Wilson's Destiny, Part II

Were it not for Woodrow Wilson, what sort of world would we be living in today? Without Wilson’s legacy of "federal credit, national debt, a large centralized government, and an imperious…moral ideology built and financed thereon," argues Byron King, would we recognize our own times?

Yesterday, we began to explore the impact President Woodrow Wilson has had on the international system. The world, we wrote, still spins on a Wilsonian axis. Yet how did one man manage to impart such a lasting legacy – one that has shaped national and world events ever since?

Wilson clearly could not have achieved what he did without the help of a few key tools. The first year of his presidency say the advent of three elements which would, as Wilson put it, greatly assist him in putting government "at the service of humanity." Today, we look at how Wilson used these tools…and how his actions have shaped the world we know today.

Wilson was an activist in expanding the federal role in the economy, pushing through such legislation as the establishment of the Federal Trade Commission (1914) and the Federal Farm Loan Act (1916). Both of these laws brought the federal government into the daily lives of Americans, in a way that would have been incomprehensible to the Founding Fathers.

On the international front, during his first term Wilson embroiled the U.S. in Mexico’s civil war, up to and including invading Mexico, a bone of contention between the two nations ever since. (In his second term, Wilson would send U.S. troops into Russia to oppose the Bolshevik Revolution, but this gets ahead of the story.)

President Woodrow Wilson: Extending the Great War through Credit

When the Great War broke out in Europe in 1914, Wilson’s administration of U.S. international trade and monetary policy was decidedly lopsided, and certainly lacking in a sense of balanced neutrality towards all belligerents. The Wilson administration forbade "loans" by U.S. banks to the warring powers. Yet Wilson’s administration permitted U.S. banks to extend massive "credits" to the French and British, thus creating an economic situation in which the U.S. bankrolled their conduct of the Great War.

Without U.S. "credit" to fund their purchases in 1914 and 1915, such credit extended into the economy by the U.S. Federal Reserve and its "elastic currency," it is quite likely that Britain and France would have run out of cash after a few months of fighting. In all likelihood, Britain and France would have had to make some accommodation for peace with Germany, and bring the War to a relatively swift conclusion. But absent peace imposed by the pocketbook, the European war went on and on, sucking more nations into the fray and wrecking the lives and cultures of many peoples.

It cannot be overstated that, during Wilson’s first term in office, European combat was funded and supported on the Allied side by U.S. money, its elastic currency, and U.S. materiel. Meanwhile, Germany, a militaristic culture lacking any real internal political process that would sanction failure of its armed forces to prevail, had little choice but to dig deeper into its economy and fight on.

In essence, Wilson’s economic and trade policies, abetted by the Federal Reserve, perpetuated the European War. They also led to (and even required, from a military standpoint) German submarine warfare on the high seas. That is, with submarine technology at its disposal, German military strategy had no other option but to sink ships carrying war materiel to Britain and France. So long as U.S. "credit" paid for the materiel, the ships would sail and the cargoes, once landed, would threaten Germany.

There was deeply rooted opposition in the U.S. electorate to any direct American participation in the European War. However, the nation enjoyed the economic boom times caused by the war-related orders pouring in from Britain and France. Mines, mills, factories and farms all posted and received premium prices for their wares, courtesy of U.S. "credits" to the Allies and the newly created Federal Reserve and its elastic currency. The economic myth was that the Allies were supporting the booming U.S. economy with their purchases of war materiel. The reality was that the Allied purchases were based on U.S. credits, supplied ultimately by Wilson’s new creation, the Federal Reserve. Thus, the war boom was at root simply inflation created by the FED.

President Woodrow Wilson: "He Kept Us Out of War"

Running for his second term in 1916, Wilson’s campaign slogan was "He kept us out of war." This was not quite correct, because by 1916 the U.S. was deeply invested in the British and French role in the fighting. After Wilson was safely re-elected for a second term, his obstinate pursuit of his otherwise failed economic and trade policies favorable to Britain and France led to a point where German submarine warfare became an American cassus belli. Less than ninety days after beginning his second term, Wilson called upon Congress for a declaration of war against Germany.

Domestic opposition to Wilson’s policies was intense, particularly within the large Irish and German populations in the U.S. But Wilson, the learned scholar of Government and former President of Princeton, was prepared to control this dissent with some of the most sweeping laws ever passed to limit free speech and political dissent. And Wilson’s Federal Reserve and newly enacted national income tax funded the war effort, all the while giving Wilson the resources he needed to expand his domestic vision of a powerful central government that literally took over many elements of U.S. industry.

According to historian Robert Nisbet, "The blunt fact is that when (under Wilson) America was introduced to the War State in 1917, it was introduced also to what would later be known as the total, or totalitarian, state."

