Should People Just Ignore Economists?
"What Good Are Economists Anyway?" asks BusinessWeek's April 27, 2009 cover story.
The article makes the important point that, since most economists failed to predict the current crisis, the worst economic collapse in nearly 80 years, we need to consider whether or not their work has any value.
Unfortunately, after bringing this failure to our attention, the article, written by economics editor Peter Coy, concludes that it's important to accept advice from the same economists who demonstrated their incompetence by not seeing this financial collapse in advance.
Peter Coy begins by quoting some noneconomists critical of the economics profession. Fans of Mises.org, I suspect, would tend to applaud these observations. Coy appears to be unaware of the Austrian School of thought and his assessment applies to the mainstream of the economics profession.
First, a blogger is quoted as saying,
"If you are an economist and did not see this coming, you should seriously reconsider the value of your education and maybe do something with a tangible value to society, like picking vegetables."
He's right.
Few economists saw this crisis coming, and many economists openly argued that there would be no recession. Such economists should question the investment they have made in their education. Society would be better off if these economists accepted work outside of the economics profession where they could produce something of value, and, more importantly, they could stop harming society with their destructive economic views.
Nassim Nicholas Taleb, author of The Black Swan, says, "We have to build a society that doesn't depend on the forecasts by idiotic economists."
Taleb is also right.
Some economists — those versed in Austrian business-cycle theory — did predict this crisis.
Those who didn't see it coming might be considered "idiotic."
Next, finance expert Paul Wilmott asserts that "Economists' models are just awful. They completely forget how important the human element is."
Right again. Mainstream economists depend on mathematical models for understanding economic relationships. The false precision of the models may give them intellectual comfort, but the models provide a mechanical view of economic decision making. While Austrian theorists are focused on human action (Austrians call this analysis "praxeology"), the modelers overlook the purposeful behavior of decision making. Models fail to incorporate the full spectrum of human decisions, giving us, at best, an incomplete view of economic relationships (for an explanation of the limitations of economic modeling, see Gene Callahan's "Models: What Are They Good For?"). Recent events show that models can show us trends in economic variables, but have difficulty predicting changes in these trends.
The BusinessWeek article also takes a swipe at the last two chairmen of the Federal Reserve. Coy notes that before the collapse, Alan Greenspan argued that there was no housing bubble, and admitted in his Senate testimony last year that his earlier pronouncements regarding the soundness of our economy were flawed.
Coy also quotes current Fed chairman Ben Bernanke. In a 2002 speech commemorating Milton Friedman's 90th birthday, Bernanke noted the Fed's role in the Great Depression, addressing Friedman: "You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
That was a false promise. Under the leadership of Greenspan and Bernanke, they have done it again. In fact, they were doing it, pumping up the economy just as they did in the 1920s, at the time of Bernanke's quote. Given the events of the last year, that statement alone shows that Bernanke does not understand what caused or what will solve this crisis.
Because of economists' demonstrated incompetence, Coy is tempted "to ignore the whole profession." But, according to Coy, "that won't do." He concludes that in order to recover from this crisis, we must listen to the best economists, and by that he means the top mainstream economists.
To make his case that economists have made important contributions to society, Coy points to research from the 1970s that shows "the importance of having a strong, independent central bank" in order to eliminate chronic high inflation. Coy's brief defense of central banking indicates that he does not link the current financial collapses to Federal Reserve policy. The Federal Reserve pumped large amounts of newly created money into credit markets, much of which went into the housing and stock markets. The artificially low interest rates generated by these policies caused malinvestments; the downturn occurs when investors realize their mistakes.
A strong central bank is the creator of, not the cure for, inflation and the business cycle (for more on the Austrian view of the financial crisis, see the Mises.org Bailout Reader).
Coy wants us to follow the "very best thinking of a generation." While he doesn't specifically say who the best thinkers are, Coy's article mentions several top mainstream economists, including recent Nobel Prize winner and hyper-Keynesian Paul Krugman. While these economists do not escape criticism, Coy argues that the profession (apparently meaning these economists) needs to come to an understanding about the cause of this crisis and lead us out of the recession. The "next agenda for macroeconomists will be to help make the economy far more robust — enough to survive the blunders of politicians, bankers, and economists of the future."
First of all, making the economy robust falls outside the job description of any economist; second, we cannot construct an economy that will withstand future attacks from political operatives and central bankers.
On the plus side, Coy leaves us with a story that should make us skeptical about Obama's Keynesian stimulus program:
As World War II ended, many economists worried that growth would lapse as military spending fell. Sewell Avery, the CEO of Montgomery Ward, was so anxious about a postwar depression that he refused to open new stores. Economists still aren't sure why he was wrong, so they can't say reliably whether fiscal stimulus will end this recession or just interrupt it.
The post–World War II economy tells us why the government's current program to stimulate the economy by spending trillions of dollars of revenues generated by borrowing and creating new money will fail. As Robert Higgs has shown, when the federal government drastically cut spending after World War II, the economy boomed. The recovery from the Great Depression was due to the reduction of government spending after the war.
Reducing the amount of government predations (Murray Rothbard's term for the government burdens on the economy) improves productive economic activity just as the massive increases in predations today will harm our economy. The economists who worried at that time that spending cuts would lead to a recession were wrong, just as the economists who are now in positions of political leadership are wrong about the causes and cure for the current panic.
BusinessWeek has done us a favor by pointing out that most economists continue to accept the very theories that prevented them from anticipating the financial collapse. However, the magazine errs in concluding that we should now listen to those same economists. It would make more sense to ignore those economists that not only failed to predict but also had a hand in creating the crisis.
BusinessWeek would have done their readers a favor if they had pointed out that one school of thought, the Austrian School, foresaw this downturn and understands how markets will correct the errors of the central bankers.
The magazine should have advised their readers to listen to Congressman Ron Paul and financial advisor Peter Schiff, and pointed their readers to the writings of Ludwig von Mises (The Theory of Money and Credit), F.A. Hayek (Prices and Production), Murray Rothbard (America's Great Depression), Jesus Huerta de Soto (Money, Bank Credit, and Economic Cycles), and Tom Woods (Meltdown).
Did FDR Make the Depression Great?
Did FDR Make the Depression Great?
Robert Murphy demonstrates in this excellent book a penetrating ability to explain the essence of fallacious economic doctrines. As he notes, three theories offer competing explanations of the Great Depression: the Keynesian account, which stresses a lack of aggregate demand; Milton Friedman's monetarism, which ascribes the severity of the early years of the Depression to a drastic cut in the money supply by the Fed; and, of course, the Austrian theory that Murphy himself favors.
Herbert Hoover, though not under Keynes's influence, defended a version of the first theory. If wages were not kept high, purchasing power would be insufficient to restore prosperity. Accordingly, Hoover encouraged businesses to refrain from wage cuts.
Murphy quickly exposes the fallacy of this view:
High wages do not cause prosperity, they are rather an indication of prosperity. Ultimately, it doesn't matter how many green pieces of paper employers hand out to workers. Unless workers first physically produced the goods (and services), there will be nothing on the store shelves for them to buy when they attempt to spend their big fat paychecks. (p. 35, emphasis in original)
But, it may be countered, is not the level of production and employment determined by aggregate demand? Granted that prosperity requires real goods, will not businessmen decide how much to produce based on what they think they will be able to sell? If so, is not the problem in a depression that, forecasting that future demand will be low, they cut back production?
Murphy once more locates the fundamental fallacy. The problem in a depression is not that production is in general too low; it is rather that resources have not been put to their best uses and need to be shifted:
By focusing on aggregate monetary conditions such as "total wage payments," Hoover completely overlooked the fact that real, physical resources had to be rearranged in order to correct the imbalances in the economy. It wasn't that "business" was producing too much, but rather that some sectors were producing too much, while other sectors were producing too little, in light of the economy's supplies of resources, the skills and desires of its workers, and the tastes of its consumers. (p. 37)
Once more, Murphy holds that we need to concentrate on the physical goods rather than on total monetary demand.
The only way to rectify the situation — to transform the economy into a sustainable configuration — was to shuffle workers and resources. Some enterprises had to be shut down immediately, releasing their workers and freeing up the raw materials they would have consumed had they remained in business… But in a market economy, workers are free to choose their occupations, and the owners of raw materials can sell their property to whomever they desire. Yet with that freedom comes the unfortunate necessity of prolonged spells of unemployment and "idle resources," when the workers and raw materials are searching for a new home in the complex economy. (pp. 37–8)
Murphy dispatches the monetarist view with similar directness and ease. Here, if anything, his remarks are of even more vital significance, since Fed Chairman Ben Bernanke firmly embraces the monetarist account of the Great Depression.
He finds a simple way to illustrate the fallacy of the mainstream analysis of deflation. According to this view, if people anticipate falling prices, they will refrain from spending. Because they expect prices to fall, they think that that will do better to consume later. But this drop in consumption causes a further price fall, and the whole cycle repeats. Prices may spiral uncontrollably downward.
Murphy responds in this way:
One could construct an analogous argument for the computer industry, in which the government passes regulation to slow down improvements in operating systems and processing speed. After all, how can computer manufacturers possibly remain viable if consumers are always waiting for a faster model to become available? … The solution to this paradox, of course, is that consumers do decide to bite the bullet and buy a computer, knowing full well that they would be able to buy the same performance for less money, if they were willing to wait… (There's no point in holding out for lower prices but never actually buying!) (pp. 68–9)
Murphy's ingenious response can also be applied to combat George Akerlof's famous lemons model of the used-car market. Akerlof argued that because of asymmetric information, owners of good used cars would tend to be driven from the market. But, contrary to what his model suggests, good used cars do get sold. In like fashion to Murphy, one can say that just because owners of good cars may not be able to obtain as high a price as they would like, it does not follow that they will refuse to sell at all.
It might be helpful to add the "real balance effect" to Murphy's account. As prices fall, the value of money rises. People's demand to hold money can then be satisfied with less money. This in part explains why people will eventually spend, even when they expect prices to continue to fall.
Keynesians will object that even if spending does eventually revive, the process takes too long. People cannot be expected to wait until the market rights itself. But this is to ignore Murphy's vital point. The process of adjustment is just what is needed: a depression is exactly a situation in which bad investments are liquidated and resources moved elsewhere.
Murphy uncovers another flaw in the conventional assault on deflation. Money that is not spent need not be hoarded, as the opponents of deflation implicitly assume:
Many analysts who are terrified of deflation stress that in an environment of falling prices, cash stuffed under the mattress earns a positive return. This observation is certainly true, but nonetheless cash lent out earns an even greater return. Falling prices, then, encourage consumers to devote more of their income to savings, which in turn lowers interest rates and allows businesses to borrow and invest more. (p. 69)
As the author abundantly shows, historical evidence strikes decisive blows against both the Keynesian and monetarist theories. On the Keynesian account, increased spending, by reviving aggregate demand, will restore good times. If so, why did Hoover and Roosevelt's massive spending leave America mired in depression? To call Hoover a big spender may surprise many readers, but Murphy notes that there is no room for doubt:
Hoover's response to the stock market crash was an enormous increase in government spending, with the budget exploding by 42 percent over his first two years … it is true that Hoover blinked and tried to tame the unprecedented (at the time) peacetime deficits. But this was only after the "stimulus" approach failed horribly. (p. 48)
Keynesians will reply that government spending should have been even greater; but this is to add an epicycle to shore up a failed theory.
Murphy turns the tables on Milton Friedman, who emphasized statistical evidence, by showing that monetarism fails to explain the data.
