White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You

1. Quoted in James Surowiecki, “A Cut Too Far,” The New Yorker, April 21, 2003.

2. James Madison, “War Message to Congress,” June 1, 1812.

3. Ibid. Ironically, that same month the British repealed the Orders in Council that had been at the heart of the dispute, but word of the repeal did not reach the United States until after war had been declared.

4. Davis Rich Dewey, Financial History of the United States, 2nd ed. (Longmans, Green, 1903), p. 130.

5. “Naval expansion and the taxes it required during Federalist John Adams’s presidency had united Republicans who had then and thereafter always resisted such initiatives as a pillar of Jeffersonian small government philosophy.” David S. Heidler and Jeanne T. Heidler, Henry Clay: The Essential American (Random House, 2010), pp. 91–92.

6. Donald R. Hickey, The War of 1812: A Forgotten Conflict (University of Illinois Press, 1995), p. 50; Robert D. Hormats, The Price of Liberty: Paying for America’s Wars from the Revolution to the War on Terror (Times Books, 2007), pp. 38–39.

7. Hickey, note 6, above, pp. 49–50; Dewey, note 4, above, p. 130. “Although a deficit was disclosed in the budget and it was generally agreed that war would take place, the proposition [to increase internal revenue taxes] was defeated.” Ibid. In March, Congress voted to borrow $11 million, but the Treasury was only able to bring in $6.5 million. Congress then authorized $5 million in short-term Treasury notes—“a kind of paper money that government creditors would accept in lieu of other forms of payment.” Hickey, note 6, above, pp. 49–50. The Democratic-Republican Congress did increase some taxes on overseas trade (which primarily affected the Northeast, the stronghold of the minority Federalists), but refused to increase taxes on internal commerce.

8. Hormats, note 6, above, pp. 43–44; John Steele Gordon, Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt, revised ed. (Walker, 2010), pp. 46–48.

9. Dewey, note 4, above, p. 139.

10. Hickey, note 6, above, pp. 90–92.

11. Ibid., pp. 195–96.

12. National Park Service, “Fort Warburton,” available at http://www.nps.gov/fowa/historyculture/warburton.htm. The fort was known as both Fort Warburton and Fort Washington. A later fort on the same site was and is still named Fort Washington. Ibid.

13. Ibid.; Les Standiford, Washington Burning: How a Frenchman’s Vision for Our Nation’s Capital Survived Congress, the Founding Fathers, and the Invading British Army (Three Rivers, 2009), p. 291.

14. On the Chesapeake Bay campaign, see Hickey, note 6, above, pp. 195–201; Standiford, note 13, above, pp. 222, 258–80. The burning of Washington was in part in retaliation for the Americans’ burning of York (now Toronto) the previous year.

15. The Treaty of Ghent was signed in December 1814, but fighting continued into 1815 because of slow communications across the Atlantic.

16. Standiford, note 13, above, p. 281.

17. Alan Taylor, The Civil War of 1812: American Citizens, British Subjects, Irish Rebels, & Indian Allies (Vintage, 2011), pp. 416–17.

18. Dewey, note 4, above, pp. 119–20; Hormats, note 6, above, pp. 33–35.

19. Hormats, note 6, above, pp. 46–50.

20. Quoted in ibid., p. 39.

21. Dewey, note 4, above, pp. 139–40.

22. Unless otherwise noted, all data on government revenues, spending, deficits, and debt are from OMB, Fiscal Year 2012 Budget of the U.S. Government: Historical Tables, Tables 1.1, 1.2, 3.1, and 7.1. In general, when we refer to budget or debt figures for a given year, we are referring to that fiscal year. Since 1977, the federal government’s fiscal year has run from October through September, so the 2010 fiscal year ended on September 30, 2010.

23. The interest rate on ten-year Treasury bonds averaged 3.3 percent in the first half of 2011; the last year that the average interest rate was so low was 1958. Federal Reserve Statistical Release H.15.

24. The Obama administration insisted that the Treasury Department would not have enough cash to meet all its obligations on August 3; some other analysts estimated that the Treasury had until August 10. Binyamin Appelbaum, “U.S. May Have Way to Cover Bills After Deadline, for Week,” The New York Times, July 26, 2011. The probability of an actual default is disputed, but some people feared it could occur.

25. On the history of the debt ceiling, see Bruce Bartlett, “Doing Away with the Debt Ceiling,” Economix (blog), The New York Times, August 1, 2011.

26. Republicans demanded that each $1 increase in the debt ceiling be accompanied by $1 in spending cuts over the next ten years.

27. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, passed in December 2010, extended income tax cuts originally passed under President George W. Bush in 2001 and 2003, as well as some of the tax cuts contained in the 2009 economic stimulus bill, and reduced the Social Security payroll tax by 2 percentage points. CBO, The Budget and Economic Outlook: Fiscal Years 2011 to 2021, January 2011, pp. 8–9.

28. See Ron Paul, “Default Now, or Suffer a More Expensive Crisis Later,” Bloomberg, July 22, 2011; Lydia Saad, “U.S. Debt Ceiling Increase Remains Unpopular with Americans,” Gallup, July 12, 2011. As with all polls, it’s not clear what respondents really thought about the plausible policy options. Still, though, 51 percent of respondents were more concerned that “the government would raise the debt ceiling but without plans for major cuts in future spending” than that “the government would not raise the debt ceiling and a major economic crisis would result.”

29. Jennifer Steinhauer, “Debt Bill Is Signed, Ending a Fractious Battle,” The New York Times, August 2, 2011; Carl Hulse and Helene Cooper, “Obama and Leaders Reach Debt Deal,” The New York Times, July 31, 2011.

30. On the policy changes that contributed to recent deficits and the current national debt, see chapter 3.

31. Gallatin’s position actually varied over time. In December 1811, however, he “clearly demanded internal revenue taxes” to assist in wartime borrowing. Dewey, note 4, above, p. 130.

32. See Iwan Morgan, The Age of Deficits: Presidents and Unbalanced Budgets from Jimmy Carter to George W. Bush (University Press of Kansas, 2009), pp. 79–80.

33. Some of the 1980s deficits were a product of the 1981–1982 recession, but structural factors (government policy rather than the economic cycle) were a larger contributor, especially in the peak deficit years of 1983–1986. In 1986, for example, the economic cycle accounted for only $13 billion out of a total budget deficit of $221 billion. CBO, Measuring the Effects of the Business Cycle on the Federal Budget: An Update, September 1, 2009, Table 1, pp. 3–4.

34. Ron Suskind, The Price of Loyalty: George W. Bush, the White House, and the Education of Paul O’Neill (Simon & Schuster, 2004), p. 291.

35. David Greene, “Shaking Faith in Social Security,” NPR, April 6, 2005; “Shameless Photo-Op,” The New York Times (editorial), April 7, 2005. The Social Security trust funds exist because the payroll taxes that fund Social Security exceeded the benefits it paid out for decades. The trust fund holds special Treasury bonds—that is, promises to pay backed by the full faith and credit of the United States.

36. Privatization would have required increased outlays estimated at between $646 billion and $969 billion over the next ten years, depending on the number of people electing to participate in the individual account system. CBO, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2006, March 2005, p. 47. Individual accounts would have required additional funding amounting to more than $2 trillion in present value terms. Peter A. Diamond and Peter R. Orszag, “Reducing Benefits and Subsidizing Individual Accounts: An Analysis of the Plans Proposed by the President’s Commission to Strengthen Social Security,” Center on Budget and Policy Priorities and Century Foundation, June 2002. The “benefit” of privatization (for the government’s finances) is that in the very long term it shifts the burden of paying for Social Security from the program itself to the individual accounts.

37. Lydia Saad, “Americans’ Worries About Economy, Budget Top Other Issues,” Gallup, March 21, 2011.

38. Washington Post–ABC News poll, April 14–17, 2011, available at www.washingtonpost.com/wp-srv/politics/polls/postpoll_04172011.html, questions 14, 17. Another poll showed that Americans oppose cutting spending on every alternative except foreign aid. Frank Newport and Lydia Saad, “Americans Oppose Cuts in Education, Social Security, Defense,” Gallup, January 26, 2011.

39. Social Security and Medicare percentages are for 2010. OMB, note 22, above, Table 3.2. Tax breaks are estimates for 2012. Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010–2014, JCS-3-10, Table 1, pp. 39, 49.

40. Suzanne Mettler, “Reconstituting the Submerged State: The Challenge of Social Policy Reform in the Obama Era,” Perspectives on Politics (September 2010): 803–24, p. 809.

41. Suzanne Mettler, “Our Hidden Government Benefits,” The New York Times, September 19, 2011.

42. Quoted in Philip Rucker, “Sen. DeMint of S.C. Is Voice of Opposition to Health-Care Reform,” The Washington Post, July 28, 2009.

43. Sam Stein, “Republicans Forced to Reverse Course, Yet Again, on Medicare,” The Huffington Post, December 8, 2009.

44. Brad DeLong, “Mark Kleiman Was Snarky Last Night: Long-Run Fiscal Crisis and the Future of America Department,” Brad DeLong: Grasping Reality with All Eight Tentacles (blog), May 25, 2011. DeLong did not say that the two positions were substantively equivalent, however. The full quotation is: “the political lesson of the past two years is now that you win elections by denouncing the other party’s plans to control Medicare spending in the long run—whether those plans are smart like the Affordable Care Act or profoundly stupid like the replacement of Medicare by RyanCare for the aged—sitting back, and waiting for the voters to reward you.”

45. Technically speaking, promises to repay in one year or less are called Treasury bills, promises to repay in two through ten years are called Treasury notes, and promises to repay in more than ten years are called Treasury bonds. For convenience, we refer to all of them as Treasury bonds or simply “Treasuries” unless there is a reason to specify a particular class. The principal amount of government borrowing is not included in revenues (when the money is borrowed) or in spending (when it is paid back). Interest on government borrowing is included in spending.

46. Another way to think about it is that government spending is the inflow (the faucet), government tax revenues are the outflow (the drain), and the national debt is the stock (the water in the bathtub).

47. People tend to misunderstand the relationship between stocks and flows, primarily by applying the “correlation heuristic”: the assumption that the behavior of a stock should mimic the behavior of the flows that affect it. See Matthew A. Cronin, Cleotilde Gonzalez, and John D. Sterman, “Why Don’t Well-Educated Adults Understand Accumulation? A Challenge to Researchers, Educators, and Citizens,” Organizational Behavior and Human Decision Processes 108 (2009): 116–30.

