In May 1991, Risa Kugal, a fortyish New York woman who said she was unemployed and supported by her mother, appeared at court in Brooklyn. She was there, as James Grant tells us, to have $75,000 in credit card debt wiped off the books under Chapter Seven of the federal bankruptcy code. She owed $18,000 on five Citibank cards, more than $17,000 on three American Express cards, and smaller amounts on a host of accounts like Macy’s. Her assets, she said, were $750.

The bankruptcy process is supposed to be long and arduous, but Judge Conrad B. Duberstein takes less than seven minutes, on average, to forgive the profligate and stick the federal government’s thumb in their creditors’ eyes. Kugal, unusually, was questioned on how exactly she had come to owe so much money on credit cards. “1 used one to pay off another,” she answered, and was promptly cleansed of her obligations. Another bankruptcy judge, Marvin Holland, hoped Kugal didn’t feel bad. He announced: “I don’t want anybody to leave this court feeling uncomfortable, guilty, or ashamed. You should walk out of here with your head held high. You should feel proud.” This is a microcosm of America. Holland’s message is sent by Washington, D.C. to all its clients, from welfare bums to S&L bandits. How have we come to this?

There are two official schools of thought on the 1980’s: the left-Clintonian, which condemns the decade as one of greed and social Darwinism, and the Wall Street Journal-supply side, which praises it as the eschaton immanetized (Wall Street got rich, the masses got rhetoric, the government got bigger, and the neoconservatives got jobs). No one has yet told the true story of the age of Reagan (suggested title: Betrayal), but we do now have a revisionist. Old Right history of money and finance that rescues truth from the distorters.

James Grant is editor of Grant’s Interest Rate Observer, the most influential (and sardonic) publication of its kind. For him, the 1980’s were the years of easy money and credit socialism sold as conservatism. A paleolibertarian, Grant recognizes the essentially collectivist nature of the Reagan boom, fueled as it was by central bank credit expansion rather than tax cuts. Bankruptcy became a snap, and banks and “thrifts” made money making profligate loans the American people are now asked to repay. But credit socialism did not begin with Reagan, and Grant surveys money, borrowing, and lending from the National Banking Act of 1864 to the five year loan on the Yugo, a car that doesn’t last that long.

Money and banking have always been contentious areas of American policy. Among the Founders, the Jeffersonians favored hard money for reasons of limited government, the Hamiltonians inflation as part of their big-government program. (Although in fairness I should add that today’s neocon makes Hamilton look like John Randolph of Roanoke.) From the Polk administration until Lincoln’s war of centralization, we had the excellent Subtreasury system, under which government could not inflate and circulating money consisted of gold and silver coins. Banking was “free,” meaning there were few restrictions on entry and each bank issued its own notes. Bankers—distrusted throughout most of American history—could issue more notes than they had specie on deposit, but without a national banking system, there could be no widespread business cycles (today’s are possible only through government-contrived increases in bank credit). But Lincoln’s depreciating greenbacks and income tax couldn’t pay all the costs of attacking and pillaging the South, so the rump Congress passed the National Banking Act of 1864. Under it, certain banks were designated national and only they could issue bank notes, which had to be accepted at par by other national banks and by the Treasury, even if the issuer were insolvent. In return for this privilege, the national banks bought all of the Treasury bonds issued.

By 1879, the United States had worked itself back to a gold standard. “As the Constitution restricted the freedom of action of the Justice Department,” says Grant, “so did the gold standard curb the activities of the Treasury. Bound by a legal definition of money, the government could not print its way out of a jam,” nor could it “bribe the voters.” This was not a satisfactory system to big debtors, however, who understood, says Grant, that “a debt is a promise to pay a sum of money. Cheapen that money, and the burden of debt becomes lighter.”

Grover Cleveland opposed inflation. It would align, he said, the country “not with the enlightened nations of Christendom, but side by side with China, with the republic of Mexico, with the republics of Central and South America, and with every other semi-civilized country on the globe.” But the banks wanted inflation and a cartelization of their industry, so that they could profit from expanding credit without fear of bank runs. And the government wanted more power. The result was the Federal Reserve System. The Wall Street Journal had pleaded with Congress “to give us what every other civilized country possesses, a central bank,” and we got it.

When the Federal Reserve Act was signed on December 23, 1913, the United Cigar Stores Co. ran full-page ads hailing it as the equivalent of the Declaration of Independence. Panics, it assured Americans, had now “become effete.” The Fed, added Representative Carter Glass of Virginia, is “an altruistic institution” and the key to permanent prosperity. Really a special interest institution, it has brought us nothing but trouble.

