The Wealth Of The Nation


TWENTY YEARS AGO , the American economy hummed like a well-oiled machine. We actually exported automobiles and oil. Economists worried about the “dollar gap”—whether the rest of the world would have enough dollars to buy from us—and the inflation rate was one percent. The economists of John F. Kennedy and Lyndon Johnson spoke of “fine-tuning” the economy. Today the economy moves only by sputters and spurts. We have idle capacity; interest rates have been in double digits, and recently so has inflation. Economists seem to have lost their faith, and there seem to be no easy or ready answers. What happened?

Henry Kaufman is an economist who finds himself both famous and powerful, even though he has never held public office. As the American economy began to slide, it was Kaufman who delineated the reasons, particularly the piling up of debt. Born in Germany, Kaufman had taken economics, finance, and banking degrees at New York University, Columbia, and the New York University Graduate School of Business. He worked briefly in commercial banking, then in the research department of the Federal Reserve Bank of New York, and he joined the Wall Street investment banking firm of Salomon Brothers (now a subsidiary of Phibro-Salomon) in 1962. As a major international underwriter and trader of bonds, stocks, and money market instruments, Salomon Brothers needed the best of intelligence on the credit markets. Kaufman became a partner in 1967 and a member of the executive committee in 1972. Throughout the 1970s Kauf man’s reputation grew, until finally his predictions of interest rates had a major influence on the bond and stock markets. Because these predictions, based on the statistical analyses of his staff and himself, were frequently gloomy, he was called “Dr. Doom” on Wall Street, albeit with affection.

Adam Smith is an interpreter of world financial markets. His 1968 book, The Money Game , was called “a modern classic” by the Nobel Prizewinner Paul Samuelson. His most recent book is Paper Money , published in 1981, which, like Kaufman’s work, delineates the pyramiding of debt. Adam Smith is the pseudonym of George J. W. Goodman, who was trained at Harvard and Oxford. This interview took place early last summer—before the astonishing mid-August stock market advance that was partly triggered by Kauf man’s prediction that interest rates would tend to decline through the rest of the year.

You spent close to nine years as a little boy in Germany before emigrating. What was it like?

I was born in 1927 in a small town about an hour away from Frankfurt and I went to grade school there for a couple of years. Thus, part of my childhood in Germany was during the period when Hitler rose to power. I remember a day in the early thirties when all the schoolchildren, including myself, were asked to line up as the army passed through and Hitler came along in his open car. Everybody in town cheered; the jubilation was just unbelievable. His car passed within a few feet of me. I will never forget it. It’s as vivid as the memory of when the Nazis broke into our house.

While you were in it?

Yes. The Nazis loved to stage torchlight parades. After they were all fired up, they would seek out Jewish homes. It was a January night. We were sleeping upstairs. My father escaped through the back into the fields, and although they did not break into our bedrooms, they tore apart everything downstairs.

It must have been terrifying.

It certainly was. It was about three or four in the morning and icy outside. Afterward, some neighbors down the block, also Jews, came to our house in their pajamas. They were bleeding from beatings by the Nazis. That is when we decided to leave. That was in early 1937.

Was it easy to leave?

It was not easy for my grandparents, who had lived all their lives in Germany. But we were fortunate that my grandfather had several sisters who had come to the United States at the beginning of the century. They were our sponsors.

You must have thought about what that experience has meant to you, how it carries into your work or how you see life.

I think we’re all products of our past in some way. Because of that experience and because of my studies, I believe that it is very important to have an orderly economic system and to have a relatively strong middle class. It is very dangerous when societies become polarized.

When you look around you today, do you see anything that worries you?

I would say that one of the great strengths of this country has always been its diversity of people, who, in a variety of ways, have amalgamated through economic opportunities into a large middle class. In the United States there is opportunity to grow and, therefore, to expand the wealth of everyone. This helps to maintain a well-balanced society.

Well, what I’m thinking of is a piece that Kevin Phillips wrote in New York Review . He said that Reaganomics is a failure and then drew parallels to the Germany of the twenties and thirties.