My Review of David McWilliams' "The History of Money"

Money Makes the World go Round

 

Irish economist David McWilliams has written a very informative and entertaining book on the history of money with loads of anecdotes. McWilliams views money as one of the great innovations of human beings just behind fire and the wheel. Why? Money facilitates intra-community and inter-community transactions to the benefit of society as a whole. As the great economist Paul Samuelson noted that money is a social contrivance. McWilliams argues that puts human interactions into overdrive as the lust for it propels economic progress.

 

He takes us back in time to the Sumerian Civilization of 2000 BCE where a handful of grain equaled a shekel and where there were lending transactions calling for the payment of interest all the way up today’s quantitative easing of central banks. The first real breakthrough occurred around 1500 BCE where in Lydia the first gold coins were produced. Later Greek and Roman coinage unify the Mediterranean region as one giant free trade zone.

 

McWilliams history is not dry. He introduces us to Johannes Guttenberg of printing press fame who was quite the scoundrel. One of the original users of his new technology was the Catholic Church where the printing press automated the production of indulgences which brought in great wealth. Calligraphy was out and printing was in. He also tells us that much of the church land in Europe came from the foreclosing of mortgages of the nobility. We also witness John Law’s Mississippi Bubble in France which cratered the economy and made banking a scandalous profession where the name bank was not used for years.

 

There is also an interesting vignette on James Joyce, who while living in Trieste owned a movie theater and later owned one in Dublin. The great writer was from immune from the temptations of money.

 

Gold plays a key role in the history of money. It was widely used for centuries as the coin of the realm. For example, the Florin gold piece of the Florence Republic was widely circulated for three hundred years. However, over time gold backed paper notes were used in place of physical gold thereby creating the gold standard.

 

McWilliams is a critic of the gold standard because it places the economy in a straitjacket by limiting the supply of money which, in his opinion, slows economic progress. When money is easy, but not too easy to cause inflation, the way is open for all kinds of invention and innovation. He believes that the gold standard stifled innovation and thus progress making him a strong proponent of the central bank managed (fiat) currencies we have today. Of course, fiat currencies require a high degree of trust in the issuing authority. Without that its value craters.

 

Here, I think, he goes too far. Economist Robert Gordon makes a convincing case that the bulk of economic progress that we have today arose from 1870-1940 where for almost all of that period the gold standard reigned supreme. (See: Shulmaven: My Amazon Review of Robert J. Gordon's "The Rise and Fall of American Growth" ) Think automobiles, electricity, telephones, indoor plumbing, aircraft and radio, for example. I would note that in 1879 the year the U.S. returned to the gold standard both the incandescent light bulb and the telephone were invented and over in Germany the internal combustion engine was invented and in the 1880’s the U.S experienced a record railroad building boom. It is hard to make the case that the gold standard stifled progress. What did in the gold standard were the huge distortions caused by the financing of World War I and the subsequent battles over reparations and inter-war debts.

 

McWilliams argues that money subjugated the people under colonial rule from 1600- 1960. That was certainly true of Belgium’s barbarism in the Congo caused by the need for rubber to make bicycle tires at the turn of the 20^th Century. Those tires were invented by the Irishman John Dunlop. However, Latin America was liberated in the early 1800’s and long-term economic growth in that entire region was hardly stellar.

 

McWilliams has the U.S. leaving the gold standard in 1936; it was, in fact, 1933. He has the United States returning to the gold standard in 1873; it was 1879. In 1873 the U.S. started the process of returning to the gold standard but wasn’t fully realized until the fulfillment of the Resumption of Specie Act in 1879. My quibbles aside, McWilliams has written a very lively book on what makes the world go round.

My Amazon Review of J. Bradford DeLong's "Slouching Toward Utopia: An Economic History of the Twentieth Century"

The Long Twentieth Century 

U.C. Berkeley economics professor and former Clinton treasury official Brad DeLong has written a narrative economic history of the long twentieth century which he argues began in 1870 and ended in 2010 with the great financial crisis. It was during this time that economic growth exploded and humanity, for the most part, escaped the Malthusian trap. Along with rising living standards the long twentieth century brought with it industrial strength destruction and environmental degradation. He attributes this to the rise of the giant corporation, the industrial research laboratory and globalization. However this book differs from Robert Gordon’s “The Rise and Fall of American Growth” (Shulmaven: My Amazon Review of Robert J. Gordon's "The Rise and Fall of American Growth") in that DeLong covers far more than technological developments.

