Two centuries of monetary and fiscal policy and banking

Inflated: How Money and Debt Built the American Dream. By Christopher Whalen. Wiley; 393 pages; $34.95 and £23.99. Buy from Amazon.com, Amazon.co.uk

AS VIEWED by Christopher Whalen, America’s financial history has been one losing battle after another against the “twin demons” of debt and inflation. To illustrate this he takes the reader on a journey through more than two centuries of monetary and fiscal policy and banking. Some of his best insights lie at the nexus between these worlds.

Along the way he has much to say about the evolution of public attitudes towards money. The gold rush created an alternative to the Puritan notion of hard work and saving that had characterised the nation’s early days. Another watershed was the legal-tender act under Abraham Lincoln, which paved the way for an acceptance of deficit spending. Monetary mores grew looser still in the 1920s with the explosion of consumer finance (tied to the rise of the motor car) and speculative, debt-fuelled investment.

A number of themes recur. Irrational exuberance in financial markets, leading to one credit boom and bust after another. The instability (and political power) of banks and the fiscal recklessness of states. The reluctance of both state and federal governments to raise enough tax to cover public demand for services and entitlements. The temptation to resort to inflation as a solution to public deficits and a willingness to let debt grow faster than the economy (Alexander Hamilton, the first treasury secretary, advocated public debt as “a mechanism for national unity”).

The author has an eye for links between past and present. Bankruptcy was used to advance the robber-barons’ private agendas in the late 19th century, just as it was used to further political goals recently with General Motors and Chrysler. The Federal Reserve’s huge monetary expansion since 2008 echoed its money-printing “recklessness” in the 1930s.

For much of its almost century-long life, writes Mr Whalen, the Fed has served the White House and the big banks before serving the people—for instance, by repeatedly providing liquidity to stabilise financial markets under the guise of protecting the real economy. Under Alan Greenspan, the central bank encouraged and facilitated greater use of debt throughout the economy. Today’s anti-Fed movement is no flash in the pan: antipathy towards central banking stretches back to the civil-war era.

But the seeds of today’s troubles were sown before Mr Greenspan’s time. By the late 1970s housing had begun to replace defence as America’s engine of growth. Before long, the myth that you could never have enough of the stuff had taken hold. Over time, the push to make housing more affordable, backed by daft government policies, became a giant enterprise involving 1,500 public and private organisations. Mr Whalen is not alone in wondering how the American economy will cope without a buoyant property market.

He worries that Americans, long used to instant financial gratification, have borrowed so heavily from the future that the necessary belt-tightening will prove to be beyond them. America and Europe used to preach to fiscally profligate developing countries about the need for structural adjustment. Now the tables have turned.

The solution lies in “a 21st century Marshall Plan in reverse”: an overhaul of the global monetary system that includes a managed devaluation of the dollar to bring down America’s external deficits and stimulate its exports. Mr Whalen looks forward to the day when the greenback is no longer the world’s sole reserve currency, a status that gives America “a free ride” on fiscal discipline. He ends on a positive note, expressing confidence that Americans “have the honesty to talk about limiting our national wants and needs to our national income”. But the overall message is none too encouraging.