As if the foregoing accomplishments would not be enough for any president, whether or not "ordained" by God to govern, another of Wilson’s enduring legacies was a direct outgrowth of U.S. participation in the Great War. This was Wilson’s effort to shape the peace and his remarkable turn of phrase, to "make the world safe for democracy." This term, and its underlying panglossian concept of remaking the world in a Princeton-honed image of American participatory government, has haunted U.S. policy ever since it was uttered. Nine decades later, U.S. foreign policy is fundamentally Wilsonian. The concept of a world "safe for democracy" has such Jovian gravity as to be inescapable, and essentially all modern political debate in the Western world is framed in its terms.

But a "world safe for democracy" requires certain underlying assumptions of power and price, which are the key elements in "making" anything happen anywhere, and certainly in "making the world safe for democracy." Whether he understood the implications or not, Wilson had a Federal Reserve, an elastic currency, and a national income tax with which to do his bidding. Not all peoples, races and nations are so fortunate.

Had Woodrow Wilson never been president, would the U.S. and the world have had a far different 20th Century? Or was Wilson just one man in a particular time of great change, a man who articulated concepts that were beneath the surface and waiting to be revealed? When Wilson walked into the White House in 1913, Germany and Italy had already spent 40 years creating and building centralized, debt-financed governments. In this regard, Wilson was an imitator, not an inventor. So did Wilson make history, or perhaps give it a shove in a particular direction, or was he merely governed by historical forces whose time had come?

President Woodrow Wilson: Absent Wilson . . .

These types of questions are endless, and just asking them certainly gives one thoughts of a world far different from this one in which we live. Absent Wilson, would there have been a U.S. central bank, the Federal Reserve, to fund the type of world economy that has evolved? Absent Wilson, what would U.S. politics have done with the 16th Amendment, the income tax amendment? How did Wilson’s presidency effect the direction of the national income tax? And absent the tax revenue, what would have happened with the early growth under Wilson of centralized federal power in the U.S.?

Absent Wilson’s inept neutrality, his biased diplomacy and willingness to throw U.S. dollars into the Great War on the side of Britain and France, would the U.S. have become involved in what was later named World War I? Would the Great War have lasted so long and caused so much damage to the fabric of European civilization and colonial influence? Would the world ever have heard, just a few years later, of war veterans such as Herr Hitler and Signor Mussolini?

Absent U.S. participation in the European War, would a pedestrian lawyer, and middling state-level politician named Franklin Delano Roosevelt have found his first federal job as Assistant Secretary of the Navy? Would the U.S. ever have bred such soldiers as Douglas MacArthur and Harry Truman, and most of the rest of the list of future political-military leaders of mid-century?

Absent events put into motion by Wilson, would the Great War have lasted so long as to cause Russia to break up and descend into a Bolshevik Revolution? Absent Wilson, would U.S. troops have gone ashore in Russia to take sides in the matter? In another region of the world, absent Wilson, would the Ottoman Empire have dissolved, to spawn the modern politics of the Middle East? And absent Wilson, would the concept of League of Nations/world governance ever have gained the traction it did?

Woodrow Wilson said that he wanted to put government "at the service of humanity." But when you distill things to a basic essence, Wilson bequeathed his nation, the world, and "humanity" the legacy of federal credit, national debt, a large centralized government, and an imperious, if not crusading, international moral ideology built and financed thereon.

What is more, Wilson’s legacy has lasted for nine decades and today seems immutable. None who are alive have experienced anything different from a Wilsonian world. No one can remember or recall first hand any time when this world of ours worked otherwise. And when things change, and change they certainly will, most people will be trapped in a Wilsonian paradigm and not understand what is happening.


Byron King
for The Daily Reckoning
April 7, 2004

Editor’s Note: Byron King has been engaged in the private practice of law for 14 years and currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University.

Unearned good fortune is almost always a curse, dear reader.

A recent photo in the English papers showed a heavy-set young man, with black leather jacket, earring, and gold chain giving the camera the finger. "The Loto Lout," the press called him. The man had won millions of dollars in the lottery. But instead of handing out $10 bills to orphans or taking lessons in elocution, the big oaf seems to be using it to become even more oafish than he had been before.

"He’s got so much money, he can get away with anything," commented an observer.

Likewise, America has always been a nation of optimists. It is a land of immigrants; pessimists would have stayed home. But thanks to good fortune, they are becoming even more optimistic than they have ever been – to the point of making themselves both delusional and dangerous.

A recent retirement survey shows that fewer people are bothering to put away money for their golden years. In the year 2001, only 61% of working people saved any money at all for retirement. Today, the figure is only 58%. More than half the survey respondents between 45 and 55 years of age said they had less than $50,000 in savings and investments, excluding their own homes.