So we see that immediately following the stock market crash, the Fed began flooding the market with liquidity and in fact brought its rates down to record lows…. If the ostensible cause of the Great Depression — the one factor that set it apart from all previous depressions — was the Fed's unwillingness to provide sufficient liquidity, then how could it possibly be that the Fed's record rate cuts proved inadequate to solve "the problem?" (pp. 76–7)
Even if this is true, though, could not Friedman still say that the massive decline in the money supply in the early 1930s exacerbated the severity of the depression? Murphy, following Murray Rothbard, denies this:
Between 1839 and 1843 the money supply fell by 34 percent and wholesale prices fell by 42 percent. If the monetarists are right, and it was the Fed's refusal to counteract the falling money supply in the early 1930s that gave us the Great Depression, then the 1839–1843 period should have been devastating. Yet Murray Rothbard (relying on Peter Temin's historical research) reports otherwise. (p. 71)
If Keynesian and monetarist theories cannot cope with the historical evidence, does the Austrian theory fare better? In the Austrian view, depressions come about because expansion of bank credit results in malinvestments. Because these need to be liquidated, the government should follow a "do nothing" policy that allows the market to return to normal conditions. When this policy was followed, recovery from depression took no more than a few years, in the 1873 depression, in contrast to the total failure to recover during the New Deal. The results were even better in the 1920–1921 depression, when both Wilson and Harding slashed government spending: "the 1920–1921 depression was so short-lived that most Americans today are unaware of its existence." (p. 71)
Murphy treats in thorough fashion the multifarious New Deal measures and their manifest failures. I shall confine myself to noting his searing condemnation of Roosevelt's gold policy.
Ordering the public to turn over its gold — under penalty of a $10,000 fine and up to ten years in prison — was a clear-cut robbery.… Yet insidious as the explicit confiscation was, the cancellation of gold clauses in contracts was in a way a more fundamental violation of property rights … the private sector had no choice but to use unbacked green pieces of paper as the foundations of its transactions. Americans were now entirely at the mercy of those controlling the printing press. (pp. 128–29)
Murphy carries forward his discussion to the World War II period. Here he has been greatly influenced by Robert Higgs's challenge to the conventional view that the war ended the Depression. (He also makes excellent use of Higgs's "regime uncertainty" in his account of New Deal failure.) He contends that the follies of central planning extend to the conduct of war. Private enterprise could have handled production of military goods better than controls actually did.
It is a simple fact of engineering that the enormous production of tanks, airplanes, and other wartime goods in the 1940s necessitated a sharp curtailment in civilian consumption. Even so, the government did not need to impose direct rationing and other controls on the home front. Instead, the government could have simply raised taxes and issued new bonds in order to purchase its desired products from military contractors and other firms… Individual businesses, seeking only to maximize profit, would have been led by an Invisible Hand to retool away from civilian production and cater instead to the overall war effort. (pp. 158–59).
Murphy's argument recalls Mises's suggestion that the French would have fared much better in the war had they relied on private firms to procure armaments.[1]
In these days of massive government bailouts and intervention, the lessons of the Great Depression and New Deal have much more than historical significance. Murphy concludes on a melancholy note:
President Obama's stimulus package and other "remedies" will not cure our economic woes any more than the New Deal cured the Great Depression. The real question is whether Barack Obama's New Deal, building on the old one, will finally sink the American economy into the sands. (p. 177).
If enough people read Murphy's hard-hitting book, we can strangle in its cradle Obama's prescription for economic disaster.
Finding Atlas
Finding Atlas
Before Ayn Rand there was Isabel Paterson.
The Economist recently reported that Ayn Rand’s novel Atlas Shrugged, first published in 1957, is back on the bestseller lists. A week before the president’s inauguration, more people were buying it than Obama’s Audacity of Hope.
For the uninitiated, Atlas explores a future world in which the nation’s economy is collapsing because of government interference. The theme developed out of Rand’s own era: she started planning her novel in 1943, in the midst of Franklin Roosevelt’s New Deal. But it’s no wonder that it seems relevant today. New Deal activism, which was principally responsible for prolonging the Great Depression, guides our current economic stimulators.
Rand’s disciples are a devoted lot. A recent issue of the New Yorker profiled one local group—the dentist with “John Galt,” the hero of Atlas Shrugged, on his license plate; the wealth manager who piously intones, “I’ve been a follower of Ayn Rand for five years”; the helpful fellow who suggests, “When civilization collapses, we’ll just have to organize an Objectivist gang.”
Mention the name Isabel Paterson in such a gathering, and you’re likely to draw blank looks. For all the fervor that Rand inspires, little notice is paid to the woman who most inspired her.
Paterson (1886-1961) was a novelist and literary critic. She was slight, just over five feet tall, with a delicate taste in food and drink, a deep love of nature, and a nationally famous sense of humor. Stubborn and sharp-witted, she was also one of the New Deal’s fiercest foes.
Paterson grew up in poverty on the Western frontier. She had only two years of formal schooling. But she learned from her own experience, as well as her encyclopedic knowledge of history, that economic success results from individual initiative, not federal management. As an author, she also knew what makes a plausible story and could see that there could not possibly be a happy ending to the government’s efforts to fix everything that was broken in the 1930s.
Both Roosevelt and his hapless predecessor, Herbert Hoover, tried to inspire confidence by keeping unsuccessful enterprises afloat at the expense of successful ones. Strangely, prudent investors declined to be stimulated, no matter how fervently they were exhorted to trust the government’s programs. For Paterson, that result was tediously predictable. She told readers she was “tired of being told that ‘credit depends on confidence.’ Fudge. Credit depends on real assets, sound money and a clean record. … When any one asks us to have confidence we are glad to inform him that the request of itself would shatter any remaining confidence in our mind.”
Then there was the issue of government planning. To Paterson, the notion that federal experts can plan to ensure the people’s welfare was a ridiculous projection of childish fantasies—“a mother’s boy economic program with a kind maternal government taking care of everybody out of an inexhaustible income drawn from mysterious sources.” Perfect planning requires perfect foresight—and who possesses that?
Paterson’s Golden Vanity, one of the few good novels about the Depression, focuses on reputed experts’ outrageous failures of foresight. Its climactic scene is a confrontation between an investor and the financier she entrusted with her money—a man who worked, with the government’s assistance, to create a baffling maze of bad investments. When she hears him admit, “We could not foresee…,” she has finally had enough. “Why couldn’t you foresee?” she demands. “If you can’t foresee, what are you paid for?” She is wrathful, and there is dignity in her wrath.
The fundamental problem, Paterson proposed, is confusion of the economy with politics. In 1932, when Hoover was still in office, she said that “our ‘best minds’ ... have already got the political machinery dangerously entangled with the economic system, disrupting both; and they are now demanding that the government should save them from what they’ve done to it.” As others stood for separation of church and state, Paterson stood for separation of politics and business. She wanted no new government programs to save an economy that government programs had already disrupted. Readers wrote to her, asking her to identify her own plan for the government to solve the nation’s problems. She replied, “What these correspondents really demand is dope. If we don’t believe in their dope, what dope can we suggest in place of it? None whatever. We do not even know a remedy for gullibility.”
Her idea was simply to leave people alone to make their own investments, to earn profits and keep them, and to liquidate unprofitable enterprises. History backed her up. She remembered the nation’s relatively quick recovery from the economic crisis of her girlhood, the depression of the 1890s: “This country experienced bankruptcy in the nineties. Part of the loss was borne by foreign bondholders. That part of the situation is now reversed. It is a much worse bankruptcy. But that is all it is.” She knew that once the incompetent were permitted to go bankrupt, the competent could “pick up the pieces.”
Such notions were contemptuously disregarded by the public intellectuals of the 1930s, men who considered Paterson a reactionary lady novelist, lacking the ability to comprehend big, hairy-chested Keynesian and Marxist theories. Edmund Wilson, America’s leading young literary critic, informed Paterson that she was “the last surviving person to believe in [the] quaint old notions on which the republic was founded.”
She maintained, however, that “the principle of the lever remains the same.” And she wasn’t the last to believe in the old Republic. Among the rising generation of conservative and libertarian intellectuals whom she influenced was a young escapee from Soviet Russia, Ayn Rand. At that time, Rand was an author without an audience. An avid reader of Paterson’s weekly newspaper columns, she sought the older writer’s acquaintance during the dark days following the election of 1940, when the Republicans ignominiously lost to Roosevelt for a third time. During the next few years, Rand sat at Paterson’s feet, learning about economics, politics, and American history. When Rand published her breakthrough novel, The Fountainhead, in 1943, she inscribed her gift copy to Paterson, “You have been the one encounter in my life that can never be repeated.”
Soon afterward, Rand started the long process of writing the 1,168-page Atlas Shrugged, a work of original genius that was nevertheless distinctively influenced by Paterson’s ideas. Both women were rigorous individualists, but when it came to images of the capitalist system as a whole, Rand yielded to Paterson.
In Rand’s opinion, The God of the Machine, Paterson’s great work of economic and historical theory, “does for capitalism what Das Kapital did for the Reds” and “what the Bible did for Christianity.” In her book, Paterson conceptualized capitalism as an enormous circuit connecting producers and consumers throughout the world, using real money and real profits to generate new efficiencies and larger amounts of energy. She stipulated that government’s proper role was to safeguard the infrastructure of this system, keeping it free from force and fraud. If government went beyond that and tried to manage the economy, it could only divert its energy and, eventually, short-circuit and destroy it.
This is exactly the way in which Rand depicts the world in Atlas Shrugged. The novel’s central story concerns a railroad—a literal circuit of economic exchange—and the people who try to keep it running, despite the government’s best efforts to connect it to projects that sap its energy. With every new government plan, with every new administrative proposal to stimulate a lagging economy, the railroad’s profits dwindle, its lines shorten, industrialists who rely on it go bankrupt, and consumers have less access to the means of life. Eventually, there is a massive breakdown. The circuit of production and consumption can be reconnected only by individuals who plan their own economic behavior. The greatest of these is the man who best understands how energy is generated.
It is a compelling picture of the world —one that demonstrates the importance of the literary imagination as a generator of intellectual energy. Indeed, if modern conservative and libertarian ideas had been forced to wait until professional economists and politicians conveyed them to the public, they would never have been conveyed. The task required people of imagination who were willing to offer America an alternative vision of itself. To put it bluntly, the task required people who could really write.
That is why William F. Buckley Jr., laying the foundation for the modern conservative movement with the creation of National Review in 1955, identified Paterson as one of the people he most wanted to write for him. He got her, too—for a while. She left NR because—an individualist in every respect—she preferred not to be edited.
Paterson’s relationship with Rand also fared badly. In 1948, an argument ended their friendship. As Paterson had written, “one genius is about all a house will hold,” and each of these geniuses had a very considerable temper. But there was an even more important reason for the break-up: Paterson’s belief in God.
This was not an unexamined assumption; it was an intellectual conviction, reached after long consideration of other ways of explaining the world. Paterson believed that the energy of the world required a source. She also believed, as she says in The God of the Machine, that no one could “rewrite the Declaration of Independence without reference to a divine source of human rights. It cannot be done; the axiom is missing.” A world without God would be a world without an intellectual and moral framework, and thus without a grounding for liberty. These were ideas that Rand, a dogmatic atheist, could never fully grasp.
As her own fame supplanted Paterson’s, Rand allowed the older woman’s influence on her to fall gradually into the shadows. Yet for many years she insisted that people who were interested in her own work must also read Paterson’s. Nor did she ever completely disavow her link to the “one encounter” that had decisively influenced her career.
Russell Kirk, the philosopher of American conservatism, had his own quarrelsome relationship with Paterson. Yet, he said, she “stood out courageously, in defiance of the Lonely Crowd. I thought that everyone must be reading her ... and could never forget her.”
Probably no one who encountered Isabel Paterson easily forgot her. Now a new generation needs an introduction. In this moment when, under stress, basic ideas are being recovered, Atlas is surging in popularity, and the historic failures of the New Deal are being re-examined, it is time to revisit her wit and learning. “The principle of the lever remains the same.” 
__________________________________________
Stephen Cox is professor of literature at UC San Diego. His two latest books are The New Testament and Literature and The Woman and the Dynamo, a biography of Isabel Paterson.
My Conversation With Ben Bernanke, July 18, 2007
My Conversation With Ben Bernanke, July 18, 2007
by Ron PaulMonetary Policy and The State of the Economy hearing before the Committee on Financial Services, U.S. House of Representatives, July 18, 2007
The CHAIRMAN. The gentleman from Texas, Mr. Paul, the ranking member of the subcommittee.
