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The issue of inflation is a constant problem with democracies. Debtors are always more numerous than creditors and not uncommonly support government policies allowing them to reay their debts in a currency that is less valuable than what they borrowed. While often popular in the short term, inflantionary policies have many negative economic and fiscal consequences. Thus the Constutution had provisions to impede the adoption of infationary fiscal policues. Alexander Hamilton was the first Secretary of the Treasury under the new Constitution. and his policy of assuming the state debts incured during the Revolution was expensive, but a master stroke in creating a stound fiscal basis for the new Republic. It not only established the good faith and credit of the Federal Government, but it built support for the new Federal Government at a critical point in American history. The Federal Government through the 19th century generally ran a budget surplus, except in time of war. One of President Jackson's proudest bosts was that he payed off the national debt. President Jackson's economic policies, especially the destruction of the Second Bank of the United States, resulted in a serious depression which drove many states into bankruptsy. This time Congress failed to bail them out. As a result, many states approved changes to their constitutions to prevent future bankruptsy. A growing economy during peace time was able to pay off the debts incurred during the 19th century wars, even the enormous debt resulting from the Civil War. Both a strong philosophical belief in a balanced budget and the gold standard restrained fiscal imprudence. The Great Depression changed that (1930s). The Depression not only forced Britain, America, and other countries off the Gold Standard, but it shifted the populations view of the role of goverment. Beginning with the New Deal, Americans began to see the Government as responsible for their welfare. President Truman was able to pay for most of the Korean War during the War. President Eiusenbhower ran budget surpluses, exceot during the serious 1957-58 recession. Beginning with the Kennedy-Johnson years (1961-69), Federal defecits have been the rule. The Clinton years were an exception. This was followed by substatial defecits during the Bush Years (2001-09) and and the enormous defecits of the Obama presidency (2009- ).
British land and fiscal policies were very unpopular, stoking opposition in the colonies.
One of the principal problems the Patriots faced in the the Revolutiona ry War was financing it. Before the actual outbreak of hostilities, the Patriots seized control of the colonial legislatures. These legislatuyres had the power to tax. The Continental Congress did not have the power to tax. It had to askl the colonial legisltures for money and supplies. The response was inadequate. The result was that the Continental Army was often poorly provisioned with terrible consequenes such as in Valley Forge, especialy during the winter of 1777-78. Congress turned to the expedient of printing money which with nothing to back it quickly lost value. And the British began countefitting Continental currency to further stabilize patriot finaces. Congress was also able to borrow money once the French c,e into the War (1778). At the end of the War, only General Washington's prestige prevented a military coup by officers tired of being ill-treated by Congress.
After the War, economically pressed debtors pressed state governments assist them. Workers and small landholders living in the Western and Southern states who had supported the revolution were disturbed when the new government adopted many of the same land and fiscal policies that created dussent ubder British rule. Small landholders in New England, after a series of poor harvests were threatened with bankruptcy and the loss of theur farms. The New England farmers first petitioned their state governments, hoping to delay foreclosures. They wanted their state governments to issue paper money that would help ease their mouning debt payments. And many of the states proceeded to adopt currency policies to assist debtors. The debts had ben contracted in gold and silver and many states passed laws allowing the debts to be paid off paper currency of much less value. [Moreno] Chief Justice John Marshall would later describe the problem in Dartmouth College vs. Woodward (1819). He wrote that the state paper money laws has weakened the confidence of man in man and embarassed all transactions between individuals by dispensing with a faithful performance of engagements." Even with infltionary state paoer money, Revolutionary War veterans even resorted to violent measures. The most famous of these pre-Constitution outbursts were Shay's Rebellion (1786-87). Small landholders rebelled against what they saw as elitist fiscal policies and unfair taxes.
