Monday, March 2, 2015

Thomas Jefferson, father of economic instability

For the past week or so, I've been reading "An Empire of Wealth," by John Steele Gordon. It's an economic history of the United States, and it's vastly more entertaining than that sounds.
Gordon is a vivid, energetic writer, and he has a knack for combining swift summary with well-chosen, arresting details.

One learns, for example, that the Erie Canal was the largest public works project in Western civilization since the Pyramids. Its budget, $7 milllion, "was equal to more than one-third of all the banking and insurance capital" in its home state of New York. One learns not only that in the 1880s New England was the center of a flourishing worldwide ice trade estimated at eight million tons a year, but that the ice business created a robust market for sawdust. It was an ideal insulator, which was convenient, as the discovery of a use for the stuff gave sawmills an incentive to stop dumping so much of it in the nearest stream.

One learns that banking and money creation in the early 19th century were often indistinguishable from straight-up fraud. "Fully half the banks founded between 1810 and 1820 had failed by 1825," Gordon writes. Which brings me to Thomas Jefferson.

I vaguely knew Jefferson had opposed Alexander Hamilton insistence on creating a national bank and that this was generally considered regrettable -- an unfortunate consequence of Jefferson's "the U.S. should be a nation of simple yeoman farmers" ethos -- but I had understood the dispute as an isolated historical incident. Gordon, however, argues that Jefferson's intransigence had far-reaching consequences, setting up America's financial system for a future of chronic dysfunction:
Unfortunately, Thomas Jefferson was a better politician than Hamilton, and a far better hater. ... The party forming around Thomas Jefferson would seize the reins of power in the election of 1800 and would not lose them for more than a generation. In that time, they would destroy Hamilton's financial regulatory system and would replace it with nothing. ... As a direct result, economic disaster would be visited on the United States roughly every 20 years for more than a century.
How bad was it? The depression of 1837 didn't reach bottom until 1843, let alone start to recover. In its early days, 90 percent of U.S. factories closed, and federal revenues fell by half. (Admittedly, the federal government was a much smaller fraction of the U.S. economy than it is now.)

The depression that began in 1873 lasted six years as well. There were others.

For what it's worth, Brink Lindsey at the libertarian Cato Institute thinks Gordon argues "somewhat simplistically," on this point, noting that if you have a central bank, its policy mistakes can screw up an economy quite as effectively as not having one.

Still, having a central bank at least creates the possibility of having effective countercyclical policy. And it's needed. (I am not impressed by arguments that laissez-faire markets naturally and rapidly self-correct; there's far too much counter-evidence.)

So I agree it's a pity Jefferson was so stubborn and so influential. Who knows, if we'd had a central bank since the 1790s rather than starting fresh in 1913, that extra century or so of policy experience might have come in handy.