How America gave in to its two deadliest temptations
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12:35 PM (39 minutes ago)
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Bill Bonner’s Diary
Maria’s Note: Maria Bonaventura here, managing editor of the Diary. Bill is unable to pen his daily essay. So today, we share an excerpt from his latest book, A Modest Theory of Civilization: Win-Win or Lose.
Bill turns to a long-forgotten warning from General “Ike” Eisenhower – and the two big temptations the former president identified for the American Republic…
How America Gave in to Its Two Deadliest Temptations
By Bill Bonner, Chairman, Bonner & Partners
Bill Bonner
The heyday of the American republic was the interwar period between Korea and Vietnam. The economy was booming. The U.S. had the biggest trade surplus… the strongest manufacturing sector… the strongest currency… and the highest salaries in the world. New York was the world’s most dynamic city. California was its Shangri-La. And the debt from World War II was being paid down.
In the arts, too, America was on top of the world. Motion pictures were the leading artform; Hollywood dominated the industry. As for the plastic arts, nobody did it better than the auto designers of Detroit who, with their sparkling glass and dazzling chrome, created the finest works of art of the century.
Elected in 1952, Dwight Eisenhower ended the Korean War, balanced the budget, reduced U.S. debt as a percentage of GDP by 16%, and reduced government spending as a percentage of GDP from 20% to 18% (not even Ronald Reagan was able to do that). He cut defense spending by nearly 30%. The Dow doubled, and personal incomes rose 35%.
Eisenhower also resisted the temptation to throw his weight around overseas. When Israel invaded Egypt in 1956, with the United Kingdom and France eagerly joining in, he refused to take part. But Eisenhower teamed up with the Soviet Union and threatened to sell British bonds if the UK failed to withdraw. He was no saint. But the hallmarks of his two terms were peace and prosperity, with relatively fewer win-lose deals imposed by the feds.
We should mention that Eisenhower was also ably served at the Fed by William McChesney Martin. Martin was a Latin scholar from Yale, who joined the brokerage firm A.G. Edwards after graduation and made full partner two years later. He gave such a good showing of himself that he was elected to head the New York Stock Exchange at age 31. Then, when World War II broke out, he was drafted and served as a private.
McChesney Martin had a simple and modest idea of his mission as chair of the Fed. He sought neither full employment, nor Dow 30,000, nor 2% consumer price inflation. He neither appeased nor sucked up, neither to Democrats nor Republicans.
Today’s Fed model – based on “dynamic stochastics” – would have been Greek to him… or perhaps merely ridiculous claptrap. Negative real interest rates… quantitative easing… and a $4.4 trillion Fed balance sheet – all would have been regarded like a quack hair-growing elixir – with faint hope and much suspicion.
As we’ve mentioned in earlier pages, the 1950s Fed chief saw his role as simply to “take the punchbowl away” when the party got out of control or to “lean into the wind” when the seas got choppy.
That is to say, McChesney Martin sought to loosen the money when the economy was lagging and tighten monetary policy when the economy was running hot. (Richard Nixon blamed McChesney Martin’s “tight money” policies for his loss in the 1960 U.S. presidential election.)
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