The moral hazzard and negative consequences created by the inflationary paper money policies of the states was a major reason that supprot grew for the reform of the Articles of Confederation and a national government that would restrict state inflaiionary policies. The new Federal Constitution specifically forbade the states to 'make any thing but gold and silver coin legal tenderin payment of debts.' The issue was addressed in the Federalist Papers that promoted ratification of the new Constitution. None othr than the Father of the Constitution, James Madison himself, wrote called the inflationary state paper money laws as the kind of 'improper or wicked' project that the new Constitution would prevent. The Constitution was an anti-inflationary compact. It wa a notable and all too rare example of democratic self restraint, And as a result, for more than a century, except for the Civil War, inflation was not a problem impairing American economic growth. [Moreno]
Alexander Hamilton was the first Secretary of the Treasury and his policy of assuming the state debts incured during the Revolution was a master stroke in creating a stound fiscal basis for the new Republic. Part of the 'political price' for ratification of te Constitution was a Federal bailout of the badly indebted states. There was some justification for this. Most of the state debts resulted from financing the Revolutionary War against Britain, essentially part of a common national effort--what Hamilton called our 'Glorious Cause'. Hamilton by assuming the states debts, bailing them out in the modern vernacular, converted the state creditors into supporters of a strong Federal Government wih the power to tax so it could raise the necessary revenue to service the Continentl Congress and state debts assumed. Both Washington and Hamilton wanted the debts paid. The fact that some of the debts were owed to the men who fought the Revolution was a factor. Both Hamilton and Washington could also see the political and economic benefits. This was impossible under the Articles of Confederation under which Congress had no power to tax. It rellied on voluntary contributions from the states for its revenues. The Continental Congress contracted about two-thirds of the debt, the states about one-third of the debt. The total debt was substantial, about 40 percent of America's gross national product (GNP). [Sargent] That was however, less than half of the current Federal debt which exceeded 100 percent of GNP (2012). The result was a fiscal crisis in America after the Revolutionary War ended (1783). The debt of both Congress and the badly endebted states traded at very deep discounts to their face value because until the Constitution was ratified, Congress had no way of paying the debts and states had revenues that were inadequate to cover the debts. As the prospects for a strong Federal Government improved, speculators began buying up the debt. One of Hamilton's first action as Treasury Secretary was to issue a report on the debt problem--'Report on Public Credit' (1790). He spelled out the proposed Grand Bargain and why he supported it. The essential bargain spelled out in the Constitution was to transfer the authority to levy tariffs from the states to the Federal Government. In return, the Federal Government assumed the state debts. At the time there was no income tax. The primary revnue source was tariffs. The Constitution was ratified (1789). When the First Congress met they agreed to assume the state debts (August 1790). Congress then approved a new national tariff and the revnue flowing into the Fedderal Treasury as more than sufficent to service the debts assumed. The Federal and state debts quickly went from deep discounts to par. Hamilton reasoned correctly that honoring its debt would firmly establish the new Amerian Republic as a resonsible creditor and thus allow it to borrow money on favorable terms in the future. This gave the United States the fiscal flexibility to finance wars and other emergencies that could not be covered by current revnue. This of course could have been largely accomplished by simply honoring the debt of the Continental Congress. The further step of honoring the state debts helped ensure that there would be support for a strong Federal Government supported by the all-important power to tax.
The Constitution put an end to the states issuing inflationary paper money. It did not end popular demand for inflationary fiscal policies. And this resulted in a major revolt in the West against Federal fiscal policies -- the Whiskey Rebellion (1794). President Washington himself personally led the U.S. Army which put diwn the Rebellion.
