Money in America — Part Eight

In our last dramatic episode, we saw America ready for war … with British help, looked at a war economy from the vantage point of Main Street, and touched on post-war conditions.

World War Two loose ends

The behind-the-scenes activities of the British Security Coordination (officially know as the British Passport Control Office in NYC) not only derailed the ‘isolationist’ element of the American public, it also succeeded in deposing Vice President Henry Wallace as FDR’s running mate in 1944.

One factor was Wallace’s vision of a post-war world which conflicted with Churchill and others, hoping to retain their stature as a world power. Recall that Great Britain insisted on returning to a gold standard at the pre-WW1 value of the pound. During WW2 years, they feared the growth and ambition of their American cousins. Perhaps the most significant area of disagreement was the role of civil aviation and who would claim the lion’s share of world domination.

Juan Trippe’s Pan American had received a $260 million war contract to build some 16 airfields in South America for military use. One provision of this contract granted the reversion of “$38 millions worth of work” to Pan Am and exclusive use of these facilities after the war. The final cost was estimated upwards of one billion dollars …

Pan Am also had their Boeing 314s (the Clipper flying boat) taken over by the government as they were the only existing aircraft that could carry large payloads across an ocean. The airline had other contracts, ferrying bombers and other aircraft, and flew all up more than 90 million miles for the U.S. Government.

Perhaps one of the factors that drew Churchill’s approval of Harry Truman was that the latter disliked Pan Am’s monopoly in South America.

Most of this aviation war work fell under the auspices of the Army Air Transport Command. What started in wartime as a very small scale operation ended up larger than the entire United States commercial airline establishment. The British were right to worry about their future.

(A slight digression)

The Tokyo Skytower, world’s largest freestanding tower, opened on 21 May 2012. This is a significant rhyme … and Skytower’s “curves and arches reflect[ing] a traditional Samurai sword” katana imagery offers interesting symbolism.

Although the first skyscraper was built in Chicago in 1884-5, the great push for really big building occurred even as the Great Depression unfolded.

• NYC – Chrysler Building, 1930, Empire State building, 1931.
• Chicago – Palmolive building, Carbide and Carbon building, and Medinah Club building, 1929.
• Cincinnati – AT&T building, 1929, Carew Tower, 1930, and Times-Star building, 1933.
• Kansas City, Missouri – Power and Light building, 1931, and Jackson Country Courthouse, 1934.
• Hartford, Conn. – Southern New England Telephone building, 1931.
• Providence, RI – County Courthouse, 1930.
• Philadelphia, PA – Lewis Tower, 1929, and Ritz-Carlton , 1931.
• Pittsburgh, PA – Gulf Building, 1932.

Just a few examples then and here we are now in another similar era with tall, taller, tallest buildings springing up around the globe. Do you feel lucky, punk?

The Post-War Economy

In a fine example of linear thinking, the pundits looked forward by looking backward. Some remembered the Bonus Army. Others anticipated a new depression … “the greatest and swiftest disappearance of markets in all history” … “insecurity, instability, and maladjustment” … “the infections of a postwar disillusionment” … “a declining birthrate” …

Fearing a thinning population and collapsing economy, the U.S. Government began planning a massive campaign, involving two hundred organizations, to provide work relief on the scale of the original New Deal.

It wasn’t necessary.

The Fourth Turning, pg. 146

With vast examples of wartime spending, many economists feared the subsequent drop in military spending would see the economy revert to depression hard times. Not so – a dozen years of thwarted consumer demand assisted strong economic growth. The 1940 GNP of $200 billion in 1940 went to $300 billion by 1950. And a decade later, GNP surpassed $500 billion.

Rebuilding Europe via the Marshall Plan aid and U.S. exports certainly was a factor. And an ‘Iron Curtain’ descending over eastern Europe supplanted the Nazi menace with a Soviet one and the Cold War was underway. Cue the MIC.

Also, the union movement threw off the government shackles imposed by the war effort. 1945 ended with automobile, electrical and steel strikes.

A gathering of elites from allied nations had met at Bretton Woods in 1944 and established a regulated method of exchange rates, referenced to the U.S. gold backed dollar – and thus the US$ became the world reserve currency.

Whether or not it’s true that the U.S. held 80% of world gold reserves then, “he who owns the gold makes the rules.” As of 2010, the total of gold reserves was 30,807 tonnes and the U.S. is said to have 8,133.tonnes, even if it’s now “only tradition” …

“After World War II, the United States held over 20,000 tons of gold in its reserves much of it having come from Europe to pay for war supplies and arms.”

Alex Stanczyk – Beijing China Jan. 7th, 2012 speech

Businessmen, industrialists, entrepreneurs, all demonized in the 30s and co-opted in the 40s saw a ‘sea change’ in attitudes. Having assisted in victory, albeit via government spending, the post-war years saw new attitudes welcoming progress. And innovation. An industrial conference certainly embraced innovation – and even depression-era experiments like television quickly became a reality that grew. Radar and microwaves turned from war to civilian use. The potential of computers was discussed; the only one willing to take a chance was Thomas J. Watson, who said he would probably lose money but it was worth exploring.

