The fortunes of war is a two-edged phrase. Victory is one interpretation, personal profit another. Although rape and plunder in the Mongol or Borgia manner were no longer acceptable in the Europe of the Enlightenment, war itself remained the principal pathway to new territory and grandeur for rulers as well as to huge fees and commissions for paymaster-generals, principal contractors and commissaries, naval offices in search of pirate money, and commissioned privateers. P.9

In another display of war’s economic effects, all six of the major waves of inflation that have swept the U.S. have come in its wake, from Bunker to the Vietnam buildup. The money in circulation has always had to be increased sharply, and each new flood that sluiced through a wartime economy has left expanded enterprises and huge profits in sectors from transportation and food munitions. 10

Estimates of the richest men in Massachusetts following King George’s War fell on those who had managed, financed, and supplied the campaigns launched from New England against the French in Canada. 10

Piracy itself had not been beyond the pale until the early 18th century. Much as Queen Elizabeth has profitably winked at the exploits of Francis Drake, many a substantial 17th Century English family enjoyed occasional sub-rosa proceeds from piracy. Some economists have ranked thinly disguised piracy behind only the East India Company as a 17th century English overseas investment. 10

The five with the highest 1790 assessments were, in order: Thomas Russell, merchant and privateer; John Hancock, merchant, smuggler and privateer; Joseph Barrell, contractor to the French fleet; Mungo MacKay, distiller and privateer; and Joseph Russell, merchant and privateer. In the 1790s, fortunes derived from privateering and government finance represented the biggest pot of money in the United States. Government contracts offered perhaps an even surer way to wealth than privateering’s wheel of fortune,” concluded Nathan Appleton who would be the principal organizer of the Massachusetts textile industry in 1813. (14)

Pattern of 1920’s and stock market crash
Tax cuts were the first pillar of boom-era politics. In 1921 the GOP Congress repealed the excess profits tax and reduced the minimum income surtax from 60% to 40%. Then the Tax Act of 1926 repealed the gift tax and reduced the income surtax and estate tax maximum from 40% to 20%.

Reduced federal spending a second encouragement, took shape as Wilson’s wartime budget deficits morphed into peacetime surpluses big enough to reduce the federal debt from $24B in 1920 to $16B in 1930

3. Deflation – the third fuel, replaced wartime inflation. The happy combination of mild deflation and a large budget surplus, a first since the 1890s allowed the Fed and the banks to pursue precisely the expansive monetary policy—abundant credit at relatively low interest rates—businessmen and investors craved.

4. Easy consumer and private mortgage lending, the fourth tinder, fed the boom by more than doubling from $17.3B in 1922 to $38.3B in 1929. The siren song of advertising, paired with the new temptations of installment credit, served to convince millions of Americans to buy Dodge coupes, Frigidiares, oil heating systems and Chris-Craft mahogany speedboats.

5. Rising industrial productivity and accelerating corporate, bank and utility mergers added more combustion. Productivity rose through the rapid spread of electric power and machinery as well as through new forms of communications—autos, trucks, highway, proliferating telephones, office machines, and such like.

6. Corporate restructuring through merges and holding company formations, sometimes good for productivity also helped investment bankers and promoters to price up assets and stock offerings. In 1919, 89 mergers had involved 527 concerns. So many family businesses were pulled into the corporate orbit that nearly 20% of U.S. national wealth shifted from private to corporate hands. So enlarged, the corporate share of national wealth rose to about 30%, and the largest 100 corporations came to command about half of the total U.S. industrial net income. Holding companies were another highlight of twenties restructuring. In 1928, of the 573 companies actively traded, 395 companies were both holding companies and operating companies and 92 did nothing but hold other companies’ securities. 60-61

7. The blaze of opportunity was turning into a speculative conflagration. Paper entrepreneurialism helped make the boom of the 20’s much more stock market-driven than even the previous booms.

8. New investment vehicles and devices also helped to heighten the speculation. Investment trusts (mutual funds), introduced in 1921 had taken in $8.5B from 4.5 million Americans by 1929. 62

9. The Federal Reserve was not the only source of the boom’s essential fuels—money and liquidity, the short-term day to day “call loans” available to speculators at 5% or 10% interest also grew like a spring flood. Their volume climbed from a billion dollars in 1923 to about $8B in 1929.

