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Macroeconomics
in Context

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Macroeconomics
in Context SECOND
EDITION

NEVA GOODWIN
Tufts University

JONATHAN HARRIS
Tufts University

JULIE A. NELSON
University of Massachusetts Boston

BRIAN ROACH
Tufts University

MARIANO TORRAS
Adelphi University

With Contributions by JAMES DEVINE

 First published 2014 by M.E. Sharpe

Published 2015 by Routledge

2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
711 Third Avenue, New York, NY 10017, USA

Routledge is an imprint of the Taylor & Francis Group, an informa business

Copyright © 2014 Taylor & Francis. All rights reserved.

No part of this book may be reprinted or reproduced or utilised in any form or by any electronic,
mechanical, or other means, now known or hereafter invented, including photocopying and
recording, or in any information storage or retrieval system, without permission in writing from
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Notices
No responsibility is assumed by the publisher for any injury and/or damage to persons or
property as a matter of products liability, negligence or otherwise, or from any use of operation of
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Practitioners and researchers must always rely on their own experience and knowledge in
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Product or corporate names may be trademarks or registered trademarks, and are used only for
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Library of Congress Cataloging-in-Publication Data

Goodwin, Neva R.
Macroeconomics in context / Neva Goodwin, Jonathan Harris, Julie Nelson, Brian Roach,
Mariano Torras. -- Second Edition.
pages cm
Includes bibliographical references and index.
ISBN 978-0-7656-3874-8 (pbk.: alk. paper)
1. Macroeconomics. I. Nelson, Julie A., 1956– II. Harris, Jonathan, 1948– III. Title.
HB172.5.G663 2014
339--dc23 2013036243

ISBN 13: 9780765638748 (pbk)

Brief Contents

Introduction
Sample Course Outlines
PAR T
I The Context for Economic
Analysis
0. Macroeconomics and Well-Being
1. Economic Activity in Context
2. Useful Tools and Concepts
3. What Economies Do
4. Supply and Demand

PAR T
II Macroeconomic Basics
5. Macroeconomic Measurement: The
Current Approach
6. Macroeconomic Measurement:
Environmental and Social
Dimensions
7. The Structure of the U.S. Economy
8. Employment, Unemployment, and
Wages
PAR T
III Macroeconomic Theory and
Policy
9. Aggregate Demand and Economic
Fluctuations
10. Fiscal Policy
11. Money, Banking, and Finance
 12. The Federal Reserve and Monetary
Policy
13. Aggregate Supply, Aggregate
Demand, and Inflation: Putting It All
Together
14. The Global Economy and Policy
PAR T
IV Macroeconomic Issues and
Applications
15. The Financial Crisis and the Great
Recession
16. Deficits and Debt
17. How Economies Grow and Develop
18. Growth and Sustainability in the
Twenty-First Century

Glossary
Index
 Contents

Introduction
Sample Course Outlines

PAR T
I The Context for Economic
Analysis
0. Macroeconomics and Well-
Being
Notes on Graphs
1. GDP per Capita
2. Recent Growth Rate of GDP per Capita
3. Net National Savings
4. Government Debt
5. Labor Productivity
6. Average Annual Hours Worked
7. Unemployment Rate
8. Inflation
9. Total Tax Revenue
10. Trade Balance
11. Income Inequality
12. Absolute Poverty
13. Foreign Aid
14. Internet Users
 15. Educational Performance
16. Life Expectancy
17. Subjective Well-Being
18. Carbon Dioxide Emissions per Capita
19. Local Air Quality

1. Economic Activity in Context

1. What Is Macroeconomics About?
2. Macroeconomic Goals
2.1 Living Standards
2.2 Stability and Security
2.3 Sustainability
3. Macroeconomics in Context
3.1 The Classical Period
3.2 The Great Depression, Keynes, and
Monetarism
3.3 Synthesizing Classical and
Keynesian Economics
3.4 Macroeconomics for the Twenty-
First Century

2. Useful Tools and Concepts

1. Our Tools for Understanding
1.1 Empirical Investigation
1.2 Theoretical Investigation
1.3 Historical Investigation
2. Economic Tradeoffs
2.1 Abundance and Scarcity
 2.2 Society’s Production-Possibilities
Frontier
2.3 Tradeoffs Over Time
3. The Role of Markets
3.1 The Meaning of Markets
3.2 The Basic Neoclassical Model
3.3 The Advantages of Markets
3.4 The Institutional Requirements of
Markets
3.5 The Limitations of Markets

3. What Economies Do
1. Introducing the Four Essential
Economic Activities
1.1 Resource Maintenance
1.2 Production
1.3 Distribution
1.4 Consumption
2. Resource Maintenance: Attending to the
Asset Base of the Macroeconomy
2.1 Stocks Versus Flows
2.2 Investment and Depreciation
2.3 Renewable Resources, Non-
Renewable Resources and
Sustainability
3. Distribution: Who Gets What, and How?
3.1 Labor and Capital Incomes
3.2 Transfers and Taxes
3.3 The Distribution of Income
3.4 Measuring Inequality
 3.5 Income Inequality Over Time
3.6 Wealth Inequality
4. The Three Spheres of Economic
Activity
4.1 The Core Sphere
4.2 The Public-Purpose Sphere
4.3 The Business Sphere
4.4 A Comparative Note: Less
Industrialized Economies
4.5 Putting Economic Activity in
Context

4. Supply and Demand

1. Markets and Macroeconomics
1.1 Classical and Keynesian Views of
Markets
1.2 Market Competitiveness
2. The Theory of Supply
2.1 The Supply Schedule and Curve
2.2 Changes in Supply
3. The Theory of Demand
3.1 The Demand Schedule and Curve
3.2 Changes in Demand
4. The Theory of Market Adjustment
4.1 Surplus, Shortage, and Equilibrium
4.2 Shifts in Supply and Demand
4.3 Elasticity
5. Macroeconomics and the Dynamics of
Real-World Markets
5.1 When Price Adjustments Are Slow
 5.2 When Prices Swing Too Much:
Market Instability
5.3 From Microeconomics to
Macroeconomics