48. For details of our budgetary projections, which are based on those of the Congressional Budget Office, see chapter 4 and the Appendix.

49. Annual excess cost growth—growth in health care spending that cannot be accounted for by population growth, demographic changes, or overall economic growth—has averaged between 1.5 percent and 2.0 percent, depending on the timeframe (2.0 percent from 1975 to 2007, 1.5 percent from 1990 to 2007 because of the shift to managed care in the 1990s). CBO, 2011 Long-Term Budget Outlook, June 2011, p. 42. On the relative importance of aging and excess cost growth, see ibid., pp. 10–11.

50. See Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, paperback ed. (Vintage, 2011), especially the Epilogue.

1. Alexander Hamilton, “Report on Public Credit,” January 1790, in Reports of the Secretary of the Treasury of the United States, vol. 1 (Blair & Rives, 1837): 3–53, p. 27.

2. Ibid., p. 31; Davis Rich Dewey, Financial History of the United States, 2nd ed. (Longmans, Green, 1903), p. 89. The country would miss the principal payments due in 1789, as well.

3. Dewey, note 2, above, p. 57.

4. Hamilton, note 1, above, pp. 14–15; Dewey, note 2, above, pp. 89–93.

5. Dewey, note 2, above, p. 57.

6. Hamilton, note 1, above, p. 4.

7. In April 1775–March 1776, Washington had 15,000–18,000 troops at the siege of Boston, while the British had 6,500, but that was the last time the Americans had numerical superiority until the end of the war. In New York (August 1776), Washington had 28,000, at least on paper, but the British had 32,000. In spring 1777, the colonists had a total of 8,500 troops in the field. At the time, the British had 16,000 in New York and 8,500 in Canada. The war in the South was fought with smaller forces (2,000–4,000 on the American side in various battles). In the decisive confrontation leading up to Yorktown (August–September 1781), the Americans and French had 6,000 men watching New York and another 5,000 in the South. In contrast, the British had 14,500 in New York and 7,000 in Yorktown. Craig L. Symonds, A Battlefield Atlas of the American Revolution (The Nautical & Aviation Publishing Company of America, 1986).

8. See Dewey, note 2, above, pp. 36–39.

9. H. W. Brands, The First American: The Life and Times of Benjamin Franklin (Anchor, 2002), p. 581.

10. Ron Chernow, Washington: A Life (Penguin, 2011), p. 366. See also Dewey, note 2, above, pp. 39–41.

11. On the timing and amount of loans, see Dewey, note 2, above, p. 47; Sidney Homer and Richard Sylla, A History of Interest Rates, 4th ed. ( John Wiley & Sons, 2005), Table 36, p. 274.

12. See Ron Chernow, Alexander Hamilton (Penguin, 2005), chapters 5–7. In the late 1790s, under President John Adams, Hamilton became inspector general of the American army and subsequently second-in-command below George Washington. Douglas Ambrose, “The Life and Many Faces of Alexander Hamilton,” chapter 1 in Douglas Ambrose and Robert W. T. Martin, eds., The Many Faces of Alexander Hamilton: The Life and Legacy of America’s Most Elusive Founding Father (New York University Press, 2006).

13. Paul Kennedy, The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000 (Vintage, 1989), p. 99.

14. Angus Maddison, “Historical Statistics: Statistics on World Population, GDP, and Per Capita GDP, 1–2008 a.d.,” available at http://www.ggdc.net/maddison/Maddison.htm. Great Britain would eventually catch up with France early in the nineteenth century.

15. See John Brewer, The Sinews of Power: War, Money and the English State, 1688–1783 (Harvard University Press, 1990), especially chapter 4.

16. See Kathryn Norberg, “The French Fiscal Crisis of 1788 and the Financial Origins of the Revolution of 1789,” chapter 7 in Philip T. Hoffman and Kathryn Norberg, eds., Fiscal Crises, Liberty, and Representative Government, 1450–1789 (Stanford University Press, 1994), pp. 265–66. For a comparison of tax collection practices in Great Britain and France, see Brewer, note 15, above, pp. 127–30.

17. On the importance of taxes to support increased borrowing, see Brewer, note 15, above, pp. 116, 119.

18. Steven C. A. Pincus and James A. Robinson, “What Really Happened During the Glorious Revolution?,” NBER Working Paper 17206, July 2011, pp. 22–27.

19. Ibid., pp. 30–36.

20. Brewer, note 15, above, pp. 129–31. On tax levels, see ibid., pp. 89–91. More generally, Douglass North and Barry Weingast write, “What established the government’s commitment to honoring its agreements . . . was that the wealth holders gained a say in each of these decisions through their representatives in Parliament.” Douglass C. North and Barry R. Weingast, “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England,” chapter 4 in Lee J. Alston, Thráinn Eg- gertsson, and Douglass C. North, eds., Empirical Studies in Institutional Change (Cambridge University Press, 1996), p. 162. North and Weingast’s emphasis on legal changes implemented following the Glorious Revolution has been widely contested, but Steven Pincus and James Robinson argue that the overall institutional changes that they identified did occur. See Pincus and Robinson, note 18, above, pp. 33–34. See also Philip T. Hoffman and Kathryn Norberg, conclusion to Hoffman and Norberg, eds., note 16, above, p. 308.

21. North and Weingast, note 20, above, pp. 154–56. Over this period, the national debt grew from about 2.5 percent of GDP to about 100 percent of GDP. Great Britain built on innovations in public finance that had been developed earlier in Italy and the Netherlands. See Niall Ferguson, The Ascent of Money: A Financial History of the World (Penguin, 2008), pp. 71–75.

22. Brewer, note 15, above, p. 89.

23. David Stasavage, “Partisan Politics and Public Debt: The Importance of the ‘Whig Supremacy’ for Britain’s Financial Revolution,” European Review of Economic History 11 (2007): 123–53, pp. 125–26. Between 1688 and 1715, interest rates fluctuated depending on the balance of power between Whigs and Tories, since the latter might have wanted to cut taxes and default on the debt. Ibid., pp. 141–43. Financial elites were not a majority of the Whig Party in the early eighteenth century, but party institutions were able to ensure voting cohesion in favor of servicing the debt, particularly through taxes on land. David Stasavage, “Credible Commitment in Early Modern Europe: North and Weingast Revisited,” Journal of Law, Economics, & Organization 18, no. 1 (2002): 155–86, pp. 169–71.

24. Stasavage, “Partisan Politics and Public Debt,” note 23, above, p. 149.

25. Daniel Defoe, The Complete English Tradesman, 1725, quoted in Ian Morris, Why the West Rules—For Now: The Patterns of History, and What They Reveal About the Future (Farrar, Straus and Giroux, 2010), p. 486. See also Kennedy, note 13, above, pp. 79–82.

26. Richard Bonney, “France, 1494–1815,” chapter 4 in Richard Bonney, ed., The Rise of the Fiscal State in Europe, c. 1200–1815 (Oxford University Press, 1999), p. 162.

27. See ibid., p. 131.

28. Taxes could be imposed without consent, as Louis XIV did in 1710, but this did not mean that they could be reliably collected without consent because of the monarchy’s dependence on tax farmers, venal officeholders, and corporate bodies. See ibid., pp. 154–55.

29. David D. Bien, “Offices, Corps, and a System of State Credit,” chapter 6 in Keith Michael Baker, ed., The French Revolution and the Creation of Modern Political Culture, vol. 1, The Political Culture of the Old Regime (Pergamon, 1987), pp. 93–95.

30. Norberg, note 16, above, pp. 268–69.

31. Ibid., p. 254.

32. Stasavage, “Credible Commitment in Early Modern Europe,” note 23, above, pp. 178–83.

33. Philip T. Hoffman, “Early Modern France, 1450–1700,” chapter 6 in Hoffman and Norberg, eds., note 16, above, p. 252; Bonney, note 26, above, p. 135; Bien, note 29, above, p. 97.

34. Norberg, note 16, above, p. 272; Bonney, note 26, above, p. 148.

35. As of 2010, the latest year for which official figures are available. OMB, Fiscal Year 2012 Budget of the U.S. Government: Historical Tables, Table 3.1.

36. Norberg, note 16, above, p. 292.

37. Bonney, note 26, above, p. 148; Bien, note 29, above, p. 90.

38. Norberg, note 16, above, p. 291; Hoffman and Norberg, note 20, above, p. 300.

39. Kennedy, note 13, above, p. 80.

40. Norberg, note 16, above, pp. 295–96; Hoffman and Norberg, note 20, above, pp. 305–8.

41. Hamilton first laid out his core positions in letters between 1779 and 1781, when he was an officer in the army and an aide to General Washington. Richard Sylla, “Financial Foundations: Public Credit, the National Bank, and Securities Markets,” chapter 2 in Douglas A. Irwin and Richard Sylla, eds., Founding Choices: American Economic Policy in the 1790s (University of Chicago Press, 2010), pp. 61–65.

42. Quoted in ibid., p. 64.

43. Hamilton, note 1, above, p. 3.

44. The $79 million estimate includes $54 million in federal government debt and $25 million in state debt. GDP was roughly $200 million; economists Louis Johnston and Samuel H. Williamson estimate nominal GDP at $187 million in 1790 and $204 million in 1791. Louis Johnston and Samuel H. Williamson, “What Was the U.S. GDP Then?,” MeasuringWorth, 2011, available at http://www.measuringworth.com/usgdp. The equivalent figure for the United States today (including debt owed by all levels of government) is 68 percent of GDP. IMF, Fiscal Monitor: Addressing Fiscal Challenges to Reduce Economic Risks, September 2011, Statistical Table 8, p. 71.

45. In Albert Gallatin’s first years as treasury secretary, beginning in 1801, the federal government took in about $10 million in revenue. Nicholas Dungan, Gallatin: America’s Swiss Founding Father (New York University Press, 2010), chap- ter 4. The country’s GDP at that time was close to $500 million, so revenue was about 2 percent of GDP. The United States could perhaps have collected more if the country’s leadership had been willing to implement a fiscal system closer to that of the British. From the 1490s through 1700, the British state collected about 2 percent of national income in revenues during peacetime, but revenue in the 1700s was in the range of 6–10 percent of national income. Patrick Karl O’Brien, “Fiscal and Financial Preconditions for the Rise of British Naval Hegemony, 1485–1815,” Working Paper 91/05, Department of Economic History, London School of Economics, November 2005, Figure 5, p. 13.

