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1 Hawthorne Economics- General

Aftershock: The Next Economy and America's Future

by

Aftershock: The Next Economy and America's Future Cover

ISBN13: 9780307592811
ISBN10: 0307592812
Condition: Standard
Dustjacket: Standard
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Excerpt

1

Eccles’s Insight

The Federal Reserve Board, arguably the most powerful group of economic decision-makers in the world, is housed in the Eccles Building on Constitution Avenue in Washington, D.C. A long, white, mausoleum-like structure, the building is named after Marriner Eccles, who chaired the Board from November 1934 until April 1948. These were crucial years in the history of the American economy, and the world’s.

While Eccles is largely forgotten today, he offered critical insight into the great pendulum of American capitalism. His analysis of the underlying economic stresses of the Great Depression is extraordinarily, even eerily, relevant to the Crash of 2008. It also offers if not a blueprint for the future, at least a suggestion of what to expect in the coming years.

A small, slender man with dark eyes and a pale, sharp face, Eccles was born in Logan, Utah, in 1890. His father, David Eccles, a poor Mormon immigrant from Glasgow, Scotland, had come to Utah, married two women, became a businessman, and made a fortune. Young Marriner, one of David’s twenty-one children, trudged off to Scotland at the start of 1910 as a Mormon missionary but returned home two years later to become a bank president. By age twenty-four he was a millionaire; by forty he was a tycoon—director of railroad, hotel, and insurance companies; head of a bank holding company controlling twenty-six banks; and president of lumber, milk, sugar, and construction companies spanning the Rockies to the Sierra Nevadas.

In the Crash of 1929, his businesses were sufficiently diverse and his banks adequately capitalized that he stayed afloat financially. But he was deeply shaken when his assumption that the economy would quickly return to normal was, as we know, proved incorrect. “Men I respected assured me that the economic crisis was only temporary,” he wrote, “and that soon all the things that had pulled the country out of previous depressions would operate to that same end once again. But weeks turned to months. The months turned to a year or more. Instead of easing, the economic crisis worsened.” He himself had come to realize by late 1930 that something was profoundly wrong, not just with the economy but with his own understanding of it. “I awoke to find myself at the bottom of a pit without any known means of scaling its sheer sides. . . . I saw for the first time that though I’d been active in the world of finance and production for seventeen years and knew its techniques, I knew less than nothing about its economic and social effects.” Everyone who relied on him—family, friends, business associates, the communities that depended on the businesses he ran—expected him to find a way out of the pit. “Yet all I could find within myself was despair.”

When Eccles’s anxious bank depositors began demanding their money, he called in loans and reduced credit in order to shore up the banks’ reserves. But the reduced lending caused further economic harm. Small businesses couldn’t get the loans they needed to stay alive. In spite of his actions, Eccles had nagging concerns that by tightening credit instead of easing it, he and other bankers were saving their banks at the expense of community—in “seeking individual salvation, we were contributing to collective ruin.”

Economists and the leaders of business and Wall Street—including financier Bernard Baruch; W. W. Atterbury, president of the Pennsylvania Railroad; and Myron Taylor, chairman of the United States Steel Corporation—sought to reassure the country that the market would correct itself automatically, and that the government’s only responsibility was to balance the federal budget. Lower prices and interest rates, they said, would inevitably “lure ‘natural new investments’ by men who still had money and credit and whose revived activity would produce an upswing in the economy.” Entrepreneurs would put their money into new technologies that would lead the way to prosperity. But Eccles wondered why anyone would invest when the economy was so severely disabled. Such investments, he reasoned, “take place in a climate of high prosperity, when the purchasing power of the masses increases their demands for a higher standard of living and enables them to purchase more than their bare wants. In the America of the thirties what hope was there for developments on the technological frontier when millions of our people hadn’t enough purchasing power for even their barest needs?”

There was a more elaborate and purportedly “ethical” argument offered by those who said nothing could be done. Many of those business leaders and economists of the day believed “a depression was the scientific operation of economic laws that were God-given and not man-made. They could not be interfered with.” They said depressions were phenomena like the one described in the biblical story of Joseph and the seven kine, in which Pharaoh dreamed of seven bountiful years followed by seven years of famine, and that America was now experiencing the lean years that inevitably followed the full ones. Eccles wrote, “They further explained that we were in the lean years because we had been spendthrifts and wastrels in the roaring twenties. We had wasted what we earned instead of saving it. We had enormously inflated values. But in time we would sober up and the economy would right itself through the action of men who had been prudent and thrifty all along, who had saved their money and at the right time would reinvest it in new production. Then the famine would end.”