Dr. PAUL. Thank you, Mr. Chairman, and welcome Chairman Bernanke. I share your concern for the inequality that has developed in our country. I think it is very real, I think it is a source of great resentment, and unfortunately, I think it is one of those things that puts a lot of pressure on Congress to increase the amount of government programs and government spending, which I do not think is the answer. I believe the inequality comes specifically from the type of currency we have. When there is a deliberate debasement of a currency, it is predictable that the middle class is injured, the poor are hurt, and there is a transfer of wealth to the wealthy, and until we understand that, I do not believe we can solve this problem. And if we resort to continued monetary inflation and more government programs, we will only make this inequality worse. This is exactly the opposite of what happens when you have a sound currency and free markets, because it is the sound currency and free markets which creates the middle class and creates prosperity and allows the best distribution of this wealth. Inflation is a monetary phenomenon. It comes from the Federal Reserve System. The Federal Reserve has tremendous pressure put on them, because almost everybody wants low interest rates, except if you happen to be a saver, then you might not like artificially low interest rates. But, of course, that contributes to the lack of savings, which is another problem that we have in this country. We concentrate on inflation by implying, and everybody casually accepts that inflation is a price problem. But the prices that go up are one of the consequences of inflation. Inflation causes malinvestment, it causes excessive debt, and it causes financial bubbles that we have to deal with. But we have a lot of information today available to us to show that there is a lot of monetary inflation going on. For instance if you look at MZM, it is growing at almost a 9 percent rate. M3 is no longer available to us from official sources, but private sources tell us it is growing at a 13 percent rate. Of course, we can reassure ourselves and say that the CPI is growing at a 2.6 percent rate. But if you go back to the old method of calculating the CPI, closer to what the average person is suffering, and one of the reasons why there is inequality going on, is it is growing at over a 10 percent rate. The fact that the dollar is weak on the international exchange markets cannot be ignored. For instance, in just 6 months, the Canadian dollar increased 11 percent against our dollar. This should stir up some concerns. But one concern that I have, that I think is causing more problems and keeps us from coming to a solution, is the divorce between the exchange value of a dollar on the international exchange markets and the effort to lower the value of a dollar in order to increase exports, which can only be done through inflation, at the same time, believing that we can have stability in prices at home, because that is a disconnect that is not possible. If we strive for a lower dollar in exchange markets, we will have price increases here at home and we have to deal with it. I yield back.
[break]
The CHAIRMAN. The gentleman from Texas.
Dr. PAUL. Thank you, Mr. Chairman. I find it rather ironic that the Federal Reserve has complete control over the money supply, yet it is the Treasury that is supposed to protect the value of the dollar. It seems like you have a little bit of responsibility for the value of the dollar as well. I have a question about the GDP. In the first quarter, our GDP did not do so well; it was less than 1 percent. Our population growth averages about 1.5 percent. So, if we have total wealth divided by the population, we actually have negative growth. Could this not be a part of the explanation as to why some people feel there is inequality and that they are not doing as well in the economy? Wouldn’t this explain some of the concerns that we have?
Mr. BERNANKE. Well, Congressman, that was, of course, a single quarter, and there were a number of temporary factors that held down GDP growth in the first quarter, including the liquidation of the inventory overhang, which I mentioned before, a swing in our trade balance – a temporary swing – and a temporary decline in Federal defense spending. All of those things have been reversing now, so I think we will be seeing in the second quarter something closer to a 3 percent growth. Between the first half of the year overall, it will be a more healthy rate of growth.
Dr. PAUL. We have a savings rate which is negative, and if we had true capitalism, this would be very, very serious because we would have no savings and no capital to invest. Today, with our monetary system, we resort to other means. We can create credit and money out of thin air, and it acts as capital by stealing value from the existing currency, and we have been doing that for a long time, so the process can continue, but it literally is inflation. Also, we can resort to borrowing overseas, and we are permitted, because we have the reserve currency of the world, to export our inflation, and that seems to be a free ride for us as well. How long can we fool the world? How long can we continue with the current account deficit of 6 percent? If our productive jobs are going overseas – and like the gentleman mentioned earlier about more jobs going overseas – eventually, this is going to catch up with us. Is it conceivable that we could live on capital formation by the creation of money and credit out of thin air? If that is the case, we would never have to go to work again if that is true. It seems like we really have to go to work. We really have to save, and we really have to invest, and we really have to get these jobs back. But I see so many of our problems as a consequence of a monetary system that discourages savings and encourages a free ride for us because there is still a lot of trust for the dollar, although that trust is going down every day. I think we have to face up to the consequences of what this might mean to us.
Mr. BERNANKE. Well, first, our national savings includes corporate savings as well as household savings. If you put those together, you get a positive number, so there is some net savings going on in the United States. Congressman, you are absolutely right that we are also relying pretty heavily on borrowing from abroad, which is our current account deficit. I think that is sustainable for a while because foreigners seem quite interested in acquiring U.S. assets. We have very deep and liquid financial markets. However, I also agree with you that that is not a long-term, sustainable situation by any means, and we need to be working to try to bring that current account deficit down over time. In answer to a previous question, I talked a bit about the importance of a structural change – increasing savings here in the United States, increasing attention to domestic demand with our trading partners.
Dr. PAUL. You did say in your talk that the predominant policy concern was inflation, which is encouraging that there is a concern. Of course, once again, inflation is a monetary phenomenon, and we have to deal with it. War sometimes is not healthy for a currency or for keeping prices down, at least inflation. It is hard to find throughout all of history when war did not create price inflation because, even in ancient times, countries resorted to clipping coins and diluting values or whatever – they inflated the currency – because people do not generally like to pay for the war. Yet, in the 1970’s, we had consequences of guns and butter. Now we are having guns and butter again, and we are having consequences, and it just looks like we may well come to a 1979/1980. Do you anticipate that there is a possibility that we will face a crisis of the dollar such as we had in 1979 and in 1980?
Mr. BERNANKE. The Federal Reserve is committed to maintaining low and stable inflation, and I am very confident we will be able to do that.
Dr. PAUL. So you are not answering whether or not you anticipate a problem.
Mr. BERNANKE. I am not anticipating a problem like in 1979 and in 1980, no.
Dr. PAUL. With your fingers crossed, I guess. Okay. Thank you.
An Introduction to Revisionism:
An Introduction to Revisionism: The Historical Fiction of Gore Vidal: The 'American Chronicle' Novels
by Jeff RiggenbachThis is chapter two of Jeff Riggenbach's new book, Why American History Is Not What They Say: An Introduction to Revisionism. The preface, table of contents, etc. are here.
I: Burr and Lincoln
Washington, D.C. (1967) was followed six years later by Burr (1973), which covers the period 1775 to 1840 as it was lived and understood by the notorious Aaron Burr. Another three years went by, and Vidal published 1876 (1976), portraying the events leading up to and immediately following the hotly contested presidential election campaign of the U.S. Centennial year, which pitted Democrat Samuel Tilden of New York against Republican Rutherford B. Hayes of Ohio.
It was nearly a decade before Vidal would add another volume to the American Chronicle series. That next volume was the celebrated Lincoln (1984), which follows events in Washington from Abraham Lincoln’s surreptitious arrival in the city to be inaugurated for his first term in the White House to his assassination scarcely four years later. Lincoln was followed, in quick succession, by Empire (1987), which focuses on the years 1898 to 1906, and Hollywood (1990), which focuses on U.S. involvement in World War I and its immediate aftermath – the years 1917 to 1923. Then, after a decade of work unrelated to the American Chronicle, Vidal published the final volume of the series, The Golden Age (2000). Oddly, this volume does not depict a previously undramatized period of years. As Harry Kloman puts it, “Rather than simply taking place after Washington, D.C. – which covers the years 1937 to 1952 – The Golden Age loops back to re-cover the same years, 1939 to 1954.” It also features almost all of the same characters. And, of course, the major historical events in the two novels are the same. As Kloman writes, The Golden Age “is the narrative Washington D.C. might have been had Vidal written the books chronologically.” Thus “You might think of the new book as an alternative version of the older one.” Kloman points out that “[w]hen Vidal published Washington, D.C. in 1967, he had no plan to tell America’s story from the Revolutionary War through the present.” Accordingly, he counsels, “now that Vidal has completed the series, one might just consider it to be six books in length, with Washington, D.C. standing off to the side, in part an accidental beginning to a Chronicle that it no longer fits, and in part an alternative conclusion that’s more literary and introspective than historical.” [91]
In the following pages, I take Kloman’s advice: I use the term “American Chronicle” to refer to the following set of six novels, arranged and discussed in correct historical sequence: Burr, Lincoln, 1876, Empire, Hollywood, and The Golden Age.
Burr is narrated by a fictional character, Charles Schermerhorn (“Charlie”) Schuyler, a young clerk employed in the New York law office of Aaron Burr. Charlie moonlights as a journalist, writing fairly regularly for the poet William Cullen Bryant, in the latter’s capacity as editor and publisher of the New York Evening Post. It is 1833, Andrew Jackson has just begun his second term in the White House, and the political cognoscenti are already debating who should be his successor. Jackson himself favors his vice president, Martin Van Buren, as does Bryant. But Bryant’s assistant on the Post, William Leggett, is not convinced of Van Buren’s suitability. He has heard rumors that Van Buren is one of Burr’s many illegitimate children, and he believes that a book or pamphlet proving the truth of that rumor to the public’s satisfaction would have the estimable effect of ruining Van Buren’s chances for the presidency. He hires Charlie to research and write such a book or pamphlet.
In the course of his research, Charlie will discover that he himself is one of Colonel Burr’s illegitimate offspring. But in the beginning he thinks of the Colonel as merely his elderly boss (Burr is seventy-seven when the novel begins), who turns out to be more than willing to have his brain picked. He gives Charlie his journal of the Revolutionary War period to read. He dictates his further memoirs to Charlie in a series of meetings, some of them at the law offices where both of them work, some of them in Burr’s home. Burr’s narrative is alternated with Charlie’s own so that the reader is gradually filled in on the history of the United States from the beginning of the Revolution to the last days of the second Jackson administration. This history is not, however, the conventional one which most of Vidal’s readers have presumably had presented to them in school. As Donald E. Pease puts it, what Burr presents in these pages is “an alternate American narrative” in which the founding fathers look somewhat different from the way most readers are accustomed to seeing them. “Instead of finding them to be representative of American civic virtue and American democracy, for example, Burr explains Washington’s belief in a strong central government as an effort to protect his vast landholdings in Mount Vernon, and Thomas Jefferson’s espousal of states’ rights simply as a political strategy to win votes.” [92]
Burr is appalled at what he considers to be Washington’s “incompetence” as a military leader. [93] He notes that Washington “did not read books” and that though he “was always short of money, he lived grandly.” He looks back on Washington as having been “defective in grammar and spelling, owing to a poor education” and as having been “most puritanical.” He speaks derisively of our first President as having been “unable […] to organize a sentence that contained a new thought.” [94] He tells Charlie that when “in September 1777 the British out-manoeuvred Washington once again and occupied Philadelphia,”
the Philadelphians did not at all mind the presence of the British army in their city; in fact, many of them hoped that Washington would soon be caught and hanged, putting an end to those disruptions and discomforts which had been set in motion by the ambitions of a number of greedy and vain lawyers shrewdly able to use as cover for their private designs Jefferson’s high-minded platitudes and cloudy political theorizings. [95]
Jefferson makes out no better than Washington in Burr’s eye view. “He was the most charming man I have ever known,” Burr tells Charlie, “as well as the most deceitful.” All in all, in Burr’s view (as imagined by Vidal), Jefferson was a prize hypocrite. “Proclaiming the unalienable rights of man for everyone (excepting slaves, Indians, women, and those entirely without property),” Burr sneers, “Jefferson tried to seize the Floridas by force, dreamed of a conquest of Cuba, and after his illegal purchase of Louisiana sent a military governor to rule New Orleans against the will of its inhabitants.” [96]
Not only did Jefferson betray his supposed individualist ideals, he refused to fight for them when the time came – at least, as Aaron Burr sees it. “I do remember hearing someone comment,” he tells Charlie, “that since Mr. Jefferson had seen fit to pledge so eloquently our lives to the cause of independence, he might at least join us in the army.” But did he? No. Instead, while Washington’s army suffered at Valley Forge, Jefferson “spent a comfortable winter […] at Monticello where, in perfect comfort and serenity, he was able amongst his books to gather his ever-so-fine wool.” [97] Later, when the British army closed in on Richmond,
Governor Jefferson fled to Monticello, leaving the state without an administration. At Monticello he dawdled, thought only of how to transport his books to safety. Not until the first British troops had started up the hill did he and his family again take to their heels. Later Patrick Henry’s faction in the Virginia Assembly demanded an investigation, but fortunately for Jefferson the proud Virginia burgesses did not want to be reminded of the general collapse of their state and so their hapless governor was able to avoid impeachment and censure. He did not, however, avoid ridicule; and that is worse than any formal censure. [98]
Not only was Jefferson a coward and a fraud, according to Burr, he was also “a ruthless man” who “simply wanted to rise to the top. Odd how Jefferson is now thought of as a sort of genius, a Virginia Leonardo. It is true he did a great number of things, from playing the fiddle to building houses to inventing dumb-waiters, but the truth is that he never did any one thing particularly well – except of course the pursuit of power.” [99]
The pursuit of personal power is, however, difficult to reconcile with the ideal of individual liberty proclaimed in Jefferson’s Declaration of Independence and enshrined in the Bill of Rights. On the other hand, according to Burr, Jefferson never really believed very fervently in such individual liberty. Consider freedom of speech and of the press, for example. Burr quotes Jefferson as having told him in late 1803 or early 1804, that
“[i]n 1789, Madison sent me a copy of the proposed amendments to the Constitution, and I wrote him that I thought he should make it clear that although our citizens are allowed to speak or publish whatever they choose, they ought not to be permitted to present false facts which might affect injuriously the life, liberty, property or reputation of others or affect the national peace with regard to foreign nations. Just the other day I reminded Madison of that sad omission in our Constitution, and he agreed that today’s monstrous press is a direct result of the careless way the First Amendment was written.”
