Whenever I am in the United States, I find myself lingering in bookstores, what my friend Joseph Epstein calls “the intellectual equivalent of pool halls.” In Princeton, New Jersey, when visiting my parents, I like to stop at the college U Store, actually a co-operative, where my membership card shows a presumably erudite Bengal tiger. (To which eating club does he belong?) There I inspect the required reading for various courses, figuring what’s good for a Princeton undergraduate is good for me.
In New York City, I drift toward Borders at 57th and Park Avenue, which has a huge collection of military, American, and world history. How they can afford to carry inventory that includes histories of Turkmenistan is beyond me. I am grateful to replenish there the tanks of what I call “readable Roman histories”: that is, books about classical history where all the footnotes are not in Latin or Greek. If I have time and energy, I make a pass at the Strand, the Greenwich Village used book loft, where the shopping bags make claim to its 12 miles of books, most of which, I sometimes think, were written by Salman Rushdie. (A good friend of mine actually went to university with Rushdie, who enjoyed the same unpopularity, although for different reasons, on campus that he does in the Arab world. In fact, in a show of their affection, his classmates formed a Page Ten Club, open for all those who failed to get past page 10 in the Rushdie’s novels. The other 450 pages are on sale at The Strand.)
For all that I enjoy book browsing, I end up shopping for essentially the same books year after year. For the children I buy what in the trade is known as young adult fiction. Authors like Joan Aikin or Rosemary Sutcliffe come to mind. For my wife, I gather up the latest contemporary fiction, provided it is below the radar of Oprah’s Book Club and does not have an appendix of questions that can be discussed at reading groups (as in: “Is there any indication that Richard Parker, the main character in Life of Pi, ever attended Princeton University?).
For myself, I divide my purchases between biographies, European and American history, Yankeeography (accounts of the New York Yankees), battle memoirs, and classical fiction, although with novels I tend toward financial realism—Dreiser, Howells, and Balzac are among my standbys—as opposed to Latin American fabulism (when it comes to Pablo Neruda, include me out). But most of my reading is connected to specific places, and my dream gift would be an atlas that showed the best books—fiction or non-fiction—that could be read in various cities or countries. For example, in the last year I have loved reading “Rubicon” by Tom Holland in Italy, “Mary, Queen of Scots” in Edinburgh, and “The Beleaguered City” by Shelby Foote in Vicksburg, Mississippi. I would boast of some other highbrow reads, but then my wife might reveal that on my bedside table is an account of the 1986 Mets, entitled “The Bad Guys Won.”
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One book that has eluded me for years is a readable economic history of the United States. I have lots of histories on my shelves that are unreadable, beginning with Charles A. Beard’s “An Economic Interpretation of the Constitution” and including some old textbooks about the Second Bank of the United States and the Texas Railroad Commission. But in recent weeks I have read with great appreciation a new book by John Steele Gordon, “An Empire of Wealth: The Epic of American Economic Power.” Gordon writes a regular column, The Business of America, for “American Heritage” magazine. Even if in his column and books he celebrates the achievements of American businessmen, it would be wrong to dismiss him simply as an acolyte of capitalism—leaving aside that his last column sings the visionary praises of one John D. Rockefeller. (His point there was that since wells were drilled in Titusville, Pennsylvania in 1859, doomsayers have been wringing their hands that we’re running out of oil.)
Published by HarperCollins and with an elegant book jacket from a Thomas Hart Benton painting, “Empire of Wealth” tells the narrative of the American economy from the Jamestown settlement to the Internet revolution, noting the many successes (such as the cotton gin and telegraph) and the occasional failures (Herbert Hoover is quoted: “The trouble with capitalism is capitalists. They’re too damn greedy.”). Gordon’s thesis is that in the great initial public offering that is American history, a genius for new products and markets (from mills to assembly lines and e-mail) has expanded the economic frontier. By contrast, in the novels of Theodore Drieser, the typical robber baron-protagonist corners a grain or trolley car market only to unravel in the arms of a chorus girl. In Gordon, however, pluck and luck usually win out over Warren Harding’s cronies or Daniel Drew’s “watered stock” (cattle readied for market with salt and then lots of water).
