By Nick Taylor, author
of “American-Made,” a 2008 history of the Works Progress Administration.
Great Depression was a worldwide economic crisis that in the United States was marked by widespread unemployment, near halts in industrial production
and construction, and an 89 percent decline in stock prices. It was preceded by the so-called New Era, a time of low unemployment
when general prosperity masked vast disparities in income.
start of the Depression is usually pegged to the stock market crash of “Black Tuesday,” Oct. 29, 1929, when the
Dow Jones Industrial Average fell almost 23 percent and the market lost between $8 billion and $9 billion in value. But it
was just one in a series of losses during a time of extreme market volatility that exposed those who had bought stocks “on
margin” – with borrowed money.
stock market continued to decline despite brief rallies. Unemployment rose and wages fell for those who continued to work.
The use of credit for the purchase of homes, cars, furniture and household appliances resulted in foreclosures and repossessions.
As consumers lost buying power industrial production fell, businesses failed, and more workers lost their jobs. Farmers were
caught in a depression of their own that had extended through much of the 1920s. This was caused by the collapse of food prices
with the loss of export markets after World War I and years of drought that were marked by huge dust storms that blackened
skies at noon and scoured the land of topsoil. As city dwellers lost their homes, farmers also lost their land and equipment
Herbert Hoover, a Republican and former Commerce secretary, believed the government should monitor the economy and encourage
counter-cyclical spending to ease downturns, but not directly intervene. As the jobless population grew, he resisted calls
from Congress, governors, and mayors to combat unemployment by financing public service jobs. He encouraged the creation of
such jobs, but said it was up to state and local governments to pay for them. He also believed that relieving the suffering
of the unemployed was solely up to local governments and private charities.
1932 the unemployment rate had soared past 20 percent. Thousands of banks and businesses had failed. Millions were homeless.
Men (and women) returned home from fruitless job hunts to find their dwellings padlocked and their possessions and families
turned into the street. Many drifted from town to town looking for non-existent jobs. Many more lived at the edges of cities
in makeshift shantytowns their residents derisively called Hoovervilles. People foraged in dumps and garbage cans for food.
presidential campaign of 1932 was run against the backdrop of the Depression. Franklin Delano Roosevelt won the Democratic
nomination and campaigned on a platform of attention to “the forgotten man at the bottom of the economic pyramid.”
Hoover continued to insist it was not the government’s
job to address the growing social crisis. Roosevelt won in a landslide. He took office on
March 4, 1933, with the declaration that “the only thing we have to fear is fear itself.”
Roosevelt faced a banking crisis and unemployment that had reached 24.9 percent.
Thirteen to 15 million workers had no jobs. Banks regained their equilibrium after Roosevelt
persuaded Congress to declare a nationwide bank holiday. He offered and Congress passed a series of emergency measures that came to characterize his promise of a “new deal for the American people.” The legislative
tally of the new administration’s first hundred days reformed banking and the stock market; insured private bank deposits;
protected home mortgages; sought to stabilize industrial and agricultural production; created a program to build large public
works and another to build hydroelectric dams to bring power to the rural South; brought federal relief to millions, and sent
thousands of young men into the national parks and forests to plant trees and control erosion.
parks and forests program, called the Civilian Conservation Corps, was the first so-called work relief program that provided
federally funded jobs. Roosevelt later created a large-scale temporary jobs program during
the winter of 1933–34. The Civil Works Administration employed more than four million men and women at jobs from building
and repairing roads and bridges, parks, playgrounds and public buildings to creating art. Unemployment, however, persisted
at high levels. That led the administration to create a permanent jobs program, the Works Progress Administration. The W.P.A.
began in 1935 and would last until 1943, employing 8.5 million people and spending $11 billion as it transformed the national
infrastructure, made clothing for the poor, and created landmark programs in art, music, theater and writing. To accommodate
unions that were growing stronger at the time, the W.P.A. at first paid building trades workers “prevailing wages”
but shortened their hours so as not to compete with private employers.
Roosevelt’s efforts to assert government control over the economy were
frustrated by Supreme Court rulings that overturned key pieces of legislation. In response, Roosevelt
made the misstep of trying to “pack” the Supreme Court with additional justices. Congress rejected this 1937 proposal
and turned against further New Deal measures, but not before the Social Security Act creating old-age
pensions went into effect.Brightening economic prospects were dashed in 1937 by a deep recession that
lasted from that fall through most of 1938. The new downturn rolled back gains in industrial production and employment, prolonged
the Depression and caused Roosevelt to increase the work relief rolls of the W.P.A. to their
highest level ever.