PAR T
II Macroeconomic Basics
5. Macroeconomic Measurement:
The Current Approach
1. An Overview of National Accounting
1.1 Conventions About National
Accounting Sectors
1.2 Conventions About Capital Stocks
1.3 Conventions About Investment
2. Defining Gross Domestic product
3. Measuring Gross Domestic product
3.1 The Product Approach
3.2 The Spending Approach
3.3 The Income Approach
4. Growth, Price Changes, and Real GDP
4.1 Calculating GDP Growth Rates
4.2 Nominal vs. Real GDP
4.3 Calculating Real GDP
4.4 Price Indexes and Inflation Rates
4.5 Growth and Growth Rates
5. Savings, Investment, and Trade
5.1 The Relationship of Savings,
Investment, and Trade
5.2 Net Domestic Product and Saving
Appendix: Chained Dollar Real GDP
6. Macroeconomic Measurement:
Environmental and Social
Dimensions
1. A Broader View of National Income
Accounting
2. Why GDP Is Not a Measure of Well-
Being
2.1 Subjective Well-Being
2.2 Critiques of GDP
3. Alternative Approaches to Representing
Well-being
3.1 The Genuine Progress Indicator
(GPI)
3.2 The Better Life Index (BLI)
3.3 The Human Development Index
(HDI)
3.4 Other National Accounting
Alternatives
4. Measuring Household Production
4.1 Time-Use Surveys
4.2 Methods of Valuing Household
Production
5. Accounting for the Environment
5.1 Environmentally Adjusted Net
Domestic Product
5.2 Valuing Environmental Factors
6. Conclusion: Measuring Economic Well-
Being
7. The Structure of the U.S.
Economy
1. The Three Major Productive Sectors in
an Economy
1.1 A Quick Review of Categories
1.2 The Relative Size of the Output
Sectors in the United States
2. The Primary Sector in the United States
2.1 The Food System
2.2 Water
2.3 The Energy System
3. The Secondary (Industrial) Sector in the
United States
3.1 Construction and Housing
3.2 Manufacturing
3.3 Where Have All the Manufacturing
Jobs Gone?
4. The Tertiary (Service) Sector
4.1 Retail Services
4.2 Finance and Financialization
4.3 Human Services: Health
4.4 Human Services: Education
4.5 Concluding Thoughts
Appendix
A1: The Tertiary Sector in the Overall Macro
Context
A2: Historical Trends and Global
Comparisons
 8. Employment, Unemployment,
and Wages
1. Employment and Unemployment
1.1 Measuring Employment and
Unemployment
1.2 The Unemployment Rate
1.3 Labor Force Participation
2. A Closer Look at Unemployment
2.1 Types of Unemployment
2.2 Patterns of Unemployment
3. Theories of Employment,
Unemployment, and Wages
3.1 The Classical Theory
3.2 Alternative Perspectives on Labor
Markets
3.3 Longer Term Issues: Productivity,
Resources, and Technology

PAR T
III Macroeconomic Theory and
Policy
9. Aggregate Demand and
Economic Fluctuations
1. The Business Cycle
1.1 What Happens During the Business
Cycle
1.2 A Stylized Business Cycle
1.3 The Downturn Side of the Story
2. Macroeconomic Modeling and
Aggregate Demand
2.1 Simplifying Assumptions
 2.2 Output, Income, and Aggregate
Demand
2.3 The Problem of Leakages
2.4 The Classical Solution to Leakages
3. The Keynesian Model
3.1 Consumption
3.2 Investment
3.3 The Aggregate Demand Schedule
3.4 The Possibility of Unintended
Investment
3.5 Movement to Equilibrium in the
Keynesian Model
3.6 The Problem of Persistent
Unemployment
3.7 The Multiplier
4. Concluding Thoughts
Appendix: An Algebraic Approach to the
Multiplier

10. Fiscal Policy

1. The Role of Government Spending and
Taxes
1.1 A Change in Government Spending
1.2 Taxes and Transfer Payments
1.3 The Circular Flow with
Government Spending and Taxes
1.4 Expansionary and Contractionary
Fiscal Policy
2. The Federal Budget
2.1 Deficits and Surpluses
 2.2 Automatic Stabilizers
2.3 Discretionary Policy
3. Policy Issues
3.1 Crowding Out and Crowding In
3.2 Different Multiplier Effects
3.3 Applying Fiscal Policy
Appendix: More Algebraic Approaches to the
Multiplier?
A1. An Algebraic Approach to the
Multiplier, with a Lump-Sum Tax
A2. And Algebraic Approach to the
Multiplier, with a Proportional Tax

11. Money, Banking, and Finance

1. Why Money?
1.1 Money and Aggregate Demand
1.2 “Running the Printing Press”
1.3 Deflation and Financial Crises
2. What Is Money?
2.1 The Roles of Money
2.2 Types of Money
2.3 Measures of Money
3. The Banking System
3.1 Private Banks
3.2 Bank Types
3.3 How Banks Create Money
4. Money and Finance
4.1 Functions of Finance
4.2 Nonbank Financial Institutions
 4.3 Financialization and Financial
Bubbles
4.4 The International Sector

12. The Federal Reserve and

Monetary Policy
1. The Federal Reserve System
2. Monetary Policy
2.1 How the Fed Creates Money and
Credit
2.2 Other Monetary Policy Tools
3. The Theory of Money, Interest Rates,
and Aggregate Demand
3.1 The Federal Funds Rate and Other
Interest Rates
3.2 Interest Rates and Investment
3.3 Monetary Policy and Aggregate
Demand
4. Monetary Policies in Practice
4.1 The Fed and Investment, 2000–
2012
4.2 The Liquidity Trap and Credit
Rationing
5. The Theory of Money, Prices, and
Inflation
5.1 The Quantity Equation
5.2 Competing Theories
6. Complications and Policy Controversies
6.1 The Fed’s Dilemma
6.2 Rules Versus Activism
 Appendix
A1. Bond Prices and Interest Rates
A2. Short- Versus Long-Run and Real
Versus Nominal Interest Rates

