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The Largest Welfare Check Ever Written
The Rise of the Wall Street Ruling Class
by THOMAS VOLSCHO

Who rules America?  Sociologists and political scientists have debated this question since C. Wright Mills published his 1956 book The Power Elite.  Writing in the 1950s, Mills argued that the United States was ruled by a triangle of power between the federal government, large corporations, and the military industrial complex (with many people moving between these sectors).  Robert McNamara went from CEO of Ford Motor Company to Secretary of Defense under the Kennedy-Johnson administrations (modern examples include Dick Cheney, Henry Paulson, Robert Rubin, Larry Summers, etc).  Since the late 1960s, sociologist G. William Domhoff has revised, updated, and increased the sophistication of power elite theory.  If we look at the composition of cabinet-level and other White House appoints since the Reagan administration, it is clear that there is a significant movement between Wall Street and the Federal Reserve Bank and Treasury Department.  But why?  The answers are found in the social and economic crises of the 1960s and 1970s. 

The rate of profit in the non-financial sector fell after peaking in 1966 and continued its fall into the mid 1970s.  At the same time, the Civil Rights, anti-war, feminist, brown power, black power, American Indian Movement, student revolts, prison riots, and other rebellions against the establishment were taking place.  Regulatory victories by Ralph Nader and other challenges to the power of the capitalist establishment were increasingly seen as a threat in the 1970s.  Lewis F. Powell (a corporate lawyer, board member, and future Supreme Court Justice) wrote a memo to the Chamber of Commerce in 1971 and opened the document by stating, “No thoughtful person can question that the American economic system is under broad attack.”  But what was most alarming was that “ Although New Leftist spokesmen are succeeding in radicalizing thousands of the young, the greater cause for concern is the hostility of respectable liberals and social reformers.”  The great fear was that mainstream liberals were becoming more radical.  A further fear was that Yale’s graduating classes (composed of old and new money and elites-to-be) in the late 1960s and 1970s included those who were versed in the “politics of despair.”

In response capitalists mobilized politically and ideologically.  By 1976, the U.S. Chamber of Commerce’s membership started increasing rapidly and doubled by 1980.  In 1975, there were just under 200 Corporate Political Action Committees (PACs) but about 1400 by 1981.  The ideological factions of the right in the late 1970s included Supply-Siders, Monetarists, and Neoconservatives.  Each of these factions were in power at the Treasury Department, White House, and Federal Reserve Bank beginning in 1979.  While they didn’t necessarily always get along, they put policies into place that led to the rise of the Wall Street Ruling Class. 

Supply-siders argued that radical tax cuts would increase economic growth so much that it would actually increase government tax revenues.  This theory (known as the “Laffer Curve”) was drawn on a napkin at a bar and then presented in editorials in the Wall Street Journal.  One of Reagan’s wunderkind, Office of Management and Budget David Stockman, confided to a Washington Post reporter (William Greider) that Reagan’s tax cut was really a “trojan horse” for cutting taxes on the rich. 

At the same time, monetarists believed that the only cause of inflation was the money supply.  Beginning in October 1979, one of the first applications of the “shock doctrine” came in the form of very high interest rates.  The vague proclamations of the Federal Reserve Banker, Paul Volcker, that the Fed was only focusing on M1 (a measure of money supply) and that the Fed’s hands were tied such that it was “the market” that determined interest rates was sold to the public.  What this really was, was “bitter medicine” and Volcker was quoted in the New York Times as saying that Americans must get used to declining living standards.  In essence, the Federal Reserve Bank was implementing the “shock and awe” phase of the first-strike of a thirty year class war.    

In 1981 Reagan signed the “Kemp-Roth” tax bill about a week after he had taken the radical step of firing 11,000 striking federal air traffic controllers.  This was accomplished within the context of the highest interest rates and subsequent unemployment rates of the postwar era (in 1981-1982).  This strategy, as explained by Naomi Klein in her book The Shock Doctrine, requires that radical policy shifts must occur when the public is disoriented and confused.  High interest rates, business failures, foreclosures, plant closures, downsizing, and rising unemployment can have this effect.  The interest-rate shocks enabled elites to pursue radical anti-union policies and radically reduce taxes on the rich.  At the same time, neoconservatives argued that “missile gaps” and “acoustic submarines” (the inability to detect them being given as evidence for their existence) developed by the Soviet Union were posing a major threat to the United States.  This justified unprecedented defense spending increases.  One of the failed moments of the Reagan revolution, of course, was the decision not to pursue “Social Security reform” while only having limited success at cutting other social programs.  This left a problem.  Tax cuts for the rich reduced the tax revenue of the Federal government while a defense-spending spree threatened to create the largest federal deficit in history. 