46. Sylla, note 41, above, p. 67.

47. Congress could assess contributions to the “common treasury, which shall be supplied by the several States, in proportion to the value of all land within each State, granted to, or surveyed for, any Person,” but “the taxes for paying that proportion shall be laid and levied by the authority and direction of the legislatures of the several States, within the time agreed upon by the United States, in Congress assembled.” Articles of Confederation, Article VIII. See James D. Savage, Balanced Budgets and American Politics (Cornell University Press, 1988), pp. 68–71. For the political context, see Merrill Jensen, The Articles of Confederation: An Interpretation of the Social-Constitutional History of the American Revolution, 1774–1781 (University of Wisconsin Press, 1940), chapter 2.

48. John Jay, Circular Letter from Congress of the United States of America, to Their Constituents, September 13, 1779, in Journals of the Continental Congress, 1774–1789, vol. 15 (Government Printing Office, 1909): 1052–62, p. 1062.

49. Robert E. Wright, One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe (McGraw-Hill, 2008), pp. 62–69.

50. Dewey, note 2, above, p. 54. Morris was long a controversial figure who was attacked for alleged conflicts of interest. Charles Rappleye, Robert Morris: Financier of the American Revolution (Simon & Schuster, 2010), chapter 15. He later went bankrupt due to unsuccessful land speculations. Ibid., pp. 504–7.

51. Homer and Sylla, note 11, above, p. 274.

52. U.S. Constitution, Article I, Section 8. On the powers to impose taxes and to incur debts, see Wright, note 49, above, pp. 81–85.

53. Bernard Bailyn, The Ideological Origins of the American Revolution, enlarged ed. (Harvard University Press, 1992), Postscript.

54. U.S. Constitution, Article I, Section 8.

55. This position was made slightly awkward by the fact that his political ally James Madison, in Federalist 44, had argued that the means were authorized whenever the end was required. Richard Brookhiser, James Madison (Basic Books, 2011), p. 92.

56. Ibid., p. 62.

57. “That exigencies are to be expected to occur, in the affairs of nations, in which there will be a necessity for borrowing; That loans in times of public danger, especially from foreign war, are found an indispensable resource, even to the wealthiest of them; And that in a country which, like this, is possessed of little active wealth, or, in other words, little moneyed capital, the necessity for that resource must, in such emergencies, be proportionably urgent. And as, on the one hand, the necessity for borrowing in particular emergencies cannot be doubted, so, on the other, it is equally evident, that, to be able to borrow upon good terms, it is essential that the credit of a nation should be well established.” Hamilton, note 1, above, p. 3.

58. Ibid., p. 27.

59. There is controversy over whether Hamilton intended to pay down the national debt or whether he would have preferred some debt in perpetuity. In key public statements, including his “Report on Public Credit,” quoted above, Hamilton seems to have wanted to pay off the debt. Hamilton’s relatively positive view of debt is one reason for the criticism he has received from across the political spectrum. Some people on the left feel that his policies unduly favored powerful rentiers (people who owned government securities) and other elites over ordinary people. See, for example, William Hogeland, The Whiskey Rebellion: George Washington, Alexander Hamilton, and the Frontier Rebels Who Challenged America’s Newfound Sovereignty (Simon & Schuster, 2006). Some on the right think that his advocacy of public debt and relatively (for the day) expansive government powers made possible today’s large, debt-financed federal government. See, for example, Thomas J. DiLorenzo, Hamilton’s Curse: How Jefferson’s Arch Enemy Betrayed the American Revolution—And What It Means for Americans Today (Crown, 2008).

60. On the terms of restructuring, see Dewey, note 2, above, pp. 94–96. The debt swap offer extended to “any of the certificates of indebtedness which the government had previously issued during the Revolutionary War and the Confederation.” Ibid., p. 94. Most of these “certificates” could be exchanged at face value for the same amount of new debt, albeit under different terms. Bills of credit (the original “Continental currency”), however, were exchanged at the rate of 100 to 1. Ibid. The new debt paid a lower interest rate but was subject to only limited redemption in the short run, which made it attractive. See also Homer and Sylla, note 11, above, p. 289. Peter Garber estimates that the value of the bond exchange package was 49 cents on the dollar in November 1790 (that is, a debt reduction of 51 percent), although the precise value varied with market prices for government debt. Peter M. Garber, “Alexander Hamilton’s Market-Based Debt Reduction Plan,” Carnegie-Rochester Conference Series on Public Policy 35 (1991): 79–104, Table 9.

61. Dewey, note 2, above, p. 95.

62. Ibid., p. 105; Chernow, note 12, above, pp. 299–300. Tariffs had already been proposed before Hamilton was appointed and the Treasury Department was formally created. Madison offered the first revenue “proposition” to the House of Representatives on April 8, 1789. Dewey, note 2, above, pp. 80–84.

63. Jefferson was somewhat obsessed by and opposed to debt, perhaps in part because of debts incurred when handling the estate of his late father-in-law. See Herbert E. Sloan, Principle and Interest: Thomas Jefferson and the Problem of Debt (University of Virginia Press, 2001), chapter 1.

64. Quoted in ibid., p. 86.

65. Quoted in Ralph Ketcham, James Madison: A Biography (University of Virginia Press, 1971), p. 308. On the debate over whether the government’s original creditors should be paid back (as opposed to current debt holders), see Wright, note 49, above, pp. 135–41.

66. Chernow, note 12, above, pp. 321–22.

67. Ibid., pp. 327–30. It was agreed that the capital would move first from New York to Philadelphia and then to Washington. The first move happened in 1790, the second in 1800.

68. Jefferson opposed the Bank of the United States primarily for political reasons; in particular, he feared the political and economic power the Bank might wield. We have sympathy for this political critique, but we recognize that Hamilton had the better of the economic arguments. See Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Pantheon, 2010), pp. 14–17.

69. Dewey, note 2, above, pp. 94–96.

70. Homer and Sylla, note 11, above, p. 274. For government bonds, “a price of 70 is reported for 1791, to yield 8.57%.” Ibid., p. 289. For government bond yields in 1798 and 1799, see ibid., Table 38, p. 282.

71. John Steele Gordon, Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt, revised ed. (Walker, 2010), p. 36; Bray Hammond, Banks and Politics in America: From the Revolution to the Civil War (Princeton University Press, 1991), chapters 4–6; Sylla, note 41, above, p. 83. For an analysis of the contribution of the financial sector to growth in the early United States, see Peter L. Rousseau and Richard Sylla, “Emerging Financial Markets and Early U.S. Growth,” Explorations in Economic History 42 (2005): 1–26.

72. In principle, a whiskey tax, even if it is paid by whiskey producers, can be passed on to whiskey consumers, making it a consumption tax. Since demand for whiskey is often thought to be relatively inelastic, it should be relatively easy to pass on a whiskey tax. According to economic historian David O. Whitten, Hamilton’s whiskey tax probably did push liquor prices upward, and the higher tariffs on imported whiskey, on balance, probably helped domestic producers. Rural farmers in the 1790s, however, may not have realized the true incidence of the whiskey tax, or they may have been more motivated by political considerations. David O. Whitten, “An Economic Inquiry into the Whiskey Rebellion of 1794,” Agricultural History 49, no. 3 ( July 1975): 491–504, pp. 499–500, 504.

73. One option would have been to simply default on the debt, which would have constituted a “tax” on people who had bought up the debt, including speculators. In some instances, arguments against paying public debts in full can be compelling, for example when those debts were incurred by a former dictator who has now been deposed. See Seema Jayachandran and Michael Kremer, “Odious Debt,” April 2005, available at http://faculty.wcas.northwestern.edu/~sjv340/odious_debt.pdf.

74. See Hamilton, note 1, above, pp. 22–23.

75. For detailed histories of the Whiskey Rebellion, see Thomas P. Slaughter, The Whiskey Rebellion: Frontier Epilogue to the American Revolution (Oxford University Press, 1986); Hogeland, note 59, above.

76. On the democratic elements of the Whiskey Rebellion, see Wythe Holt, “The Whiskey Rebellion of 1794: A Democratic Working-Class Insurrection,” paper presented at the Georgia Workshop in Early American History and Culture, January 23, 2004, available at http://colonialseminar.uga.edu/whiskeyrebellion-6.pdf.

77. Richard H. Kohn, “The Washington Administration’s Decision to Crush the Whiskey Rebellion,” Journal of American History 59, no. 3 (December 1972): 567–84, p. 568.

78. Ibid., pp. 574–75.

79. Howard Zinn, A People’s History of the United States: 1492–Present (Harper Perennial Modern Classics, 2005), p. 101.

80. Paul Brest, Sanford Levinson, Jack M. Balkin, Akhil Reed Amar, and Reva B. Siegel, Processes of Constitutional Decisionmaking: Cases and Materials, 5th ed. (Aspen, 2006), p. 102.

81. Quoted in Robert D. Hormats, The Price of Liberty: Paying for America’s Wars from the Revolution to the War on Terror (Times Books, 2007), p. 31.

82. Quoted in ibid., p. 13.

83. On the degree of continuity between Federalist and Republican policies, see ibid., pp. 32–33.

84. On Gallatin, see Dungan, note 45, above; Raymond Walters, Jr., Albert Gallatin: Jeffersonian Financier and Diplomat (University of Pittsburgh Press, 1957); Edwin Gwynne Burrows, Albert Gallatin and the Political Economy of Republicanism, 1761–1800 (Garland, 1986); Henry Adams, The Life of Albert Gallatin ( J. B. Lippincott, 1879); John Austin Stevens, Albert Gallatin (Houghton, Mifflin and Company, 1899); and Henry Adams, ed., The Writings of Albert Gallatin ( J. B. Lippincott, 1879).

85. Quoted in Adams, The Life of Albert Gallatin, note 84, above, p. 270.

86. Quoted in Walters, note 84, above, p. 43.

87. The claim was that Gallatin had not been a U.S. citizen for the requisite period of time. He was removed from the Senate on a party-line vote.