During World War I, the Fed created massive amounts of credit to fund the war, as it has done for other unnecessary wars. Since heavy inflation requires at least the unofficial abandonment of the gold standard, it became unpatriotic to use gold coins rather than paper money, or even to give a gold piece as a Christmas present. The Fed stopped the artificial boom in 1920 by ceasing to inflate (something it must always do eventually to avoid hyperinflation), causing a sharp, short depression. But then, to support Great Britain’s impractical monetary policy, it created credit again, producing the boom that turned into the Great Depression, which in turn gave us Franklin D. Roosevelt, the New Deal, gold confiscation, the welfare state, and America’s entry into World War II.

The final blow to sound money came on August 15, 1971, when Richard M. Nixon closed the “gold window” that had allowed foreign governments to redeem their dollars for gold. A check on central-bank discretion, this “window” was the last link to the rule of law in monetary affairs. Since then, the aftertax, after-inflation income of the average American family has fallen more than 19 percent. Said Leonid Brezhnev at the time, “We are now witnessing the beginning of the devaluation of the United States dollar,” and “the possibility of a profound crisis of the capitalist system should not be excluded.”

In this saga of monetary destruction. Grant’s list of scoundrels is long. On his shorter list of heroes is John M. “One Hundred Percent” Nichols, president of the First National Bank of Englewood, Illinois. During the bank runs of 1933, Nichols had invited nervous depositors to withdraw their money, since—true to his nickname—his bank was 100 percent liquid, with a dollar in cash or readily marketable securities for every dollar on deposit. (Modern banks are inherently bankrupt and protected from default only by a federal safety net.) “One Hundred Percent” Nichols later called a press conference to write down publicly the value of the Federal Reserve Bank of Chicago stock he was obliged to hold. He was supposed to value it at $24,000, but said its real worth was ten cents. He also refused to pay any assessments to the new FDIC, calling it a “damnable piece of political trickery.” In 1941, he closed his bank “for the duration of the Roosevelt-concocted emergency,” a pledge he had made during the 1940 election, and, in 1943, he spent $10,000 to tear his headquarters building down rather than sell it, ordering the site covered with black soil for “an honorable burial.” He felt that he could not be both a banker and an honest man under the new regime.

Another hero is Sewell Avery, head of Montgomery Ward and a self-made man on what used to be the American model. A member of the Old Right, he despised everything about the New Deal: higher taxes, deficit spending, the socialist National Recovery Administration, and Roosevelt himself. But most of all he hated the income tax, which he denounced, as Fortune noted, as “the work of Satan.” When Roosevelt took over the Continental Illinois in 1933, using one of Herbert Hoover’s proto-New Deal agencies, the Reconstruction Finance Corporation, he installed the first head of the FDIC as president. Sewell Avery would have none of it and resigned from the board. During the Depression, Avery saved Montgomery Ward through a combination of entrepreneurial talent and fiscal conservatism. But fearing another depression after World War II, he refused to expand through debt. As a result, he lost market share to those companies that had their indebtedness wiped out by Federal Reserve inflation.

In 1944 Avery refused to sign a government-imposed union contract that would have resulted in the firing of nonunion workers, so Roosevelt seized the company. Avery refused to leave and was carried out of Ward’s headquarters by two Army MPs. “He was actually picked up and carried out in his chair,” said Attorney General Francis Biddle, at whom Avery had flung his worst insult, “You New Dealer!”

As Grant notes, “Avery awoke in the morning of postwar America on the wrong side of the bed.” Business “faced not a standard deflation but a newfangled, state-sponsored inflation.” Because the dollar would be depreciated, it would pay to borrow and to repay in cheaper money. Refusing to conform, Avery lasted until the 1950’s, when the 80-year-old man lost a proxy fight to the young Louis E. Wolfson, who would go on to fame and fortune—and jail—in the new era.

Central banking is bad enough, but deposit insurance really wreaks havoc. Federal deposit insurance, the welfare measure that did so much to help bring on the 1980’s, was first proposed in 1894 by banker Charles G. Dawes, a future Vice-President of the United States. It went nowhere, but in the Progressive Era some of the states followed Dawes’ lead, starting with Oklahoma in 1908. Yet Oklahoma’s plan folded in 1910 after a large bank failure, and none of the others were successful either.

