Sept. 24 (Bloomberg) -- William Duer was a friend of Alexander Hamilton who wrote essays supporting the ratification of the U.S. Constitution in 1787 and ’88.
He proposed that the new federal government should gain investors’ trust by paying old state and national debts -- failing to mention that he was one of the creditors who would benefit most handsomely from those payments.
In “A Nation of Deadbeats: An Uncommon History of America’s Financial Disasters,” Scott Reynolds Nelson presents a good case that the U.S. was founded by bankers who used their insider knowledge and political connections to make lots of money. And their influence hasn’t diminished all that much despite having caused dozens of financial crises since.
Nelson’s book belongs to the lessons-from-past-crises genre, which has been booming since the 2008 financial meltdown. One of the most influential entries has been “This Time Is Different” by Carmen Reinhart and Kenneth Rogoff, who analyzed episodes of financial trouble from 66 countries over 8 centuries to show how this crisis actually wasn’t that different from earlier ones.
“A Nation of Deadbeats” is closer to Liaquat Ahamed’s “Lords of Finance”: lots of storytelling, hardly any data. Nelson has compiled dozens of interesting episodes from 19th-century U.S. history involving the interactions of politicians and bankers and shows how they all culminated in financial troubles as well as, eventually, solutions.
Nelson doesn’t weave his anecdotes together as masterfully as Ahamed, whose book won the 2010 Pulitzer Prize for history. Yet “A Nation of Deadbeats” is fun to read; it gleans interesting tidbits from the past and puts today’s troubles in better perspective.
For example, I had no idea that the Democratic Party was founded by politicians opposing a big bank’s influence on finance and politics. Or that Democrats then established their own competing bank, which went on to finance land purchases in undeveloped regions.
The land speculation financed by easy money caused a financial crisis when prices collapsed and loans couldn’t be paid back.
Of course, despite having taken place in 1819, this sounds similar to the housing crash we just went through. Then, as now, the banks played a crucial role in financing a bubble, ended up almost collapsing when the bubble popped and relied on government support to survive.
“The bank was saved and the people were ruined,” wrote a political economist criticizing government policy at the time of the collapse of the Second Bank of the U.S. Not much has changed on that front either.
Banks in the 1800s were also engaged in pretending that they’d gotten rid of risk by passing it onto other players, though it never truly left their balance sheets. This imaginary risk elimination made it possible to place bigger bets but also exacerbated the damage when the bets soured. The securitization, derivatives and off-balance-sheet entities that were supposed to lower risk for today’s institutions made the latest crisis much more harmful to the global economy for the same reason.
In 1857, the Bank of England ended up rescuing several U.S. banks that collapsed, according to Nelson’s account. It’s good that we returned the favor in 2008 when the Federal Reserve’s rescue efforts helped British, French and German banks as much as their American counterparts.
The book’s title refers to the overstretched borrowers who can’t pay their debts when markets crash every few decades, causing a financial and economic crisis. Nelson introduces the idea at the beginning of the book by talking about his father, a debt collector who sweet-talked his way into people’s homes before they realized he was there to repossess their TV sets.
The repo man thought too many people borrowed more than they should have. Yet Nelson doesn’t live up to his promise of making the connection from the deadbeats to the financial crises. Nor does he spell out the reasons behind the crises and the lessons we should take from them in dealing with today’s realities. Readers have to draw their own conclusions.
Nelson can’t hide his disappointment with the Democratic Party, which was founded two centuries ago to attack “vested privilege.” Following in Bill Clinton’s footsteps, President Barack Obama has embraced Wall Street and didn’t “reach for the broom stick” to clean up the mess the banks had created, Nelson writes.
He probably shouldn’t hope for the broom to be picked up after November’s elections either, regardless of the outcome.
“A Nation of Deadbeats” is published by Knopf (330 pages, $27.95). To buy this book in North America, click here.
(Yalman Onaran, a senior writer at Bloomberg News, is author of “Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy.” The opinions expressed are his own.)
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