88. See, for example, Slaughter, note 75, above, p. 200. Gallatin later called his participation in a 1792 Pittsburgh meeting “my only political sin”—in part because the opposition movement eventually served to help the Federalists. Walters, note 84, above, p. 69.

89. On Gallatin’s career in Congress, see Dungan, note 45, above, pp. 59–65. Gallatin’s 1796 Sketch of the Finances of the United States was the most detailed assessment of American public finance to date. Adams, ed., The Writings of Albert Gallatin, note 84, above, vol. 3, pp. 71–207. On the differences between Hamilton’s and Gallatin’s positions in the 1790s, see Sylla, note 41, above, pp. 74–80.

90. Dungan, note 45, above, pp. 70–71.

91. Quoted in Hormats, note 81, above, p. 34.

92. Ibid., pp. 33–35; Dewey, note 2, above, pp. 119–20. The repeal reduced net annual revenue to the Treasury by about $600,000, of which “about five-sixths was derived from the tax on distilled liquors.” Ibid.

93. Dewey, note 2, above, p. 125. Total debt was $83.0 million in 1801 and $45.2 million in 1812. There was a large increase in debt in 1804 to pay for the Louisiana Purchase, shown in these accounts as $11.2 million in “debt” and $3.7 million in “assumed claims.”

94. Of the total $15 million, $2 million was paid “cash down from the surplus in the treasury,” $11.25 million was raised in a loan—new “6 per cent. stock, redeemable after fifteen years in four annual installments”—and “the remainder was to be met by a temporary loan.” Ibid., p. 121. (Foreign trade was booming and revenues in 1802 were higher than expected, so there was no need for a temporary loan.)

95. Brookhiser, note 55, above, chapter 9. The issue was restrictions that the French and the British had placed on American trade during the Napoleonic Wars. Napoleon offered to drop his restrictions in 1810. This was a diplomatic feint—“we commit ourselves to nothing,” Napoleon said privately—but it endeared him to the Americans. Ibid., p. 186. The British, in contrast, steadfastly refused to repeal their Orders in Council restricting trade. (Ironically, the British did repeal them eventually, but the news traveled too slowly to forestall the American declaration of war. Ibid., p. 195.)

96. Walters, note 84, above, p. 254; Dewey, note 2, above, pp. 128–30; Hormats, note 81, above, pp. 37–40. On the War Hawks of the 12th Congress (1811–1813), see David S. Heidler and Jeanne T. Heidler, Henry Clay: The Essential American (Random House, 2010), chapter 4. Clay wanted war and eventually supported Treasury Secretary Albert Gallatin’s tax proposals, but it was hard to win support from the Democratic-Republican majority.

97. Dewey, note 2, above, p. 130. In Dewey’s analysis, Gallatin bears some of the fault for the failure to raise taxes before going to war; after recommending excise taxes in 1807, he backed away from them in 1808, and did not return to the proposal until late 1811. Ibid., pp. 128–30.

98. “Gallatin enumerated the advantages derived by the government from the bank, in its safe-keeping of the public deposits, in the collection of the revenues, in the transmission of public moneys, in the facilities granted to importers, and in loans that had been made to the government.” Ibid., pp. 126–27. See also Walters, note 84, above, pp. 237–40.

99. Prior to the declaration of war in June 1812, “little had been accomplished either in placing the army and navy upon a possible war footing or in devising fiscal resources against the gathering crisis.” Dewey, note 2, above, p. 128.

100. Ibid., pp. 123–24, 141–42.

101. Ibid., p. 133.

102. “Caught between limitations placed by Congress on the rates and prices of its loans and the reluctance of investors to buy, the Treasury was ultimately forced to accept very unfavorable terms.” Homer and Sylla, note 11, above, p. 292. The yield on government debt had been below 6 percent in 1810; at the worst point it reached 9.2 percent in 1814. Bonds that had traded at a price of 104 in 1810 fell as low as 65 in 1814. Data are for the “U.S. 6s of 1790,” comparing the 1810 high price with the 1814 low price. Ibid., Table 40, p. 293.

103. Hormats, note 81, above, pp. 43–44; Gordon, note 71, above, pp. 45–48.

104. Dewey, note 2, above, pp. 139–40; Hormats, note 81, above, pp. 44, 48–49. Congress imposed “specific duties upon refined sugar, carriages, licenses to distillers of spirituous liquors, sales at auction, licenses to retailers of wines, and upon notes of banks and bankers.” Stevens, note 84, above, pp. 244–45.

105. Alan Taylor, The Civil War of 1812: American Citizens, British Subjects, Irish Rebels, & Indian Allies (Vintage, 2011), p. 416.

106. Donald R. Hickey, The War of 1812: A Forgotten Conflict (University of Illinois Press, 1995), pp. 197–201.

107. Ibid., p. 195.

108. The national debt was $127 million in 1815. Treasury Department, “Historical Debt Outstanding—Annual,” available at http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm. GDP is estimated at $916 million, for a debt-to-GDP ratio of 14 percent. Johnston and Williamson, note 44, above.

109. Quoted in Dennis S. Ippolito, Why Budgets Matter: Budget Policy and American Politics (Pennsylvania State University Press, 2003), p. 48.

110. On the “balanced budget rule,” see ibid., pp. 3–4. From 1792 until the War of 1812, the federal government ran an annual deficit only five times; after the war, it ran only three deficits through 1836. Gordon, note 71, above, pp. 202–4.

111. Wright, note 49, above, pp. 275–76. On the state debt crisis of the 1840s, see John Joseph Wallis, Richard E. Sylla, and Arthur Grinath III, “Sovereign Debt and Repudiation: The Emerging-Market Debt Crisis in the U.S. States, 1839–1843,” NBER Working Paper 10753, September 2004.

112. Hormats, note 81, above, p. 83.

113. Colin McEvedy and Richard Jones, Atlas of World Population History (Penguin, 1978), p. 288; David S. Landes, The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor (W. W. Norton, 1999), p. 298.

114. Gordon, note 71, above, p. 70.

115. The South did issue bonds backed by cotton, but demand for these bonds dried up because of a successful naval blockade by the North. Ferguson, note 21, above, pp. 94–96.

116. Eugene M. Lerner, “The Monetary and Fiscal Programs of the Confederate Government, 1861–1865,” Journal of Political Economy 62 (1954): 506–22; Eugene M. Lerner, “Money, Prices, and Wages in the Confederacy, 1861–65,” pp. 11–40 in Ralph Andreano, ed., The Economic Impact of the American Civil War (Schenkman, 1962).

117. See Thayer Watkins, “Episodes of Hyperinflation,” San José State University, available at http://www.sjsu.edu/faculty/watkins/hyper.htm.

118. Hormats, note 81, above, pp. 62–74; Ippolito, note 109, above, p. 65–66; Dewey, note 2, above, p. 305. On the Civil War income tax, see Steven R. Weisman, The Great Tax Wars: Lincoln to Wilson—The Fierce Battles over Money and Power That Transformed the Nation (Simon & Schuster, 2002), chapter 2.

119. Hormats, note 81, above, pp. 80–82; Homer and Sylla, note 11, above, p. 304. H. W. Brands calls Cooke “America’s first celebrity banker.” H. W. Brands, The Money Men: Capitalism, Democracy, and the Hundred Years’ War over the American Dollar (W. W. Norton, 2006), p. 128. On the private and public relationships between Jay Cooke and Salmon Chase during the Civil War, see Richard White, Railroaded: The Transcontinentals and the Making of Modern America (W. W. Norton, 2011), pp. 10–14.

120. Ippolito, note 109, above, p. 69.

121. Treasury Department, note 108, above; Johnston and Williamson, note 44, above.

122. This rate was on the “old 6s of 1848–1868,” whose price fell to 86. Homer and Sylla, note 11, above, p. 303. However, the picture is complicated by the fact that most bond issues were assumed to be payable in gold coin—so investors were both taking government credit risk and betting on gold prices. Ibid., pp. 302–3, footnote 1.

123. Ippolito, note 109, above, pp. 66–69. The greenbacks were preceded by so-called Demand Notes, which were convertible into gold coin, but only briefly; conversion was suspended in late 1861.

124. Dewey, note 2, above, p. 291.

125. One index of prices rose from 100 in 1860 to 216.8 in 1865. Ibid., p. 294.

126. The quote may be apocryphal, as there is no specific source; see Ellis Paxson Oberholtzer, Jay Cooke: Financier of the Civil War, vol. 1 (George W. Jacobs, 1907), p. 574.

127. Ippolito, note 109, above, pp. 74–76; Hormats, note 81, above, pp. 87–89.

128. McEvedy and Jones, note 113, above, p. 290.

129. See the calculations and comparisons in Arvind Subramanian, Eclipse: Living in the Shadow of China’s Economic Dominance (Peterson Institute for International Economics, 2011), p. 108. On productivity improvements in nineteenth-century America, see Landes, note 113, above, chapter 19.

130. According to David Cutler and Grant Miller, “clean water was responsible for nearly half the total mortality reduction in major cities, three quarters of the infant mortality reduction, and nearly two thirds of the child mortality reduction.” David Cutler and Grant Miller, “The Role of Public Health Improvements in Health Advances: The Twentieth-Century United States,” Demography 42, no. 1 (2005): 1–22, p. 1.

131. On the campaign for workers’ compensation insurance, see David A. Moss, When All Else Fails: Government as the Ultimate Risk Manager (Harvard University Press, 2002), chapter 6.

132. Ippolito, note 109, above, Table 3-4, p. 80.

133. This was generally true across Europe and other industrializing countries. See Vito Tanzi and Ludger Schuknecht, Public Spending in the 20th Century: A Global Perspective (Cambridge University Press, 2000), chapter 1. According to their estimates, general government spending (including all levels of government) in the United States amounted to 7.3 percent of GDP around 1870 and only grew to 7.5 percent of GDP in 1913. Ibid., Table 1.1, p. 6.

134. See Daron Acemoglu, Simon Johnson, and James A. Robinson, “The Colonial Origins of Comparative Development: An Empirical Investigation,” American Economic Review 91, no. 5 (December 2001): 1369–1401; Daron Acemoglu, Simon Johnson, and James A. Robinson, “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution,” Quarterly Journal of Economics 117, no. 4 (November 2002): 1231–94.