A pleasure of reading Gordon is that he writes with energy and precision, and he has a love of historical words and obscure facts. Thus in telling the epic of American economic power, he slips in numerous linguistic origins. For example: The word cowboy “was first applied to the black slaves who herded cattle in colonial Carolina.” Jefferson coins the word “dime” and popularizes the idea of “cents.” “Those who invested money in an enterprise were called adventurers, a word that is still echoed today in the term venture capitalist.” The word “dollar” comes from the German “Thal,” which means valley and gave its name to a productive Bohemian silver mine, which later issued much sought-after coins (‘thalers’ became dollars). “A Scottish engineer named John McAdam, in the early part of the of the nineteenth century, would perfect the technology of road building using layers of stone and gravel and give his name (slightly misspelled as macadam) to the process…” The term civil engineer evolves because until the 1750s most engineers worked for the military. The “right whale” was the one that “was easy to catch, and floated when dead.” James Gordon Bennett, founder of the New York Herald, first coined the word ‘leak’, in the 1830s, to describe “stories slipped to reporters by politicians for their own purposes.” Thomas Edison invented the world “hello.” The word “debugging” literally comes from the insects that got into the vacuum tubes of early computers and made them run poorly.
As recounted in Gordon, the story of American capitalism is a triumph of native invention. Colonists and pilgrims arrive in what one Puritan calls “a howling wilderness,” cultivate gardens full of corn, tobacco, and wheat, circulate currencies of convenience, establish banks and stock markets, mechanize farms and factories, lay railroad track, welcome immigrants, endure the odd panic or recession, grow rich on foreign wars, and finally bestride the world’s markets with iPods and Wal-Mart. Near the conclusion he writes: “The late 1990s in the United States were the greatest period of wealth creation in the history of the world.” But it is a period of economic growth that has antecedents, for example, in the railroad industry, which in 1830 had, nationwide, 23 miles of track and which, by 1860, had laid down 30,626 miles of rail.
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If Gordon’s book were only an invitation to celebrate the Robber Barons’ Ball, it would not be worth plowing through its 419 pages. But where the argument becomes more subtle and provocative is in his perspective on the history of American money and banking. Because the US was founded in a new world without trade guilds or Venetian banks, its financial markets started nearly from scratch. Since the drafting of the constitution, the argument about monetary policy has defined many of the fissures in the country’s political and economic debate.
In the last almost two hundred and fifty years, the nation has failed to reach agreement on whether the success of American enterprise is a tribute to efficient, self-correcting markets, inventive genius, and hard work or whether the American economy is a succession of rigged markets, government bailouts, and inside trades. For example, the 1824 Supreme Court decision, “Gibbons v. Ogden,” is described as the “Emancipation Proclamation of American Commerce,” in that it freed interstate commerce from local, state-enforced monopolies. But the historian Charles Francis Adams, as quoted in Gordon, describes an earlier-day Enron, Crédit Mobilier, as follows: “The members are in Congress; they are trustees for the bondholders; they are directors; they are stockholders; they are contractors; in Washington they vote the subsidies, in New York they receive them, upon the plains they expend them, and in the ‘Crédit Mobilier’ they divide them.”
Many arguments about the nation’s concentration of wealth have been focused on whether the United States needed a national bank and a single currency. One reason no one liked the economic consequences of the Continental Congress or the Articles of Confederation is that financial markets were multi-ring circuses, giving rise to the phrase “not worth a continental,” to denote worthless paper currency. During the drafting of the Constitution and the George Washington presidency, Alexander Hamilton supported the creation of a quasi-national bank (although the government would only hold 20 % of the shares), and his redemption of near worthless revolutionary war bonds, at par, is an example either of early monetary prudence and the first step toward a sound national currency, or a scam worthy of the 1980s savings and loan bailouts or the taxpayer subsidies for Chrysler and Long-Term Capital Management. Opposed to the Federalist national bank were the Arcadian visions of Thomas Jefferson, who believed that “banks are more dangerous than standing armies,” and who saw the U.S. economy as a variation on a landscape painting—the province of yeomen and village markets, not bankers on bended knees to kings and princes.
Hamilton got his Bank of the United States, although it disappeared in 1811, and later Andrew Jackson shuttered the Second Bank of the United States. Nor did the U.S. get a true central bank until 1913, when the Woodrow Wilson administration created the Federal Reserve Bank and its regional branches. Gordon writes: “Thomas Jefferson, one of the most brilliant men ever to live, was psychologically unable to incorporate the need for a mechanism to regulate the emerging banking system or, indeed, banks at all, into his political philosophy.” For most of the nineteenth century, without an instrument either to regulate banks or the liquidity of the financial system, booms and busts were an inevitable part of the laissez-faire system. Gordon concludes that: “bank failure, thanks in large part to Thomas Jefferson and his political heirs, was to become as American as apple pie.”
