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ARCHIVAL INSIGHTS
INTO THE EVOLUTION OF ECONOMICS
The Emergence
of Arthur Laffer
The Foundations of Supply-
Side Economics in Chicago
and Washington, 1966–1976
Brian Domitrovic
Archival Insights into the Evolution of Economics
Series Editor
Robert Leeson
Stanford University
Stanford, CA, USA
This series provides unique archival insights into the evolution of economics.
Each volume examines the defining controversies of one or more of the
major schools.
More information about this series at

http://www.palgrave.com/gp/series/14777
Brian Domitrovic
The Emergence of
Arthur Laffer
The Foundations of Supply-Side Economics
in Chicago and Washington, 1966–1976
Brian Domitrovic
The Laffer Center
The Woodlands, TX, USA
ISSN 2662-6195 ISSN 2662-6209 (electronic)

Archival Insights into the Evolution of Economics
ISBN 978-3-030-65553-2 ISBN 978-3-030-65554-9 (eBook)
https://doi.org/10.1007/978-3-030-65554-9
© The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer
Nature Switzerland AG 2021
This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights of
translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and retrieval,
electronic adaptation, computer software, or by similar or dissimilar methodology now
known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publication does not imply, even in the absence of a specific statement, that such names are
exempt from the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information
in this book are believed to be true and accurate at the date of publication. Neither the
publisher nor the authors or the editors give a warranty, expressed or implied, with respect to
the material contained herein or for any errors or omissions that may have been made. The
publisher remains neutral with regard to jurisdictional claims in published maps and
institutional affiliations.
This Palgrave Macmillan imprint is published by the registered company Springer Nature
Switzerland AG.
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
For Bob Mundell
Acknowledgments
For supply of information central to this book’s content, Arthur Laffer has
been both forthcoming about his life and career and helpful in finding,
and often acquiring, further relevant sources. All six children in the Laffer
family have been distinctly helpful as well, if Arthur Jr. and Rachel may be
singled out. At the Laffer firm, Mike Madzin, Randi Butler, Nick
Drinkwater, Kenny Smith, and Richard Neikirk have been of great assis-
tance. Thanks as well go to Dick Strong, Bob Mundell, Valerie Natsios-
Mundell, Mark Molesky, Steve Forbes, Robert Leeson, Nathan Lewis,
Ralph Benko, Larry Kudlow, Don Critchlow, Marc Miles, Chuck Kadlec,
Pinar Emiralioglu, Brian Jordan, Tony Batman, and Jeanne and Rex
Sinquefield. And thanks go to Sam Houston State University and the staffs
of archival collections, including those held at the Richard M. Nixon
Library, the Harry S. Truman Library, the Duke University Libraries, the
University of Chicago Library, the MIT Libraries, the Economists’ Papers
Archive at the Duke University Libraries, and depositories at Stanford
and Yale.
vii
Contents
1 American Abundance 1
2 In the Scope of Paul Baran 17
3 “Growth and the Balance of Payments” 41
4 Rising at Chicago 65
5 “A Formal Model of the Economy” 93
6 1065115
7 Toward the Policy Mix147
8 The Laffer Curve175
ix
x Contents
9 Global Monetarism205
10 The Arc of Reform239
A Note on Sources247
Index249
Abbreviations
AEI American Enterprise Institute

AER American Economic Review
BoB Bureau of the Budget
CEA Council of Economic Advisers
CPI Consumer Price Index
GDP Gross Domestic Product
GNP Gross National Product
GPO Government Printing Office
IMF International Monetary Fund
JPE Journal of Political Economy
MESA Mechanics Educational Society of America
NBER National Bureau of Economic Research
NYT New York Times
NIPA National Income and Product Accounts
OMB Office of Management and Budget
OPEC Organization of Petroleum Exporting Countries
QJE Quarterly Journal of Economics
RNPL Richard M. Nixon Presidential Library
SDR Special Drawing Right
SOMC Shadow Open Market Committee
WHOF: SMOF White House Office Files: Staff Members’ Office Files, RNPL
WP Washington Post
WSJ Wall Street Journal
xi
CHAPTER 1
American Abundance
In Philip Roth’s 1959 novella Goodbye, Columbus, the protagonist, a

young man who lives in the old section of Newark, is amazed at the pros-
perity he finds in the homes of some of his friends, including in the Short
Hills, New Jersey, spread of the young lady he is courting. On the main
floor of her home he finds himself chilling “in the steady coolness of air by
Westinghouse.” The sporting goods on the lawn—these are a sight.
“Outside, through the wide picture window, I could see the back lawn
with its twin oak trees,” this protagonist, one Neil Klugman, narrates. “I
say oaks, though fancifully, one might call them sporting-goods trees.
Beneath their branches, like fruit dropped from their limbs, were two
irons, a golf ball, a tennis can, a baseball bat, basketball, a first-baseman’s
glove, and what was apparently a riding crop.” Soon to be discovered were
a basketball court and a stopwatch. He goes down to her family’s base-
ment and finds the refrigerator in that smartly renovated space to be
“heaped with fruit, shelves swelled with it, every color, every texture, and
hidden within, every kind of pit.” There are three kinds of plums, “long
horns of grapes,” nectarines, peaches, various melons, “and cherries, cher-
ries flowing out of boxes and staining everything scarlet.” He marvels at
these people. “Fruit grew in their refrigerator and sporting goods dropped
from their trees!” This is not to mention the family’s country club, or even
the municipal tennis courts and running tracks. Everything is so nice. And
© The Author(s), under exclusive license to Springer Nature 1

Switzerland AG 2021
B. Domitrovic, The Emergence of Arthur Laffer, Archival Insights
into the Evolution of Economics,
https://doi.org/10.1007/978-3-030-65554-9_1
2 B. DOMITROVIC
Neil always has a good time using all the stuff with his girlfriend and her
family. Her father had built a little business installing bathroom porcelain.
The point of the novella appears to be that Neil cannot let his rather
mild mean and indifferent side from intruding on his courting of the
young woman, and the force of this petty trait makes them break up. He
looks at his reflection in her college-library window and asks himself why
he cannot simply take advantage of the good things that he has before
him. It was a tough question, and Roth did not answer it. This was the
closing vignette of the book. “What was it that had turned winning into
losing,” Neil asks himself as he stares at his reflection, wondering what
unknown counterproductive forces are inside his head, allowing “and los-
ing—who knows—into winning?”
One of the central issues implied in Goodbye, Columbus was that some-
thing had to be made, some reckoning taken, of the blooming economic
prosperity of the 1950s. The United States, if not much of the world
recently cursed by the most horrible conflict, and prior to that the Great
Depression, clearly had set to producing the likes of mass affluence once
World War II was over with. The novella testified to this. But what if, wel-
comed into the expansiveness of a prosperity such as that of the postwar
era, as Neil was via his girl, one is feckless, too much of a schmuck to enjoy
it when offered? Is there something wrong with such a person—in terms
of character, or morally? It could even be possible that at some level of
consciousness such a person dislikes prosperity, would rather it moderate,
and might be ready to take subtle action to see it curtailed. This is an
unsettling thought. But human envy and willful incompetence have their
native prowess. “I looked hard at that image of me, at that darkening of
the glass,” Neil said, and then the image broke up, the questions cut off in
various stages of being formed as they were summoned up from within.1
Neil’s girlfriend’s brother went to Ohio State University. He has a pho-
nograph record of songs that the college band plays over announcements
of the sports teams’ exploits. At the end, a voice expresses the sentiments
of the graduating seniors, saying, “Goodbye, Columbus,” as in the loca-
tion of the university, Columbus, Ohio. Going out to Ohio, that too was
consistent, in the 1950s, with the habits of Eastern seaboarders who were
living large in the great postwar prosperity. Ohio, the home of some of the
greatest nineteenth-century enterprises that defined the twentieth century,
Goodyear, Procter & Gamble, and Standard Oil, enterprises that swelled
the life—the mass affluence of all the workers and the executives and their
so often big and extended families—that great business success can carry
1 AMERICAN ABUNDANCE 3
in its tow. It was a booming place, a reality that contemporary people

accustomed to thinking, with no small amount of justification, of the near
Midwest as rustbelt and opioid country may find hard to grasp. In 1940,
perhaps the birth year of some of the members of that college band play-
ing in “Goodbye, Columbus” with enthusiasm in the novella, Ohio was
not such a place, even if it had recently endured the Depression. It was still
fully an industrial powerhouse, and by virtue of that fact, an engine of
livelihoods and prosperity. To be born in Ohio in 1940—something close
to the acme and core, in terms of time and place, of that formerly proud,
and now sometimes derided national ethos, the American Dream.
Arthur Laffer was born in August of that year in the distinctive Ohio
steel-mill town 150 miles to the northeast of Columbus, Youngstown. His
family was on a brief business assignment there prior to returning to the
ancestral home of Cleveland, where this future economist would grow up.
His earliest memory is from 1945, when his grandparents had him in
Arizona, giving him the run of the Pioneer Hotel in Tucson much like, he
remembers, the fabled Eloise in the Plaza in New York. His parents were
busy back east, his father completing his war work as a “dollar-a-year man”
industrial executive. To soak up in childhood as a preface to a life in eco-
nomics—that discipline seeking to know the ways of material thriving—
the unfolding of American postwar prosperity beginning in 1945: this was
some special school.
Postwar prosperity was the greatest phenomenon in global mass well-
being that has perhaps ever occurred. The throngs of people getting jobs,
holding jobs, getting promotions, buying cars, moving into homes, taking
vacations, saving money, inventing devices, starting businesses, and not
only in the national location of the American Dream. As Laffer’s closest
friend and confidante in the upcoming years, the economist and 1999
Nobel Prizewinner Robert Mundell, put it before Congress in 1965, “the
most exceptional characteristic of the world economy in the past fifteen
years is its unparalleled prosperity and stability. I can think of no compa-
rable period in the whole of modern history.”2
Thirty years after his birth, Arthur Laffer was about the most successful
young economist of his generation. In 1969, at the age of twenty-nine, he
achieved professorial tenure at the University of Chicago. This was the
economics faculty—Chicago’s in the 1960s—that has gone down in his-
tory as among the most intellectually distinguished (and assertive) as any
on the American university scene from over the ages. It was the faculty of
that household name Milton Friedman and included a roster of future
4 B. DOMITROVIC
Nobel Prizewinners. Laffer got early tenure at this place. While he was
taking graduate classes at Stanford University two years before, the
American Economic Review published an article of his. A paper he pre-
sented at a hyper-critical Chicago economic “workshop” launched a revo-
lution in international macroeconomics half a decade later, in the 1970s,
even as it was never published. His dean at Chicago, George P. Shultz,
swept him in 1970 into a special position in presidential government, as
inaugural economist at the White House’s new Office of Management and
Budget (OMB).
The economics of this young phenom had a central point. This was that
postwar prosperity was going great. The point was obvious, perhaps, but
Laffer brought mathematics and sequences of logic to his demonstrations.
His chief area of interest was the international monetary system. He
argued that the prevailing global arrangement of major currencies fixed at
rates of exchange to the dollar, and the dollar itself to gold, was serving
the needs of the world economy well. Great economic growth was the
evidence. As a secondary interest he was curious about the dynamics of
growth within a given country. What makes a domestic economy really
move, given that there were so many nice examples in the 1960s—this was
an interest he was developing at an increasing level of intensity, as his
articles on the satisfactoriness of the current quasi-classical monetary sys-
tem got published in all the top places.
Laffer was successful as a young economist because of the intriguing
way he posed his arguments to his peers in the academy. However, the
thrust of his arguments, for saying that postwar prosperity was going
great, made him exceptional. This point was not obvious within his field,
the record shows. The regnant schools of macroeconomics, incumbent
Keynesianism and the fully rising challenger monetarism, contended from
their basic premises that the market economy cannot keep humming on its
own and, moreover, that threats to economic stability and performance
were gathering in the 1960s. The economy needed shrewd government
interventions at every turn, and more than it was currently getting.
Keynesianism wore such assumptions on its sleeve. Under the condi-
tions of late capitalism, per John Maynard Keynes in his 1930s vein, those
with money, the rich, are so satiated with the wealth accumulated over
generations of success that they lose inspiration to invest. The lack of
investment in such a context, a “liquidity trap,” in turn creates unemploy-
ment. The natural condition of the economy as a big industrial revolution
progresses into its latter stages is that markets clear below the level of
employment, and therefore of general prosperity, that is socially accept-