Treasury Secretary Galation hoped to finance the War using the First Bank of the United States. The Bank was a national bank, sort of a precursor to the Federal Resetve chartered for a term of 20 years, by the United States Congress (1791). Unfortunatly the Congress did not renew the Bank charter (1811). Galatian had to plead with wealthy Americans like fur tycoon John Philip Astor to loan the Government money. The War caused major financial defaults. With the Bank of the United States gone, private banks charted by the states printed massive quantities of paper money. (The Fedral Government at the time did not print a paper currency. The banks used thoir notes to buy the Federal government bonds used to finance the war. Most of the banks which didn't take part in the note printing frenzy were those located in New England, where the War was not popular. When the participating banks began to fail the U.S. Federal government as ell as state governments (outside New England) decided to aid the banks. "As the banks all faced failure, the governments, in August 1814, permitted all of them to suspend specie payments -- that is, to stop all redemption of notes and deposits in gold or silver -- and yet to continue in operation. In short, in one of the most flagrant violations of property rights in American history, the banks were permitted to waive their contractual obligations to pay in specie while they themselves could expand their loans and operations and force their own debtors to repay their loans as usual." [Rothbard] Ironically, the future president had written "Of all the enemies to public liberty, war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes; and armies, and debts and taxes are the known instruments for bringing the many under the domination of the few ... No nation could preserve its freedom in the midst of continual warfare." [Madison]
The Federal Government through the 19th century generally ran a budget surplus, except in time of war. One of President Jackson's proudest boasts was that he payed off the nationsal debt. Internal improvements became a major issue in the early Republic following the War of 1812. These involved major investments. Some involved private investment. Others used state funds or a combinaton of state and private funds. Given the size of some of the projects, there were attempts to obtain Federal funding. Commonly the Western states were particularly in favor of funding for internal improvements. The developing Whig Party suppoted the expenditures for roads, canals, bridges, and railroads. The Democrats were of a mixed mind, but many including President Jackson opposed them despite being from what at the time was western state. Jackson was particularly concerned with corruption. Some states spent very heavily for internal improvments. The issue of bailing out the states came up again 50 years after Hamilton's Grand Bargain (1840s). Several states wwe essentially bankrupted during the Depression set in motion by President Jackson (1829-37) and his war against the Second Bank of the United Sates. The Depression did not set in until after President Jackson had left office and his chosen successor, Vice-President Martin Van Buren had replaced him. With the precident of the Grand Brgain, many state officials were hopeful tht the Federal Government would bail them out again. Their representatives in Congress pushed to do just this. This time, however, their had been no Glorious Cause as a common effort. ome states had pursued responsible fiscal policies and othrs had not. Those that had been irresponsible found their finances challenged by the Depression. The issue was hotly debated. The debate was heated, but raised the issues key to a Federal system. (The debate may well be repeated again given the massive debts currently amassed by states like California, New York, New Jersey, Illinois, and others.) Congress in the 1840s refused to follow the 1789-90 precedent and bail out the states. Several states as a result were unable to meet their obligations. One historian writes, "... it was by refusing to bailout the states a second time in the 1840s that the United States preserved its federal system, with substantial fiscal independence for state governments." If the Federal Govrnment had intervned to bail out the states they almost certainly would have demanded and obtaind greater control over state finances, undermining the Federal system as structured in the Constitution. The short term fiscal impact of this experience was that the credit reputation of the Federal Government declined along with that of the states. Over time, however, public finances, both Federal and state benefitted. One enduring result of this experience was that the states became much more fisically responsble. Several states even amended their constitutions to require balanced budgets.
