Contents Preface Acknowledgments Introduction Chapter 1: Free Banking and Private Money The Bank of the United States State Debt Defaults The Age of Andrew Jackson The Panic of 1837 The Gold Rush The Rise of Bank Clearinghouses Chapter 2: Lincoln Saves a Nation by Printing Money The Lincoln Legacy Financing the War Salmon Chase and Jay Cooke Fisk and Gould Profit by Inflation The Panic of 1873 Gold Convertibility Restored The Battle Over Silver Money A Changing American Dream The Silver Compromise Chapter 3: Robber Barons and the Gilded Age The Age of Speculation Republicans Embrace Inflation The Panic of 1893 The Cross of Silver The Evangelical Silverites The Turning Point: 1896 Chapter 4: The Rise of the Central Bank The Progressive: Theodore Roosevelt A Flexible Currency The Crisis of 1907 The National Monetary Commission The Passage of the Federal Reserve Act Roosevelt, Wilson, and the Politics of Reform Chapter 5: War, Boom, and Bust The Fed During WWI A Return to Republican Normalcy The Roaring Twenties A New Era of Debt and Investing The Rise of Consumer Finance America Transformed Prelude to the Depression Bust: Stocks Fall and Tariffs RISE Inflation Versus Deflation Ford, Couzens, and the Detroit Banks Chapter 6: New Deal to Cold War FDR and the Era of Broken Precedent The Seizure of Gold and Dollar Devaluation Dollar Devaluation Hurt World Trade The Rise of the Corporate State The Reconstruction Finance Corporation Central Planning Arrives in Washington FDR Embraces Federal Deposit Insurance The Legacy of FDR The Fed and The RFC Corporativist Reform at the Fed America Goes to War Wartime Inflation and Debt Finance Bretton Woods and Global Inflation Chapter 7: Debt and Inflation Federal Revenues Grow The Fed Regains Independence The Post-War Economy Soars The Legacy of War Cold War, Free Trade The Dollar’s Golden Age Global Imbalances Return Richard Nixon’s Betrayal The End of the Dollar Peg The Return of Sovereign Borrowing Chapter 8: Leveraging the American Dream The New Uncertainty Humphrey-Hawkins and Full Employment Balanced Budgets and Inflation Volcker’s Shock Treatment The Crisis Managers The Latin Debt Crisis Reagan Reappoints Volcker The Neverending Crisis Volcker Exits, Volatility Returns From Excess to Delusion The Greenspan Legacy Chapter 9: A New Monetary Order The Growth Challenge Jobs versus Inflation Changing Places Triffin’s Dilemma and the Dollar Notes Selected References About the Author Index Copyright © 2011 by R Christopher Whalen All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Whalen, R Christopher, 1959– Inflated: how money and debt built the American dream / R Christopher Whalen p cm Includes index ISBN 978-0-470-87514-8 (hardback); 978-0-470-93371-8 (ebk); 978-0-470-93370-1 (ebk) Debts, Public—United States Inflation (Finance)—United States Money—United States— History Monetary policy—United States—History I Title HJ8101.W43 2010 332.10973–dc22 2010028553 For Pamela Voici mon secret Il est très simple: on ne voit bien qu’avec le cœur L’essentiel est invisible pour les yeux —Antoine de Saint Exupéry, Le Petite Prince (1943) I not think it is an exaggeration to say that it is wholly impossible for a central bank subject to political control, or even exposed to serious political pressure, to regulate the quantity of money in a way conducive to a smoothly functioning market order A good money, like good law, must operate without regard to the effect that decisions of the issuer will have on known groups or individuals A benevolent dictator might conceivably disregard these effects; no democratic government dependent on a number of special interests can possibly so —F A Hayek Denationalization of Money, Institute of Economic Affairs (1978) Preface What is the American dream? The historian and Pulitzer Prize winning author of The Epic of America, James Truslow Adams, is recognized as the first American to define the concept: The American Dream is “that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement It is a difficult dream for the European upper classes to interpret adequately, and too many of us ourselves have grown weary and mistrustful of it It is not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.”1 Adams’s observation was as much a reflection on the nation’s past as it was asking about its future Adams published his book, Epic of America, in 1931 during the Great Depression His world view was more egalitarian and libertarian than the corporate perspective, which today governs much of American life Adams expressed hope for a world that was not merely defined by commercial standards but comprised of a society where individuals were free to pursue their own definitions of liberty and success In the twentieth century, the concept of the American dream can be said to trace its roots back to the promise of “life, liberty and the pursuit of happiness,” the most famous line in the Declaration of Independence Simply stated, when the immigrants who built the United States came to this country, they expected to be able to achieve a level of personal freedom and material security that was substantially better than that which