able. Government must step in, take the extra savings from the rich, and
plow the money into productive investment. Or government must out-
right give these savings to the unemployed, so as to increase consumer
demand and therefore the rate of return on investment, attracting the
capital of languid rich into the marketplace.3
Monetarism was in an important sense no more sanguine about the
ability of the market to clear at a high level of prosperity. In an early state-
ment of his philosophy in the American Economic Review (AER) in 1948,
monetarism’s chief exponent Friedman asserted that “government must
provide a monetary framework for a competitive order since the competi-
tive order cannot provide one for itself.” He proposed “a reform of the
monetary and banking system to eliminate both the private creation or
destruction of money,” if as well limiting by law the discretion of the gov-
ernment’s central-banking authority. Government, not the private sector
at all, had to be the supplier of money in the interest, as in a term from the
title of this 1948 article, “economic stability.” Left to its own devices, the
private sector could never get currency issuance right. In such conditions,
there were bound to be recessions when not bouts of inflation. Friedman’s
analysis of why the private sector could not correctly produce a supply of
money was not as dedicated as Keynes’s regarding the paucity of invest-
ment after a long industrial revolution. Friedman may well have taken the
market’s natural instability as a given, so as to have a point of entry into
the Keynesian discussion. Then he would turn the tables against
Keynesianism and declare monetary as opposed to fiscal policy the main
determinant. When Friedman was winning tenure and promotions at the
University of Chicago from the late 1940s through the early 1960s, the
path of least resistance into the great conversation of economics was to
play along with the premises of Keynesianism.4
In their heyday, these theories put macroeconomics in a strange posi-
tion with respect to real events. Postwar prosperity was clearly a fact. It
was, furthermore, enduring, arguably getting better (growth was higher in
the 1960s than the 1950s), and spreading into untouched places domesti-
cally and internationally. Therefore, according to both Keynesianism and
monetarism, there had to be judicious interventions taking place all the
while on the part of government. There had to be, for the one school of
thought, fiscal policy addressing the problem of the settled rich’s weak
propensity to invest; and for the other, steady and intelligent government
management of the money supply. If these things did not obtain, if they
6 B. DOMITROVIC
were not in fact happening as postwar prosperity sustained itself, then

Keynesianism and monetarism would have to lose their priority. Indeed,
they would be disproven. It therefore became an urgent matter for
Keynesianism and monetarism not only to find examples of policy, in the
1950s and 1960s, that proved their relevance. It also became an existential
imperative to reiterate the point that the economy was necessarily headed
toward crisis. If the economy was not headed toward crisis as its natural
course, Keynesianism and monetarism had no purchase.
As for the location of the crisis in its nascent stage in the 1960s—the
crisis had to be nascent as postwar prosperity proceeded apace—Keynesians
and monetarists agreed where it was gathering most ominously. It was in
the arrangements of the international monetary system, specifically as
related to that system’s two central characteristics, fixed exchange rates
and a dollar redeemable in gold. Within macroeconomics, the talk was
incessant that the United States was running a chronic “deficit” within its
“balance of payments” in the 1960s, meaning that in general, foreigners
accumulated more dollar assets than Americans did foreign-currency
assets. As dollar holdings stacked up among foreign holders, often central-
bank reserve accounts, the American gold stock appeared to face a reckon-
ing. If the foreign claimants to US gold acted on their rights to get gold
for their dollars at the pre-fixed price, the system would lose its ability to
function. The United States would run out of gold, and per a late World
War II agreement—the protocols that came out of the Bretton Woods
conference of 1944—countries were permitted not to guarantee their cur-
rencies’ exchange rates against the dollar if the dollar was not redeemable
in gold. Therefore, the legacy gold/fixed-exchange-rate monetary system
was revealing, in the 1960s, that it was untenable.
The monetarists led by Friedman urged the dropping of gold and fixed
rates for a floating exchange-rate system, in which currencies would trade
against each other at whatever prices the market desired. Given such a
switch, the looming balance-of-payments, gold-redemption comeuppance
for the United States would not occur. The collateral benefit of flexible
exchange rates, for monetarism, was the enabling of an independent
money-supply policy. Under fixed rates, changes in the money supply put
pressure on the exchange rate, which according to the rules had to stay the
same. Flexible rates conferred a freedom in monetary policy such that
authorities could pursue domestic unemployment and inflation goals
without the impediment of having to maintain a currency par. Keynesians,
for their part, wanted governments to have a free hand at running budget
deficits, changing the tax code, and engineering spending programs, all in
the in the name of domestic aggregate demand and investment manage-
ment. Budget deficits in particular notoriously spooked the exchange-rate
markets. To overcome this obstacle, the best option was a “benign neglect”
policy of letting the dollar-gold crisis mature until a transition from fixed
to flexible exchange rates forced itself into being. From the perspectives of
both monetarism and Keynesianism, the one way to achieve balance-of-
payments equilibrium given gold and fixed rates was to slow down eco-
nomic growth domestically. This was a horrible option and the real-world
crisis that the extant system was courting.5
And yet here was this young tenured economist at Chicago, this Arthur
Laffer, saying that the booming economy was excellent of its own accord
and not heading toward crisis, in particular with regard to that whipping
boy, the international monetary system. Fixed exchange rates for Laffer
approximated perfection, as he said characteristically at a conference in
January 1970: “With fixed exchange rates and price level flexibility…the
real, as well as the nominal, money stock is perfectly elastic. Unemployment,
as a result of monetary phenomena, should not exist.” No need for
Keynesianism or monetarism—old-fashioned fixed exchange rates con-
duce to the results to which these two modernist schools aspired.
“Although these two systems”—of flexible and fixed exchange rates—“are
often thought of as analytically identical, the differences between them
may be the difference between underemployment and prosperity.” As for
the balance-of-payments crisis, he found it phony. From a journal article
of his from 1969: “The United States should have over-all balance of pay-
ments deficits. Foreigners as well as the United States gain from the
U.S. role as the international financial intermediary.” As for how to “solve”
the balance-of-payments “crisis,” he had a solution in a 1969 paper, the
one that upended the field the next decade: “An increase in the rate of
growth of a country relative to the rest of the world will improve that
country’s overall balance of payments.” In future years, he had a formula
for “an increase in the rate of growth of a country,” substantial marginal
tax cuts.6
The debates Laffer was joining in the first years of his career through
1970 were in the classic area of the free market versus government inter-
vention. There had been such debates before, to be sure, but the promi-
nent ones of several decades prior had not taken place when the market
economy was successful and predominant. When F.A. Hayek issued his cri
de coeur to the market of 1944, The Road to Serfdom, in the wake of the
8 B. DOMITROVIC
Depression and during ultra-big-government World War II, the tone was
unmistakably one of entreaty. Hayek’s dedication was “to the socialists of
all parties,” conceding that there were quite a few socialists. Postwar pros-
perity presented the opposite problem as had the Great Depression. The
Depression forced the defenders of the market to prove their relevance.
Postwar prosperity forced the prophets of intervention to prove theirs.
The preferred option, in the latter case, ultimately was to take refuge in
the shadows, to see an unworkability in the international monetary sys-
tem, of which most people were oblivious, as the mechanism of crisis.
Meanwhile the experience of the continual postwar prosperity remained
keen and palpable.
Laffer therefore had a grand time as a kid economist, through at least
1970, tweaking the macroeconomic consensus. Paper after paper of his
showed how fixed exchange rates and convertibility in gold—those fossils
of the nineteenth century—were readily delivering postwar prosperity,
with no natural end in sight. Gamely, these papers came out in the august
places, the AER, the Journal of Political Economy, Harvard University
Press. As Laffer made his contributions to the field, he got his tenure,
promotion, citations, and invitations to speak—the accoutrements of a top
economist arriviste. These times did not last. Just as Laffer climbed up to
the pinnacle with tenure at Chicago, the United States did something
inexplicable with respect to its beloved postwar prosperity. It traded win-
ning for losing.
Stagflation
The tennis cans, riding crops, overstuffed refrigerators, family cars, Silicon
Valley startups, jobs-for-life, the various contents and trappings of the leg-
endary postwar American abundance went alternatively scarce and dear in
price in the years after 1969. The decade of the 1970s has gone down in
history, justifiably, as that of “stagflation,” the difficult-to-grasp combination
of minimal or negative economic growth with severe consumer-price infla-
tion. The numbers confer the point. In the 1960s, there was a nine-year
boom of 5 percent annual growth in real economic output. Price increases
averaged about a percent per year, tipping up to 5 percent at the end. From
1969 through 1982, there were four recessions, three of them double-dip,
and one of them, that of 1973–75, swallowing an entire year (1974).
Unemployment naturally surged during these recessions, reaching shocking
peaks of 9 percent in the mid-1970s and 11 percent in the early 1980s.
Consumer prices took off like a moonshot. From the time of the lunar
rocket in 1969 until 1982, the increases were fully 165 percent—nearly 8
percent per year. It was true, apparently, that the economy of the 1950s
and the 1960s had been careening toward crisis all along. Stagflation in
the 1970s through the early 1980s showed it.
Laffer therefore came into his own as a beacon of contrarian wisdom in
these changed circumstances—perhaps one could suppose. This is not
what occurred. Rather, the profession of academic economics all but
expectorated him from its ranks. The great 1970s stagflation, at least over
its first phase, when the public was still somewhat quiescent about it, func-
tioned as a vindication of the king macroeconomic theories that had been
crying crisis ever since postwar prosperity had gotten dismayingly regular.
The calls welled up for the assistance of these theories in the early 1970s.
Budget and tax policy had to be adjusted toward full employment—
Keynesianism was in its cockpit. The Federal Reserve sure has made a mess
of things now and it needs rules—monetarism had been waiting for this its
whole life.
Laffer and to be sure his redoubtable colleague Mundell were true
enough to themselves to point out that the stagflation of the 1970s had
come care of the specific “reform” which macroeconomics had been bay-
ing for and then finally got. In 1971, the United States stopped redemp-
tions in gold for dollars, ending the gold standard. And within a
year-and-a-half, by early 1973, all major currencies had abandoned fixed
rates of exchange to one another. Now currencies “floated,” having a new
value at every moment in the marketplace and inconvertible in gold or
anything else—as had been the clear and interminably repeated recom-
mendation of the macroeconomic profession for the past decade. There
had been no crisis brewing in the economy, Laffer and Mundell said.
Rather, the economy met a fate that the establishment of professional eco-
nomics had engineered for it by means of maladroit policy.
Laffer’s basic diagnosis was twofold. Inflation came care of “devalua-
tion,” or a currency trading on the markets against other currencies for
less than previously. Laffer spelled out, in a series of works in the early
1970s, how a domestic economy’s “relative price structure,” what each
good and service costs in terms of every other good and service in the
economy, generally stays stable. Therefore when imports become more
expensive, as happens given a currency devaluation, the prices of all the
other goods in the domestic economy go up to maintain the relative price
structure against those imported goods. He found that numerically, the
10 B. DOMITROVIC
levels were exact. If a currency devalues by 10 percent against the curren-