The United States at mid-century was growing rapidly, but was hampered by a shortage of money. The impact of the money supply on an economy is well studied today, but largely unkniown at the time. There was no national paper money. Paper bills were issue by state chartered banks and unrelaible. This was the situation after President Jackson killed the Second Bank of the United States (1833). An economy based on private banks issuing paper curreny is and was a recipie for fraud. Greenbacks would not appear until the Civil War (1861-65). The Federal Goverment minted gold, silver and copper coins. The Constitutuion made only gold and silver legal tender for settement of debt. The shortage of gold in particular meant that the supply was inadequate for the growing economy. And just as the United States was acquired California in the Mexican War than a saw mill operator, James Wilson Marshall, saw gleaming specs in the tailrace at Sutter's Mill near what is now Sacremento (1848). His discovery set off a worldwide rush to a basically unpopulated California. (The Mexican and Native American populatuin was very small.) Marshall had set off the first major gold rush of modern times -- the California Gold Rush (1848-55). Marshall was ruined when hordes of crazed prospecting Fort-Niners forced him off his land. Getting to California was a major undertaking. Eastern United Stateswas separated frim California by the vast Great Plains, near desert areas, and the toweinhg Rocky Mountains. Thousands of individuals, and not just Americans, undertook the effort because of the alure of gold. About half came overland. There was no rail connection yet -- that would take another two decades. Crossing the country overland took months and could not even be attempted except in organized, well armed groups of slow-moving heavy covered wagons carrying supplies. This occurred in the age of sail, althhough steam ships were beginning to appear. There were two sail routes from the American East Coast. The shortest route was across the malaria-infested Istmus of Panana. The longer was around the Horn (Cape Horn/Magellan Straits). 'Round the Horn' is is today an idiomatic Anmerican expression. Finding gold was not the only impact. Only a few of the Forty-Niners got rich finding gold. But many stayed in Califirnia. Agriculture, ranching, forestry, as well as mining expanded to supply the growing population. San Francisco which was the port near the gold fields grew almost instantly grew from a non-discript settlement of about 200 people to a roaring boomtown of about 36,000. Roads, railoroads, churches, stores, workshops, and schools appeared as towns sprung up throughout California. Residents wrote a state constitution (1849). It was adopted by a referendum. A state government was elected and enpowered. California was admitted to the Union (1850).
A growing economy during peace time was able to pay off the debts incurred during the 19th century wars, even the enormous debt resulting from the Civil War. The Civil War proved to be one of the new American Republic's greatest fiscal tests. The Federal Government under the stewardship of Treasurer Salmon P. Chase, was careful to maintain a sound fiscal footing and pursued prudent fiscal and tax policies. The Confederacy with far fewer options and resources pursued wrecklass fiscal policies. President Lincoln commented as the War began to wind down that the Civil War "has produced a national debt and taxation unprecedented, at least in this country." (1864) The war effort increased the public debt 15 times (1861-65). This was balanced by tax increases. A Federal income tax was introduced. The rates were low, but it ws a major innivation in Federal policy which had primarily been financing itself through import duties. The rate was percent on income above $800 and 5 percent on those living outside the country (1861). Congress revived the rates the following years, 3 percent tax on income beyond $600 and 5 percent on earnings over $10,000. The income tax covered about 25 percent of the cost of the War. [Hormats] All kinds of other taxes were introduced such as excise taxes on photographs. Chase, oversaw the creation of both the first federal currency--the greenback (1862) and a national banking system (1863). A standardized currency, the greenback, enabled the United States to issue some $500 million in war bonds. The Cionstitution prohibited the states from issuing paper money, but not the Congress. The banks provided a market for these bonds. The Confederacy in sharp contrast pursued a ruinous fiscal policy. The Confederate Treasurer was not an easy assignment. There were two men wgfilled the position: Christopher G. Memminger (1861-64) and George A. Trenholm (1864-65). Both men faced the same problem of other Confederate cabinet officers, but in especially string terms because money was involved. The Southern states suceeded from the Federal Union under the banner of states rights. They feared the Federal Government would force major changes, of course on slavery. They thus were not anxious to accept controls by the new Confederate central Goverment. One author writes, "The single-minded condemnation of the Yankeess probably kept President Davis and the Confederate Congressfrom becoming targets of widespread dicontent among white Virginians .... The frequently acerbic Kean thought the Confederate government deserved at least some of the blame, however. In January 1865, he chatised [the Confederate] Congress for lacking the courage to face the full extent of the Confederacy's fiscal crisis. 'As the real condition of the treasury comes to be known, he wrote, 'the hopeless bankruptcy in which it is plunged , the arrears of $320 million, and the proposition to tax 16% ad valorem as a means of meeting it--the Congress can get more and more weak in the knees.'" [Robertson]