135. The literature on the history of Latin American development is large. See, for example, David Rock, Argentina: 1516–1987 (University of California Press, 1987); John A. Crow, The Epic of Latin America, 4th ed. (University of California Press, 1992); Fernando López-Alves, State Formation and Democracy in Latin America, 1810–1900 (Duke University Press, 2000); and Miguel Angel Centeno, Blood and Debt: War and the Nation-State in Latin America (Pennsylvania State University Press, 2002).

136. Barry Eichengreen and Ricardo Hausmann, “Exchange Rates and Financial Fragility,” in New Challenges for Monetary Policy: A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 26–28, 1999: 329–68.

137. OMB, note 35, above, Table 1.1.

138. Hormats, note 81, above, pp. 115–21.

139. Ibid., pp. 123–27, 132; Ippolito, note 109, above, pp. 106–8.

140. OMB, note 35, above, Table 1.1; Ippolito, note 109, above, p. 118.

141. Quoted in H. W. Brands, Traitor to His Class: The Privileged Life and Radical Presidency of Franklin Delano Roosevelt (Doubleday, 2008), p. 319.

142. Ibid., p. 320.

143. Max Hastings, Inferno: The World at War, 1939–1945 (Random House, 2011), pp. 181–82.

144. OMB, note 35, above, Table 3.1.

145. David McCullough, Truman (Simon & Schuster, 1992), p. 291.

146. “The United States eventually provided 47 percent of the British Empire’s armour, 21 percent of small arms, 38 percent of landing ships and landing craft, 18 percent of combat planes and 60 percent of transport aircraft.” Hastings, note 143, above, p. 352.

147. OMB, note 35, above, Tables 1.1, 1.2; Hormats, note 81, above, pp. 163–64.

148. OMB, note 35, above, Table 2.2.

149. Ibid., Table 1.2.

150. Ibid., Table 7.1. Yields on long-term government debt stayed below 2.5 percent throughout the war. Homer and Sylla, note 11, above, Table 48. In part this was due to intervention by the Federal Reserve, but it is also generally true that confidence in government securities remained high. All of the Treasury’s loan campaigns were oversubscribed. Ippolito, note 109, above, p. 151.

1. Nixon made this statement during the third televised presidential debate with Senator John F. Kennedy. “Kennedy Nixon Full Debate Day 3 Part 5 (1960),” YouTube, available at http://www.youtube.com/watch?v=wFqlk9f7IVs. Nixon was responding to the following question from Charles von Fremd of CBS News: “Mr. Vice President, in the past 3 years, there has been an exodus of more than $4 billion of gold from the United States, apparently for two reasons: because exports have slumped and haven’t covered imports and because of increased American investments abroad. If you were president, how would you go about stopping this departure of gold from our shores?”

2. White’s thesis won a prize and was published by Harvard University Press. Harry D. White, The French International Accounts, 1880–1913 (Harvard University Press, 1933). At the end of his career, White briefly became controversial when he was accused of sharing secrets with agents of the Soviet Union and appeared before the House Un-American Activities Committee. For assessments, see R. Bruce Craig, Treasonable Doubt: The Harry Dexter White Spy Case (University Press of Kansas, 2004); David Rees, Harry Dexter White: A Study in Paradox (Coward, McCann & Geoghegan, 1973). For a spirited defense of White, see Nathan I. White, Harry Dexter White: Loyal American (Independent Press, 1956). The idea that White’s input into designing the international system was intended to undermine the United States is without foundation.

3. John Morton Blum, From the Morgenthau Diaries: Years of War, 1941–1945 (Houghton Mifflin, 1967), pp. 228–29. See also Herbert Levy, Henry Morgenthau, Jr.: The Remarkable Life of FDR’s Secretary of the Treasury (Skyhorse, 2010), p. 336; Alan H. Meltzer, A History of the Federal Reserve, Volume 1: 1913–1951 (University of Chicago Press, 2003), p. 613.

4. White personally had many of the key insights that led to the design of the Bretton Woods system. On White’s thinking, see James M. Boughton, “American in the Shadows: Harry Dexter White and the Design of the International Monetary Fund,” chapter 2 in Robert Leeson, ed., American Power and Policy (Palgrave Macmillan, 2009); James M. Boughton, “Harry Dexter White and the International Monetary Fund,” Finance & Development 35, no. 3 (September 1998).

5. David Graeber, Debt: The First 5,000 Years (Melville House, 2011), pp. 37–40. On the widespread use of credit in early modern Europe, see ibid., pp. 326–29. See also Niall Ferguson, The Ascent of Money: A Financial History of the World (Penguin, 2008), pp. 27–30.

6. Graeber, note 5, above, pp. 45–54.

7. In the United Kingdom, “Legal tender has a very narrow and technical meaning in the settlement of debts. It means that a debtor cannot successfully be sued for non-payment if he pays into court in legal tender. It does not mean that any ordinary transaction has to take place in legal tender or only within the amount denominated by the legislation. Both parties are free to agree to accept any form of payment whether legal tender or otherwise according to their wishes.” The Royal Mint, “Legal Tender Guidelines,” available at http://www.royalmint.com/Corporate/policies/legal_tender_guidelines.aspx. In the United States, under the Coinage Act of 1965, “United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.” 31 U.S.C. § 5103. According to the Treasury Department, “this statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise.” Treasury Department, “Legal Tender Status,” available at http://www.treasury.gov/resource-center/faqs/Currency /Pages/legal-tender.aspx.

8. Graeber, note 5, above, pp. 212–14. In ancient Mesopotamia, for example, the silver shekel was the unit of account, but silver was rarely used for actual transactions; instead, most transactions were based on credit. Ibid., pp. 38–40. In twelfth-century Europe, accounts were kept using the monetary units established by Charlemagne around 800, even though none of the coins minted under Charlemagne were still in circulation. Ibid., p. 48.

9. Jacob Goldstein and David Kestenbaum, “A Chemist Explains Why Gold Beat Out Lithium, Osmium, Einsteinium . . . ,” Planet Money (blog), NPR, November 19, 2010.

10. Douglas Mudd, All the Money in the World: The Art and History of Paper Money and Coins from Antiquity to the 21st Century (Smithsonian, 2006), p. 136.

11. The technology that makes it possible to print money is relatively recent in the Western world. According to Douglas Mudd, Europe’s “first circulating banknotes” were issued in 1661 by a Swedish bank, but “bills of credit or exchange notes with a date limitation” existed in China during the Tang dynasty in the seventh century a.d., and “Exchange Certificates without a date limitation” were issued under the Jin dynasty in 1189. Ibid., pp. 22, 29. Before the widespread use of paper money, governments could and did issue coins made out of cheap metals. The government can keep the difference between what it costs to create a piece of money and the face value of that money, which is known as seigniorage. See, for example, Akira Motomura, “The Best and Worst of Currencies: Seigniorage and Currency Policy in Spain, 1597–1650,” Journal of Economic History 54, no. 1 (March 1994): 104–27.

12. Transactions within existing communities could be conducted using credit, but currency was more important in long-distance trade.

13. There was a mint in Massachusetts in the mid-seventeenth century, but it was shut down. Davis Rich Dewey, Financial History of the United States, 2nd ed. (Longmans, Green, 1903), pp. 20–21. For the primitive physical appearance of the early Massachusetts coins, see Mudd, note 10, above, p. 135.

14. “The Mexican eight reales, later renamed the peso, became the dominant silver trade coin of the world, and remained so until the late nineteenth century,” primarily because Mexico produced a lot of silver. Mudd, note 10, above, p. 133. This coin was known as the Spanish dollar among foreign exchange dealers in London. “On the eve of the colonies’ war of independence, Spanish silver coins were the dominant part of the coinage.” Barry Eichengreen, Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (Oxford University Press, 2011), p. 11.

15. Dewey, note 13, above, p. 19. Taxes were often paid in commodities. Using a readily produced “soft” commodity as money does not work well, as colonists discovered when they tried to use tobacco. For more details on the early monetary system in the United States, see Eichengreen, note 14, above, chapter 2.

16. See Dewey, note 13, above, chapter 1. This situation persisted through the Revolution. “Various foreign coins circulated side by side, as the English guinea, crown, and shilling; the French guinea, pistole, and crown; the Spanish pistole; and the johannes, half-johannes, and moidore; and unequal values were given in different parts of the Union to coins of the same intrinsic worth, thus affording opportunity for clipping and fraudulent change.” Ibid., pp. 101–2. The gold johannes was a Portuguese coin. Eichengreen, note 14, above, p. 11.

17. Government-backed paper money was used in the Massachusetts Bay Colony from 1690. According to Douglas Mudd, this was “the first in the Western world.” Mudd, note 10, above, p. 136. Thomas J. Sargent and François R. Velde review the difficult history of ensuring there is enough “small change” under commodity money systems in The Big Problem of Small Change (Princeton University Press, 2002).

18. In part this may have been because he hoped to get the printing contract. H. W. Brands, The First American: The Life and Times of Benjamin Franklin (Anchor, 2002), p. 133.

19. Ibid., p. 135. See also Walter Isaacson, Benjamin Franklin: An American Life (Simon & Schuster, 2003), p. 63.

20. Dewey, note 13, above, pp. 26–27. The colony put the paper money into circulation by lending between £20 and £200 to people based on the security of their property. Ibid. According to Bray Hammond, this was a standard operation in colonial America and, with a few exceptions (such as in Rhode Island), it did not involve over-issue and runaway inflation. Bray Hammond, Banks and Politics in America: From the Revolution to the Civil War (Princeton University Press, 1991), chapter 1. See also James D. Savage, Balanced Budgets and American Politics (Cornell University Press, 1988), pp. 56–66; Robert E. Wright, One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe (McGraw-Hill, 2008), pp. 43–45.

21. Dewey, note 13, above, pp. 29–30. Benjamin Franklin complained to the British about this issue in 1766. Ibid., p. 30.

22. Ibid., pp. 34–38. “Associated in a struggle against what was termed unlawful taxation, the colonists showed no disposition to entrust the power of taxation to a body of delegates whose authority did not rest on an organic constitution.” Ibid., p. 34. Congress also passed resolutions denouncing people who would not accept its bills of credit as payment. Ibid., pp. 38–39. For an image of a 1776 “Continental Note,” see Federal Reserve Bank of Minneapolis, “His- tory of Central Banking in the United States: Currency,” available at http://www.minneapolisfed.org/community_education/student/centralbankhistory/currency.cfm.