was available in other nations of the world Today’s Americans as well as the thousands of immigrants who come to the United States each year still have that same promise in mind Americans as a whole view themselves as reasonably prudent and sober people when it comes to matters of money, though the choices we make at the ballot box seem to be at odds with that self image As a nation we seem to feel entitled to a national agenda and standard of living that is beyond our current income, a tendency that goes back to the earliest days of the United States This book examines this apparent conflict by reviewing our nation’s past from a political and financial perspective, with an emphasis on the portions of the narrative prior to the decade of boom and bust Events such as the Gold Rush of the 1840s, the Civil War, the creation of the Federal Reserve System, and the two World Wars, are examined in the context of the changing definition of the aspirations of a nation Whether taming the frontier in the 1800s, fighting poverty in the 1930s or bailing out private banks and corporations in the twenty-first century, successive American governments turned debt and inflation into virtues in order to make ends meet, a choice not unlike that made by leaders in many other nations of the world But Americans have taken the tendency to borrow from the future to an extreme and in the process made it a core ethic of our society In pursuing the American dream today without limitation, we have made our tomorrows less certain The rejection of any practical limits on expenditure is a view particularly encouraged by the generations of Americans that have come since WWII and the subsequent half century of Cold War By virtue of the sacrifices of the past, Americans believe that we are somehow exempted from the laws of gravity as regards finance and economics We speak of our “special” role in the global economy even as we repeat the mistakes of Great Britain, Rome, and other ancient civilizations Public-private partnership, creation Public sector debt, growth private sector, relationship Pujo, Arsene P Pujo Committee focus investigation reopening political context report, publication Purchasing power, promotion Pushing on a string Railroads asset choice banks/commercial companies, comparison collapse dominance, cessation post-Civil War debt Railway Labor Act, Supreme Court (upholding) Rainsford, W.S Rand, Ayn (Greenspan disciple) Raskob, John J Rayburn, Sam Raynes, Sylvain Reading Railroad bankruptcy corporate instability, cause debt, interest (payment) Reagan, Ronald deregulation promise supporters White House entry Reaganomics Real economic growth, average (Reagan years) Real estate bust (2007) Real wages, impact Recession Reconstruction, financial opportunity Reconstruction Finance Corporation (RFC) authorization Baruch prediction Federal Reserve System, relationship government policy implementation Hoover creation intermediate credit facility control lending powers loans, usage Mills perspective operations, expansion parastatal corporation, Jones control role, importance Red Scare (1919-1920) Reed, John Reeves, Richard Reform, politics (Roosevelt/Wilson impact) Reinhart, Carmen (This Time It Is Different) Reis, Bernard J (False Security) Rentier class, RFC (impact) Report of Indianapolis Convention Republican Convention (1896) Republican normalcy, return Republican Party Great Crash, impact House/Senate sweep (1896) inflation platform institutionalization Rockefeller leadership split Reserve Banks, nationalization Rickards, James Rivlin, Alice Roaring Twenties cessation private debt level stock prices Robber Barons asset choice capitalism, laissez faire system impact influence/power, growth investment strategy, emulation support Robeson, George Robins, Lionel (Great Depression) Robinson, H Perry Rockefeller, John Chase National Bank founding Standard Oil creation Rockefeller, Jr., John D Rockefeller, Nelson Rockefeller, William Rockefeller family Roosevelt focus Taft, alignment Rockefeller Trust Holdings Rogers, H.H., campaign contributions Rogers, Will Rogoff, Kenneth (This Time It Is Different) Romney, George Roosevelt, Franklin Delano autocrat, role Baruch analysis Brain Trust budget deficit opposition conservative criticism death Democratic rubber stamp demonization economic crisis response economic recovery, path emergency powers, assumption fireside chat radio broadcast, initiation four freedoms Glass criticism gold strategy GOP perspective governor, role Hoover critique income tax, imposition intimidation ITO authorization legacy Mussolini/Stalin, Hoover/Republican comparison New Deal, imposition (Hoover criticism) precedents, breaking revanchist big business campaign Stalin, opposition statist initiative, Fed Board (impact) support tariff reduction tax increases transformation, promise Roosevelt, Theodore achievements/legacy American/centrist progressive support attraction big stick Byrd perspective “Citizenship in a Republic” (speech) criticism death government debt libertarianism McKinley, contrast progressive change progressive perspective reformer, reputation speech (1903) White House