10. Stockowners ranks expanded from under one million in 1914 to 6-9 million and 5 to 6 million households in 1929. 62

While the markets were setting records and economists talked about a new plateau of permanent prosperity, businessmen, financiers and Republicans vied with each other in taking credit.

In 1927, President Coolidge sent fro Professor William Z. Ripley of Harvard who had just brought out a critique entitled Main Street and Wall Street. After spending the day together and Ripley described the “double-shuffling, money-fudging, hornswoggling and skullduggery” behind the soaring Dow, Coolidge asked what he could do. Ripley replied that it was a state matter: New York, not the White House, had authority over the New York Stock Exchange. 64



Four engines powered the expansion of the economy that began in 1982: (1) military spending increased enormously, pouring money into defense contractors and military installations. Corporate investments grew, favored by 1981-tax legislation, putting substantial money into computers but far more into office buildings and construction. The third engine was debt, which ballooned as governments, corporations and individuals borrowed as rarely before, plowing most of that back into the economy. Fourth, much like the 1920s, financial activities accelerated—from stock market gains and their wealth effect to mergers and leveraged buyouts, deal making, and the steady growth of bank and investment sector employment. Expanding debt and the profits of innovative finance, both frequent boom companions, also stimulated luxury consumption.

Between 1982 and 1992, the Dow trebled in nominal dollars, which meant a doubling even after inflation. Paper entrepreneurs, took an unusual share through merger and leveraged buyout activities. 91-2

No gain in power or prestige exceeds that of the Federal Reserve Board. Much of its expanded responsibility was necessary, first to deal with the complications after currency rats were untied from gold in the early 1970s and the second time after inflation forced federal deregulation of bank interest rates in 1980. The dollar stakes of money supply and interest rate regulation now soared. At the same time, this elevation of an institution managed by an unelected board of governors and commingling official authority with private banking industry participation became a sectoral Magna Carta of sorts. It EMPOWERED THE BANKS AND FACILITATED THE DISPROPORTIONATE GROWTH OF WEALTH TIED TO CAPITAL AND THE FINANCIAL MARKETS. 19TH CENTURY FAVORITISMS, AKIN TO THOSE OF THE FIRST AND SECOND BANKS OF THE UNITED STATES WERE CREEPING BACK INTO PLACE.

James Grant argued that cycles and failures were necessary “by suppressing crises, the modern financial welfare state has inadvertently promoted speculation.” 95

The most egregious skews, which led the Economist to observe in 1991 that “socialism” had at last come to America, showed up during the mammoth S&L bailout of 1989-992. This was the rescue by FDIC under the auspices of the newly created federal Resolution trust Corporation of several thousand banks and savings and loans. Wholesale insolvencies eventually moved the problem to Washington, into the lap of FDIC and the RTC. By 1990, the latter had the largest assets of any corporation in the U.S.: $210B including everything from shopping malls, junk bonds, mortgages to a chunk of the Dallas Cowboys, etc. The rescue was financed by floating hundreds of billions of dollars’ (95) worth of U.S. bonds to be paid for by the public over 40 years. Not all of the rescue was necessary. Big depositors were completely paid off in disregard of the $100,0-00 ceiling of federal depositor insurance, and many of the assets were sold in attractive packages to the politically well connected, sometimes with agreed-upon federal subsidies to sweeten the pie. 97

The industrial policy debate of the early 1980s had long since ended. The United States did adopt a kind of “industrial policy,” one that bowed to the mounting national importance of both private finance and the treasury and the Federal Reserve Board. (97) Instead of seeking to restore the older manufacturing industries or build the new technological sector, Washington authorities steadily protected and advanced banking and finance, providing rescues from perils, insolvencies, and crises hitherto regarded as being hazards of the marketplace. (97)

The continued eminence of both the treasury and the Federal Reserve furnished a central continuity between the 80s and the 90s and the Republican Bush and the Democratic eras. Finance was in a bipartisan catbird’s seat. 97