Still, as Burr relates it, Jefferson did not advocate federal action against members of the press who published “false facts.” On the contrary. “As usual, Jefferson had a way around the difficulty […]. ‘Since the federal government has no constitutional power over the press, the states can then devise their own laws.’” [100]
Perhaps worst of all (at least in the eyes of some), there was the matter of Jefferson’s slave, Sally Hemings – or, as Burr refers to her, “Jefferson’s concubine Sally, by whom he had at least five children.” Sally was an illegitimate daughter of John Wayles, Jefferson’s father-in-law, Burr tells Charlie, “which made her the half-sister of Jefferson’s late wife. […] Amusing to contemplate that in bedding his fine-looking slave, Jefferson was also sleeping with his sister-in-law! One would have enjoyed hearing him moralize on that subject.” [101]
Nor are Washington and Jefferson the only Founding Fathers to rank low in Aaron Burr’s estimate. There is also Alexander Hamilton, whom Burr had met and befriended during the Revolution – or so, at any rate, he tells Charlie. As the years passed, however, the two men not only grew apart but also came more and more regularly into conflict. In the end, Burr killed Hamilton in a duel. Burr does not explain to Charlie why he called Hamilton out, but an old friend of Burr’s, Sam Swartwout, the customs collector of the port of New York, does the job for him. Hamilton, Swartwout tells Charlie, had accused Burr, a widower, of living in incest with his lovely, intelligent, and accomplished daughter.
The 1804 duel with Hamilton is perhaps the most famous event in Burr’s life. The second most famous is probably his arrest and trial, four years later, on charges of treason. As Burr tells Charlie the latter story, it reminds him (unsurprisingly) of Jefferson’s hypocrisy and lust for power. According to Burr, Jefferson tried to suspend habeas corpus so he could continue to hold two of Burr’s alleged associates in a military prison and “beyond the reach of the Constitution.” In his defense, Jefferson argued that “[o]n great occasions, every good officer must be ready to risk himself in going beyond the strict line of law, when the public preservation requires it.” His political opponents, Jefferson acknowledged, “will try to make something of the infringement of liberty by the military arrest and deportation of citizens, but if it does not go beyond such offenders as Swartwout, Bollman, Burr, Blennerhassett, etc., they will be supported by the public approbation.” Burr’s summary of Jefferson’s view is succinct and unsparing. “In other words,” he tells Charlie, “if public opinion is not unduly aroused one may safely set aside the Constitution and illegally arrest one’s enemies.” [102]
In the next novel in Vidal’s series, Lincoln, another president employs the same tactics, and justifies his actions in a very similar way. It is now more than fifty years after Jefferson’s abortive attempt to suspend habeas corpus. Abraham Lincoln is making war against the Southern states that seceded from the Union at the beginning of his first term in the White House. In his attempt to ensure that Maryland does not join those seceded states, he imposes martial law, orders the arrest of “anyone who takes up arms – or incites others to take up arms, against the Federal government,” and orders further that those arrested be held “indefinitely without ever charging them with any offense.” His justification is reminiscent of the one Burr attributes to Jefferson, who spoke of “the public preservation.” “[T]he most ancient of all our human characteristics is survival,” Lincoln tells his Secretary of State, William H. Seward. “In order that this Union survive, I have found it necessary to suspend the privilege of the writ of habeas corpus, but only in the military zone.” As Lincoln sees it, he is merely exercising what he calls the “inherent powers” of the presidency when he takes actions of this kind. And, as he tells Seward, “An inherent power […] is just as much a power as one that has been spelled out.” [103]
Lincoln is not narrated in the first person as Burr is. Rather it is narrated in the third person – not an “omniscient” third person, but one whose point of view hops around among a short list of important characters: Lincoln’s secretary, John Hay; Secretary of State Seward; Treasury Secretary Salmon P. Chase; First Lady Mary Todd Lincoln; and David Herold, the pharmacist’s clerk and Southern sympathizer who was later convicted of conspiring successfully with John Wilkes Booth and others to assassinate Lincoln early in his second term in office.
The Lincoln thus presented might well be expected to resemble the proverbial elephant as observed by several different blind men. But in fact Vidal’s Lincoln is much more coherent than that, for his observers are not blind. They differ widely in their opinions and interpretations of what they see, but what they see is identifiably the same man. Harold Bloom looks at Vidal’s Lincoln and sees “[a] minority President, elected with less than 40 percent of the total vote.”
Though his election committed him only to barring the extension of slavery to the new states, and though he was a moderate Republican and not an Abolitionist, Lincoln was violently feared by most of the South. Vidal’s opening irony, never stated but effectively implied, is that the South beheld the true Lincoln long before Lincoln’s own cabinet […] The South feared an American Cromwell, and in Vidal’s vision, the South actually helped produce an American Bismarck. [104]
Vidal’s Lincoln, says Donald E. Pease, is “interested mostly in self-aggrandizement,” though his interest in sex was sufficient in his younger years that he “contracted syphilis from a prostitute and communicated this disease to his wife and children.” [105] To Fred Kaplan, Vidal’s Lincoln is “a pragmatic and manipulative politician with one overriding vision: to save the Union and by saving it to transform it into a modern, industrialized, national state so powerfully and tightly coherent that nothing can tear it apart again.” [106]
This mania for “saving the Union” cannot be overestimated as a central factor in the motivations and behavior of Vidal’s Lincoln. As Bloom notes, Vidal’s Lincoln is “a respecter of neither the states, nor the Congress, nor the Court, nor the parties, nor even the Constitution itself.” [107] Pease makes the same point when he writes that “Vidal’s Lincoln is a political heretic who believes in none of the political instruments supportive of union (the Congress, the Courts, the Constitution) except insofar as they can supplement his will to absolute executive power.” [108]
Vidal’s Lincoln is also no Great Emancipator. Vidal’s Lincoln, as Pease points out, “believes the emancipation of slaves entails their exportation to the West Indies or Liberia.” [109] For, as Kaplan notes, though he is “[o]pposed to slavery, Lincoln does not believe slavery an issue worth fighting about.” [110] Vidal’s Lincoln tells the assembled delegates of the Southern Peace Conference that met with him shortly after his election that “I will do what I can to give assurance and reassurance to the Southern states that we mean them no harm. It is true that I was elected to prevent the extension of slavery to the new territories of the Union. But what is now the status quo in the Southern states is beyond my power – or desire – ever to alter.” “I have never been an abolitionist,” he tells his Secretary of War, Edwin Stanton. To a delegation of black freemen that comes to meet him at the White House, Vidal’s Lincoln declares that “your race is suffering, in my judgment, the greatest wrong inflicted on any people. But even when you cease to be slaves you are still a long way from being placed on an equality with the white race.” His secretary, John Hay, sitting in on the meeting, reflects that the president “was unshaken in his belief that the colored race was inferior to the white.”
The fact that Lincoln had always found it difficult to accept any sort of natural equality between the races stemmed, Hay thought, from his own experience as a man born with no advantage of any kind, who had then gone to the top of the world. Lincoln had no great sympathy for those who felt that external circumstances had held them back.
Early in his second term, Vidal’s Lincoln informs Congressman Elihu Washburne (R-Illinois) of his intention to “reimburse the slave-owners” for their freed slaves. This, he tells Washburne, “will […] be a quick way of getting money into the South for reconstruction.” In addition to the money he’ll need for that plan, he adds, “we’ll need money to colonize as many Negroes as we can in Central America.” Washburne is somewhat astonished that the president still favors such a plan. “When you get hold of an idea,” he says to Lincoln, “you don’t ever let it go, do you?” Lincoln replies: “Not until I find a better one. Can you imagine what life in the South will be like if the Negroes stay?” [111]
Vidal’s Lincoln is firm in his belief that slave-owners should be compensated for their loss and that the freed slaves should be deported. He is also firm in his belief that both these issues are merely tangential to the war raging between the United States and the Confederate States. Late in 1861, when the rogue Union general John C. Frémont declares martial law in Missouri (a border state) and announces that he will “confiscate the property of all secessionists, including their slaves, who were to be freed,” Vidal’s Lincoln declares “with anguish, to Seward, ‘This is a war for a great national idea, the Union, and now Frémont has tried to drag the Negro into it!’” As Vidal sees it, this understanding of the war was not only Lincoln’s, but also that of other prominent Americans of the time. Early in 1863, for example, not long after the president has delivered his annual message to Congress, Vidal’s John Hay finds himself in conversation with the lawyer, diplomat, and newspaperman Charles Eames (1812-1867), who assures him that “what the war is about” is “the principle that the Union cannot be dissolved, ever.” Later that year, when Union forces under General George G. Meade finally won a decisive victory over Robert E. Lee’s Army of Northern Virginia at Gettysburg, Pennsylvania, Meade telegraphed the White House, according to Vidal’s account, that he now looked “to the army for greater efforts to drive from our soil every vestige of the presence of the invader.” Vidal’s Lincoln does not like Meade’s choice of words. “Of course, Pennsylvania is our soil,” he tells Hay. “But so is Virginia. So are the Carolinas. So is Texas. They are forever our soil. That is what the war is about and these damned fools cannot grasp it; or will not grasp it. The whole country is our soil. I cannot fathom such men.” [112]
Fully in keeping with this understanding of what the war is all about is Lincoln’s view of how reconstruction should be handled once the war is won. The Radical Republicans take the formation of the Confederate States of America at face value: “the states in rebellion were out of the Union and should be treated as an enemy nation’s conquered provinces.”
But Lincoln’s line was unwavering. The Union was absolutely indivisible. No state could ever leave it; therefore no state had ever left it. Certain rebellious elements had seen fit to make war against the central government, but when those elements were put down all would be as it was and the Southern states would send representatives to Congress, exactly as they had done in the past. [113]
But, of course, after the war, nothing was as it was before the war. Not only had 600,000 Americans lost their lives in the conflict, but another 400,000 were wounded, many of whom were crippled for life. Altogether, nearly 1,000,000 Americans were casualties of the war, out of a total population of a little more than 31,000,000. If three percent of the current U.S. population were to be killed or wounded in a war, we would be looking at nearly 9,000,000 casualties. There was also extensive property damage, particularly in the South – damage so extensive it would be many decades before anything resembling a full economic recovery could be said to have taken place there. Perhaps most important of all, in Vidal’s version of the years 1861-1865, a series of precedents was laid down by the Lincoln administration which, in the years ahead, would justify the steady erosion of individual liberty in the United States.
