Category Archives: The Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in 1930 after the passage of the Smoot-Hawley Tariff bill (June 17), and lasted until the late 1930s or early 1940s. It was the longest, most widespread, and deepest depression of the 20th century.
January 8, 2013 by David Ziffer
On the 100th anniversary of the creation of the Federal Reserve, it seems fitting that we should present a brief history of US dollar debasement:
1787: U.S. Constitution ratified. “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts.”
1792: U.S. Coinage Act ratified. Our first Coinage Act establishes a uniform standard of gold and silver content of U.S. coins, paving the way for over a century of trust in the U.S. dollar that will ultimately catapult the U.S. to world economic supremacy.
1861: Greenbacks and Greybacks: In desperation and in direct violation of the U.S. Constitution, both the north and south issue paper currency with no gold or silver backing. Following the war, the U.S. returns to its constitutional roots, ceasing production of Greenbacks and making efforts to retire them as the U.S. returns to the gold standard. A first-class postage stamp (introduced in 1863) costs two cents.
1913: Creation of the Fed: In the belief that a central bank will prevent future economic panics, the U.S. government forms a banking cartel called the Federal Reserve, a rather facetious name given that the Fed is not federal and it maintains no reserves. In so doing our government ignores the warning of Thomas Jefferson:
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.
The stage is now set for the collapse of the dollar. A first-class postage stamp still costs two cents.
1934: Gold Reserve Act: After 23 years of dollar debasement by the Fed, Franklin Roosevelt is forced to acknowledge the growing disparity between the century-old fixed price of gold ($20.67/oz.) and its market price. The rift is made painfully obvious by the outflow of U.S. gold into the coffers of foreign nations redeeming dollars for gold at the stated fixed price. In direct violation of the U.S. Constitution, Roosevelt and Congress not only remove gold from circulation but prohibit ownership of gold by U.S. citizens. With the stroke of a pen the dollar is devalued from $20.67/oz. to $35/oz. Despite massive improvements in delivery efficiency, a first-class postage stamp now costs three cents.
1944: Bretton Woods: In the belief that the world requires a unified monetary standard in order to eliminate trade wars that ultimately lead to shooting wars, leading nations establish a dollar-based monetary system in which currencies are valued in terms of the U.S. dollar, which still claims to be gold-backed. This unwarranted trust ironically gives the U.S. yet more license and incentive to continue its debasement, since the world’s citizens now accept newly printed dollars with the mistaken notion that they can be redeemed for a fixed amount of gold. A first-class postage stamp still costs three cents.
1965: Second Coinage Act. In order to finance two very expensive initiatives (the Vietnam War and moon walking) and in direct violation of the U.S. Constitution, Lyndon Johnson signs a new Coinage Act that removes all silver content from U.S. coins. In so doing he provides the following advice to the public, explicitly promising future federal precious metals market manipulation:
If anybody has any idea of hoarding our silver coins, let me say this. Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content. The new coins are not going to have a scarcity value either. The mint is geared to get into production quickly and to do it on a massive scale. We expect to produce not less than 3 1/2 billions of the new coins in the next year, and, if necessary, twice that amount in the following 12 months.
In this same speech Johnson states that scarcity of silver is the motivation for the change. Despite incredible improvements in delivery efficiency that should have dropped the price astronomically, a first-class postage stamp now costs five cents.
1971-75: Petrodollars replace the gold standard: In a repetition of the 1934 crisis, the U.S. gold supply is being decimated by foreign governments redeeming dollars for gold at the stated fixed price ($35/oz.), a completely untenable ratio after thirty more years of dollar debasement by the Fed. In direct violation of the U.S. Constitution, Richard Nixon and the Congress once again stop the outflow, but this time rather than set a new unmaintainable fixed rate they simply eliminate the fixed dollar/gold ratio. Realizing that the collapse of the gold standard will dramatically reduce demand for dollars worldwide, Nixon strikes a deal with OPEC: trade oil in dollars only in return for perpetual U.S. military support. By 1974 gold is irrelevant to the U.S. hegemony, and so as his final act of the year Gerald Ford signs a bill that once again allows U.S. citizens to own gold. The first-class postage stamp now costs ten cents.