Americans think they need no retirement savings for the same reason they think they need not worry about Asian competitors taking their industries and their jobs. What will they live on? What jobs will their children and grandchildren find? How will they ever pay their debts?

"We’ll think of something," say people who rarely think at all, as if their fate depended on their own creative cogitation. But how did they get where they are? Creative thinking had nothing to do with it. Had they been born in India or in China, rather than in the U.S.A., they might have come back from the maternity ward on a bicycle rather than in the backseat of a big Volvo…and might now be sitting on a wooden bench 12 hours a day in an unheated factory earning 35 cents per hour – and feeling lucky, but not necessarily optimistic.

Thus do Americans owe their situations not to themselves, but to the whims of the gods. Through neither fault nor virtue, they have won the Loto…finding themselves in one of the world’s relative paradises…like a gypsy orphan tossed into the Garden of Eden. They ought to fall upon their knees in gratitude…and pledge to turn away from temptation before it even shows itself. Maybe then, the gods would look upon them with favor and let them stay. Instead, the dumb oafs take their credit cards and go in search of apple trees.

Cash? Savings? Firewood? Umbrellas? Inventory? Who needs them! We’ll come up with something just when we need it. Always have.

Americans even put the roofs over their own heads at risk. They’ve mortgaged more of their homes than at any time in history…and, on the advice of their leading economist, Alan "Bubbles" Greenspan, have increasingly favored riskier adjustable rates over fixed-rate mortgages. When interest rates go up – as they must, sooner or later – millions will lose their houses. But of course, they’ll think of something.

Warren Buffett, meanwhile, is hoarding cash. He had $13 billion of it in 2002. Now, his cash pile has grown to $36 billion.

But what does Buffett know?

Over to Addison…for the news:


Addison Wiggin, writing from Baltimore…

– In the land of raw fish, the Nikkei gained one percent yesterday, breaking 12,000 to set a new 32-month high. The index has now gained 50% in the last twelve months. We are beginning to wonder if after 14 years, the excesses in post-bubble Japan have finally been wrung out…

– But then again, the Nikkei isn’t the only index that has performed well recently. In fact, you’d be hard pressed to find one that didn’t rise last year. Dart-throwing monkeys, children, and even Japanese investors should have made money last year, as the massive global reflation bid up the prices of almost every asset under the sun.

– Life is good…and any old fool can get rich by trading stocks, so it would seem. Of course, we at the Daily Reckoning know better – "pride cometh before a fall"…"complacency breeds contempt"…choose your cliché; it makes no difference. History shows that a bear market doesn’t end until the excesses of the previous bull market have been beaten out of stock valuations.

– As we laboriously detail in our book, the Japanese know all about bear markets – their stocks have recently hit 20-year lows. But the lumps here in America do not. They know about bull markets and tech stocks; they know about million-dollar mansions and million-dollar debts. What they don’t know is what happens when the fat lady begins to sing…

– Yesterday, the Dow went up and the Nasdaq went down – a rare and meaningless divergence. The Nasdaq dropped 19 points to close at 2,060, while the Dow gained 12 to 10,571. Predictably, the S&P was somewhere in the middle, falling 2 points to 1,148.

– Despite yesterday’s indecision, Mr. Market is still smiling…though his grimace is more like a grin – a devilish grin. For Mr. Market is fond of games; he likes to deceive and confuse. Last month, we thought the "Baghdad Bounce" was history when the indices dropped nearly 10% in two weeks. But just as the bears sharpened their claws and licked their lips, the market reclaimed its losses.

– The Financial Times reports that confidence among U.S. business leaders is stronger than at any time in the last 20 years. A return to profitability has encouraged companies to begin hiring once again, and heralds the end of the "jobless recovery." More than three-quarters of CEOs expect uninterrupted growth over the next six months.

– Of course, 20 years ago, stocks were cheap. 1982 represented the start of a multi-decade bull market, and a wonderful buying opportunity. Today, however, the landscape is very different and stock valuations retain the bulk of their 20-year gains.

– Even the barbarous relic was in a good mood yesterday. Gold added $3.40 to close at $418.50 in New York, while silver added 10 cents to $8.20. All’s well that ends well, eh?…at least, until the bear begins anew.

– In the meantime, while the markets are rising and we feel so flush, we can’t resist wandering over to our favorite subject – wine. As much as we relish the taste of un bon vin…and the stupid things it allows us to say…the Sovereign Society tells us it also has a secondary function: it stores value. Particularly if it’s "fine" wine.