invasion of Poland in September 1939, following Japan’s
invasion of China two years earlier and
the continuing war there, turned national attention to defense. Roosevelt, who had been re-elected in 1936, sought to rebuild
a military infrastructure that had fallen into disrepair after World War I. This became a new focus of the W.P.A. as private
employment still lagged pre-Depression levels. But as the war in Europe intensified with France
surrendering to Germany and England
fighting on, ramped up defense manufacturing began to produce private sector jobs and reduce the persistent unemployment that
was the main face of the Depression. Jobless workers were absorbed as trainees for defense jobs and then by the draft that
went into effect in 1940, when Roosevelt was elected to a third term. The Japanese attack
on Pearl Harbor in December 1941 that started World War II sent America’s
factories into full production and absorbed all available workers.
the New Deal’s many measures and their alleviation of the worst effects of the Great Depression, it was the humming
factories that supplied the American war effort that finally brought the Depression to a close. And it was not until 1954
that the stock market regained its pre-Depression level…NYT, 3/4/09
Former President Harry S Truman is credited with explaining the difference
between an economic recession and a depression.
"It's a recession when your neighbor loses his job; it's a depression when you lose yours,"
Truman was quoted as saying in an April 13, 1958, article in the Observer magazine.
As unemployment and credit crises continue to rock the national economy, The Sun interviewed veterans of the
worst economic downturn in U.S. history, The Great Depression - lessons from which continue to have relevance today.
Over the past eight months, several people who were children or young adults during the Depression era of 1929
to 1940 have recalled for The Sun how their families survived during that financially devastating era. Most recalled living
by a simple axiom of getting down to the basics of family and focusing on their needs rather than wants.
Phill Tomlinson writes: A great deal can be learnt through history.
In a practical sense its completely useless, as it merely just documents past events, but past events can help explain current
and possible future events. If you can never get to grips with a subject matter it is best to look at history to try and to
identify possible similarities. I have taken some quotes from a historical book and I think a lot of the quotes below could
be said of the current situation we find ourselves in.
"If the Federal Reserve had an inflationist attitude during the boom, it was just as ready to try to
cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions.
In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash—the final week of
October—and in that brief period added almost $300 million to the reserves of the nation’s banks. During that
week, the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted
about $200 million more for member banks. Instead of going through a healthy and rapid liquidation of unsound positions, the
economy was fated to be continually bolstered by governmental measures that could only prolong its diseased state."
"The Federal Reserve also promptly and sharply lowered its rediscount
rate, from 6 percent at the beginning of the crash to 4.5 percent by mid-November. Acceptance rates were also reduced considerably.
This enormous expansion was generated to prevent liquidation on the stock market and to permit the New York City banks to
take over the brokers’ loans that the “other,” non-bank, lenders were liquidating."
"Dr. Anderson records that, at the end of December, 1929, the leading
Federal Reserve officials wanted to pursue a laissez-faire policy: “the disposition was to let the money market ‘sweat
it out’ and reach monetary ease by the wholesome process of liquidation.” The Federal Reserve was prepared to
let the money market find its own level, without providing artificial stimuli that could only prolong the crisis. But early
in 1930, the government instituted a massive easy money program. Rediscount rates of the New York Fed fell from 4.5 percent
in February to 2 percent by the end of the year."
1930, the Federal Reserve had steadily lowered its rediscount rates: from 4.2 percent at the beginning of the year, to 2 percent
at the end, and finally down to 1.2 percent in mid-1931."
"President Hoover was proud of his experiment in cheap money, and in his speech to the business conference on December
5, he hailed the nation’s good fortune in possessing the splendid Federal Reserve System, which had succeeded in saving
shaky banks, had restored confidence, and had made capital more abundant by reducing interest rates. Hoover had done his part
to spur the expansion by personally urging the banks to rediscount more extensively at the Federal Reserve Banks. Secretary
Mellon issued one of his by now traditionally optimistic pronouncements that there was “plenty of credit available.”
And William Green issued a series of optimistic statements, commending the Federal Reserve’s success in ending the depression.
On November 22, Green said: All the factors which make for a quick and speedy industrial and economic recovery are present
and evident. The Federal Reserve System is operating, serving as a barrier against financial demoralization. Within a few
months industrial conditions will become normal, confidence and stabilization in industry and finance will be restored."
"By early 1930, people were generally convinced
that there was little to worry about. Hoover’s decisive actions on so many fronts—wages, construction, public
works, farm supports, etc., indicated to the public that this time swift national planning would turn the tide quickly. Farm
prices then seemed to be recovering, and unemployment had not yet reached catastrophic proportions, averaging less than 9
percent of the labor force in 1930."
"During the second
half of 1930, production, prices, foreign trade, and employment continued to decline. On July 29, Hoover called for an investigation
of bankruptcy laws in order to weaken them and prevent many bankruptcies—thus turning to the ancient device of attempting
to revive confidence by injuring creditors and propping up unsound positions."
