My Review of George Selgin's "False Dawn: The New Deal and the Promise of Recovery, 1933-1947"

The Recovery that Failed

Libertarian economist George Selgin has written an intriguing history of the New Deal and role Keynesian thought played in it. The book is largely a critique of Eric Rauchway’s “The Moneymakers.” (See:   https://shulmaven.blogspot.com/2015/12/my-amazon-review-of-eric-rauchways.html ) In the main I agree with Selgin. Simply put, many policies attributed to Roosevelt weren’t really his and by and large Roosevelt was wary of deficits as a macroeconomic policy tool. In Selgin’s framework the New Deal consisted of three R’s: recovery, relief, and reform. Selgin focuses on the recovery aspects and notes that Roosevelt’s deficits came from funding relief.

To begin with the ideas behind the Emergency Banking Act of 1933 which closed and then reopened the banks came from Hoover’s treasury department, namely Secretary Ogden Reed and Under-Secretary Arthur Ballentine. Further Roosevelt opposed the deposit insurance provisions of the Glass-Steagall Act because of the moral hazards associated with it. That issue would come to the fore in the 1980’s. A criticism of Selgin is that he does not give credit for how successful deposit insurance was during the 1937-38 downturn. The bank runs of the early depression were over.

 

As to deficit financing, the biggest deficit took place in 1936 when the World War I veterans’ bonus was paid out. Roosevelt opposed it and his veto was over-ridden. The payout provided a short-term boost to the economy and played a significant role in his re-election. However, in 1937 the lack of such stimulus played a role in that year’s downturn.

 

In the Spring of 1938 Roosevelt and his advisors finally took Keynes’ advice and embarked on the first true Keynesian stimulus of his administration. However, in the light of the World War II spending that was to come, it was far too little.

 

Selgin credits the massive gold inflows of the 1930’s for the modest recovery that took place. The gold came from Stalin’s stepping up gold production in the Soviet Union and European flight capital fearing Hitler. It was the gold inflow that enabled the Fed to embark on a policy of monetary easing, a policy that was halted in late 1936 as the treasury sterilized the gold inflows out of fear of inflation.

Roosevelt did take the U.S. off the gold standard in 1933 and raised the price of gold, a stratagem that Keynes advised. To Keynes it would be path to monetary ease. However, according to Selgin the increase in price of gold came from the ideas of George Warren who thought that a rise in the price of gold would automatically increase commodity prices. It did not.

 

Along the way Selgin notes how Roosevelt’s reforms stalled the economy, and the anti-business nature of his policies greatly weakened private investment. That would not turn until World War II ended and the feared depression did not take hold. Selgin observed a rise in business optimism in the aftermath of the war; however, this sentiment was not reflected in stock prices, as Wall Street experienced a three-year bear market from 1946 to 1949.  Stock market investors at the time were clearly worried. As a result, it would have helped to have some discussion of stock prices during his 1933-1947 history.

 

 

 

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 Greg Steinmetz's "American Rascal: How Jay Gould............"

Robber Baron

 

Greg Steinmetz has written a biography of one of Matthew Josephson’s robber barons. I must confess I read Josephson’s “The Robber Barons” in junior high and to me they were heroes in the sense that these mostly self-made men built America in the latter half of the 1800’s. We cannot look at the life of Jay Gould through 21^st Century eyes, but rather we have to look at his life in the context of America being an emerging market with all of the corruption that entails.

 

To be sure much of what Gould did in markets would be illegal today, but was not in the 1860’s. Nevertheless, his collusion with New York City Boss Tweed was illegal then and Gould got away with it.

 

We see Gould rising from humble beginning to running a tannery operation to becoming a major factor on the New York Stock and Gold exchanges. We see him puling off a corner in the gold market in 1869 that unfairly implicated President Grant. To me the most interesting factoid in that development was that the young Thomas Edison was the telegraph operator who telegraphed the changing price of gold throughout the Nation.

 

We next see Gould becoming a railroad baron where he ended up controlling 16% of the nation’s track mileage through strategic stock purchases. Far from being only a stock jobber, Gould was responsible for laying 4,000 miles of new track throughout the country. Too many of his contemporaries, Gould was the smartest person in the room.

 

Steinmetz highlights the role of reformer and Adams family scion Charles Francis Adams in pushing for railroad regulation, yet we see him later running the Union Pacific Railroad for a decade. He too wanted to make a buck. We also learn contrary to the populist myth American railroads suffered from too much competition, rather than too little.