In a widely ignored 2000 book, Wall Street Capitalism: A Theory of the Bondholding Class, economist E. Ray Canterbery explains what happened.  The tax cuts drastically increased the incomes of the rich and they used their newfound money from the tax cuts to buy the Treasury bonds, notes, and bills that the Treasury Department had to issue in order to finance Reagan’s deficits.  The combination of monetarism (high interest rates), supply-side tax cuts, and the phantom Soviet threat created the bondholding class.  In essence, a Wall Street Welfare institution known as the bond market came to dominate politics in the United States.  Instead of using taxes to fund the federal government (and increasingly state and municipal governments), taxes on the rich were cut and they were handed an “investment opportunity” so that working and middle-class taxpayers now pay a “bondholder’s tax” to firms like Goldman Sachs and JP Morgan Chase (as well as Japan and China).  The domination had become quite apparent in early 1993 when President-elect Bill Clinton remarked "You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of fucking bond traders?"  Clinton ditched his 1992 campaign promises to the whims of the Wall Street Ruling Class and the Federal Reserve Bank.

Treasury securities come in maturities of 1 month, 3 months, 3 years, 7 years, 10 years, and 30 years.  But rarely does the bondholding class hold their securities to maturity.  Instead, they are circulated through high-volume secondary markets.  In October of 2010, for instance, the average daily trading volume of Treasury bonds was $558 billion.  Treasury, State, and Municipal bonds are highly concentrated among the rich.  In the 2007 Survey of Consumer Finances, the Top 5 percent (ranked by net worth) held about 93.6 per cent  of all bonds (this does not include the savings bonds that the working and middle classes are familiar with).  Likewise, the Top 5 percent owned 82.4 per cent  of all stocks.  The bondholding class oscillates between bonds and stocks as market conditions dictate.  The Wall Street Ruling Class manipulates the supply of bonds, bills, and notes of differing maturities through its “Treasury Borrowing Advisory Committee” to maximize the economic gains of the bondholding class.  The current Chairman and Vice Chairman are from JP Morgan Chase and Goldman Sachs, respectively.

 By implementing what Canterbery calls a “bondholding class strategy,” the Federal Reserve Bank managed interest rates so as to optimize returns for the bond and stock market.  Studies indicate that bond prices and the stock market generally react negatively to what is good news for most Americans: strong employment growth, a decline in jobless claims, an increase in wages, or an uptick of inflation sends bond and stock prices falling.  When news reports of slower housing starts, slower than expected employment growth, an increase in unemployment or jobless claims are released, the bond and stock markets rally.  This is a major difference in the class interests between the vast majority of Americans whose primary income is from wages and salaries and the minority of rich asset holders.  When the economy grows too fast, the ideology of the bondholding class dictates that the Federal Reserve Bank should raise interest rates (which increases the unemployment rate and reduces wages).  Keep wage and commodity inflation in check by all means necessary while allowing for stock market and home mortgage inflation. 

The last thirty years of the class war waged by the Wall Street Ruling Class and the Federal Reserve Bank has been about reducing wages and goods inflation while sustaining financial asset inflation to increase the enrichment of the bond and stock holders.  Net interest payments on Treasury securities are welfare payments to the Wall Street Ruling Class.  One of the propaganda functions of the highly concentrated (by ownership) mass media is to keep the masses confused about this great source of power.  From the perspective of the elite, it is better to inflame and encourage hatred for Mexican immigrants, welfare recipients, and Muslims.  But Mexican immigrants and Muslims, generally speaking do not run the country.  Instead, the simple answer is: follow the money.  By following the money you will be led to a street with a river at one end and a graveyard at the other.  In fact, it is for whom the firms located on this street received the largest welfare check ever written.  As the chorus of Ron Paul supporters, Tea Party activists and white supremacists continues rising and violence escalates, the question arises:  Is there socialism in the United States? The answer is a resounding Yes! Socialism for the rich.        

THOMAS VOLSCHO is Assistant Professor of Sociology, CUNY / College of Staten Island. He can be reached at Thomas.Volscho@csi.cuny.edu