"As a consequence, while the immigration law had already reduced net immigration into
the United States to about 200,000 per year, Hoover’s decree reduced net immigration to 35,000 in 1931, and in 1932
there was a net emigration of 77,000. In addition, Hoover’s Emergency Committee on Employment organized concerted propaganda
to urge young people to return to school in the fall, and thus leave the labor market."
"He hailed the Federal Reserve System as the great instrument of promoting stability,
and called for an “ample supply of credit at low rates of interest,” as well as public works, as the best methods
of ending the depression."
"As 1931 drew to
a close and another Congressional session drew near, the country and indeed the world were in the midst of an authentic crisis
atmosphere—a crisis of policy and of ideology. The depression, so long in effect, was now rapidly growing worse, in
America and throughout the world. The stage was set for the “Hoover New Deal” of 1932."
"During 1929, the Federal government had a huge surplus of $1.2 billion"
"From a modest surplus in 1930, the Federal government
thus ran up a huge $2.2 billion deficit in 1931."
thing Hoover was not reticent about: launching a huge inflationist program. First, the administration cleared the path for
the program by passing the Glass–Steagall Act in February, which (a) greatly broadened the assets eligible for rediscounts
with the Fed, and (b) permitted the Federal Reserve to use government bonds as collateral for its notes, in addition to commercial
"Thus, the Hoover administration pursued a giant
inflationary policy from March through July 1932, raising controlled reserves by $1 billion through Fed purchase of government
securities. If all other factors had remained constant, and banks fully loaned up, the money supply would have risen abruptly
and wildly by over $10 billion during that period. Instead, and fortunately, the inflationary policy was reversed and turned
into a rout. What defeated it? Foreigners who lost confidence in the dollar, partly as a result of the program, and drew out
gold; American citizens who lost confidence in the banks and changed their deposits into Federal Reserve notes; and finally,
bankers who refused to endanger themselves any further, and either used the increased resources to repay debt to the Federal
Reserve or allowed them to pile up in the vaults. And so, fortunately, inflation by the government was turned into deflation
by the policies of the public and the banks, and the money supply dropped by $3.5 billion."
Notice some parallels between the present and the period being described above? The things I find most striking are the
fact the FED drastically cut rates from 6% to 1.2%, compared with today in which they cut from 5.25% to 2% at present. Also
the fact that at the beginning of the bust the government were running huge budget surpluses, and within a couple of years
were running huge deficits, compared with now where the US has persistently for years now been running up huge deficits which
will get worse.
Of course the period being described was the Great
Depression and the Quotes were taken from Murray Rothbards book, Americas Great Depression. Contrary to what people believe
the great depression was not suddenly brought about after the infamous stock market crash in October 1929, it was brought
about over a 3-4 year period of excessive monetary inflation in the previous years during the 1920's boom and increasing inflationary
policies during the bust along with increased government interference, which made the Depression so great. In fact the stock
market also rallied during this time and didn't bottom out till around 1933. Hoover was the creator of the New Deal, Roosevelt
just merely carried on with it with even more enthusiasm contary to the myth that Hoover had a no hands approach to the economy.
In the end this is where we now stand,
"But here, in the crisis
of 1933, the banks could no longer continue as they were. Something had to be done. Essentially, there were two possible routes.
One was the course taken by Roosevelt; the destruction of the property rights of bank depositors, the confiscation of gold,
the taking away of the people’s monetary rights, and the placing of the Federal Government in control of a vast, managed,
engine of inflation. The other route would have been to seize the opportunity to awaken the American people to the true nature
of their banking system, and thereby return, at one swoop, to a truly hard and sound money."
We all know what happened in subsequent years. Nixon removed the US from the gold standard, and in effect all western
currencies from gold as bretton woods was dissmantled. Now the dollar and world currencies are backed with nothing as we enter
another dissasturous chapter in history of fiat currency.
If we wish to draw the parallels to today, roughly in 1928 real estate prices began to fall compared with 2006 in the
US. 1929 and stock prices began to fall, compared with 2007 when the Dow was at its all time high. So what does that mean
in the next few years if we are only at 1930. Well we have a lot further to go and the governments and Central Banks are doing
exactly what history has taught us not to do.
there are differences, which I believe position the US in a worse position. Back then the US had huge budget surpluses in
previous years, exported goods throughout the world and had huge oil reserves (cheep energy reserves which can never be overstated).