Eccles thought this was nonsense. A devout Mormon, he saw that what passed for the God-given operation of economics “was nothing more than a determination of this or that interest, specially favored by the status quo, to resist any new rules that might be to their disadvantage.” He wrote, “It became apparent to me, as a capitalist, that if I lent myself to this sort of action and resisted any change designed to benefit all the people, I could be consumed by the poisons of social lag I had helped create.” Eccles also saw that “men with great economic power had an undue influence in making the rules of the economic game, in shaping the actions of government that enforced those rules, and in conditioning the attitude taken by people as a whole toward those rules. After I had lost faith in my business heroes, I concluded that I and everyone else had an equal right to share in the process by which economic rules are made and changed.” One of the country’s most powerful economic leaders concluded that the economic game was not being played on a level field. It was tilted in favor of those with the most wealth and power.

Eccles made his national public debut before the Senate Finance Committee in February 1933, just weeks before Franklin D. Roosevelt was sworn in as president. The committee was holding hearings on what, if anything, should be done to deal with the ongoing economic crisis. Others had advised reducing the national debt and balancing the federal budget, but Eccles had different advice. Anticipating what British economist John Maynard Keynes would counsel three years later in his famous General Theory of Employment, Interest and Money, Eccles told the senators that the government had to go deeper into debt in order to offset the lack of spending by consumers and businesses. Eccles went further. He advised the senators on ways to get more money into the hands of the beleaguered middle class. He offered a precise program designed “to bring about, by Government action, an increase of purchasing power on the part of all the people.”

Eccles arrived at these ideas not by any temperamental or cultural affinity—he was, after all, a banker and of Scottish descent—but by logic and experience. He understood the economy from the ground up. He saw how average people responded to economic downturns, and how his customers reacted to the deep crisis at hand. He merely connected the dots. His proposed program included relief for the unemployed, government spending on public works, government refinancing of mortgages, a federal minimum wage, federally supported old-age pensions, and higher income taxes and inheritance taxes on the wealthy in order to control capital accumulations and avoid excessive speculation. Not until these recommendations were implemented, Eccles warned, could the economy be fully restored.

Eccles then returned to Utah, from where he watched Roosevelt hatch the first hundred days of his presidency. To Eccles, the new president’s initiatives seemed barely distinguishable from what his predecessor, Herbert Hoover, had offered—a hodgepodge of ideas cooked up by Wall Street to keep it afloat but do little for anyone else. “New York, as usual, seems to be in the saddle, dominating fiscal and monetary policy,” he wrote to his friend George Dern, the former governor of Utah who had become Roosevelt’s secretary of war.

In mid-December 1933, Eccles received a telegram from Roosevelt’s Treasury secretary, Henry Morgenthau, Jr., asking him to return to Washington at the earliest possible date to “talk about monetary matters.” Eccles was perplexed. The new administration had shown no interest in his ideas. He had never met Morgenthau, who was a strong advocate for balancing the federal budget. After their meeting, the mystery only deepened. Morgenthau asked Eccles to write a report on monetary policy, which Eccles could as easily have written in Utah. A few days later Morgenthau invited Eccles to his home, where he asked about Eccles’s business connections, his personal finances, and the condition of his businesses, namely whether any had gone bankrupt. Finally, Morgenthau took Eccles into his confidence. “You’ve been recommended as someone I should get to help me in the Treasury Department,” Morgenthau said. Eccles was taken aback, and asked for a few days to think about it.

“‘Here you are, Marriner, full of talk about what the government should and shouldn’t do,’” Eccles told himself, as he later recounted in his memoirs. “‘You ought to put up or shut up. . . . You’re afraid your theory won’t work. You’re afraid you’ll be a damned fool. You want to stick it out in Utah and wear the hair shirt of a prophet crying in the wilderness. You can feel noble that way, and you run no risks. [But] if you don’t come here you’ll probably regret it for the rest of your life.’” Eccles talked himself into the job.