cies of its major trading partners, the domestic price level will increase by
10 percent within the devaluing country.
Stagnation, Laffer and Mundell reasoned together, came from the
interaction of inflation with the tax code, which was for the great part, in
the United States, “un-indexed” for inflation. If there was a 10 percent
inflation and workers got 10 percent raises to make up for it, the 10 per-
cent raises faced “marginal” rates on a progressive income-tax schedule
that were higher than the average rate those workers had been paying in
taxes. Therefore, the raises did not cover the increase in prices. People
responded to this sort of development by among other things buying less,
lowering output. If, alternatively, companies paid even more to keep their
employees whole, profit margins went negative, forcing layoffs and lower-
ing stock prices. The problem was more severe with respect to capital-
gains taxation. And it all stemmed from the cashiering of gold and fixed
exchange rates.
Cui bono—a central question in source analysis. “Who benefits” when
an action is taken? To the historian, understanding who benefits is the
simple path to causation. If somebody benefits from a situation, then that
somebody is a strong candidate for having caused that situation. Economics
was prestigious in the late 1960s, about that there can be no doubt. Ivy
League universities, named professorial chairs, top journals, grants, col-
umns in the newsmagazines, places in government and even in business—
all these bourgeois baubles had come to the profession in profusion by the
1960s. But economics was also misplaced in the world. Its major macro-
economic schools offered diagnoses that assumed a market tendency
toward depression, or at least considerable variation in economic perfor-
mance. The propensity for making such diagnoses reflected origins in the
debates of the 1930s, but also a rigidity in dealing with a changing world—
not to mention a desire to claim structural relevance for economics. When
postwar prosperity emerged, the macroeconomists of the major schools
either had to claim credit for the development, or the run had to end for
them to remain vindicated. In the offing both things happened. On simple
cui bono grounds, the question in regard to stagflation is why. Not only
does it appear that macroeconomics played a major role in causing stagfla-
tion; it also appears that it was in its narrow self-interest to court and take
on such a role.
Under the pretext that it was discovered that he had never finished his
Stanford Ph.D. degree, Laffer became a persona non grata at Chicago
after 1971. He cast around for other university appointments, landing one
at the University of Southern California in 1976. In the meantime, he
pressed on with work along the lines he had done prior to 1971, this time
under the auspices of an urgent problem that had to be solved. The nation
had to go back to fixed rates and probably gold, and it had to focus on
real-life production instead of some succession of policy fixes recom-
mended by an economic-advisory elite. He had a hard time getting his
work past peer review—it had been so easy before 1971—but he had alter-
native audiences care of his spell at OMB. There he had become acquainted
not only with major players in government, such as Richard M. Nixon and
Gerald R. Ford administration officials Shultz, Donald H. Rumsfeld, and
Richard Cheney. He also got to know major journalists, above all the new
leadership of the editorial page of the Wall Street Journal, Robert L. Bartley
and Jude Wanniski.
Laffer started telling these people about his economics. As stagflation
worsened, especially after the final collapse of fixed rates in early 1973,
such high officials and thought leaders gave Laffer all sorts of attention.
He found new platforms, such as the Journal editorial page, private semi-
nars to rising Members of Congress and presidential officials, and legisla-
tive testimony. As the public found the huge double-dip inflationary
recession of 1973–75 increasingly infuriating, Laffer started to become a
national sage. It was sometime in this period that he first sketched out his
curve relating tax rates against tax revenues, the “Laffer curve,” one of the
most famous economics graphs—in terms of its popular recognizability—
of all time. A contribution of this volume is to present the earliest extant
version of the Laffer curve that has yet been discovered. Lore has it that
Laffer first sketched the curve, sometime in 1974, “on the back of a paper
napkin,” thanks to the recollection of Wanniski. The evidence here shows
that Laffer had actually worked his curve out a great deal in modelling
beforehand.7
Arthur Laffer has a twofold notoriety in modern American economic
history. In the first place, he drew his curve. It got so much attention in
the popular press in the late 1970s and early 1980s that, according to the
calculations of economist Robert Shiller, it rivalled the chatter over major
contemporaneous popular-cultural fads such as the Rubik’s cube. In the
second place, Laffer was the one who introduced former California gover-
nor Ronald Reagan to the idea of cutting tax rates, and he assisted Reagan
as an advisor through his victory in the presidential election in 1980 and
his two-term presidency thereafter. Reagan had scarcely toyed with
12 B. DOMITROVIC
cutting taxes, in practice as governor and as a promise on the presidential

campaign stump in 1976, until on the arrangement of handlers who knew
Laffer, Reagan was introduced to the thirty-five-year-old economist.
Laffer made his case, and the germ of the signature Reagan economic
policy—serial tax-rate cuts—took form as Reagan plotted his 1980 run.8
The Laffer of the time before he met Reagan is the subject of this book.
It asks the question, where did this figure come from? And in particular,
what was the source and origin of the views in which Laffer was so confi-
dent, and which proved so influential, in the arena of national politics in
the late 1970s and the 1980s? The answer to these questions lies in the
evidence Laffer set down in the eventful first phase of his career, from his
papers published and unpublished, the government reports and memo-
randa he drew up, and the notes (such as those pertaining to the Laffer
curve) that he set down in private but which we now have in the archives.
The evidence comes on thick beginning in 1966, when as a Stanford grad-
uate student Laffer first read Mundell’s paper on “Growth and the Balance
of Payments” and, adoring it, decided that he had to get to Chicago and
be Mundell’s colleague. This phase of his career ended as Laffer departed
from Chicago ten years later, in 1976, decamping to an endowed chair at
the University of Southern California and settling into the social circle
of Ronald and Nancy Reagan. Perhaps as a collateral matter, the history of
the first ten years of Laffer’s career must also be in good part a history of
the unaccountably intense debates surrounding the international mone-
tary system in the 1960s through the early 1970s. Outside of a handful of
dedicated insiders in the likes of the International Monetary Fund, few
people talk about the international monetary system today. It is perhaps
difficult to convey how current, how imperative, was the issue, in the
organs of intellectual and policy discussion in the late 1960s, of what kind
of monetary system the world should have. It was a vogue issue then, and
a minor one now. In the years before he drew his Laffer curve, this young
economist had gotten terribly involved in the preeminent macroeconomic
debate of the final years of the generation-long boom after World War II.
As for the historiography that pertains to Laffer and the tradition of
“supply-side economics” that he is rightly understood, with Mundell, to
have captained, it has increased in extent and sophistication in recent
years. However, the subject area has an unfortunate tendency to draw out
methodological mediocrity from the researchers who study it. The simple
problem is this: scholarly inquiries into the history of Laffer and his sup-
ply-side economics movement (as it came to be referred to after 1976)
have called on, in total, a small fraction of the possible sources. Reading a
sample of a theoretician’s words will not equip the researcher to confer
historical understanding; reading pertinent sources in fullness is a neces-
sary condition of interpreting a few well. This is an axiom of historical
methodology. There is a peremptory quality, a hastiness in historiography
about supply-side economics and its practitioners, as if the conclusions are
obvious. These people over-promised, were amateurish, or were in the
pocket of the business establishment—to linger on sources after citing a
few is unnecessary.9
Yet to linger on sources in this case is to begin to reveal profundity. And
if the economics of Laffer, and that of his colleagues, was profound to
some minimum degree, then the standard argumentative apparatus about
supply-side economics being a “crank” movement that derailed the
enlightened march of wisdom into policy via professionalization meets a
formidable challenge. But the stakes are greater than this. In the early part
of his career, and to an extent later, Laffer was an evocative participant in
a major sociological transformation that was working its way through the
United States. He was a high member of a new kind of elite, that of top
academic economists, making a bid for relevance beyond any those in this
station had claimed before, and at the expense of traditional social elites
that were at the same time confronting their own impending decadence.
In the balance hung the fate of a country grown accustomed to epochal
prosperity.
Notes
1. Philip Roth, Novels & Stories 1959–1962 (New York: Library of America,
2005), 21, 37, 108.
2. Robert A. Mundell, “The Composition of International Reserves and the
Future of the Dollar,” Guidelines for International Monetary Reform:
Hearings before the Subcommittee on International Exchange and Payments
of the Joint Economic Committee, July 28, 1965, p. 48.
3. Traditionally, the definition of the Keynesian liquidity trap is narrow and
technical, referring to the near equivalence in the rate of return among
interest-bearing instruments and cash. Given that Keynes’s observations
about the liquidity preference involved comments on the slack nature of
investment demand from the multi-generational rich, the term probably
should refer to the general need, late in stages of extended economic devel-
opment, for high rates of return to get the settled rich to part with their
money via investment. In this sense is the term “liquidity trap” used in this
14 B. DOMITROVIC
work. As Keynes wrote in the General Theory: “Not only is the marginal
propensity to consume weaker in a wealthy community, but owing to its
accumulation of capital being already larger, the opportunities for further
investment are less attractive unless the rate of interest”—on comparatively
passive financial assets—“falls at a sufficiently rapid rate.” John Maynard
Keynes, The General Theory of Employment, Interest and Money (1936), ch.
3 part II, http://gutenberg.net.au/ebooks03/0300071h/printall.html.
4. Milton Friedman, “A Monetary and Fiscal Framework for Economic
Stability,” AER 38, no. 3 (June 1948), 245–47.
5. The term “benign neglect” became current in international monetary
reform circles after March 1970, when Nixon advisor Daniel P. Moynihan
introduced it in the context of racial and urban policy.
6. Arthur B. Laffer, “Two Arguments for Fixed Rates,” in The Economics of
Common Currencies, eds. Harry G. Johnson and Alexander K. Swoboda
(Cambridge, Mass: Harvard University Press, 1973), 32; “The U.S. Balance
of Payments—A Financial Center View,” Law and Contemporary Problems
34, no. 1 (Winter 1969), 46; “An Anti-Traditional Theory of the Balance of
Payments Under Fixed Exchange Rates,” unpublished manuscript, February
1969, Laffer archive, p. 22.
7. Jude Wanniski, The Way the World Works: How Economies Fail—and Succeed
(New York: Basic Books, 1978), 288.
8. Robert J. Shiller, “Narrative Economics,” Cowles Foundation Discussion
Paper No. 2069, Yale University, p. 24.
9. Among methodologically rigorous books the leader is Monica Prasad,
Starving the Beast: Ronald Reagan and the Tax Cut Revolution (New York:
Russell Sage Foundation, 2018). Prasad, a sociologist, makes innovative use
of polling data in assessing the popularity of the supply-side program.
Astonishingly, she has to dedicate attention to discrediting, by means of
evidence, the presumption that there was a racial element to the supply-side
revolution. Her efforts in this regard suggest that a reason that the history
of supply-side economics has not been treated in scholarship as expansively
as might befit the most significant economic-policy revolution since the
New Deal is that it did not evince racial animus. As Nancy MacLean’s noto-
rious Democracy in Chains: The Deep History of the Radical Right’s Stealth
Plan for America (New York: Viking, 2017) indicated, the mood of scholar-
ship may well be that the free-market movement is to be studied expansively
only in those areas in which it is suggestive (even if by means of dubious
historical method) of such animus. Another historiographical motif is that
business pressure groups’ adoption of the cause of supply-side economics
conveyed the movement to the fore of policy. The effect is to minimize the
intellectual-historical status of supply-side economics. See the relevant
sections of Benjamin C. Waterhouse, Lobbying America: The Politics of

Business from Nixon to NAFTA (Princeton: Princeton University Press,

2014) and Kim Phillips-Fein, Invisible Hands: The Businessmen’s Crusade
Against the New Deal (New York: W.W. Norton, 2009). Thinness of sourc-
ing plagues the supply-side-history section of Daniel T. Rodgers, Age of
Fracture (Cambridge, Mass.: Harvard University Press, 2012). Making a
hash of evidence is Jason Stahl, Right Moves: The Conservative Think Tank in
American Political Culture since 1945 (Chapel Hill: University of North
Carolina Press, 2016), within which the premise of an extended criticism of
Laffer, Mundell, and Wanniski is a conflation of the balance of payments
with the budget deficit (p. 98). Name-calling over method is the “trickle-
down” section of John Quiggin, Zombie Economics: How Dead Ideas Still
Walk Among Us (Princeton: Princeton University Press, 2012). A history
that explicitly takes Keynesianism as “quite profound” and supply-side eco-
nomics as “less a new wisdom” and a “catechism” with political “fish to fry”
is Michael A. Bernstein, A Perilous Progress: Economists and Public Purpose
in Twentieth- Century America (Princeton: Princeton University Press,
2001), 165, 167. For a history of supply-side economics, see Brian
Domitrovic, Econoclasts: The Rebels Who Sparked the Supply-Side Revolution
and Restored American Prosperity (Wilmington, DE: ISI Books, 2009), and
for the legacy of the movement see Bruce Bartlett, The New American
Economy: The Failure of Reaganomics and a New Way Forward (New York:
St. Martin’s Press, 2009), and Binyamin Appelbaum, The Economists’ Hour:
False Prophets, Free Markets, and the Fracture of Society (New York: Little,
Brown, 2019).
CHAPTER 2
In the Scope of Paul Baran
Arthur Laffer’s career in economics might be said to have begun with a

speech on economic policy by the president of the United States. On June
11, 1962, Laffer was present, as an undergraduate student, when John
F. Kennedy gave his Yale University commencement address in which he
outlined views that had come to his attention about having a “high” mon-
etary policy and a “flexible” fiscal policy. This speech has gone down in
history as the one that telegraphed the economic policy that Kennedy
soon adopted, of a strong gold dollar coupled with tax-rate cuts (the
essence of what would be called “supply-side economics” in the next
decade), the policy that accompanied early stages of the 1960s eco-
nomic boom.1
Laffer attended the 1962 commencement, including the JFK speech
(which he does not recall making an impression), because it was the grad-
uation of the class with which he had come in at the age of eighteen in the
fall of 1958. Laffer was not graduating with this original class of his. He
had just completed a Wanderjahr in Germany after two years of poor
grades at Yale in his sophomore and junior years, and his senior year
awaited him. In that year, he would switch his major from engineering to
economics.
Laffer had grown up in an atmosphere of big business. He was born in
August 1940 to Molly and William G. Laffer, in Youngstown, Ohio,
where his father was in a brief stint as an executive at a beer company. The
© The Author(s), under exclusive license to Springer Nature 17