 

DeLong frames his argument over the differences between the views of Friedrich von Hayek and Karl Polanyi. DeLong characterizes Hayek as believing “the market giveth and the market taketh away, blessed be the name of the market” and Polanyi’s view that the market is made for man, not the other way around. A long time ago I had an economics professor who would open each class by invoking the blessing of the market and he was a liberal Democrat.  DeLong’s utopia represents a merger between Hayek and Polanyi that ends up with a social democratic version of Keynesian economics.  What he is vague about is that when he discusses the notion of Polanyian rights, which amount to the belief that citizens are entitled to a host of economic benefits, earned and unearned with no real limiting factors. DeLong is a fan the European entitlement state, but he fails to mention that most of the entitlements are funded by regressive payroll and value added taxes that would be a very rough sale in America.

 

Where the book is good, he has excellent vignettes on the lives of real people who were making history such as Nikola Tesla and Leon Trotsky. He also goes into the horrors of “really existing socialism” in both its Russian and Chinese forms. In that sense DeLong is a true social democrat. He is also very good in discussing how the 1970’s inflation undid the Keynesian consensus and led to the neo-liberal order which then collapses as deregulated financial markets were consumed by a fire of their own making.

 

What DeLong leaves out is that much scientific progress came outside of the organized industrial laboratories. He gives no credit to governmental and university labs, and he leaves out the garage work of Bill Hewlett and David Packard, Bill Gates, and Steve Jobs. These folks were tinkerers in the tradition of the early Thomas Edison. Further for some reason he leaves out of his discussion the role of the oil industry whose products fueled the mobility of his long twentieth century. Without the oil industry little of what he discussed would have occurred.

 

DeLong has written an excellent narrative history of our era; just take his politics with a few grains of salt.

For the full Amazon URL see: The Long Twentieth Century (amazon.com)

My Amazon Review of Donald Sassoon's "The Anxious Triumph: A Global History of Capitalism 1860-1914"

Global Capitalism 1.0

University of London history professor Donald Sassoon could have written a great book for the lay reader describing the first global epoch of capitalism. Unfortunately he took all of the drama out of one of the most dramatic eras in world economic history. Perhaps I am being too harsh because of my amateur status, but his 768 page book, although loaded with information, is a long and difficult slog.

Sassoon’s book lacks the drama of Marx’s 1848 “Communist Manifesto” where praises how the rising capitalist bourgeoisie was transforming Europe. Where Marx showed excitement Sassoon is plodding. Much later Keynes’s “Economic Consequences…” highlights what was available to England’s pre-war bourgeoisie with the mere dialing of a telephone (no telephones in 1860). It would have been nice if he described the life of the bourgeoisie and the working class of 1860 and compared it to that of 1914. The world changed for better for both classes. It would have helped if Sassoon studied Robert Gordon’s “The Rise and Fall of American Growth.” Remember that the first global age began with the telegraph and the steamship and ended with the telephone, electric lights and the internal combustion engine, all three invented around 1879. It was those three inventions created under capitalist auspices that changed the world.

For a history of capitalism, very few capitalists are mentioned. I was hoping to learn about the methods and vision of the European and Japanese capitalists who built their societies, but came away disappointed. The author describes the rise of capitalism in a host of countries, but he doesn’t put flesh and bones on it. He seems to be more interested in the political leadership than the rising capitalist class.

He further sets up a straw man by arguing that the neo-liberals of the 1980s harkened back to a capitalist nirvana of the 1860s when government’s role in the economy was small. He rightly states that government played a major role in capitalist development everywhere and practically all neo-liberals knew it. Sassoon favored more government involvement and he appears to be very sympathetic to the German protectionist of the 1840s Friedrich List.

Where Sassoon is good is his discussion on the huge profits Britain generated from the sale of opium to China and that colonialism, especially in Africa, wasn’t all that profitable for Europe. Most trade took place among the more developed countries. He also highlights that much of 19^th century America was built with European capital.

My sense is that only the nerdiest of lay readers will find this book of interest. There is a lot here but it takes time to plow through.

For the full Amazon URL see: https://www.amazon.com/review/R1EG4VG2S3487Z/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Susan Schulten's "A History of America in 100 Maps"

Map Geek

I must confess that I am a map geek and there are some really terrific historical maps in Denver University Professor Susan Schulten’s book of 100 maps. I especially liked the maps portraying the slave trade, the Anglo-French rivalry over North America in the 1700s, the 1823 map that made manifest destiny so evident 20 years before the phrase was coined, Sherman’s use of census maps to plan his march through Georgia, Harlem nightlife in the 1930s, the 1961 Freedom Rides and Disneyland.