 

Through it all Gould was a family man who loved his wife and six children who died to young in his mid-fifties. In this brief biography Steinmetz tells a riveting story about Jay Gould and his times.

For the full amazon URL see: Robber Baron (amazon.com)

My Amazon Review of Edward Chancellor's "The Price of Time: The Real Story of Interest"

 

Easy Money: The Root of all Evil

 

Longtime financial commentator Edward Chancellor has written a sweeping socio-economic history of interest rates going back to the ancient Sumerian civilization of over 4000 years ago and the Code of Hammurabi up to the present. Chancellor correctly notes that interest rates represent the “universal price of time” that links the present to the future and is essential in valuing any asset.

 

His concern is that when politicians and central bankers underprice the cost of money all kinds of bad things happen. Those bad things would include asset bubbles, commodity price inflation, income inequality, uneconomic investment, the monopolization of the economy and food riots leading to political destabilization. But what is the correct price? Chancellor relies on the work of Eugen von Bohm-Bawerk, Irving Fisher, Friedrich Hayek, and Knut Wicksell. He leaves out the work of my late and great economics professor Jack Hirshleifer with his “Investment, Interest and Capital.”

 

Simply put on a micro foundation basis the interest rate is determined by society’s rate of time preference and its ability to increase output overtime. Thus, from the point of view of output growth the real interest rate should equate to the real growth in GDP.  However, when money, credit and central banking are introduced you dramatically increase the likelihood of overshooting and undershooting the neutral rate of interest.

 

Chancellor criticizes central bankers for their seeking economic stability via inflation targeting. Low inflation in product markets usually makes sense, but sometimes it masks inflation is asset markets giving rise to bubbles. It here where Chancellor brings in Hyman Minsky’s work on stability leading to instability. Thus, it was the Great Moderation of 1982-2007 that led to the crash of 2008.

 

He is especially critical of Fed chairs, Bernanke, Yellen, and Powell for them violating Bagehot’s rules for acting in a crisis and for all of them keeping interest rates way to low for way to long which gave rise to the maladies listed above. With respect to Walter Bagehot, in a banking crisis the central bank should lend aggressively on good collateral at a penalty rate. To be sure our central bankers lent aggressively, but not all on good collateral and certainly not at a penalty rate which opened the gates to a populist rebellion against the bankers.

 

By keeping interest rates too low for too long, the Fed totally distorted the relationship between the present and the future which made hitherto unprofitable investments lucrative. Thus, instead of investing in new assets businesses and individuals bid up the price of existing assets to the detriment of long run productivity. And remember who owns existing assets, the already wealthy.

 

What Chancellor gets wrong is that he focuses too much on the policy rate. The relevant interest rate is the long-term rate which is tied to the long-term growth in the economy and the long-term rate via the term premium is usually higher than the policy rate. Further, necessary short-term reductions in the policy rate to manage a crisis and/or a recession should not affect long term rates all that much. However, when central banks promise to keep rates low forever, the long-term rate will converge on the short-term rate. Thus, the error of the Fed was not to lower the rates in a crisis but keeping them low well past the crisis.

 

Edward Chancellor has written an important book that reflects Austrian economics over Keynesian economics, but I suspect it will gain popularity overtime as the credibility of our central bankers continues to erode.

For the full amazon URL see: Easy Money: The Root of all Evil (amazon.com)

My Amazon Review of Edward Glaeser's and David Cutler's "Survival of the City: Living and Thriving in an Age of Isolation"

 

Sickness and the City

 

Harvard urban economics professor Edward Glaeser and Harvard health economics professor David Cutler have teamed up to write a book about the post-Covid environment for cities. They rightfully note that isolation and social distancing caused by the pandemic are city destroyers in that they break the bonds of agglomeration economies that are so necessary for cities to succeed. In a word they represent an “existential threat” to a city’s viability.

 

There is quite a bit of history here in that they discuss role of cholera, typhus, bubonic plague, and influenza in determining the development or nondevelopment of cities. Early on city leaders understood the need to quarantine sick individuals and travelers from lands where sickness was evident.

 

To deal with future pandemics the authors call for strengthening the public health infrastructure to deal with stockpiling protective equipment and the delivery of healthcare services. They propose a global public health NATO to supplement the World Health Organization which would intervene in health emergencies. This NATO would also help fund vitally needed sanitation infrastructure in less developed countries. Given NATO’s defeat in Afghanistan, it has become far less of a role model.

