Here's two lessons from the GD.. but read the whole article. Those who don't understand the past are doomed to repeat it...
Lessons from the Great Depression: the consumer credit bubble
A credit-fueled bubble that affected nearly every corner of the economy - encompassing everything from consumer credit, to business loans, to margin debt at stock brokerages - crested the following summer. Alas, historians have thoroughly documented what happened when this euphoria morphed into panic.
As the panic that engulfed Wall Street spread to the banking community, pain that was previously only felt by those involved in the speculative stock market quickly consumed the business community. Consumers reined in spending, so business owners rationally cut expansion plans and investments in inventory.
Once consumers had reached the saturation point of installment credit, companies like Ford had the capacity to produce far more cars than the market demanded.
Bankers, fearing defaults on their riskiest loans, called them in just as the ability to pay them off had vanished. The combination of falling asset prices (factories, inventories, real estate, etc.) and bank runs was lethal. The country witnessed an enormous number of bank failures in a short period of time.
Lessons from the Great Depression: the dollar devaluation
In 1932, President Franklin D. Roosevelt was elected in a landslide on promises to take swift and decisive action. The foundation of this recovery involved devaluing the US dollar against its gold backing, and basically amounted to currency debasement and deficit- financed make-work programs. The cost of the New Deal - the brainchild of British economist John Maynard Keynes - was foisted upon future generations.
When confronted with these long-term costs and the necessity of running budget surpluses to pay off debt incurred by his "demand management program," Keynes casually dismissed this critique with the statement that "in the long run, we are all dead."
Well, it's safe to say that we have reached what would be considered "the long run" and, no, we are not all dead yet. The only thing that has sheltered the current working generation from the financial consequences of government debt growth (taxes, runaway CPI inflation) is the fact that America successfully "dollarized" the rest of the world in the post-World War II period.
This is not to say that the US will escape unscathed. International accounts will be settled through further destruction in the value of the dollar. It must, and the Fed will do everything in its power to ensure the dollar's future devaluation. Whether it will be "successful" remains to be seen, but you can be assured that painful consequences will accompany unconventional Fed policy.
June 06, 2006
Lessons from the Great Depression: the consumer credit bubble & dollar devaluation
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15 comments:
SCARY.
To paraphrase the great Ed Wood, and in deference to the fatalistic Keynes:
"It is safe to say that the grandchildren of some of the people reading this blog will not be born on earth."
The future is irrevocable; it cannot be changed. Relax - be happy - convert 20% of your [ass]ets to silver and gold bullion held in your possession - and you're insured against economic calamity.
Here's another gem from Keynes, a man who would know the truth of it:
"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens...Lenin was certainly right."
Maybe the biggest lesson learned from The Great Depression is we didn't learn anything.
I thought Ben Bernanke was a student of the GD, and has a plan to make sure that never happens again? Surely the government and the banks in our country have learned from the past. They are the richest guys around...
Ooops, just heard there's another T warning gotta run to the bomb shelter. -- I bet houses with bomb shelters are selling fast. Maybe Centex should start offering a bomb shelter with every house.
Anonymous said...
Keynes didn't say that moron. The Gold Standard was a HUGE reason why the Great Depression happened.
Ed Wood is a homosexual slut that needed a good solid, beat down. Then when it disfigured, beaten face are laughed at across the country, he will be exiled like all other "gold" punks.
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Keynes did say it, smarty:
http://www.brainyquote.com/quotes/authors/j/john_maynard_keynes.html
So certain are thee that the gold standard caused the great depression, hmmm. Please explain how gold-backed money which was in circulation for over 100 years previously inexplicably precipitated such an economic catastrophy as the GD. I suppose you never heard of the newly formed Federal Reserve (1913), adjustable reserve requirements, and the unprecidented credit boom of the roaring 20's that preceded the crash.
You are sadly and simultaneously ignorant, arrogant and a homophobe: no doubt a Bushite.
Yes, the gold standard did have some responsibility.
For the previous 100 years of the gold standard there were plenty of nasty panics and severe recessions.
It is a homey illusion to imagine that in the past under the gold standard that there was no "fiat" creation of money or debt.
That was untrue. The difference was that individual banks themselves put out their own currencies, backed (in theory) by a *fractional* gold reserve.
And yes there were nasty runs on banks and sudden restrictions of credit and calling in loans which usally served to impoverish ordinary people. Inflation isn't the only way to lose---usually it had been sudden credit contraction and economic slides which usually ended up transferring wealth from ordinary people to the wealthy. ("Thou shalt not crucify man on a cross of gold").
A gold standard wasn't a great idea either. Given the large growth of population and economic wealth it would be somewhat silly if the money supply was tied to the physical capacity of a certain mining industry and geological considerations.