13. Aggregate Supply, Aggregate

Demand, and Inflation: Putting
It All Together
1. Aggregate Demand and Inflation
1.1 A New View of the Aggregate
Demand (AD) Curve
1.2 Shifts of the AD Curve: Spending
and Taxation
1.3 Shifts of the AD Curve: Monetary
Policy
2. Capacity and the Aggregate Supply
Curve
2.1 The Aggregate Supply (AS) Curve
2.2 Shifts of the AS Curve: Inflationary
Expectations
2.3 Shifts of the AS Curve: Supply
Shocks
3. Putting the AD/AS Model to Work
3.1 An Economy in Recession
3.2 An Overheated Economy
3.3 Stagflation
3.4 A Hard Line Against Inflation
3.5 Technology and Globalization
4. Competing Theories
4.1 Classical Macroeconomics
 4.2 Keynesian Macroeconomics
Appendix: More Schools of Macroeconomics
A1. New Classical Economics
A2. The Neoclassical Synthesis and New
Keynesian Macroeconomics
A3. Post-Keynesian Macroeconomics

14. The Global Economy and

Policy
1. Macroeconomics in a Global Context
1.1 Global Connections
1.2 Major Policy Tools
1.3 Patterns of Trade and Finance
2. The Trade Balance: Completing the
Picture
2.1 The Circular Flow Revisited
2.2 Effects on the Multiplier
2.3 Balance between Savings,
Investment, and Net Borrowing
3. International Finance
3.1 Purchasing Power Parity
3.2 Currency Exchange Rates
3.3 The Balance of Payments
4. Macroeconomics in an Open Economy
4.1 Fiscal Policy
4.2 Monetary Policy
4.3 Managed Versus Flexible Foreign
Exchange
5. International Financial Institutions
 Appendix: An Algebraic Approach to the
Multiplier, in a Model with Trade

PAR T
IV Macroeconomic Issues and
Applications
15. The Financial Crisis and the
Great Recession
1. Prelude to a Crisis
1.1 The Housing Bubble
1.2 The Subprime Crisis
2. Economic Impacts of the Crisis
2.1 Unemployment and the Vicious
Recessionary Spiral
2.2 The Great Depression and the
Great Recession Compared
3. Underlying Causes of the Financial
Crisis
3.1 Inequality
3.2 Bank Size and Deregulation
3.3 Misguided Corporate Incentive
Structure
3.4 Globalization and Long-Term
Economic Trends
4. Remedies and Ideas for Averting Future
Crises
4.1 Fiscal and Monetary Responses
4.2 The Dodd-Frank Bill
4.3 Beyond Dodd-Frank

16. Deficits and Debt

 1. Deficits and the National Debt
2. The U.S. National Debt: A Historical
Perspective
2.1 Two Centuries of Deficits and Debt
2.2 “Supply-Side” Economics
2.3 1989 to the Present
3. The Debt and Its Links to Finance
3.1 Taxonomy of Debt Types
3.2 Federal Government Borrowing:
Potential Problems
4. Political Economy of the Debt
4.1 Who Owns the Debt?
4.2 The Balanced Budget Debate
4.3 Imposed Austerity: The Case of the
European Union
5. Deficit Projections and Potential Policy
Responses
5.1 Deficit Projections
5.2 Policy Choices
5.3 Budgetary Reforms: The Simpson-
Bowles Plan
5.4 Budgetary Reforms: Congressional
Budget Office
5.5 Debt and Deficits in Context

17. How Economies Grow and

Develop
1. Development and Economic Growth
1.1 Standard Economic Growth Theory
Another random document with
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 General Miles,
Report
(Annual Reports of the War Department, 1898,
volume 1, part 2, page 36).

{618}

UNITED STATES OF AMERICA: A. D. 1898 (July-September).

The War with Spain.
Capture of Manila.
Relations with the Filipino insurgents.
General Merritt's report.
Aguinaldo declared President of the Philippine Republic.

"Immediately after my arrival [July 25] I visited General

Greene's camp and made a reconnaissance of the position held
by the Spanish, and also the opposing lines of the insurgent
forces, hereafter to be described. I found General Greene's
command encamped on a strip of sandy land running parallel to
the shore of the bay and not far distant from the beach, but
owing to the great difficulties of landing supplies, the
greater portion of the force had shelter tents only, and were
suffering many discomforts, the camp being situated in a low,
flat place, without shelter from the heat of the tropical sun
or adequate protection during the terrific downpours of rain
so frequent at this season. I was at once struck by the
exemplary spirit of patient, even cheerful, endurance shown by
the officers and men under such circumstances, and this
feeling of admiration for the manner in which the American
soldier, volunteer and regular alike, accept the necessary
hardships of the work they have undertaken to do, has grown
and increased with every phase of the difficult and trying
campaign which the troops of the Philippine expedition have
brought to such a brilliant and successful conclusion.