They also theoretically had the dollar backed by Gold which meant even though the FED tried to inflate they were constrained,
where as now it is a complete fiat currency meaning there will be no limits to inflate this time. Ben Bernanke the current
head of the FED is supposedly a student of the Great Depression but from what I've seen, he's repeating what was done 75 years
ago, and he's doing a pretty good job of fooling everyone. Nationalising Fannie and Freddie Mac, that were created at the
end of the Great Depression, is an absolute disaster as I have said before, and is exactly what President Hoover and the FED
would have done during the last depression.
will end on the following note from Murray Rothbard. Maybe we are facing another depression and crisis of the same magnitude?
"What was the trouble? Economic theory demonstrates
that only governmental inflation can generate a boom-and-bust cycle, and that the depression will be prolonged and aggravated
by inflationist and other interventionary measures. In contrast to the myth of laissez-faire, we have shown in this book how
government intervention generated the unsound boom of the 1920s, and how Hoover’s new departure aggravated the Great
Depression by massive measures of interference. The guilt for the Great Depression must, at long last, be lifted from the
shoulders of the free-market economy, and placed where it properly belongs: at the doors of politicians, bureaucrats, and
the mass of “enlightened” economists. And in any other depression, past or future, the story will be the same."
The Age of Stupidity"There
is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the
crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total
catastrophe of the currency system involved.", Ludwig Von Mises
el brillo el oro
Por James Grant
Nuestro dinero está hecho de papel, lo cual es bueno, o al menos esa es la conclusión que esta historia
un colapso económico anterior pretende transmitirles a sus lectores. En su intento por revitalizar la economía y rescatar
el sistema financiero, un banco central puede limitarse a simplemente imprimir dinero. De hecho, eso es exactamente lo que
lleva haciendo la Reserva Federal de Estados Unidos a un ritmo frenético desde que se desatara el pánico en 2008. Entonces,
comparemos la facilidad de duplicar el dólar con la pesadez de excavar en minas su antecesor dorado.
Lords of Finance(algo
así como "Los señores de las finanzas") es un repaso modernista a los errores que desembocaron en la Gran Depresión. También
supone, necesariamente, una provocación para debatir sobre esta, nuestra Gran Recesión. Liaquat Ahamed es el modernista en
cuestión, y escribe con toda la autoridad que le provee su historial como inversionista profesional, ex miembro del Banco
Mundial y fideicomisario de Brookings Institution.
Ahamed provee detallados perfiles de los principales banqueros centrales de los años 20 y 30 y el mundo
que sin querer destruyeron: Benjamin Strong, el Ben S. Bernanke de entonces pero sin educación universitaria; el mejor amigo
de Strong, Montagu Norman, el emocionalmente débil presidente del Banco de Inglaterra; y Horace Greeley Hjalmar Schacht, el
banquero central de Alemania, que "logró parecerse a una mezcla de un oficial de la reserva de Prusia y un juez prusiano en
ciernes tratando de copiar al oficial".
En la obra de Ahamed, ninguna de estas personalidades es presentada como un héroe, pero el villano de
la película es el patrón oro. O, más bien, lo que Ahamed describe de forma inexacta e inútil como "el patrón oro". Su batalla
de hecho es con el estándar del intercambio del oro, una versión de espectáculo itinerante del artículo genuino.
El patrón oro constituyó el sistema monetario de forma más o menos constante desde Waterloo hasta la
Primera Guerra Mundial. Era la simplicidad misma. Los billetes podían intercambiarse por oro, y el oro a su vez en billetes,
a una tasa fija e inviolable. La tarea diaria de un banco central consistía en facilitar este intercambio. En lo que conocemos
hoy en día como "política monetaria" (como sinónimo de manipular tasas de interés o la provisión de dinero para impulsar el
mercado laboral o sacar a la economía de un bache) el concienzudo banquero central no tendría nada que ver.
El patrón oro desapareció en la Primera Guerra Mundial. En su lugar, los gobiernos del mundo de la posguerra
establecieron un sistema que se parecía al estándar de oro. Se decía que las monedas estaban "respaldadas" por lingotes. Pero,
de hecho, los banqueros centrales hicieron caso omiso de las normas de estándar de oro. Manipulaban las tasas de interés y
de intercambio y acabaron con las funciones del exquisito patrón oro. Lo que se parecía al patrón oro en realidad no tenía
ninguna relación con éste. La gente incluso sospechaba que, en la mayoría de los países, las monedas de oro desaparecían en
arcas privadas en vez de circular de mano en mano tal como lo habían hecho durante generaciones antes de la Gran Guerra.
El patrón oro sigue en vigor, con sus características esenciales. Lo que respalda a muchas monedas de
referencia, por supuesto, no es otra cosa que la buena voluntad de los bancos centrales que las emiten. Pero el hecho de respaldar
con oro no es, en esencia, el atributo primordial de un patrón oro que funcione adecuadamente. Lo que hizo que el sistema
autorregulatorio perdurara fue la simple norma de que un dólar o un franco o una libra no podían estar en dos lugares al mismo
tiempo. Los movimientos de oro entre deudores y acreedores se aseguraban de eso.