Switzerland AG 2021
B. Domitrovic, The Emergence of Arthur Laffer, Archival Insights
into the Evolution of Economics,
https://doi.org/10.1007/978-3-030-65554-9_2
18 B. DOMITROVIC
next year the family moved to Cleveland, his parents’ hometown. His
father was returning to a previous employer, the Cleveland Graphite
Bronze Company, to supervise a manufacturing unit. Cleveland Graphite
Bronze, founded in 1919, produced bearings and bushings for the auto-
motive industry. It expanded greatly with World War II, tripling its work-
force to 7500, inclusive of hiring hundreds of women to work in its
aircraft-parts division. It experienced unique union difficulties during the
war, an experience that steeled William Laffer’s resolve against “right-to-
work”—the prerogative of a worker not to join a union in a predominantly
union shop—a resolve not passed down to his son. In September 1944,
the United States War department took temporary control of the opera-
tions of the company—the first such takeover in Ohio during the war—as
5000 Cleveland Graphite Bronze workers went on strike.
The pretext of the strike was small: the company had fired a worker
after a string of violations. The animus behind the strike, however,
appeared to derive from competition among unions. Leadership of the
company’s workers’ major union, the Mechanics Educational Society of
America (MESA), was concerned about inroads that Congress of Industrial
Organization affiliates were making among the rank-and-file at the com-
pany. MESA decided to show its strength as an organization by calling a
strike as American military forces were making strides in all theatres and
required uninterrupted materiel shipments. By forcing the company into
federal control, MESA showed that it could push it around. After two
months, MESA and the company agreed to cooperate, and the govern-
ment overseers left. Afterwards, the company prevailed in arbitration in
the original complaint that had touched off the strike.
William Laffer endured these developments, and clearly strove to incor-
porate their lessons into his conception of business strategy, as a member
of the United States War Production Board and as Cleveland Graphite
Bronze’s chief planning officer, a promotion he gained in 1943. In 1955,
he was named president of the firm, which several years earlier had renamed
itself the Clevite Corporation. The company increasingly specialized in
defense and space-program products. It developed an acoustic torpedo for
use against submarines, circuit boards for submarines, and transistors and
fuel-cell electrodes for rockets. In 1959, it made a major expansion of its
Waltham, Massachusetts, transistor factory, which would employ 1500
persons. In 1960, Clevite bought Shockley Transistor of Palo Alto,
California, the developer of the transistor, and three years removed from
its suffering the departure of the “traitorous eight” of engineers to
2 IN THE SCOPE OF PAUL BARAN 19
Fairchild Semiconductor, in the episode generally understood today as the

founding event of Silicon Valley. In that year, per Fortune magazine,
Clevite was the 443rd biggest industrial company in the United States,
with sales of some $94 million and profits of $6.8 million. It employed
6500 persons, placing it 325th among industrial firms.2
Arthur Laffer recalls that his father approved of certain central aspects
of the political-economic policy status quo that prevailed while he led
Clevite and was chairman at its successor after 1969, Gould, Inc. Surely
with the bitter 1944 strike experiences in mind, his father made clear that
he preferred to negotiate with one representative of the employees, one
union. He opposed right-to-work legislation in Ohio, which failed in a
ballot initiative in 1958, on the grounds that it would lead to efficiency
losses. These would derive from management’s having to scramble in
making multiple labor deals with individual employees as well as perhaps
several unions. Along similar lines, when the Nixon administration pro-
posed wage-and-price controls while Arthur Laffer was working within it
in the early 1970s, William Laffer expressed his preference for the policy,
believing that federal ceilings on wages would temper union tendencies to
ask for more. William Laffer’s career testified to widely held corporate-
executive attitudes in the post-World War II period. Given that companies
had large, quasi-permanent workforces, it was easiest to deal with them as
aggregates. And given that unions can over-ask for wages, benefits, and
time reductions (and call strikes to jockey for position against rival unions),
federal assistance in limiting their bargaining power was welcome. Also
representative of big business in this era, especially concerning enterprises
involved in high technology, Clevite’s revenues, earnings, and operations
in good part flowed from government contracts in defense and space.
With his wife Molly, William Laffer was a (Ohio Senator) Robert A. Taft
Republican and thought taxes were too high. But he also felt, Laffer
recalls, that there was opportunity to collect profits “beyond taxes,” even
in the 1950s and early 1960s when income-tax rates on corporations were
as high as 52 percent and on individuals 91 percent. This was also consis-
tent with the business-government nexus of the period, the issue President
Dwight D. Eisenhower touched on in his 1961 lament over the “military-
industrial complex.” Government contracts as a matter of routine consid-
ered the total costs a contractor faced and provided that a profit margin
remained. If costs via taxes on employee compensation and company prof-
its were high, government contracts took these costs into account in
20 B. DOMITROVIC
calculating the profit residual. The priority in these times was on contacts
at and relationships with government agencies and familiarity and experi-
ence with bureaucratic procedures. Lacking these advantages as a matter
of definition, startup companies faced the costs of high tax rates on their
own, putting them at a disadvantage to the established competitors they
sought to challenge or even topple.
The Fortune 500 list of the biggest companies in the country, which
first appeared in 1955 and on which Clevite regularly ranked in the 400
range, had more firms from Ohio in these years than from any other state
outside of New York, Illinois, and Pennsylvania. And Cleveland had more
names on the list than any other city in Ohio (in 1960, sixteen). The
Cleveland in which Arthur Laffer grew up in an executive’s family remained
at the apex of its business significance that had been established in the
heyday of the American industrial revolution in the latter part of the cen-
tury before, when John D. Rockefeller organized Standard Oil in that city,
Euclid Avenue’s “millionaires row” of homes set a new standard of execu-
tive opulence, and the streetcar suburb was pioneered. Laffer’s mother
Molly’s father Arthur B. Betz (who died in 1947) was a major steel ware-
houser in Cleveland, owning a series of sheds that kept giant pieces of
equipment on call for Great Lakes freighters when their engine compo-
nents failed.
Arthur Betz was self-made. His first job was a runner at corporate
offices of a metals firm later bought out by United States Steel. William
Laffer’s father had been a brain surgeon. The family remembers his
remarkable collection of diseased brains, which this Dr. Laffer would
study, kept in his research space at home in bell jars with formaldehyde.
Mertice Laffer, Arthur’s grandmother, was a notable suffragist, her 1916
“Votes For Women” attire now held in a Cleveland museum. Both the
Betz and Laffer families were Presbyterian and came from smaller internal
Ohio towns that had received German immigrants in the early nineteenth
century. A Laffer ancestor’s home in Hanover, Ohio, was a stop on the
underground railroad for the fugitive enslaved. In keeping with the liberal
family tradition on the matter of race, Laffer’s father was the main finan-
cier of the Forest City Hospital in Cleveland (opened 1957), which served
a consortium of African-American doctors seeking greater involvement in
all aspects of hospital services and management. By the time of Arthur’s
birth, both the Betz and Laffer families were firmly Republican in terms of
their political orientation. Molly ran three times at the top of the straight-
ticket Republican slate for the Ohio House of Representatives. The slate
lost on each occasion in this Democratic-dominant region. Twice she was

grand-jury foreman for Cleveland’s Cuyahoga County. In 1952, she was a
Republican National Convention alternate delegate for presidential candi-
date Taft. For four years, she was head of the Western Reserve Women’s
Republican Club, probably the largest such organization in the country
with a membership that swelled as high as 5000.3
Arthur Laffer was prepped at the Hawken and University Schools, at
the latter of which William Laffer served as a trustee. In heading to Yale
for college, Arthur followed the traditional course of male students
prepped in the former Western Reserve, the slice of northeastern Ohio
which Connecticut had claimed in colonial times and within which in
1796 Yale alumnus Moses Cleaveland surveyed a site for a city (which
would bear his name leaving out the first “a”). Likewise prepped at the
University School, Laffer’s father and Arthur’s two brothers had all three
gone to Yale. Molly Betz had attended the Laurel School in Shaker Heights
near Cleveland and finished at a school in Pennsylvania. Arthur’s selection
of engineering as a major came on the recommendation of his brother and
may have been influenced by the engineering focus of his father’s firm,
Clevite. Of the three children in the family, all boys, Arthur was the young-
est by eight years and the one distinctly affable. As he got older and it
became clear that he had prospects, he and his parents thought of them-
selves as “a team,” advancing in the world as one might in an atmosphere
of talent, ancestry, and privilege.
Laffer recalls that his University School education “carried” him
through his first year at Yale, in which he got Bs and Cs and two Ds for
grades. But sophomore and junior years, he struggled with Cs and Ds,
save a B in one of two economics courses he took over his first three years
and in one math class. His father told him that he had to shape up or leave
college. Father and son agreed that the son should see some of the world.
Young Laffer headed off to Germany in the summer of 1961, for an office-
clerk internship with a division of Clevite’s, Intermetall in southwestern
West Germany. In Berlin that August, he saw the construction of the
Soviet wall. Laffer returned to Cleveland telling his father that he wanted
to take a full year in Germany. His father disagreed, but a Yale dean con-
curred with the undergraduate, and Arthur Laffer returned to the Federal
Republic in September.
He enrolled in the University of Munich and, tired of engineering,
signed up for classes in Volkswirtschaft and Betriebswirtschaft, correspond-
ing to economics and business in the American system. He found that
22 B. DOMITROVIC
after several of the large lectures’ meetings, he was one of a handful of

students who consistently came to class. It was an indication that the sub-
ject area was interesting him. He took two term’s worth of these courses,
in German, a language in which he was becoming proficient. At the end of
the spring term he returned to the United States, assuring his parents that
he was ready to apply himself in college as he had not before. He went to
New Haven for the commencement, saw Kennedy speak, and took sum-
mer classes at Western Reserve University in Cleveland. In his senior year,
1962–1963, he took nine economics courses and completed his Yale
College bachelor’s degree with the highest grades on his record, As and Bs.
In the fall of 1962, two Yale economists returned from Washington,
DC after serving on Kennedy’s Council of Economic Advisers (CEA).
These were Professors James Tobin as a member of the three-person CEA
and Arthur Okun as a senior staff economist. In economics lore to the
present day, these were the “glory days” (in President Barack Obama’s
CEA chair Christina Romer’s phrase) of the CEA. Tobin and his col-
leagues introduced to Kennedy a “New Economics,” as dubbed by the
press, and as described by Tobin as seeking “to liberate federal fiscal policy
from restrictive guidelines unrelated to the performance of the economy”
(specifically the “taboo on deficit spending”) as well as to “liberate mon-
etary policy and to focus it squarely on the same macroeconomic objec-
tives that should guide fiscal policy.” Budget deficits occasioned by
temporary income-tax cuts and infrastructure spending, and monetary
policy focusing on low long-term rates that encouraged capital commit-
ments while dispensing with concern for the Bretton Woods system of
fixed exchange rates and a dollar anchored in gold—these were the fea-
tures of the New Economics personified by Tobin, Okun, and their col-
leagues on the Kennedy Council, including chair Walter Heller and staff
economist Robert Solow.4
Tobin interpreted Kennedy’s Yale commencement address of June
1962 as drawing a distinction between the American business class pre-
sumptively represented by the Yale alumni and the intellectual bearers of
economic ideas to whom Kennedy was striving to give proper hearing. As
Tobin reflected upon it in 1974: “In his famous Yale Commencement
speech in 1962, Kennedy had solicited a hostile audience to adopt, or at
least tolerate, a pragmatic approach to economic policy in place of the
emotions, slogans, myths, and shibboleths that had shaped business and
financial attitudes ever since 1936.” Likewise it was “Kennedy’s feeling,
expressed in his 1962 Yale Commencement address, that the solutions of
many national problems were blocked more by irrational ideology than by
real conflict of interest and could be found by removing ideological blind-