The problem is that in the Great Depression there was a sudden reduction in the velocity of money as credit imploded and banks et al wanted all their loans back and started a cascade of foreclosure. Becuase of the fractional gold standard they all had to do that, and each one had to get their money back before their competitors did, otherwise the bank would suddenly fail in spectacular run as depositors lost faith.
The reason that Roosevelt confiscated gold was that it was the only way that the government (under the gold standard) at the time could actually try to increase the money supply again to alleviate the Depression.
What had happened is that the few who had assets of course kept it in gold and didn't spend it, hence the actual volume of money in circulation (which was NOT gold!) times the money velocity (how often it goes through economically useful transactions) imploded.
If you don't have a gold standard then there is no need to confiscate gold during a depression, so don't worry any more about that.
And yes, the message is that they will inflate if necessary. The inflation is necessary when the velocity of money slows.
That's what happened in Japan after their dual bubble popped: velocity of money slowed and the Bank of Japan had to open the gates.
Gold never goes down. HUGE PROFITS, NO RISK! GET RICH QUICK, BYU GOLD!
Yes, what you say is historically accurate. Yet you miss the meaning of it almost entirely. To wit:
A gold standard does not prevent recessions and panics. It is not intended as such. But, a gold standard protects the unit value of money. By the way, there is still inflation under a gold standard, as gold is mined and accumulated each year and the aggregate supply increases (~2%). Restraining growth in the money supply is the whole point of a gold standard. When multiple banks issue gold-backed securities and offer interest rates and demand collateral as dictated by market conditions, it is part and parcel of the free market and competition. When there is a recession some businesses or banks fold as market forces weed out the weak, inefficient or corrupt. The free market is an evolutionary system, requiring destruction to balance out creation of wealth and assets. In this way, through the ups and downs, the market shows progressive growth through managable corrections, and there is a progression improvement in the standard of living. You see, during the nineteenth century, the US exhibited the greatest improvement in standard of living anf productivity in all of history: the money supply hardly grew at all (at about 2% per year to be exact), yet the population became progressively wealthier - because prices for all manner of goods dropped during that century. This latter deflation was balanced nicely by gold inflation to result in a stable currency, high savings rate (as people saved, accumulated wealth, purchased capital which created more productive wealth, and so on), low interest rates (on the whole) and a productive capital-replete debt-free society.
You come at the US monetary and economic history from the viewpoint that the federal government should control the money supply, have a monopoly on wealth transaction as it were: why? It is absurd to state that Roosevelt had to sieze the gold in circulation to increase the money supply in circulation - what idiocy. Listen to waht you are saying - it makes no sense. If he wanted to increass the gold-banked currency in circulation, all he had to do was devalue the dollar relative to gold. Of course, competing gold-backed securities and bonds would have retained their value, thus protecting depositors. Only newly issued federal reserve notes neede to be pegged lower. But, Roosevelt siezed the people's gold, then promptly devalued the dollar by 70%. The gold was literally handed over to to the stockholders of the Federal Reserve (which is by the way a private banking cartel separate from the US government) with the balance in Fort Knox at $20.67 per ounce, and promptly revalued to $35. This was one of the greatest theft's of the people's wealth in all of history.
I will further prove your assertion that FDRs modus operandi to sieze gold in order to increase the money supply is utterly false. Did you know that only a very small fraction of circulating gold was returned to the US Treasury in response to FDR's infamous executive order of 1933, amounting to only a few percent in increase in the federally held gold bullion. So, the people's gold was hardly a factor in expanding the money supply. No, the siezure was a means to rob the people at the behest of the Fed bankers, plain and simple. And, a prominnent cabinet member in FDR's administration told him that right to his face.
I could go on. You know many facts, but your comprehension of them is very flawed, my homophobic friend.
In defense of FDR. I'll say the following. If at that time of crisis over 30%+ of the population wanted communism (later in the 40's & 50's many notables in science and entertaintment were outed for pink tendencies) and another 30%+ of the populace wanted to go fascist -think Lindbergh and many notable Wall Streeters, and less than 40% wanted the country to remain as it was.
What would you do? - Play fast and loose with the currency in order to save the country. Or be a gold fundamentalist? and ensure that the currency will have value, but it'll be the currency of a non-existant country.
I guess FDR chose well, even though our present tyrant King George thinks not.
I am the commenter on the gold standard, but this anonymous person isn't the vile homophobic one.
Whether or not FDR's gold seizure actually was succesful at greatly increasing the money supply doesn't change what the intent was. If it was insignificant economically then I'm not sure what the intent was. There is little material which is written from a more balanced historical and economic view versus the ravings of the right wing gold nuts.
I do object to the historically inaccurate notion often held by gold bugs, that the time from 1850 to 1929 was a time of beatific financial placdity where everybody grew rich with a nice comfortable Sharpe ratio thanks to the divine wisdom of the gold standard.