Uno podría deducir que una característica tan básica del mundo físico se trasladaría con toda naturalidad
al financiero. Pero el equipo de demolición de la posguerra descubrió que se podía crear una cierta clase privilegiada de
dinero que cumplía una doble función. Se trataba de la "divisa de reserva". La libra esterlina fue la divisa de reserva original,
la marca monetaria más importante de aquel momento. El dólar estadounidense es su sucesor. Tanto Gran Bretaña como luego EE.UU.
pudieron hacerlo de las dos formas: consumir mucho más de lo que producían pero sin tener que pagar a sus acreedores extranjeros
en otra cosa que no fuera el papel moneda que sólo ellos podían imprimir legalmente. Y si eso no fuera suficiente, los acreedores
reinvertían responsablemente las libras o los dólares en valores del gobierno deudor. Mientras duró, parecía el cielo en la
Pero por supuesto que no duró mucho. Nunca dura. La inflación (de los precios o del crédito) siempre
actúa como verdugo. El flaco servicio que Ahamed le hace a la historia es no distinguir entre las fallas de patrón oro clásico,
por un lado, y las imperfecciones mucho más profundas del estándar de intercambio de oro (tan similar a los males del estándar
actual de dólar"), por el otro.
Había algo en el auténtico patrón que fastidiaba a los intelectuales. H.G. Wells, citado en esta obra,
habla de la "magnífica y estúpida honestidad" del patrón oro original. Para John Maynard Keynes el mero capricho de excavar
oro de la tierra sólo para volver a enterrarlo en las cajas fuertes del Banco de Inglaterra era indefendible. Ahamed insiste
en que por consiguiente, Keynes tenía razón: "No hay mejor testamento de su legado... que el hecho de que en los 60 y tantos
años desde que pronunció sus palabras... armado de sus reflexiones, el mundo ha evitado una catástrofe económica como la que
arrasó con todo entre 1929 y 1933".
Pero, un minuto. ¿Acaso Ahamed habló demasiado pronto? Uno puede tener la esperanza de que no sea así,
pero sus magníficas descripciones del acontecer del principio de los años 30 recuerdan de una forma espeluznante a la crisis
actual. Un lector deLords
of Financese verá poco preparado, apartando la vista del texto para absorber
los espantosos titulares de la TV. ¿Será que la humanidad no ha aprendido la lección? ¿Acaso la sustitución de ilustres economistas
por lingotes inertes de oro nos ha librado del colapso de créditos y corridas contra la banca internacional? El autor parece
sugerirlo. "La Fed", escribe acerca del estilo intervencionista de la política monetaria por el que el estándar de intercambio
de oro alentó en los años 20, "había asumido una responsabilidad totalmente nueva: la de promocionar la estabilidad económica
interna". Gracias, Ben Strong. Gracias, Ben Bernanke.
Si Ahamed estaba en busca de un auténtico héroe de finanzas de entreguerras, pasó por alto a su hombre.
Jacques Rueff, un gran economista francés, sonó la alarma una y otra vez. El clásico patrón oro era un instrumento de equilibrio
económico, escribió, mientras que su sucesor es un motor de excesos. "Durante 10 años, hicimos todo lo que estaba en nuestro
poder para minar ese equilibrio".
Al criticar el "patrón oro", Ahamed me recuerda a aquel que condena "la pintura" por no encontrarle ningún
uso a Andy Warhol...WSJ
Paper is what our money is made of, and a
lucky thing, too -- or so readers of this history of an earlier monetary mess are meant to understand. Needing to brace up
the economy or rescue the financial system, a central bank can just print the stuff. Indeed, the Federal Reserve has been
doing just that at breakneck speed since the panic of 2008 began. Compare the ease of duplicating the millennial dollar with
the drudgery of mining its gold-standard forebear.
"Lords of Finance" is a modernist's account
of the errors that helped to produce the Great Depression. It is also, necessarily, a provocation to debate about this, our
Great Recession. Liaquat Ahamed is the modernist in question, and he writes with all the world-wise assurance of the professional
investor, World Bank alumnus and Brookings Institution trustee that he is.
Mr. Ahamed gives us rich portraits of the
principal central bankers of the 1920s and 1930s and of the world they unintentionally wrecked: Benjamin Strong, the Ben S.
Bernanke of his time but without the college education; Strong's best friend Montagu Norman, the emotionally fragile governor
of the Bank of England; and Horace Greeley Hjalmar Schacht, Germany's central banker, who "managed to look like a compound
of a Prussian reserve officer and a budding Prussian judge who is trying to copy the officer."