ers to dispassionate pragmatic analysis.” By the spring of 1962, per Tobin,
Kennedy “had become intellectually convinced of the Council’s case.
Innocent of economics on inauguration day, he was an interested and apt
pupil of the professors in the Executive Office Building.”5
As Kennedy encapsulated it in his Yale address, according to Tobin, the
vanguard economists in the halls of power in 1962 had excellent new ideas
about how to achieve growth and prosperity, while business leaders had
gotten stuck on economic-policy fixations. The latter group was overly
concerned that there not be a federal budget deficit and that the redeem-
ability of the dollar in gold at $35 for an ounce of gold to foreign authori-
ties (as in the Bretton Woods arrangements currently prevailing) not be
imperiled. Business leaders’ immovability on these issues was so sure that
it had to come from “emotions,” “myths,” and “irrational ideology” as
opposed to “dispassionate pragmatic analysis” such as put forth by the
New Economists. This was particularly clear because these economists had
shown, Tobin felt convincingly to Kennedy, how subtle ways to run a defi-
cit and risk the gold dollar would yield non-inflationary growth above the
postwar norm. This norm had not been particularly distinguished to begin
with, Tobin noted, given that there were four recessions from 1949–1960.
The accuracy of Tobin’s characterizations in this vein are open for
debate. As for Kennedy’s address, it was jocose to the point of chummi-
ness. Its main policy point was that a “flexible” fiscal policy (presumably
implying deficits) could be matched with a “high” monetary policy (pre-
sumably implying a defense of the dollar), splitting the difference between
the groups Tobin had pitted against each other. Tobin’s words do, how-
ever, suggest a common perception, a mentalité, that may well have held
sway in the economics establishment, including in its leading section at
Yale, as Arthur Laffer studied within it quite intensively as a senior.
Laffer remembers that Tobin lectured in one of his classes in the fall of
1962. The topic was “Operation Twist,” the Federal Reserve program of
the year before to keep long-term rates low so as to encourage investment
and short rates high to manage the balance of payments. Laffer recalls
finding the explanation he was given that day justifying the policy implau-
sible. Here was a student who had come from the social context of big-
business leadership, the stodgy crowd according to Tobin, studying Yale
economics, including hearing Tobin’s lecture, and letting his quizzicality
have play. Laffer remembers enjoying his senior seminar from Stanley
Engerman and believes that the one low grade on his comprehensive exam
at the end of his college career came from Arthur Okun.
24 B. DOMITROVIC
Elective Affinities
As he met success in his senior year at Yale, Laffer decided that he wanted
to go to business school and applied to Stanford University’s. Stanford
accepted him on the condition that his senior-year grades came in strong,
which they did. In the fall of 1963, Laffer enrolled in Stanford’s Master of
Business Administration program. He was marking out a path to the kind
of executive career pursued by his father. But atypically for a business stu-
dent, and building on the enthusiasm of the nine courses in economics he
had taken the year before in college, he began taking graduate classes in
the economics department. The first was an economic development class
from Paul A. Baran, who, Laffer recalls, ordinarily but not in this case
detested business students.
Baran was a noted Marxist and to some degree advertised himself as
one of the very few open Marxists on a major American university faculty.
Born in the Russian empire to a father who was a Menshevik activist, he
studied in Weimar Germany and the Soviet Union in the 1920s. One of
his mentors was Friedrich Pollock, a principal of the group that had
recently formed the Institut für Sozialforschung (Institute for Social
Research) in Frankfurt am Main and would come to be widely known as
the Frankfurt School. Pollock was the member of the Institut responsible
for developing its signature views on “state capitalism,” a term that had
recently come into currency and referring to the methods by which large
corporations collude with governments to forestall the natural processes
of social revolution in advanced industrial economies. Baran avowed in
1951 that “my associations at the university of Frankfurt am Main in
1929,” inclusive of a fellowship and an assistantship at the Institut, “had a
significant impact on my political thinking.”6
Baran studied and taught mainly in Germany in the 1920s and early
1930s, completing a doctorate in Berlin with a dissertation on left-wing
notions of economic planning. He left the country in 1933. He came to
the United States in 1939, worked in various economic-research positions
for the federal government and the Federal Reserve, and was appointed to
the Stanford economics faculty in 1949. He attained the rank of professor
in 1951. Baran published two monographs, The Political Economy of
Growth (1957) and the posthumous Monopoly Capital (1966), co-
authored and finished by the fervently left-wing political economist Paul
Sweezy. Both books make unmistakable Baran’s main intellectual interests
in economics. His central concern was the economic “surplus,” or the
amount of production in an economy beyond the provision of subsistence

needs. In Monopoly Capital, Baran and Sweezy estimated this surplus reg-
ularly to average about 50 percent of total economic output in the
United States.
The existence of a surplus, to Baran, was welcome, reflecting an econ-
omy acting on its capability of being productive. The problem was how it
was disposed of. Typically, in the major capitalist economies, in Baran’s
analysis, the surplus came to waste. Large portions of it went to such
activities as marketing, padding expense accounts, and prompting con-
sumers to buy things they did not need, as well as government-spending
initiatives that propped up the very same activities or were otherwise use-
less or counterproductive. (During World War II, Baran had worked for
John Kenneth Galbraith, whose 1958 Affluent Society expressed similar
views.) As Baran and Sweezy offered in an example in Monopoly Capital,
government “spending on highways has gone beyond any rational con-
ception of social need. … The cancerous growth of the automobile com-
plex. … would have been impossible if government spending for the
required highways had been limited and curtailed as the oligarchy has
limited and curtailed spending for other civilian purposes.” Automobile
manufacturers promoted demand for cars to an unseemly degree, and the
government accommodated it.
Baran and Sweezy made similar points about education. They asserted
that a central function of the provision of public schooling, via tax reve-
nue, was to accentuate the prestige of private schooling. Corporations that
generated excess revenue beyond the costs of production and sales used a
portion of that excess to support their executives’ lifestyles. This support
included conceding to school taxation, since mass public schooling con-
ferred distinctiveness to executives who educated their children privately.
As Baran and Sweezy put it, such maneuvering “ensures the inequality of
education so vitally necessary to buttress the general inequality which is
the heart and core of the whole system.” The disposition of the surplus,
overall, was a tale of extensive inegalitarian waste.7
An optimal system would be one in which the surplus beyond basic
needs is allocated as precisely as possible according to the investment and
consumption priorities that a good society should have. Baran was certain
that such priorities were not the ones the United States he observed had,
but it was important that the country had a surplus. Given the existence of
a surplus, the pressing matter concerned distribution, planning, and con-
sciousness. As he wrote in The Political Economy of Growth, the ideal
26 B. DOMITROVIC
“socialist government is thus placed in the position of deciding on the

share of aggregate output to be withdrawn from consumption and devoted
to purposes of investment (and/or collective utilization).” A good social-
ist government would dispense with the overdone marketing and so forth
and see where surplus production could be concentrated in ways that
enhanced real human flourishing, to use the current expression. Baran
thought that proper socialism could involve a decrease in production, in
that marketing and its likes can take the demand for production to levels
better sacrificed for leisure and cultural pursuits.8
Baran’s work had the impress of political economic left-Hegelianism in
its mid-modern form, such as developed by Pollock and the Frankfurt
School. Production per se was not an issue. Capitalism had proven that it
can be plenty productive. The question was whether it could figure out
how to be productive in the right way, once basic needs were taken care
of. This was the problem of “late capitalism,” a concept that Pollock and
his colleagues had helped to popularize. In Frankfurt School theory, pro-
duction beyond basic needs (Baran’s surplus) under the conditions of late
capitalism has an unfortunate potency: it can warp the attitudes of produc-
ers and consumers alike. The ability to be plenty productive tempts pro-
ducers to make fundamentally useless but superficially attractive goods
and consumers to demand them. If the society in question lacks the proper
attitudinal structure, people will give in to such temptations. The central
matter in late capitalism, from this perspective, was therefore not achiev-
ing some level of output, but rather the quality of “consciousness” in the
Hegelian sense whereby persons in a society are prone to make good
choices. Baran’s economics required the development of a good (or “true”
in the Hegelian terminology) consciousness within the economic-planning
establishment and if possible across society at large. Baran died in March
1964, poetically at the California home of Leo Löwenthal, a Frankfurt
School member keen to demonstrate the ways in which true consciousness
might be developed and lived by in the postwar American scene.
Laffer came into Baran’s course on economic development, Economics
215, in the fall quarter of 1963 perhaps oblivious to this vanguard of left-
wing economic philosophy. But as he has attested over the years, he both
found Baran’s worldview fascinating and strove that academic quarter to
learn and recapitulate it as well as he could. He also got along with Baran,
the two taking the opportunity to speak in German and talk about
Mitteleuropa. We do not possess the work Laffer produced for this course,
which was probably confined to exams. As Laffer’s economics unfolded
over the next two decades, it was certainly not neo-Marxian. But the elec-
tive affinities with Baran’s economics are unmistakable.
The central item in Laffer’s body of work, the Laffer curve, developed
from studies of “Harberger triangles” illustrating the “deadweight loss”
from an imposition of a tax. This is a topic in a latter chapter of this book.
Laffer’s core idea, the beating heart of the Laffer curve, is that tax rates
cause changes in behavior that necessarily involve losses. There may be
gains, if the revenues used from tax collections yield utilities greater than
the losses, but there inescapably are losses. The first Laffer curve as Laffer
outlined it in his private notes around 1974 had immediately below it a
von Neumann-Morgenstern general utility function requiring a greater
than null result from any tax-rate change.
The central matter in tax policy, as Laffer’s theory in this area would
develop, was that there must be a clear, accurate, and perhaps even enlight-
ened assessment of what exactly will result comprehensively in the econ-
omy from a tax change. If an increase in the rate of income tax will result
in further revenue, the issue of whether the revenue will be spent well is
essential. If a change in a federal rate affects collections in other federal tax
jurisdictions, in state and local tax collections, and in tax systems abroad,
to what effect in each case and in total is an essential issue. If a tax rate is
to change, assessing its advisability must involve assessing things at a dis-
tance from the immediate economic domain of that rate, including how
the taking of income and economic activity in general might shift in reac-
tion to the change. Laffer came characteristically to inquire after what the
“secondary, tertiary, and quaternary” effects might be of changes in a tax
rate in one given jurisdiction across the global economy over time. This
was the origin of the fabled “free lunch” of supply-side economics. If tax-
rate cuts broadly eliminate deadweight losses, there is no trade-off between
growth and tax revenues. As economist Robert E. Lucas, who admittedly
had been skeptical of supply-side economics earlier in his career, wrote in
1990 several years before he won the Nobel Prize, “the supply-side econo-
mists … have delivered the largest genuinely free lunch I have seen in 25
years in this business, and I believe we would have a better society if we
followed their advice.”9
Baran for his part asked what was the level of economic production and
whether what was produced beyond necessities was good. The latter may
be a subjective judgment, but such concerns did not immobilize him. He
pursued questions of whether the economic surplus was being dealt with
productively with the relentlessness typifying the fabled Marxist academic.
28 B. DOMITROVIC
Laffer asked similar questions with reminiscent doggedness with respect to