During this period of frontier capitalism, banks were local affairs, closer, in today’s terms, to Web sites or supermarkets than branches of Bank of America. Gordon writes: “Still others were known as wildcat banks because their headquarters (the only place their notes could be redeemed for gold and silver) were located ‘out among the wildcats’ where they were, quite deliberately, hard to find.” In addition, it was the banking system, not the U.S. Treasury, that was responsible for the circulating currency. “In the 1850s,” Gordon describes, “there were more than seven thousand kinds of more or less valid banknotes in circulation and more than five thousand that were fraudulent or counterfeit.” Actually as early as 1690, the American colonies had created paper money. Warehouse receipts, indicating crops held in storage, functioned as early money. Bank drafts were cut in half, into quarters, and then eights (hence “pieces of eight”). Later goldsmiths floated vouchers that could be redeemed for gold. At the outbreak of the Civil War, Gordon recalls, “the number of paper money issues in circulation numbered in the thousands and created a monetary cacophony quite as bad as the colonial hodgepodge of bits of foreign coins, warehouse receipts, and provincial letters of credit.”
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It took the Civil War for the United States to adopt a national currency. A run on confidence after the engagement at Fort Sumter sent American gold to vaults in London and Paris. President Lincoln had no choice but to detach the Northern economy from the gold standard. He noted wryly that “the bottom is out of the tub” as he watched the country’s gold reserves retreat as hastily as Union forces at Bull Run. In their place, he had Congress authorize the Treasury to issue paper money, so-called “greenbacks,” because, as Gordon writes, “they were printed in green ink on the reverse.” After that, legal tender was either greenbacks or the drafts of nationally chartered banks.
With the passage of the act creating the Federal Reserve Bank in 1913, Thomas Jefferson finally lost his argument with the moneychangers. Despite his faith in free enterprise, Gordon concludes that central banking alone is the greatest weapon to keep banks and currency sound, and the economy on an even keel. He believes Jefferson’s hostility to banks gave the nineteenth century endless cycles of boom and bust. At the same time, it was the US central bank, according to Gordon, that accelerated and locked in the 1930s Depression. He writes that “the Federal Reserve moved aggressively to defend the dollar and maintain the gold standard as foreign central banks and investors moved to repatriate gold. It was an utterly disastrous decision, perhaps the greatest of all the mistakes made in these years.”
By most accounts the Depression was the perfect storm of economic mismanagement. As the Fed raised interest rates to defend the US dollar, commercial banks, in turn, called in loans or foreclosed on mortgages. But deflation in the US market made it that much harder for farmers or other debtors to repay their loans. To make matters worse, President Hoover then asked Congress for a tax increase so that he could balance the budget. Congress dutifully went along with the request, and then raised the stakes in this game of incompetence by passing the Smoot-Hawley Act, which increased a variety of import tariffs. Higher interest rates, taxes, and tariffs choked economic development while the accompanying deflation left debtors unable to pay off their loans, thus collapsing more than 5000 banks. Gordon believes than opposition to centralized wealth froze the government’s ability to respond to the 1929 stock-market crash, and he cannot help but attribute some blame for the Depression to his favorite whipping boy, writing about Congress in 1931 that “the ghost of Thomas Jefferson was abroad in the its halls.”
In the glory days of American capital, when recession had threatened the American economy, wealthy industrialists, like J.P. Morgan, had stepped up to buy gold, securities, or collapsing railroads, and the panics had been averted or, at least, minimized. In the modern era the government has become the benevolent robber baron, and, in theory, Depressions are no longer possible because the Federal Reserve can pump enough liquidity into the system to keep banks solvent and consumers in credit. After the attacks of September 11th, which had followed the collapse of the technology stock bubble, a lingering US recession might have been among the damaged collateral, had the Fed not intervened. In the meantime, the US has run up unprecedented budget and trade deficits, at a time when the oil supply is tight and real estate is as expensive as Dutch tulips. But if I am reading Gordon correctly, he concurs with the Reagan administration in believing that “deficits don’t matter.”