23. There are exceptions. British “consols” are a form of perpetual government debt, first issued in the eighteenth century; they have no maturity date, but they are callable (that is, the government can pay them off at any time). In general, some government debt can be redeemed at the government’s discretion, but some debt can only be paid off at maturity or is subject to restrictions on redemption. Money can always be taken out of circulation at the discretion of the government.

24. Dewey, note 13, above, pp. 36, 39–41. Under the 1790 funding act, the Continental currency could be exchanged for new government debt at a ratio of 100 to 1. Ibid., p. 41.

25. These are “specie values”: estimates of real purchasing power in gold or silver coin equivalents. The nominal amount of paper money created was much higher, around $240 million, but it bought less and less over time due to depreciation. Ibid., pp. 35–36.

26. Franklin made this statement after four years of war. Brands, note 18, above, p. 581.

27. Quoted in Dewey, note 13, above, p. 41. See also Mudd, note 10, above, p. 137.

28. Milton Friedman, “Bimetallism Revisited,” Journal of Economic Perspectives 4, no. 4 (Fall 1990): 85–104, pp. 87–88. On the general use of bimetallism (silver and gold as the joint basis for a monetary system) in the eighteenth and nineteenth centuries, see Angela Redish, Bimetallism: An Economic and Historical Analysis (Cambridge University Press, 2000).

29. Dewey, note 13, above, p. 103. The Continental Congress had already decided in 1785–1786 that the U.S. currency should be known as the dollar and that it should be decimal; it had also specified the silver and gold value of the dollar, but almost no coin was minted. Eichengreen, note 14, above, p. 11.

30. Friedman, note 28, above, p. 88. The bimetallic standard specifically meant that both silver and gold were coined freely by the U.S. mint. “From 1837 to the Civil War, the U.S. gold dollar was defined as equal to 23.22 grains of pure gold, the silver dollar as equal to 371.25 grains of pure silver or 15.988 times as many grains of silver as of gold, rounded in common parlance to a ratio of 16 to 1.” Ibid., p. 85. (A “grain” here refers to a unit of weight.) After the California gold rush, however, if you had sixteen ounces of silver, you would not want to turn it into silver dollars; instead, you would trade it for slightly more than one ounce of gold, which you could turn into slightly more gold dollars.

31. Bray Hammond argues that the United States was ahead of the United Kingdom in the sense that incorporated banks were allowed in America but not in the United Kingdom, with the exception of the Bank of England. Hammond, note 20, above, pp. 4, 65–67. The British aversion to incorporated banks was partly due to legislation that followed the collapse of the South Sea Bubble in 1720. Ibid., p. 3. Richard Sylla concludes that by 1800 the United States had more fully modernized its financial system than either of its major predecessors, the Netherlands and Great Britain. Richard Sylla, “Financial Foundations: Public Credit, the National Bank, and Securities Markets,” chapter 2 in Douglas A. Irwin and Richard Sylla, eds., Founding Choices: American Economic Policy in the 1790s (University of Chicago Press, 2010), p. 60.

32. On the role of banks in expanding the money supply, see Ferguson, note 5, above, pp. 51–52. On early-nineteenth-century banking, see Peter Temin, The Jacksonian Economy (W. W. Norton, 1969), pp. 40–41. If money is defined narrowly as legal tender only, then bank notes are “near money.” Bank notes were convertible into legal tender (silver or gold coin—not bullion, which is uncoined gold or silver) under well-specified conditions. As long as people were confident that this conversion could actually take place, they were happy to accept bank notes as payments. As Hamilton wrote in 1791, “the simplest and most precise idea of a bank is a deposit of coin or other property as a fund for circulating a credit upon it which is to answer the purpose of money.” Quoted in Hammond, note 20, above, p. 69. This system is known as “fractional reserve banking.”

33. Gold, silver, and other coins can be clipped, have their precious metal content diluted, or be debased in other ways.

34. In other words, in a gold-based “free banking” system with no central bank, money is largely created by banks. Before becoming chair of the Federal Reserve, Alan Greenspan said of such a system, “A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy.” “Gold and Economic Freedom,” chapter 6 in Ayn Rand, Capitalism: The Unknown Ideal (Signet, 1967).

35. Temin, note 32, above, p. 38. The bank’s total assets were $82.7 million, most of which were “loans and discounts” (various kinds of credit); in addition to notes and deposits, these were balanced by $35 million in capital. Although the Second Bank of the United States had a federal charter and had some influence over the money supply, it was far from a modern central bank.

36. In 1816, John Calhoun claimed that state banks had $170 million of bank notes outstanding while holding $15 million of specie. Dewey, note 13, above, p. 149. See also the discussion of bank balance sheets in Hammond, note 20, above, pp. 78–79.

37. Privatization of the money supply had its critics. In the 1830s, for example, “At the root of people’s ambivalent attitude toward insider lending was confusion about whether banks were public or private enterprises.” Naomi R. La- moreaux, Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England (Cambridge University Press, 1996), p. 35. “Insider lending” here refers to the practice of lending to people who are connected to directors or managers of the bank. Lamoreaux argues that this was a prevalent practice in New England during the early nineteenth century. Individual bankers did very well, in part from their ability to create money, which generated resentment. Ibid., chapter 2.

38. A bank is solvent if its assets, including loans, are worth more than its liabilities, including bank notes and deposits. Even if a bank is solvent, however, it generally cannot sell its assets instantly at their true value, so it may not be able to get its hands on enough currency (specie then, printed bills today) to pay off its liabilities in a bank run.

39. The most famous is probably the Suffolk Bank system in Boston, where one private bank monitored the convertibility of bank notes and thus the presumed liquidity and solvency of associated banks. Dewey, note 13, above, p. 155. The Suffolk Bank system was an entirely private enterprise, but it was arguably successful because it had some prototype features of a central bank: participating banks maintained balances at Suffolk and cleared the “country bank” notes they received through it. By the 1830s, “The Suffolk was in effect the central bank of New England. . . . It was regulating the extension of bank credit, supporting the country banks, on occasion tightening the curb on them, and responsibly advising them what they should do and what not.” Hammond, note 20, above, p. 554; see also ibid., pp. 552, 562–63.

40. Murray N. Rothbard, The Panic of 1819: Reactions and Policies (Ludwig von Mises Institute, 2007). Rothbard attributes this panic to overlending by the federally chartered Second Bank of the United States. Temin, note 32, above, p. 113; Reginald Charles McGrane, The Panic of 1837: Some Financial Problems of the Jacksonian Era (University of Chicago Press, 1965); Clement Juglar, A Brief History of Panics in the United States (Cosimo Classics, 2006), p. 4; James L. Huston, The Panic of 1857 and the Coming of the Civil War (Louisiana State University Press, 1987); Elmus Wicker, Banking Panics of the Gilded Age (Cambridge University Press, 2000), p. xiii.

41. Dewey, note 13, above, pp. 145, 281.

42. Ludwig von Mises, in particular, argued that government intervention in the credit markets only causes damaging distortions such as excessive risk taking. Ludwig von Mises, The Theory of Money and Credit (Yale University Press, 1953). See also Murray N. Rothbard, The Case Against the Fed (Ludwig von Mises Institute, 2007); Richard M. Ebeling, ed., The Austrian Theory of the Trade Cycle and Other Essays (Ludwig von Mises Institute, 1996); Ron Paul, End the Fed (Grand Central, 2009).

43. Wicker, note 40, above, p. xiii. See also M. John Lubetkin, Jay Cooke’s Gamble: The Northern Pacific Railroad, the Sioux, and the Panic of 1873 (University of Oklahoma Press, 2006); Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm ( John Wiley & Sons, 2007).

44. Walter Bagehot, Lombard Street: A Description of the Money Market (Book Jungle, 2007). Bagehot made the key distinction between illiquid banks, which should be supported by the central bank, and insolvent banks, which should be left to fail. In practice, this turns out to be a very hard distinction to make, leaving plenty of room for interpretation. Bagehot focused on the British financial system; financial crises were common to many European countries experiencing economic development, not just the United States. See Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises (Basic Books, 1978).

45. See Charles Goodhart, The Evolution of Central Banks (MIT Press, 1988). For a modern discussion of how the Federal Reserve manages the money supply, see J. Bradford DeLong, Macroeconomics, updated ed. (McGraw-Hill, 2002), pp. 373–75. The Federal Reserve directly controls its own liabilities (primarily the balances in commercial banks’ accounts at Federal Reserve banks), also known as “high-powered money” or the monetary base. The Federal Reserve uses reserve requirements and other tools such as buying and selling government bonds to influence the total money supply (including deposits at commercial banks).

46. Dewey, note 13, above, p. 100.

47. Ibid., pp. 278–79.

48. Ibid., pp. 321–23. On the business and culture of counterfeiting currency, see Stephen Mihm, A Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States (Harvard University Press, 2007).

49. Dewey, note 13, above, pp. 284–88.

50. The new treasury notes, like the bank notes they replaced, were not legal tender for all debts. They could be used to pay taxes to the government and were legal tender between national banks, which helped them gain acceptance. Ibid., pp. 326–27.

51. Ibid., pp. 325–28. “The right to make money was now the federal government’s alone. A decade earlier, such an assertion—that the nation could rightly rein in ‘notes not issued under its own authority’—would have been greeted with derision and unyielding opposition. But the outbreak of the war had set in motion forces that had unified the nation and coalesced support for the notes that had helped preserve it.” Mihm, note 48, above, p. 359.

52. See Dewey, note 13, above, pp. 372–78; Friedman, note 28, above, p. 91. Although the monetary system was officially bimetallic until the Gold Standard Act of 1900, it was effectively on gold in 1879. Ibid., p. 88.

53. See Robert J. Barro, “Money and the Price Level Under the Gold Standard,” chapter 5 in Barry Eichengreen, ed., The Gold Standard in Theory and History (Methuen, 1985). “The basic conclusion is that output growth—which dominates over ‘technical advances’ in gold production—would imply secular decline in the price level.” Ibid., p. 88.

54. The fall in prices from 1869 to 1899 was likely larger in sectors like agriculture, manufacturing, and mining than in construction or building materials. See Jeffry A. Frieden, “Monetary Populism in Nineteenth-Century America: An Open Economy Interpretation,” Journal of Economic History 57, no. 2 ( June 1997): 367–95, Table 1, p. 368.