"I discovered during my visit to General Greene that the left

or north flank of his brigade camp extended to a point on the
'Calle Real' about 3,200 yards from the outer line of Spanish
defenses of the city of Manila. This Spanish line began at the
powder magazine, or old Fort San Antonio, within a hundred
yards of the beach and just south of the Malate suburb of
Manila, and stretched away to the Spanish left in more or less
detached works, eastward, through swamps and rice fields,
covering all the avenues of approach to the town and
encircling the city completely. The Filipinos, or insurgent
forces at war with Spain, had, prior to the arrival of the
American land forces, been waging a desultory warfare with the
Spaniards for several months, and were at the time of my
arrival in considerable force, variously estimated and never
accurately ascertained, but probably not far from 12,000 men.
These troops, well supplied with small arms, with plenty of
ammunition and several field guns, had obtained positions of
investment opposite to the Spanish line of detached works
throughout their entire extent; and on the particular road
called the 'Calle Real,' passing along the front of General
Greene's brigade camp and running through Malate to Manila,
the insurgents had established an earthwork or trench within
800 yards of the powder-magazine fort. They also occupied as
well the road to the right, leading from the village of Pasay,
and the approach by the beach was also in their possession.
This anomalous state of affairs, namely, having a line of
quasi-hostile native troops between our forces and the Spanish
position, was, of course, very objectionable, but it was
difficult to deal with, owing to the peculiar condition of our
relations with the insurgents, which may be briefly stated as
follows:

"Shortly after the naval battle of Manila Bay, the principal

leader of the insurgents, General Emilio Aguinaldo, came to
Cavite from Hongkong, and, with the consent of our naval
authorities, began active work in raising troops and pushing
the Spaniards in the direction of the city of Manila. Having
met with some success, and the natives flocking to his
assistance, he proclaimed an independent government of
republican form, with himself as president, and at the time of
my arrival in the islands the entire edifice of executive and
legislative departments and subdivision of territory for
administrative purposes had been accomplished, at least on
paper, and the Filipinos held military possession of many
points in the islands other than those in the vicinity of
Manila. As General Aguinaldo did not visit me on my arrival
nor offer his services as a subordinate military leader, and
as my instructions from the President fully contemplated the
occupation of the islands by the American land forces, and
stated that 'the powers of the military occupant are absolute
and supreme and immediately operate upon the political
condition of the inhabitants,' I did not consider it wise to
hold any direct communication with the insurgent leader until
I should be in possession of the city of Manila, especially as
I would not until then be in a position to issue a
proclamation and enforce my authority, in the event that his
pretensions should clash with my designs.

"For these reasons the preparations for the attack on the city
were pressed and military operations conducted without
reference to the situation of the insurgent forces. The wisdom
of this course was subsequently fully established by the fact
that when the troops of my command carried the Spanish
intrenchments, extending from the sea to the Pasay road on the
extreme Spanish right, we were under no obligations, by
pre-arranged plans of mutual attack, to turn to the right and
clear the front still held against the insurgents, but were
able to move forward at once and occupy the city and suburbs.

"To return to the situation of General Greene's brigade as I

found it on my arrival, it will be seen that the difficulty in
gaining an avenue of approach to the Spanish line lay in the
fact of my disinclination to ask General Aguinaldo to withdraw
from the beach and the 'Calle Real,' so that Greene could move
forward. This was overcome by instructions to General Greene
to arrange, if possible, with the insurgent brigade commander
 in his immediate vicinity to move to the right and allow the
American forces unobstructed control of the roads in their
immediate front. No objection was made, and accordingly
General Greene's brigade threw forward a heavy outpost line on
the 'Calle Real' and the beach and constructed a trench, in
which a portion of the guns of the Utah batteries was placed.
The Spanish, observing this activity on our part, made a very
sharp attack with infantry and artillery on the night of July
31. The behavior of our troops during this night attack was
all that could be desired, and I have, in cablegrams to the
War Department, taken occasion to commend by name those who
deserve special mention for good conduct in the affair. Our
position was extended and strengthened after this and resisted
successfully repeated night attacks, our forces suffering,
however, considerable loss in wounded and killed, while the
losses of the enemy, owing to the darkness, could not be
ascertained.

"The strain of the night fighting and the heavy details for
outpost duty made it imperative to re-enforce General Greene's
troops with General MacArthur's brigade, which had arrived in
transports on the 31st of July. The difficulties of this
operation can hardly be overestimated. The transports were at
anchor off Cavite, 5 miles from a point on the beach where it
was desired to disembark the men.
{619}
Several squalls, accompanied by floods of rain, raged day
after day, and the only way to get the troops and supplies
ashore was to load them from the ship's side into native
lighters (called 'cascos') or small steamboats, move them to a
point opposite the camp, and then disembark them through the
surf in small boats, or by running the lighters head on to the
beach. The landing was finally accomplished, after days of
hard work and hardship; and I desire here to express again my
admiration for the fortitude and cheerful willingness of the
men of all commands engaged in this operation. Upon the
assembly of MacArthur's brigade in support of Greene's, I had
about 8,500 men in position to attack, and I deemed the time
had come for final action. During the time of the night
attacks I had communicated my desire to Admiral Dewey that he
would allow his ships to open fire on the right of the Spanish
line of intrenchments, believing that such action would stop
the night firing and loss of life, but the admiral had
declined to order it unless we were in danger of losing our
position by the assaults of the Spanish, for the reason that,
in his opinion, it would precipitate a general engagement, for
which he was not ready. Now, however, the brigade of General
MacArthur was in position and the 'Monterey' had arrived, and
under date of August 6 Admiral Dewey agreed to my suggestion
that we should send a joint letter to the captain-general
notifying him that he should remove from the city all
non-combatants within forty-eight hours, and that operations
against the defenses of Manila might begin at any time after
the expiration of that period.

"This letter was sent August 7, and a reply was received the
same date, to the effect that the Spanish were without places
of refuge for the increased numbers of wounded, sick women,
and children now lodged within the walls. On the 9th a formal
joint demand for the surrender of the city was sent in. This
demand was based upon the hopelessness of the struggle on the
part of the Spaniards, and that every consideration of
humanity demanded that the city should not be subjected to
bombardment under such circumstances. The captain-general's
reply, of same date, stated that the council of defense had
declared that the demand could not be granted; but the
captain-general offered to consult his Government if we would
allow him the time strictly necessary for the communications
by way of Hongkong. This was declined on our part for the
reason that it could, in the opinion of the admiral and
myself, lead only to a continuance of the situation, with no
immediate result favorable to us, and the necessity was
apparent and very urgent that decisive action should be taken
at once to compel the enemy to give up the town, in order to
relieve our troops from the trenches and from the great
exposure to unhealthy conditions which were unavoidable in a
bivouac during the rainy season.