Why? Because it is impossible to insure a bank, which is an entrepreneurial firm. Insurance can only succeed with a broad class of similar policyholders (homeowners, for example) whom companies know from actuarial tables will have only a certain number of fires, burglaries, etc., each year. Firms charge enough to cover these losses and make a profit. But one cannot buy insurance against, for example, the natural market uncertainties of the restaurant business, and, absent government intervention, no one will insure banks in this way. Deposit insurance, public or private, is a pipedream, and therefore right up the politician’s alley.

In 1913, a version of the Dawes plan was introduced in Congress, but Senator John W. Weeks of Massachusetts helped to defeat it. By adopting such a system, he said, people would seek the highest return on their money without considering a bank’s soundness. Deposit insurance would subsidize the riskiest banks at the expense of the sound. Instead, a person “should be taught to be solicitous for his own personal welfare by keeping his eyes open and his mind exercised to protect his personal interests.” A “form of socialism” is no answer. But it was, as usual, a solution for Roosevelt, who in the frenetic beginning of his New Deal established the Federal Deposit Insurance Corporation (now going bust and creating a much bigger mess than the S&Ls).

It was, for example, the FDIC—combined with Reagan’s deregulation of the insured S&Ls—that made “Monkeybrains” Patterson rich. In the early 1980’s, Patterson, who earned his nickname in college, was head of a tiny shopping-center bank in Oklahoma City called Penn Square. There he was known for wearing Mickey Mouse ears, howling like a hound dog, and getting rich by making crazed oil patch loans and selling them to big banks like Continental Illinois. By the time Penn Square went under in 1982—not being one of the 12 banks that Reagan’s Controller of the Currency called “too big to [be allowed to] fail”—Monkeybrains and his friends were rolling in dough and Penn Square had palmed off more than $1 billion worth of uncollectable loans on Continental Illinois.

When the news got out, there was a bank run on the Chicago institution. Not the old-fashioned sort, where worried customers line up at the door for their money (which is never there, given the nature of fractional-reserve banking), but an electronic run. Foreign customers with much more on deposit than the FDIC limit of $100,000 had their money wired to them in a few moments. To stop the run, the Reagan administration nationalized Continental Illinois, backing $100 million depositors with $10,000 taxpayers. Today, the bank is 80 percent owned by the Resolution Trust Corporation, one of thousands of socialist enterprises bequeathed to us by Reagan.

Reagan’s deregulation also made possible the activities of Charles H. Keating Jr., antipornography crusader, owner of some of our finest politicians, and head of Lincoln Savings and Loan. Keating purchased his S&L with Michael Milken junk bonds in 1984 and used it for funneling federally insured deposits into risky securities and real estate. “I think we’ve hit the jackpot,” a happy Reagan had said as he signed the deregulation legislation. And many did, at a cost of more than $500 billion to the taxpayer. Deregulation is an economic imperative in real industries, but not when it frees financial cowboys to roll the dice at taxpayer expense.

In addition to costing Americans $1 billion in insured losses, Keating also sold $200 million in uninsured Lincoln bonds to what a confidential sales memo described as their top prospects: “the meek, the weak, and the ignorant.” “Keating had said he would sell the bonds to Mother Teresa,” writes Grant, “although that was apparently not what the memo was driving at.” The day before Keating was indicted for fraud, 79-year-old Martin Fowler bought $14,000 worth of the even-then worthless bonds. According to the Los Angeles Times, he planned to use the income to help care for his 40-year-old daughter who has Down’s Syndrome.

The debt boom of the 1980’s is over, although we are only beginning to see its consequences. But as Grant shows, the speculative frenzy didn’t just happen. It was the result of a long process of the centralization of money and banking, the democratization of credit, and the socialization of risk. The Wall Street Journal denounces these views as “Victorian finance,” but isn’t that exactly what we need in such a financially promiscuous time? And who but a money crank or a Keynesian could agree with Andrew Stuttaford in National Review that Grant is to be faulted for opposing “expansion of credit” and “government assistance,” which have made us “immeasurably richer”? Actually, they have made most of us poorer and much less free.

This is the most entertaining book of its kind. More than that, it is brilliant—and brilliantly written—history. Worth a Pulitzer but too right-wing to get it. Money of the Mind shows not only why we’re in trouble, but why four thousand people pay $450 a year for James Grant’s commentary. He’s a national treasure.


[Money of the Mind: Borrowing and Lending in America From the Civil War to Michael Milken, by James Grant (New York: Farrar, Straus & Giroux) 512 pp., $25.00]