Saturday, November 03, 2012

Freaks of Fortune By Jonathan Levy Harvard, 414 pages, $35 & The Founders and Finance By Thomas K. McCraw Harvard, 485 pages, $35

In 1801, Albert Gallatin, Thomas Jefferson's Treasury secretary, vowed to extinguish the public debt, then in the sum of $83 million. It would be gone in 16 years, he vowed. But 16 years later, it had grown to $127 million.
President Bill Clinton, too, produced a plan to pay down the debt in 16 years. This was in 1999, when the nation owed $3.6 trillion. Though the clock's still ticking, it looks as if 2015 will find the debt weighing in not at zero but at something like $12.9 trillion (not counting the IOUs held by the government itself), a margin of miss about 100,000 times greater than Gallatin's.  "The U.S. economy" is the name we confer on the collective efforts of 143 million working Americans. Nobody invented it, but Gallatin and Hamilton—and the Philadelphia merchant Robert Morris, among others—gave it an early constructive push. Other pioneers followed, many laboring in obscurity, including Elizur Wright, a hotblooded Massachusetts actuary who developed the American science of life insurance. Confronted today by the fiscal cliff, mounting dependency on federal entitlements and the virtual nationalization of Citigroup C -0.92% following the panic of 2008, a voter might well pause to study the words and deeds of America's economic visionaries. Surely, they didn't envision this.
The Founding Fathers had a lot to do with the shape the USA is in today. I am reading Ron Chernow's magisterial history of Hamilton & his contribution is staggering. The US today is almost literally written in the image of the man on the $10 bill.
In "The Founders and Finance," Thomas K. McCraw, an emeritus professor of business history at the Harvard Business School, celebrates the contributions of men who chose to become Americans, as distinct from those whose parents gave them no choice in the matter. Gallatin made his way to America from Geneva, Switzerland, Hamilton from the Caribbean island of St. Croix and Robert Morris from the English city of Liverpool. Each brought with him an approach to financial organization somehow lacking in the native population.
Mr. McCraw makes a good deal of this "immigrant exceptionalism"—and rightly so, for he has hit on something new. In expounding his thesis, though, he gives short shrift to the vital contributions of a fourth-generation Yankee. Marketing the speculative-grade debt of the rebellious American colonies in Europe early in the 1780s, John Adams became this country's indispensable junk-bond salesman. Morris, the superintendent of finance of the insolvent national government in Philadelphia, would routinely write checks on the balances that he hoped Adams was raising in Amsterdam. Not infrequently, the deposits didn't exist, and it fell to Adams to raise them on the fly. John Adams was no capitalist, but he saved the bacon of the emerging American money class. Morris owned as much of this bacon as anyone in the northern colonies. He was a ship owner and merchant before the War of Independence, and he continued to build his fortune even after he entered public service. Some raised an eyebrow at the spectacle of the superintendent of finance conducting a sideline business in privateering, but Morris's patriotism was above reproach. A signer of the Declaration of Independence (1776), the Articles of Confederation (1778) and the Constitution (1787), he achieved, as Mr. McCraw notes, a documentary hat trick duplicated only by Roger Sherman of Connecticut. Under Morris's financial stewardship, from early 1781 to late 1784, the broke national government stayed broke, though it did keep fighting. Lacking the power to tax, Congress could only beg. These pleadings it addressed to the states, which mainly ignored them. In extremis, Morris would reach into his own pocket, kite drafts or juggle accounts to postpone the day of reckoning. He was instrumental in the chartering of the Bank of North America, a forerunner to Hamilton's national bank. A paladin of hard money and balanced budgets in public life, Morris borrowed like Congress in private business. In the 1790s, he gratuitously risked everything on a six- million-acre real-estate speculation; he failed, landed in debtor's prison and died poor. Still, he saw as clearly as anyone the potential of the country to which he was so devoted. Let property be protected and trade be untrammeled, said Morris, and "these United States will abound with the greatest plenty of their own produce of perhaps any nation in the world." President George Washington, in need of a Treasury secretary, first asked Morris. Declining the honor, Morris suggested Alexander Hamilton. Happily for America, Hamilton accepted—"and proceeded," as Mr. McCraw rightly judges, "to turn in the most impressive economic performance in the history of American statecraft." Like Morris and Gallatin, Hamilton was a hard-money man, and he presciently warned against the discredited practice of printing dollars unballasted by gold and silver. "The stamping of paper," as Hamilton put it, "is an operation so much easier than the laying of taxes, that a government, in the practice of paper emissions, would rarely fail in any such emergency to indulge itself too far." What Hamilton couldn't know is how much easier the tapping of a computer keyboard would prove to be than the cranking of a press. "Quantitative easing," as the Federal Reserve styles today's money-materializing technique, is performed without anybody even having to raise a sweat. Well told by Mr. McCraw are the familiar stories of Hamilton's consolidation and funding of the public debt, of his incessant fighting with Thomas Jefferson, and of his final duel with Aaron Burr. "I feel a sense of obligation towards my creditors," Hamilton noted on the eve of his death, "who, in case of accident to me, by the forced sale of my property, may be in some degree sufferers." Like Morris, Hamilton had a surer hand with the nation's finances than he had with his own. Gallatin's story, though less familiar than Hamilton's or even parts of Morris's, is every bit as timely as theirs. Eager for adventure not available in the buttoned-down home of John Calvin, the 19-year-old Gallatin stole off to America in 1780. He made his way to western Pennsylvania, entered local politics, won election to the U.S. Senate (where he was denied a seat on a technicality), went to Congress, became the financial brain of Jefferson's Republican Party, and was at last appointed Treasury secretary. There he served for 13 years, a tenure that no successor has matched. Mr. McCraw shows just how different was Jefferson's party from the one doing business under the Republican banner today. Not for Gallatin the expense and ostentation of a full-service government. He wanted the bare bones, if them. Thus, he proposed, let us abolish the Navy; it cost money. And the interest on the public debt? Another extravagance. Better if there were no debt. This was the Jeffersonian line, though Gallatin, unlike his high-living boss at Monticello, was as debt-averse in private life as he was on the job. As it cost money to send his shirts to the laundry, the Treasury secretary wore them unwashed. But, notes Mr. McCraw, for neither Jefferson nor Gallatin was frugality in government an end in itself. When the opportunity to buy the Louisiana Territory from a motivated seller presented itself in 1802, the Jefferson administration seized it, borrowing the $15 million with which to double the size of the United States. Gallatin's signal contribution to this transaction is today commemorated on the American map: in Gallatin County, Mont., and in the 2.1 million-acre Gallatin National Forest, which adjoins Yellowstone National Park.