 

They view urban America largely through the narrow prism of New York and Los Angeles where the struggle is between the insiders and the outsiders. Homeowner insiders control local zoning which restricts housing supply that makes housing unaffordable for all but the wealthy, and the police and teachers’ unions insiders make reform of policing and education difficult. It is these insiders who prevent cities from achieving their natural function of being the engine for intergenerational mobility.

 

Going forward the competitive environment for the so-called super star cites is going to get tougher. The authors believe they will continue to thrive, but the breakthrough of remote work is going to make it more difficult. Simply put, there is too much office space and the businesses that live off dense concentrations of office buildings will suffer.

 

My main criticism of the book is that it is way to New York and Los Angeles focused. It ignores the very exciting urban environments of Houston, Nashville, Austin, and Denver, for example. Those cities are thriving amidst the pandemic and will do far better once it ends.     

For the full Amazon URL see: Sickness and the City (amazon.com)

My Amazon Review of Janek Wasserman's "The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas"

Something was in the Coffee

I first learned of Eugen von Bohm-Bawerk from the late and great UCLA economist Jack Hirshleifer’s capital theory class nearly 50 years ago. Who knew he was an Austrian and I had never heard of the Austrian School of economics. I have since learned of the people and ideas associated with the school. Here University of Alabama history professor Janek Wasserman presents a way too detailed look at the people and ideas of the Austrian School.

There must have been something in the coffee of late 19^th and early 20^th Century Austria-Hungary. In Vienna there lived the founders of the Austrian school including the above mentioned Bohm-Bawerk and Friedrich Hayek, Joseph Schumpeter, Carl Menger, Fritz Machlup, Gottfried Haberler, Oscar Morgenstern, and Ludvig von Mises. Not to be overshadowed in the dual monarchy, Budapest produced such physicists as Edward Teller, Leo Szilard, John von Neumann, and Dennis Gabor around the same time. In fact the two strands would merge when Morgenstern teamed up with von Neumann to write the “Theory of Games and Economic Behavior” in 1944.

The Austrian school was a major promoter of the now accepted marginal utility theory of value. Menger along with Jevons and Walras developed the theory in the 1870s and it was codified by Marshall in the 1890s. Marginal utility stood in direct contrast to the classical labor theory of value developed by Adam Smith and David Ricardo that was later expanded by Karl Marx.

The Austrians viewed themselves as classical liberals and as such they stood foursquare in opposition to the growing appeal of socialism that developed in the 1880s. Their theory was developed in the coffee houses of Vienna and many of their seminars were open to all. Indeed Bohm-Bawerk was open enough to invite socialists Otto Bauer and Rudolf Hilferding and the soon to be Bolshevik   revolutionary Nikolai Bukharin. But make no mistake, the Austrians were suspicious of popular democracy.

Their world first crashed with the onset of World War I and its aftermath and then the leading lights were forced into exile with the arrival of Hitler. Two emigres to the West became famous in the 1940s with Hayek’s “The Road to Serfdom” and Schumpeter’s “Capitalism, Socialism and Democracy.” 

With collectivism on the rise in the 1940s, they formed the Mont Pelerin Society where unlike the looser seminars of pre-World War I Vienna, dissent was not welcomed. It was through Mont Pelerin that the Austrians linked up with such Chicago School luminaries as Milton Friedman and George Stigler. It was at one of their conferences that von Mises called them out as socialists. Splits were inevitable.

Nevertheless after the Austrians linked up with Chicago and they received increasing funding from sympathetic foundations their influence soared as their views of limited government, free trade, floating exchange rates and the information economy percolated up to policy makers on both sides of the Atlantic. In a sense they were the godfathers of the neoliberal world.

Wasserman tells the story in way too much detail which is great for the academic reader, but not so much for the educated lay reader.

The Full amazon URL appears at: https://www.amazon.com/review/R1ZQEF4OUM2GWU/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Binyamin Appelbaum's "The Economists' Hour: False Prophets, Free Markets and the Fracture of Society"

Economists in the Crosshairs

I have to admit at the outset that I am a card carrying financial economist and know or knew several of the economists mentioned in the book. New York Times editorial writer and former economics reporter Binyamin Appelbaum has written a screed blaming the Chicago School of economics for the vast increase in economic inequality since 1973. Trust me he gives them way too much blame/credit because the amorphous forces of globalization and technology have done far more to create the winner take all society we seem to be living with.