For many months thereafter, Eccles steeped himself in the work of the Treasury and the Roosevelt administration, pushing his case for why the government needed to go deeper into debt to prop up the economy, and what it needed to do for average people. Apparently he made progress. Roosevelt’s budget of 1934 contained many of Eccles’s ideas, violating the president’s previous promise to balance the federal budget. The president “swallowed the violation with considerable difficulty,” Eccles wrote.

The following summer, after the governor of the Federal Reserve Board unexpectedly resigned, Morgenthau recommend-ed Eccles for the job. Eccles had not thought about the Fed as a vehicle for advancing his ideas. But a few weeks later, when the president summoned him to the White House to ask if he’d be interested, Eccles told Roosevelt he’d take the job if the Federal Reserve in Washington had more power over the supply of money, and the New York Fed (dominated by Wall Street bankers), less. Eccles knew Wall Street wanted a tight money supply and correspondingly high interest rates, but the Main Streets of America—the real economy—needed a loose money supply and low rates. Roosevelt agreed to support new legislation that would tip the scales toward Main Street. Eccles took over the Fed.

For the next fourteen years, with great vigor and continuing vigilance for the welfare of average people, Eccles helped steer the economy through the remainder of the Depression and through World War II. He would also become one of the architects of the Great Prosperity that the nation and much of the rest of the world enjoyed after the war.

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immparts, September 29, 2010 (view all comments by immparts)
Mr. Reich has taken a unique look at the macro causes of this latest Recession/Depression. Simply put, he is absolutely correct. My company is a Machine Tool Builder, or at least was. The 1970's were reasonably good years for the Machine Tool Industry. Then came Ronald Regan in the 1980's. When Mr. Regan came into office there were over 500 members of the National Machine Tool Builders Association. When he left office there were less than 50 members remaining. With that limited membership, the NMTBA disbanded. Manufacturing was moving offshore at a dizzying pace. The scandal of that time was the failure of government (Republican) to provide for and plan for new opportunities for the displaced workers. This, at a time when women were entering the workforce in record numbers. Then as Mr Reich correctly observes, technology (computerized operations) began displacing additional workers even as more persons were entering the workforce. Then began the mergers of financial institutions, the abandonment of any restraint of compensation demanded by CEO's and their ilk. All this while cutting workforces. Then, of course, we saw the banks driving up real estate values to support greater lending, even though much of it was totally irresponsible. The banks caused this run on real estate and the resultant inflation of real estate values, all of which was unsupported by any real underlying value. Finally, the collapse of Iceland shouted the folly of Wall Street. And now, we all know what happened to the citizens of the United States as well. This was a slow moving freight train coming down the track and the politicians, Wall Street, the Banks and Insurance Companies failed to comprehend or care about the magnitude of the impending disaster they themselves had caused.

The solutions? I doubt I have listed any that most Americans do not already want.
1. All Executive compensation in public companies should be subject to shareholder
approval, period!
2. The top wage earners should pay their fair share of taxes. Period!
3. We must encourage manufacturing to re-establish in the United States now!
4. We must encourage more research and development in the U.S. now!
5. We must rebuild our infastructure now!
6. We must improve the educational system in the U.S. Especially math and science.
7. We need to address the illegal worker problem we ourselves created.
8. We need to limit the concentration of wealth in banks, Wall Street and
Insurance companies to ensure a more competitive enviornment.

These problems have been identified long before my comments. Mr. Reich has put the problems and solutions in perspective. We now need only to implement the solutions, which we all agree are needed, to ensure all U.S. citizens will have continued opportunitity and prosperity.
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Product Details

ISBN:
9780307592811
Subtitle:
The Next Economy and America's Future
Author:
Reich, Robert B.
Publisher:
Knopf
Subject:
Economics - General
Subject:
General Current Events
Subject:
Economic Conditions
Subject:
Politics - General
Copyright:
Publication Date:
20100921
Binding:
Hardback
Grade Level:
General/trade
Language:
English
Illustrations:
2 DIAGRAMS TO BE REDRAWN
Pages:
192
Dimensions:
9.5 x 5.9 x .8 in .86 lb

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Related Subjects

Featured Titles » History and Social Science
History and Social Science » Economics » General
History and Social Science » Economics » US Economy
History and Social Science » Politics » General
History and Social Science » Sociology » Future Studies