Average American were losing ground overall from the late seventies through the mid –nineties. 97

The increasing openness to Democrats extended to Wall Street. Part of it reflected the financial sector’s own increasing emphasis on computerization and organizations. Grinds and globalists were replacing Groton and Skull and Bones men. But soon after taking office, Clinton had shifted toward the Wall Street and bond market view under the tutelage of chief economic adviser Robert Rubin, the former Goldman Sachs co-chairman. This in turn led to closer collaboration with Federal Reserve chairman Greenspan who was reappointed in 1996. 99-100

Besides the influence of Greenspan and Rubin, Democratic policy was powerfully pulled by the Republican capture of Congress in the anti-Clinton revolt of the 1994 elections. Economic compromise between the White House and Congress itself became conservative. Nor did liberals miss the irony as Clinton posed for the cameras signing measures like welfare reform, spending cuts, and the capital gains tax-rate reduction of 1997. One stalwart regretted that “The President embraced major objectives of big business and finance has his own—promoting globalization, further deregulation, the managerial values of efficiency and continued shredding of the old social contract.” 100

Clinton’s growing emphasis on reining in federal spending and borrowing to free up more private credit at lower rates was popular on Wall Street. Investors were also reassured by Fed chairman Greenspan and his record of containing the brief 1987 stock market crash and achieving a soft landing for the U.S. economy in 1994-95. The prestige and puissance of the Fed in the 90s, much like the fledging presence of the Federal Reserve System in the 20s, provided both psychological and monetary comforts. In this new era of central banking either speculation could be kept in bounds or the institutions and markets turning shaky would be bailed out. Whatever the chairman’s periodic inveighing against irrational exuberance, the public came to believe that he kept liquidity on tap like the average neighborhood barkeep—a tap that was opened wide in 1997 with his 3 rate cuts to dissolve the Asian currency crises, and once more in late 1999 when the money poured into the system to ease the never-materializing Y2k threat. Instead, it expanded the Nasdaq bubble to its final winter 1999-2000 diameter. 102

In the US, stock market gains had propelled the growth of the GDP during the 80s but Clinton gave the bond and stock markets a new lever of attention and public commitment. 103

Under his aegis, bond markets became leading indicators in 1993, monitored for proof that deficit reduction would bring down interest rates and stimulate business investment. New York Times Thomas Friedman developed a genre of mid-1990s articles on Clinton “stock market diplomacy”—politics calculated to reassure and support the financial markets. Soon the rising stock market itself became a touchstone by 1996 made into a Clinton re-election poster. 103

Between 1993 and 1999, there was $8T in new stock market wealth created. 103

Calling it “stock market Keynesianism” skirted the parallel to the pre-Keynesian twenties. The centrality of stocks was on more and more economists’ lips. The fed would have to begin weighing assets prices in setting interest rates, some maintained, so as to prevent bubbles from taking shape. Others countered that the Fed was already quietly doing so. One political pundit wondered whether Washington’s growing revenue dependence on top-bracket wealth concentration and high stock prices-the orchards producing the economic fruits of high-end consumer spending and soaring capital gains tax receipts—might not fundamentally warp official policies toward supporting stock and wealth and maximizing market capitalizations for big corporations.

The U.S. domestic and international policies of the 80s and 90s, slowly expanding their each and sophistication, nurtured U.S. banks, securities markets and investors, prompted U.S. corporations and exports, and bailed out most of them when necessary—a combination that can be described, with no great reach, as neo-or financial mercantilism on behalf of U.S. corporations and financial assets. This made it a far cry from the free enterprise of the storied variety. In 1996, an article in Foreign Policy entitled, “Securities: The New Wealth machine,” explained how “securitization—the issuance of high-quality bonds and stocks—has become the most powerful engine of wealth creation in today’s world economy.” Whereas societies used to accumulate wealth only slowly, they can now do so quickly and directly, and “the new approach requires that a state find ways to increase the market value of its productive assets.” 104

