Much has been written about the 2008 the financial crisis seeking lessons in causality from the past. It is instructive, therefore, to read a survey of U.S. economic history written before the recent crisis to find parallels pertinent to today's challenges.
John Steele Gordon's thorough single-volume history "An Empire of Wealth," published in 2004, provides this opportunity. It contains many familiar post-mortems of past crises. Free of detailed dissection of the current crisis, however, Gordon's work illuminates some long-standing traits of the U.S. economy.
Lessons in Gordon's work pre-date the current crisis and will likely stay relevant beyond it. They may not be primary causes of the recent crisis, but they were factors and in some cases facilitators of it. Here are five of them.
1. America's debt driven economy is older than you think: One recurring argument about the current crisis is that it was brought on by a newfound U.S. obsession with debt. Gordon reminds us how far back America's preoccupation with debt goes. President Woodrow Wilson's legislation establishing the modern income tax also set the precedent for the tax deduction, and in the broad scope we recognize today. "Interest on all debts, and many other things were deductible from taxable income", Gordon writes. Our current tax code is the collective result of relentless issue-specific lobbying. The notion of facilitating consumption by making tax concessions to debt, however, is as old as the income tax itself.
2. So is the impulse to change legislative intent by "defunding": The Republican push to defund the Affordable Care Act has a historical parallel. Gordon recounts the practice of "impoundment," through which presidents from Jefferson forward simply prevented funds appropriated by Congress from being spent. Johnson tried to curb inflation by impounding large portions of the federal budget. After Congress over-rode Nixon's veto of the Federal Water Pollution Act, he impounded the appropriations to implement it. The 1974 Budget Control Act – best known for its creation of the Congressional Budget Office – also banned impounding. The concept of altering legislative intent by defunding enacted law, therefore, is not new, and not confined to the legislative branch.
3. National debt levels don't only go up: The current U.S. debt-to-GDP ratio is 73 percent, according to CBO. That sits roughly in the middle of the historical range, from an estimate of 30 percent in 1790 to the record high of 113 percent in 1946. (A useful timeline of U.S. debt history, based on CBO numbers, is available from The Atlantic.) Gordon reminds us that the U.S. debt situation has changed markedly over short periods of time. Over the course of World War I the U.S. went from being a debtor nation (owing $3.7 billion) to a net creditor ($12.6 billion in outstanding lending). The U.S. faces health and social security entitlements that did not exist then and pose new fiscal challenges. It is useful to bear in mind, however, that debt trajectories have changed and can change quickly.
4. Taxes and regulation were used to create the current financial system: U.S. banks continue to push back against regulatory changes stemming from the recent crisis. Banks and policymakers alike have periodically argued for more lenient financial regulation to improve U.S. competitiveness. So it's important to remember that regulation played a key role in the creation of the U.S. banking system.
Gordon briefly describes the creation of a system of nationally chartered banks in 1863. The Union needed a more stable supply of financing for the war as well as strong institutions that would serve the re-formed Union at the end of the conflict. To that end, Congress used several regulatory tools. It instituted high capital requirements for banks to receive a federal charter; it required nationally chartered banks to invest in U.S. securities; it standardized U.S. banknotes; and it levied a 10 percent surtax on state-chartered banknotes to encourage all banks to take national charters.
Although it would take the creation of the Federal Reserve to significantly curb the frequency of banking panics, the move to create a modern U.S. banking system began during the Civil War, and it relied on prudent regulation.
5. Political leaders who know better make bad economic decisions: Like many historians, Gordon aims to revise consensus views of U.S. presidents. Thomas Jefferson comes under his heaviest criticism for personal hypocrisies over slavery and political misjudgments over the value of an agrarian economy. Conversely, Gordon aims to resuscitate Herbert Hoover's reputation. "Hoover did all he could – and far more than had any previous president faced with economic adversity – both to reverse the course of the economy in (the Great Depression) years and to ameliorate the suffering it caused," Gordon writes. Hoover's missteps, Gordon argues, stemmed not from misguided economic policies but from changing political realities. Hoover's push for a large tax increase in 1931, a reversal of his earlier position, came only after his Republicans lost their House majority and Democrats pushed hard for balancing the budget in the midst of the Depression.
History never repeats, but it echoes. Issues specific to the recent crisis – home values, collateralized debt obligations – emerged after Gordon's work was published. The themes above and others, however, echo through each convulsion of the U.S. economy.
Michael Crowley is a writer for the Foreign Policy Association. He has previously worked at the Center for Strategic International Studies, Akin Gump, and The Pew Charitable Trusts.
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