None of these worthies is cast as a hero,
in Mr. Ahamed's telling, but the villain of the piece is the gold standard. Or, rather, the villain of the piece is what Mr.
Ahamed inexactly and unhelpfully describes as "the gold standard." His quarrel is actually with the goldexchange standard,
a road-show version of the genuine article.
Lords of Finance By Liaquat Ahamed (Penguin Press, 564 pages,
The gold standard -- i.e.,thegold standard -- was
the monetary system more or less continuously in place between Waterloo and World War I. It was simplicity itself. Bank notes
were exchangeable into gold, and gold into bank notes, at a fixed, inviolable rate. A central bank's everyday job was to facilitate
this exchange. Of what we know today as "monetary policy" -- i.e., manipulating interest rates or the money supply to promote
full employment or to pull the economy out of the ditch -- the conscientious central banker would have no part.
This gold standard perished in World War
I. In its place, the governments of the postwar world established a system that looked like the gold standard. Currencies
were said to be "backed" by bullion. But, in fact, the central bankers overrode the gold-standard rules. They manipulated
interest rates and exchange rates and otherwise gummed up the exquisite gold-standard works. What looked like the gold standard
bore no real relation to it. People suspected as much, for gold coins, in most countries, disappeared into private hoards
rather than circulating from hand to hand as they had done for generations before the Great War.
Thatgold standard -- the gold-exchange standard -- remains in
force, in its essential attributes, today. What backs millennial currencies, of course, is nothing but the good intentions
of the central banks that issue them. But gold backing is not, in fact, the essential feature of a properly functioning gold
standard. What made that self-regulating system tick was the simple rule that a dollar or a franc or a pound could not be
in two places at the same time. Gold movements between debtors and creditors ensured as much.
You might suppose that so basic a feature
of the physical world would naturally rule the financial one. But the post-World War I wrecking crew discovered that a certain
privileged kind of money could be made to do double duty. This was the "reserve currency." The pound sterling was the original
reserve currency, the top monetary brand of the day. The U.S. dollar is its successor. It was given to Britain, later to the
U.S., to have it both ways, to consume much more than it produced but never to have to pay its foreign creditors in anything
except the paper that it alone could lawfully print. And as if that were not good enough, the creditors dutifully reinvested
the pounds or dollars in the securities of the debtor government. It was heaven on earth, while it lasted.
Of course, it didn't last; it never does.
Inflation -- of prices or of credit -- brings down the hammer. The disservice that Mr. Ahamed does to history is to fail to
distinguish between the flaws of the classical gold standard, on the one hand, and the far deeper imperfections of the gold-exchange
standard (so similar to the evils of today's dollar standard), on the other.
There was something about the real McCoy
that rankled intellectuals. H.G. Wells, quoted here, spoke of the "magnificent, stupid honesty" of gold standard 1.0. To John
Maynard Keynes the sheer caprice of digging up gold out of the Earth only to rebury it in the vaults of the Bank of England
was insupportable. And Keynes, so Mr. Ahamed insists, was right: "There is no greater testament of his legacy . . . than that
in the 60-odd years since he spoke, . . . armed with his insights, the world has avoided an economic catastrophe such as overtook
it in the years from 1929-33."
Hold on a minute: Has Mr. Ahamed spoken too
soon? One may hope not, yet his superb descriptions of the unraveling of the early 1930s are creepily evocative of today's
crisis. A reader of "Lords of Finance" will be unprepared, looking up from the text, to absorb the ghastly headlines on cable
TV. Has humanity not learned its lesson? Has the substitution of learned economists for inert gold bars truly delivered us
from credit collapse and international bank runs? The author seems to say so. "The Fed," he writes of the interventionist
style of monetary management that the gold-exchange standard encouraged in the 1920s, "had undertaken a totally new responsibility
-- that of promoting internal economic stability." Thanks, Ben Strong. Thanks, Ben Bernanke.
If Mr. Ahamed were casting around for a genuine
hero of interwar finance, he missed his man. Jacques Rueff, the great French economist, sounded the alarm time and again.
The classical gold standard was an instrument of economic balance, he wrote, its successor an engine of excess. "For ten years,"
Rueff declared in a speech in 1932, "we had done everything in our power to undermine that equilibrium."
Harrumphing about the "gold standard," Mr.
Ahamed reminds me of the fellow who condemned "painting" because he had no use for Andy Warhol.
Compare This Crisis To Anything
But The Great Depression: Comparison of the 1930's Economic Structure
We aren't the America most people think we are. We have relied
on easy money, deficit spending and our designation as the world reserve currency to sell as much national debt as humanly
possible. Why compare this crisis to the great depression when 1790-1795 France and the destruction of the Asignot is extremely
similiar to the currency destruction our government had created via reckless fiscal and monetary policy.
