitution, and all the subsequent 25 new constitutions, including the Chavista constitution of 1999, declared the sovereign state as the heir of the kings’ mineral rights.  Article 12 of the current constitution states: “Mineral and hydrocarbon deposits of any nature that exist within the territory of the nation, beneath the territorial seabed, within the exclusive economic zone and on the continental shelf, are the property of the Republic, are of public domain, and therefore inalienable and not transferable. The seacoasts are public domain property”.  The laws that permit oil and gas exploration, extraction, initial transportation and storage may only be conducted directly by the state, by 100% state-owned companies, or by approved joint ventures in which the state holds more than 50% of the shares. In other words, the political establishment is in total control of the industry. It will thus act only in the political interests of the group in control of “the power of the state”, defined as “the stato” by Machiavelli, who coined the term.

                 The Rebel State took the road not taken by Venezuela and not taken by any of the other 22 countries that gained their independence from Spain. It began hostilities against Spain in 1810, as did some of the neighboring provinces. In 1813, at the battle of Medina, the Spanish Royal army massacred the rebel militia, killing in one military action more than two thirds of the male adult population of the country. Desolation followed and the Spanish government promoted new immigration. People seeking land and freedom from all parts of Europe and America accepted the invitation to buy land. Independence from Spain was gained in 1821, only to become ruled by a new emperor. By 1823, after another conflagration, the Rebel State became a province of a federation that soon became entangled in a civil war. The winning dictator, General Santa Anna abrogated the federal constitution in 1835. The Rebel State declared again its own independence, this time from Estados Unidos Mexicanos.

Map of Texas economic activity over the whole territory

                 The Rebel State adopted the name of The Republic of Texas. Mexico invaded with two armies led by the President-Dictator of Mexico. The Texan Army, really a militia of volunteers led by General Sam Houston and a cavalry led by Juan Seguin, defeated the Mexican state at the Battle of San Jacinto, capturing General Francisco Lopez de Santa Anna. After a decade as an autonomous republic with its own constitution, it annexed itself as the 28^th state of the United States of America through an international treaty.

Captured President of Mexico Gral. Santa Anna brought to Sam Houston, commander of the Texas volunteer militia after the Battle of San Jacinto. Houston was wounded in the leg.

                 While under New Spain-Mexico (colonial Texas), private title to land was created by land grant acknowledging the sovereignty of the soil, while the underground was reserved by the king/state. In the colonial and Mexican grants, if the mineral rights were included, they were subjected to the royalty and expressly designated in the title. The first Constitution of the Republic makes no mention of mineral rights, but several of its provisions specifically protect the property rights of its citizens. The Republic of Texas continued the legal practice of selling and granting land, but without separating or reserving any claim to the underground. The annexation constitution of 1845 extends those protections, and puts Texas under the system of Federal Law. Since then, Texas adopted English common law on property rights, including the right of ownership of mineral deposits. In other areas, such as water rights, it kept the ancient laws of Spain. The King of England did not reserve ownership of the mineral rights of any American soil, and ownership of land was always under English common law. Mineral rights passed with the surface rights when property changed hands. The people of Texas owned the oil from the moment they acquired the land.

Oil field of the Spindletop Well, near Beaumont in 1901

                 Texas was not alone in adopting this change. The Louisiana Purchase treated property the same way taking the rights away from the Kings of France and Spain. After the Mexican-American War, the new states of California, Arizona, New Mexico and Nevada also changed the colonial mineral law to recognize that surface owners also owned the minerals.

                 There is also one extraordinary characteristic of Texas. Today, 200 years later, 93% of the total area of the country is privately owned. Some of it are the parcelled remnants of the colonial grants, another large segment of ownership resulted from the parcelling and land development carried out by the railroads along their ROWs, and the towns that developed as a result. Around the large urban hubs, ownership at the present is a combination of old family ranchlands, lands that have been acquired for land development, and all the national, state and local developers and homebuilders preparing the future. Utilities, all private, and mainly pipelines feeding the ports and the rest of the nation, are also large landowners. The federal government is one of the large owners of land at close to 1% of the total. When its properties are analized, two things stand out. Most of it is the land occupied by Big Bend National Park, and the rest are the numerous military bases and facilities of the Corps of Engineers that have federal control of the large number of dams and man-made lakes on navigable rivers, or for flood protection. When the state of Texas lands are broken down, aside from roads and other communications facilities and government offices, the largest portion is dedicated to fund the university system that benefits from the royalties derived from the oil and gas private leases in the semi-arid lands of west Texas. Texas extensive private land ownership with full rights and its government concentrated in its limited public functions are the foundation of its economic success.

