The latest, and perhaps the best, book to be written in the wake of the Great Recession raises an important question: Why is it that America’s self-appointed elite refuses to learn from its long record of failure and futility in economic management that its ideas and policies are all wrong?

The answer is provided by the Latin proverb “Cui bono?”  The policies of our self-righteous and arrogant rulers may be wrecking the country; their ideas may have proved erroneous in every way; but the resulting system is working for them.  There is also the matter of pride.  Viewing themselves as members of a diverse meritocracy, superior in intellect and morality to the benighted and bigoted masses from which they emerged, they are not about to consider arguments, however logical or evidentiary, that challenge their intellectual competency and fitness to rule.  So, as was entirely expectable, David Stockman’s masterpiece of economic reasoning and historical illumination was cursorily noticed but mostly ignored.

It should be required reading for everyone inside the Beltway.

The Great Deformation is a financial and monetary history of the United States since the 1920’s, written from an Old Right, almost Rothbardian perspective.  I say “almost” because Stockman is not a disciple of the late Murray Rothbard, and he is no anarchist.  But both clearly belong to the party of sound money, honest finance, and economic reality.  Where they differ is that Rothbard argued for 100-percent reserve banking and against paper money of any kind (other than gold or silver certificates).  By contrast, Stockman has no objection to fractional-reserve banking (so long as it is managed on commercial-banking principles), or to paper money, so long as that money is backed by, and ultimately redeemable in, gold.  As the historical record proves, there is no way other than a gold standard of imposing monetary or financial discipline upon banks and governments.

Rothbard also believed that the first turn down the road to financial ruin was taken in 1914, with the establishment of the Federal Reserve.  (This is also the position of Ron Paul.)  Stockman, for his part, believes it was taken in 1933 and 1934, when Franklin Roosevelt, in a succession of executive orders, essentially took the United States off the gold standard and began a series of experiments based on the belief that government could manage the economy better than businessmen, farmers, and bankers.  FDR’s New Deal thus

shattered the foundation of sound money and inaugurated a regime of capricious fiscal and regulatory activism that inexorably fueled the growth of state power and the crony capitalism which thrives on it.

Stockman emphasizes, as did Rothbard, that big business and big finance, rather than being the victims or playthings of big government, have been its biggest enablers and beneficiaries.  What they have long favored, and lobbied and paid for, is not a return to sound money, fiscal rectitude, and a free-market economy but a perpetuation of crony capitalism, fiscal profligacy, and monetary inflation.

Stockman resembles Rothbard in another way: He is an excellent economic historian, far better than virtually all professionally trained historians who teach at our elite colleges and public universities.  What these professors do is repeat the same false narratives and simplistic myths that are uttered by government officials, parroted by politicians, and endlessly regurgitated by the business press.  Stockman exposes them all as charlatans, shills, and fools who live and work inside a circular feedback loop, which endlessly perpetuates economic error and historical falsehood, while shutting out every dissenting view.

Stockman’s historical method is revolutionary in its simplicity.  He goes straight to the sources, which in economics means the raw data and statistics that reveal what was actually happening in the economy in the past.  He then examines government policies to see whether they had, or did not have, the effects attributed to them by their official apologists, then and now.  His quotations are few, mainly drawn from those who were making, or opposing, prevailing economic policy.  They reveal great prescience on the part of the dissidents and recurring stupidity from those in positions of power.

My only complaint concerns the disjointed chronological structure of Stockman’s narrative.  He begins with the Bush administration’s panicky response to the financial panic of 2008; takes up the story again in the 1980’s; retreats further to the 1920’s, 30’s, 40’s, 50’s, and 60’s; comes forward once more to the 1980’s, 90’s, and the 21st century; and lands finally in the Bernanke-Obama years.  It can be confusing.