"The seacoast batteries in defense of Manila are so situated

that it is impossible for ships to engage them without firing
into the town, and as the bombardment of a city filled with
women and children, sick and wounded, and containing a large
amount of neutral property, could only be justified as a last
resort, it was agreed between Admiral Dewey and myself that an
attempt should be made to carry the extreme right of the
Spanish line of intrenchments in front of the positions at
that time occupied by our troops, which, with its flank on the
seashore, was entirely open to the fire of the navy. It was
not my intention to press the assault at this point, in case
the enemy should hold it in strong force, until after the navy
had made practicable breaches in the works and shaken the troops
holding them, which could not be done by the army alone, owing
to the absence of siege guns. … It was believed, however, as
most desirable, and in accordance with the principles of
civilized warfare, that the attempt should be made to drive
the enemy out of his intrenchments before resorting to the
bombardment of the city. …

"All the troops were in position on the 13th at an early hour

in the morning. About 9 a. m. on that day our fleet steamed
forward from Cavite and before 10 a. m. opened a hot and
accurate fire of heavy shells and rapid-fire projectiles on
the sea flank of the Spanish intrenchments at the powder
magazine fort, and at the same time the Utah batteries, in
position in our trenches near the 'Calle Real,' began firing
with great accuracy. At 10.25, on a prearranged signal from
our trenches that it was believed our troops could advance,
the navy ceased firing, and immediately a light line of
skirmishers from the Colorado regiment of Greene's brigade
passed over our trenches and deployed rapidly forward, another
line from the same regiment from the left flank of our
earthworks advancing swifty up the beach in open order. Both
these lines found the powder-magazine fort and the trenches
flanking it deserted, but as they passed over the Spanish
works they were met by a sharp fire from a second line
situated in the streets of Malate, by which a number of men
were killed and wounded, among others the soldier who pulled
down the Spanish colors still flying on the fort and raised
our own.

"The works of the second line soon gave way to the determined
advance of Greene's troops, and that officer pushed his
brigade rapidly through Malate and over the bridges to occupy
Binondo and San Miguel, as contemplated in his instructions.
In the meantime the brigade of General MacArthur, advancing
simultaneously on the Pasay road, encountered a very sharp
fire, coming from the blockhouses, trenches, and woods in his
front, positions which it was very difficult to carry, owing
to the swampy condition of the ground on both sides of the
roads and the heavy undergrowth concealing the enemy. With
much gallantry and excellent judgment on the part of the
brigade commander and the troops engaged these difficulties
were overcome with a minimum loss, and MacArthur advanced and
held the bridges and the town of Malate, as was contemplated
in his instructions.

"The city of Manila was now in our possession, excepting the

walled town, but shortly after the entry of our troops into
Malate a white flag was displayed on the walls, whereupon
Lieutenant Colonel C. A. Whittier, United States Volunteers,
of my staff, and Lieutenant Brumby, United States Navy,
representing Admiral Dewey, were sent ashore to communicate
with the Captain-General. I soon personally followed these
officers into the town, going at once to the palace of the
Governor-General, and there, after a conversation with the
Spanish authorities, a preliminary agreement of the terms of
capitulation was signed by the Captain-General and myself.
This agreement was subsequently incorporated into the formal
 terms of capitulation, as arranged by the officers
representing the two forces, a copy of which is hereto
appended and marked.
{620}
Immediately after the surrender the Spanish colors on the sea
front were hauled down and the American flag displayed and
saluted by the guns of the navy. The Second Oregon Regiment,
which had proceeded by sea from Cavite, was disembarked and
entered the walled town as a provost guard, and the colonel
was directed to receive the Spanish arms and deposit them in
places of security. The town was filled with the troops of the
enemy driven in from the intrenchments, regiments formed and
standing in line in the streets, but the work of disarming
proceeded quietly and nothing unpleasant occurred.

"In leaving the subject of the operations of the 13th, I

desire here to record my appreciation of the admirable manner
in which the orders for attack and the plan for occupation of
the city were carried out by the troops exactly as
contemplated. I submit that for troops to enter under fire a
town covering a wide area, to rapidly deploy and guard all
principal points in the extensive suburbs, to keep out the
insurgent forces pressing for admission, to quietly disarm an
army of Spaniards more than equal in numbers to the American
troops, and finally by all this to prevent entirely all
rapine, pillage, and disorder, and gain entire and complete
possession of a city of 300,000 people, filled with natives
hostile to the European interests, and stirred up by the
knowledge that their own people were fighting in the outside
trenches, was an act which only the law-abiding, temperate,
resolute American soldier, well and skillfully handled by his
regimental and brigade commanders, could accomplish. …

"The amount of public funds and the numbers of the prisoners

of war and small arms taken have been reported in detail by
cable. It will be observed that the trophies of Manila were
nearly $900,000, 13,000 prisoners, and 22,000 arms.
Immediately after the surrender my headquarters were
established in the ayuntamiento, or city office of the
Governor-General, where steps were at once inaugurated to set
up the government of military occupancy. … On the 16th a
cablegram containing the text of the President's proclamation
directing a cessation of hostilities was received by me, and
at the same time an order to make the fact known to the
Spanish authorities, which was done at once. This resulted in
a formal protest from the Governor-General in regard to the
transfer of public funds then taking place, on the ground that
the proclamation was dated prior to the surrender. To this I
replied that the status quo in which we were left with the
cessation of hostilities was that existing at the time of the
receipt by me of the official notice, and that I must insist
upon the delivery of the funds. The delivery was made under
protest.

"After the issue of my proclamation and the establishment of

my office as military governor, I had direct written
communication with General Aguinaldo on several occasions. He
recognized my authority as military governor of the town of
Manila and suburbs, and made professions of his willingness to
withdraw his troops to a line which I might indicate, but at
the same time asking certain favors for himself. The matters
in this connection had not been settled at the date of my
departure. Doubtless much dissatisfaction is felt by the rank
and file of the insurgents that they have not been permitted
to enjoy the occupancy of Manila, and there is some ground for
trouble with them owing to that fact, but, notwithstanding
many rumors to the contrary, I am of the opinion that the
leaders will be able to prevent serious disturbances, as they
are sufficiently intelligent and educated to know that to
antagonize the United States would be to destroy their only
chance of future political improvement.