profile Root, Carroll Rosner, Josh Roth, William Rothbard, Murray America’s Great Depression analysis Case Against the Fed History of Money and Banking in the United States Rubini, Nouriel (Crisis Economics) Russia bankruptcy military confrontation, cost revolution (1917) Salomon Brothers, market rigging scandal Santoni, C.J Saving American departure social attitudes, change Savings & loans (S&Ls) crisis solvency, appearance Schlesinger, Arthur Schultz, Charlie Schwab, Charles M U.S Steel purchase Schwartz, Anna Depression arguments FDR analysis Fed analysis Monetary History of the United States New Deal documentation U.S money supply analysis Second Bank of the United States cessation/defeat charter, expiration collapse, reaction creation reauthorization, veto renewal Republican support Secular deflation, Central Bank attention Secular inflation, impact Securities and Exchange Commission (SEC), Kennedy (role) Security (relative value), assessment (rejection) Shannon, Randy Sherman, John Sherman, Tecumseh Sherman Antitrust Act (1890) passage usage violation Sherman Silver Purchase Act gold reserve drain passage repeal Short-term loans, usage Shrinkage, term (usage) Sidey, Hugh Silk, Leonard Silver certificates, U.S Treasury issuance coinage, restrictions (cessation) coins demand minting, number restoration/remonetization compromise demonetization free coinage agitation popularity legal tender status manipulation (Hunt brothers) market dynamic monetary usage money, battle positions, unwinding (Corrigan) prices, decrease problems purchase law, repeal Sherman proposal Treasury purchases true believers Silverites, impact Simon, William Sinclair, Upton (Money Changers) Skidelski, Robert Sloan, Alfred P product change, desire Smith, Adam Smith, Alfred E Raskob support Roosevelt nomination Smith, Rixey (Carter Glass: A Biography) Smoot-Hawley tariff enactment impact role Snyder, John Socialist parties, growth Social Security impact inflation driver Social Security Act, Supreme Court (upholding) Social Security Trust fund, level Soft money, Republican party position Solomon, Tony Solorzano, Cuauhtemoc Cardenas Southern industry, Cotton Whig/Republican banker stake (substantiality) Sovereign borrowing, return Sovereign states, foreign lending (problem) Soviet communism, military advance Soviet threat Sowell, Thomas (Conflict of Visions) Spanish-American War, cessation (Hobart negotiation) Special drawing rights (SDR) Speculation age forms, acceptance issue, Fed (impact) model, rise Speculative estimates, usage Speculative lending, cessation Spooner, John Sproul, Allan St Louis Federal Reserve Banks, FRASER database maintenance Stalin, Joseph FDR, opposition rise Standardization, usage (growth) Standard Oil, Rockefeller creation Stanislaw, Joseph State chartered banks currency, usage debt repudiation impact numbers (1935) State debt accumulation, Washington (impact) defaults Steagall, Henry B Banking Act sponsorship Stein, Herbert Stern, Gary H Stevenson, Adlai Stewart, John Fat Years and the Lean Stewart, William Silver Knight (pamphlet) Stillman, James Stock investment New Era theory perspective, change Stock markets human nature, impact purchases (financing), short-term loans (usage) Stocks, decline Strong, Benjamin Bankers Trust Company exit Delano/House meeting Morgan control replacement Strong, William Subprime debt bubble, blame Subprime Debt Crisis (2008) Subprime debt crisis, Fed/Treasury assistance Subprime financial crisis, perspective (Raynes) Subprime housing crisis (2007-2009), issues Suez Canal, closing (1956) Sugar Equalization Board Summers, Larry Swanberg, W.A Sylla, Richard Systemic risk, moral dilemma Szymczak, M.S Taft, William Howard government debt Taleb, Nassim Tammany Hall Roosevelt, impact Tansil, Charles Callan America Goes to War Tariffs competitiveness, FDR promise FDR maintenance imposition increase protection, increase reduction FDR endorsement Hoover opposition Republican party position Tariffs for revenue only Taxes FDR increase reduction, passage Tennessee Iron & Coal Company U.S Steel acquisition Tenth National Bank funds, Fisk collection attempt Terror, balance (exploitation) Texas, annexation (Cooke speculation) Third Bank of the United States, authorization/Tyler veto Third World loan portfolio Thomas, Elmer Thomas, J.J Thomas Amendment Thrifts, government-subsidized term liquidity (provision) Thrift stamps, purchase Timberlake, Richard Todd, Walker debt analysis “Federal Reserve Board and the Rise of the Corporate State” “History of International Lending” Total debt (1929-1996) Trade balance, impact Trade restraint cases Transcontinental railroad, completion (1869) Treaty of Ghent Treaty of Versailles Triffin, Robert (Gold and the Dollar Crisis) Triffin’s dilemma, U.S dollar (relationship) Truman, Harry S administration, housing focus succession Trusts growth investment vehicles Tugwell, Rexford G Twain, Mark Tweed, “Boss” William Fisk/Gould connections Tyler, John cabinet, defection/appointment Unconscious revolution Underwood Tariff Unemployment increase (1970s) insurance, increase Nixon observation Unemployment (1837) Unemployment level (1950s) Union Pacific Railroad, Gould control Unitary government, Hamilton support United Kingdom adjustment loan receipt deflation, initiation Fed policy, Hoover dissuasion food prices, WWI control war finances, Keynes assistance United States banking system crisis flaw pressure, intensification Confederation, problems confidence, FDR (impact) consumption/opportunity, maintenance currency system, flaw debt growth debtor position (WWI) deflation economic growth, drag economic output (WWI), decline economic resurgence, European goods flow dependence economy performance post-WWI correction recession WWI, impact exports increase (WWI) Fed accommodation post-WWI decrease external account, surplus account factories, productivity (increase) farm acreage, WWI growth farm sector, WWI profits federal debt annual average maturity reduction (WWI) financial system, shortcomings fiscal discipline fiscal/monetary regimes, change fiscal stringency, acceptance foreign nation subsidy, provision government bonds, sale inflationary tendencies spending habits, change industrialization industrial power, rise interest rate, increase interventionist tendency markets, speculative character military outlays, decrease military spending (1945-1996) money supply, growth money supply, growth (1867-1960) nominal GDP, comparison output, inflation-adjusted decline political challenges public sector debt, equivalence real economy, deterioration recession (1927) reputation, damage reserve currency, burden (easing) slaves, importation (illegality) stock valuations, arguments tactical/strategic situation tariff protection, WWI increase trade balance (1960-1972) trade protectionism, post-WWI return transformation unemployment (1873) wealth, appearance World War I, impact United States Bank of Pennsylvania, charter Urban America, transformation U.S Constitution, Commerce Clause currency provision U.S dollar backing Bretton Woods, impact decline (1985) devaluation FDR, impact impact gold convertibility, restoration Golden Age inflation Nixon devaluation peg, cessation Triffin’s dilemma, relationship value erosion U.S Steel Corporation, formation U.S Treasury bank of issue cash balances credit standing, decline (perception) debt gold accumulation, deflationary factor gold stocks, stabilization Liberty bonds issuance outstanding debt rescue silver certificates issuance Valuation, impact Value dividend rate, relationship investing, derision reduction, shrinkage (term, usage) standard/common denominator Van Buren, Martin Vandenberg, Arthur Vanderbilt, Cornelius Vanderlip, Frank A Vidal, Gore Vietnam War cost, impact opposition payment public protests Vinson, Fred Volatility, return Volcker, Paul bank regulation Carter nomination credibility crisis control debt forgiveness opposition exit leadership, Todd perspective monetary policy Reagan reappointment shock treatment Wall Street capacity, expansion market crash (1929) speculative bubble, collapse speculators, bear raids Wall Street Journal, Barron commentary War, legacy Warburg, Paul M rediscounting regulation changes, objections War Finance Corp (WFC) Warner, Charles Dudley War of 1812 debt, reduction financial disaster Warren, Elizabeth (Two-Income Trap) Washington, George Watergate scandal Wells, H.G Western nations, economic stability Whalen, Richard J campaign examination Catch the Falling Flag Whip Inflation Now (WIN) White House, anti-competitive discretion Williams, John Skelton Willis, Parker Wilson, Woodrow candidate, bank selection criticism draft legislation, Owen/McAdoo preparation food price controls inauguration/election justice, concept loans, avoidance non-interventionism popularity, decline progressive reform Roosevelt comment WWI entry decision, reasons Woodward, Bob Work, perception Work Projects Administration (WPA) World Bank, free trade effectiveness World Economic Conference, FDR attendance World trade, dollar devaluation (impact) World War I American debt repayment approach American feelings cessation, refocus economic benefit European debt, repayment failure/refusal financial center, shift gold standard, abandonment profiteers, punishment United States entry, Wilson decision involvement, Morgan/Strong (impact) profit opportunity war shipments, letters of credit (U.S central bank endorsement) World War II employment issue, attention inflation mobilization New Dealers War WWI debt imposition, impact Wriston, Walter WWI Enemy Trading Act, FDR usage Yalta Agreement Yell, Archibald Yergin, Daniel (Commanding Heights) Young, Roy (resignation) Youngman, William ... is the American dream? The historian and Pulitzer Prize winning author of The Epic of America, James Truslow Adams, is recognized as the first American to define the concept: The American Dream. .. that year and the default on the national debt, the United States was on the verge of financial and political dissolution.8 The creation of the Second Bank of the United States was the American. .. The veto of the reauthorization of the Second Bank was not the end of the matter, however The debate over the bank and the nature of money played a significant role in the 1832 landslide reelection