Yet Stockman’s narrative raises an historical-philosophical question of great importance.  Is there a point of no return for nations, beyond which recovery and renewal is no longer possible?  Stockman believes such a point was reached by Richard Nixon in 1971 when he closed the gold window and thereby defaulted on the obligation of the United States under the Bretton Woods agreement of 1944 to redeem her international dollar liabilities.  The immediate reason for doing so was that the Europeans, the French especially, were demanding gold for their depreciating dollar holdings, and U.S. gold reserves were dwindling fast.  Given the success of the gold-exchange standard in anchoring a stable, prosperous, and noninflationary postwar economic order, Nixon should have stood by it and reversed the dangerous policies that had caused the run on the dollar in the first place.  Those policies began when Lyndon Johnson waged a land war in Asia and expanded the welfare state at home without raising taxes: Guns, Butter, and Debt.  (The previous Democratic war president, Truman, had financed his war entirely by taxes.)  But Nixon was not about to raise taxes, reduce spending, or raise interest rates with the presidential election only a year away.  So he opted for the easy way out, as politicians are wont to do, reassured all the while by a whispering devil (Milton Friedman) that a regime of fiat currencies and floating exchange rates would benefit the American and global economy far more than would the retention of gold.

The ground was now laid for the fatal conjunction of deficit spending and inflationary monetary policy.  Instead of the government having to raise taxes (always unpopular), or compete for loanable funds by bidding up interest rates and crowding out private investment, the Fed would “monetize the debt” by purchasing treasury securities with newly printed money through its open-market operations.  The way was clear for “deficits without tears,” and “all deficits, all the time.”  Foreign central banks were also eager buyers, and as long as they were willing to hold U.S. Treasury securities and other dollar liabilities in lieu of being paid for the nation’s exports of finished goods, America could run chronic trade deficits to match its fiscal deficits.  It was as if both Congress and the American consumer had been given unlimited lines of credit.  As a result, federal spending as a percentage of GDP has steadily increased, the cumulative trade account deficit with the rest of the world is now over $8 trillion, the national debt is $16 trillion, and total credit-market debt (public and private) reached $52 trillion in 2008.

Over the same period, America’s productive economy has been eviscerated.  It has been replaced by a gambling casino, a debt-driven consumption binge, raging inflation in health, education, and energy, and a wasteful, boom-bust cycle in commercial and residential real estate, and all of it subsidized by the government and nourished by Federal Reserve liquidity.  Over the last 12 years in particular, the U.S. economy has been on a road to nowhere.  Since 2000, GDP growth has averaged only 1.7 percent per year.  That figure would be zero were the government honestly to account for inflation.  In other words, what little was gained during the Bush Boom was wiped out by the Bush Bust, and has not yet returned during the Obama “recovery.”

Over 50 years ago, the U.S. economy looked very different.  It was not drowning in debt, and it was a vigorous exporter of manufactured goods.  From 1954 to 1963, real GDP growth averaged 3.4 percent per year (that is, after the modest annual inflation rate of 1.4 percent was subtracted), and it was not followed by a stock-market crash and a recession.  No ten-year period since then has come close to matching this record, yet Eisenhower’s policies (fiscal conservatism, balanced budgets, moderate interest rates, and a strong dollar) are anathema.

So what is the end game?  Stockman believes that our “50 year Keynesian joy ride is over,” and that a “Keynesian state wreck is ahead.”  He also believes that the political class is so intellectually vapid and politically corrupt that they are incapable of realizing the magnitude of their manifold errors and correcting them.  “Deficits and debt have now reached the point where they are too large and too embedded . . . to be resolved.”  Peak Debt or not, Congress, the president, and the Fed will continue to do what they have been doing since the 1960’s: borrow, spend, and inflate.

Mr. Stockman’s previous best-seller, The Triumph of Politics (1986), recounting his frustrating experience as Ronald Reagan’s first budget director, should disabuse even the most optimistic of readers of the possibility that 30 years later, when the country is far more politically dysfunctional, there could ever be a return to a sound dollar, balanced budgets, and a liberal and productive economic order.  The downward trajectory has gone on for too long.


[The Great Deformation: The Corruption of Capitalism in America, by David A. Stockman (New York: Perseus) 742 pp., $35.00]