55. The amount of silver that could be coined (brought to the mint and turned into money) was limited by the Coinage Act of 1873. Dewey, note 13, above, pp. 403–7. Proponents of free silver sought unlimited coinage. Whether or not Bryan and his supporters had a good economic argument is still being debated. See, for example, Friedman, note 28, above; Frieden, note 54, above; Marshall Gramm and Phil Gramm, “The Free Silver Movement in America: A Reinterpretation,” Journal of Economic History 64, no. 4 (December 2004): 1108–29.

56. On the timing and size of Australian gold discoveries, see Rodney Maddock and Ian McLean, “Supply-Side Shocks: The Case of Australian Gold,” Journal of Economic History 44, no. 4 (December 1984): 1047–67.

57. On the operation of the gold standard in detail, see Eichengreen, ed., note 53, above, especially chapters 6–8. Even during the international gold standard’s heyday at the end of the nineteenth century and beginning of the twentieth century, central banks held both gold and foreign currency assets as reserves. Eichengreen, note 14, above, p. 53.

58. Ben Bernanke and Harold James, “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison,” chapter 2 in R. Glenn Hubbard, ed., Financial Markets and Financial Crises (University of Chicago Press, 1991), p. 37. On the motivations for restoring the gold standard, see Barry Eichengreen and Peter Temin, “The Gold Standard and the Great Depression,” Contemporary European History 9, no. 2 (2000): 183–207. On differences between the interwar and prewar gold standard systems, see Eichengreen, ed., note 53, above, chapters 9–11.

59. See Ben S. Bernanke, “The Financial Accelerator and the Credit Channel,” speech at The Credit Channel of Monetary Policy in the Twenty-first Century (conference), Federal Reserve Bank of Atlanta, Atlanta, Georgia, June 15, 2007.

60. Eichengreen and Temin, note 58, above, p. 196. Mellon is quoted in David Cannadine, Mellon: An American Life (Vintage, 2008), p. 402.

61. For a summary of this argument, see Bernanke and James, note 58, above, pp. 40–41.

62. Eichengreen and Temin, note 58, above, p. 200. At the time, central banks could hold U.S. dollars and U.K. pounds as reserves; as they converted them into gold, total reserve holdings by central banks fell.

63. Ibid., p. 203.

64. Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 (Oxford University Press, 1995), p. 328.

65. William L. Silber, “Why Did FDR’s Bank Holiday Succeed?,” FRBNY Economic Policy Review, July 2009: 19–30, pp. 21–22.

66. 48 Stat. 1, § 3. H. W. Brands, Traitor to His Class: The Privileged Life and Radical Presidency of Franklin Delano Roosevelt (Doubleday, 2008), pp. 327–28.

67. David M. Kennedy, Freedom from Fear: The American People in Depression and War, 1929–1945 (Oxford University Press, 1999), p. 143.

68. 48 Stat. 31, §§ 43–45. According to Raymond Moley, then an influential presidential adviser, “The cold fact is that the inflationary movement attained such formidable strength by April 18 that Roosevelt realized that he could not block it, that he could, at most, try to direct it.” Eichengreen, note 64, above, p. 331.

69. “Over the unanimous opposition of the Federal Reserve Board, Roosevelt embargoed gold exports by halting the issue of export licenses. Under the circumstances, he had little choice.” Ibid., p. 332.

70. Kennedy, note 67, above, pp. 143–44.

71. Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009), Tables 7.2, 7.3, pp. 112–14; Alex J. Pollock, “Was There Ever a Default on U.S. Treasury Debt?,” The American Spectator, January 21, 2009. We do not consider the 1790 restructuring itself to be an act of default, since the restructuring was voluntary. The United States had already been in default since the 1780s, however.

72. The price of gold was set at $20.67 per ounce in 1834; although greenbacks were not actually convertible into gold from the Civil War until 1879, the official price of gold remained the same. See Friedman, note 28, above, pp. 85–86.

73. Brands, note 66, above, p. 328.

74. Sidney Homer and Richard Sylla, A History of Interest Rates, 4th ed. ( John Wiley & Sons, 2005), Tables 47–48, p. 349.

75. Bernanke and James, note 58, above, pp. 41–44; Gauti B. Eggertsson, “Great Expectations and the End of the Depression,” American Economic Review 98, no. 4 (2008): 1476–1516.

76. Meltzer, note 3, above, p. 613.

77. Keynes argued that a gold-based system put the onus for adjustment—changes in economic policies to address external payments imbalances—on countries with current account deficits (higher imports than exports); the United Kingdom was likely to be such a country after the war. “Keynes wanted more symmetric adjustment between surplus and deficit countries. He wanted to impose financial penalties on countries that ran excessively large current account surpluses, ease the burden of adjustment on deficit countries by providing more resources to the IMF, and have the IMF run more like an international central bank with less political control exerted by the United States.” Arvind Subramanian, Eclipse: Living in the Shadow of China’s Economic Dominance (Peterson Institute for International Economics, 2011), p. 17.

78. “Sterling area” countries held a great many pounds that they were presumed likely to want to sell. Eichengreen, note 14, above, pp. 40–42. See also James M. Boughton, “Why White, Not Keynes? Inventing the Postwar International Monetary System,” chapter 4 in Arie Arnon and Warren Young, eds., The Open Economy Macromodel: Past, Present and Future (Kluwer, 2002).

79. The United States ran a trade surplus throughout the Bretton Woods period, but this was outweighed by capital outflows.

80. See Charles P. Kindleberger, Europe and the Dollar (MIT Press, 1968), chapter 10.

81. In technical terms, many countries began allowing current account convertibility during the 1950s. Such convertibility is an essential requirement of membership in the IMF but was initially waived for many countries due to the “dollar shortage.”

82. Paul Kennedy, The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000 (Vintage, 1989), Table 42, p. 433. The postwar recovery of the West German economy is known as the “Wirtschaftswunder” (literally, economic wonder); the period following World War II is known in France as the “trente glorieuses” (literally, thirty glorious [years]).

83. Giscard d’Estaing was minister of finance in the 1960s under President Charles de Gaulle, another critic of American power. Eichengreen, note 14, above, p. 4. Arvind Subramanian attributes the phrase “exorbitant privilege” to de Gaulle and his adviser Jacques Rueff. Subramanian, note 77, above, p. 55.

84. OMB, Fiscal Year 2012 Budget of the U.S. Government: Historical Tables, Tables 1.2, 7.1.

85. David G. McCullough, Truman (Simon & Schuster, 1992), p. 337.

86. President Harry Truman in 1947, quoted in Henry Kissinger, Diplomacy (Simon & Schuster, 1994), p. 453.

87. The $17 billion was a “moral commitment” by Congress, not an authorization or appropriation. Greg Behrman, The Most Noble Adventure: The Marshall Plan and the Time When America Helped Save Europe (Free Press, 2007), p. 165.

88. OMB, note 84, above, Table 3.1. High defense spending was due in part to the development of the American “way of war,” which involved large amounts of concentrated firepower in the form of artillery and air attacks. See Robert H. Scales, Jr., Firepower in Limited War, rev. ed. (Presidio, 1995), chapter 1.

89. Jerry Tempalski, “Revenue Effects of Major Tax Bills,” Treasury Department Office of Tax Analysis Working Paper 81, September 2006, Table 1, p. 15; Center for Tax Justice, “Top Federal Income Tax Rates Since 1913,” November 2011, available at http://www.ctj.org/pdf/regcg.pdf. High marginal tax rates motivated well-paid people to develop strategies for shielding income from tax. See C. Wright Mills, The Power Elite (Oxford University Press, 2000), pp. 151–57.

90. “For eight years, he had steadfastly fended off those to his left who would risk the nation’s private economy by ignoring deficits and spending government money at will, and those to his right who would do the same by cutting taxes and demanding unsustainable defense expenditures.” Jim Newton, Eisenhower: The White House Years (Doubleday, 2011), p. 338. “He had come to office determined to erase the $8.2 billion budget deficit he had inherited from Truman. Steady resistance to federal spending, along with the expansion of the economy through the mid-1950s, had allowed Eisenhower to deliver surpluses in 1956 and 1957, only to have those dry up during the 1958 recession. But that recession had passed quickly, and the 1960 budget offered Ike his final opportunity to deliver the economy into safe hands. He held fast on spending and taxes, and left office with a $500 million surplus.” Ibid., p. 320. On the tension between Eisenhower and Nixon over tax cuts, see G. Scott Thomas, A New World to Be Won: John Kennedy, Richard Nixon and the Tumultuous Year of 1960 (Praeger, 2011), p. 42.

91. “American monetary liabilities to foreigners first exceeded U.S. gold reserves in 1960.” Eichengreen, note 14, above, p. 50. In 1950, the United States’ stock of “international reserves” (mostly gold) was $24.3 billion, while its “external liquid liabilities” (mostly central bank holdings of dollars) were $8.9 billion— a coverage ratio of 2.73. By 1959, reserves were down to $21.5 billion and external liabilities were $19.4 billion, so the coverage ratio was 1.11. Herbert G. Grubel, The International Monetary System: Efficiency and Practical Alternatives (Penguin, 1969), Table 2, p. 138.

92. The fear may have been exaggerated. “Why the cumulation of foreign liquid dollar claims was a problem is not clear. Of course, if U.S. gold holdings far exceeded foreign liquid dollar claims, either in private or in official hands, foreigners could not successfully directly run [on] U.S. gold reserves if the entire amount of U.S. reserves was made available to defend the parity. As liquid claims accumulated sufficiently to exceed U.S. gold reserves, such a direct run was feasible. Nevertheless, the gulf between feasibility and profitability can be vast.” Peter M. Garber, “The Collapse of the Bretton Woods Fixed Exchange Rate System,” chapter 9 in Michael D. Bordo and Barry Eichengreen, eds., A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform (University of Chicago Press, 1993), note 2, pp. 461–62. In the early 1960s, the U.S. current account was consistently in surplus. BEA, International Transactions, Table 1.

93. Quoted in Arthur M. Schlesinger, Jr., A Thousand Days: John F. Kennedy in the White House (Houghton Mifflin, 1965), p. 654.