My problem with her book is what she leaves out, her negative characterizations of industry and she is way too equivalent with to the Cold War. To me any map book on the history of America would have to include three maps on the wiring of America. Specifically the electrical, telephonic and internet grids. The same holds true for the expansion of the railroads. Her comment on the railroads largely follows the populist narrative not how the strategic vision of Abraham Lincoln bound the nation with the Pacific Railway Act. It is obvious to me that she is not familiar with Robert Gordon’s now classic “The Rise and Fall of American Growth.”

With respect to the Cold War she views it more as a big power rivalry rather than in Ronald Reagan’s words a fight against “the focus of evil in the modern world.”

We were the good guys. She soft pedals the role of Soviet agents in the counsels of government by calling them “a few civil servants in the Roosevelt and Truman administrations.” I don’t think Alger Hiss at State and Harry Dexter White at Treasury viewed themselves as cogs in the bureaucracy.

Those criticisms aside, there is much to be learned from Susan Schulten’s book. Look at the maps and read the commentary with a critical eye.

For the full amazon URL see: https://www.amazon.com/review/RYPW1A2TGM0ZS/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Charles R. Morris' "A Rabble of Dead Money: The Great Crash and the Global Depression: 1929-1939

The Great Depression: Who done it?

Charles R. Morris has presented us with a very thoughtful popular history on the origins of the Great Depression. He pulls together the thoughts of four really good books on the subject without getting too bogged down in technical jargon. They are Barry Eichengreen’s “Golden Fetters,”  Liquat Ahamed’s “The Lords of Finance,” Robert Gordon’s “The Rise and Fall of American Growth,” and Frederick Lewis Allen’s popular history of the 1920’s “Only Yesterday.”

To Morris and most of the economics profession the cause of the Great Depression was the imbalances that arose out of World War I with its interaction with the gold standard. This is more a Hooveresque version of the cause compared to Roosevelt’s view that causes were domestic; namely rampant speculation, the unequal distribution of income and the 1920’s depression in agriculture. Morris debunks all of the Rooseveltian causes and notes that agriculture wasn’t that bad off in the late 1920s. He does not however note the revolution in agricultural technology caused by the introduction of tractors eliminated the need for forage crops that accounted for 40% of the U.S.’s agricultural output. That alone would have triggered a fundamental restructuring of the industry.

Morris is very good at discussing the impact of electricity, automobiles and radio on production and the lifestyles of average Americans. The 1920’s truly brought with it a revolution in production and consumption. He also has vignettes about the rise and fall of the Samuel Insull, the utility mogul and Ivar Kreuger, the global match king as there empires collapsed under a mountain of debt.

If he holds out one party for special opprobrium it is Germany in its failure to step up to its reparations obligations after the 1924 Dawes Plan knocked them down enough to satisfy Keynes. Simply put they never were going to pay and it was the entire reparation process that put an inordinate amount of stress on the global financial system. However it is unrealistic to assume that any 1920’s social democratic government would have put on such a squeeze on their domestic economy as the French did following their defeat in the Franco-Prussian War of 1870.

As a result if a lay reader doesn’t want to slog through the four books I mentioned above, Morris’ alternative is well worth the read.

For the complete Amazon URL see:

https://www.amazon.com/review/RBRIHGNDDR8L8/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

Promises, Promises.., UCLA Anderson Forecast, September 2016

Presidential candidates Hillary Clinton and Donald
Trump are making all kinds of promises which they believe
will improve the economy for the average person.2 In
very simplified terms Trump wants to substantially reduce
taxes on businesses (including 100% expensing of capital
outlays) and individuals, increase tariffs, deport at least five
million people, increase spending on immigration control,
infrastructure and defense. Needless to say, the federal
deficit would explode should all of his ideas be enacted. In
contrast, Hillary Clinton wants to increase taxes on high
income earners and use the proceeds to enable free tuition
at public colleges for most students, expand social security,
increase healthcare spending, refinance/forgive student debt
and increase spending on infrastructure. Her plan would
modestly increase the deficit, but it is silent on its potential
to make economic growth even slower than it is now. Of
course, whether any or all of these proposals get through
Congress remains an open question.