I also object to the notion that preserving the "value of the dollar" or as though it were a Vestal Virgin ought to be the only goal of economics: what happens in the real life with real people and real physical things is much more important than the normalization unit used to count. Economic study does reveal, correctly as I see it, that the worst alternative is radical deflation or hyperinflation as both result in collapse of real-world productive physical investment and activities. Given those experiences the best alternative appears to be a small amount of financial inflation as evenly distributed in time as possible.
The US did grow wealthier radically in the late 19th century of course due to major technological developments, such as the discovery
of oil in the US (geologically the US was blessed with at least as much oil as Saudi Arabia, and of higher quality, but most of it is gone now), electrification etc.
The US also grew wealthier radically after FDR and the Federal Reserve.
The Federal Reserve system has its problems, but the other possibilities explored throughout history all appear to be worse.
One change is the ability to capture broad economic statistics (though with some significant, but not fatal error) which wasn't really possible or at least done significantly before the 1930's or so. Without those data intentional monetary is nearly impossible so perhaps a kind of gold standard is as good as is it gets.
I don't think that's so great now, because I don't feel like ensuring that Canada and South Africa and Russia will be far wealthier than the USA on account of an arbitrary choice of financial instrument. (Canada will soon be richer than the US due to oil).
The cause of bank panics in the past always has been the banking system itself.
You go to the bank and deposit $100. This is a "demand deposit". The bank, under current banking law (er, I mean "privilege"), can loan out $90, even though the bank agrees to give you your $100 whenever you show up to demand it. The bank does not have your money. It loans that $90 out, and then that guy deposits the $90. Now it can lend out another $81. And so on until there is are claims on up to $1000, all based on the original $100.
If customers start to pull out their money too fast in this situation, the bank can't handle it and goes under. Then you have a bank panic.
This system exists for the sole benefit of the banks. Wouldn't it be great to have a monopoly on collecting 10 times the interest on each dollar that you have? Of course it would. Let's say rates are 10%, you deposit your $100, and the bank can make $100, or 100% interest on your money. It's a sham.
The depression occurred not BECAUSE of the gold standard necessarily, but because it was not a 100% gold standard. There were many more dollars, each representing 1/20th an ounce of gold then there was gold to back it up. The system was fragile by design, just so BANKERS CAN COLLECT ALL THOSE OBSCENE INTEREST PAYMENTS. In a TRUE free market, ANYTHING can be used as money, as long as both parties agree on the exchange. The market mechanism oin its own would quickly "decide" what IS and IS NOT money.
If people were just paying for things with gold and silver coins (with a freely floating exchange rate, of course), there would have been NO DEPRESSION.
It's always the banks' fault, because of FRACTIONAL RESERVE BANKING.
ANY amount of money in the money supply is enough. The economy works just as well when it cost 5 cents for a cup of coffee as it does when it costs $2.
"You are sadly and simultaneously ignorant, arrogant and a homophobe" - that's a description of a Clintonite!!!
To Chicote:
I thank you for a brilliant, concise and crystal clear elaboration on the benefits of a stable honest currency (gold-backed) that is a true store of wealth; it's converse, the fractional reserve system is, as you so aptly put it, a scam that enables banks to earn obscene levels of interest on deposits and commit usury at the expense of the people by, in effect, circulating unbacked (e.g. counterfeit) currency.
To anonymous homophobe: I say it is innane to defend FDR's fascist act, to sieze and centralize the people's wealth, and justify it as necessary to secure the people's liberty (although Anakin Skywalker would no doubt agree with you). Wealth in the hands of individual citizenry is the surest preservative of freedom: private owners of assets and capital do not vote to have their assets collectivized in the name of some illusory common good - rubbish. The subversive government obtains political power by fostering envy between the haves and have nots - in a representative republic it is certainly possible for a majority to be on the public dole and clamor for collectivization at the expense of the "wealthy" (i.e. tax the rich!); however, that was hardly in case in 1933 - government was far smaller and less pervasive/invasive vis-a-vis the private sector as it is today, and there were very few social programs for the less fortunate amongst us. There wasn't a large segment of the population dependent upon the government largess at the expense of the taxpayers. The former has been the creation of the socialist democratic policies of the New Deal and it's progenitors, to this very day (exhibit A: post-Katrina New Orleans).
The establishment of a central bank, the Federal Reserve Banking Cartel, has done more to impoverish our people and concentrate excessive power in the hands of a few bureaucrats in Washington than any other government act in American history. The Fed is the supplier of monetary morphine - and the American people have been progressively reduced to monetary junkies, hopelessly hooked on debt and credit, brainwashed into believing that inflation is "necessary" and "beneficial," accepting of the fraud that is the fiat dollar, and dumbed-down into believing that a handful of well-schooled functionaries (i.e. central bankers) are qualified to determine interest rates for the entire land. George Orwell would be amazed at how far we have fallen, how blind we have become, and how hopelessly enslaved we are by a handful of "temple money changers."
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