"On the 28th instant I received a cablegram directing me to

transfer my command to Major-General Otis, United States
 Volunteers, and to proceed to Paris, France, for conference
with the peace commissioners. I embarked on the steamer
'China' on the 30th in obedience to these instructions."

Report of General Wesley Merritt

(Annual Reports of the War Department, 1898,
volume 1, pages 39-45).

"Aguinaldo … retired to Malalos, about 25 miles to the

northward, leaving his troops entrenched round Manila, and
there with considerable pomp and ceremony on September 29th,
1898, he was declared First President of the Philippine
Republic, and the National Congress was opened with Pedro
Paterno as President of that assembly."

G. J. Younghusband,
The Philippines and Round About,
page 27.

UNITED STATES OF AMERICA: A. D. 1898 (July-December).

War with Spain.
Suspension of hostilities.
Negotiation of Treaty of Peace.
Instructions to American Commissioners.
Relinquishment of Spanish sovereignty over Cuba and cession
of Porto Rico, the island of Guam and the Philippine Islands
to the United States.

In his message to Congress, December 5, 1898, President

McKinley gave the following account of his reception of
overtures from Spain, for the termination of the war, and of
the negotiations which resulted in a treaty of peace:

"The annihilation of Admiral Cervera's fleet, followed by the

capitulation of Santiago, having brought to the Spanish
Government a realizing sense of the hopelessness of continuing
a struggle now become wholly unequal, it made overtures of
 peace through the French Ambassador, who, with the assent of
his Government, had acted as the friendly representative of
Spanish interests during the war. On the 26th of July M.
Cambon presented a communication signed by the Duke of
Almodovar, the Spanish Minister of State, inviting the United
States to state the terms upon which it would be willing to
make peace. On the 30th of July, by a communication addressed
to the Duke of Almodovar and handed to M. Cambon, the terms of
this Government were announced, substantially as in the
protocol afterwards signed. On the 10th of August the Spanish
reply, dated August 7th, was handed by M. Cambon to the
Secretary of State. It accepted unconditionally the terms
imposed as to Cuba, Porto Rico and an island of the Ladrone
group, but appeared to seek to introduce inadmissible
reservations in regard to our demand as to the Philippine
Islands. Conceiving that discussion on this point could
neither be practical nor profitable, I directed that, in order
to avoid misunderstanding, the matter should be forthwith
closed by proposing the embodiment in a formal protocol of the
terms upon which the negotiations for peace were to be
undertaken.
{621}
The vague and inexplicit suggestion of the Spanish note could
not be accepted, the only reply being to present as a virtual
ultimatum a draft of protocol embodying the precise terms
tendered to Spain in our note of July 30th, with added
stipulations of detail as to the appointment of commissioners
to arrange for the evacuation of the Spanish Antilles. On
August 12th M. Cambon announced his receipt of full powers to
sign the protocol submitted. Accordingly, on the afternoon of
August 12th M. Cambon, as the plenipotentiary of Spain, and
the Secretary of State, as the plenipotentiary of the United
States, signed a protocol providing:

Article I—
Spain will relinquish all claim of sovereignty over and title
to Cuba.
Article II-
Spain will cede to the United States the island of Porto Rico
and other islands now under Spanish sovereignty in the West
Indies and also an island in the Ladrones to be selected by
the United States.

Article III-
The United States will occupy and hold the city, bay and
harbor of Manila pending the conclusion of a treaty of peace,
which shall determine the control, disposition and government
of the Philippines.

The fourth article provided for the appointment of joint

commissions on the part of the United States and Spain, to
meet in Havana and San Juan, respectively, for the purpose of
arranging and carrying out the details of the stipulated
evacuation of Cuba, Porto Rico and other Spanish islands in
the West Indies.

The fifth article provided for the appointment of not more

than five commissioners on each side, to meet at Paris not
later than October 1st, and proceed to the negotiation and
conclusion of a treaty of peace, subject to ratification
according to the respective constitutional forms of the two
countries.

The sixth and last article provided that upon the signature of
the protocol hostilities between the two countries should be
suspended and that notice to that effect should be given as
soon as possible by each government to the commanders of its
military and naval forces. Immediately upon the conclusion of
the protocol I issued a proclamation of August 12th,
suspending hostilities on the part of the United States. The
necessary orders to that end were at once given by telegraph.
The blockade of the ports of Cuba and San Juan de Porto Rico
was in like manner raised. On the 18th of August the
muster-out of 100,000 Volunteers, or as near that number as
was found to be practicable, was ordered. On the 1st of
December 101,165 officers and men had been mustered out and
discharged from the service and 9,002 more will be mustered
out by the 10th of this month. Also a corresponding number of
general staff officers have been honorably discharged from the
service. The military commissions to superintend the
evacuation of Cuba, Porto Rico and the adjacent islands were
forthwith appointed: For Cuba, Major-General James F. Wade,
Rear-Admiral William T. Sampson, Major-General Matthew C.
Butler. For Porto Rico, Major-General John R. Brooke,
Rear-Admiral Winfield S. Schley and Brigadier-General William
W. Gordon, who soon afterwards met the Spanish commissioners
at Havana and San Juan respectively. … Pursuant to the fifth
article of the protocol, I appointed William H. Day, late
Secretary of State; Cushman K. Davis, William P. Frye and
George Gray, Senators of the United States, and Whitelaw Reid,
to be the peace commissioners on the part of the United
States. Proceeding in due season to Paris they there met on
the first of October five commissioners, similarly appointed
on the part of Spain."

Message of the President to Congress,

December 5, 1898.