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Here’s one of the ironies of American economic history: that backing currency with gold, balancing the budget, running a trade surplus, avoiding wars, and letting the market sort out the good banks from the wildcats, is, in general, bad for the economy. The business of America flourishes in times of war (during WW I, GM’s stock climbed from 39 to 500), responds favorably to government subsidies (New York State financed the Erie Canal), lives well off the government’s easy money (during WW II, the national debt went from $43 billion to $296 billion), and doesn’t mind bank runs so long as the government is the lender of last resort (cf. the Reagan administration’s $200 billion bailout of the savings and loan industry). Native inventiveness and hard work certainly count for something, but there’s nothing like other people’s money, especially that of the government, to jump-start economic activity.
Aligned against these deficit-spending interests have been the likes of Thomas Jefferson (who opposed central banking), John Adams (who said: “Every dollar of a bank bill that is issued beyond the quantity of gold and silver in the vaults represents nothing and therefore is a cheat upon somebody”), Andrew Jackson (who devoted his presidency to paying off the national debt and getting rid of the Second Bank of the United States), and even the much maligned Herbert Hoover (who, in the teeth of the Depression, tried to balance the budget). Although these men had their differences politically, all of them associated moneyed interests with the European aristocracy that had been swept away in the American Revolution. Wealth was something found on farmland or in a producing factory, not deposited in banks or hedge funds, with those William Jennings Bryan, quoting Thomas Carlisle, called “the idle holders of idle capital.”
Woven into Gordon’s history is an excellent summary of American taxation. As he writes: “Governments have only three ways to raise money to pay their bills. They can tax, they can borrow, and they can print.” After Hamilton paid off the revolutionary war debt at par, the government relied mostly on import tariffs to fund its relatively moderate expenditures. Only during the Civil War did the government impose an income tax, which lapsed during the period of Reconstruction. It was not until the administration of Woodrow Wilson, and with the costs of World War I, that America got a federal income tax of more than 50 percent (in the Civil War it was 3 percent). FDR imposed a tax on inheritance and later introduced the idea of withholding a portion of everyone’s income. When tariffs were the source of government revenue, Gordon notes that the national debate was between “sections of the country.” New England mill owners wanted high tariffs on cloth. The South wanted low tariffs. “With income tax, the debate was now one between economic classes.”
Although Gordon has many kind words for the likes J.P. Morgan, Herbert Hoover, and John Jacob Astor (whose “only regret” on his death bed was not having bought all of Manhattan), I sense between the lines of “Empire of Wealth” a grudging appreciation for Keynesian economics. Jefferson and his oft-quoted ghosts preferred the economy divided among forty acre plots and mules. In opposition, Hamilton and the Federalists believed in central banking, an industrial class, and the occasional government bailout, beginning with those revolutionary-era bonds.
Applied to the modern era, the government of George W. Bush would seem to be living the Federalist dream. The trade deficit is close to $1 trillion. 25 % of all mortgages are valued at more than 80 % of the appraised worth of the financed properties. In the last six years the accumulated budget deficits have approached $2 trillion. Jefferson and Jackson should be turning in their graves. But clearly the joke is on fiscal probity, at least when it comes to a nation. For all the Bush administration’s war mobilizations and spendthrift habits, from 2002-2005, real GDP grew more than 3 % in 10 successive quarters. Alas, in this instance, the robber barons bailing out American markets were not the heirs of J.P. Morgan, but leveraged customers, delirious in the aisles of Home Depot, who have maxed out their home equity lines.
Gordon ends his book on September 11, 2001, with a quote from Cicero (“the sinews of war are infinite money”) and a saber-rattling conclusion: “The American economy at the dawn of the twenty-first century was more nearly capable of producing those sinews than any other economy the world has ever known.” In that sense, the United States should prevail in the war on terrorism as it did in the Cold War—by spending the enemy into submission. But when you look at the Battle of September 11th, the costs to the attackers were some Wal-Mart box cutters, 19 plane tickets and flight-school tuition in Florida. In response, the American government has spent more than $1 trillion on homeland security and foreign wars, not to mention posting runaway trade and budget deficits. For those amounts, the US is mired in Iraq, and the enemy can enlist suicide bombers from recruitment posters that run daily on global television. Which side is burying the other with the sinews of expenditure?
