1862 Greenback Dollar -- worth about 30 cents by 1865. Drowning in debt and inflation after the Civil War, the US managed to regain its credit and restore its currency. Can't we do the same today?
Last week, I gave a tepid Two Cheers for the Debt Ceiling !!, mostly because I saw the looming global crisis, the specter of a US government default, as finally pushing Congress and the White House to do their jobs of managing the country's out-of-control finance.Since then, like everyone else, I have followed the drama in Washington, D.C., the secret White House meetings of President Obama and top Capitol Hill leaders, the leaked stories of temper tantrums and finger pointing, House Republican Eric Cantor (R-Va) storming out one day, Obama losing his temper the next, the strategies, the deals and non-deals.
It's now a week later, default is a week closer, and the bickering goes on. It's starting to give me shivers, a sinking feeling -- like a crime is being committed across town in a dark alley as we sit here. If the debt ceiling talks fail, it will cast a long shadow. Here's why--
First the good news - an opportunity:
I'm going to bore you here with some dry statistics. Humor me on this.
Here's the key point: The US government today owes a crushing debt of $14.3 trillion to creditors and bondholders -- over $47,000 for every man, woman, and child in the country. This is a staggering amount of money, growing by over a trillion each year, already larger than the country's annual economic output, and threatens to cripple us for generations -- putting us literally in the same boat as Greece and other bankrupt European countries today.
In its 235-year history, the USA has run up a tab this big only twice: during the Civil War and during World War II.
Note the spikes after the Civil War (1865) and World War II (1945). For the Civil War, multiply the peak by three to account for the collapse of the Union's Greenback paper currency.
The good news is that, in each of these cases, the USA managed to dig its way back, regain its credit, and emerge as the leading economy in the world. We can follow this same blueprint today. My hope was that the debt ceiling crisis would be the spark -- and the continuing talk about a multi-trillion-dollar "grand bargain" is, to my mind, gets it exactly right.What blueprint? Here's the history-
Ulysses S. Grant. As general, he defeated Robert E. Lee to win
the Civil War. As president, he stabilized the currency and
paid down the debt.
- The Civil War: To finance the Civil War, President Abraham Lincoln's government borrowed heavily. Public debt exploded from $90 million in 1861 to over $2.75 billion in 1866 (worth hundreds of billions in modern money). At the same time, it also cheapened the currency through massive inflation, issuing over $500 million in fiat paper dollars or Greenbacks. By the time Robert E. Lee surrendered to US Grant at Appomattox Courthouse in April 1865, those paper Greenbacks had lost about two-thirds of their value (measured against gold). So, on top of oceans of debt, we also had an almost-worthless currency. How did we dig out of this mess?
- First, we paid down the debt. Starting in 1867 and continuing through 1878, the US Treasury consistently every month sold gold and bought bonds -- slowly paying off debt and strengthening the dollar. By 1878, it had lowered the debt by about 25% (to $2.1 billion) and the country was able to return to a strict gold standard -- no more fiat paper.
- Second, we kept up revenues with high taxes -- in the form of protective import tariffs -- so we could also help US business and run costly programs like Reconstruction, farm homesteads, railroad land grants, and the Plains Indian Wars.
- Third, the economy grew. The great post-war industrial boom of the late-1800s Gilded Age, a product of many causes -- wartime stimulus, corporations, government subsidies, immigration, a wave of tech technologies, so on -- quickly made the lingering debt a shrinking portion of a booming economy.
- Finally, the country had patience to stick with this plan over fifteen years under three different presidents: Andrew Johnson, Ulysses Grant, and Rutherford Hayes.
- World War II: Like the Civil War, World War II was also hugely expensive, forcing the US government to borrow heavily. The debt this time exploded from $50 billion in 1940 to over $270 billion in 1946, topping 120 percent of US annual gross domestic product -- the highest ever (see char above). How did we pay it back?
- Again, first we kept down the debt. Between 1947 and 1960, the US government ran seven annual budget surpluses and seven small deficits, keeping nominal debt essentially flat -- around $270-280 billion.
- At the same time, we kept up taxes to also pay for, among other things, the Cold War, the Korean War, the interstate highway system, and continuing New Deal programs.
- Again, the economy soared. Real gross domestic product more than doubled during those years, and continued to explode through the 1960s.
- Finally, patience. Over some 15 years, presidents as diverse as Harry Truman, Dwight Eisenhower, and John F. Kennedy all stuck to the plan. By the time President Kennedy was assassinated in 1963, the World War II debt had shrunk to less than 50 percent of GDP. By 1981, it would bottom at 32%.
The history is clear: With four things -- discipline, income, growth, and patience -- this country has climbed out of fixes far worse than the one we're in today. Even in the 1990s, we managed to do the trick.
But today, we seem to lack those exact virtues: no discipline, a tax system decimated by Bush-era cuts and special loopholes (US tax revenue today is 14.9% of GDP, vs. 17-18% during the 1950s), anemic growth, and a culture of now.
The debt ceiling crisis, for all it's flaws, finally seemed to give our politicians a mechanism and backbone to restore order.
- The Tea Party movement, to its credit, insisted that any increase in debt be tied to effective spending controls.
- President Obama, to his credit, finally came to see the need for a "grand bargain" cutting debt by $4 trillion or more over a decade -- the very type of discipline that dug us out after World War II and the Civil War. House Speaker John Boehner, according to news accounts, seemed to agree.
- Democrats and Obama, to their credit, insisted that any bargain be fair, not weighted against poor and old, that wealthy people give their share, and that excessive tax giveaways be cut.
- The public, to its credit, seemed ready to swallow the pill.
This is rare. And it may be another 10 or 20 years before the political stars align themselves so well. But now, as default comes near, Republicans and Democrats all seem to be getting cold feet.
Watching the drama in Washington today, I am less concerned about a possible US government default. Few politicians at this point still seem eager to end up with that particular egg on his faces. Instead, I am afraid that, in the pinch, they will all happily sacrifice a once-in-a-generation opportunity to take a serious serious stab at controlling the country's finances. Republicans will hide behind their no-new-taxes pledges; Democrats will point to the Republicans' failure to compromise; all sides will point to the need to give financial markets short-term "confidence."
A citizens, we should demand better - that our leaders produce the "grant bargain." Without it, we may avoid default in August, but don't expect credit rating agencies to smile on our fiscal house of cards after the crisis is over. Chicago mayor Rahm Emanual, the former White House chief of staff, had it right: "You should never let a good crisis go to waste."