He basically argues that the economics profession staged a hostile takeover of Washington politics. The profession rises from the bowels of the Fed to the near stardom of CEA Chairman Walter Heller in the Kennedy White House. It was the heyday of Keynesian economics as the Kennedy-Johnson tax cuts engendered the mid-1960s boom. It was the failure of Keynesian economics to predict that inflation and unemployment could exist side-by-side that opened the way for the Chicago School. He specifically signals out Milton Friedman, Arnold Harberger, Richard Posner and Michael Jensen among others as his villains.

Appelbaum really doesn’t understand how the 1970s inflation unhinged society. For most American the economy seemed to be out of control and he doesn’t note that the tight bracket unindexed income tax system confiscated the real wages of the American people. Thus although pre-tax wages rose faster than inflation; after-tax they did not. Thus to me Fed Chairman Paul Volcker was a hero.

His careful research shows up in his discussion of how the draft ended under the impetus of Nixon aide Martin Anderson, the intellectual arguments of Milton Friedman and the strong technical work of Walter Oi. He also discusses the role of dissent in the armed forces by highlighting an anti-war demonstration that took place in Fayetteville, North Carolina adjacent to Fort Bragg where actress Jane Fonda spoke. I attended that demonstration. He showed real diligence in coming with the source for this event in an unpublished Duke Ph.D. dissertation written by air force colonel Scoville Currin.

Appelbaum has mixed feelings about the volunteer army, but I suspect that if the United States had a draft after 9/11 he would be far less ambivalent. In 2001 Appelbaum would have been 23 years old and I just can’t picture him taking mortar fire in the Hindu Kush Mountains of Afghanistan or being face down in the mud on the banks of the Tigris River in Iraq.

He devotes a chapter to the role of the “Chicago boys” in the 1970s Pinochet dictatorship of Chile. There Chicago trained economists’ orchestrated policy of the regime. To Appelbaum their policies weren’t all that successful, but he stopped the clock in 1990. He doesn’t really speculate on what would have happened if assassinated socialist Chilean president Salvatore Allende remained in power. It could very well turned out be a facsimile of the Chavez/Maduro hell in Venezuela instead of it being the thriving country that it is today.

Appelbaum rightly notes that the Reagan deregulation of the 1980s had its origin under Jimmy Carter. Where under the Senate leadership of Edward Kennedy and with the backing of Ralph Nader both the airline and trucking industries were deregulated. Here the economist in charge was Alfred Kahn. We can thank him for cheaper airfares and the hassles of flying today.

In his obsession to blame economists for inequality Appelbaum also leaves out the massive failure of all too many urban and rural public schools. If anything most economists are on the side of the angels in attempting to improve public education. Further he fails to mention that for all practical purposes the Democratic Party abandoned American workers for the siren calls of identity politics.

Appelbaum has written a very readable book. Unfortunately he way over-states his case. He should have been more modest. By the way that is the same advice I give to my economist colleagues. His personal vignettes about the economists he discusses are terrific and unlike most books, read his footnotes. There are loads of interesting kernels there.

For the full Amazon URL see: https://www.amazon.com/review/R2TASSYK4EXXP4/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Tobias Straumann's "1931:Debt, Crisis and the Rise of Hitler"

Annus Horribilis

Although most scholars put the focus of the Great Depression on events in the United States, Swiss historian Tobias Straumann turns his keen eye on the role Germany had in making the Great Depression “Great.” In fact the 1932 annual report of the Bank for International Settlements noted “In the circumstance of the German problem- which is largely responsible for the growing financial paralysis of the world – call for concerted action Governments alone can take.” To Straumann there is a straight line from the May 1931 failure of the Credit Anstaltt, to Germany suspending convertibility in the wake of bank runs in July, to Britain abandoning the gold standard in September which was followed in September and October by the Federal Reserve raising its discount rate for 1.5% to 3.5% in the teeth of the depression.

He tells part of his story through the eyes of Viennese economist and Swiss banker Felix Somary. As early as 1926 Somary was warning about the unsustainability of the reparations regime establish after the Dawes Plan and as the 1920s roared on he became even more bearish. Unfortunately to be right early is sometimes viewed as being wrong. Trust me, I have experience with this. As a result his warnings went unheeded, even from Keynes.

Although the title of this book is 1931, it really starts in 1930 with the adoption of the Young Plan which modestly reduced German reparations, but made the payment structure more rigid. The plan was predicated on a growing world economy that was quickly turning into a tailspin. From the outset both Hitler and the Communists became severe critics of the plan.