The Greenback or National Greenback Party was a short lived party founded in 1876 as American was emerging from the depression resulting from the Panic of 1873. Farmers focused on the currency as a cause of the Pacnic of 1873. Thus news fiscal policies were seen by some as the sollution to the economic crisis. The Greenback Party advocated an expansion of the money supply by issuing paper money. Esssentially this was a policy of inflation as the money supply at the time was primarily a function of the gold supply. 'Greenbacks' referred to the paper currency issued by the Federal Government in 1862 to help finance the Civil War. (The bills like moder American currency had green backs.) The Party maintained that a flexible supply of paper money would benefit working people. The also charged that limiting the issuance of paper money to that which could be backed by specie (gold or silver bullion) served the interests of the wealthy. This was a position that had been argued by Edward Kellogg well before the Civil War (1841). Alexander Campbell help popularize Kellogg's views on paper money during the 1860s. It was, however, not until the Panic of 1873 that Kellogg's and Cambell's ideas received substantial popular support. There was considerable opposition to the idea, especially from the financial class as creditors stood to lose vast sums if their outstanding loans were repaid in a deflated currency. Congress passed the Specie Resumption Act (1875). This put the United States on a hard currency system with paper money backed by specie. The Greeback Party was formed to repeal The Specie Resumption Act and to increase the printing of paper money (1876). The Greenback Party polled a mere 80,000 votes in its first election (1876). Labor troubles in the wake of the Panic of 1873 year increased support for the Party. Labor unrest was especially serious in 1877 and many workers began to join farmers in viewing economic problems on the manipulation of financeers and industrialists. The result was considerable success for the Greeback Party in the next Congressional election (1878). The Party this time polled nearly 1 million votes and elected 14 Greenback Congressnen. Support for the Party, however, wained after the 1878 election. The economy had recivered from the depression following the Pacnic of 1873. With the return of economic prosperity, there was less interest in economic reform. The Greenback Party had been founded largely on one issue and that issue had become increasingly moot with prosperity and the realization that the Specie Resumption Act would not be repealed. The Party did poorly in the election of 1884 and that was to prove to be its last national campaign. The Greenback Party thus failed, it was, however, to have a major inpact on the Populist Party and the Democratic Party.
Wuth the exception of the Civil War, the Federal Government exhibited considerable restraint during the 19th century. The Federal Government had overcome Civil War inflation and the greenback was fully reddemable in gold (by 1879). The massive expasion of American industry after the Civil War heped the Federal Governmebnt pay off the war debt. Massive increses in productivity in Amrica's free market provided the conditions for this expansion. Some investors wre, however, burned by the Civil War greenback and inflation. As a result, gold clauses began to appear in contracts. They required repayment in gold. As the greenback had gained parity with gold, this did not prove a problen for several decades. [Moreno]
Fiscal policy became arare important issue in the 1896 electin campaign. The massive industrial expansion of the United Sttes resulted in a moderae deflation. Productivity increases were an important factor. The decline in prices meant that the real purchasung power of wages ws increasing. At the same time there was a push for inflationary policies. This was especially poplar with southern and western farmers and others with mortgages advocted an expansion of the money supply. The 1896 campign became the battle of standards. Like modern day Socialist, Democratic candidatecWillian Jennings Bryan framed the issue in emotionl, moral terms--'you shall not crucufy mankind on a cross of gold'. The Republicans supported the gold tandard and cored a decisive victory over Bryan and the silver-inflation Democrats.
Ironically at about the same time that Democratic presidetial candidate William Jennings Bryan gave his 'Cross of Gold' speech (1896), dicoveries of Gold around the world (United States--Alaska, South Africa, and Australia), significantly expanded the momey supply. Gold discoveries in ecomies based on the gold srtandard was the only way of expanding the money supply. [Moreno]
Both a strong philosophical belief in a balanced budget and the gold standard restrained fiscal imprudence. J.P. Morgan served as a kind of un-official national banker at the turn of the 20th centuty.. he helped mange fiscal crises in 1895 and 1907. Ironically he died in the same year the President Wilson and Congress created the Federal Reserve.