The ultimate expression of wealth or financial mercantilism involved the elimination under Reagan, Bush and then Clinton of so-called “moral hazard” in U.S. and global finance through bailouts and rescues by one agency after another. The deliverance list kept growing: Under Reagan, major banks, a threatened Latin Am. Default bond payments 1983, stock market flooded with liquidity after 10/19/87, S&L financial oxygen tent of 1989-993 stretched over the whole Bush administration. Under Clinton, resurrections were almost biblical: the collapsing Mexican peso, with its threat to U.S. bondholders (93) , shaky Asian currencies and banks (97), the arrangement by Greenspan for Wall Street to bailout LTCM (98) and the Federal Reserve’s late 1999 Y2K miscalculation. 105-106

The net worth of the median U.S. household in constant dollars declined from $51,640 to $49,900 between 1989 and 1995 because so many Americans had debts growing faster than their assets. Most had little, if any stock. 107

It is worthwhile to explore the high international plateau of the 21st c regulation represented in finance by central banks but in global trade and loan matters by the WTO, IMF, and World Bank. Once again a new layer of government became a new framework of opportunity. The 1990s and 80s brought another such intergovernmental opening. We have seen how the unelected Federal Reserve emerged as a governmental powerhouse, playing international as well as Domestic U.S. management roles. Central banks also enlarged their independent authority elsewhere, especially in early-nineties Europe, where the Maastricht Treaty required the national central banks of countries participating in the European Union to meet a prescribed standard of political independence. By 2000, Europe had its own ECB and together with the Bank of Japan, and the U.S. Fed Reserve, the 3 dominated the global financial system, controlling upwards of 80% of growth in the developed world. “Governments have largely ceded to these three institutions the responsibility of controlling world inflation and to do this they must necessarily influence the near-term path for GDP and unemployment,” noted Goldman Sachs economist Gavyn Davies. “Rarely, if every, can so much power have been wielded by such a small number of institutions sitting outside the direct democratic process.” p 230

In collaboration with US multinational banks and corporations, the US government, on a bipartisan basis, was indeed closely involved in writing the rules of the new global investor economy, especially through two new frameworks brought into existence in the 9190s: the North American Free Trade Agreement 1993 – and the World Trade Organization 1995.

Rise of Robert Rubin
The late 80s and the beginning of the 90s had seen the “rise of the traders” to head major Wall Street investment firms. Now Washington economics took a similar direction with the appointment of Robert Rubin, the former currency arbitrageur and cochairman of Goldman Sachs, as chairman of Clinton’s National Economic Council in 1993 and as secretary of the treasury in 1996. From his experience running Wall Street’s most sophisticated money-making machine, Rubin more than any other individual, built a partial government equivalent in the Clinton administration: the US economy., like a major Wall Street International investment firm would be run to make money and attract it from around the world. Leverage and speculation were both givens. The global reach of the Fed under Alan Greenspan was complementary.

Large policy bets were placed on federal deficit reduction to cheer the bond market, bring down interest rates, and stimulate economic expansion. This would bolster tax receipts, corporate profits, the D and the Nasdaq. Rising stock prices would in turn buoy consumer spending and expand income and capital gains tax payments, shrinking the deficit further. Business and financial support would strengthen the administration’s hand. 353-4

Whatever, bank, investment firm, loan or currency problems might become serious would be rescued or bailed out, at least wherever possible. Financiers also knew what was becoming unacceptable: any recession or major wealth disruption. The Fed and the treasury, in a sense, become joint, proactive managers of the multi-trillion-dollar “USA Fund.” Market economics might be the claim, but globalized U.S. government economic management was the game. 354

Debt too, left conflicting tracts. Americans were comforted by word from Washington that its perilous excesses of the 80s and 90s—expressed in the federal budget deficit and the national debt—were being rolled back. Reduction of the federal budge deficit actually buoyed fin de siecle speculation by freeing private credit and by giving the money-supply controllers at the Federal Reserve the wherewithal to cut interest rates, as they did 3 times in 1998 to ease the international currency and debt crises. It also let them flood the U.S. financial system with liquidity, as they did in November and December 1999 to meet the supposed millennial Y2K threat. 360