The Great Depression: Most don't realize the inflationary act in the 1920's was to help the British out, but
also kicked started the roaring 20's. Of course everyone was happy during the boom times, which only had the magnitude and
duration it did because it became a bubble economy. But when the economy hit the wall and significant wealth was destroyed
due to the governments intervention which distorted peoples time preference thus causing large missallocations of capital.
FDR's continuous government intervention such as price controls and artifical job creastion was the reason the crisis
was prolonged, making a 2-3 years ordeal last nearly a decade. So what it so different than the currenct crisis?
Well the biggest difference lie in the foundation and health of the economy and its fundamentals.
The 1930's America was one of, if not the biggest creditor nation in world as opposed to current conditions,
which we have transformed ourselves into the biggest debtor nation.
The previous point obvisouly lie in the fact that we had unparralled productive capacity realtive to the rest
of the world. Today our productive capacity relies mostly on technology and services, which need much larger capital expenditures
in order to compete in the global marketplace.
The roaring 20's was a period of excess but doesn't compare to the unprecendented excesses americans have been
living in the last decade. Our governemnt has squandered trillions upon trillions, which at somepoint have to be repaid with
interest wihich will either come from the printing press or a default. the latter would likely cause the chinese to de-peg
causing input pirces to increase. But more importantly it would undermine the U.S as the economic superpower and thus the
USD would no longer remain the reserve currency. These both would result in an enormous influx of dollars back to the united
states. remeber about half of our currency is outside our boarders.
The great depression allowed for multiple bankrupties, which the government did not bailout and inflate the
money supply exponentially. We have began to monetize our debt (which i talked about in the previous article).
It's hard to count the bubbles being created as i wrote this. There is the bond bubble, the consumer credit
bubble which will pop in the near future, and the housing bubble which has been popped but we still don't know the size of
the balloon. Not to mention the fed marking the purchase of their CDS purchases and mark them to market while in reality i
would be surprised if they were worth 10-15 cents on the dollar.
In other words even with the massive government intervention in the 1930's, the end game resulted in a 10 year
recession. The current siutation has involved intervention to such a degree, the free market can't fight it off. Though i
try to remain optimistic, the sheer fact the FED doesn't realize that this is a currency crisis, is brining us to the brink
If the Fed can only relate this to pre-revolutionary france, which involved abaonment of the gold standard (like
we did at Bretton Woods), they would clearly see what the future holds. When France was in a recession the issue of abadoning
the gold standard in favor of paper money (the asingot), which was initially defended by the best intellectual, government
influence eventually took over. They began stimulus packages (or our equivalent to one) and sold of land such as churches
etc and incurred rather large debts. These stimulus packages worked much like cutting the interest rate from 5% to 1% (greenspan)
and Bernanke 4.55-0%. The french stimulus initally worked but each infusion became shorter lived. They did this until hyperinflation
broke out in 1795. The U.S however was always able to get financing from other nations or buying treasuries (increasing the
money supply). additionally our input costs have been held artifically low, keeping inflationary pressures to a minimum. But
this can't continue much longer as the strength of our dollar which is propped up artificially high will soon see its demise.
Although we have implemented other forms of stimulus than the french, the end result will be the same...Motley Fool, 4/7/09
Gierstad and Smith want to know why some asset bubbles (i.e., tech stocks) pop without bringing
broader economic collapse, while others (i.e, real estate) do. Their provisional answer:
In the equities-market downturn early in this decade, declining assets were held by institutional
and individual investors that either owned the assets outright, or held only a small fraction on margin, so losses were absorbed
by their owners. In the current crisis, declining housing assets were often, in effect, purchased between 90% and 100% on
margin. In some of the cities hit hardest, borrowers who purchased in the low-price tier at the peak of the bubble have seen
their home value decline 50% or more. Over the past 18 months as housing prices have fallen, millions of homes became worth
less than the loans on them, huge losses have been transmitted to lending institutions, investment banks, investors in mortgage-backed
securities, sellers of credit default swaps, and the insurer of last resort, the U.S. Treasury.
In an important paper in 1983, Ben Bernanke argued that during the Depression, severe damage
to the financial system impeded its ability to perform its economic role of lending to households for durable goods consumption
and to firms for production and trade. We are seeing this process playing out now as loan funds for automobile purchases have
withered. Auto sales fell 41% between February 2008 and February 2009. Retail and labor markets too are now part of the collateral
damage from the housing debacle. Housing peaked in early 2006. Losses from the mortgage market began to infect the financial
system in 2006; asset prices in that sector began to decline at the end of 2006. Meanwhile, equities and the broader economy
were performing well, but as the financial sector deteriorated, its problems blindsided the rest of the economy.