– In fact, a carefully selected vintage can appreciate significantly in price, while offering much sought-after diversification to the lucky owner. "It’s completely off-scale to what conventional money managers look at in terms of alternative investments," writes Wanda Lubelwana in an article back on the DR website, "but the trend in fine wine prices is up, sometimes dramatically.

– "For instance, tracking prices across a range of publications and listed prices, a case of the 2000 Pétrus is now valued at US$22,400 up 100% from initial release in 2002. Backtrack to the 1982 vintage – a case of Pétrus purchased in 1994 for US$3,000 is now worth US$29,000." Add in the fact that capital gains made from wine investing are exempt from taxes, and you’ve got a pretty attractive alternative investment.

– The global reflation shows no signs of slowing. In the face of such rapid monetary expansion, investors might want to start looking for tangible assets that will maintain their value…and are absent from the mainstream’s radar screen. Fine wine offers just such an opportunity – if, unlike us, you can resist the urge to drink it.


And Bill Bonner, back in Paris…

*** The media’s lumpenfeed is abundant, but not very nourishing. The more you have of it, the less you really know. For example, everyone now knows that jobs are finally being created. This is taken as proof that the Feds can manage the economy successfully. Who bothers to notice that American workers continue to get poorer? As debt piled up, the average weekly paycheck in the private sector fell 88 cents last month. As the King Report explains below, the new jobs are lower-paying jobs:

"How could non-farm payrolls explode 308k when a) the unemployment rate increased to 5.7%; b) wage growth was less than expected at 0.1%; c) the ’employed population ratio’ actually FELL to 62.1% from 62.2%; d) the ’employment participation rate’ was unchanged at 65.9%; e) total employment was unchanged at 138.3m and most importantly f) the avg workweek fell 0.1 to 33.7, which is near a 40-year low (33.5)! (See table A-1.)

"When dissecting the numbers we learned that NSA service job wages fell 8 cents and they accounted for 230k of the 308k job growth. Leisure & hospitality wages NSA fell 4 cents; and NSA avg hours worked fell 0.3. Something is obviously wrong. Healthcare contributed 36k jobs, leisure & hospitality 28k, retail 47k, government created 31k and the phantom jobs estimated to be created by small business was 153k! This is now known as the business birth/death rate. Apparently a large number of workers entered the workforce in order to force the unemployed rate higher, but still something seemed incredibly wrong.

"After the close, our good friend and astute, no nonsense economist, ex-Fed official and investment adviser (at Van Hoisington Management), Lacy Hunt, provided the answers to the conundrum. Of the 308k jobs created, 296k are temporary or part-time jobs!

"Let us repeat and let’s be very clear, almost all jobs created in what is heralded as a great employment report are part-time jobs.

"’In March, the number of persons who worked part time for economic reasons increased to 4.7 million, about the same level as in January. These individuals indicated that they would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs.’ People want full-time but can’t find it. Lacy opines that Congress did not renew unemployment benefits so many people took whatever they could get. This accounts for the surge in people entering the workforce."

*** Everyone is wondering when the Fed will raise rates. The economy is said to be growing nicely…and finally creating jobs. Yet, the Fed holds its key lending rate at 1% – an "emergency" level. What’s the emergency? Our friend, Trey Reik, comments:

"Maintenance of an ’emergency’ Fed Funds rate of 1%
after second-half-2003 GDP-growth of 6% speaks volumes. We have long maintained that the Federal Reserve cannot raise (short) rates without causing a wave of defaults on our nation’s $33 trillion in debt.

"Nevertheless, such ridiculously low rates have finally begun to spill into rampant price inflation of everything ‘hard.’ With all due respect to the CPI and PPI, which have become nothing short of insulting to one’s intelligence, prices of things are exploding. The CRB Index continues to set 20-year highs! The Journal of Commerce Economic Cycle Research Institute Industrial Price Index, as reported today, April 5, estimates trailing 52-week inflation in a broad basket of industrial inputs at 39.44%! Last week’s much-heralded ISM Manufacturing Survey (reading of 62.5) included a ‘prices-paid’ component of 86.0! If any reading above 50 is ‘expanding,’ what would 86 imply? Off-the-charts?

"Austrian economics terms the final stage of rampant credit excess a ‘crack-up boom.’ Increasingly, we sense that such a condition may be unfolding in the current economic landscape."

*** We don’t know when the Fed will raise rates…but when they do, we suspect, many among the lumpen will be driven from Paradise. Having developed an irresistible dependence on the Fed’s E-Z credit, Americans are dangerously close to finding their apple trees.

Then again…"would there have been a U.S. central bank, the Federal Reserve, to fund the type of world economy that has evolved" – had the 28th President of the United States not come along, asks our friend Byron King?

Below, our unpaid correspondent reaches for an answer.

The Daily Reckoning