The instructions given (September 16) by President McKinley to

the commissioners appointed to treat for peace with Spain, and
the correspondence between the commissioners at Paris and the
President and the Secretary of State at Washington during the
progress of the negotiations, were communicated confidentially
to the United States Senate on the 30th of January, 1899, but
not published until February, 1901, when the injunction of
secrecy was removed and the printing of the papers ordered by
vote of the Senate. The chief interest of these papers lies in
their disclosure of what passed between the American executive
and the peace commissioners on the subject of the Philippine
Islands which led to the demand for their entire surrender by
Spain.

In his instructions of September 16th to the commissioners, on

their departure for the meeting with Spanish commissioners at
Paris, the President wrote on this subject: "By article 6 of
the protocol it was agreed that hostilities between the two
countries should be suspended, and that notice to that effect
should be given as soon as possible by each Government to the
Commanders of its military and naval forces. Such notice was
given by the Government of the United States immediately after
the signature of the protocol, the forms of the necessary
orders having previously been prepared. But before notice
could reach the commanders of the military and naval forces of
the United States in the Philippines they captured and took
possession by conquest of the city of Manila and its suburbs,
which are therefore held by the United States by conquest as
well as by virtue of the protocol. In view of what has taken
place it is necessary now to determine what shall be our
future relations to the Philippines. …

"Our aim in the adjustment of peace should be directed to

lasting results and to the achievement of the common good
under the demands of civilization rather than to ambitious
designs. The terms of the protocol were framed upon this
consideration. The abandonment of the Western Hemisphere by
Spain was an imperative necessity. In presenting that
requirement we only fulfilled a duty universally acknowledged.
It involves no ungenerous reference to our recent foe, but
simply a recognition of the plain teachings of history, to say
that it was not compatible with the assurance of permanent
peace on and near our own territory that the Spanish flag
should remain on this side of the sea. This lesson of events
and of reason left no alternative as to Cuba, Porto Rico, and
the other islands belonging to Spain in this hemisphere. The
Philippines stand upon a different basis. It is none the less
true, however, that, without any original thought of complete
or even partial acquisition, the presence and success of our
 arms at Manila imposes upon us obligations which we can not
disregard. The march of events rules and overrules human
action. A vowing unreservedly the purpose which has animated
all our effort, and still solicitous to adhere to it, we can
not be unmindful that without any desire or design on our part
the war has brought us new duties and responsibilities which
we must meet and discharge as becomes a great nation on whose
growth and career from the beginning the Ruler of Nations has
plainly written the high command and pledge of civilization.

{622}

"Incidental to our tenure in the Philippines is the commercial

opportunity to which American statesmanship can not be
indifferent. It is just to use every legitimate means for the
enlargement of American trade; but we seek no advantages in
the Orient which are not common to all. Asking only the open
door for ourselves, we are ready to accord the open door to
others. The commercial opportunity which is naturally and
inevitably associated with this new opening depends less on
large territorial possessions than upon an adequate commercial
basis and upon broad and equal privileges. It is believed that
in the practical application of these guiding principles the
present interests of our country and the proper measure of its
duty, its welfare in the future, and the consideration of its
exemption from unknown perils will be found in full accord
with the just, moral, and humane purpose which was invoked as
our justification in accepting the war.

"In view of what has been stated, the United States can not
accept less than the cession in full right and sovereignty of
the island of Luzon. It is desirable, however, that the United
States shall acquire the right of entry for vessels and
merchandise belonging to citizens of the United States into
such ports of the Philippines as are not ceded to the United
States upon terms of equal favor with Spanish ships and
merchandise, both in relation to port and customs charges and
rates of trade and commerce, together with other rights of
protection and trade accorded to citizens of one country
within the territory of another. You are therefore instructed
to demand such concession, agreeing on your part that Spain
shall have similar rights as to her subjects and vessels in
the ports of any territory in the Philippines ceded to the
United States."

On the 7th of October, Mr. Day, on behalf of the American

commissioners, cabled a long communication from Paris to Mr.
Hay, his successor in the United States Department of State,
summarizing testimony given before the Commission by General
Merritt, lately commanding in the Philippines, and statements
brought by General Merritt from Admiral Dewey, General Greene,
and others. In part, the telegram was as follows:

"General Anderson, in correspondence with Aguinaldo in June

and July, seemed to treat him and his forces as allies and
native authorities, but subsequently changed his tone. General
Merritt reports that Admiral Dewey did not approve this
correspondence and advised against it. Merritt and Dewey both
kept clear of any compromising communications. Merritt
expresses opinion we are in no way committed to any insurgent
programme. Answering questions of Judge Day, General Merritt
said insurrection practically confined to Luzon. Tribal and
religious differences between the inhabitants of various
islands. United States has helped rather than injured
insurrection. Under no obligation other than moral to help
natives. Natives of Luzon would not accept Spanish rule, even
with amnesty. Insurgents would be victorious unless Spaniards
did better in future than in past. Insurgents would fight
among themselves if they had no common enemy. Think it
feasible for United States to take Luzon and perhaps some
adjacent islands and hold them as England does her colonies.
Natives could not resist 5,000 troops. … General Merritt
thinks that if United States attempted to take possession of
Luzon, or all the group as a colony, Aguinaldo and his
immediate followers would resist it, but his forces are
divided and his opposition would not amount to anything. If
the islands were divided, filibustering expeditions might go
from one island to another, thus exposing us to constant
danger of conflict with Spain. In answer to questions of
Senator Frye, Merritt said insurgents would murder Spaniards
and priests in Luzon and destroy their property if the United
States withdrew. United States under moral obligation to stay
there. He did not know whether the effect of setting up a
government by the United States in Luzon would be to produce
revolutions in other islands. It might cause reforms in their
government. … Answering questions of Mr. Gray, Merritt said
consequences in case of either insurgent or Spanish triumph
made it doubtful whether United States would be morally
justified in withdrawing. Our acts were ordinary acts of war,
as if we had attacked Barcelona, but present conditions in
Philippine Islands were partly brought about by us. Insurgents
not in worse condition by our coming. Spaniards hardly able to
defend themselves. If we restored them to their position and
trenches, they might maintain themselves with the help of a
navy when we withdrew. Did not know that he could make out a
responsibility by argument, but he felt it. It might be
sentimental. He thought it would be an advantage if the United
States would change its policy and keep the islands. (He)
thought our interests in the East would be helped by the cheap
labor in the Philippines, costing only from 20 to 80 cents a
day, according to skill. … Answering questions of Mr. Reid,
Merritt said he considered capture of Manila practically
capture of group. Nothing left of Spanish sovereignty that was
not at mercy of the United States. Did not think our humanity
bounded by geographical lines. After Dewey's victory we armed
insurgents to some extent, but Dewey says it was
over-estimated. Insurgents bought arms from Hongkong merchants
with Dewey's cognizance, but Dewey was not in favor of allowing
this to continue. Spaniards would destroy Aguinaldo and his
principal followers, if allowed to do so."
 October 25, Judge Day cabled a message to Washington, saying:
"Differences of opinion among commissioners concerning
Philippine Islands are set forth in statements transmitted
herewith. On these we request early consideration and explicit
instructions. Liable now to be confronted with this question
in joint commission almost immediately." The differing
statements then transmitted were three in number, the first of
them signed by Messrs. Davis, Frye, and Reid, who said:
"Information gained by commission in Paris leads to conviction
that it would be naval, political, and commercial mistake to
divide the archipelago. Nearly all expert testimony taken
tends to this effect. As instructions provide for retention at
least of Luzon, we do not consider question of remaining in
Philippine Islands at all as now properly before us. We
therefore ask for extension of instructions. Spain governed
and defended these islands from Manila, and with destruction
of her fleet and the surrender of her army we became as
complete masters of the whole group as she had been, with
nothing needed to complete the conquest save to proceed with
the ample forces we had at hand to take unopposed possession.
{623}
The Ladrones and Carolines were also governed from the same
capital by the same governor-general. National boundaries
ought to follow natural divisions, but there is no natural
place for dividing Philippine Islands. … If we do not want the
islands ourselves, better to control their disposition; that
is, to hold the option on them rather than to abandon it.
Could then at least try to protect ourselves by ample treaty
stipulations with the acquiring powers. Commercially, division
of archipelago would not only needlessly establish dangerous
rivals at our door, but would impair value of part we kept."

Disagreeing with this view, Judge Day said:

"I am unable to agree that we should peremptorily demand the

entire Philippine island group. In the spirit of our
instructions, and bearing in mind the often declared
disinterestedness of purpose and freedom from designs of
conquest with which the war was undertaken, we should be
consistent in our demands in making peace. Territory
permanently held must be taken as war indemnity and with due
regard to our responsibility because of the conduct of our
military and naval authorities in dealing with the insurgents.
Whether this conduct was wise or unwise is not now important. We
cannot leave the insurgents to mere treaty stipulations or to
their unaided resources, either to form a government or to
battle against a foe which (although) unequal to us, might
readily overcome them. On all hands it is agreed that the
inhabitants of the islands are unfit for self-government. This
is particularly true of Mindanao and the Sulu group. Only
experience can determine the success of colonial expansion
upon which the United States is entering. It may prove
expensive in proportion to the scale upon which it is tried
with ignorant and semibarbarous people at the other side of
the world. It should therefore be kept within bounds." Judge
Day, accordingly, suggested a division of the archipelago that
would give to the United States Luzon, Mindoro, and Palawan,
and control the entrance to the China Sea. Senator Gray, in a
third statement, dissented from both these views, saying: "The
undersigned can not agree that it is wise to take Philippine
Islands in whole or in part. To do so would be to reverse
accepted continental policy of the country, declared and acted
upon throughout our history. Propinquity governs the case of
Cuba and Porto Rico. Policy proposed introduces us into
European politics and the entangling alliances against which
Washington and all American statesmen have protested. It will
make necessary a navy equal to largest of powers; a greatly
increased military establishment; immense sums for
fortifications and harbors; multiply occasions for dangerous
complications with foreign nations, and increase burdens of
taxation. Will receive in compensation no outlet for American
labor in labor market already overcrowded and cheap; no area
for homes for American citizens; climate and social conditions
demoralizing to character of American youth; new and disturbing
questions introduced into our politics; church question
menacing. On whole, instead of indemnity—injury. The
undersigned can not agree that any obligation incurred to
insurgents is paramount to our own manifest interests. … No
place for colonial administration or government of subject
people in American system. So much from standpoint of
interest; but even conceding all benefits claimed for
annexation, we thereby abandon the infinitely greater benefit
to accrue from acting the part of a great, powerful, and
Christian nation; we exchange the moral grandeur and strength
to be gained by keeping our word to nations of the world and
by exhibiting a magnanimity and moderation in the hour of
victory that becomes the advanced civilization we claim, for
doubtful material advantages and shameful stepping down from
high moral position boastfully assumed. We should set example
in these respects, not follow in the selfish and vulgar greed
for territory which Europe has inherited from medieval times.
Our declaration of war upon Spain was accompanied by a solemn
and deliberate definition of our purpose. Now that we have
achieved all and more than our object, let us simply keep our
word. … At the very least let us adhere to the President's
instructions and if conditions require the keeping of Luzon
forego the material advantages claimed in annexing other
islands. Above all let us not make a mockery of the injunction
contained in those instructions, where, after stating that we
took up arms only in obedience to the dictates of humanity and
in the fulfillment of high public and moral obligations, and
that we had no design of aggrandizement and no ambition of
conquest, the President among other things eloquently says:
'It is my earnest wish that the United States in making peace
should follow the same high rule of conduct which guided it in
facing war. It should be as scrupulous and magnanimous in the
concluding settlement as it was just and humane in its
original action.' This and more, of which I earnestly ask a
re-perusal, binds my conscience and governs my actions."

But the President had now arrived at a different state of