Thursday, June 23, 2022

In 108 Years the Fed is Zero-for-Eight Stopping 5%+ Inflation Without Recession

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“Throughout its 108-year history the Federal Reserve has never succeeded at reversing an inflation rate of 5% or greater without producing a recession. At zero for eight, its batting average is literally zero.”

-Cautious Optimism Economics Correspondent

4 MIN READ - A dispatch from the research department of the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

In recent weeks the Economics Correspondent has commented he believes a recession is extremely likely if the Federal Reserve uses the higher policy interest rates and/or quantitative tightening needed to bring inflation down to its target rate of around 2%.

Even if the United States enters a technical recession soon due to the possibility of a slightly negative consecutive second quarter, the Correspondent fears the shallow contraction will deepen later as the effects of future rate hikes have yet to be felt.

The Correspondent believes this in part due to economic theory. Most of the major macroeconomic schools—the Keynesians, the Monetarists, the Austrians, and the Modern Monetary Theorists—agree that a rapid increase in interest rates triggers an economic retrenchment, although they disagree on the specific mechanism that the higher rates trigger to induce the slump.

However what the Economics Correspondent finds more convincing than theory, and believes most of the public also finds more persuasive, is empirical evidence. 

So the Cautious Optimism Economics Correspondent’s research department, composed of himself and his computer, offers this exclusive, high-powered analysis:

Beware. Throughout its 108-year history the Federal Reserve has never succeeded at reversing an inflation rate of 5% or greater without producing a recession. At zero for eight, its batting average is literally zero.

Where's the empirical evidence you ask? See the St. Louis Fed’s own CPI chart (attached) and read further for more details on what appears to be an exception in 1951—but isn’t.

To access the chart directly go to the St. Louis Fed at:

And to view the relationship between the Fed Funds policy rate (rising as the Fed tries to slow down the inflation that it itself has created) and subsequent recessions, view:

Perhaps in 2022 by divine intervention the Fed might bring inflation down from today's official 8.6% CPI to around 2% without a recession, but if it actually succeeded it would be through a combination of blind luck and a miracle.

So the Economics Correspondent would definitely not take that bet.

And up until yesterday the Jay Powell Fed has tried repeatedly to promote a “glass half full” outlook, citing the Fed’s success in raising interest rates in 1994 without causing a recession: a textbook example of the so-called “soft landing.”

However just a glance at the CPI chart reveals the inflation rate in 1994 was nowhere close to 5%. Rather, it sat near 2.5% for the entire year.

If the inflation rate in 1994 had been 8.6% instead of 2.5%, the Economics Correspondent is confident the more aggressive rate hikes needed to bring it down would have also made the soft-landing scenario all but impossible.

Powell seems to be coming around to the reality. Yesterday in Congressional testimony he admitted that a soft-landing “is going to be very challenging.”

That concludes the main post, but read on for a few more wonkish details about 1951 and the pre-1948 period.



1) There appears to be an exception in 1951, where inflation peaks at 9.6% before falling rapidly without a recession.

The Economics Correspondent has analyzed quarterly GDP data for 1950 and 1951 at the Bureau of Economic Analysis, and in fact the private sector did go into recession.

However massive government spending on the Korean War helped the country avoid an official recession, but only mathematically.

The definition of GDP is private consumer spending + private business investment spending + government purchases + net exports, or famously: C + I + G + Nx = Y.

Adding just the private sector components—C, I, and Nx—there were two consecutive quarters of economic contraction in late 1950 and early 1951, and contraction in three out of four quarters.

But a sharp uptick in government war spending mathematically offset the contraction enough for overall GDP to contract in only one quarter.

However there’s no question that the private sector, what really matters, fell into recession.

2) The St. Louis Federal Reserve chart doesn’t include the 1914-1948 period.

However historical inflation records reveal that shortly after the establishment of the Federal Reserve inflation exceeded 5.0% for nearly five years (March 1916 to December 1920). 

Economic historians also record that the Benjamin Strong New York Fed famously pushed real interest rates up to 24% (8% nominal plus a 16% trough deflation) to stop the inflation, producing the Depression of 1920-21 along the way.

There were no more major inflation episodes in the 1920’s and the country entered a major deflation in the early 1930’s as over 9,000 U.S. banks failed in the opening years of the Great Depression. 

Inflation briefly eclipsed 5% for a few months in 1934 but the entire 1930’s decade is already considered one long depression.

3) To finance massive World War II expenditures the Fed resorted to aggressive money creation, but wartime price controls concealed the effect other than shortages.

In the immediate postwar period price controls were lifted, triggering a major acceleration in price inflation as the effects of years of new money were at last felt. The inflation rate persisted between 8.5% and 19.7% for twenty months ending in January of 1948.

Returning to the attached CPI chart, we can see the Fed’s reaction in early 1948: a major interest rate hike that kneecapped the inflation, but not without producing another recession in 1948-1949.

Monday, June 20, 2022

Janet Yellen/Biden White House Chorus: "Recession Not Inevitable"

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“We expect a transition to steady and stable growth… I don’t think a recession is at all inevitable.”

-Janet Yellen, Treasury Secretary and former Federal Reserve Chair. June 19, 2022

From Fortune: "Recession not inevitable, Yellen says: 'We expect a transition to steady and stable growth'" at:

“Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend.”

-Federal Reserve Chair Ben Bernanke. July 19, 2007

The Cautious Optimism Correspondent for Economic Affairs and Other Egghead stuff agrees Janet Yellen is technically right: there’s always a 0.1% chance a recession can be avoided.

OK, make that 0.001%.

But in the meantime he’s writing down Yellen’s quote, marking the date, and will come back and check out how it has aged in a year or two. 

Kinda like…

“My judgment right now is that the recent inflation that we have seen will be temporary. It’s not something that’s endemic”

-Janet Yellen. May 27, 2021

And a few more from the last few days:

1) “Not only is a recession not inevitable, but I think that a lot of people are underestimating those strengths and the resilience of the American economy.”

-Brian Deese, White House National Economic Council Director. June 19, 2022.

2) “A recession is not inevitable.”

-Jennifer Granholm, White House Energy Secretary. June 19, 2022

3) "First of all, it's [recession] not inevitable.”

-Joe Biden. June 16, 2022.

It has to be a huge coincidence that they're all using the same words at the same time.

Sunday, June 19, 2022

ExxonMobil's Quarterly Profits vs Apple's

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Nine days ago Joe Biden accused ExxonMobil of making "more money than God."

Forbes has compiled a chart comparing the last ten quarters' net profits for ExxonMobil and Apple. Apple, in orange, appears to make five times more money than God in blue.

CO's Economics Correspondent has written in more detail on the specific finances of ExxonMobil, ChevronTexaco, Apple, Google, Microsoft, and Facebook at:

Spoiler: Apple also pays less than one-quarter the taxes that God pays.

Tuesday, June 14, 2022

ExxonMobil Paid More Than $1 Trillion in Taxes Over a Decade But Joe Biden Says "Start Paying Your Taxes!"

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"Yes, in the eleven-year period FY2004 through FY2014, ExxonMobil paid literally over $1 trillion ($1.05T) in U.S. and international taxes, by far the largest single taxpayer in America."

5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff examines Joe Biden’s recent criticism of Big Oil using kryptonite for politicians: math. Prepare for the factual financial statistics from American energy and tech firms instead of fictitious blabber from elected bureaucrats.

During a speech at the Port of Los Angeles Joe Biden recently blamed, once again, Big Oil and “corporate greed” for high gas prices and overall price inflation. 

Calling out one company by name this time, Biden complained that “ExxonMobil made more money than God last year” and closed out his remarks by ordering the diversified energy supermajor to “start paying your taxes!”

This is of course just another of multiple salvos bashing America’s world-leading energy industry alongside a posse of Democratic politicians attacking Big Oil’s “record profits” to heat up the bloodthirst of their political base.

But the Economics Correspondent would like to ask two simple questions: 

Q1. Have any of these politicians, Biden included, actually gone back and looked at oil companies’ past financials before accusing them of posting “record profits?”

Q2. Has ExxonMobil not “started paying taxes?”

Fortunately, the Economics Correspondent routinely accesses years’ worth of SEC-filed corporate 10-K financial reports, standardized accounting that any competent politician could look up with a Google search if they had the intelligence or principled honesty to bother.

Let's compare the rhetoric to the financial reality.

1) “More money than God”

First there's Joe Biden’s complaint that “ExxonMobil made more money than God last year.”

Yes, after posting a record $22.4 billion loss in FY2020, ExxonMobil's results recovered in FY2021, recording net income of $23.0 billion.

That $23.0 billion net profit was what remained after ExxonMobil first paid $62.5 billion in total taxes (income, sales-based, duties, and other taxes) for a final net profit margin of 8.0%.


But if ExxonMobil's final profit is “more money than God,” then several big tech firms must be “Supergods” in Biden’s book.

Here's how much net income some leading tech firms posted in 2021, plus their tax bills:

-Apple: Net income: $94.7 billion, Taxes paid: $14.5 billion, Net profit margin: 25.9%

-Microsoft: Net income: $61.3 billion, Taxes paid: $9.8 billion, Net profit margin: 36.5%

-Google: Net income: $76.0 billion, Taxes paid: $14.7 billion, Net profit margin: 29.5%

-Facebook: Net income: $39.4 billion, Taxes paid: $7.9 billion, Net profit margin: 33.4%

And again, for comparison purposes…

-ExxonMobil: Net income: $23.0 billion, Taxes paid: $62.5 billion, Net profit margin: 8.0%

Big Tech financials sources:

So why beat up on ExxonMobil but not Apple, Microsoft, Google, or Facebook—corporations that make far more money than ExxonMobil while paying a tiny fraction of the taxes?

Well big tech is full of loyal Democratic voters, Democratic campaign contributors, and opposition-targeting censors.

Whether Biden leaves Big Tech alone because they’re his allies is partially speculation. What isn’t speculation is that many Democratic politicians have no clue how much these companies make and how much energy companies pay in taxes.

2) What about Big Oil’s “record profits?” We’ve been hearing that nonstop for the last several months.

For example:

“At a time of record profits, Big Oil is refusing to increase production to provide the American people some much needed relief at the gas pump.”

    -Rep. Frank Pallone, (D-NJ) chairman of the House Energy and Commerce Committee

"While families are struggling to pay higher prices at the pump, oil and gas companies are recording record profits.”

    -House Speaker Nancy Pelosi (D-CA)

“Giant oil corporations like @exxonmobil are making billions in record profits. We need a Windfall Profits Tax to tax big oil on their profits & we need to invest in clean energy too.”

    -Sen. Elizabeth Warren (D-MA)

“The big oil companies are profiteering. They are making record profits causing consumers unprecedented pain.”

    -Sen. Richard Blumenthal (D-CT)

“ExxonMobil is charging outrageous gas prices while seeing record profits.”

    -Sen. Ed Markey (D-MA)

There are countless more quotes but I’ll stop there. You get the idea. It’s common knowledge Democratic politicians have all synchronized to the “record profits” narrative.

So how about it? How big are Big Oil’s “record profits?”

Looking at corporate financials for the U.S. energy industry, we’ll just focus on what are, by far, America's two largest energy companies: ExxonMobil and ChevronTexaco.

3) ExxonMobil

As previously mentioned, after posting a *real record loss* of $22.4 billion in FY2020 ExxonMobil recovered and recorded net income of $23.0 billion in FY2021.

Is that a record?

Here are some of ExxonMobil’s past annual profits, both nominal and (adjusted for inflation):

2004: $25.3 billion ($37.7 billion)

2005: $36.1 billion ($52.0 billion)

2006: $39.5 billion ($55.7 billion)

2007: $40.6 billion ($55.6 billion)

2008: $45.2 billion ($59.7 billion)

2010: $30.5 billion ($39.7 billion)

2011: $41.0 billion ($52.1 billion)

2012: $44.9 billion ($55.7 billion)

2013: $32.6 billion ($39.8 billion)

2014: $32.5 billion ($39.0 billion)

and as a reminder:

2021: $23.0 billion (aka. “record profits”)

Well, that’s a decade’s worth of years when ExxonMobil made more, a lot more, than they made in 2021, all of it very recently for those Democratic politicians with amnesia.

Meanwhile Joe Biden ordered ExxonMobil to “start paying your taxes!”

Has ExxonMobil not been paying its taxes?

Here are some samples of taxes paid by ExxonMobil in previous years (total including sales-based taxes, corporate income taxes, and other taxes and duties):

2004: $75.0 billion

2005: $98.6 billion

2006: $100.7 billion

2007: $105.7 billion

2008: $116.3 billion

2009: $78.6 billion

2010: $89.2 billion

2011: $108.1 billion

2012: $102.3 billion

2013: $91.2 billion

2014: $82.9 billion

Yes, in the eleven-year period FY2004 through FY2014, ExxonMobil paid literally over $1 trillion ($1.05T) in U.S. and international taxes, by far the largest single taxpayer in America.

During the same period, the bottom 70% of all U.S. taxpayers paid a total of $1.24 trillion in federal income taxes 

Source: Internal Revenue Service

Much of those payments are excise taxes and duties to other nations since ExxonMobil extracts, refines, and moves hundreds of millions of barrels of petroleum annually from/to other countries. But the company still paid over a trillion dollars out of their revenue streams to the treasuries of the U.S. and other international governments (and diverted away from shareholders) and paid as much in taxes as the bottom 65% of all American federal income taxpayers combined: about 86 million filers.

If that means ExxonMobil hasn’t “started paying your taxes,” I don’t know what Joe Biden’s definition of “start” is.  Maybe it’s the same as his definition for “start reading from your teleprompter!” or “start your cognitive decline!”

Sources: ExxonMobil 2010-2014 (pages 36, 53)

ExxonMobil 2004-2008 (pages 30, 50)

4) Lastly, what about ChevronTexaco?

In FY2021 ChevronTexaco posted net income of $15.6 billion. Is that a “record profit?”

By now you can see where this is going. Chevron’s net income in select previous years, nominal and (adjusted for inflation):

2006: $17.1 billion ($25.5 billion)

2007: $18.7 billion ($26.9 billion)

2008: $23.9 billion ($31.5 billion)

2010: $19.0 billion ($24.7 billion)

2011: $26.9 billion ($34.2 billion)

2012: $26.2 billion ($32.5 billion)

2013: $21.4 billion ($26.1 billion)

2014: $19.2 billion ($23.0 billion)

And again for comparison:

2021: $15.6 billion (aka. “record profits”)

Taxes paid:

2006: $35.7 billion

2007: $35.8 billion

2008: $40.3 billion

2009: $25.6 billion

2010: $31.2 billion

2011: $36.2 billion

2012: $29.7 billion

2013: $26.0 billion

2014: $23.0 billion

Chevron financials sources:

Chevron 2012-2014 (pages FS-2, 31, 48)

Chevron 2009-2011 (pages FS-2, 9, 45)

Chevron 2006-2008 (pages FS-2, 9, 47)

Incidentally, criticizing random San Francisco liberals may not be on the same level as quoting the President of the United States, but the Economics Correspondent lives in the City by the Bay and has lost count how many times he has heard or seen Bay Area liberals accuse ExxonMobil and ChevronTexaco of “paying zero tax.”

When I pointed out ExxonMobil had paid over $1 trillion in taxes from 2004 to 2014 and included URL links to their SEC-filed 10-K’s one commenter retorted “Next time include links to data that isn’t fake.”

Because... you know, the SEC is in bed with Big Oil: a joint-partnership enterprise to concoct fraudulent accounting from the offices of federal securities regulators.

But then it's always easy for progressives to live in taxes fantasyland when they’re not the ones paying.

Thursday, June 9, 2022

Free vs Regulated Banking: The Second Bank of the United States and the Panic of 1819 (Part 2 of 2)

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“We are under the bank bubble, as England was under the South Sea bubble, France under the Mississippi bubble.”

    -Thomas Jefferson letter to Charles Yancey, 1816

“The Bank was saved, and the people were ruined.”

    -American economist William Gouge (1833) on the Panic of 1819

Second Bank of the United States banknote

6 MIN READ - On Tuesday the Economics Correspondent posted Part 1 of "The Second Bank of the United States" (War of 1812 origins). If you find today's column on the Bank's role in the Panic of 1819 interesting you can find the previous article at:


Congress’ strategy for chartering the Second Bank of the United States (SBUS) in 1816 was to use its prestigious banknotes to buy up excess private banknotes which had been overissued in the wartime environment of irredeemable paper money.

The SBUS would then gradually demand specie redemption (gold or silver coin) from the state banks who would steadily retire their notes, and the country could avoid a rapid contraction of the money supply.

At least that was the plan.

The SBUS did buy up state banknotes, but it never forced the issue of redemption, perhaps out of cowardice.

Or perhaps due to corruption.

For the SBUS turned out to be riddled with fraud and corruption itself, particularly in its two largest branches: Philadelphia and Baltimore.

Of the SBUS’s peak twenty-five nationwide branches, the Philadelphia and Baltimore offices issued a full three-fifths of the entire institution's loans. 

Particularly guilty were Baltimore branch president and merchant James A. Buchanan (no relation to future President James Buchanan who voted against the SBUS’s recharter) and branch cashier William McCulloch.

McCulloch had a habit of making large, confidential loans to Buchanan and his merchant friends for their own purposes “without any authority and without the knowledge of the board of that office, or of the parent bank.” (William Graham Sumner, 1896) 

In all $3 million of such secret loans were issued, over half of which was spent for personal reasons and most of which went unpaid, ultimately collapsing the Baltimore office when the ruse was later discovered.

But together the SBUS’s hoard of government securities, refusal to call in state banknotes, and fraud and corruption posed an insignificant risk to the U.S. economy when compared to its greatest blunder of all: inflation.

From the late Professor Murray Rothbard, for 57 years the only economist to have written a book exclusively on the Panic of 1819:

“From its inception, the Second Bank launched a spectacular inflation of money and credit… …At the peak of its initial expansion, in July 1818, the Bank of the United States’s specie totaled $2.36 million, and its aggregate notes and deposits totaled $21.8 million. Thus in a scant year and a half of operation, the Second Bank of the United States had added a net of $19.2 million to the nation’s money supply… …The huge expansion of money and credit impelled a full-scale inflationary boom throughout the country.”

Citing J. Van Festermaker’s estimates (1965), the “total money supply in the nation rose from $67.3 million in 1816 to $94.7 million in 1818, a rise of 40.7 percent in two years.”

Rothbard also provides a sketch of how enormous the resulting price and speculative booms became:

“The index of export staples in Charleston rose from 105 to 160 [from 1815 to 1818]; the prices of Louisiana staples rose from 178 to 224 in the same period… exports rose from $81 million in 1815 to a peak of $116 million in 1818. Prices rose greatly in real estate, land, farm improvement, and slaves, much of it fueled by the use of bank credit for speculation. There was a boom in turnpike construction, furthered by vast federal expenditures on turnpikes.”

Frontier land values also surged in remote western states like Tennessee, Kentucky, Ohio, Indiana, and Alabama.

Stock prices soared too. Trading activity on the outside curbs of Wall Street ballooned so much that traders were forced to open the nation’s first indoor stock exchange, the NYSE, in March of 1817. 

And all the new cheap SBUS money floating around…

“…impelled a further inflationary expansion of state banks on top of the spectacular enlargement of the central bank. Thus the number of incorporated state banks rose from 232 in 1816 to 338 in 1818 (+45.7%). Kentucky alone chartered 40 new banks in the 1817-1818 legislative session.” (Rothbard)

But the cheap-money speculative mania was not lost on everyone. 

Thomas Jefferson, himself a student of economic history who was aware of past central bank-induced bubbles in France (1719), England (1721, 1772, 1783) and the United States (1791, 1797) warned in a letter to his friend Colonel Charles Yancey that:

“The American mind is now in that state of fever which the world has so often seen in the history of other nations. We are under the bank bubble, as England was under the South Sea bubble, France under the Mississippi bubble.”


By 1818 the Second Bank realized it was in deep trouble. 

Late 1818 and early 1819 brought the final maturity dates for America to repay its Louisiana Purchase debt. Not only was the U.S. Treasury scheduled to repay over $4 million, but the terms of the original 1803 agreement obliged payment in gold or silver coin only—no paper notes.

As the SBUS was the federal government’s banker, the Treasury was poised to withdraw a massive $4 million in specie within months, but the Second Bank had only $2.36 million of specie backing $21.8 million of paper liabilities in July of 1818.

The SBUS was in real danger of bankruptcy.

Thus the Bank resorted to the only course of action available: It stopped lending and aggressively called in loans from all corners of the country. In a desperate attempt to raise coinage to save itself, the Second Bank launched a massive contraction of money and credit just as spectacular as the expansion it had just inflated.

According to Rothbard: “Contraction of money and credit by the Second Bank of the United States was almost unbelievable, total notes and deposits falling from $21.9 million in June 1818 to $11.5 million only a year later (-47.2%).”

Starved of new money to fuel speculative mania asset bubbles in land and business ventures quickly popped, setting off widespread bankruptcies and bank failures. The latter, whose notes and deposits became worthless, led to further contraction of the money supply.

Rothbard: “We get the following estimated total money supply [of the United States]: in 1818, $103.5 million; in 1819, $74.2 million, a contraction in one year of 28.3 percent.”

To put the deflation in perspective, the Great Depression is largely blamed on a 30% contraction of the nation’s money supply over three-and-a-half years. The 1819 contraction was squeezed into one year.

America quickly fell into a full-fledged national depression. 

The number of bank failures lends credence to the name “Panic of 1819.” From 1819 to 1822, over 20% of America’s incorporated banks failed, falling from 341 to 267.

Former President Thomas Jefferson wrote to former President John Adams in late 1819 that “The paper bubble is then burst. This is what you and I, and every reasoning man, seduced by no obliquity of mind, or interest, have long foreseen.”

And there was more bloodletting. From Rothbard: 

“The index of export staples fell from 158 in November 1818 to 77 in June 1819, an annualized drop of 87.9%... …imports fell from $122 million in 1818 to $87 million the year later (-29%)… …Bankruptcies abounded, and one observer estimated that $100 million of mercantile debts to Europe were liquidated by bankruptcy during the crisis.”

Lastly, falling wages and widespread unemployment plagued the country. The estimated wage for agricultural workers rose from 60 cents a day in 1811 to $1.50 in 1818, but one year later it fell to 53 cents.

Nationwide unemployment estimates are difficult to calculate for 1819 when the government didn’t keep official statistics. However, manufacturing in cities was hard hit and one telling statistic from Philadelphia reveals of the 9,700 employed in branches of manufacturing in 1815, only 2,100 remained by the fall of 1819.

By 1821 the economy bottomed out. With the process of debt liquidation and monetary contraction cleared, the economy began a recovery. 

However, the Second Bank had done itself no favors ingratiating itself to the public which largely blamed it for the economic pain and suffering inflicted upon the country. 

Americans of the early 19th century appear to have been far more educated in matters of economics than their 21st century successors.

To end with a summation from Rothbard:

“In the dramatic summing up of hard-money economist and historian William Gouge, by its precipitous and dramatic contraction ‘the Bank was saved, and the people were ruined.’”

Tuesday, June 7, 2022

Fed Reports Median U.S. Home Price Reaches $428,700 (Can't Imagine the Cause)

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The Federal Reserve reports the median price of homes sold in the United States reached $428,700 in the first quarter, up $106,100 since April of 2020.

Hmm, the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff can't imagine what could have caused home prices to rise so quickly.

Free vs Regulated Banking: The Second Bank of the United States and the Panic of 1819 (Part 1 of 2)

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5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff focuses on yet more historical federal intervention into America’s banking affairs, this time with the nation’s second central bank, the abortive Second Bank of the United States which directly precipitated the Panic of 1819.


America’s first central bank, Alexander Hamilton’s First Bank of the United States, only survived for twenty years. Having spawned the Panic and Recession of 1792 and the Panic and Depression of 1797, its charter renewal died in 1811 by a single U.S. House and single Senate vote.

One year later the United States declared war on Great Britain, opening the War of 1812.

From the standpoint of government finance, Congress’ declaration of war might be the worst case of bad timing in history.

By the 19th century major powers were financing wars with plentiful central bank credit. British Parliament had relied on the Bank of England to provide generous loans for over a century, and Napoleon had established the Bank of France in 1800 for the same purpose.

The Economics Correspondent is not saying he necessarily agrees with the arrangement of central banks making vast wartime credit available to the very governments that grant them special privileges, only that the United States entered the War of 1812 without the central bank that Congress had just shuttered a year prior.

Pressed to find credit from somewhere—anywhere—to fight the world’s most powerful army, the states and eventually the federal government resorted to private inflation by temporarily suspending the obligation of state banks to redeem their notes in silver or gold specie (i.e. going off the silver/gold standard, also known as the bimetallic standard).

Under the bimetallic standard, state-chartered private bank issuances of credit and paper banknotes were constrained by their stock of metallic reserves. If they overextended credit too many noteholders might demand banknote redemption at once and drain their silver/gold coin reserves (i.e. specie) leading to bankruptcy.

The bimetallic standard therefore acted as a market restraint on the amount of credit and paper money banks could issue, keeping inflation in check and preventing the formation of dangerous investment and speculation bubbles.

That all changed when the combined federal and state governments intervened and freed banks to renege on their contractual obligations to redeem notes in specie. 

As intended, banks quickly went on a massive lending spree since, freed from the discipline of silver and gold, the more loans and paper banknotes they issued, the more interest and profits they could earn.

This was precisely the goal of Congress and the Madison administration: not only to free state banks to create vast amounts of credit and paper money, but also make much of it available to the Treasury for wartime financing, and with such a generous supply of credit available to lend it at favorable interest rates.

The strategy parallels Great Britain’s own when it suspended its gold standard in 1797 to fight Napoleon for the next eighteen years. The only difference was the British government received its credit from a single, closely connected and highly privileged central bank, the Bank of England, whereas the United States government would rely on America’s plethora of private state banks.


The War of 1812 ended with the Treaty of Ghent in early 1815, but the United States government was left with the problems of a large debt overhang and state banks which by then had printed far more paper money than they could back with gold and silver coin.

Congress was fully aware that going back on the bimetallic standard cold turkey could result in a large contraction of money and credit while placing enormous strain on the banking system. Hence debate reopened on the establishment of a central bank. 

President Madison, who previously had opposed the First Bank of the United States' charter renewal, was convinced by Treasury Secretary Alexander J. Dallas of the necessity of a new central bank to facilitate the postwar transition from an unrestrained, highly inflated monetary system back to the more disciplined bimetallic standard.

Congress subsequently passed the charter establishing a second central bank, the Second Bank of the United States (SBUS), in April 1816. Headquartered again in Philadelphia, the SBUS opened its doors for business in January 1817 under President William Jones.

Like its predecessor, the First Bank of the United States, the SBUS would operate on a twenty-year charter requiring renewal by Congressional vote.

Like the First Bank, the SBUS raised its capital through a stock subscription. And like the First Bank, it subscribed one-fifth of its shares to the federal government who became a minority owner. 

Just as the First Bank had done 25 years prior, the SBUS loaned the subscription capital to the U.S. Treasury and the loan was repaid through several years of SBUS stock dividends.

Like the First Bank, the SBUS acted as the Treasury's exclusive steward of federal deposits, giving it a “too big to fail” semblance as the public believed Congress would never allow its own bank of deposit to go bankrupt.

Like the First Bank, the SBUS would accept deposits from the public and also extend loans to private business.

Like the First Bank, the SBUS’s notes were accepted for payment of federal taxes, giving them a quasi-legal tender status. 

And like the First Bank, the SBUS would be granted a monopoly by Congress: the exclusive right to open interstate branches and operate nationwide, giving it an outsized credit influence over any normal private bank.

Finally, as with the First Bank, subscribers to the SBUS’s stock offering would be allowed to purchase their shares with U.S. Treasury bonds, the objective being to support Treasuries prices while stuffing the Bank’s portfolio with government bonds. Treasuries interest payments to the Bank and its shareholders would come courtesy of the hapless U.S. taxpayer.

On a side note, the plan for the SBUS to accept Treasury bonds as payment for bank shares was no coincidence, nor was the appointment of Philadelphia attorney Alexander J. Dallas as Madison’s Treasury Secretary.

Dallas’ nomination was lobbied heavily by Philadelphia banker and merchant Stephen Girard, thought to be one of the two wealthiest men in America at the time. 

Girard had personally bought the First Bank of the United States when its privileged national charter expired in 1811, and his now-private state bank served as the federal government’s largest creditor during the War of 1812.

Subsequently at war’s end Girard found himself with enormous holdings of U.S. government bonds and was looking for a reliable buyer.

Murray Rothbard, for 57 years the only economist to have dedicated a book solely to the Panic of 1819, explains Girard’s interest in the new national bank:

“During the War of 1812 Girard became a very heavy investor in the war debt of the federal government. Both as a prospective large [SBUS] stockholder and as a way to unload his public debt, Girard began to agitate for a new Bank of the United States."

"Dallas’s appointment as Treasury Secretary in 1814 was successfully engineered by Dallas and his close friend, wealthy New York merchant and fur trader John Jacob Astor, also a heavy investor in war debt [and the second of the two richest men in the country].”

We’ll continue with the story of how the SBUS produced the Panic and Depression of 1819 in Part 2.

Friday, June 3, 2022

Biden White House Considering Adding 25% Energy Windfall Profits Tax

Click here to read the original Cautious Optimism Facebook post with comments

CO reported on Wednesday that the United Kingdom imposed a 25% windfall tax on energy profits late last week. 

That will surely do wonders for increasing already limited supplies.

Now President Biden thinks that sounds like a great idea for America too.

As the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff opined earlier this week, energy companies spend tens of billions of dollars exploring and drilling prospective sites–both onshore and offshore–that often come up empty, and then spend tens of billions more to develop the minority of sites that pay off. 

Then they pay out tens of billions more in transport, financing costs, regulatory compliance, sales and marketing, permits, royalties, and duties, all on top of the cost of their failures.

Even with global oil prices at their highest level in fourteen years British supermajor Shell plc produced a net income profit margin of 7.3% in fiscal year 2021.

That compares to a 26.3% net profit margin for Apple, 30.8% for Facebook, and 25.7% for Coca Cola.

With the share of profits energy companies are allowed to keep further watered down by new windfall taxes...

"The most marginal prospective sites, the ones E&P companies thought were barely worth the risk at the old tax rate, are sure to be scrapped now." (Economics Correspondent commentary from Wednesday) 

More at Reuters: "White House weighs oil profits tax to fund consumer rebate"

Wednesday, June 1, 2022

U.K. Chancellor of the Exchequer Announces Energy Windfall Profits Tax Rate of 65%

Click here to read the original Cautious Optimism Facebook post with comments

"Chancellor of the Exchequer Rishi Sunak announced a 25% levy on oil and gas production earnings, raising the headline rate of tax to 65% from 40%."

A 65% tax rate.

The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff is just sure that a 65% tax rate will do wonders for expanding oil and gas production in the North Sea.

Imagine dropping hundreds of millions of pounds to explore a prospective site in the harsh North Sea environment just to find the ocean floor field is dry. And after striking out enough times to the tune of billions of pounds, which is common in offshore exploration, you finally hit one with oil and gas.

Then the government moves in and takes 65% of whatever you have left after the costs not only of production, transport, financing costs, regulatory compliance, sales and marketing, permits, royalties, and duties, but of all your previous failures as well.

Well the most marginal prospective sites, the ones E&P companies thought were barely worth the risk at the old tax rate, are sure to be scrapped now.

And that'll really help with the global supply problem.

It's a sad policy reversal. 

Boris Johnson had previously announced plans to expand North Sea energy production in light of lower Russian deliveries to Europe, but the British press reports he has been politically weakened by a Covid party scandal from 2020 and is now throwing out populist bones to appease the opposition as well as a large share of the British public that still doesn't understand supply and demand.

Read more at S&P Global: "UK oil, gas windfall tax will 'drive away investors,' hit North Sea supply: industry chief"