production as it related to tax rates. Laffer asked, for example, if tax rates
go up and production suffers only a little, whether it is because owners of
capital are choosing to rely more on their machines which they have
already paid for to keep churning out product. If this is the case, it must
be understood that the tax-rate increase has specific damaging effects of
depreciating capital and making labor uncompetitive against capital. He
asked if currency devaluations actually encourage imported goods, because
in becoming more expensive, more of them should be produced and less
consumed in foreign countries. He asked if increases in tax rates decrease
the enterprise demand for money, and if therefore events such as the Great
Depression typically blamed on the gold standard had at their root tax
increases that prompted a portfolio-preference for gold.
The parallel between the economics of Baran and Laffer was not exact.
It had the aspect of an elective affinity. The motive force that drove Baran
to demand that the productive surplus beyond necessities be investigated
in its minutiae to see how it might be allocated in stringently enlightened
fashion had a like in Laffer. Some similar basic impulse impelled Laffer to
require that every tax change be interrogated down to the last details as to
its comprehensive economic effects, with everything at the end run
through a comprehensive utility analysis. The final expressions of the eco-
nomics of Baran and Laffer differed in clear respects. Baran was a planner,
Laffer an advocate of market freedom. The basic imperatives behind their
economics were, however, similar. Each of these economists called for a
large surplus that at every aspect of its multifariousness served to an opti-
mal degree the respective principles that they regarded as primary.
The title of Baran’s book, The Political Economy of Growth, captured the
nub of the economics Laffer would develop over the course of his career.
Laffer wanted to know the correlation between the two, between growth
and the specific policy arrangements that are consistent with growth. His
arguments for the soundness of classical monetary systems and the way he
reasoned from his curve would indicate his conclusion that economic pol-
icy that is extensive or presumptuous can stifle growth. Laffer would advo-
cate for restraint in economic policy. To Baran, unenlightened production,
from expense accounts to interstate highways, pointed the way to another
version of restraint. In Baran’s economics, a well-off society should be
more thoughtful about what it desires to produce.
Conceivably Laffer would have had few objections to these standard
examples that Baran gave of the surplus wasted. Expense accounts took
advantage of tax deductibility, and the highways were government spend-

ing. Both tax deductions and government spending were, in language
Laffer would develop in his economic model, “wedges” driven between
the real factors of production. In his model (outlined in the 1970s), the
likes of entrepreneurs seeking to make a good or service that they feel
people truly want or need have a smaller pool of potential managers when
executive recruits are loath to leave their expense-account lifestyle; and
prospective employees for such entrepreneurs have to command a higher
wage than otherwise because they are taxed to pay for government spend-
ing. Baran’s surplus and Laffer’s wedge had similar predicates.
Therefore as Laffer made his transition from Yale to Stanford in the
mid-1960s, he developed preferences among the various approaches of
left-liberal economics. The Tobin approach—holding that business was
incapable of sufficiently clearheaded thought to get economic policy
right—turned him off. As Tobin spelled out quite clearly, the liberal eco-
nomics profession was enlightened; if availed of, it would steer the econ-
omy clear of the policy mistakes business leaders would otherwise incur.
Baran, in contrast, saw attitudinal deficiencies diffused throughout the
economy and policy, presumably including the economics profession itself.
Policy cooperated with primordial economic desires to create the big but
poorly allocated surplus.
To be sure, Baran asserted his own form of special knowledge. Planners
of a Marxian bent were to examine the economic surplus, expose it for
what it was, and rearrange it according to enlightened criteria. Baran was
an able representative of Marxism, a doctrine that has justly come in for
criticism for providing no serious account of the nature of its own enlight-
enment. How were Baran or Sweezy supposed to know how to allocate
the surplus well once they identified it? Rarely in The Political Economy of
Growth or Monopoly Capital is it more than implied or asserted that the
planners will get allocation right. Why they will—what was the mechanism
for getting allocation right—has been from the doctrine’s origins in the
nineteenth century a fatal impossibility of Marxism.
Baran’s weakness in this regard, however, was in important respects less
problematic than Tobin’s lionization of progressive economic wisdom.
Tobin’s claim for the unique enlightenment of economics played on
strongly schematic impressions about sociological roles. People in busi-
ness were not very good at thinking—they were vulnerable to being “irra-
tional.” People in academia were intellectually gifted. A division of labor
obtained in modern society in which those whose specialty was clear
30 B. DOMITROVIC
thinking should shape policy, and those who excelled in the processes of
business should stick to that. The argument was self-serving, arrogating to
economics the mantle of policy.
The justification for Tobin’s claims went unprovided. Presumably, they
rested upon the nature of the professional accoutrements that the disci-
pline had been gaining in recent years. The New Economists and their
colleagues had academic degrees, avant-garde theory (continually updated
Keynesianism), posts at institutions with marked social and intellectual
cachet, a developed mathematical apparatus suggestive of science, peer
review, a prestige hierarchy among the universities and the journals, awards
and distinctions, and posts in government and the highbrow organs of
journalism (Tobin wrote for the New Republic). Acutely processed profes-
sionalization itself was the warrant of economics’ enlightenment. It was a
remarkable bid of afflatus for Tobin to posit that non-economists—busi-
nesspeople—involved in the economy were cursed with the burden of hav-
ing to shake being transfixed by the likes of a “taboo.”
The social-competitive nature of the Tobin position had no counterpart
in the Baran position. Baran did not seek to insult the business commu-
nity’s intellectual capabilities and in the offing make a run for power. He
was more forthright. He declared that a range of standard practices in the
economy was wasteful and recommended trying to think better about
how to use productive resources. He was unable to ground a claim for the
wisdom of Marxist planning, but this problem had dogged Marxism from
the start and was probably endemic to it. If Marxism could prove its wis-
dom, it would have to subject itself to falsifiability (as Karl Popper had
argued), and this ran counter to the agit-prop ethos of the doctrine. Baran
offered no resolution to these standard criticisms of Marxism. But in no
way did he seek to advance his guild at the expense of the business power
elite, as Tobin strove to.
Laffer, that son of a 1950s/60s-era CEO, probably concurred with
Baran’s evidentiary points. Clevite maintained an apartment on 59th
Street in New York, clearly a tax deduction, which Laffer remembers the
family having the run of when he was a boy. And Clevite chased the com-
paratively easy money and oddball projects of the government-contracting
leviathan while elbowing out non-connected smaller companies and start-
ups. These things cannot have appeared to him as expressions of optimal
productivity and entrepreneurship. Baran’s points were intriguing to him.
They showed that such suboptimality, such waste, could be identified in a
first step toward better alternatives.
In later years, Laffer would make a habit of referring to the classical

healing terminology of medicine, namely primum non nocere and vis medi-
catrix naturae, or, respectively, “first do no harm” and “the healing power
of nature.” In the outlook he developed as a pupil of business in his fam-
ily’s household, and as a Stanford MBA student, Laffer probably thought
that business practices could be improved. But there was a great deal of
good that business did produce—the testament of postwar prosperity.
Accordingly as he started to become an economist, he developed a sense
of primum non nocere. And as he perceived that within the profession that
he was bidding to enter numbered practitioners who claimed that they
were essential to the health of the economy, he recalled that non-
interventional processes were the essence of vis medicatrix naturae.
Economics Ph.D.s typically did not hail from the homes of Fortune 500
chief executives. A belief was welling up within this academic group that
American prosperity could scarcely persist without it. Indeed, if this group
was to maintain size and influence, not cultivating such an impression
could risk its very justification.10
The Way to the Ph.D.

As Laffer continued in the MBA program, he kept taking graduate eco-
nomics courses. In the spring of 1964, after Baran had died (Laffer
remembers giving brief remarks at his memorial service), Laffer took his
next one, on money, employment, and income, taught by Moses
Abramovitz. In the 1963–1964 academic year, as he completed his busi-
ness courses, he took four more graduate economics courses. He got his
MBA degree in June 1965 and at that point had completed the required
price-theory course sequence for doctoral students in economics and part
of the sequence in the theory of income and economic fluctuations. He
applied for admission to the Ph.D. program and was accepted. That sum-
mer, he entertained business job offers. The one that most gave him pause
was from the New York investment bank Morgan Stanley. He faced a deci-
sion about pursuing a career in business or in academia, and he chose the
latter, returning to Palo Alto for his doctoral program in the fall.
Laffer recalls that the decision was difficult. The Morgan Stanley offer
was a plum for a new MBA and came with a significant salary. He appreci-
ated his father’s and in general his family’s notable success in business and
did not disdain it. Moreover, he had begun to perceive that expansive new
opportunities were beckoning in business. He picked up on some of them
32 B. DOMITROVIC
in the job he had while a business student. He worked the night watch at
the Clevite Palo Alto facility, that of Shockley Transistor. He got to know
the namesake, William Shockley, the 1956 Nobel laureate in physics for
his joint research in the development of the semiconductor transistor.
At this juncture in his career, Shockley was following ultimately blind
leads into human genetics, and he wore smarting traces of the effect on
him of the departure of the likes of Robert Noyce, Gordon Moore (the
Intel founders), and Eugene Kleiner (the venture capitalist) from his firm
several years earlier. It was apparent that Shockley had been seeding some-
thing quite big, indeed what we now see as the vast technological revolu-
tion centered in Silicon Valley. Laffer thought Shockley a little odd, but
quite interesting, and a window into a world that was coming of age.
Shockley talked with Laffer about Germanium transistors as well as genet-
ics and may have tried to recruit the young business student. The contact
ended when Clevite sold the Shockley outfit to ITT in 1965.
If Laffer’s time on the night watch at Shockley Transistor offered a tip
into a nascent world of entrepreneurial opportunity, it also cemented this
MBA student’s commitment to scholarly economics. Laffer took the job
not only to earn a few dollars, but to do so while he could read in a silent
and unperturbed environment. The night watch job gave him a chance to
master his economic-course syllabi. The business students typically
reserved their extra hours for leisure, networking, or prep-work on an
entrepreneurial idea. Laffer husbanded his extra hours for his economics
education. Nighttime at Shockley became his study hall in advanced eco-
nomics. When he got the Morgan Stanley offer, he had come too far in
acquaintance if not penetration of the field to turn away.
Aside from Abramovitz, who tapped Laffer as a research assistant,
Laffer took courses from his dissertation committee member Ronald
McKinnon, his adviser Emile Despres, Melvin Reder, Marc Nerlove, John
Gurley, and Edward Shaw. Other faculty members teaching in the depart-
ment included Kenneth Arrow (the 1972 economics Nobelist) and Lorie
Tarshis (Keynes’s main American popularizer and the subject of barbs in
William F. Buckley’s God and Man at Yale of 1951). The written work in
economics that Laffer soon began to produce with rapidity and in quantity
reflected the subject matter of these courses. They also reflected thematic
consolidations that Laffer made as he shaped his own economics in
extended hours of study, mainly at nighttime at Shockley. The law of one
price as elucidated classically in Marshall, Jevons, and Wicksell; the
Samuelson price-factor equalization theorem; the Stolper-Samuelson
relative-price-factor model and the Rybczynski theorem; the Cobb-