One of the Progressuive reforms in the United States was the establishment of the Fedral Reserve dring the Wilson Administratyiion (1913). The result was the delegation of monetary authority to an appointed bureaucracy. Not flly reciognized because the Demiocratic Party wants to blamebusinessmen firv the F=Grrat Depression,n is the Fed's Role in casing the Great Depressuion. And What ever the achievements of the Federal Reserve, controlling inflation is not one of them. The results were predictable. Infaltion before the Fedral Reserce has been estimated at about 175 percet (1800-1913). Since the establishment of the Federal Reserve, inflation has totaled about 450 percent (1913-2012). And the Fed's assessment that the 2022 inflation was transitory as well as the policuies of the Niden administratiion caused a huge birstv iof inflation. Many observers believe that current Fed policies and the policies iof the Obama Administration are leading toward a massive future infation.that will subtantially expand the infation record.
The United States established the Federal Reserve just before the outbreak of World War I (August 1914). The United States managed to stay out of the war for nearly 3 years, but after Germany resumed unrestricted submarine warfare, declared war even though it had virtually no army (April 1917). The Federal Government sold bonds to finance the War. The Fed acted to keep borrowing vosts low to finance the war effort. It increased the money suppy by 75 percent. The War and Fed actions caused substantial inflation. Consumer prices doubled (1914-20).
Economists still debate the causes of the Great Depression. Some economists argue persuaively that the Fed mismanaged the post-World War I reconversion. The Fed pursued a policy of low interest rates and high prices. They pursued this policy more aggressively and longer than they shoud have. When they did begin to shift policy they helped turn a recession into the Depression by raising rates after the Stock Market Crash (1929). [Friedman and Schwartz] Despite their misteps, Congress awarded the Fed with greater power, most notably with the Banking Act of 1935. This has been called an example of the adage, 'in politics, nothing suceeds like failure." [Moreno] The Great Depression had huge fiscal cosequences (1930s). The Depression forced Britain, America, and other countries off the Gold Standard. The first two steps President Roosevelt took after assuming office was to 1) close the banks and 2) begin the process of taking Anerica off the gold standard. The New Deal also shifted the populations view of the role of goverment. Beginning with Progressive Movement, Americans began to see the Government as responsible for their welfare.
There is a popular myth that President Roosevelt ended the Depression and solved the unemployment proble, We hear Congressmen and other talkibng heads commonly expressing this opinion on television. There is no doubt he want to and enacted program after program backed by massive defecit spending to do so. In fact he failed. The Roosevelt Administration which took office in 1933 did made substantial economic progress, although the statictics can be and often are manipulated for partisan purposes. Considerable economic growth was achieved. GDP growth averaged an impressive 9 percent. This was, however, from the severly dressed levels that existed when the President assumed office. The New Deal also reduced unemployment from from 25 to 14 percent, although a substantial part of that employment increase was Government jobs programs like the Worls Progress Administration (WPA). President Roosevely as the economy began to improve decided that he had to address the problem of rising defecits. He thus decided to balance the budget and cut deficit spending. At the same time, the Federal Reserve raised reserve ratio requirements for member banks which contraction the monetary base. The economy soon slumped back into recession. The most often sited reason for the recession which became known as the Roosevelt recession was the Presuident's attempt to molify conservative critics by cutting defecit spending. Commonly partisans site this as the reason for the recesion. In fact there are probably three major causes of the recession: 1) Administration cutting defecit spending, 2) the Federal Reserve contracting the monetary base, and 3) sharp Administration tax increases. The causes of the Roosevelt recession hae been studied at some length by economists. There is general agreement that these were the three major factors. There is no agreement as to the relative importance of these three factors. Milton Freedman has focused on the Federal Reserve�s tight monetary policy. [Freedman and Swartz, pp. 493-545.] The issue is complicated and can not be easily answered. What is important to bear in mind in addressing the literature is that some economists and even more politicans will draw conclusions based on ideology. Often Kensyean economists will fail to mention the tax increases. And free market ecomomists will down play the imporance of the spending cuts.