The problem is that in order to be effective, any economic
plan has to be able to jump start productivity growth
that has been extraordinarily weak for more than a decade.
As our colleague Ed Leamer noted last quarter, it will be
extremely difficult for the U.S. economy to return to a 3% a
year growth path without productivity growth moving from
near zero to about 2%.3 Put bluntly, the growth in real GDP
is a function of the growth in labor hours and the increase in
the output per hour or productivity. Presented below is the
long-trend in the growth in output per hour. (See Figure 1)

Figure 1 Productivity Growth, Output/Hour Worked
Sources: U.S. Department of Commerce, UCLA Anderson Forecast

By simple arithmetic if we posit that the labor force
is growing at around 1% or less per year and if we assume
that the average person is not going to step up the number
of hours worked, then with 1% productivity growth the
steady state growth for real GDP is about 2% a year. This
is, in fact, the history of recent years. Thus the question
before the candidates is how are they going to improve the
outlook for productivity? And note the mass deportation
of workers would reduce hours worked in the short-run.

The answer to this question is not simple. There is no
magic wand and improvements in productivity take time
to implement and are largely dependent on technological
innovation. To economist Robert Gordon, the growth in
productivity experienced by the United States between
1870- 1970 was based on a series of one-off events based
on the internal combustion engine, the harnessing of electromagnetic
energy, indoor plumbing and improvements in
public health. 4. To him our fascination with the computer/
communications technology of today pales in comparison
to the arrival of electricity and the automobile. Perhaps he
is too pessimistic, but the burden of proof is on the technoenthusiasts.

Nevertheless, even if you are a techno-enthusiast, productivity
improvements don’t take place over night. It takes
time for technology to diffuse into the broader economy,
workers have to be educated and trained and new infrastructure
has to be built. Thus, the policies that both Clinton
and Trump are talking about potentially would only have a
limited impact in the short-run. Over a longer time period
an improved infrastructure, a more efficient tax structure
and a better educated workforce will help, but again, in the
fullness of time.

In any event, with both Clinton and Trump calling for
more spending and with tax increases difficult to pass, the
path of the federal deficit will be decidedly higher thereby
reversing the trend of lower deficits in recent years. (See
Figure 2) In the meantime we have modeled in increased
federal spending on infrastructure, a program both candidates
agree on.

The Forecast

Although the inventory correction has taken longer
than what we had previously anticipated, the economy
appears to be rebounding from the 1% growth recorded in
the first half to about 2.7% in the second half. (See Figure
3) Thereafter the growth in real GDP is forecast to run at a
2%- 2.5% clip for the years, 2017 and 2018, respectively.
In other words, it will not be much different from the past
seven years. And to be very explicit, we are assuming
that Hillary Clinton will be elected in November with at
least one house of Congress remaining Republican, the
conventional wisdom as of this writing.

Figure 2 Federal Surplus/Deficit, FY 2000 - FY 2018F
Sources: Office of Management and Budget and UCLA Anderson Forecast

Figure 3 Real GDP Growth
Sources: U.S. Department of Commerce, UCLA Anderson Forecast

With the economy approaching full employment,
employment growth will inevitably slow. After consistently
averaging about 200,000 job gains a month since 2011, employment
growth will slow to about 150,000 jobs a month
in 2017 and 125,000 jobs a month in 2018. Remember
the closer an economy is to full employment the more the
demographics of the work force takes hold. (See Figure 4)
The unemployment rate is forecast to be in a very tight 4.8%
-5.0% range for most of the forecast period as the labor force
participation rate rises modestly.

The modest growth we are forecasting will come from
continued gains in the consumer and housing sectors along
with a rebound in capital spending. Although real consumption
expenditures will not approach the 3.2% increase of
2015, there will be solid gains of 2%+ over the next two
and half years. (See Figure 5) The drop off will largely be
due to a peaking in the automobile market with light vehicle

sales running at about a 17.5 million unit rate. (See Figure 6)


Similarly, housing activity continues to grind higher.
Rising wages, low interest rates and higher rents are underpinning
housing demand with the last factor beginning to
trigger a shift away from rentals towards ownership units.
Although well off peak production, we forecast that housing
starts will increase to 1.19 million units this year and to 1.38
million units and 1.41 million units, in 2017 and 2018, respectively,
up from 1.11 million units in 2015. (See Figure 7)

Figure 4 Unemployment Rate
Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 5 Real Consumption Expenditures
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 6 Light Vehicle Sales
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 7 Housing Starts
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

With respect to business fixed investment we expect
the declines in both equipment and structures in 2016 to
reverse next year. (See Figures 8 and 9) This reversal of
fortune will largely be due to the end of the collapse in oil
and gas drilling investment and the beginnings of a modest
recovery in that sector. Similarly, the hesitancy in overall
corporate investment experienced in the first half appears
to be waning.