For Vidal’s Lincoln does not limit his assault on the Constitution to the suspension of habeas corpus. He tells Seward not long after his first inauguration, “Yesterday, at three in the afternoon, I ordered every U.S. marshal in the country to seize the original of every telegram that has been sent and a copy of every telegram that has been received in the last twelve months.” Seward wonders aloud about “[t]he legal basis for this seizure,” and Lincoln answers, “The broader powers inherent in the Constitution.” Vidal’s Lincoln censors the press, locking up editors who oppose his policies. Vidal’s Baron Gerolt, the Prussian minister to Washington, tells Seward that his own boss, Otto von Bismarck, “very much admires the way that you arrest editors but he dares not do the same in Prussia because he says that, unlike you, he is devoted to freedom of speech.” That Vidal’s Lincoln is not in fact devoted to freedom of speech is made evident by his action against the former Ohio Congressman Clement Vallandigham, who “held that Lincoln’s war measures were illegal and unConstitutional [sic] and so far worse than the defection of the Southern States.” Vidal’s Lincoln has Vallandigham arrested and forcibly exiled to the Confederacy. Vidal’s Lincoln threatens to place New York City under martial law to suppress opposition to the nation’s first military conscription law. Vidal’s Seward reflects in 1864 that there is now “a single-minded dictator in the White House, a Lord Protector of the Union by whose will alone the war had been prosecuted” and that “Lincoln had been able to make himself absolute dictator without ever letting anyone suspect that he was anything more than a joking, timid backwoods lawyer.” Charlie Schuyler, the narrator of Burr, reappears briefly in a couple of scenes in Lincoln, and, in the novel’s closing pages, observes to John Hay that Bismarck “has now done the same thing to Germany that you tell us Mr. Lincoln did to our country.” [114]
II: 1876, Empire, and Hollywood
1876, the third novel in Vidal’s American Chronicle series, is once again narrated in the first person by Charlie Schuyler (now in his early sixties), who has returned to the United States after spending thirty years in Europe, first as a member of the diplomatic corps, then as the husband of an independently wealthy member of a noble family. His wife is now long dead, Charlie’s money has run out, and his wealthy son-in-law’s recent, unexpected departure from this world (followed by the discovery of his carefully concealed penury), has left him responsible once more for his accomplished daughter, Emma, whom he had thought well married and safely provided for. Charlie has continued to dabble in journalism over the years, has even published a book or two. So he and Emma come back to the United States in 1875 on a triple errand: Charlie will attempt to earn a sufficient amount from freelance writing for newspapers and magazines to support the two of them in decent style; Charlie will meanwhile do what he can to help New York Governor Samuel Tilden get himself elected president in the upcoming 1876 election (and to persuade Tilden to send Charlie right back to Paris as U.S. Ambassador to France); and Charlie will also see if he can find another, comparably well fixed husband for his daughter. In the course of covering both the presidential campaign and the Centennial Exhibition in Philadelphia, and in the course of marketing his daughter to financially qualified suitors, Charlie meets and profiles numerous luminaries of the period – Tilden, Republican Congressman and presidential aspirant James G. Blaine, Republican Senator and presidential aspirant Roscoe Conkling, Chester Alan Arthur (the customs collector of the port of New York), President U. S. Grant, journalist Charles Nordhoff, and Mark Twain among them – but the emphasis here is not, as it was in Burr and Lincoln, on the sayings and doings of these actual historical figures. Nor does Vidal’s vision of these famous people conflict with the conventional understanding of them in the way that his vision of Lincoln and the Founding Fathers does. He presents the Grant administration as riddled with corruption, but this is a commonplace. He portrays Tilden as the legitimate winner of the 1876 election, who was defrauded of his rightful presidency by the Republican Party and the U.S. Supreme Court – but this is another commonplace. The emphasis in 1876 is on the imaginary characters, on Charlie and Emma and on the rich new husband they find for her, William Sanford.
In terms of historical chronology, Sanford made his first appearance in the American Chronicle in the pages of Lincoln, where he was seen as a wealthy young Union captain, an aide to General Irvin McDowell, who devoted his spare time to romancing Kate Chase, daughter of Treasury Secretary Salmon P. Chase. “I plan to leave the army the first of the year,” Sanford tells Kate late in 1862. “We could go to France. There is a house there I’ve had my eye on since before the war. At St. Cloud, near Paris. We could have a wonderful life. I’d study music. You could be at court, if you wanted that.” [115]
Kate doesn’t take Sanford up on his offer. Instead she marries the equally wealthy, if somewhat drunken, senator from (formerly governor of) Rhode Island, William Sprague. Sanford moves on, then meets and marries another woman, who turns up in 1876 as the delightful Denise Sanford, another of the imaginary characters whose sayings and doings dominate the pages of this third novel in Vidal’s series. Denise becomes pregnant, then dies in childbirth; the Sanfords’ infant son Blaise is spared. Within weeks, Sanford has wooed and wed Emma. Within a year, she herself is dead in childbirth, leaving behind a daughter, Caroline de Traxler Sanford, the illegitimate great-granddaughter of Aaron Burr.
As the fourth novel in Vidal’s series, Empire, opens, the year is 1898 and Caroline is twenty. She attends a luncheon party which also includes John Hay, Henry James, and Henry Adams. Hay and Adams are familiar to us from Lincoln, in which Hay functioned as one of Lincoln’s two secretaries, and as an important point-of-view character, and in which Adams functioned as Hay’s young friend, scion of the famous Adams family but determined to make it on his own as a journalist. Hay is about to be appointed Secretary of State by Republican President William McKinley, who has just led the nation to victory against Spain in the Spanish-American War. We learn that Caroline’s father has just died and that she and her half-brother Blaise are quarrelling over the estate. In an effort to gain leverage over her brother, Caroline appropriates some valuable paintings from their family home, sells them, and uses the proceeds to buy a dying daily, the Washington Tribune, which she proceeds to transform into a journalistic success story. She does so, in no small part, by carefully following the lessons never spelled out but always implied by the successive triumphs of Blaise’s employer, William Randolph Hearst. Thus, though Blaise works as Hearst’s personal assistant, and though he lusts to own a paper in his own right, it is his half-sister who proves to be Hearst’s more talented student.
Caroline runs the Tribune alone for seven years, during which time she becomes pregnant by a young, married Congressman, James Burden Day, and quickly marries an impecunious cousin to provide her daughter Emma with an official father and herself with an official mate, sparing Day a scandal that might ruin his career, settling her husband’s many troublesome debts, and never revealing, either to her husband or to her daughter, the identity of Emma’s actual father. After she finally collects her inheritance, Caroline brings Blaise into her newspaper operation as co-publisher. She decides to invest in real estate in Georgetown, despite the fact that it is “still mostly Negro,” because “here and there, eighteenth-century townhouses were being restored by the canny white rich. Caroline had taken two row houses and knocked them into one.” [116]
It is not long, however, before Caroline is living only part time in Georgetown. By 1917, as Hollywood, the fifth novel in Vidal’s series, opens, she is adopting a new identity, as silent film actress Emma Traxler, and a second part-time home, this one in Los Angeles. Blaise, meanwhile, has also married and produced children, the younger of whom, Peter Sanford, will follow his father into journalism, except that he will eschew the world of newspapers for the world of magazines, devoting his career to a journal of analysis and opinion called The American Idea. In the epilogue of The Golden Age, the sixth and final volume of Vidal’s American Chronicle, it is the turn of the 21st Century and the now elderly Peter Sanford is being interviewed, along with his friend Gore Vidal, at Vidal’s home in Italy for a TV documentary. The producer-interviewer who is putting the documentary together is Aaron Burr (“A. B.”) Decker, grandson of Caroline’s daughter Emma and thus great-great-great-great-grandson of the original Aaron Burr, with whose story the series began.
The last three novels of the series focus more attention on the sayings and doings of the Sanford family, James Burden Day, and other imaginary figures, and comparatively less on the historical events and personages of the times in which they take place. The three are, in fact, all of a piece with respect to this issue. Fred Kaplan tells us that Vidal had originally planned for the first two of these three novels to be a single book:
[T]hrough much of 1985-86 he had worked on Manifest Destiny, the tentative title of the next novel in his American history series. When the manuscript became too long, he used much of it under the title Empire […], published in June 1987 […]. The remainder became the core of Empire’s successor, Hollywood, which was published in February 1990. [117]
Harry Kloman suggests that Empire is overly “concerned with frivolities, name-dropping, and gossipy historical deconstruction,” [118] and Andrew Sullivan faults The Golden Age in very similar terms:
The characters in the novel – writers, senators, proprietors of political magazines and their countless relatives – are all so well-heeled that their conversation […] amounts to little more than chatter. […] At times the book reads like one of those interminable Vanity Fair pieces about cocktail parties in the 1950s given by society hostesses no one but a complete snob would give a hoot about. [119]
On the other hand, it must be acknowledged that all this frivolous chatter and gossipy name dropping is not entirely irrelevant to Vidal’s purpose in the American Chronicle series. For a large part of that purpose is to make certain points about journalism – as a shaper of the historical record, as an influence on public opinion, and as a center of social power. Journalism is a prominent presence throughout the American Chronicle, as are individual journalists, both real ones like William Cullen Bryant, Henry Adams, and William Randolph Hearst and invented ones like Caroline, Blaise, and Peter Sanford. The sayings and doings of these journalists do have thematic significance, however frivolous they may seem at certain times and to certain readers. Indeed, it might be argued that their very frivolity and superficiality are meant to tell us something about journalists and journalism in the abstract.
Also, though the last three novels in the series do focus to a greater extent than the first three on the sayings and doings of imaginary journalists, they are by no means limited entirely to depictions of these journalists. The politicians who figured large between 1898 and 1954 are depicted also, and in ways that differ markedly from more conventional accounts of the period. Secretary of State John Hay, for example, minces no words in describing the frank racism and imperialism behind the foreign policy he recommends to President McKinley, when the latter seeks his guidance on the matter of the Philippines, newly “liberated” from Spain. “I have always thought,” Vidal’s Hay says,
“that it was the task of the Anglo-Saxon races, specifically England, now shrinking, and ourselves expanding, to civilize and to,” Hay took a deep breath and played his best if most specious card, “Christianize the less developed races of the world. I know that England is counting on us to continue their historic role, and they believe, as I believe, that the two of us together can manage the world until Asia wakes up, long after we’re gone, I pray, but with our help now, a different sort of Asia, a Christian Asia, civilized by us, and so a reflection of what was best in our race once history has seen fit to replace us.” [120]
Lest there be any misunderstanding, Vidal’s Hay also assures the president that he has mercantilist as well as racist and imperialist reasons for believing the United States should hold onto the Philippines. “The European powers are getting ready to divide up China,” he tells McKinley. “We’ll lose valuable markets if they do, but if we are entrenched nearby, in the Philippines, we could keep the sea lanes open to China, keep the Germans and the Russians and the Japanese from upsetting the world’s balance of power.” [121]
Hay’s views are shared fully by the bellicose governor of New York, Theodore Roosevelt, who is destined to become McKinley’s second vice president a scant two years later, and, after McKinley’s assassination only a few months into his second term, the youngest man ever to have assumed the American presidency up to that time. “Have you read Admiral Mahan on sea-power?” Vidal’s Roosevelt demands of Blaise Sanford during an interview. “Published nine years ago. An eye-opener. I reviewed it in the Atlantic Monthly. We are fast friends. Without sea-power, no British empire. Without sea-power, no American empire, though we don’t use the word ‘empire’ because the tender-minded can’t bear it.” [122] Then the governor really gets going.