Consumer and institutional indebtedness, in other words, were the means by which losses in
the real estate sector were transmitted throughout the economy. And something similar happened 80 years ago:
The events of the past 10 years have an eerie similarity to the period leading up to the Great
Depression. Total mortgage debt outstanding increased from $9.35 billion in 1920 to $29.44 billion in 1929. In 1920, residential
mortgage debt was 10.2% of household wealth; by 1929, it was 27.2% of household wealth.
The Great Depression has been attributed to excessive speculation on Wall Street, especially
between the spring of 1927 and the fall of 1929. Had the difficulties of the banking system been caused by losses on brokers'
loans for margin purchases in 1929, the results should have been felt in the banks immediately after the stock market crash.
But the banking system did not show serious strains until the fall of 1930.
Bank earnings reached a record $729 million in 1929. Yet bank exposures to real estate were
substantial; as the decline in real estate prices accelerated, foreclosures wiped out banks by the thousands.
The difference between now and then is that the Depression-era Federal Reserve contracted
the money supply, whereas the Obama-era Fed has greatly expanded it. Gjerstad and Smith appear skeptical that increases in
the money supply, or "quantitative easing," will be enough to stop the contraction. America spent the last 20 years piling
up debt - personal, commercial, public - and the bill has come due. Nothing changes that fact. The Great Deleveraging has
The Crash of 2008: It's the Panic of
1825 all over again (also 1837, 1847, 1866 ... )
Gee, was that 1998, or 2008? Neither -- try
You might think an era of gas lighting, slow sailing ships
and horse-drawn carriages has little to teach us about modern finance, but much
of what we consider advanced capitalism has been in place since the 1500s: stock
markets, portfolio insurance, options, commercial paper and global banking.
Eerily, many of the conditions that fed the boom of the
1820s and the bust of 1825 parallel the present:
Emerging economies were opening (South America then, China and India now);
Expansionary monetary policy and easy credit fueled a stock market boom;
Infrastructure projects required massive capital and equally massive
Risky/fraudulent "investments" were sold alongside sound ventures;
Banks' lending discipline and oversight declined in the euphoria, creating
Prices rose, adding to the instability (in our era: oil jumping to $147 a
Speculation in overseas and risky domestic ventures ran rampant;
New financial instruments had been introduced which obscured both risks and
The academic phrase for this gulf between what the seller of
the security or property knows -- that it is hugely risky -- and what the buyer
accepts as true -- that this is a "safe" investment with a satisfactorily high
return -- is "asymmetric information."
Many analysts point to the
prodigious expansion of difficult-to-assess mortgage backed securities and
exotic derivatives such as CDOs (collateralized debt obligations, often backed
by highly leveraged securities) as the chief source of asymmetric information
flow which caused buyers around the world to purchase highly risky assets in the
belief that they were high-yielding "safe" investments.
Others point to
the ample opportunities for fraud and embezzlement in such cloudy situations --
another parallel with 1825 and indeed, every stock market/credit bubble and
It is generally overlooked that capitalism in its
natural state is highly prone to bouts of credit expansion and euphoric
speculation which then lead to financial panics and crashes. The Panic of 1825,
for instance, was followed by the panics of 1837, 1847 and 1857. Then next
crash, in 1866, was hardly the end of volatility, as the Panic of 1873 was a real
doozy, setting off a deep six-year recession in the U.S. The Panic of 1893 is
generally considered to have launched a depression, while the Panic of 1907 is
widely credited with sparking the creation of the Federal Reserve system six
years later in 1913.
central purpose of the U.S. Treasury and the Fed's interventions has been to
prop up the banking system, with the understanding that it was necessary because
banks perform the essential services of processing private information (mortgage
applications, for example) and monitoring borrowers.
But what the Fed and
Treasury have not learned from the Panic of 1825 is that the shareholders and
managers of the banks which were saved from insolvency by central bank
intervention should suffer the losses which are necessary to encourage prudent
lending after the panic has ended.
The Fed and indeed, all the central
banks of the major global economies, also failed to understand the chief lesson
of the 1825 Panic: that it was fundamentally fueled by expansionist monetary
Thus we have to wonder if the current central banking "solution"
-- encouraging lending, lowering interest rates and accepting any sort of
distressed asset as collateral -- isn't just setting up the Panic of 2011.
Whenever you find you
are on the side of the majority, it is time to pause and reflect
--- Mark Twain
We have never observed
a great civilization with a population as old as the United States will have in the twenty-first century; we have never observed
a great civilization that is as secular as we are apparently going to become; and we have had only half a century of experience
with advanced welfare states...Charles Murray
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