A major and often not well reported aspect of World War II was economics The Germans finabced their war economy by ruthlessly exploiting the economies of captive nations, including the Hunger Plan in the East. The United States financed its war economy by borrowing money and raiding taxes. World War II was a massive undertaking. The United States not only had to financed its own war effort, but also that of its Alles, especially Britain and the Soviet Union. The sumes were enormous. Federal Reserve policy in World War II was to keep interest rates low to assist the Federal Government to finance the War. Again large quantities of bonds were sold which not only provided fuinds, but took money out of the system to tampen down inflation.
President Truman was able to pay for most of the Korean War (1950-53) during the War. The Federal Reserve at firs\t assisted by keeping interest rates low, but then reversed course as the Tresury pressed for lower interest rates. It stood firm against demnands for artifically low intrest rates (1951). The Fed neogitaited a kind of accord with the administration, reasserting its independence. President Eisenhower ran budget surpluses, except during serious 1957-58 recession.
Beginning with the Kennedy-Johnson years (1961-69), Federal defecits have been the rule. The Federal Government substantially increased entitlement spending as part of the Great Society. Then expenditures escalted further with the escaltion of the Vietnam War (1975-80). The Fed provided accomodating policy for defecit spending. The resulting infltion forced the complete abandonmnt of the gold standard and the abandoment of the post-World War II Bretton Woods system of fixed exchange rates. The result was Staflation and the economic malaise of the Carter years (1977-81). Federal Reserve Chairman Paul Vokker managed to tame inflation early-80s) [Moreno] His persription was massive increases in interest rates, some of the highest in American history. That had severe econimic consequences. Even so prices have doubled since Vokker's inflation fighting policies (1980s-2010s). The Clinton years were an exception to years of defecit spending . This was primarily beause budget-cutting Republicans won control of the Congress for the first time in decades.
This was followed by substatial defecits during the Bush Years (2001-09) and and the enormous defecits of the Obama presidency (2009- ). Both President Bush and President Obama resorted to defecit spending. President Obama's defit spending was not only largr, but included much more entitlement spending which are recurrent. By doubling down on defecits as an effort to jump start the economy. PresidentObama and the Federal Reserve are making the greatest policy gamble in American fiscal history. Defecit spending at this time seems politically acceptable to the American people. There are, however, not alot of examples in world economic history of countries spending their way to prosperity through massive defecit spending. One observer writes, "Now the inflationary potential of defecit financing has grown enormously over the first Obma term. The lesson of American history is that it is difficultenough for the Governmntto resist popular demands for inflation to relieve private debts. When the Government itself is the country's chief debtor, resistance is all but impossible." [Moreno] President Obama has proven very politically adept at tarnishing the defecit hawk Republicans with unfairness and 'throwing grandma off the cliff'. Whether he and the Federl Reserve will be able to manage the inevitable fiscal consequences is a very different question. One subject not given adequate attention in the efforts to resove the 2008-09 financial crisis was state debts. Build American bonds helped keep several states afloat as did the Obama Administrations's stimulus program. These just helped keep the troubled states from bankruptsy, they did not address the serious and mounting state debts. Some of the most indebted states include: California, Illinois, New Jersey, and New York. It is not lost on economists, but rarely mentioned by the main stream media, that the most indebted states tend to be the states with the highest tax rates. Their oproblem is two fold. First is very high current spending levels and budget defecits. Second is the massive long term commitments, especially mounting retirement benefits promised to state employees. These benbefits have increased in recent years in reponse to the political ppwer of piblic employee unions. Inevitably these states unless like New Jersey they begin to address their massive debts will turn to the Federal Government to bail them out.
Friedman, Miltion and Anna Schwartz. Monetary History of the United States.
Madison, James (1795).
Moreno, Paul. "Gold, greenbacks and inflation: AHistory and a warning," Wall Street Journal (January 17, 2012), p. A17.
Robertson, James. The Untold Civil War: Exploring the Human Side of War (2012).
Rothbard, Murray. A History of Money and Banking in the United States.
Sargent, Thomas J. "An American history lesson for Europe," The Wall Street Journal (February 3, 2012), p. A 17.
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