Douglas production function; the refuted (as by Ricardo) theory of abso-
lute advantage; Slutsky’s equation; Say’s law; general equilibrium—these
points of reference in the publications Laffer brought out in the years after
he completed his graduate coursework at Stanford were those he had
made a priority in this formative period of his economics.
As he confirmed that he should opt not for Morgan Stanley but for the
Stanford economics program in 1965, Laffer took a summer job in the
research department at the Federal Reserve Bank of Cleveland. The
department director was Maurice Mann, whom Laffer would succeed five
years later as economist at the Office of Management and Budget. Laffer
came up with a project for himself, writing a critical commentary on a
recent article in the American Economic Review (AER) concerning short-
term international capital movements written by Brown University econo-
mist Jerome L. Stein.
This is the first piece of writing in economics of Laffer’s that we possess.
We have it in its final form: as it was published in the AER two years later.
Laffer brought the paper he had done at the Cleveland Fed to Stanford
that fall, and one of his professors, McKinnon, indicated that with revision
it was publishable. McKinnon worked with Laffer on the changes, and
Laffer sent the article to the AER, which accepted it. In his first formal
year as a doctoral student in economics, he had a publication forthcoming
in the field’s top journal.
Laffer’s “Comment III” in the June 1967 AER, on Stein’s “International
Short-Term Capital Movements” in the March 1965 AER, prefigured the
economic model Laffer would outline and dedicate himself to as a
University of Chicago professor from 1967 to 1976. Stein’s article had
produced a statistical analysis of short-term capital flows between the
United States and Great Britain in the late 1950s and early 1960s. Stein
inquired after the representativeness of an example in 1961 in which the
“massive capital inflow into the United States was not caused by the rela-
tive rise in the U.K. Treasury bill rate,” but by “a disturbance which led
many to believe that sterling would be devalued.” The passive voice ren-
dered unclear what Stein was driving at. He seemed to be indicating that
a relative rise in the British rate prompted thoughts that the pound ster-
ling was about to be devalued. At any rate, Stein’s analysis indicated that
speculation against currency devaluation determined a good portion of
short-term capital flows as a rule.11
34 B. DOMITROVIC
Laffer’s “Comment” proposed an alternative variable set that was

responsible for the excess in short-term capital movements which Stein
had attributed to speculation against currency devaluation. The major
term in this set was the trade balance and the subsidiary term the money
supply as it changed relative to the trade balance. If the American trade
balance with respect to Britain increased, and as was typical “exporters are
prone to hedge foreign accounts receivable,” excess short-term demand
for dollars over pounds would develop. This real process could account,
Laffer suggested, for all of Stein’s speculation factor. Laffer quoted from
recent expert testimony to Congress: “It would appear, then, that virtually
all of the net outflow of U.S. short-term capital outflow before 1960, and
50–60 percent of the much larger outflow of 1960 and 1961 (and indeed
the first half of 1962 as well) consisted of export finance.” As Stein had
used the popular perception of a devaluation play in 1961 as a pretext for
his analysis, Laffer used this observation as pretext for his. He constructed
a series of equations against the same data as Stein’s and found that after
considering the financing needs pertaining to changes in the trade bal-
ance, his work served to “reduce the coefficients of [speculation] to a
point where they are statistically indistinguishable from zero.”
The argument Laffer was making would become a well-known signa-
ture of his and his close colleague at Chicago Mundell’s by the end of the
decade. In the 1967 AER piece, Laffer implied that changes in the domes-
tic economy enhancing or retarding growth in-country had consequences
for the trade balance that must be precisely understood. If the economy of
a country grows, for example, the country ordinarily will import more and
export more, according to a schedule that corresponds to production
capabilities and consumption preferences that change with income. If a
country grows (or shrinks), its trade balance necessarily will change.
Therefore, the trade financing needs of the economy, the bulk of which
are expressed in short-term international capital movements, will change
according to the differential growth rates of the countries in question as
well as the schedule of production and consumption preferences
against income.
The essential point that if a country grows or shrinks, in particular with
respect to a trading partner, capital flows financing the resulting difference
in the trade balance must change accordingly. Laffer dismissed mere
interest-rate differentials as a significant factor in flows. A higher or lower
rate would attract or repel creditors at the same rate as it would repel or
attract borrowers. He wrote that “one may think of banks as having a
marginal propensity to invest in foreign short-term assets” and implied

that borrowers were just as quick to bolt the home country for lower rates
in foreign locales. Along the lines of the Sidney Alexander absorption
model (as Mundell would point out to Laffer when he read Laffer’s
“Comment”), differences in flows ultimately turn on differences in pros-
pects. Growing places attract capital, and stagnant places export it.12
To Laffer in 1967, such understandings were sufficient to indicate why
there may have been short-term capital flows recently between the United
States and Great Britain which could not be accounted for by interest-
rate differences. To Stein, it was evidence of speculation against a central
component of the received international monetary system, a fixed
exchange rate. In this first published episode of his career in economics,
Laffer began to reveal the terms of the debate in which he would be
engaging in political economy through the stagflation era, the President
Ronald Reagan years, and beyond. He felt that the real economy nor-
mally cleared its transactions, with no residuals needing management via
governmental policy. And he felt that domestic growth differentials usu-
ally accounted for all the changes in international capital flows and trade
as well. Such changes did not bespeak faultiness in a fixed-exchange-
rate system.
Stein’s article had a Keynesian style. It indulged the idea that the cur-
rent system was unstable. Excess and speculation came to the fixed-
exchange-rate world as a matter of course, in this case revealed by the way
money moved among major countries over brief periods of time. The
implication was that the movements were wasteful. A system that did not
occasion speculation in capital flows would have capital allocated in full
toward the real needs of useful production (a point reminiscent perhaps of
Baran). The philosophical supposition of Keynesianism is that economies
when left alone are unstable and clear below the level of maximum useful
productivity. Economies therefore need therapy (in classical Keynesianism,
in the form of innovative government-spending projects) in order to
achieve their potential. Stein’s article implied, similarly, that the current
monetary system was wasting resources and that something had to be
done by way of intelligent exogenous reform to change it for the better.13
Stein was joining a pan-economics effort, as it would clearly become by
the late 1960s, deeming Bretton Woods as having outlived its usefulness
and needing to be dispensed with for something more contemporary.
Fixed exchange rates and an anchor in gold—these central attributes of
Bretton Woods derived from the haphazard monetary system of the
36 B. DOMITROVIC
primitive industrial economy prior to the Keynesian revolution—they

could not abide modern sensibilities in professionalized economics. From
Milton Friedman to James Tobin to Paul Samuelson, among numerous
others, top economists in the 1960s fashioned a consensus that exchange
rates should float and gold dropped as a systematic unit, fulfilling Keynes’s
notorious 1923 remark that the gold standard was a “barbarous relic.”
Identifying one of the umpteen inefficiencies in the fixed-exchange-rate,
gold-anchored system as Stein had in 1965 in the AER, he contributed
yet another piece of evidence that it was time for the international mone-
tary system to grow up.
Economists had at first welcomed Bretton Woods. As Robert Leeson
reported in his study of the mass coalescing of anti-Bretton Woods senti-
ment among economists in the 1960s, Ideology and the International
Economy (2003), in a 1945 poll of members of the American Economic
Association 90 percent of the respondents approved of the adoption of the
protocols. Yet as Friedman reflected in 1967, by that point, in his estima-
tion, 75 percent of economists favored flexibility in exchange rates, up
from his guess of 5 percent a generation before. As Leeson recounts, by
the mid-1960s, the new majority for flexible rates was hardening into a
movement. It had become typical for economists to urge the adoption of
flexible rates. Leeson adduced a joint statement made in 1966 by Friedman,
Harry Johnson (Laffer’s future rival at Chicago), future Nobelists James
Meade and Jan Tinbergen, and secular-stagnation pioneer Alvin Hansen
that griped that flexible exchange rates to date had “received little atten-
tion in official circles” and that intellectual momentum demanded other-
wise. He quoted Harvard University’s Gottfried Haberler’s claim that
flexible rates were “the only alternative” to more onerous national capital
controls, as well as Tibor Scitovsky’s assertion that flexible rates expressed
the “greater faith—or hopes … of most of the academic specialists today.”
(Scitovsky was a future dissertation-committee member of Laffer’s at
Stanford.) And there was Princeton University’s Fritz Machlup, who told
Friedman of his intention “to form another group. The time has come, we
think, to make a more aggressive push towards greater flexibility of
exchange rates”—indicating a plan to rally academic experts in this area to
influence members of Congress and officials at the treasury.
From a theoretical perspective, it is ascertainable why economists in
both the monetarist and Keynesian traditions would be interested in clear-
ing away the gold/fixed-exchange-rate system re-codified in 1944.
Monetarism emphasized monetary quantities, specifically as opposed to
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The Project Gutenberg eBook of Illustrated
history of the United States mint
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Title: Illustrated history of the United States mint
Editor: George Greenlief Evans
Release date: June 21, 2022 [eBook #68369]
Language: English
Original publication: United States: George G. Evans, 1888
Credits: Charlene Taylor and the Online Distributed

Proofreading Team at https://www.pgdp.net (This file
was produced from images generously made available
by The Internet Archive)
*** START OF THE PROJECT GUTENBERG EBOOK

ILLUSTRATED HISTORY OF THE UNITED STATES MINT ***
ILLUSTRATED HISTORY
OF THE
United States Mint
WITH A COMPLETE DESCRIPTION OF
AMERICAN COINAGE,
From the earliest period to the present time. The
Process of Melting, Refining, Assaying, and
Coining Gold and Silver fully described:
WITH BIOGRAPHICAL SKETCHES OF
Thomas Jefferson, Alexander Hamilton, Robert Morris, Benjamin
Rush,
John Jay Knox, James P. Kimball, Daniel M. Fox, and the Mint
Officers from its foundation to the present time.
TO WHICH ARE ADDED
A GLOSSARY OF MINT TERMS
AND THE
LATEST OFFICIAL TABLES

OF THE
Annual Products of Gold and Silver in the different
States, and Foreign Countries, with Monetary
Statistics of all Nations.
ILLUSTRATED with PHOTOTYPES, STEEL PLATE PORTRAITS

and WOOD ENGRAVINGS,
with NUMEROUS PLATES of Photographic Reproductions of RARE
AMERICAN
COINS, and Price List of their numismatic value.
New Revised Edition, Edited by the Publisher.
PHILADELPHIA:
GEORGE G. EVANS, Publisher.
1888.
Copyrighted by
George G. Evans.
1885.
Recopyrighted, 1888.
DUNLAP & CLARKE,

Printers and Book Binders.
819-21 Filbert Street,
Philadelphia.
INDEX.
Adjusting room, 32
American coinage, history of from 1792 to 1888
gold coins, 142
silver coins, 142
Amount coined in fiscal year, 136, 141
of coin in the United States, 142
Ancient coining, 2
Greek coins, 44
Persian coins, 45
Roman coins, 46
Annealing furnaces, 29
Architecture indebted to coins, 5
Assay, process of, 23
Assayers of Mint, list of, 118
Assaying gold, 24
silver, 25
rooms, 24
Barber, Charles E., Mint Engraver, 127

William, ” , 126
Bars manufactured at Mints during fiscal year, 136, 141
Bland dollar, history of, 62
Bond of indemnity signed by employees of first Mint, 1799, 17
Booth, James C., Melter and Refiner, 123
Boudinot, Elias, 102
Bosbyshell, Col. O. C., Coiner, 116
Boyd, N. B., Assistant Melter and Refiner, 124
Brazilian coins, 58
Bullion deposit and purchase of, 132
for the silver dollar coinage, 1887, 132
on hand at the Mints, 142
Brief explanation of terms commonly used in treating of bullion,
Mint coinage and money (see glossary), 149
Cabinet of coins and relics, 41

Cashiers of the Mint, 128, 129
Childs, George H., Coiner, 116
Chinese coins, 51
Circulation of gold and silver in the United States, 138, 142
of silver dollars, 138
Cloud, Joseph, 123
Cobb, Mark H., Cashier, 128
Coinage Act of 1873, 99, 100
and milling rooms, 35
fiscal year 1887, 131
of first silver dollar, 15
Coiners of Mint, 114-118
Coins, classification of, 48-68
English, of the Commonwealth and Cromwell, 56, 57
issued at the Philadelphia Mint from its establishment in
1792 to 1888, 81-89
of Athens, 47
of China, 51
of Egypt, 45
of Ferdinand and Isabella, 67
of Siam, 50
prices current, 154-160
of Switzerland, 55
of Syria, 46
Colonial coins, 59
paper money, 133
pine tree money, 59
Comparison of expressing the fineness of Gold in thousandths
and in carats, 148
Confederate coins (C. S. A.), 63
Copy of paper laid in corner stone of the Mint, 18
old pay roll, 12
Costumes on coins, 5
Cox, Albion, 128
Curator of the Mint, 129
Curiosities and minerals, 43
Deposit melting room, 23

weighing room, 21
DeSaussure, Henry William, Director, 101
Directors and Superintendents of Mints, 101-111
Dollar of 1804, history of, 64
standard, history of, 62
trade, history of, 61
Donations of old coins, 69
Double eagle of 1849, history of, 66
Du Bois, William E., Assayer, 121-123
Earnings of Mint and Assay Offices, 144