94. “His administration would boost defense spending by $6 billion in 1961, surpassing Ike’s final Pentagon budget by 14 percent. Kennedy seemed intent on demonstrating America’s military resolve.” Thomas, note 90, above, p. 295.

95. On the impact of Keynesian thinking on President Kennedy and his proposed tax cuts, including the support they received from the business community, see Robert Lekachman, The Age of Keynes (Random House, 1966), chapter 11.

96. Quoted in Jonathan Oberlander, The Political Life of Medicare (University of Chicago Press, 2003), p. 31.

97. Quoted in “Don’t Let Dead Cats Stand on Your Porch,” The New York Times, September 19, 2009.

98. Irving Fisher, “The Debt-Deflation Theory of Great Depressions,” Econometrica 1, no. 4 (October 1933): 337–57; Ben Bernanke and Mark Gertler, “Agency Costs, Net Worth, and Business Fluctuations,” American Economic Review 79 (1989): 14–31.

99. OMB, note 84, above, Table 7.1.

100. Olivier Jeanne has analyzed the five major periods of debt reduction in the United States. From 1791 to 1835, the national debt fell from 39.9 percent of GDP to roughly 0 percent, or 0.9 percentage points per year. From 1866 to 1916, it fell from 33.5 percent to 3.0 percent in 50 years, or 0.6 percentage points per year. From 1919 to 1930, it fell from 34.6 percent to 15.6 percent, or 1.7 percentage points per year. From 1946 to 1974, it fell from 108.7 percent to 23.9 percent, or 3.0 percentage points per year. From 1993 to 2001, it fell from 49.3 percent to 32.5 percent, or 2.1 percent per year. The average primary surplus following World War II was 1.0 percent of GDP, the second-lowest level of these five periods. The real interest rate, however, was 3.4 percentage points less than the real growth rate; in all other periods, the real interest rate was higher than the real growth rate. Olivier Jeanne, private communication, November 2011.

101. See Carmen M. Reinhart and M. Belen Sbrancia, “The Liquidation of Government Debt,” NBER Working Paper 16893, March 2011. They find that, in the United States, the real interest rate averaged –3.5 percent from 1945 to 1980 and that negative real interest rates reduced the national debt by 3 percent to 4 percent of GDP per year. Ibid., pp. 38–39.

102. The higher short-term interest rates necessary to reduce gold outflows will not necessarily push up the long-term interest rates that matter more for government borrowing.

103. At the end of 1967, the U.S. had international reserves of $14.8 billion and external liquid liabilities of $33.2 billion for a coverage ratio of 0.45, the lowest since World War II. Grubel, note 91, above, Table 2, p. 138.

104. See Robert Triffin, Gold and the Dollar Crisis (Yale University Press, 1961), pp. 70–71.

105. As recalled by Clark Clifford, then secretary of defense, “In the midst of the growing crisis over Vietnam, a new problem broke out: a massive purchase of gold in London and international markets depleted our gold supply in a single day by almost $400 million. We still backed gold at the artificial price of thirty-five dollars per ounce, and if the international buying continued, we could see a severe weakening of the dollar.” Clark Clifford with Richard Holbrooke, Counsel to the President: A Memoir (Random House, 1991), p. 502.

106. There were repeated rounds of negotiations, particularly with countries like Germany and Japan that had trade surpluses and were therefore continuing to accumulate gold. The United States wanted them to “revalue” (appreciate) their currencies relative to the dollar, which would reduce their exports and increase their imports. There were some revaluations but not enough to make a significant difference.

107. On the end of Bretton Woods, see Garber, note 92, above; Douglas A. Irwin, “The Nixon Shock After Forty Years: The Import Surcharge Revisited,” working paper, December 9, 2011.

108. Richard Reeves, President Nixon: Alone in the White House (Simon & Schuster, 2001), p. 354; Paul A. Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (Times Books, 1992), p. 77.

109. Reeves, note 108, above, p. 357.

110. Ibid., p. 363. An alternative interpretation is that President Nixon wanted to stimulate the economy and saw the Bretton Woods system as a constraint that had to be removed.

111. James Grant, “Gold at High Altitudes,” Grant’s Interest Rate Observer 29, no. 17 (September 9, 2011): 3. See also James Grant, “The Cumulative Effect of History,” in Grant’s Interest Rate Observer 29, no. 12 ( June 17, 2011): 1–4.

112. Quoted in Eichengreen, note 14, above, pp. 61–62.

113. “Volatility there was in the share of dollars in foreign exchange reserves in the 1970s, but no secular decline.” Ibid., p. 63.

114. This was a larger increase than that in the 1968–1974 period ($58.1 billion). Philip Armstrong, Andrew Glyn, and John Harrison, Capitalism Since World War II: The Making and Breakup of the Great Boom (Fontana, 1984), Tables 12.2, 16.6, pp. 298, 370. The comparison between these time periods is complicated by inflation, but the fact that there was no big shift by central banks away from dollars is not controversial.

115. Iwan Morgan, The Age of Deficits: Presidents and Unbalanced Budgets from Jimmy Carter to George W. Bush (University Press of Kansas, 2009), pp. 80–81.

116. OMB, note 84, above, Table 1.2. ERTA was initially projected to cost over 4 percent of GDP in its fourth year; even the Revenue Act of 1945 was only expected to cost 2.67 percent of GDP per year. Tempalski, note 89, above, Table 2, pp. 16–17.

117. OMB, note 84, above, Table 1.2. The budget deficit was 7.2 percent of GDP in 1946, which was technically in peacetime, but this was because it took time to reduce military spending after World War II.

118. “Before 1982, U.S. current account deficits were small and temporary. Deficits in some years were typically offset by surpluses in other years. Since 1982, though, the United States has experienced large and chronic current account deficits.” Craig S. Hakkio, “The U.S. Current Account: The Other Deficit,” Federal Reserve Bank of Kansas City Economic Review, Third Quarter, 1995: 11–24, p. 12.

119. See Stephen Marris, Deficits and the Dollar: The World Economy at Risk (Institute for International Economics, 1985), p. 31.

120. Paul A. Volcker, testimony before the Joint Economic Committee, February 5, 1985, available at http://fraser.stlouisfed.org/historicaldocs/832/download/28426/Volcker_19850205.pdf, p. 10. See also Marris, note 119, above.

121. Morgan, note 115, above, pp. 110–12, 115–16.

122. This is in part because governments fear that the IMF will recommend inappropriate macroeconomic policies. In some instances, however, powerful elites resent IMF advice because it threatens their privileges or their hold on power. See Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Pantheon, 2010), chapter 2.

123. See Morris Goldstein and Philip Turner, Controlling Currency Mismatches in Emerging Markets (Institute for International Economics, 2004).

124. By the end of 2010, China held more than $1.28 trillion of U.S. Treasury securities. Elena L. Nguyen, “The International Investment Position of the United States at Yearend 2010,” Survey of Current Business, July 2011: 113–23, Table K, p. 118. These data are for “foreign official and private holdings,” but most experts think that the Chinese holdings are mostly by the official sector, primarily the central bank and other government agencies. China was the largest foreign holder of Treasuries, followed by Japan at $871.5 billion, Brazil at $184.7 billion, Russia at $169.4 billion, “OPEC Asia” at $165.8 billion, and Taiwan at $153.7 billion. Total foreign holdings of U.S. Treasury securities were over $4.3 trillion.

125. Grubel, note 91, above, Table 1, p. 136. International reserves also included “Fund positions” (credit lines that could be drawn on automatically, without conditions), which were $1.6 billion in 1948 and $6.6 billion in 1968.

126. In the 1970s, 80 percent of total central bank reserves was in dollars; this situation was little changed from the end of the Bretton Woods era. Eichengreen, note 14, above, p. 63.

127. IMF, Data Template on International Reserves and Foreign Currency Liquidity. The total for every month from March through August 2011 exceeds $7 trillion; data for later months were incomplete at time of writing. Reporting is entirely voluntary.

128. China alone has over $3 trillion in reserves. Joseph E. Gagnon, Nicholas R. Lardy, and Nicholas Borst, “The Internal Cost of China’s Currency Policy,” Realtime Economic Issues Watch (blog), Peterson Institute for International Economics, October 3, 2011. The breakdown by currency is difficult to estimate because it is a closely guarded secret in many countries. Of the reserves for which a currency breakdown is voluntarily reported to the IMF, over 60 percent was in dollars as of 2010. IMF, Currency Composition of Official Foreign Exchange Reserves. According to Federal Reserve staff estimates, dollar assets made up over 60 percent of all reserves in 2009. Linda S. Goldberg, “Is the International Role of the Dollar Changing?,” Current Issues in Economics and Finance 16, no. 1 ( January 2010), Chart 3, p. 4.

129. Treasury Department, “Monthly Statement of the Public Debt of the United States,” September 30, 2011. The $10.1 trillion figure excludes debt held by other branches of the federal government.

130. As of 2010, nonresidents held 53 percent of marketable federal government debt. IMF, Fiscal Monitor: Addressing Fiscal Challenges to Reduce Economic Risks, September 2011, Statistical Table 9, p. 72. As of September 2011, the Treasury Department had $9.6 trillion in marketable debt outstanding. Treasury Department, note 129, above.

131. As Stephen Cohen and Brad DeLong write, “Foreign governments and investors, mostly in Asia, have believed that macroeconomic policy and portfolio equilibrium require that they boost their holdings of dollar-denominated foreign assets to levels that two decades ago would have been regarded as absurd and unbelievable.” Stephen S. Cohen and J. Bradford DeLong, The End of Influence: What Happens When Other Countries Have the Money (Basic Books, 2010), p. 93. On the accumulation of dollar investments by foreign countries, see ibid., chapter 5.

132. The average ten-year Treasury yield for the decade preceding the financial crisis (1998–2007) was 4.9 percent; the average for 2009–2011 was 3.1 percent; the yield at the end of 2011 was 1.9 percent. The average from April 1953 (the earliest data available from the Federal Reserve) through 2007 was 6.5 percent. Federal Reserve Statistical Release H.15.

Notes

ABBREVIATIONS

INTRODUCTION

1. IMMORTAL CREDIT

2. END OF GOLD

BEA	Bureau of Economic Analysis
CBO	Congressional Budget Office
IMF	International Monetary Fund
NBER	National Bureau of Economic Research
OECD	Organisation for Economic Co-operation and Development
OMB	Office of Management and Budget