The real wild card for the next few years involves the
export sector. The dollar has been strong, foreign economies
generally weak and there has been an obvious increase in
protectionist sentiment worldwide. As a result, global trade
has not been a source of growth in recent years. We are
assuming that there will be a modest increase in export volumes
over the next few years after two years of essentially
zero growth. If there is a risk to our forecast you can do no
worse than starting here.

Figure 8 Real Investment in Equipment
Sources: U.S. Department of Commerce, UCLA Anderson Forecast

Figure 9 Real Investment in Nonresidential Structures
Sources: U.S. Department of Commerce, UCLA Anderson Forecast

Figure 10 Real Exports
Sources: U.S. Department of Commerce, UCLA Anderson Forecast
Inflation on the Rise

Although the Fed is reluctant to admit it, the era of
very low inflation is behind us. On a year-over-year basis,
core inflation is already running well above a 2% annual
rate. (See Figure 11) By next year the headline consumer
price increase will approximate 3% as service sector inflation
combines with modestly higher oil prices. And even
the Fed’s preferred gauge for inflation, the chain weighted
deflator for personal consumption expenditures will exceed
2% in both 2017 and 2018.

The rebound in inflation is being fueled by higher
energy prices, coupled with large increases in service prices
especially residential rent and higher wages. The average
worker is in the process of getting a raise as private sector
wage compensation will be increasing at a 4% rate over the
next two years. Simply put, there are growing spot shortages
of labor appearing in many parts of the country and the
July JOLTS data indicated a record amount of job openings.

After years of experimenting with zero interest rates,
quantitative easing, and forward guidance and internationally
with negative interest rates and corporate bond buying,
it now appears that monetary policy is at the end of its rope.
Despite it all, globally, inflation is not budging. There isn’t
much more monetary policy can do except for the central
banks to directly fund government spending by printing
money through the purchase of zero coupon perpetual bonds.
It may come to that and perhaps a field trip to Caracas,
Venezuela is in order where a former bus driver is on the
road to generating quadruple digit inflation. Of course that
would mean the end of central bank independence. Thus,
the answer lies in fiscal policy and that is something that
both Ms. Clinton and Mr. Trump are advocating in their
own unique ways.

As for long-term interest rates, we expect them to
rise in tandem with short rates and the higher inflation we
expect to see. In order for this to happen both Europe and
Japan will have to leave negative interest rates behind and
we are beginning to see the first signs of this. Put bluntly
the Central Banks have run out of bonds to buy and there is
growing recognition that the sustained period of very low
long-term interest rates is creating systemic risk in the form
of bankrupting pension plans and life insurance companies.
This problem is more acute in Europe than the U.S., but the
state and local pension plans of the U.S. are in dire straits
and it is getting worse with each passing day.
Figure 11 Consumer Price Index vs. Core CPI
Sources: U.S. Bureau of Labor Statistics, UCLA Anderson Forecast

Figure 12 Employee Compensation/Hour
Sources: U.S. Bureau of Labor Statistics, UCLA Anderson Forecast

The Fed Begins to Move….Slowly

This was supposed to be the year of three or four
increases in the Fed Funds rate. Instead, the ever data
dependent Fed will likely raise rates only once this year.
However, as transitory worries fade (i.e. Brexit) and the
economy demonstrates its ability to grow at a 2%+ clip, we
anticipate that 2017 could very well bring with it three 25
basis point rate hikes taking the funds rate by yearend to
around 1.5%. (See Figure 13)

Figure 13 Federal Funds Rate vs. 10-Year U.S. Treasury Bond
Yields
Sources: Federal Reserve Board, UCLA Anderson Forecast

Conclusion

The economy having survived a first half slowdown
is on track for 2%+ growth over the next few years. Don’t
expect much help from the political system because we
will not see a meaningful improvement in growth unless productivity picks up. Public policy in this regard can be
successful, but it will take time. Meantime, inflation will
pick up modestly in a roughly full employment economy
causing the Fed to gradually raise interest rates.  

Endnotes
1. With apologies to Neil Simon.
2. In the interests of full disclosure I wrote an Op-Ed in support of Hillary Clinton and in opposition to Donald Trump. See Shulman, David, “I’m a
Republican and I Don’t Like Hillary Clinton – but I’m Voting for her.” Los Angeles Times, Op-Ed, August 8, 2016.
3. Leamer, Ed, “It’s not 9.8 Meters per Second Squared Anymore,” UCLA Anderson Forecast, June 2016.
4. See Gordon, Robert J., “The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War,” Princeton: Princeton University