The man caught in the middle was German Chancellor Heinrich Bruning, a centrist. Straumann is more sympathetic to Bruning than many historians. Simply put he had limited options and was hemmed in by the gold standard which left him only one choice, austerity. As a result in the September 1930 elections the Nazi Party received 19% of the vote and becomes the second largest party in Germany. Although we now think of Hitler with his militaristic racist screeds, in 1930 he was offering very serious criticism of the Young Plan in his speeches. Hitler’s electoral gains terrify foreign investors leading to a run on Germany’s gold reserves. Put bluntly, Bruning was in a box and the countdown began.

By 1931 the downward spiral continued with even more austerity coming from Bruning. To maintain domestic popularity Bruning plays the nationalist card in returning the Rhineland to German control and proposing a customs treaty with Austria. Of course the French go crazy and that limits the availability of banking credits from France. Hence both German and French politicians were prisoners of their own electorates. The lesson here is that international agreements must have domestic support in order to work.

After the July 1931 banking collapse the way was open for Hitler. In the October election the Nazis receive 37% of the vote and become the largest party in Germany. With the Communists achieving 15% of the vote, the two extremist parties work hand in glove to bring down Bruning. And the rest as they say is history.

Straumann has written an important history that should be required reading in the capitals of Europe. Although the EU succeeded in Greece, at least for now, it might not be so lucky with Italy. It should heed the lessons of “1931.”

For the full amazon URL see: https://www.amazon.com/review/R3CO3LP16KVA4M/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Eric Rauchway's "Winter War: "Hoover, Roosevelt and the First Clash Over The New Deal"

Not Quite a War

UC Davis economic historian Eric Rauchway elevates the personal dislike between Herbert Hoover and Franklin Roosevelt into a war that would determine the future of both the Democratic and Republican parties. Simply put, he way overstates his case and demonstrates his very clear left-liberal bias. To be sure Hoover is a sore loser and acts that way, but their disagreements can hardly be characterized as “a war”.

Rauchway’s thesis is that Hoover consciously acted to abort the New Deal in the womb.  To me the disagreement was far more personal than political and given the economic crisis it would have been far better for both of them to work together the way George Bush and Barack Obama did in 2008, but alas that was not the case. Beneath the surface while Hoover and Roosevelt were having their spat Hoover treasury officials Ogden Mills and Arthur Ballantine were working hand-in-glove with income treasury secretary William Wooden to deal with the banking crisis. In fact Jonathan Alter in his "Defining Moment" noted that “the Hoover men essentially designed the blueprint of FDR’s rescue of the banks.” Thus if the generals were at war the lieutenants certainly were were not.

Rauchway argues that Hoover’s ideas were a precursor to the Republican southern strategy of the 1960s. To his credit he does note that the African-American vote began deserting the party of Lincoln in response to Hoover’s treatment of them during the 1927 Mississippi River Flood and his failed supreme court nomination of the racist John Parker in 1930. That is all true, but the fact remains Roosevelt sold out to the southern barons of the Senate to pass his program and it was the Republican Party that was the party of civil rights well into the 1960s and especially with the nomination of Wendell Willkie in 1940.

He also argues that Roosevelt as early as 1932 was well aware of the threat that the rise of Hitler presented to the democracies. Yet he blew up the 1933 World Economic Conference that sent a clear signal to Hitler that the U.S. was abandoning Europe. Indeed from 1933-38 was probably the most isolationist period of the 20^th Century. Being worried about Hitler and acting are two different things.

Moreover while Roosevelt was worried about fascism abroad he was implementing it at home. What else can you make of the cartelization caused by the Agricultural Adjustment Act and the National Industrial Recovery Act, if not a form of proto-fascism? Moreover it was hardly progressive to plow under crops and slaughter piglets to prop up farm prices during a period of real starvation. Thankfully the Supreme Court saved us from these failed experiments.

Rauchway conveniently leaves out the crackpot ideas of Cornell economist George Warren who influenced Roosevelt on farm and monetary policies. He also ignores that one of the causes of 1920s farm crisis was the mechanization of agriculture as 40% of cropland was devoted to forage crops that were no longer needed.

Let me say that this review is not intended to be an all-out attack on the New Deal. Much good came from leaving the gold standard, banking and securities reforms and the beginning of massive public works projects. The country was in a crisis and we have to put ourselves into the shoes of the decision makers of the time, but we also have to heed Keynes admonition that “reform is the enemy of recovery.” I wish Rauchway would see things that way.