Eckfeldt, Adam, Coiner, 115
George N., M. D., Director, 103
Jacob B., Assayer, 118-120
English coins, 55, 56
silver tokens, 57
Engravers and die-sinkers at the Mint, 124-128
Engraving dies, 34
Egyptian coins, 54
Establishment of the Mint, 13
Estimated value of foreign coins (official table of), 146
Extract from Constitution of the United States relating to coining,
131
from expenditures of the Mint, fiscal year, 1887, 135
from resolution of Congress relating to Mint, 19
Family coins (Grecian), 47

First silver dollar coined, 14
First U. S. money coined, 15
Foreign coins, value of in United States money (table of), 146
Fox, Hon. Daniel M., Superintendent, 105-109
French coins, Marie Antoinette, etc., 54
German coins, 55
Glossary of Mint terms, 149
Gobrecht, Christian, 126
Gold and silver productions of the world, 137
coins of Oliver Cromwell, 57
and silver coins manufactured at the Philadelphia Mint
since its establishment in 1792, 81-89
Gold Medallic ducat, head of Luther, 55
Golden daric, of Persia, 45
Grecian coins, 44
Greek Republic, 46
Gun money of James II, 57
Horatio C. Burchard, second director, extracts from the director’s

last report, (Transcriber’s Note: No number was printed
here, and it’s not at all clear what this refers to. Possibly the
entry should have been edited out.)
Hamilton, Alexander, 92
Head of Jupiter Ammon (a specimen of), 47
of Minerva, with Greek helmet, 55
Heraldic emblems, 5
Historical sketch of first U. S. Mint, 7-10
History of coinage, ancient and modern, 1-6
of present U. S. Mint, 17
Humor pictured in medals and coins, 5
Incidents of history on coins, 4

Introduction, 1, 2
Japanese coins, 53
Jefferson, Thomas, 90, 91
“Joe” and half “Joe”, 58
Kimball, James Putnam, 93, 94

Key, William H., Assistant Engraver, 116
Kneass, William, Engraver, 114
Knox, John Jay, 95-98
Language upon coins and medals, 6

Linderman, Henry Richard, M. D., 104-107
Longacre, James B., Engraver, 115
McClure, R. A., Curator, 129

McCullough, Richard S., 123
Medals and Cabinet Coins, 153
partial list of, for sale at the Mint, 150-152
Melter and refiner’s office, 23
Melters and refiners of the Mint, 123, 124
Melting rooms, 26
Metallic money in Colonial times, 60
Mexican coins, 58
Money of Great Britain, 55
of the Chinese Empire, 51
French ” , 54
German ” , 55
Grecian ” , 46
past and present, 1
Roman Empire, 46
time of Moses, 46
Turkish Empire, 54
United States, 61
Moore, Samuel, M. D., Director, 102
Morgan, George T., Assistant Engraver, 127
Morris, Robert, diary of, 7
National medals, 150-152

New York doubloon, 61
Note to visitors of the Philadelphia Mint, 161
Notes on the early history of the Mint, 7-10
Oak tree money, 60

Oliver Cromwell, cast of, 42
Oriental coins, 50, 67
Pacific coast coins, 62
Paper money, aggregate issue in war times, 148
Parting and refining, 26
Patterson, Robert, LL. D., Director, 102
Robert M., Director, 102
Pay roll of first Mint, 12
Peale, Franklin, Coiner and Assayer, 115
Penny of William the Conqueror, 56
Persian coins, 45
“Peter,” the Eagle (Mint bird), 43
Pettit, Thomas M., Director, 103
Pine tree money, 59
Pollock, James, A. M., LL. D., Director, 103
Portraiture upon coins, 3
Portuguese and Spanish coins, 58
Pound sterling, Charles First, 56
Presidential medals, 151
Profits on silver coinage, 134
Progress in coining, 33
Rare coins, price list (approximate value), 154-160

Refining by acids, fiscal year 1887, 148
Relics, 42
Resolution of Congress establishing the Mint, 11
Richardson, John, Assayer, 129
Joseph, ” , 129
Rittenhouse, David, First Director, 101
Rolling gold and silver, 29
Rolling room, 28
Roman coins, imperial, 46
Rules and regulations of first Mint, 15-16
Rush, Benjamin, Treasurer, 116
Russian coins, 55
double rouble, head of Peter the Great, 55
Ryal or royal, of Queen Elizabeth, 56
Scot, Robert, Engraver, 125

Scotch groat, of Robert Bruce, 57
pennies, 57
Selections of rare coins, 66, 67
Separating room, 26
Silver bullion purchased and coined (see table), 132
Siamese coins, 50
Silver coins of the United States (see table), 132
Silver, first American, 14
Snowden, Col. A. Loudon, Coiner, Superintendent, 104
James Ross, LL.D., Superintendent, 103
Sovereign of Oliver Cromwell, 57
Specie and paper circulation of the United States (table of), 143
of the World (see table), 142
Standard weights, 129-131
Steel, William S., Coiner, 18, 116
Subsidiary coinage, 134, 150
Table of circulation of gold and silver, 142

Table showing where the precious metals in the U. S. come
from, 139
“The temple sweepers,” Grecian coin, 49
Trade dollar, history of, 62
Trade dollars coined, exported, imported, melted and redeemed,
Act of March 3, 1887, 134
Twenty dollar gold piece of 1849, 63
Turkish coins, 54
United States, coins, 61

Mint first established, 7
Mint test for gold and silver, 149
Valuable and rare coins, price-list of, 154-160

Value, in United States money, of one ounce Troy of gold, at
different degrees of fineness, 160
Value of gold and silver received at the Mints and Assay Offices,
132
Value of foreign gold coins deposited at the New York Assay
Office in 1887, 135
Value of foreign gold and silver coins in United States money,
146
Visiting the Mint, 20
Voigt, Henry, Coiner, 114
Washington coins and medals, 150
“Widow’s mite,” history of, 68
World’s coinage (table of), 143
Wright, Joseph, Engraver, 125
INTRODUCTION.
MONEY OF THE PAST AND PRESENT.
The need of a circulating medium of exchange has been

acknowledged since the earliest ages of man. In the primeval days,
bartering was the foundation of commercial intercourse between the
various races; but this gave way in time, as exchanges increased. In
the different ages many commodities have been made to serve as
money,—tin was used in ancient Syracuse and Britain; iron, in
Sparta; cattle, in Rome and Germany; platinum, in Russia; lead, in
Burmah; nails, in Scotland; silk, in China; cubes of pressed tea, in
Tartary; salt, in Abyssinia; slaves, amongst the Anglo Saxons;
tobacco, in the earliest settlements of Virginia; codfish, in New
Foundland; bullets and wampum, in Massachusetts; logwood, in
Campeachy; sugar, in the West Indies; and soap, in Mexico. Money
of leather and wood was in circulation in the early days of Rome; and
the natives of Siam, Bengal, and some parts of Africa used the
brilliantly-colored cowry shell to represent value, and some travelers
allege that it is still in use in the remote portions of the last-named
country. But the moneys of all civilized nations have been, for the
greater part, made of gold, silver, copper, and bronze. Shekels of
silver are mentioned in the Bible as having existed in the days of
Abraham, but the metals are believed to have been in bars, from
which proportionate weights were chipped to suit convenience. The
necessity for some convenient medium having an intrinsic value of
its own led to coinage, but the exact date of its introduction is a
question history has not yet determined. It is supposed the Lydians
stamped metal to be used as money twelve hundred years before
Christ, but the oldest coins extant were made 800 B. C., though it is
alleged that the Chinese circulated a square bronze coin as early as
1120 B. C. All of these coins were rude and shapeless, and generally
engraved with representations of animals, deities, nymphs, and the
like; but the Greeks issued coins, about 300 B. C., which were fine
specimens of workmanship, and which are not even surpassed in
boldness and beauty of design by the products of the coiners of
these modern times. Even while these coins were in circulation spits
and skewers were accepted by the Greeks in exchange for products,
just as wooden and metal coins were circulated simultaneously in
Rome, 700 B. C., and leather and metal coins in France, as late as
1360 A. D. The earliest coins bearing portraits are believed to have
been issued about 480 B. C., and these were profiles. In the third
century, coins stamped with Gothic front faces were issued, and after
that date a profusion of coins were brought into the world, as every
self-governing city issued money of its own. The earliest money of
America was coined of brass, in 1612, and the earliest colonial coins
were stamped in Massachusetts, forty years later.
Ancient and extensive as the use of money has been in all its
numerous forms and varied materials, it merely represented a
property value which had been created by manual labor and
preserved by the organic action of society. In a primitive state, herds
of cattle and crops of grain were almost the only forms of wealth; the
natural tendency and disposition of men to accumulate riches led
them to fix a special value upon the metals, as a durable and always
available kind of property. When their value in this way was generally
recognized, the taxes and other revenues, created by kings and
other potentates, was collected in part or wholly in that form of
money. The government, to facilitate public business, stamped the
various pieces of metal with their weight and quality, as they were
received at the Treasury; and according to these stamps and marks,
the same pieces were paid out of the Treasury, and circulated
among the people at an authorized and fixed value. The next step
was to reduce current prices of metal to a uniform size, shape, and
quality, value and denomination, and make them, by special
enactment, a legal tender for the payment of all taxes or public dues.
Thus, a legalized currency of coined money was created, and the
exchangeable value of the various metals used for that purpose fully
established, to the great convenience of the world at large.
Ancient Coining.

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ISSN 2662-6195 ISSN 2662-6209 (electronic)

2 In the Scope of Paul Baran 17

3 “Growth and the Balance of Payments” 41

5 “A Formal Model of the Economy” 93

7 Toward the Policy Mix147

8 The Laffer Curve175

10 The Arc of Reform239

A Note on Sources247

AEI American Enterprise Institute

In Philip Roth’s 1959 novella Goodbye, Columbus, the protagonist, a

© The Author(s), under exclusive license to Springer Nature 1

in its tow. It was a booming place, a reality that contemporary people

employment, and therefore of general prosperity, that is socially accept-

were not in fact happening as postwar prosperity sustained itself, then

levels were exact. If a currency devalues by 10 percent against the curren-

cutting taxes, in practice as governor and as a promise on the presidential

Business from Nixon to NAFTA (Princeton: Princeton University Press,

In the Scope of Paul Baran

Arthur Laffer’s career in economics might be said to have begun with a

© The Author(s), under exclusive license to Springer Nature 17

Fairchild Semiconductor, in the episode generally understood today as the

lost on each occasion in this Democratic-dominant region. Twice she was

after several of the large lectures’ meetings, he was one of a handful of

real conflict of interest and could be found by removing ideological blind-

amount of production in an economy beyond the provision of subsistence

“socialist government is thus placed in the position of deciding on the

Laffer asked similar questions with reminiscent doggedness with respect to

advantage of tax deductibility, and the highways were government spend-

In later years, Laffer would make a habit of referring to the classical

The Way to the Ph.D.

relative-­price-factor model and the Rybczynski theorem; the Cobb-­

Laffer’s “Comment” proposed an alternative variable set that was

marginal propensity to invest in foreign short-term assets” and implied

primitive industrial economy prior to the Keynesian revolution—they

Title: Illustrated history of the United States mint

Editor: George Greenlief Evans

Release date: June 21, 2022 [eBook #68369]

Original publication: United States: George G. Evans, 1888

Credits: Charlene Taylor and the Online Distributed

*** START OF THE PROJECT GUTENBERG EBOOK

LATEST OFFICIAL TABLES

ILLUSTRATED with PHOTOTYPES, STEEL PLATE PORTRAITS

New Revised Edition, Edited by the Publisher.

DUNLAP & CLARKE,

Barber, Charles E., Mint Engraver, 127

Cabinet of coins and relics, 41

Deposit melting room, 23

Earnings of Mint and Assay Offices, 144

Family coins (Grecian), 47

Horatio C. Burchard, second director, extracts from the director’s

Incidents of history on coins, 4

Kimball, James Putnam, 93, 94

Language upon coins and medals, 6

McClure, R. A., Curator, 129

2 In the Scope of Paul Baran 17

3 “Growth and the Balance of Payments” 41

5 “A Formal Model of the Economy” 93

7 Toward the Policy Mix147

8 The Laffer Curve175

10 The Arc of Reform239

A Note on Sources247

relative-price-factor model and the Rybczynski theorem; the Cobb-