As quickly as Detroit factories had converted to war work, they changed back even faster. The first 1946 civilian cars rolled off the lines before year’s end.

In the farm sector, increased productivity led to agricultural overproduction. Small farms were losing competitive ability and the 1947 farm workforce of 7.9 million people declined over the next forty years to less than half that. Farming grew to become Big Agra.

Nothing goes up forever – business eased off from expansionary investment. President Truman responded to an eleven month slump beginning in November 1948, shortly after his “Fair Deal” economic reforms. Coincidentally the Federal Reserve had initiated a period of monetary tightening. Also, there was the new, improved threat of the Cold War – and Truman reinstituted the draft. Economists had forecast a much worse period, deflation, gloom and doom. The GNP declined 1.5%, consumerism had lessened and unemployment went up to 7.9%. A little deficit spending wouldn’t hurt …

The face of the urban workplace environment changed, too. By the 1950s more service works would be counted than those who produced goods. By 1956, more white-collars were employed than blue-collars. Unions won their first long-term employment contracts, with generous benefits …

Business activity has expanded greatly since the spring of 1946 in response to the stimulation of a large postwar civilian demand for goods and services. As a result of this increased activity, as well as of advancing prices and a sharp reduction in corporate taxes, business profits after taxes reached new high levels by the end of 1946. In this period expenditures by business for plant, equip- ment, and inventories have been in unprecedented volume. In order to finance the great increase in assets, business in general has invested the largest annual volume of retained earnings in history, has drawn upon its large wartime accumulation of cash and Government securities, has borrowed from banks, and has floated new issues of securities.

Federal Reserve Bulletin, May 1947

The Fed also noted that the dollar volume of sales in 1946 was 75 percent greater that the previous peacetime peak year of 1929. Wartime profits for business contributed to unusually high levels of plants and equipment spending – aided by a large volume of investment funds. Banks with large holdings of short-term Treasuries could sell or pledge against advances from the Federal Reserve and thus increase their loan portfolios. Special tax credits adjustment wartime taxes for business reduced the 1946 tax liabilities.

Wartime financing by the twelve Federal Reserve Banks, after statutory dividends to the member banks in 1947 yielded a net earning of 60 million dollars. About 90 percent was paid into the Treasury.

The Rise of Suburbia

William Levitt addressed the problem of affordable home ownership first in New York and four other locations. A generation accustomed to ‘government issue’ found the identical ‘cookie-cutter’ houses acceptable, especially since they were cheaper than renting. Assembly-line production techniques in building houses for the first time proved effective.

Levitt & Sons and other builders were guaranteed by the V.A. and FHA which benefitted veterans significantly. The first homes were offered in March, 1949, even as the administration fought deflation.

The typical blue collar family had an option for better living also.

http://tigger.uic.edu/~pbhales/Levittown/Life%20magazine%20images%201949-/Bernard%20Levey%20family%20in%20front%20of%20original%20Cape%20Cod.jpg

Levittown, New York was the model of an ideal American suburb. It would take decades for these modest homes to morph into McMansions all across the nation – but once a paradigm shift has begun, it must stay the course.

The symbiosis of automobiles for Everyman as well as tidy little suburban homes was irresistible. Those hordes who once escaped the family farm for city life now expanded inexorably into something that was neither. The average new car cost $1,510 in 1950 and a gallon of gas to put in it set you back 18 cents. That Cape Cod house style averaged $8,450 and it came with modern kitchen appliances!

A middle-class wage averaged $3,210 and one of the biggest discretionary expenses was a B&W TV at $249.95, and it was made in America.

The sprawl continued over the years: inner suburbs, outer suburbs, exurbs, and by the 1990s, suburbs mingled with commercial centres, industrial parks, and corporate headquarters.

The Treasury-Federal Reserve Accord

The Federal Reserve System formally committed to maintaining a low interest rate peg on government bonds in 1942 after the United States entered World War II. It did so at the request of the Treasury to allow the federal government to engage in cheaper debt financing of the war. To maintain the pegged rate, the Fed was forced to give up control of the size of its portfolio as well as the money stock. Conflict between the Treasury and the Fed came to the fore when the Treasury directed the central bank to maintain the peg after the start of the Korean War in 1950.

http://www.richmondfed.org/publications/research/special_reports/treasury_fed_accord/background/

Actually, Truman wanted that peg maintained for his U.N. police action. The Fed argued the low peg produced an excessive monetary expansion causing inflation. The Accord, eliminated the obligation of the Fed to monetize the debt of the Treasury at a fixed rate. This agreement became essential to the independence of central banking …

Thus, 1951 ushered in “the modern Federal Reserve System”.

Sociologically, all you need to know about the decade of the 50s was written in William H. Whyte’s “The Organization Man.” Americans inspired to win World War 2 returned to an empty suburban life, conformity, and the pursuit of the dollar. Kurt Vonnegut would have agreed. His first novel, “Player Piano”, reflected the corporate culture of uniformity, team work, collectivism and stability that he experienced at General Electric.