Gallatin's was an eminent, honorable and productive life, though not always a happy one. The death of his first wife cut short a "deliriously happy" marriage after just five months. He married again, but three of the four Gallatin daughters died in infancy. Public life, too, brought its share of disappointment. For all his years in America, Gallatin never lost his heavy French accent, nor, his political enemies charged, his fancy, Frenchified ways of thinking. "Still at heart an alien," Henry Clay said of the patriot. On the eve of the War of 1812, Gallatin—still the Treasury secretary, though by now under President Madison—had to contend with a public debt that stood at $45 million, the Louisiana Purchase notwithstanding. Then came the war and a relapse into the bad habits of the Revolutionary era. Insolvent, the government resorted to printing up paper dollars with which to pay its bills. Mercifully, Gallatin didn't have to watch. By this time, he was in Europe helping to negotiate a peace with Britain.
Gallatin finished his days as the president of the National Bank in the City of New York, later renamed the Gallatin National Bank. Many years later, following a merger and a few changes of name, the Gallatin Bank, or its corporate ectoplasm, entered the maw of J.P. Morgan Chase JPM -0.98% . It may interest Jamie Dimon, who seems perfectly reconciled to dollars you can conjure on a computer screen, to know that his distant predecessor hated fiat money as much as he did the public debt and that he persuasively said so in an 1831 tract, which you can Google GOOG +0.05% . It is titled "Considerations on the Currency and Banking System of the United States." In it, Gallatin condemns deposit insurance (New York state was experimenting with a "Safety Fund"), endorses the gold standard and enjoins banks not to owe more than the equivalent of twice their capital (today's bankers owe eight, nine or 10 times their capital). Mr. McCraw has little to say on the sum of these eminently sound prescriptions. I say, Gallatin is looking better every year.
Freaks of Fortune By Jonathan Levy Harvard, 414 pages, $35
While, for some of us, an insufficient attention to the principles of the founding financiers is the ultimate source of our disarranged public finances, for others the trouble is embedded in the very nature of a capitalist economy. In "Freaks of Fortune," Jonathan Levy sets himself the task of writing a history of economic and social risk in America in the 19th and early 20th centuries and, along the way, of showing that big government didn't just come from nowhere. It is an indispensable absorber, he suggests, of the shocks of the free market. Mr. Levy devotes chapters to, among other topics, marine insurance, the intersection of life insurance and race, the failure of the Freedman's Bank (a thrift institution masquerading as a government-sponsored enterprise that came a cropper when it ignored Gallatin's banking principles), farm mortgages, futures markets, and the trust movement. Yes, Mr. Levy acknowledges, America's 19th-century economy produced "hitherto unimaginable levels of economic growth and material wealth." But at the same time, "moral, productive risk-taking could pass an elusive threshold and become immoral, unproductive gambling." His narrative focuses chiefly on these perceived flaws.
"Freaks of Fortune" is a formidable work of scholarship—hats off to the author for the depth and breadth of his research—but, equally, a fatiguing one. You will learn as much as you ever cared to know about Elizur Wright and the rise of actuarial science and about the crooks and incompetents who ran the Freedman's Bank into the ground. You will learn that the author, an assistant professor of history at Princeton, is inordinately fond of the phrase "the generative insecurities and radical uncertainties of capitalism."
No doubt capitalism generates all manner of uncertainties. But so does every other system of economic organization I can think of. And so do the government's insistent attempts to meliorate uncertainty—for instance, by "stimulating" us half to death. We all take a chance—professors, monks, others—just by getting out of bed in the morning. The question is: Which risks do you prefer to run? Which would you prefer that the government hedge on your behalf? Mr. Levy's chapter on monopoly—"trusts," as they were called at the turn of the 20th century—features an Ayn Rand-type villain named George W. Perkins. A Morgan banker, Perkins sought to reorganize American business along the lines of cooperation, not competition. He declared, for instance, that there should be one big life insurance company, not a lot of little squabbling ones. "My idea," he said, "is that the businessman of this country must today, and in the future, serve the people." For Perkins, as for many another statist, World War I was an ideological godsend. "Money-making has been the one, all-absorbing occupation in this country for the last forty years," said the investment banker. But the war "is striking down individualism and building up collectivism." At about the time Perkins uttered these remarks, the founder of General Motors, GM +0.43% Billy Durant, was professing a different credo. "Competition is the life of trade," Durant declared. "I stand for competition. I am opposed to monopoly or control on the principle that it destroys initiative, curtails freedom of action, and frequently leads to the abuse of power. . . . If I controlled the motor car business, the public would very likely get what I wanted to build. With open competition, as we now have it, the public will get what they want." What does the public want? On Tuesday, many of us will register our preferences at the polling place. As for me, I am lining up—to the full extent permitted—with the ideas and principles of Durant and Gallatin, and of Morris and Hamilton.

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