Roosevelt was now marching rapidly in a circle at the center of the room. He had been seized by a speech. As he spoke, he used all the tricks that he would have used and [sic] had Blaise been ten thousand people at Madison Square Garden. Arms rose and fell; the head was thrown back as if it were an exclamation mark; right fist struck left hand to mark the end of one perfected argument, and the beginning of the next. “The degeneracy of the Malay race is a fact. We start with that. We can do them only good. They can do themselves only harm. When the likes of Carnegie tells us that they are fighting for independence, I say any argument you make for the Filipino you could make for the Apache. Every word that could be said for Aguinaldo could be said for Sitting Bull. The Indians could not be civilized any more than the Filipinos can. They stand in the path of civilization.” [123]
I speak now only of savages,” Vidal’s Roosevelt insists.
“When Mr. Seward acquired Alaska, did we ask for the consent of the Eskimos? We did not. When the Indian tribes went into rebellion in Florida, did Andrew Johnson offer them a citizenship for which they were not prepared? No, he offered them simple justice. Which is what we shall mete out to our little brown brothers in the Philippines. Justice and civilization will be theirs if they but seize the opportunity. We shall keep the islands!” [124]
Later, after he has become president and asked Hay to stay on as Secretary of State, Vidal’s Roosevelt defends the diplomatic and military chicanery by means of which he obtained the right of way through Panama to build a canal in that Central American country. “The point, John, is that we have done something useful for our country. Our fleets can go back and forth, quickly, between Atlantic and Pacific.” Hay is perplexed. “You see a future so filled with war?” he asks the president. And Vidal’s Roosevelt replies, “Yes, I do. […] I also see our own mission, which is to lead where once England led, but on a world scale…” [125]
Still later, when President Woodrow Wilson has led the United States into involvement in World War I, Vidal’s Roosevelt shows up at the White House to offer to lead a volunteer division in France. While there, he takes the opportunity to offer the president some advice on his conduct of the war. He points out to the president that “the German-language press […] has been, from the beginning, disloyal to this country. I would, as a military necessity, shut all those papers down.” Wilson is taken somewhat aback. “Isn’t this – arbitrary?” he asks Roosevelt. “Surely, they are guaranteed the same freedoms –” But Roosevelt cuts him off. “This is war, Mr. President. Lincoln suspended habeas corpus, shut down newspapers, and we’ll have to do the same….” Nor is this all he recommends to the startled president. “Many would-be traitors – German sympathizers – pretend to be peace-lovers, to be – what’s their phrase? – ‘conscientious objectors.’ Well, I would treat them conscientiously! I would deny them the vote. If they are of military age and refuse to fight for their country, then they must forgo their citizenship.” [126]
Vidal’s Wilson, for his part, a “professional historian, who preferred the British parliamentary system to the American executive system,” is not at all averse to the idea of helping the British with just about anything they might want to undertake. Once he decides to intervene in World War I to aid the British, he follows Roosevelt’s advice and harshly censors the press. But he finds to his sorrow that, even with his critics silenced, there is insufficient public support for his war. As a result, there are “too few volunteers.” He has a solution, though: “We must conscript the young men. Draft them. Find a new word for draft, if necessary, but no matter what the word, there is so little time to do so much in.” Accordingly, Vidal’s Wilson wastes no time in making sure that “[c]onscription was […] swift and absolute and under another name. On June 5, ten million men between twenty-one and thirty had been registered under the National Defense Act for ‘selective service’ in the armed services, which sounded rather better than, say, cannon fodder in France.” [127]
III: Hollywood and The Golden Age
Wilson’s successors in the White House, Warren G. Harding and Herbert Hoover, are both much more wary of foreign entanglements. (Vidal pays short shrift to Calvin Coolidge, who served between Harding and Hoover, perhaps because Coolidge merely carried out Harding’s foreign policies.) Blaise Sanford looks at Harding and muses that
[t]he fact that Harding’s career had been one of astonishing success could not be ascribed solely to brute luck or animal charm. Without luck and charm, Harding would probably not have had a political career. But he had had the luck and the charm and something else as well, hard to define because he was so insistently modest. [128]
So modest is Vidal’s Harding that he publicly gives all credit for his administration’s triumph at the Washington Naval Disarmament Conference in 1921 to his Secretary of State, Charles Evans Hughes. In fact, as Vidal tells it, all Hughes had done was “read off the particulars of Harding’s secret plan,” under which “the United States was willing to scrap thirty capital ships” and “Great Britain, Japan, France and Italy were invited to rid themselves of close to two million tons of war-ships.” [129]
Harding had figured that if any word of his plan were to leak to the press, military expansionists everywhere would have time to rally public opinion against disarmament. Hence the thunderbolt, hurled by Hughes in the presence of the benign presidential author. It was Harding’s theory that once world opinion was appealed to, there would be no way for the various governments to back down.
Harding’s theory proved correct. His “gamble paid off. The world was enthralled, and in the course of a single morning Harding became the central figure on the world’s stage, and the most beloved.” [130]
Herbert Hoover, who entered the White House as president six years after Harding’s sudden death, attempted to continue his predecessor’s peace-loving foreign policy, only to be brought up short by the machinations of his own Secretary of State, Henry L. Stimson. Stimson, according to Vidal’s Hoover,
“wanted to make all Asia our responsibility. That means if the Japanese would not let go of Manchuria, we would go to war with them. When I realized what he was up to, I called a Cabinet meeting and read Henry the riot act. I agreed that although Japanese behavior on the mainland of Asia was deplorable, we were in no way threatened, economically or morally.” [131]
Making war under such circumstances is repugnant to Vidal’s Hoover. “I would never sacrifice any American life anywhere,” he states forthrightly, “unless we ourselves were directly threatened.” “People forget,” Vidal’s Hoover complains, “that when I was elected president we were occupying most of Central America and the Caribbean. I pulled the Marines out of Haiti, out of Nicaragua, and then when our war lovers insisted that we invade Cuba and Panama and Honduras, I said no.” [132]
After 1932, Hoover is helpless to prevent war so easily, for he has been voted out of office and replaced by Franklin Delano Roosevelt, a distant cousin of the earlier, Republican Roosevelt, who had been so bellicose and eager for hostilities. The new, Democratic Roosevelt “goes on and on about how he hates war because he has seen war,” Vidal’s Hoover declares with evident contempt. “As usual, he lies. He toured a battlefield or two after Germany had surrendered. And that was that. He saw no war. Does he hate what he has never experienced? Who knows? But I had to feed the victims of that war and I don’t want anything like that to happen ever again. But Stimson does. Roosevelt does. I find them unfathomable.” [133]
By the time Vidal’s Hoover utters these remarks the two unfathomable creatures at whose motives he so marvels are busily working together, for Roosevelt names Stimson his Secretary of War just after winning an unprecedented third term in the White House in November 1940. And thereafter, Vidal’s Stimson and Vidal’s FDR conspire to turn American public opinion around 180 degrees so that it will favor the course they themselves fervently advocate: U.S. intervention in the European war that began in 1939. Another of their co-conspirators is Harry Hopkins, the former social worker turned presidential confidante and adviser. “A principal architect of the New Deal, as the President’s largely unsuccessful plan to end the Depression was called, Hopkins was the man in the shadows, forever whispering into the President’s ear, as they experimented with programs and secretly manipulated friends and enemies.” [134] And, as luck would have it, Hopkins also becomes a close friend of Caroline Sanford, who returns to Washington in 1939, at the beginning of The Golden Age. She is sixty and has spent the last decade in Europe, but is now bent on playing an active part once again in the daily publication of the Washington Tribune. Her friendship with Hopkins makes her privy to much interesting information.
There is no way,” Hopkins tells Caroline,
“that we – this administration anyway – will let England go down. We can always handle the isolationists here at home […] [w]ith some protective camouflage for Churchill, for England. The fact is they haven’t been a great power since 1914. But we all kept pretending they were until Hitler came along. Up till then the whole thing has been a sort of bluff. That’s why we keep going on about a special relationship between the English-speaking nations, […] [d]isguising the fact that we are the world empire now and they are simply a client state. A bunch of offshore islands. Certainly they are close to us in many ways, but they aren’t necessary to us. To be blunt, we can survive – even thrive – without them, which is the wicked wisdom of the intelligent isolationists who are not just for America First, as they like to say in their speeches, but for Amerika über Alles.” [135]
The question is how the president is going to involve the United States in the European war, coming to the aid of the British, when most Americans clearly oppose such an intervention. Former U.S. Senator Thomas Pryor Gore of Oklahoma, the blind politician turned out of office in 1936 by his constituents (perhaps for his outspoken criticism of the popular, if “largely unsuccessful,” New Deal), remains in Washington, where he has spent so much of his career, practicing law, talking politics with his numerous friends in and around the District, and relying on his grandson, Eugene Luther Vidal, Jr. (who will later become famous as the novelist, playwright, and essayist Gore Vidal), as an assistant and guide around the Capitol. In a conversation with the fictitious Senator James Burden Day, Vidal’s Gore declares unequivocally that “the President has a plan, even some sort of timetable,” and that he is “provoking Japan into attacking us so he can live up to his campaign promise that, if elected, no sons of yours will ever fight in a foreign war – unless, of course, we are attacked.” In that event, if the attacker were Japan, not only would “the nation […] be willing to enter the war,” but the United States would also be involved in the European conflict, “because Germany and Italy would have to honor their military treaty with Japan.” [136]
“It’s a very clever game.” Gore’s one glass eye had strayed northward, while the blind eye was half shut. “Eighty percent of our people don’t want us to go back to Europe for a second world war and nothing will ever persuade them, no matter how many of our ships the Germans sink. So we at least learned that lesson from last time. But to get the Japanese to strike first is true genius – wicked genius.” [137]
Hopkins instructs Caroline on the wisdom of this plan. “[I]t is wisest for the President to let them make the first move. We think they’ll attack Manila, and if by some miracle they should manage to blow up that horse’s ass MacArthur, our cup will truly runneth over.” Even if they don’t blow up MacArthur, however, “there’s no going to war unless all your people are united behind you. Well, they are nowhere near united even though we keep losing ship after ship to the Nazis and no one blinks an eye. So we must take one great blow and then…”
Hopkins pauses and Caroline prompts him by asking, “Then what?”
“Then we go for it,” Hopkins replies. “All of it. And get it.”
“What is it?” Caroline demands, frustrated.
“The world,” Hopkins tells her. “What else is there for us to have?” [138]
Vidal’s Roosevelt succeeds in provoking the Japanese into an attack on Pearl Harbor. He succeeds too in concealing his foreknowledge of this event from the naval command in Hawaii, thereby insuring that the “one great blow” his nation must take is a great one indeed – great enough, devastating enough, to bring about the complete turnaround in public opinion that is necessary for the president to take the nation into a foreign war without committing political suicide in the process. However, FDR does not live to see the end of the war he leads his nation into. That pleasure falls to his successor, the unassuming Missouri haberdasher Harry S. Truman. And Truman minces no words in making it clear that he favors precisely the sort of U.S.-dominated world envisioned by Roosevelt and Hopkins. When Blaise Sanford’s son Peter covers one of Truman’s early speeches on foreign policy for his magazine The American Idea, he finds that
[t]he President not only briskly assumed for the United States global primacy but made it clear that from this moment forward the United States could and would interfere in the political arrangements of any nation on earth because “I believe that it must be the policy of the United States to support free peoples who are resisting attempted subjugation by outside pressure.” [139]
On the other hand, this is not to say that everything in President Truman’s foreign policy would have met with the approval of either Roosevelt or Hopkins. On the contrary. As Hopkins puts it to Caroline,
“Henry Wallace says Harry will agree with you before you’ve actually said what you mean. Then he’ll go around telling everyone he gave you hell. Now it looks like he wants to give Stalin hell. That’s bad news. The Boss was always willing to treat Stalin in a normal way. As the head of the other great world power. That’s why Stalin trusted him, to the extent Russians ever trust anybody. Then Harry goes off to Potsdam and starts to renege on every agreement we made at Yalta. All because he’s got the atomic bomb and they don’t. So we’re going to have a very expensive arms race and trouble everywhere.” [140]
In summary, then, Gore Vidal’s American Chronicle novels tell a tale of American history that would seem passing strange to anyone whose understanding of the subject is confined to what has long been conventionally taught in American public schools and colleges. In Vidal’s American history, the Founding Fathers are not graven saints, but fallible mortals driven as often by vanity, greed, and lust (whether for power or for the flesh of attractive slave girls) as by any belief in the nobility of their cause, and more often bent on benefiting themselves and the members of their social class than on benefiting Americans in general. In Vidal’s American history, Abraham Lincoln preserved the Union at the cost of destroying everything about it that had made it worth preserving – the protections supposedly afforded by the Constitution to the inalienable individual rights of American citizens. In Vidal’s American history, a cabal of racist imperialists had seized control of the federal government within scarcely more than a hundred years of the Constitution’s ratification, and sent its young men on a rampage of international meddling and mass murder that culminated in the total destruction of two Japanese cities. In Vidal’s American history, it was the United States, not the Soviet Union, which launched and then prolonged the Cold War.