For the full Amazon URL see: https://www.amazon.com/review/R1VJ9V9PPKXS9F/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Jacob Soll's "The Reckoning: Financial Accountability and the Rise and Fall of Nations"

Accounting for Accountability

I expected more from Jacob Soll’s “The Reckoning.” Soll a history/accounting professor( quite a combination) at USC and a McArthur “Genius” grant winner offers up his history of accounting from the early Renaissance to the present and the role that it played in the development of capitalism and the modern state. As an economics and history nerd the book should have been right up my alley. However the debits and credits didn’t bounce off the page. The writing is dry and text bookie.

Soll tells the story of accounting from the Italian city-states where merchants learned the secrets of double-entry bookkeeping and where Luca Pacioli wrote his foundational text. Accounting knowledge follows commerce where Spain ignored it leading to the bankruptcy of its empire and where Holland embraced it making it the most prosperous place in Europe. He takes us to Walpole’s England and Colbert’s France. It was in France where accounting was used to consolidate Louis XIV’s rule and then ignored as the cost of wars diminished the power of the state.

Soll is most acute in discussing the role Jacques Necker, Louis XVI finance minister.  As the state veered towards bankruptcy Necker published the official accounts which demonstrated the cravenness of the regime helping to ignite the revolution. He also discusses Josiah Wedgwood’s use of cost accounting to justify his use of child labor.   

Soll discusses the accounting failures of the 1920s, the late 1990s, the Great Recession and the rise of the giant accounting firms. He discusses auditing without really defining what auditors do and the clear conflicts between auditing and consulting among the accounting firms.

If there is a theme to his book it is that good accounting leads to both business and governmental accountability and without out it a host of problems arise. I just wish Soll’s writing weren’t so dry.

The full amazon URL appears at: https://www.amazon.com/review/R3OLG7A2YHWIEH/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Sebastian Edwards' "American Default: The Untold Story of FDR, the Supreme Court and the Battle over Gold"

The Great Depression Showdown over Gold

As an economic history nerd I can only applaud the work of my UCLA colleague Sebastian Edwards in his vibrant telling the story of the long forgotten Supreme Court showdown over the United States’ abrogation of contracts written with the gold clause. Remembering the inflation of the Civil War greenback era, most creditors demanded gold clauses in debt contracts in which they would be repaid in in either gold or its paper money equivalent value.

This system worked fine until the onset of the Great Depression. It is here where Edwards begins his story as President Roosevelt adopts an inflationist policy by first abandoning the gold standard by requiring all citizens to turn in their physical gold at the then $20.67/ounce price. Then in June 1933 Congress adopts a joint resolution authorizing Roosevelt to increase the price of gold which he ultimately does to $35/ounce and the legislation abrogates the gold clause in all contracts. Indeed, most economists credit the early recovery from the depression directly to the monetary easing associated with Roosevelt’s gold policies.

If Congress hadn’t abrogated the gold clause all debts would have been written up to reflect the devaluation by 69%. Thus it would require a payment of approximately $1700 to repay a nominal debt of $1,000. Needless to say a host of bankruptcies would have ensued.

Of course several creditors sued and Edwards skillfully moves the action from Roosevelt and Congress to the Supreme Court. The Supreme Court ruled that it was in Congress’ power to alter private contracts, but it was not in its power to alter U.S. government debt. However, the court ruled that as of the date of the Joint Resolution gold was still trading at $20.67/ounce and Americans were not allowed to possess physical gold at that time. Hence there would be no damages. A brilliant 5-4 ruling by Chief Justice Hughes.

The reason why these cases have been forgotten is that if they went the other way all hell would have broken loose. Instead of rallying as the stock market did after the ruling, stocks likely would have crashed. It would have triggered a constitutional crisis with Court versus the other two branches of government. Indeed the lead up to the ruling was a precursor to the 1937 court fight that Roosevelt would have.

As an aside Edwards notes that the United States had a treaty with Panama concerning the lease payments for the Panama Canal. That treaty had a gold clause in it. After a long negotiation in 1939 the lease payment was increased retroactive to 1934 thereby reflecting the dollar devaluation. Thus, the U.S. made good on its international treaty obligations.

“American Default” is a worthy addition to the economics literature of the Great Depression. It should be read with the works of Friedman & Schwartz, Bernanke, Irwin, Eichengreen and Sumner. And because it is more a history book than an economics book the lay reader should find it very readable. Further given the rising debt/GDP ratio in the U.S. when coupled with even larger unfunded liabilities, the idea of a 21^st century American default is not totally improbable.

The full amazon URL appears at: https://www.amazon.com/review/R1JCSUKKX3TVDP/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv