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According to Wikipedia, the US decisively won both Barbary wars and could press on if they wanted to. However, they signed peace treaties, which incredibly granted to the loser a significant sum of money. I'm quite astonished by that: why in the world would the winning side pay money to the losing side? Especially since that war was about money (tributes) in the first place?
Sure, I'm not the only one who was surprised by such an apparent nonsense, as the article itself suggest, William Eaton had similar feelings and was ignored. However, this was apparently accepted by most as normal, and I've no clue why.
I will answer with regards to the first barbary war.
It is indeed true, as can be read in the Treaty Of Peace and Amity between the United States of America and the Bashaw, Bey and Subjects of Tripoli in Barbary. signed June 4, 1805, that the US did pay $60 000 as ransom in order to achieve peace. The second article of the treaty reads:
The Bashaw of Tripoli shall deliver up to the American Squadron now off Tripoli, all the Americans in his possession; and all the Subjects of the Bashaw of Tripoli now in the power of the United States of America shall be delivered up to him; and as the number of Americans in possession of the Bashaw of Tripoli amounts to Three Hundred Persons, more or less; and the number of Tripolino Subjects in the power of the Americans to about, One Hundred more or less; The Bashaw of Tripoli shall receive from the United States of America, the sum of Sixty Thousand Dollars, as a payment for the difference between the Prisoners herein mentioned.
You say that the US decisively won the war, but consider the character of the war: It was a naval war. And it was not the first, Tripoli declared war all the time: Versus Sweden, France, Portugal, and others. Tripoli never had a fleet to fight the frigates that were brought against it, but once they were gone Tripoli would resume its piracy. Therefore the aim of the wars were usually to blockade the port of Tripoli until a favorable peace treaty was attained. Sweden in 1802 for example managed to lower its annual tribute to Tripoli from 20 000 Spanish piastre to only 8 000 piastre (they also paid a large amount in ransom, just like the US). Most countries did pay tributes, but the size varied. The great achievement of the US was that their treaty contained no tributes, they only paid a ransom. Which is, in principle, a big difference. If they would have had to continue with the payment of tributes, it would indeed have been a failure (the war was started because Jefferson refused to pay the demanded tributes).
Was Eaton right? Did they pay more than they had to? Consider the following paragraph from The U.S. Navy: a history:
Faced with the twin threats of Eaton's army and Barron's ships, the pasha had dropped his demand for the payment of American tribute and accepted $60,000 - about half what he had previously demanded - as a ransom for the crew of the Philadelphia. Lear's peace at a price received a mixed reception in the UnitedStates. Critics charged that the treaty was ill timed because resumption of the naval bombardment, combined with an attack by Eaton's force, would have brought the war to an end without the payment of ransom. Others argued that this was the best treaty ever extracted from the Tripolitans, and as long as the Philadelphia's crew remained in enemy hands, no better one could have been obtained without endangering their lives.
I am unsure of what Eaton could have accomplished, he was heading for Tripoli when the peace treaty was signed.
So the answer to your question would be, I believe, that a "decisive victory" does not mean what you think it does. They never controlled the city of Tripoli, merely the sea outside it. At some point, they had to make peace. Having frigates in the mediterranean sea was not cheap either.
I am not sure what you are talking about.
The treaty between the United States and the Dey of Algiers signed July 3, 1815, ended all tribute, freed all American slaves in Algiers, and gave the United States complete commercial rights. Moreover, the Dey was required to pay 10,000 Spanish dollars to the American consul.
Question: Why did the US pay money to the losers, at the end of both Barbary wars?
The United States did not win the First Barbary War. After some amazing and unexpected success in a ground invasion, which involved minimal US support, Tobias Lear and Commodore James Barron grabbed defeat from the jaws of victory. Commodore Barron refused to support the continuation of the ground invasion, and Tobias Lear signed a peace treaty with the Tripoli Bey which increased annual payment to the pirate nation. The United States was also paying off the Moroccan, Algerian, and Tunisian pirates who all demanded individual treaties and tribute. America's Barbary Pirate problems wouldn't be resolved until the second Barbary Pirate War conducted a decade after the first in 1815.
Treaty of Tripoli
With the disbanding of the former Continental Navy and the selling of its last warship by the Confederation Congress in 1785, now without a standing navy, much less a navy capable of projecting force across an ocean, the U.S. was forced to pay tribute monies and goods to the Barbary nations for the security of its ships and the freedom of its captured citizens. As Lieutenant and consul William Eaton informed newly appointed Secretary of State John Marshall in 1800, "It is a maxim of the Barbary States, that 'The Christians who would be on good terms with them must fight well or pay well.'
Soon after the formation of the United States, privateering in the Mediterranean Sea and the eastern Atlantic Ocean from the nations of the Barbary Coast prompted the U.S. to initiate a series of so-called peace treaties, collectively known as the Barbary Treaties. Individual treaties were negotiated with Morocco (1786), Algiers (1795), Tripoli (1797) and Tunis (1797), all of them more than once.
- 25 July 1785, Algeria began piracy against the U.S. with the capture of the schooner Maria, and Dauphin a week later. All four Barbary Coast states demanded $660,000 each tribute from the US. However, the US envoys were given only an allocated budget of $40,000 to achieve peace.
- July 15, 1786, The United States entrees into it's first agreement with a Barbary Pirate state where it agrees to tribute in exchange for safe passage the Treaty with Morocco,
- June 21, 1788. The United States Constitution is ratified.
- 1795 the United States agreed to pay $800,000 to the Bey of Tunisia in exchange for 100 American captives, plus annual tribute that amounted to about 20 percent of the yearly federal budget.
- 1796: United States signs a treaty with Tripoli President Adams agrees to annual tribute.
- 1799: United States agrees to pay Tripoli $18,000 per year to secure safety for American trade ships in the Mediterranean; similar agreements with the other Barbary powers are also settled
- February 17, 1801: Thomas Jefferson becomes President of the United States. Jefferson who is philosophically against paying for a standing navy, doesn't object to paying off the Pirates.
- March 1801: Tripoli declares war on the United States and seizes numerous American merchant ships
Tripoli declares war because while the United States has agreed to pay them, the United States is not paying them in a timely manner. So the Pirates start causing trouble.
Thomas Jefferson uses a three pronged approach to deal with the declaration of war from the Bey of Tripoli.
A).. He dispatches a squadron of ships to the Mediterranean to confront the pirates and blockade Tripoli's main port.
B). The former envoy to the Tripoli pirates is dispatched from the United States back to Tripoli with a wild scheme to cause insurrection against the Bey. The envoy was William Eaton, one of the great American hero's lost to history. Eaton had been serving as a kind of Foreign Service Officer to the Barbary Coast Pirates under the Adams Administration so he was familiar with the part of the world and the pirates. Eaton had recently been recalled when Commodore Richard Morris, had shown up in Tripoli and had been "arrested", until he agreed to pay off Eaton's $26,000 debt. Commodore Morris's brother had recently cast the tie breaking vote in the US senate which selected Thomas Jefferson as our third President over Aron Burr. There is some question as to how much of that debt was actually owed. They Bey bascally saw the opportunity for a pay day and sticking it to the United States who wasn't paying tribute in a timely manner. Morrison's squadron paid the sum, and Eaton was returned to the US in disgrace with an angry Commodore Morris blaming him for the embarrassing episode.
Anyway Eaton makes it back to Washington City just ahead of the notice that the Tripoli had declared war on the US. Jefferson initially tells Eaton that the US government isn't going to honor / pay for his debt which Eaton claims was insured on behalf of the United States. If Jefferson did not agree to cover the debt it would bankrupt Eaton's family. The two men strike an agreement which see's the settlement of the debt deferred, and William Eaton boards a ship back to Tunisia with a wild plan to de-throne the Bey. Eaton with no money, and just a handful of marines (8) is tasked with starting a revolution in Tripoli unseat the Bey and place his older brother on the throne. Jefferson doesn't give William Eaton operational command over any ships, nor weapons, nor money to see this plot through. William Eaton basically gets passage back to North Africa, an honorary rank in the US Navy and a hand shake agreement with Jefferson.
C). Meanwhile… Jefferson dispatches Tobias Lear, an infamous and also forgotten name in US history. Lear was George Washington's aid /book keeper/right hand man after Washington Left the White House. Lear is infamous for:
(1)Attempting to embezzle money from the aging Washington.
(2)Sending out letters to the founding fathers after Washington's death; offering to destroy Washington's personal correspondences and diary entries which could be embarrassing if entered into the historical record. Lear would provide this service for a price. Anyway Jefferson and Lear had done business and this leads to a series of lucrative postings for Lear under the Jefferson Administration. His latest was as diplomat seeking to settle/payoff the Bey of Tripoli.
The First part of Jefferson's plan is an utter failure. In Oct 1803 The USS Philadelphia under Captain Bainbridge is trying to blockade Tripoli. 1 Ship blockade. That's what you do when you have fewer than 10 ships in the entire US navy. The USS Philadelphia runs aground. Captain BainBridge immediately gives orders to dump the guns and gunpowder overboard and surrenders. The USS Philadelphia unbeaches itself a few hours latter when high tide comes up, but by that time the 307 US servicemen have already surrendered and become slaves of the Bey of Tripoli. So much for the US Navy. The US Navy's greatest exercise in Tripolian coastal waters in the first Barbary War is a raid in which they burn the captured USS Philadelphia thus keeping it from becoming the Bey of Tripoli's pirate fleets flag ship.
Meanwhile Jefferson's underfunded second plan to pressure the Bey of Tripoli shows some results. William Eaton and 8 marines(lead by 1st Lieutenant Presley O'Bannon) start recruiting mercenaries along with the Bey's older Brother(Hamet Karamanli) who is living in exile in Egypt. They promise US Navy Support, which they don't have, and elude to a chest of gold. The chest however doesn't contain gold, as Jefferson gave them no gold. Ultimately they are able to convince 500 European Mercenaries and Arabs to join them on their quest. This "army" with almost no support, and with just scant provisions crosses 500 miles into Tripoli. There with US Navy coordination, they successfully attack and capture the second largest city in Tripoli(Battle of Derna (April-May 1805).
After they capture Derna, they send word back to Malta the base of operations for the US navy squadron. Eaton calls for more Marines in preparation for an assault on the Capital Tripoli to unseat the Bey. Only Commodore James Barron refuses to support him. Commodore Barron tells Eaton their is no money in the Navy's budget for this war. He says his ships can't take another winter in the Mediterranean and need to be going back to home waters. Commodore Barron pulls the plug on William Eaton's amazing, but never really supported successful component of the First Barbary war. Eaton and O'Bannon are forced to abandon their "army" in the field as they slip aboard a US ship and flee back to the United States.
The now properly motivated the Bey of Tunisa and Tobias Lear reach an agreement where the US agrees to continue to pay tribute to the Tripoli pirates, to go along with the tribute we are paying to the Morrocco Pirates, and the Algerian Pirates and the Tunisian Pirates… and Jefferson declares victory… but make no mistake, the United States Lost the first Barbary war. The enemy was left in the field, payments continued, and the Second Barbary war would be fought a decade latter over basically the same terms.
Notable Statements from William Eaton…
Congress should have dispatched a squadron of quaker meeting houses, as they would have performed identically to the US Navy.
Congress should change the sigil of the United States. Instead of an Eagle clutching arrows, they should change it to an Eagle clutching a Cigar, or a Fiddle Bow.
Eaton's capture of Derne scared the Bashaw senseless, so when Lear, not knowing how impactful Eaton's victory was offered to pay $60,000, because he thought the bashaw would have demanded more. In reality, The bashaw would most likely have have accepted almost any treaty, so long as it meant he kept his throne from his brother.
The Depression You've Never Heard Of: 1920-1921
When it comes to diagnosing the causes of the Great Depression and prescribing cures for our present recession, the pundits and economists from the biggest schools typically argue about two different types of intervention. Big-government Keynesians, such as Paul Krugman, argue for massive fiscal stimulus—that is, huge budget deficits—to fill the gap in aggregate demand. On the other hand, small-government monetarists, who follow in the laissez-faire tradition of Milton Friedman, believe that the Federal Reserve needs to pump in more money to prevent the economy from falling into deep depression. Yet both sides of the debate agree that it would be utter disaster for the government and Fed to stand back and allow market forces to run their natural course after a major stock market or housing crash.
In contrast, many Austrian economists reject both forms of intervention. They argue that the free market would respond in the most efficient manner possible after a major disruption (such as the 1929 stock market crash or the housing bubble in our own times). As we shall see, the U.S. experience during the 1920–1921 depression—one that the reader has probably never heard of—is almost a laboratory experiment showcasing the flaws of both the Keynesian and monetarist prescriptions.
What are war reparations?
At the end of a war, countries are required to make payments as a way of making up for the damage inflicted. This was the case at the end of World Wars I and II. The debt can be paid back for many reasons, including machinery damage, and forced labor. Typically, compensation comes in the form of money or material goods.
After World War II, a number of treaties were signed to make sure countries like Greece, Israel, and the Soviet Union were compensated for the destruction caused. Those who lost the war were therefore required to pay the victors.
The only Allied country who won but paid compensation was the USA, to Japan. In 1988, under the Civil Liberties Act, U.S. President, Ronald Reagan, apologized to the Japanese-Americans interned in camps during World War II and agreed to pay $20,000 to each surviving former detainee.
Origin, History, and Facts
Slavery has been going on long before African slaves were brought into slave markets around the world. Around the early 1600s, many British and European ships were seized and plundered of all their goods especially their most valuable commodity―the people on the ships. Many coastlines of England, France, Italy, Ireland, Portugal, and Spain were raided in the death of the night, leaving behind deserted beaches and empty houses. These savage abductions were being carried out by Barbary pirates or Corsairs, i.e., the Turks. Those captured were shipped in inhumane conditions and were brought to the pirate’s hometown, where they were sold off as slaves.
Slaves were often paraded through the streets for the public to see. These Barbary slaves were inspected, forced to perform for their perspective buyers, and branded.
Men were made to jump to prove that they weren’t lame. Both men and women were often stripped naked to see their health and sexual value.
Men were checked for circumcision to know if they were Jews. Clothes were inspected to see if anything valuable was stitched into them. Their ear lobes were inspected to see any sign of piercing, which indicated to their slaves being rich back on their land.
Healthy slaves were sent either for hard manual labor or back on the galleys/ships. However, if found unfit, they were left to wander the streets and beg for money.
Their facial hair or hair on their heads, both being an important part of their identity, was shaved off to further humiliate them.
Those who were sent back on the ship had a far worse fate than the ones performing hard labor. Two to five men were shackled together by their feet with their hands to the oars and made to man the oars of the galleys. They were not allowed to move from their place. They often slept, ate, urinated, and defecated on their seat. Those who managed these rowers often cracked their whips or bull’s pizzle on the bare backs of these slaves. Once on the port, these slaves were condemned to bagno and other work that the Pasha or ruler sent them.
Women, on the other hand, were used for housework. But if a woman was beautiful, she was reserved to serve her masters in sexual servitude.
Though most slaves boarded at their master’s residence, many were sent to bagnios/bagno or baths, which were hot and overcrowded warehouses.
Slaves usually got a Friday off along with a couple of hours free for themselves each day. This is when they got to earn some money, with which they could pay off rent at the bagnos and for food.
Even though the slaves worked at the bagnos, they had to pay a fee for filthy lodging and disgusting food.
Some household or agricultural slaves were rented or sent out by their masters. These slaves had to bring back a certain amount of money, a sum of which was returned to the master or else they were severely beaten. These slaves usually wore an iron ring around their ankles, which was strapped to a heavy chain.
This was a very religious era, wherein the slaves had a great desire to confess and receive unction. Therefore, the pasha saw to it that at any given time, there were at least to priests at the bagno.
Unlike their confessions back home, the slaves had to pay the pasha for the priest’s services. Thus, many slaves were often left without any money to pay for their food or clothing.
Slaves often considered converting into Islam. Converting into the Islamic religion would change a few things for them. For instance, though they would stay slaves, but the rules did not remain as rigid. However, the pasha was left with fewer slaves to exploit, and so the priest’s job was to keep the slaves from converting.
Slaves were often worked to death, and their lives had little to no value. In fact, research has it that the price of slaves was so low, that they believed they could “swap a slave for an onion“, and there were so many slaves at any given time, that if one died, they could easily be swapped by another. Hence, these slaves were worked to death.
Islamic culture and law forbade any trade in alcohol, but was lenient when it came to consumption. Many slaves established small taverns in bagnos and made themselves quite a living, catering to Muslim drinkers. If the slaves were exceptionally gifted, highly profitable for their masters, and valuable to his master, he could be rewarded with mistresses and property.
Catholic Churches tried to buy back their people who were enslaved by the Barbaries. Parishioners were encouraged to provide for the money and locked collection boxes were set up in order to raise money for the ransom of poor slaves.
On the other hand, Protestant countries had a more aggressive approach towards the pirates. During Charles II’s reign, several galleys were ceased by the Royal Navy, while European countries bombarded many slave ports, especially their main port in Algiers in the early to mid-1800s. Europe and America began fighting frequently against the Barbary pirates. They came up with a treaty that abolished Christian slave trade however, non-European slave trade was allowed to continue.
In 1830, the French invaded Algiers and later Tunis and placed it under colonial rule. However, soon after capturing Tripoli, it was returned to the Ottoman, which was then captured by Italy. And so, the Barbary slave trade ceased for good.
Why Trickle-Down Economics Is Relevant Today
Republicans continue to use trickle-down economic theory to guide policy.
In 2010, the Tea Party movement rode into power during the midterm elections. They wanted to cut government spending and taxes. As a result, Congress extended the Bush tax cuts, even for those making $250,000 or more.
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA). It cut the corporate tax rate from 35% to 21% beginning in 2018. The top individual tax rate dropped to 37%. Trump's tax plan cut income tax rates, doubled the standard deduction, and eliminated personal exemptions. The corporate cuts are permanent while the individual changes expire at the end of 2025.
The Tax Policy Center found that those earning in the top 1% would receive a larger tax cut percentage than those in lower income levels. By 2027, those in the lowest 20% income levels would pay higher taxes.
Though Trump said it would boost growth enough to make up for the debt increase, the Joint Committee on Taxation reported that the Act would add $1 trillion in debt even after including the tax cut's impact on economic growth. It wouldn't spur growth enough to offset the cuts' loss in revenue.
The True Cost of 9/11
The Sept. 11, 2001, terror attacks by al-Qaida were meant to harm the United States, and they did, but in ways that Osama Bin Laden probably never imagined. President George W. Bush’s response to the attacks compromised America’s basic principles, undermined its economy, and weakened its security.
The attack on Afghanistan that followed the 9/11 attacks was understandable, but the subsequent invasion of Iraq was entirely unconnected to al-Qaida—as much as Bush tried to establish a link. That war of choice quickly became very expensive—orders of magnitude beyond the $60 billion claimed at the beginning—as colossal incompetence met dishonest misrepresentation.
Indeed, when Linda Bilmes and I calculated America’s war costs three years ago, the conservative tally was $3 trillion to $5 trillion. Since then, the costs have mounted further. With almost 50 percent of returning troops eligible to receive some level of disability payment, and more than 600,000 treated so far in veterans’ medical facilities, we now estimate that future disability payments and health care costs will total $600 billion to $900 billion. The social costs, reflected in veteran suicides (which have topped 18 per day in recent years) and family breakups, are incalculable.
Even if Bush could be forgiven for taking America, and much of the rest of the world, to war on false pretenses, and for misrepresenting the cost of the venture, there is no excuse for how he chose to finance it. His was the first war in history paid for entirely on credit. As America went into battle, with deficits already soaring from his 2001 tax cut, Bush decided to plunge ahead with yet another round of tax “relief” for the wealthy.
Today, America is focused on unemployment and the deficit. Both threats to America’s future can, in no small measure, be traced to the wars in Afghanistan and Iraq. Increased defense spending, together with the Bush tax cuts, is a key reason why America went from a fiscal surplus of 2 percent of GDP when Bush was elected to its parlous deficit and debt position today. Direct government spending on those wars so far amounts to roughly $2 trillion—$17,000 for every U.S. household—with bills yet to be received increasing this amount by more than 50 percent.
Moreover, as Bilmes and I argued in our book The Three Trillion Dollar War , the wars contributed to America’s macroeconomic weaknesses, which exacerbated its deficits and debt burden. Then, as now, disruption in the Middle East led to higher oil prices, forcing Americans to spend money on oil imports that they otherwise could have spent buying goods produced in the U.S. The Federal Reserve hid these weaknesses by engineering a housing bubble that led to a consumption boom. It will take years to overcome the excessive indebtedness and real-estate overhang that resulted.
Ironically, the wars have undermined America’s (and the world’s) security, again in ways that Osama Bin Laden could not have imagined. An unpopular war would have made military recruitment difficult in any circumstances. But, as Bush tried to deceive America about the wars’ costs, he underfunded the troops, refusing even basic expenditures—say, for armored and mine-resistant vehicles needed to protect American lives or for adequate health care for returning veterans.
Secrets and Lies of the Bailout
It has been four long winters since the federal government, in the hulking, shaven-skulled, Alien Nation-esque form of then-Treasury Secretary Hank Paulson, committed $700 billion in taxpayer money to rescue Wall Street from its own chicanery and greed. To listen to the bankers and their allies in Washington tell it, you’d think the bailout was the best thing to hit the American economy since the invention of the assembly line. Not only did it prevent another Great Depression, we’ve been told, but the money has all been paid back, and the government even made a profit. No harm, no foul &ndash right?
It was all a lie &ndash one of the biggest and most elaborate falsehoods ever sold to the American people. We were told that the taxpayer was stepping in &ndash only temporarily, mind you &ndash to prop up the economy and save the world from financial catastrophe. What we actually ended up doing was the exact opposite: committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyperconcentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it. The result is one of those deals where one wrong decision early on blossoms into a lush nightmare of unintended consequences. We thought we were just letting a friend crash at the house for a few days we ended up with a family of hillbillies who moved in forever, sleeping nine to a bed and building a meth lab on the front lawn.
But the most appalling part is the lying. The public has been lied to so shamelessly and so often in the course of the past four years that the failure to tell the truth to the general populace has become a kind of baked-in, official feature of the financial rescue. Money wasn’t the only thing the government gave Wall Street &ndash it also conferred the right to hide the truth from the rest of us. And it was all done in the name of helping regular people and creating jobs. “It is,” says former bailout Inspector General Neil Barofsky, “the ultimate bait-and-switch.”
The bailout deceptions came early, late and in between. There were lies told in the first moments of their inception, and others still being told four years later. The lies, in fact, were the most important mechanisms of the bailout. The only reason investors haven’t run screaming from an obviously corrupt financial marketplace is because the government has gone to such extraordinary lengths to sell the narrative that the problems of 2008 have been fixed. Investors may not actually believe the lie, but they are impressed by how totally committed the government has been, from the very beginning, to selling it.
THEY LIED TO PASS THE BAILOUT
T oday what few remember about the bailouts is that we had to approve them. It wasn’t like Paulson could just go out and unilaterally commit trillions of public dollars to rescue Goldman Sachs and Citigroup from their own stupidity and bad management (although the government ended up doing just that, later on). Much as with a declaration of war, a similarly extreme and expensive commitment of public resources, Paulson needed at least a film of congressional approval. And much like the Iraq War resolution, which was only secured after George W. Bush ludicrously warned that Saddam was planning to send drones to spray poison over New York City, the bailouts were pushed through Congress with a series of threats and promises that ranged from the merely ridiculous to the outright deceptive. At one meeting to discuss the original bailout bill &ndash at 11 a.m. on September 18th, 2008 &ndash Paulson actually told members of Congress that $5.5 trillion in wealth would disappear by 2 p.m. that day unless the government took immediate action, and that the world economy would collapse “within 24 hours.”
To be fair, Paulson started out by trying to tell the truth in his own ham-headed, narcissistic way. His first TARP proposal was a three-page absurdity pulled straight from a Beavis and Butt-Head episode &ndash it was basically Paulson saying, “Can you, like, give me some money?” Sen. Sherrod Brown, a Democrat from Ohio, remembers a call with Paulson and Federal Reserve chairman Ben Bernanke. “We need $700 billion,” they told Brown, “and we need it in three days.” What’s more, the plan stipulated, Paulson could spend the money however he pleased, without review “by any court of law or any administrative agency.”
The White House and leaders of both parties actually agreed to this preposterous document, but it died in the House when 95 Democrats lined up against it. For an all-too-rare moment during the Bush administration, something resembling sanity prevailed in Washington.
So Paulson came up with a more convincing lie. On paper, the Emergency Economic Stabilization Act of 2008 was simple: Treasury would buy $700 billion of troubled mortgages from the banks and then modify them to help struggling homeowners. Section 109 of the act, in fact, specifically empowered the Treasury secretary to “facilitate loan modifications to prevent avoidable foreclosures.” With that promise on the table, wary Democrats finally approved the bailout on October 3rd, 2008. “That provision,” says Barofsky, “is what got the bill passed.”
But within days of passage, the Fed and the Treasury unilaterally decided to abandon the planned purchase of toxic assets in favor of direct injections of billions in cash into companies like Goldman and Citigroup. Overnight, Section 109 was unceremoniously ditched, and what was pitched as a bailout of both banks and homeowners instantly became a bank-only operation &ndash marking the first in a long series of moves in which bailout officials either casually ignored or openly defied their own promises with regard to TARP.
Congress was furious. “We’ve been lied to,” fumed Rep. David Scott, a Democrat from Georgia. Rep. Elijah Cummings, a Democrat from Maryland, raged at transparently douchey TARP administrator (and Goldman banker) Neel Kashkari, calling him a “chump” for the banks. And the anger was bipartisan: Republican senators David Vitter of Louisiana and James Inhofe of Oklahoma were so mad about the unilateral changes and lack of oversight that they sponsored a bill in January 2009 to cancel the remaining $350 billion of TARP.
So what did bailout officials do? They put together a proposal full of even bigger deceptions to get it past Congress a second time. That process began almost exactly four years ago &ndash on January 12th and 15th, 2009 &ndash when Larry Summers, the senior economic adviser to President-elect Barack Obama, sent a pair of letters to Congress. The pudgy, stubby­fingered former World Bank economist, who had been forced out as Harvard president for suggesting that women lack a natural aptitude for math and science, begged legislators to reject Vitter’s bill and leave TARP alone.
In the letters, Summers laid out a five-point plan in which the bailout was pitched as a kind of giant populist program to help ordinary Americans. Obama, Summers vowed, would use the money to stimulate bank lending to put people back to work. He even went so far as to say that banks would be denied funding unless they agreed to “increase lending above baseline levels.” He promised that “tough and transparent conditions” would be imposed on bailout recipients, who would not be allowed to use bailout funds toward “enriching shareholders or executives.” As in the original TARP bill, he pledged that bailout money would be used to aid homeowners in foreclosure. And lastly, he promised that the bailouts would be temporary &ndash with a “plan for exit of government intervention” implemented “as quickly as possible.”
The reassurances worked. Once again, TARP survived in Congress &ndash and once again, the bailouts were greenlighted with the aid of Democrats who fell for the old “it’ll help ordinary people” sales pitch. “I feel like they’ve given me a lot of commitment on the housing front,” explained Sen. Mark Begich, a Democrat from Alaska.
But in the end, almost nothing Summers promised actually materialized. A small slice of TARP was earmarked for foreclosure relief, but the resultant aid programs for homeowners turned out to be riddled with problems, for the perfectly logical reason that none of the bailout’s architects gave a shit about them. They were drawn up practically overnight and rushed out the door for purely political reasons &ndash to trick Congress into handing over tons of instant cash for Wall Street, with no strings attached. “Without those assurances, the level of opposition would have remained the same,” says Rep. Raúl Grijalva, a leading progressive who voted against TARP. The promise of housing aid, in particular, turned out to be a “paper tiger.”
HAMP, the signature program to aid poor homeowners, was announced by President Obama on February 18th, 2009. The move inspired CNBC commentator Rick Santelli to go berserk the next day &ndash the infamous viral rant that essentially birthed the Tea Party. Reacting to the news that Obama was planning to use bailout funds to help poor and (presumably) minority homeowners facing foreclosure, Santelli fumed that the president wanted to “subsidize the losers’ mortgages” when he should “reward people that could carry the water, instead of drink the water.” The tirade against “water drinkers” led to the sort of spontaneous nationwide protests one might have expected months before, when we essentially gave a taxpayer-funded blank check to Gamblers Anonymous addicts, the millionaire and billionaire class.
In fact, the amount of money that eventually got spent on homeowner aid now stands as a kind of grotesque joke compared to the Himalayan mountain range of cash that got moved onto the balance sheets of the big banks more or less instantly in the first months of the bailouts. At the start, $50 billion of TARP funds were earmarked for HAMP. In 2010, the size of the program was cut to $30 billion. As of November of last year, a mere $4 billion total has been spent for loan modifications and other homeowner aid.
In short, the bailout program designed to help those lazy, job-averse, “water-drinking” minority homeowners &ndash the one that gave birth to the Tea Party &ndash turns out to have comprised about one percent of total TARP spending. “It’s amazing,” says Paul Kiel, who monitors bailout spending for ProPublica. “It’s probably one of the biggest failures of the Obama administration.”
The failure of HAMP underscores another damning truth &ndash that the Bush-Obama bailout was as purely bipartisan a program as we’ve had. Imagine Obama retaining Don Rumsfeld as defense secretary and still digging for WMDs in the Iraqi desert four years after his election: That’s what it was like when he left Tim Geithner, one of the chief architects of Bush’s bailout, in command of the no-strings­attached rescue four years after Bush left office.
Yet Obama’s HAMP program, as lame as it turned out to be, still stands out as one of the few pre-bailout promises that was even partially fulfilled. Virtually every other promise Summers made in his letters turned out to be total bullshit. And that includes maybe the most important promise of all &ndash the pledge to use the bailout money to put people back to work.
THEY LIED ABOUT LENDING
O nce TARP passed, the government quickly began loaning out billions to some 500 banks that it deemed “healthy” and “viable.” A few were cash loans, repayable at five percent within the first five years other deals came due when a bank stock hit a predetermined price. As long as banks held TARP money, they were barred from paying out big cash bonuses to top executives.
But even before Summers promised Congress that banks would be required to increase lending as a condition for receiving bailout funds, officials had already decided not to even ask the banks to use the money to increase lending. In fact, they’d decided not to even ask banks to monitor what they did with the bailout money. Barofsky, the TARP inspector, asked Treasury to include a requirement forcing recipients to explain what they did with the taxpayer money. He was stunned when TARP administrator Kashkari rejected his proposal, telling him lenders would walk away from the program if they had to deal with too many conditions. “The banks won’t participate,” Kashkari said.
Barofsky, a former high-level drug prosecutor who was one of the only bailout officials who didn’t come from Wall Street, didn’t buy that cash-desperate banks would somehow turn down billions in aid. “It was like they were trembling with fear that the banks wouldn’t take the money,” he says. “I never found that terribly convincing.”
In the end, there was no lending requirement attached to any aspect of the bailout, and there never would be. Banks used their hundreds of billions for almost every purpose under the sun &ndash everything, that is, but lending to the homeowners and small businesses and cities they had destroyed. And one of the most disgusting uses they found for all their billions in free government money was to help them earn even more free government money.
To guarantee their soundness, all major banks are required to keep a certain amount of reserve cash at the Fed. In years past, that money didn’t earn interest, for the logical reason that banks shouldn’t get paid to stay solvent. But in 2006 &ndash arguing that banks were losing profits on cash parked at the Fed &ndash regulators agreed to make small interest payments on the money. The move wasn’t set to go into effect until 2011, but when the crash hit, a section was written into TARP that launched the interest payments in October 2008.
In theory, there should never be much money in such reserve accounts, because any halfway-competent bank could make far more money lending the cash out than parking it at the Fed, where it earns a measly quarter of a percent. In August 2008, before the bailout began, there were just $2 billion in excess reserves at the Fed. But by that October, the number had ballooned to $267 billion &ndash and by January 2009, it had grown to $843 billion. That means there was suddenly more money sitting uselessly in Fed accounts than Congress had approved for either the TARP bailout or the much-loathed Obama stimulus. Instead of lending their new cash to struggling homeowners and small businesses, as Summers had promised, the banks were literally sitting on it.
Today, excess reserves at the Fed total an astonishing $1.4 trillion.”The money is just doing nothing,” says Nomi Prins, a former Goldman executive who has spent years monitoring the distribution of bailout money.
Nothing, that is, except earning a few crumbs of risk-free interest for the banks. Prins estimates that the annual haul in interest­ on Fed reserves is about $3.6 billion &ndash a relatively tiny subsidy in the scheme of things, but one that, ironically, just about matches the total amount of bailout money spent on aid to homeowners. Put another way, banks are getting paid about as much every year for not lending money as 1 million Americans received for mortgage modifications and other housing aid in the whole of the past four years.
Moreover, instead of using the bailout money as promised &ndash to jump-start the economy &ndash Wall Street used the funds to make the economy more dangerous. From the start, taxpayer money was used to subsidize a string of finance mergers, from the Chase-Bear Stearns deal to the Wells Fargo­Wachovia merger to Bank of America’s acquisition of Merrill Lynch. Aided by bailout funds, being Too Big to Fail was suddenly Too Good to Pass Up.
Other banks found more creative uses for bailout money. In October 2010, Obama signed a new bailout bill creating a program called the Small Business Lending Fund, in which firms with fewer than $10 billion in assets could apply to share in a pool of $4 billion in public money. As it turned out, however, about a third of the 332 companies that took part in the program used at least some of the money to repay their original TARP loans. Small banks that still owed TARP money essentially took out cheaper loans from the government to repay their more expensive TARP loans &ndash a move that conveniently exempted them from the limits on executive bonuses mandated by the bailout. All told, studies show, $2.2 billion of the $4 billion ended up being spent not on small-business loans, but on TARP repayment. “It’s a bit of a shell game,” admitted John Schmidt, chief operating officer of Iowa-based Heartland Financial, which took $81.7 million from the SBLF and used every penny of it to repay TARP.
Using small-business funds to pay down their own debts, parking huge amounts of cash at the Fed in the midst of a stalled economy &ndash it’s all just evidence of what most Americans know instinctively: that the bailouts didn’t result in much new business lending. If anything, the bailouts actually hindered lending, as banks became more like house pets that grow fat and lazy on two guaranteed meals a day than wild animals that have to go out into the jungle and hunt for opportunities in order to eat. The Fed’s own analysis bears this out: In the first three months of the bailout, as taxpayer billions poured in, TARP recipients slowed down lending at a rate more than double that of banks that didn’t receive TARP funds. The biggest drop in lending &ndash 3.1 percent &ndash came from the biggest bailout recipient, Citigroup. A year later, the inspector general for the bailout found that lending among the nine biggest TARP recipients “did not, in fact, increase.” The bailout didn’t flood the banking system with billions in loans for small businesses, as promised. It just flooded the banking system with billions for the banks.
THEY LIED ABOUT THE HEALTH OF THE BANKS
T he main reason banks didn’t lend out bailout funds is actually pretty simple: Many of them needed the money just to survive. Which leads to another of the bailout’s broken promises &ndash that taxpayer money would only be handed out to “viable” banks.
Soon after TARP passed, Paulson and other officials announced the guidelines for their unilaterally changed bailout plan. Congress had approved $700 billion to buy up toxic mortgages, but $250 billion of the money was now shifted to direct capital injections for banks. (Although Paulson claimed at the time that handing money directly to the banks was a faster way to restore market confidence than lending it to homeowners, he later confessed that he had been contemplating the direct-cash-injection plan even before the vote.) This new let’s-just-fork-over-cash portion of the bailout was called the Capital Purchase Program. Under the CPP, nine of America’s largest banks &ndash including Citi, Wells Fargo, Goldman, Morgan Stanley, Bank of America, State Street and Bank of New York Mellon &ndash received $125 billion, or half of the funds being doled out. Since those nine firms accounted for 75 percent of all assets held in America’s banks &ndash $11 trillion &ndash it made sense they would get the lion’s share of the money. But in announcing the CPP, Paulson and Co. promised that they would only be stuffing cash into “healthy and viable” banks. This, at the core, was the entire justification for the bailout: That the huge infusion of taxpayer cash would not be used to rescue individual banks, but to kick-start the economy as a whole by helping healthy banks start lending again.
This announcement marked the beginning of the legend that certain Wall Street banks only took the bailout money because they were forced to &ndash they didn’t need all those billions, you understand, they just did it for the good of the country. “We did not, at that point, need TARP,” Chase chief Jamie Dimon later claimed, insisting that he only took the money “because we were asked to by the secretary of Treasury.” Goldman chief Lloyd Blankfein similarly claimed that his bank never needed the money, and that he wouldn’t have taken it if he’d known it was “this pregnant with potential for backlash.” A joint statement by Paulson, Bernanke and FDIC chief Sheila Bair praised the nine leading banks as “healthy institutions” that were taking the cash only to “enhance the overall performance of the U.S. economy.”
But right after the bailouts began, soon-to-be Treasury Secretary Tim Geithner admitted to Barofsky, the inspector general, that he and his cohorts had picked the first nine bailout recipients because of their size, without bothering to assess their health and viability. Paulson, meanwhile, later admitted that he had serious concerns about at least one of the nine firms he had publicly pronounced healthy. And in November 2009, Bernanke gave a closed-door interview to the Financial Crisis Inquiry Commission, the body charged with investigating the causes of the economic meltdown, in which he admitted that 12 of the 13 most prominent financial companies in America were on the brink of failure during the time of the initial bailouts.
On the inside, at least, almost everyone connected with the bailout knew that the top banks were in deep trouble. “It became obvious pretty much as soon as I took the job that these companies weren’t really healthy and viable,” says Barofsky, who stepped down as TARP inspector in 2011.
This early episode would prove to be a crucial moment in the history of the bailout. It set the precedent of the government allowing unhealthy banks to not only call themselves healthy, but to get the government to endorse their claims. Projecting an image of soundness was, to the government, more important than disclosing the truth. Officials like Geithner and Paulson seemed to genuinely believe that the market’s fears about corruption in the banking system was a bigger problem than the corruption itself. Time and again, they justified TARP as a move needed to “bolster confidence” in the system &ndash and a key to that effort was keeping the banks’ insolvency a secret. In doing so, they created a bizarre new two-tiered financial market, divided between those who knew the truth about how bad things were and those who did not.
A month or so after the bailout team called the top nine banks “healthy,” it became clear that the biggest recipient, Citigroup, had actually flat-lined on the ER table. Only weeks after Paulson and Co. gave the firm $25 billion in TARP funds, Citi &ndash which was in the midst of posting a quarterly loss of more than $17 billion &ndash came back begging for more. In November 2008, Citi received another $20 billion in cash and more than $300 billion in guarantees.
What’s most amazing about this isn’t that Citi got so much money, but that government-endorsed, fraudulent health ratings magically became part of its bailout. The chief financial regulators &ndash the Fed, the FDIC and the Office of the Comptroller of the Currency &ndash use a ratings system called CAMELS to measure the fitness of institutions. CAMELS stands for Capital, Assets, Management, Earnings, Liquidity and Sensitivity to risk, and it rates firms from one to five, with one being the best and five the crappiest. In the heat of the crisis, just as Citi was receiving the second of what would turn out to be three massive federal bailouts, the bank inexplicably enjoyed a three rating &ndash the financial equivalent of a passing grade. In her book, Bull by the Horns, then-FDIC chief Sheila Bair recounts expressing astonishment to OCC head John Dugan as to why “Citi rated as a CAMELS 3 when it was on the brink of failure.” Dugan essentially answered that “since the government planned on bailing Citi out, the OCC did not plan to change its supervisory rating.” Similarly, the FDIC ended up granting a “systemic risk exception” to Citi, allowing it access to FDIC-bailout help even though the agency knew the bank was on the verge of collapse.
The sweeping impact of these crucial decisions has never been fully appreciated. In the years preceding the bailouts, banks like Citi had been perpetuating a kind of fraud upon the public by pretending to be far healthier than they really were. In some cases, the fraud was outright, as in the case of Lehman Brothers, which was using an arcane accounting trick to book tens of billions of loans as revenues each quarter, making it look like it had more cash than it really did. In other cases, the fraud was more indirect, as in the case of Citi, which in 2007 paid out the third-highest dividend in America &ndash $10.7 billion &ndash despite the fact that it had lost $9.8 billion in the fourth quarter of that year alone. The whole financial sector, in fact, had taken on Ponzi-like characteristics, as many banks were hugely dependent on a continual influx of new money from things like sales of subprime mortgages to cover up massive future liabilities from toxic investments that, sooner or later, were going to come to the surface.
Now, instead of using the bailouts as a clear-the-air moment, the government decided to double down on such fraud, awarding healthy ratings to these failing banks and even twisting its numerical audits and assessments to fit the cooked-up narrative. A major component of the original TARP bailout was a promise to ensure “full and accurate accounting” by conducting regular­ “stress tests” of the bailout recipients. When Geithner announced his stress-test plan in February 2009, a reporter instantly blasted him with an obvious and damning question: Doesn’t the fact that you have to conduct these tests prove that bank regulators, who should already know plenty about banks’ solvency, actually have no idea who is solvent and who isn’t?
The government did wind up conducting regular stress tests of all the major bailout recipients, but the methodology proved to be such an obvious joke that it was even lampooned on Saturday Night Live. (In the skit, Geithner abandons a planned numerical score system because it would unfairly penalize bankers who were “not good at banking.”) In 2009, just after the first round of tests was released, it came out that the Fed had allowed banks to literally rejigger the numbers to make their bottom lines look better. When the Fed found Bank of America had a $50 billion capital hole, for instance, the bank persuaded examiners to cut that number by more than $15 billion because of what it said were “errors made by examiners in the analysis.” Citigroup got its number slashed from $35 billion to $5.5 billion when the bank pleaded with the Fed to give it credit for “pending transactions.”
Such meaningless parodies of oversight continue to this day. Earlier this year, Regions Financial Corp. &ndash a company that had failed to pay back $3.5 billion in TARP loans &ndash passed its stress test. A subsequent analysis by Bloomberg View found that Regions was effectively $525 million in the red. Nonetheless, the bank’s CEO proclaimed that the stress test “demonstrates the strength of our company.” Shortly after the test was concluded, the bank issued $900 million in stock and said it planned on using the cash to pay back some of the money it had borrowed under TARP.
This episode underscores a key feature of the bailout: the government’s decision to use lies as a form of monetary aid. State hands over taxpayer money to functionally insolvent bank state gives regulatory thumbs up to said bank bank uses that thumbs up to sell stock bank pays cash back to state. What’s critical here is not that investors actually buy the Fed’s bullshit accounting &ndash all they have to do is believe the government will backstop Regions either way, healthy or not. “Clearly, the Fed wanted it to attract new investors,” observed Bloomberg, “and those who put fresh capital into Regions this week believe the government won’t let it die.”
Through behavior like this, the government has turned the entire financial system into a kind of vast confidence game &ndash a Ponzi-like scam in which the value of just about everything in the system is inflated because of the widespread belief that the government will step in to prevent losses. Clearly, a government that’s already in debt over its eyes for the next million years does not have enough capital on hand to rescue every Citigroup or Regions Bank in the land should they all go bust tomorrow. But the market is behaving as if Daddy will step in to once again pay the rent the next time any or all of these kids sets the couch on fire and skips out on his security deposit. Just like an actual Ponzi scheme, it works only as long as they don’t have to make good on all the promises they’ve made. They’re building an economy based not on real accounting and real numbers, but on belief. And while the signs of growth and recovery in this new faith-based economy may be fake, one aspect of the bailout has been consistently concrete: the broken promises over executive pay.
THEY LIED ABOUT BONUSES
T hat executive bonuses on Wall Street were a political hot potato for the bailout’s architects was obvious from the start. That’s why Summers, in saving the bailout from the ire of Congress, vowed to “limit executive compensation” and devote public money to prevent another financial crisis. And it’s true, TARP did bar recipients from a whole range of exorbitant pay practices, which is one reason the biggest banks, like Goldman Sachs, worked so quickly to repay their TARP loans.
But there were all sorts of ways around the restrictions. Banks could apply to the Fed and other regulators for waivers, which were often approved (one senior FDIC official tells me he recommended denying “golden parachute” payments to Citigroup officials, only to see them approved by superiors). They could get bailouts through programs other than TARP that did not place limits on bonuses. Or they could simply pay bonuses not prohibited under TARP. In one of the worst episodes, the notorious lenders Fannie Mae and Freddie Mac paid out more than $200 million in bonuses­ between 2008 and 2010, even though the firms (a) lost more than $100 billion in 2008 alone, and (b) required nearly $400 billion in federal assistance during the bailout period.
Even worse was the incredible episode in which bailout recipient AIG paid more than $1 million each to 73 employees of AIG Financial Products, the tiny unit widely blamed for having destroyed the insurance giant (and perhaps even triggered the whole crisis) with its reckless issuance of nearly half a trillion dollars in toxic credit-default swaps. The “retention bonuses,” paid after the bailout, went to 11 employees who no longer worked for AIG.
But all of these “exceptions” to the bonus restrictions are far less infuriating, it turns out, than the rule itself. TARP did indeed bar big cash-bonus payouts by firms that still owed money to the government. But those firms were allowed to issue extra compensation to executives in the form of long-term restricted stock. An independent research firm asked to analyze the stock options for The New York Times found that the top five executives at each of the 18 biggest bailout recipients received a total of $142 million in stocks and options. That’s plenty of money all by itself &ndash but thanks in large part to the government’s overt display of support for those firms, the value of those options has soared to $457 million, an average of $4 million per executive.
In other words, we didn’t just allow banks theoretically barred from paying bonuses to pay bonuses. We actually allowed them to pay bigger bonuses than they otherwise could have. Instead of forcing the firms to reward top executives in cash, we allowed them to pay in depressed stock, the value of which we then inflated due to the government’s implicit endorsement of those firms.
All of which leads us to the last and most important deception of the bailouts:
THEY LIED ABOUT THE BAILOUT BEING TEMPORARY
T he bailout ended up being much bigger than anyone expected, expanded far beyond TARP to include more obscure (and in some cases far larger) programs with names like TALF, TAF, PPIP and TLGP. What’s more, some parts of the bailout were designed to extend far into the future. Companies like AIG, GM and Citigroup, for instance, were given tens of billions of deferred tax assets &ndash allowing them to carry losses from 2008 forward to offset future profits and keep future tax bills down. Official estimates of the bailout’s costs do not include such ongoing giveaways. “This is stuff that’s never going to appear on any report,” says Barofsky.
Citigroup, all by itself, boasts more than $50 billion in deferred tax credits &ndash which is how the firm managed to pay less in taxes in 2011 (it actually received a $144 million credit) than it paid in compensation that year to its since-ousted dingbat CEO, Vikram Pandit (who pocketed $14.9 million). The bailout, in short, enabled the very banks and financial institutions that cratered the global economy to write off the losses from their toxic deals for years to come &ndash further depriving the government of much-needed tax revenues it could have used to help homeowners and small businesses who were screwed over by the banks in the first place.
Even worse, the $700 billion in TARP loans ended up being dwarfed by more than $7.7 trillion in secret emergency lending that the Fed awarded to Wall Street &ndash loans that were only disclosed to the public after Congress forced an extraordinary one-time audit of the Federal Reserve. The extent of this “secret bailout” didn’t come out until November 2011, when Bloomberg Markets, which went to court to win the right to publish the data, detailed how the country’s biggest firms secretly received trillions in near-free money throughout the crisis.
Goldman Sachs, which had made such a big show of being reluctant about accepting $10 billion in TARP money, was quick to cash in on the secret loans being offered by the Fed. By the end of 2008, Goldman had snarfed up $34 billion in federal loans &ndash and it was paying an interest rate of as low as just 0.01 percent for the huge cash infusion. Yet that funding was never disclosed to shareholders or taxpayers, a fact Goldman confirms. “We did not disclose the amount of our participation in the two programs you identify,” says Goldman spokesman Michael Duvally.
Goldman CEO Blankfein later dismissed the importance of the loans, telling the Financial Crisis Inquiry Commission that the bank wasn’t “relying on those mechanisms.” But in his book, Bailout, Barofsky says that Paulson told him that he believed Morgan Stanley was “just days” from collapse before government intervention, while Bernanke later admitted that Goldman would have been the next to fall.
Meanwhile, at the same moment that leading banks were taking trillions in secret loans from the Fed, top officials at those firms were buying up stock in their companies, privy to insider info that was not available to the public at large. Stephen Friedman, a Goldman director who was also chairman of the New York Fed, bought more than $4 million of Goldman stock over a five-week period in December 2008 and January 2009 &ndash years before the extent of the firm’s lifeline from the Fed was made public. Citigroup CEO Vikram Pandit bought nearly $7 million in Citi stock in November 2008, just as his firm was secretly taking out $99.5 billion in Fed loans. Jamie Dimon bought more than $11 million in Chase stock in early 2009, at a time when his firm was receiving as much as $60 billion in secret Fed loans. When asked by Rolling Stone, Chase could not point to any disclosure of the bank’s borrowing from the Fed until more than a year later, when Dimon wrote about it in a letter to shareholders in March 2010.
The stock purchases by America’s top bankers raise serious questions of insider trading. Two former high-ranking financial regulators tell Rolling Stone that the secret loans were likely subject to a 1989 guideline, issued by the Securities and Exchange Commission in the heat of the savings and loan crisis, which said that financial institutions should disclose the “nature, amounts and effects” of any government aid. At the end of 2011, in fact, the SEC sent letters to Citigroup, Chase, Goldman Sachs, Bank of America and Wells Fargo asking them why they hadn’t fully disclosed their secret borrowing. All five megabanks essentially replied, to varying degrees of absurdity, that their massive borrowing from the Fed was not “material,” or that the piecemeal disclosure they had engaged in was adequate. Never mind that the law says investors have to be informed right away if CEOs like Dimon and Pandit decide to give themselves a $10,000 raise. According to the banks, it’s none of your business if those same CEOs are making use of a secret $50 billion charge card from the Fed.
The implications here go far beyond the question of whether Dimon and Co. committed insider trading by buying and selling stock while they had access to material nonpublic information about the bailouts. The broader and more pressing concern is the clear implication that by failing to act, federal regulators­ have tacitly approved the nondisclosure. Instead of trusting the markets to do the right thing when provided with accurate information, the government has instead channeled Jack Nicholson &ndash and decided that the public just can’t handle the truth.
A ll of this &ndash the willingness to call dying banks healthy, the sham stress tests, the failure to enforce bonus rules, the seeming indifference to public disclosure, not to mention the shocking­ lack of criminal investigations into fraud committed by bailout recipients before the crash &ndash comprised the largest and most valuable bailout of all. Brick by brick, statement by reassuring statement, bailout officials have spent years building the government’s great Implicit Guarantee to the biggest companies on Wall Street: We will be there for you, always, no matter how much you screw up. We will lie for you and let you get away with just about anything. We will make this ongoing bailout a pervasive and permanent part of the financial system. And most important of all, we will publicly commit to this policy, being so obvious about it that the markets will be able to put an exact price tag on the value of our preferential treatment.
The first independent study that attempted to put a numerical value on the Implicit Guarantee popped up about a year after the crash, in September 2009, when Dean Baker and Travis McArthur of the Center for Economic and Policy Research published a paper called “The Value of the ‘Too Big to Fail’ Big Bank Subsidy.” Baker and McArthur found that prior to the last quarter of 2007, just before the start of the crisis, financial firms with $100 billion or more in assets were paying on average about 0.29 percent less to borrow money than smaller firms.
By the second quarter of 2009, however, once the bailouts were in full swing, that spread had widened to 0.78 percent. The conclusion was simple: Lenders were about a half a point more willing to lend to a bank with implied government backing &ndash even a proven-stupid bank &ndash than they were to lend to companies who “must borrow based on their own credit worthiness.” The economists estimated that the lending gap amounted to an annual subsidy of $34 billion a year to the nation’s 18 biggest banks.
Today the borrowing advantage of a big bank remains almost exactly what it was three years ago &ndash about 50 basis points, or half a percent. “These megabanks still receive subsidies in the sense that they can borrow on the capital markets at a discount rate of 50 or 70 points because of the implicit view that these banks are Too Big to Fail,” says Sen. Brown.
Why does the market believe that? Because the officials who administered the bailouts made that point explicitly, over and over again. When Geithner announced the implementation of the stress tests in 2009, for instance, he declared that banks who didn’t have enough money to pass the test could get it from the government. “We’re going to help this process by providing a new program of capital support for those institutions that need it,” Geithner said. The message, says Barofsky, was clear: “If the banks cannot raise capital, we will do it for them.” It was an Implicit Guarantee that the banks would not be allowed to fail &ndash a point that Geithner and other officials repeatedly stressed over the years. “The markets took all those little comments by Geithner as a clue that the government is looking out for them,” says Baker. That psychological signaling, he concludes, is responsible for the crucial half-point borrowing spread.
The inherent advantage of bigger banks &ndash the permanent, ongoing bailout they are still receiving from the government &ndash has led to a host of gruesome consequences. All the big banks have paid back their TARP loans, while more than 300 smaller firms are still struggling to repay their bailout debts. Even worse, the big banks, instead of breaking down into manageable parts and becoming more efficient, have grown even bigger and more unmanageable, making the economy far more concentrated and dangerous than it was before. America’s six largest banks &ndash Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley &ndash now have a combined 14,420 subsidiaries, making them so big as to be effectively beyond regulation. A recent study by the Kansas City Fed found that it would take 70,000 examiners to inspect such trillion-dollar banks with the same level of attention normally given to a community bank. “The complexity is so overwhelming that no regulator can follow it well enough to regulate the way we need to,” says Sen. Brown, who is drafting a bill to break up the megabanks.
Worst of all, the Implicit Guarantee has led to a dangerous shift in banking behavior. With an apparently endless stream of free or almost-free money available to banks &ndash coupled with a well-founded feeling among bankers that the government will back them up if anything goes wrong &ndash banks have made a dramatic move into riskier and more speculative investments, including everything from high-risk corporate bonds to mortgage­backed securities to payday loans, the sleaziest and most disreputable end of the financial system. In 2011, banks increased their investments in junk-rated companies by 74 percent, and began systematically easing their lending standards in search of more high-yield customers to lend to.
This is a virtual repeat of the financial crisis, in which a wave of greed caused bankers to recklessly chase yield everywhere, to the point where lowering lending standards became the norm. Now the government, with its Implicit Guarantee, is causing exactly the same behavior &ndash meaning the bailouts have brought us right back to where we started. “Government intervention,” says Klaus Schaeck, an expert on bailouts who has served as a World Bank consultant, “has definitely resulted in increased risk.”
And while the economy still mostly sucks overall, there’s never been a better time to be a Too Big to Fail bank. Wells Fargo reported a third-quarter profit of nearly $5 billion last year, while JP Morgan Chase pocketed $5.3 billion &ndash roughly double what both banks earned in the third quarter of 2006, at the height of the mortgage bubble. As the driver of their success, both banks cite strong performance in &ndash you guessed it &ndash the mortgage market.
So what exactly did the bailout accomplish? It built a banking system that discriminates against community banks, makes Too Big to Fail banks even Too Bigger to Failier, increases risk, discourages sound business lending and punishes savings by making it even easier and more profitable to chase high-yield investments than to compete for small depositors. The bailout has also made lying on behalf of our biggest and most corrupt banks the official policy of the United States government. And if any one of those banks fails, it will cause another financial crisis, meaning we’re essentially wedded to that policy for the rest of eternity &ndash or at least until the markets call our bluff, which could happen any minute now.
Other than that, the bailout was a smashing success.
This article is from the January 17th, 2013 issue of Rolling Stone.
The War of 1812, still seeking a little respect
Tom Freeman's painting of the August 24, 1814 burning of the White House by British troops during the War of 1812. (White House Historical Association)
You will be forgiven for not noticing that the bicentennial of the War of 1812 is nearing full swing.
No such dispensation could be granted for the 150th anniversary of the Civil War, of course, as it is impossible to miss the armies of reenactors, the newspaper special sections, the magazine covers, the Civil War travel packages — all this, even though sesquicentennial has none of the zing of bicentennial.
Other anniversaries are much in the news. On Memorial Day, President Obama kicked off the 13-year commemoration planned for the 50th anniversary of the Vietnam War. The 100th anniversary of the sinking of a ship (admittedly, the Titanic) and the 60th anniversary of a queen (British, no less!) have drawn mountains of publicity in comparison to the War of 1812.
It gets no respect, this Rodney Dangerfield of American wars.
Some 36 percent of Americans say there were no significant outcomes to the War of 1812, or if there were any, they could not name them, according to a recent poll by the Canadian research firm Ipsos Reid for the Historica-Dominion Institute.
While 17 percent of Canadians consider the War of 1812 the most important war in the formation of their nation’s identity, only 3 percent of Americans feel the same way. (True, Americans have a lot more wars to choose from than Canadians.)
Historians duel over which deserves the title of most obscure major American war, Korea or 1812. Clay Blair titled his fine 1987 history of Korea “The Forgotten War” Donald Hickey, one of 1812’s foremost scholars, countered two years later with “The War of 1812: A Forgotten Conflict.” (J. MacKay Hitsman named his book “The Incredible War of 1812,” but he was Canadian.)
There are pockets of enthusiasm, to be sure, nowhere more so than in Maryland, which kicks off three years of commemorations with the “Star-Spangled Sailabration” beginning Wednesday in Baltimore, and where the cars sport War of 1812 license plates and the governor (Martin O’Malley) shows up at 1812 reenactments on horseback, dressed as a Maryland militia officer.
The Maryland Historical Society on Sunday opened “In Full Glory Reflected,” a major exhibit on the war, and on June 17, the Baltimore Symphony Orchestra will premiere “Overture for 2012” by Baltimore native Philip Glass, who composed it as a companion piece to Tchaikovsky’s “1812 Overture,” which will also be performed.
But in New York, site of some of war’s most important fighting, funding for a state War of 1812 commission was blocked for three years before a token amount of money for bicentennial programs was allotted in March.
Its anonymity is certainly no fault of the war itself, which has a gripping plot: Upstart nation with a tiny army and even smaller navy declares war on former colonial master, one of the most powerful nations on earth, and nearly gets blown off the map, but rallies in the end to squeak out a moral victory.
The war, which was declared on June 18, 1812, featured some of the most dramatic episodes in the nation’s history. These are familiar to most Americans, but as floating moments in time, ones they often can’t quite place in the War of 1812:
The dastardly British burning of Washington. Quite a few folks think that must have been during the Revolutionary War never mind that the White House and the Capitol, not to mention Washington, did not exist.
The USS Constitution’s great victories at sea. Nope, “Old Ironsides” did not fight during the Revolutionary War. Yep, War of 1812. Oliver Hazard Perry’s message after his signal victory on Lake Erie — “We have met the enemy and they are ours.” No, that wasn’t from a “Pogo” cartoon strip.
Most at least know the Battle of New Orleans happened in the War of 1812, though almost all knowledge comes from Johnny Horton’s 1959 hit “Battle of New Orleans,” a song that manages to get almost every fact wrong. (“Colonel Jackson” and his men did not make a little trip “down the mighty Mississipp’ ” — Major Gen. Andrew Jackson and his army were in Alabama. Need we go on?)
A popular theory as to the war’s anonymity is that no one can figure out why it was fought. The Revolutionary War was fought for American independence. The Civil War was fought to preserve the union and/or end slavery. World War I was fought to save Europe. World War II was fought to save the world. Vietnam was fought to stop the spread of communism.
But the War of 1812? Well, it was fought to end the British practice of impressment. And to end onerous trade restrictions. You know, Free Trade and Sailors’ Rights. Or actually, it was about Western expansion — the first major war of American imperialism, as a (British) scholar recently called it.
The dilemma was captured perfectly in a War of 1812 video last year from College Humor, in which an American officer struggles to explain to his wife what the war is all about. “It might have something to do with taxes,” he muses.
The hardest point for many Americans to accept — and one reason the war is overlooked — is that the United States declared war. A lot of Americans assume Britain, still sore about losing the Revolutionary War, launched the war to reclaim its colonies.
Consumed with its titanic struggle against Napoleon’s France, Britain had no interest in launching a new conflict on an enormous continent across the ocean.
The British had a with-us-or-against-us mentality — not unlike that of the United States after Sept. 11, 2001 — and regularly trampled on American sovereignty. They seized American sailors of suspected British origin to man Royal Navy ships, and they severely restricted American trade.
Bowing to this British behavior would leave Americans “not an independent people, but colonists and vassals,” President James Madison believed. The War Hawks — an aptly named band of members of Congress from the South and West— were eager to see North America cleared of the British, allowing unimpeded expansion to the west, and, some hoped, to the north.
On some levels, historian Alan Taylor argues, the conflict is best seen as a civil war, completing unfinished business from the American Revolution. The Americans and the loyalists who had moved across the border had competing visions for the future of the North American continent, neither involving the other.
The only thing greater than the confusion over what the war was about is the disagreement over who won.
Canada would have the best claim, except that technically it did not yet exist — it was then British North America. But multiple American invasions of the colonies of Upper Canada (today Ontario) and Lower Canada (today Quebec) ended in failure.
The successful defense set the stage for Canada’s future independence and nationhood. Among the calamities Canadians believe they thus avoided, named by 6 percent in the Ipsos Reid poll: Sharing American citizenship with Snooki and the cast of “Jersey Shore.”
The British preserved their position in North America, but the war was hardly an unqualified success. Waging the war proved enormously expensive, the Royal Navy suffered shocking defeats at the hands of the fledgling U.S. Navy, and the British army met with disaster at New Orleans.
As for Americans, they endured humiliating defeats on the Canadian frontier, the disgraceful loss of Washington and a government that was bankrupt by the war’s end (having refused to raise taxes to pay for it — another precedent!). Yet a string of victories at the end of the war — including at Baltimore and Plattsburgh — allowed the United States to emerge from peace negotiations in Ghent with decent terms. The Americans may have lost militarily, Hickey has observed, but they won the peace.
The only point virtually all scholars agree on— as required by guild regulations governing the assessment of American wars — is that Native Americans were the big losers. British efforts to establish an Indian buffer state in the Old Northwest were abandoned at Ghent, and America’s westward expansion continued inexorably.
Some argue that Americans want to remember only victories, and that therefore they have forgotten the War of 1812, which ended in failure. Or as a draw. Or with no clear-cut victory. But it was certainly more of a success than Vietnam, and no one has a problem remembering that war.
A bigger factor may be the name. The War of 1812 is a singularly poor name for a war that lasted nearly three years. The Spanish-American war, everybody knows the contestants. The Barbary Wars are nothing if not atmospheric.
But the War of 1812? It has a clerical feel, something to be filed after the Enabling Act of 1802 but before the Panic of 1819.
Despite such challenges, there are signs of hope for the War of 1812 in the Ipsos Reid poll: 77 percent of Americans believe it had a significant impact on the nation’s identity. Certainly, Americans of the day believed that.
“The war has renewed and reinstated the national feelings and character which the Revolution had given, and which were daily lessening,” said Albert Gallatin, the former treasury secretary who helped negotiate the treaty. The people, Gallatin added, “are more American they feel and act more as a nation and I hope that the permanency of the Union is thereby better secured.”
The war left America with its national anthem, and its most enduring icon, the Star-Spangled Banner. It firmly established the sovereignty of the United States and cleared the path for Canada’s eventual independence.
For those reasons and many others not involving Snooki, the War of 1812 deserves to be better remembered and better respected.
Steve Vogel is the author of “Through The Perilous Fight,” an account of the British invasion of the Chesapeake in 1814, to be published next spring by Random House.
Jefferson Versus the Muslim Pirates
W hen I first began to plan my short biography of Thomas Jefferson, I found it difficult to research the chapter concerning the so-called Barbary Wars: an event or series of events that had seemingly receded over the lost horizon of American history. Henry Adams, in his discussion of our third president, had some boyhood reminiscences of the widespread hero-worship of naval officer Stephen Decatur, and other fragments and shards showed up in other quarries, but a sound general history of the subject was hard to come by. When I asked a professional military historian—a man with direct access to Defense Department archives—if there was any book that he could recommend, he came back with a slight shrug.
But now the curious reader may choose from a freshet of writing on the subject. Added to my own shelf in the recent past have been The Barbary Wars: American Independence in the Atlantic World, by Frank Lambert (2005) Jefferson’s War: America’s First War on Terror 1801–1805, by Joseph Wheelan (2003) To the Shores of Tripoli: The Birth of the U.S. Navy and Marines, by A. B. C. Whipple (1991, republished 2001) and Victory in Tripoli: How America’s War with the Barbary Pirates Established the U.S. Navy and Shaped a Nation, by Joshua E. London (2005). Most recently, in his new general history, Power, Faith, and Fantasy: America in the Middle East, 1776 to the Present, the Israeli scholar Michael Oren opens with a long chapter on the Barbary conflict. As some of the subtitles—and some of the dates of publication—make plain, this new interest is largely occasioned by America’s latest round of confrontation in the Middle East, or the Arab sphere or Muslim world, if you prefer those expressions.
In a way, I am glad that I did not have the initial benefit of all this research. My quest sent me to some less obvious secondary sources, in particular to Linda Colley’s excellent book Captives, which shows the reaction of the English and American publics to a slave trade of which they were victims rather than perpetrators. How many know that perhaps 1.5 million Europeans and Americans were enslaved in Islamic North Africa between 1530 and 1780? We dimly recall that Miguel de Cervantes was briefly in the galleys. But what of the people of the town of Baltimore in Ireland, all carried off by “corsair” raiders in a single night?
Some of this activity was hostage trading and ransom farming rather than the more labor-intensive horror of the Atlantic trade and the Middle Passage, but it exerted a huge effect on the imagination of the time—and probably on no one more than on Thomas Jefferson. Peering at the paragraph denouncing the American slave trade in his original draft of the Declaration of Independence, later excised, I noticed for the first time that it sarcastically condemned “the Christian King of Great Britain” for engaging in “this piratical warfare, the opprobrium of infidel powers.” The allusion to Barbary practice seemed inescapable.
O ne immediate effect of the American Revolution, however, was to strengthen the hand of those very same North African potentates: roughly speaking, the Maghrebian provinces of the Ottoman Empire that conform to today’s Algeria, Libya, Morocco, and Tunisia. Deprived of Royal Navy protection, American shipping became even more subject than before to the depredations of those who controlled the Strait of Gibraltar. The infant United States had therefore to decide not just upon a question of national honor but upon whether it would stand or fall by free navigation of the seas.
One of the historians of the Barbary conflict, Frank Lambert, argues that the imperative of free trade drove America much more than did any quarrel with Islam or “tyranny,” let alone “terrorism.” He resists any comparison with today’s tormenting confrontations. “The Barbary Wars were primarily about trade, not theology,” he writes. “Rather than being holy wars, they were an extension of America’s War of Independence.”
Let us not call this view reductionist. Jefferson would perhaps have been just as eager to send a squadron to put down any Christian piracy that was restraining commerce. But one cannot get around what Jefferson heard when he went with John Adams to wait upon Tripoli’s ambassador to London in March 1785. When they inquired by what right the Barbary states preyed upon American shipping, enslaving both crews and passengers, America’s two foremost envoys were informed that “it was written in the Koran, that all Nations who should not have acknowledged their authority were sinners, that it was their right and duty to make war upon whoever they could find and to make Slaves of all they could take as prisoners, and that every Mussulman who should be slain in battle was sure to go to Paradise.” (It is worth noting that the United States played no part in the Crusades, or in the Catholic reconquista of Andalusia.)
Ambassador Abd Al-Rahman did not fail to mention the size of his own commission, if America chose to pay the protection money demanded as an alternative to piracy. So here was an early instance of the “heads I win, tails you lose” dilemma, in which the United States is faced with corrupt regimes, on the one hand, and Islamic militants, on the other—or indeed a collusion between them.
I t seems likely that Jefferson decided from that moment on that he would make war upon the Barbary kingdoms as soon as he commanded American forces. His two least favorite institutions—enthroned monarchy and state-sponsored religion—were embodied in one target, and it may even be that his famous ambivalences about slavery were resolved somewhat when he saw it practiced by the Muslims.
However that may be, it is certain that the Barbary question had considerable influence on the debate that ratified the United States Constitution in the succeeding years. Many a delegate, urging his home state to endorse the new document, argued that only a strong federal union could repel the Algerian threat. In The Federalist No. 24, Alexander Hamilton argued that without a “federal navy . . . of respectable weight . . . the genius of American Merchants and Navigators would be stifled and lost.” In No. 41, James Madison insisted that only union could guard America’s maritime capacity from “the rapacious demands of pirates and barbarians.” John Jay, in his letters, took a “bring-it-on” approach he believed that “Algerian Corsairs and the Pirates of Tunis and Tripoli” would compel the feeble American states to unite, since “the more we are ill-treated abroad the more we shall unite and consolidate at home.” The eventual Constitution, which provides for an army only at two-year renewable intervals, imposes no such limitation on the navy.
Thus, Lambert may be limiting himself in viewing the Barbary conflict primarily through the lens of free trade. Questions of nation-building, of regime change, of “mission creep,” of congressional versus presidential authority to make war, of negotiation versus confrontation, of “entangling alliances,” and of the “clash of civilizations”—all arose in the first overseas war that the United States ever fought. The “nation-building” that occurred, however, took place not overseas but in the 13 colonies, welded by warfare into something more like a republic.
T here were many Americans—John Adams among them—who made the case that it was better policy to pay the tribute. It was cheaper than the loss of trade, for one thing, and a battle against the pirates would be “too rugged for our people to bear.” Putting the matter starkly, Adams said: “We ought not to fight them at all unless we determine to fight them forever.”
The cruelty, exorbitance, and intransigence of the Barbary states, however, would decide things. The level of tribute demanded began to reach 10 percent of the American national budget, with no guarantee that greed would not increase that percentage, while from the dungeons of Algiers and Tripoli came appalling reports of the mistreatment of captured men and women. Gradually, and to the accompaniment of some of the worst patriotic verse ever written, public opinion began to harden in favor of war. From Jefferson’s perspective, it was a good thing that this mood shift took place during the Adams administration, when he was out of office and temporarily “retired” to Monticello. He could thus criticize federal centralization of power, from a distance, even as he watched the construction of a fleet—and the forging of a permanent Marine Corps—that he could one day use for his own ends.
At one point, Jefferson hoped that John Paul Jones, naval hero of the Revolution, might assume command of a squadron that would strike fear into the Barbary pirates. While ambassador in Paris, Jefferson had secured Jones a commission with Empress Catherine of Russia, who used him in the Black Sea to harry the Ottomans, the ultimate authority over Barbary. But Jones died before realizing his dream of going to the source and attacking Constantinople. The task of ordering war fell to Jefferson.
Michael Oren thinks that he made the decision reluctantly, finally forced into it by the arrogant behavior of Tripoli, which seized two American brigs and set off a chain reaction of fresh demands from other Barbary states. I believe—because of the encounter with the insufferable Abd Al-Rahman and because of his long engagement with Jones—that Jefferson had long sought a pretext for war. His problem was his own party and the clause in the Constitution that gave Congress the power to declare war. With not atypical subtlety, Jefferson took a shortcut through this thicket in 1801 and sent the navy to North Africa on patrol, as it were, with instructions to enforce existing treaties and punish infractions of them. Our third president did not inform Congress of his authorization of this mission until the fleet was too far away to recall.
O nce again, Barbary obstinacy tipped the scale. Yusuf Karamanli, the pasha of Tripoli, declared war on the United States in May 1801, in pursuit of his demand for more revenue. This earned him a heavy bombardment of Tripoli and the crippling of one of his most important ships. But the force of example was plainly not sufficient. In the altered mood that prevailed after the encouraging start in Tripoli, Congress passed an enabling act in February 1802 that, in its provision for a permanent Mediterranean presence and its language about the “Tripolitan Corsairs,” amounted to a declaration of war. The Barbary regimes continued to underestimate their new enemy, with Morocco declaring war in its turn and the others increasing their blackmail.
A complete disaster—Tripoli’s capture of the new U.S. frigate Philadelphia—became a sort of triumph, thanks to Edward Preble and Stephen Decatur, who mounted a daring raid on Tripoli’s harbor and blew up the captured ship, while inflicting heavy damage on the city’s defenses. Now there were names—Preble and Decatur—for newspapers back home to trumpet as heroes. Nor did their courage draw notice only in America. Admiral Lord Nelson himself called the raid “the most bold and daring act of the age,” and Pope Pius VII declared that the United States “had done more for the cause of Christianity than the most powerful nations of Christendom have done for ages.” (In his nostalgia for Lepanto, perhaps, His Holiness was evidently unaware that the Treaty of Tripoli, which in 1797 had attempted to formalize the dues that America would pay for access to the Mediterranean, stated in its preamble that the United States had no quarrel with the Muslim religion and was in no sense a Christian country. Of course, those secularists like myself who like to cite this treaty must concede that its conciliatory language was part of America’s attempt to come to terms with Barbary demands.)
W atching all this with a jaundiced eye was the American consul in Tunis, William Eaton. For him, behavior modification was not a sufficient policy regime change was needed. And he had a candidate. On acceding to the throne in Tripoli, Yusuf Karamanli had secured his position by murdering one brother and exiling another. Eaton befriended this exiled brother, Hamid, and argued that he should become the American nominee for Tripoli’s crown. This proposal wasn’t received with enthusiasm in Washington, but Eaton pursued it with commendable zeal. He exhibited the downside that often goes with such quixotic bravery: railing against treasury secretary Albert Gallatin as a “cowardly Jew,” for example, and alluding to President Jefferson with contempt. He ended up a supporter of Aaron Burr’s freebooting secessionist conspiracy.
His actions in 1805, however, belong in the annals of derring-do, almost warranting the frequent comparison made with T. E. Lawrence’s exploits in Arabia. With a small detachment of marines, headed by Lieutenant Presley O’Bannon, and a force of irregulars inevitably described by historians as “motley,” Eaton crossed the desert from Egypt and came at Tripoli—as Lawrence had come at Aqaba—from the land and not from the sea. The attack proved a total surprise. The city of Darna surrendered its far larger garrison, and Karamanli’s forces were heavily engaged, when news came that Jefferson and Karamanli had reached an understanding that could end the war. The terms weren’t too shabby, involving the release of the Philadelphia’s crew and a final settlement of the tribute question. And Jefferson took care to stress that Eaton had played a part in bringing it about.
This graciousness did not prevent Eaton from denouncing the deal as a sellout. The caravan moved on, though, as the other Barbary states gradually followed Tripoli’s lead and came to terms. Remember, too, that this was the year of the Battle of Trafalgar. Lord Nelson was not the only European to notice that a new power had arrived in Mediterranean waters. Francis Scott Key composed a patriotic song to mark the occasion. As I learned from Joshua London’s excellent book, the original verses ran (in part):
In conflict resistless each toil they endur’d,
Till their foes shrunk dismay’d from the war’s desolation:
And pale beamed the Crescent, its splendor obscur’d
By the light of the star-bangled flag of our nation.
Where each flaming star gleamed a meteor of war,
And the turban’d head bowed to the terrible glare.
Then mixt with the olive the laurel shall wave
And form a bright wreath for the brow of the brave.
The song was part of the bad-verse epidemic. But brushed up and revised a little for the War of 1812, and set to the same music, it has enjoyed considerable success since. So has the Marine Corps anthem, which begins: “From the halls of Montezuma to the shores of Tripoli.” It’s no exaggeration to describe the psychological fallout of this first war as formative of the still-inchoate American character.
T here is of course another connection between 1805 and 1812. Renewed hostilities with Britain on the high seas and on the American mainland, which did not terminate until the Battle of New Orleans, might have ended less conclusively had the United States not developed a battle-hardened naval force in the long attrition on the North African coast.
The Barbary states sought to exploit Anglo-American hostilities by resuming their depredations and renewing their demands for blood money. So in 1815, after a brief interval of recovery from the war with Britain, President Madison asked Congress for permission to dispatch Decatur once again to North Africa, seeking a permanent settling of accounts. This time, the main offender was the dey of Algiers, Omar Pasha, who saw his fleet splintered and his grand harbor filled with heavily armed American ships. Algiers had to pay compensation, release all hostages, and promise not to offend again. President Madison’s words on this occasion could scarcely be bettered: “It is a settled policy of America, that as peace is better than war, war is better than tribute. The United States, while they wish for war with no nation, will buy peace with none.” (The expression “the United States is” did not come into usage until after Gettysburg.)
Oren notes that the stupendous expense of this long series of wars was a partial vindication of John Adams’s warning. However, there are less quantifiable factors to consider. The most obvious is commerce. American trade in the Mediterranean increased enormously in the years after the settlement with Algiers, and America’s ability to extend its trade and project its forces into other areas, such as the Caribbean and South America, was greatly enhanced. Then we should attend to what Linda Colley says on the subject of slavery. Campaigns against the seizure of hostages by Muslim powers, and their exploitation as forced labor, fired up many a church congregation in Britain and America and fueled many a press campaign. But even the dullest soul could regard the continued triangular Atlantic slave trade between Africa, England, and the Americas and perceive the double standard at work. Thus, the struggle against Barbary may have helped to force some of the early shoots of abolitionism.
Perhaps above all, though, the Barbary Wars gave Americans an inkling of the fact that they were, and always would be, bound up with global affairs. Providence might have seemed to grant them a haven guarded by two oceans, but if they wanted to be anything more than the Chile of North America—a long littoral ribbon caught between the mountains and the sea—they would have to prepare for a maritime struggle as well as a campaign to redeem the unexplored landmass to their west. The U.S. Navy’s Mediterranean squadron has, in one form or another, been on patrol ever since.
And then, finally, there is principle. It would be simplistic to say that something innate in America made it incompatible with slavery and tyranny. But would it be too much to claim that many Americans saw a radical incompatibility between the Barbary system and their own? And is it not pleasant when the interests of free trade and human emancipation can coincide? I would close with a few staves of Kipling, whose poem “Dane-Geld” is a finer effort than anything managed by Francis Scott Key:
It is always a temptation to an armed and agile nation
To call upon a neighbor and to say:—
“We invaded you last night—we are quite prepared to fight,
Unless you pay us cash to go away.”
And that is called asking for Dane-geld,
And the people who ask it explain
That you’ve only to pay ’em the Dane-geld
And then you’ll get rid of the Dane!
Kipling runs briskly through the stages of humiliation undergone by any power that falls for this appeasement, and concludes:
It is wrong to put temptation in the pathof any nation,
For fear they should succumb and go astray
So when you are requested to pay up or be molested,
You will find it better policy to say:—
“We never pay any-one Dane-geld,
No matter how trifling the cost
For the end of that game is oppression and shame,
And the nation that plays it is lost!”
It may be fortunate that the United States had to pass this test, and imbibe this lesson, so early in its life as a nation.
Statistical Modeling, Causal Inference, and Social Science
As a European, I’ve always been fascinated by how trivial and common-sense matters end up in courts. I’ve been less fascinated and more annoyed by the piles of forms and disclaimers everywhere. Finally, annoyance takes over any kind of fascination faced with the medical bills – often so high because of lawsuit-protecting insurance. As Paul H. Rubin writes in NY Times:
The United States is already the most litigious society in the world. We spend about 2.2 percent of gross domestic product, roughly $310 billion a year, or about $1,000 for each person in the country on tort litigation, much higher than any other country. This includes the costs of tort litigation and damages paid to victims. About half of this total is for transactions costs — mostly legal fees.
So why is that? One way to explore that is to examine the composition of the US Congress, as BusinessWeek has done a few years ago:
Law is the profession that’s best represented in the US Congress. How do lawyers vote compared to other professions? I’ve worked on quantitative analysis of voting behavior in US Senate a few years ago, so this is a pet interest of mine. I was thus interested to receive an email from two Swiss researchers summarizing their research:
In a study recently published in the Journal of Law and Economics (working paper version available here), Ulrich Matter and Alois Stutzer investigate the role of lawyer-legislators in shaping the law. The focus of their study lies particularly on legislators with a professional background as attorney (and not on the legislators’ education per se). In order to code the occupational backgrounds of all US Congressmen and all US state legislators over several years, the authors assembled a data set with detailed biographical information drawn from Project Vote Smart and compiled via its application programming interface (an R package that facilitates the compilation of such data is available here). The biographical information is then linked to the legislators’ voting records in the context of tort law reform at the federal and state level between 1995 and 2014.
The theoretical consideration is that lawyer-legislators can, by deciding on statutory law, affect the very basis of their business and that this is particularly the case for tort law. A look at the raw data (figure below) indicates that lawyer-legislators are less likely to support reforms that restrict tort law than legislators with a different professional background.
This holds when controlling for other factors in regression analyses. For bills aiming at increasing tort liability the pattern switches and lawyer-legislators are more likely to vote in favor of bills that extend tort law than legislators with a different professional background.
Overall, the findings are consistent with the hypothesis that lawyer-legislators, at least in part, pursue their private interests when voting on tort issues. From a broader perspective, the results highlight the relevance of legislators’ identities and individual professional interests for economic policy making.
I can imagine other professions in the Congress engaging in similar protectionism of an imperfect status quo in their respective fields. It’s access to data and statistics that facilitate this necessary scrutiny in analyzing conscious and unconscious biases of legislators.