Aftershock: The Next Economy and America's Future Used Hardcover
0 stars - 0 reviews
$8.95 In Stock
Product details 192 pages Knopf Publishing Group - English 9780307592811 Reviews:
"Publishers Weekly Review" by , "Reich (Supercapitalism), secretary of labor under Bill Clinton and former economic adviser to President Obama, argues that Obama's stimulus package will not catalyze real recovery because it fails to address 40 years of increasing income inequality. The lessons are in the roots of and responses to the Great Depression, according to Reich, who compares the speculation frenzies of the 1920s — 1930s with present-day ones, while showing how Keynesian forerunners like FDR's Federal Reserve Board chair, Marriner Eccles, diagnosed wealth disparity as the leading stress leading up to the Depression. By contrast, sharing the gains of an expanding economy with the middle class brought unprecedented prosperity in the postwar decades, as the majority of workers earned enough to buy what they produced. Despite occasional muddled analyses (of the offshoring of industrial production in the 1990s, for example), Reich's thesis is well argued and frighteningly plausible: without a return to the 'basic bargain' (that workers are also consumers), the 'aftershock' of the Great Recession includes long-term high unemployment and a political backlash — a crisis, he notes with a sort of grim optimism, that just might be painful enough to encourage necessary structural reforms. (Oct.)" Publishers Weekly (Copyright PWyxz LLC)
"Review" by , "Former Secretary of Labor Reich...argues that America will not have a sustained economic recovery until the middle class has more buying power.... Lucid and cogent."
"Review" by , "Ensured a current-events hearing by his public prominence, Reich may find his readership defined by those in tune with his short tracts expansionist view of government."
"Synopsis" by , A brilliant reading of the economic crisis and how we should deal with its aftermath.

When the nation’s economy foundered in 2008, blame was almost universally directed at Wall Street. But celebrated economic policy maker and political theorist Robert B. Reich suggests a different reason for the meltdown, and for a potentially treacherous road ahead. Reich argues that the real problem is structural: it lies in the increasing concentration of income and wealth at the top — and a middle class that had to go deeply into debt to maintain a decent standard of living.

His thoughtful and detailed account of where we are headed over the next decades reveals the essential truth about our economy that is driving our politics and shaping our future. His assessment of what must be done to ensure that prosperity is widely shared — a much broader safety net for the middle class to be financed by higher marginal tax rates on the very wealthy — heralds a necessary and long-overdue transformation.

Here is a practical, humane, and much-needed blueprint for lastingly improving America’s economy.

"Synopsis" by , Offering a much-needed blueprint for improving America's economy, political theorist Reich delivers a brilliant reading of the economic crisis and how Americans should deal with its aftermath.
"Synopsis" by , A brilliant new reading of the economic crisis—and a plan for dealing with the challenge of its aftermath—by one of our most trenchant and informed experts.

When the nations economy foundered in 2008, blame was directed almost universally at Wall Street. But Robert B. Reich suggests a different reason for the meltdown, and for a perilous road ahead. He argues that the real problem is structural: it lies in the increasing concentration of income and wealth at the top, and in a middle class that has had to go deeply into debt to maintain a decent standard of living.

Persuasively and straightforwardly, Reich reveals how precarious our situation still is. The last time in American history when wealth was so highly concentrated at the top—indeed, when the top 1 percent of the population was paid 23 percent of the nations income—was in 1928, just before the Great Depression. Such a disparity leads to ever greater booms followed by ever deeper busts.

Reichs thoughtful and detailed account of where we are headed over the next decades reveals the essential truth about our economy that is driving our politics and shaping our future. With keen insight, he shows us how the middle class lacks enough purchasing power to buy what the economy can produce and has adopted coping mechanisms that have a negative impact on their quality of life; how the rich use their increasing wealth to speculate; and how an angrier politics emerges as more Americans conclude that the game is rigged for the benefit of a few. Unless this trend is reversed, the Great Recession will only be repeated.

Reichs assessment of what must be done to reverse course and ensure that prosperity is widely shared represents the path to a necessary and long-overdue transformation. Aftershock is a practical, humane, and much-needed blueprint for both restoring Americas economy and rebuilding our society.

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