And there was McCarthy and reds under the bed. The Rosenberg trial. HUAC. The ever-present threat of the Cold War and mushroom clouds. Captain America and Mickey Spillane taking out Commies. A new chapter in ‘War is the health of the state’ …

The business magazine Steel had applauded Truman’s policies: “the firm assurance that maintaining and building our preparations for war will be big business in the United States for at least a considerable period ahead.”

In 1950, the U.S. Budget was $40 billion with $12 billion for the military. By 1955, that year’s budget was $62 billion with $40 billion for the military. When John F. Kennedy was elected in 1960, it was 49% of about $91 billion total. Very soon after his inauguration, JFK asserted the country was spending too much for war and intended to cut back the size of the active military. Then he reversed course, adding $9 billion to the ‘defense’ kitty. A curious observation has been made about the Nixon-Kennedy debates: those who felt JFK won were primarily television viewers; the radio audience leaned toward Nixon. The 1960 election was incredibly close.

Of course, news of Soviet buildups, the “bomber gap” and the “missile gap” turned out to be exaggerated. Nonetheless, the 1970 military budget had grown to $80 billion – half of that to about 15 industrial corporations.

The fear factor card never gets old, continually played and believed. From an Iranian threat, the panic of “Reds” only 90 miles away to Bay of Pigs to the Cuban missile crisis and then an assassination to wonder about. On and on.

But by 1964, the American High had worn out and the greatest antiwar movement ever experienced in America had its effect – enter the Second Turning, the Consciousness Revolution. Perhaps the prelude to this season shift was the founding of the AARP in 1958 – another type of looking ahead from the previous generation.

After the ‘death of Camelot’ (smothered by glitz, hype and myth) America embraced the Great Society with good intentions and no ability to do simple arithmetic. The 1964 election saw the biggest Democratic landslide since 1938. Liberals would eliminate poverty – and any slight failures were blamed on the excessive spending on the Vietnam War.

And along came Nixon

Aside from health problems, LBJ also faced dissension within the ranks, from an antiwar movement, complete with Hollywood celebrities – and depressing polling results indicated the pragmatic decision to “not seek … not accept the nomination of my party for another term.” Following his earlier remarks in that speech, suspending bombing in North Vietnam and being in favor of peace talks, this decision was unexpected.

With LBJ’s withdrawal from a race that was looking promising for antiwar Eugene McCarthy likely to win large numbers of convention delegates, Hubert Humphrey announced his candidacy. So did Robert Kennedy. The latter’s ambition ended with another lone nut with a gun … McCarthy was overshadowed by Humphrey. The 1968 Democratic Convention in Chicago, complete with antiwar riots and police brutality seen by “the whole world” had some influence in the outcome of the election. The failed Paris peace talks … for whatever reason … added to the shift to the Republican brand.

Nonetheless, the end result was squeaky close with but 0.7% in favor of Nixon.

Nixon assumed office after about eight years of expansion. By the end of 1969, attempts to handle the budget deficits of the Vietnam War and Federal Reserve monetary tightening via raised interest rates spawned an eleven month recession. Confidence grew with the Christmas present of the end of a mild (0.6%) recession and 1971 started looking bright.

Meanwhile, what had begun at Bretton Woods was slowly unraveling. With a little bit of coercion, the U.S. Dollar had been accepted as the world reserve currency and a fixed-exchange system would reign.

Everything worked well in the post-war era. The Marshall Plan and other aid was designed to assist growth of nations, such as Japan, as targets for export of U.S. goods – and thus able to absorb U.S. Dollars. The U.S. was producing half of the world’s manufactured goods. Initially holding half of the world’s reserves, and a creditor nation. But by 1970, U.S. Reserves were down to 16%, the Deutsche Mark and yen were undervalued with neither country willing to revalue – this being the justification for weaker currency being good for exports. Trade imbalances were worsening.

And then there was de Gaulle. With the U.S. insisting on the FDR gold price fix of $35/oz., an open market for gold made the pegged convertability between central banks a problem.: the U.S. had to keep running deficits to keep the system liquid and other countries were tempted to buy gold at the Bretton Wood price and sell on the open market for the artifically maintained strength of the U.S. Dollar.

In about 1967, de Gaulle realized the reserve currency was unsustainable and intended returning France to a gold standard. Having been a party to the establishment of the London Gold Pool in 1961, he responded to his prime minister’s later analysis:

“The international monetary system is functioning poorly because it gives advantages to the country issuing the reserve currency. Such a country can have inflation by making others pay for it.”

George Pompidou

France pulled out and the London Gold Pool collapsed in 1968. By 1971, U.S. Reserves were only around $10 billion and foreign banks held $80 billion in dollars.

In early 1971, de Gaulle sent a French battleship with a hoard of dollars to convert to gold at the Federal Reserve Bank of New York. The British ambassador to Washington conveyed the August 11 instruction of his government, conversion of $3 billion dollars into gold, to be stored in the underground vault of said bank. Other foreign governments had gold stored there also.

On August 16, 1971, Nixon abandoned the gold standard, asserting that the United States would no longer redeem dollars.

Fiat on!

And it’s been downhill ever since.

Epilogue to come …