Attack on the Chrysler Capitalists
Attack on the Chrysler Capitalists
by Peter Schiff
The Obama administration singled out hedge funds as the bad guys this week in its attempt to reorganize Chrysler.
The accusation falls comfortably into the administration's view that unfettered capitalists on Wall Street and poor planning by short-sighted CEO's are responsible for our financial problems.
Reacting to the setback, President Obama took dead aim at the few capitalists left: the owners of some of Chrysler's securitized bank debt – hedge funds and private investors – who scuttled the plan.
He described these "holdouts" as unwilling to make the sacrifices that the company, the banks, the workers, the pensioners (all on the government dole) and the taxpayers had been prepared to make for the good of the country.
Ironically, the "greedy" group that Obama holds responsible for killing the auto industry is the only force that can save it.
These ideas, echoed in Congress, the media and on Main Street, completely ignore how government intervention incentivized the bad behavior and brought down our economy.
The investors' reluctance to cave in sends Chrysler to bankruptcy court. Normally, this process would be the best means to reallocate Chrysler's assets in a way that benefits our economy. But Obama made it clear that this will be no ordinary bankruptcy.
The guiding hand of Washington had already formulated its far-sighted plan to save Chrysler, and it is meant to strongarm those who won't cooperate.
President Obama is out to restructure Wall Street. As a result, expect a cram-down rather than a negotiation. The sanctity of the bank debt holder's investment contracts will crumble under the political weight of Obama's vision.
Chrysler has not been profitable for years; and with Washington calling all the shots, the potential for long-term viability has been dashed.
A real bankruptcy is the only solution. In it, current shareholders get wiped out, current contracts and obligations are voided, and the remaining assets, both physical and intellectual, are sold to the highest bidders. But the process would create the opportunity for new management, with private capital, to buy auto-producing assets for pennies on the dollar, hire skilled auto workers at much lower costs, scrap out-of-date business practices, and produce cars cheaply and profitably. Under the guise of "saving jobs," the Administration has disrupted this process.
In contrast to the holdouts, the administration claims consensus of all major stakeholders. But this ignores how government has tilted the playing field. Billions of dollars of TARP and bailout subsidies have compromised the ability of the big banks and the Chrysler Board to make decisions independent of politics. The independence retained by the holdouts is a thorn that will, unfortunately, be quickly removed.
Giving control of Chrysler, and soon GM, to the UAW and the government will enshrine a culture of failure and seal Detroit's fate. Both companies will become government-sponsored entities, not too dissimilar from Amtrak or the Post Office, forever relying on taxpayer funds to create products of dubious quality.
Empty coffers
Corporate bonds
Empty coffers
Bondholders of bankrupt companies are being left with a pittance
INVESTORS buy bonds for security as well as income. When a company goes bust, the bondholders have an early claim on the business’s remaining assets—a much better claim than shareholders do.
In this recession, however, defaults are clobbering everyone. In many recent bankruptcies, prices on unsecured bonds suggest holders will be left with less than ten cents on the dollar (see table). Even secured bondholders, whose claims are backed by specific assets, would get back just over 15 cents. In the pre-crisis world, bondholders tended to get a recovery rate of more than 40 cents, analysts say.
Why the shortfall? One reason, as Jim Reid of Deutsche Bank points out, is the link between recovery rates and default. Recovery rates tend to be low when default rates are high, as they now are. That is because high default rates occur when economies are in trouble and business assets have to be offloaded at fire-sale prices.
But this alone cannot explain the collapse. Goldman Sachs says recovery rates during recessions have historically averaged 20%. A second explanation concerns the type of companies that borrowed during the boom. Steve Dulake, head of credit strategy at JPMorgan, says yield-hungry investors were prepared to back riskier companies in 2005 and 2006 and that businesses with highly cyclical records were the targets of leveraged buy-outs. As economies have slumped, such companies have seen their revenues drop and they have a slimmer hope of being refinanced.
The use of “covenant-lite” bonds and loans issued with devil-may-care zeal during the boom are also coming back to haunt lenders. Covenants protect investors by requiring companies to take action when their finances start to deteriorate. In their absence, bond investors have been able to intervene only at a later stage, when firms have fewer assets left.
Given that defaults have been high and recovery rates low, it is surprising that high-yield bonds have earned positive returns so far this year. But that may reflect the terrible beating such bonds took in the late stages of last year. By January bonds were pricing in a catastrophe; instead, the fundamentals have just been very, very bad.
With short-term rates near zero, investors have been lured into bonds in search of income. According to Goldman, retail investors have put $8 billion into high-yield mutual funds since December 1st. But will such flows survive a high-profile default such as General Motors?
A cold coming they'll have of it
The Conservatives in government
A cold coming they'll have of it
The Tories, favourites for the next election, embrace austerity
FAMOUS for its top girls’ boarding school and a racecourse beloved of preposterously hatted blue-bloods, Cheltenham is the kind of town where the recession seems a small war in a distant country. The timing of the Conservatives’ recent spring conference there was as congenial as its setting: at most 13 months remain before a general election that, judging by the polls (see chart), will end the Tories’ prolonged absence from power.
Yet the flatness of the jamboree, where activists were subdued, party staff glad to be absent and the speeches of ministers-in-waiting mostly leaden, almost drove observers to check that they had come to the right place. For David Cameron, the “heir to Blair” who has led the Tories to electability over the past three years, the contrast with Labour’s beatific run-up to its 1997 election triumph must grate.
Much of this reflects Britain’s grim Zeitgeist. Tories know that recession and the rise of anti-politics, stoked by stories of Westminster sleaze, means that loathing for the government does not imply love for its opponents. But some of the Cheltenham glumness reflects a dawning awareness that the next government faces a hard and unpopular slog, dominated by the burden of fixing the awful public finances.
The credit crunch and broader crisis that began in 2007 has often wrong-footed the Tories. Not only were they unconvincing on many specifics (they initially opposed the nationalisation of Northern Rock, a failed mortgage lender, for example), but Mr Cameron’s thriving attempt to rebrand the party as sunny and youthful suddenly jarred with the bleaker times. Lulled like many by years of uninterrupted economic expansion, he took a while to shed a complacently post-economic message which vaunted “GWB”, or general well-being, above GDP and suggested that society needed more fixing than the economy. The Tories persisted with their mantra of “sharing the proceeds of growth” between tax cuts and public spending after growth had stopped.
But the recession has discombobulated both main parties. Gordon Brown, despite a dead-cat bounce after his bank bail-out and fiscal stimulus last year, has seen his premiership mauled by it. (The Liberal Democrats’ deputy leader, Vince Cable, has sounded authoritative but his party has made only slim gains in the polls.)
The Conservatives are now deftly re-re-branding themselves as the party of austerity. Their opposition to a debt-financed fiscal stimulus, and particularly to a temporary cut in VAT (a sales tax), seemed quixotic last autumn. It has since gained adherents, even before the mortifying scale of public borrowing was set out in the recent budget. To the frustration of their core supporters, the Tories have not promised to reverse the government’s income-tax hike for high earners. The priority, says George Osborne, the shadow chancellor of the exchequer, is to undo the planned increase in national-insurance contributions. Taxes may have to go up, he thinks, but increasing those on jobs could kill an economic recovery before it begins.
Some in the party grumble that pundits have been slow to credit the Tories with taking brave positions on the economy. They console themselves that the public seems more impressed. A recent ICM poll showed Mr Cameron and Mr Osborne leading their opposite numbers in government on the question of economic competence by a ten-point margin.
None of this is to deny that the Conservatives have some way to go before their voice on economic matters truly carries. Their pledge to scrap inheritance tax for most households, so popular when it was unveiled in 2007 that it helped make Mr Brown retreat from a snap election he was about to call, now seems indulgent. The Tories have implied that implementing the policy may be delayed; it might make sense to scale it down too (it would raise the individual inheritance tax threshold from £325,000 to £1m, or $1.5m). Nor are they providing details about their approach to fiscal retrenchment. That is understandable: Mr Osborne reminds critics that, had he given in to demands for more precise plans in happier years, he would now be tearing them up. But fine print on which taxes are to rise and which budgets are to be cut will be expected eventually.
There are reasons other than the state of the economy to think that the Tories are shaping up to be sober rather than spectacular. Despite his self-styled affinity with Tony Blair, Mr Cameron has none of the former prime minister’s messianic zeal. In his scepticism towards grand plans, and in the privileged background he shares with many colleagues (a political handicap, confess Tories too canny to believe Britain has become classless), he seems to follow more naturally in the tradition of patrician Tory leaders such as Harold Macmillan. His cautious line on health care, which some say is too soft on doctors and nurses, encourages this view, as does his rejection of a big-picture vision of foreign policy in favour of case-by-case pragmatism.
Not just Supermac’s heir
But this tells only half the tale. Mr Cameron harbours some radical ideas, such as greater choice and competition among schools (see article) and the revival of local government. The theme of “giving power away” seems a neat response to plummeting trust in national politics. And Mr Blair, like Margaret Thatcher, acquired much of his boldness in office; Mr Cameron may do the same. Above all, austerity is its own form of radicalism. Efficiency gains alone will not plug the hole in the budget (see article); the government may have to shed functions altogether. Mooted ideas include limiting eligibility for tax credits, child benefit and other goodies to the poor and, because cuts will have to fall on Tory causes too, perhaps scrapping some defence projects.
Not the soporific “do-nothings” of caricature, then, but the Tories have greater expectations than that to live up to. Mr Osborne is confident that the next election will be as seminal as those of 1945, which led to the construction of the welfare state, and 1979, when free-market economics made its comeback. Bold stuff, but he has yet to outline what profound change in Britain’s political economy he foresees.
Others outside Britain have high hopes of the Tories too. As centre-right leaders elsewhere wobble or fall, many conservative-minded observers may look to a new Tory government for inspiration. Some Tories were giddy recently when their favourite American pundit, David Brooks of the New York Times, cited Mr Cameron’s communitarian strain of conservatism—or “Red Toryism”, in the coinage of Phillip Blond, an intellectual fellow traveller—as the future direction for America’s Republican Party. But this too needs elaboration if it is not to fizzle out like Mr Blair’s “Third Way”. What Britain’s government will look like by the middle of next year is increasingly clear. What the country will look like five years after that is less so.
The populist's problem
Iran's economy
The populist's problem
The Iranian president’s economic incompetence could cost him in forthcoming elections
WHEN once asked about apparent inconsistencies in his economic policy Mahmoud Ahmadinejad, Iran’s president, gave a frank reply: “I pray to God that I will never know about economics”. With a ballooning deficit, falling oil prices, soaring inflation and rising unemployment Iran’s economy is in a poor state. Mr Ahmadinejad's prayers seem to have been answered.
Iran's president was elected in 2005 on a platform of populist economic reform. He promised to put the rewards of his country’s vast oil wealth on the dinner tables of its people and root out corruption. With presidential elections coming up in June, people are scrutinising his record to see how well he has performed. As the five-day registration period opened for candidates seeking to run for president on Tuesday May 5th the picture for Mr Ahmadinejad looked rather gloomy. An escalating confrontation with the West over nuclear power and his threats against Israel may distract from Iran’s economic woes temporarily, but for most Iranians the economy will dictate how they vote.