                 A comparison of land ownership and property rights between Venezuela and Texas will expose another reality that seldom goes beyond the issues related to oil and gas. Large portions of the land are undeveloped by any present standards. Some of it is sparsely occupied by aboriginal groups, many tribes still subsisting from hunting and gathering, with limited planting. The total control of ALL mineral rights and resources is owned and monopolized by the state apparatus. Beyond the mineral wealth, there is another angle where the state claims total control: water and natural resources beyond mineral wealth. The Chavista constitution is the longest in the world, inspired by the soviet model and guided by the Peruvian Marxist Jose Carlos Mariategui (1894-1930) who was trained in Marxism while exiled to Italy. Regardless of Mariategui’s political inclinations that would lead to poverty, just like Chavismo has done, he deserves recognition for introducing a serious effort to incorporate the ancestral forms of social and political organization of the natives.

The Huaorani tribe, one of many inhabitants of the Venezuelan Amazonia, south of the Orinoco

                 The “Indian Problem” is seldom discussed in the USA. We prefer to hide our abject failure and sweep it under the federal rug  of oblivion. The first nations in the United States are still considered “others”; they were “granted” citizenship in their own land until 1924, and even today, the have a “custodial” relationship under the federal politicians that deny them full property rights over the land of their “reservations”. Maybe dealing with the Venezuelan reality will also open new avenues to finally address “the Indian Problem” in the United States. Venezuela has not solved it either. The following excerpts of the current Venezuelan constitution are illustrative of some of the barriers any reform will encounter.

                State Ownership & Control (Art. 302, 4): The State holds ownership of petroleum, strategic industries, and resources like water, essential for life, promoting domestic manufacturing and technology.

                National Sovereignty (Art. 303): The State retains all shares in Petróleos de Venezuela, S.A. (PDVSA) for national economic and political sovereignty.

                Indigenous Rights (Art. 12, 10): Recognizes indigenous peoples' collective ownership of traditionally occupied lands, requiring demarcation and titles, though conflicts arise with existing resource extraction.

                Environmental Protection (Art. 8): The State is responsible for an overall policy to preserve the environment, territorial integrity, and biodiversity in border areas.

               VENEZUELA IS NOT ALONE

               Some forty years ago, when some oil drilling companies began to express interest in drilling in the potential oil fields detected in the jungles of Guatemala, I wrote a report warning the Canadian investors about the political and legal risks involved. I later wrote an article for public consumption in the newspaper about a different angle. The topic looked counterintuitive and contrary to all the public’s expectations of finding oil. Since all mineral rights in the former colonies, except in Texas, those rights became a prerogative of the new states, finding oil (or gold) was not a fortunate event, but a curse. It would inevitably lead to larger government, more spending and bureaucracy. This means corruption, inflation and an overvaluing of the currency. By overvaluing the currency with the flow of US dollars, all traditional productive activities for export would become uneconomic, agriculture and food security would suffer, and the lowest salaries would become too expensive in the international market to attract foreign investment. To gain more power, popular expenses such as energy, transportation and gasoline would be subsidized, leading to price distortions throughout the economy, etc.  This is what has happened everywhere in the world where oil was found, and it ended in the control of the political system. I still believe I was right. Examples of real-life are abundant. Venezuela is not alone.

            HOW TO WIN THE SUPPORT OF ALL VENEZUELANS AND ALL THE MAJORITIES OF LATIN AMERICANS IGNORED SINCE INDEPENDENCE.

             The first immediate stage must be to return to the people FULL RIGHTS OF PROPERTY OF THE LAND, nullifying all the Spanish King’s rights and prerogatives that the independent Venezuelan state usurped from the people at the beginning. This means that all mineral resources and commercially viable natural resources should be available for development by the owners of the land and private property ownership should be extended.

            Once a new legal framework is established, before indemnifying the American companies in the petroleum industry for their losses in Venezuela, before taking over the country’s oil resources by “managing” the cupola of the corrupt and powerful status quo, Venezuelan citizens whose properties were seized should be compensated and invited to return to participate in the Venezuelan Renaissance. 

            Finally, just like it happened in Texas, immigration should be promoted with homestead laws that promote investment and work in forging the great future that was envisioned by their Founding Fathers. A careful stewardship of the land, its resources and its beauty should be the main consideration. There is plenty of Venezuelan human capital prepared to participate in the oil industry. There is also plenty of Venezuelan financial capital invested abroad for several decades that can return and participate in the new oil era of the Venezuelan Renaissance.

                 STARTING A FIRESTORM

         It is not hard to imagine that a real revolution will be sparked by the Venezuelan Renaissance, not only in the neighborhood, but also in the rest of the continent, and even in far away lands in Africa, the Middle East and Asia, where the ignored majorities do not have the benefits and incentives of full property rights of the land. The market economies will take care of the details if the government does not attempt to manage the economic system which is really nothing less that peoples’ everyday lives.

                 WILL THIS BE THE LEGACY OF THE DONROE DOCTRINE? Or will it be just another chapter of an outdated “ugly American” passe imperialism? Which option is better in the long run to satisfy the American interests and extend the spirit behind the Novus Ordo Seclorum?