One thing Mr Ahmadinejad cannot be blamed for is the volatile oil price. Iran’s economy is heavily dependent on oil and gas,they account for over 80% of government revenue, so plummeting prices are particularly painful. Oil hit a peak of almost $150 a barrel in July 2008, but now hovers around $50 (back roughly to where it was when Mr Ahmadinejad took over) leaving Iran’s economy bruised. High prices had encouraged Mr Ahmadinejad to spend liberally, injecting billions of dollars into the economy through hand-outs and cheap loans. Now his profligacy is coming back to haunt him. Inflation is running at over 25% and the cost of food and housing, in particular, has rocketed. And economic activity is slowing: a recent report form the country’s central bank shows a plunge in industrial investment and construction, as well as a fast decline in foreign reserves.
Iran is also hobbled by targeted economic sanctions applied by the United States, which have discouraged investment. High oil prices went some way to mitigating their effect and Iran found some ways round them, turning to countries such as Dubai for loans and credit. But the global financial crisis led to credit drying up and lower oil prices have made lending to Iran less appealing.
As the country suffers, Iran’s parliamentarians and financiers are growing increasingly fed up with Mr Ahmadinejad’s cack-handed management of the economy. In 2008 Tahmasb Mazaheri, his second central-bank governor (the president sacked the first), gave warning that Mr Ahmadinejad’s policy of low interest rates risked sparking hyperinflation. The president insisted that interest rates not only be kept low, but below the inflation rate. The president ignored those warnings and so in desperation the central bank decided to withhold credit.
As a result the inflation rate fell a bit for the first time since Mr Ahmadinejad took power. Mr Mazaheri has since been given the boot too, though the credit freeze remains in place. Mr Ahmadinejad has also come under fire for abolishing the state planning board, a shah-era institution considered one of the most technically competent and for handing out huge construction contracts to the Revolutionary Guard. Iran’s elite military corps is not best known for its business skills.
In March this year Mr Ahmadinejad proposed cuts in government subsidies on oil, gas and electricity. These would have freed up about $20 billion of government funds, conveniently providing the president with a big wad of cash to hand to poor Iranians in time for the election. Fearing this would push up energy prices and inflation, parliament sent him packing just as it did with its refusal to pass his budget.
Although it will be the most important issue in the election, so far none of the candidates has offered a detailed plan of how to get Iran’s economy out of its current troubles. Mir-Hossein Mousavi, a reformist candidate for the presidency, could possibly have a better chance than his rivals: he is fondly remembered for his handling of the economy during the long war against Iraq. He will hope to capitalise on his reputation.
As the incumbent, Mr Ahmadinejad remains the favourite. But many Iranians resent his extraordinary economic ineptitude. Even if he splashes about a lot of cash before the election in June, a significant number of voters will not be swayed.
Swine-Flu Hysteria
Swine-Flu Hysteria
In the matter of swine flu -- and the single dumbest response to it yet -- first prize was about to go to the government of Egypt, which last week ordered a cull of the country's estimated 400,000 pigs, never mind that the disease, name notwithstanding, is mainly transmitted human-to-human.
![[Global View]](http://s.wsj.net/public/resources/images/OB-DP567_oj_glo_E_20090504185356.jpg)
AP Tokyo, Japan, April 28.
But then an Egyptian health official admitted "the authorities took advantage of the situation to resolve the question of disorderly pig rearing." More likely, as the country's Coptic minority was quick to suspect, was that health and sanitation were merely pretexts to extend anti-Christian bigotry into matters of livelihood and diet.
So that leaves the runners-up: protectionist Russia, which used the flu panic to ban pork imports from Spain and Canada; U.S. immigration restrictionists, who see in the "Mexican flu" a fresh reason to argue for a wall along the border; and panicky Joe Biden, who unwittingly made the case against Amtrak ("I wouldn't go anywhere in confined places now") until his handlers interceded. Who knew Mr. Biden was talking about himself when he warned last year that Barack Obama would be tested by crisis early in his presidency?
Of course the winner of the contest is Mr. Biden, since he lacks even the excuse of a self-interested motive. But standing right behind the vice president is a legion of heavily credentialed panic proliferators.
These are the people whose terrifying forecasts you last heard during the avian flu panic of 2005 (deaths to date: 257, according to the World Health Organization) and the SARS panic of 2002-2003 (774 deaths). By contrast, garden-variety flus typically kill upwards of 30,000 Americans a year.
You might also have a vague memory of the "mad cow" panic that gripped the world in the 1990s. In his 1997 book "Deadly Feasts," Richard Rhodes warned that the human variant of mad cow, known as vCJD, might kill as many as 500,000 people a year in Britain alone. So far, total confirmed cases world-wide run to around 150.
Today's touchstone for panic is the 1918-20 Spanish Flu, mention of which seems to be included in nearly every news account of the swine flu outbreak. The Spanish Flu killed anywhere between 20 and 50 million people, at a time when the world's population numbered around 1.9 billion. Adjusting for population growth, the University of Minnesota's Michael Osterholm has suggested a modern-day outbreak could claim as many as 360 million lives.
But wait: Hasn't medical science made some progress in the past 90 years? An article in yesterday's Times of London notes that in 1919 the recommended precautions included mustard baths, Bovril (a salty meat extract, apparently), and salt water for gargling. Also, "the good effects of wine continue to be emphasized, and most agree in selecting port as the best of these."
Now we know better. Now, also, there are not several million exhausted and frightened men living in filthy conditions and close quarters along two sides of a 450-mile front. Or troops and sailors being moved in crowded trains and crowded ships, or being treated in overcrowded hospitals. And at least in Western cities, it is no longer typically five-to-a-room in squalid tenement housing.
These details matter because, as science writer Wendy Orent has pointed out in the New Republic, "only the precise conditions of World War I's Western Front -- a true disease factory -- could have created a flu as virulent as the one responsible for the 1918 pandemic. . . . The virus didn't need to keep people well enough to walk about -- fresh victims were close at hand."
Sure enough, no flu pandemic has been even remotely comparable: The worst was the Asian flu of 1957-58, which killed an estimated two million people, including 70,000 in the U.S. (or about twice the annual average.) That's been true despite the more than tripling of the world's population, the advent of factory farming, "climate change" and planeloads of potentially disease-bearing people bouncing between Mexico City and Hong Kong and New York and Paris.
In other words, despite all the processes of globalization that are said to be leading us toward nature's great comeuppance, trend lines indicate we are better equipped than ever to minimize the effects of a pandemic.
Why? Because wealthier people tend to be healthier people, and because wealthier societies have more to invest in medicine and research, and because a higher standard of living tends to correlate with more personal space. Also, because globalization means information sharing across boundaries, and rapid adoption of best practices, and greater transparency.
Just look at Mexico: In September 1985, following a devastating earthquake, an incompetent authoritarian government thought it could do the job without outside help. Wrong. This time around, an accountable government was, comparatively, a model of responsibility and openness. That's a result of two decades of political and economic liberalization.
So at least Mexico is making progress. As are we -- a point we too often forget amid occasional pandemic bouts of hysteria.
More Banks Will Need Capital
More Banks Will Need Capital
Stress Tests Identify About Ten; Wells, BofA, Citigroup Face Order to Refill Coffers
DAMIAN PALETTA DEBORAH SOLOMON
WASHINGTON -- The U.S. is expected to direct about 10 of the 19 banks undergoing government stress tests to boost their capital, according to several people familiar with the matter, a move that officials hope will quell fears about the solvency of the financial sector.
The exact number of banks affected remains under discussion. It could include Wells Fargo & Co., Bank of America, Citigroup Inc. and several regional banks. At one point, officials believed as many as 14 banks would need to raise more funds to create a stronger buffer against future losses, these people said, but that number has fallen in recent days.
Representatives from Wells, Bank of America and Citi declined to comment.
![[KBW Bank Index performance]](http://s.wsj.net/public/resources/images/P1-AP784_STRESS_NS_20090504194926.gif)
The Obama administration announced the stress tests -- a process of examining banks' ability to withstand future losses -- back in February. At the time, the news sparked concern among investors and depositors that the results would be used to shut down or nationalize some of the country's weaker institutions. But Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner assured investors that none of the banks undergoing stress tests would be allowed to fail and that all would have access to government funds if needed.
In fact, the stress-test regimen appears so far to have eased some of the fears that swept through financial markets in February, just as President Franklin D. Roosevelt's bank holiday did in 1933. He shut down the nation's banks for several days during a banking panic and only reopened those the government deemed safe. One possible explanation for the recent, calmer state of affairs: The problems the tests appear to be uncovering aren't as bad as some analysts' worst expectations.
Also, if multiple banks are being directed to boost their capital, that could make the process seem less daunting than if it were singling out a few companies as weak.
In a sign of how much the doomsday scenario has faded, bank stocks surged Monday despite reports that Wells Fargo was identified in an initial review as one of the financial institutions needing a stronger buffer.
The San Francisco bank's stock jumped 24%, or $4.64, to $24.25 in New York Stock Exchange composite trading at 4 p.m. Bank of America shares rose 19% on Monday, while Citigroup was up 7.7%.
The stock prices of all three banks, which may need to raise tens of billions in new capital as a result of the stress tests, have tripled since early March.
![[Wells Fargo]](http://s.wsj.net/public/resources/images/OB-DP578_050409_D_20090504222815.jpg)
Getty ImagesA Wells Fargo customer enters a bank branch May 4, 2009 in San Francisco, Calif.
It's possible Wall Street is being overly optimistic about the impact of the results and the resulting dash by banks to bolster capital. One big risk worrying industry officials is that the market will view banks on the list as insolvent when the official results are announced Thursday, even though Fed officials have repeatedly said that's not the case.
Several banks are expected to already have enough capital to weather a worsening economy, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. J.P. Morgan Chase Chairman and Chief Executive James Dimon expressed confidence Monday that the banking system can withstand losses from the recession, even though it will take years for the industry to recover.
"The banking system can handle an awful lot of stress and be OK," he said in a Monday conference call sponsored by Calyon Securities Inc., a unit of Credit Agricole Group.
Mr. Dimon also reiterated J.P. Morgan's goal to repay the $25 billion the New York bank received from the government last year "as soon as possible," saying company officials plan to discuss details of the potential repayment after the stress-test results are announced.
An initial stress test identified Wells Fargo as among the banks needing a bigger buffer, said a person close to the company. It is unclear whether Wells would be forced to raise fresh capital or if regulators would accept the bank's argument that it can earn its way through the losses in future years. Wells expects more clarity Tuesday.
Any bank holding company with more than $100 billion in assets was required to undergo the tests, which were largely conducted by the Fed. Their purpose was to ensure that major financial institutions had enough capital to continue lending if the economy worsened through 2010. Government officials are expected to meet with banks beginning Tuesday to go over final results. Banks directed to raise more capital aren't necessarily in trouble today, but regulators think they don't have enough of a buffer against potential future losses.
Administration officials believe many banks will be able to raise capital without tapping the Troubled Asset Relief Program's remaining $109.6 billion. They're optimistic the bulk of the money will come from private investors made more confident by the glut of information provided by the tests. Banks could sell assets and stakes in their companies, a move that could accomplish another government goal of shrinking some of the country's largest banks.
Officials say banks that can't tap private markets will be able to raise capital by agreeing to convert some of the government's existing preferred shares into common equity, a move that would leave the government owning chunks of the nation's largest banks.
"There undoubtedly will be banks that need more capital," White House spokesman Robert Gibbs said Monday in a news briefing. He said he didn't believe the Obama administration would need to ask Congress for more money. "I think everyone involved will be looking for banks to raise this through either private means or the selling of some assets that they have or that they control."
The tests have set off some tense exchanges in private between Treasury officials and bank regulators at the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, who worried that disclosing too much information publicly could threaten the health of banks that are trying to repair themselves.
The Fed plans to release the results of the stress tests on Thursday after U.S. stock markets close. Anticipating the test results, McGraw-Hill Cos.' Standard & Poor's Ratings Service unit put on watch for downgrade the credit ratings of 22 banks and one thrift.
The affected companies face at least a 50% chance of being downgraded by at least one notch in the next 90 days.
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