2000: Iraq threatens the petrodollar: Shortly after the creation of the Euro, Saddam Hussein makes Iraq the first major oil exporting country to sell oil in a currency other than the dollar, thereby threatening the global petrodollar arrangement. Citing this “weapon of mass destruction” while misleading the public into a preposterous belief that he is really referring to conventional weapons that could somehow threaten the U.S., George W. Bush reacts swiftly by invading in 2003 and quickly reverting Iraq to dollar sales. To make our point exceptionally clear to world leaders, the U.S. (using proxies) hunts down Hussein and executes him in 2006. The first-class postage stamp now costs 33 cents.
2008: Beginning of the end: Under Barack Obama, Fed chairman Ben Bernanke begins a series of bailouts of banks (that are presumably Fed members) and of U.S. debt (both mortgage-backed securities and U.S. Treasurys). The first-class postage stamp now sells for 42 cents.
2013: 100th Anniversary: The master of dollar-printing is 100 years old. The Fed marks its birthday by engaging in the largest debt purchase program in history ($40 billion of mortgage-backed securities and $45 billion of Treasurys per month). Awaiting the collapse of the petrodollar arrangement and the subsequent radical reduction in the purchasing power of the dollar, the price of gold is bid up to over $1600 per ounce. And despite the fact that humans now expend a tiny fraction of the effort to deliver a letter in 2013 compared to what was required in 1863, the price of a first-class stamp is now 46 cents.
Technically the U.S. left the gold standard in 1971, but in reality we abandoned it in 1913 with the creation of the Fed. The two publicly visible gold-standard slippages of the past century (FDR’s repricing and Nixon’s cancellation) were merely necessary adjustments following decades of gradually increasing gold-price inconsistency caused by continuous inflation. Given this, it seems hard to imagine that the Fed was created for any purpose other to create this inflation, i.e. to effectively raise our taxes under the table.
This has enormous implications for today’s long-term investor. Our most constant and predictable financial reality is the continued inflationary policy of the Fed. Given this, and assuming the U.S. is unlikely to pull another rabbit out of the global hat as Nixon and Ford did with the petrodollar in the early 70s, the dollar will almost certainly continue losing purchasing power indefinitely, in terms of both commodities and other currencies. And when the oil-producing nations finally agree to accept payment in currencies other than the dollar, expect a precipitous drop. Invest accordingly.
21 May, 2012, 14:52 Posted by Zarathustra
The events in Europe right now is essentially a slow-motion bank run (or “bank jog”) on various European banks in the periphery. Greece, for instance, have been losing deposits in their banks, while Spanish bank Bankia was rumoured to have massive among of deposits being withdrawn. And of course, in the days of modern banking with internet and other stuff, you don’t even need to see a massive queue outside a bank to know that there’s a bank run.
Disturbingly, what’s happening today in Europe reminds me of something happening more than 80 years ago, when bank failures triggered bank runs virtually in the whole of Europe, later bank holidays in hope to stop bank runs, capital control, and countries going off gold standard. Sure enough, by thinking about the event in 1931 by no means suggest that I think what happened then will surely happen in 2012. It is always, however, good to look at the history and see what we can learn from it.
We all knew that the Great Depression started in 1929. Perhaps lesser known is that one of the more dangerous legs of the slump during the the Great Depression did not start until 1931 when an Austrian Bank Credit Anstalt went bust.
At the time, it was the biggest bank of Austria. Its failure triggered a European banking crisis, with bank runs started first with Austrian banks, then with German banks.
In Liaquat Ahamed’s wonderful book Lords of Finance: The Bankers Who Broke the World, he wrote that while Austria was a small country with the GDP about one tenth of Germany’s, remarkably the failing on its biggest bank sent a massive shockwave to the whole of Europe, an ultimately to the world economy. While the big central bankers were trying to come up with rescue packages, without the experience of modern central banking, they came in too late, with too little money.
During the time of the Great Depression, it was the French which had the biggest gold reserve after the United States. At the time of Credit Anstalt’s failure, the French was apparently faring relatively well among European countries. And not surprisingly, politics was in play in their attempt to save themselves. France, although financially stronger among European great powers, they were not keen at all to save the Germans and Austrians (perhaps still quite keen to punish them for starting World War One). When the United States unilaterally forgo war debts from Europe for a year, which included German’s reparation, France was furious. Liaquat Ahamed quoted that the British Prime Minister at the time Ramsay MacDonald saying that “France has been playing its usual small minded and selfish fame over Hoover proposal…”, while the Bank of England Governor’s Montagu Norman said, according to Ahamed, that “Berlin was being ‘bled to death’ while the French and the Americans were busy arguing” (p. 413). And sure enough, when the German’s central bank Reichsbank asked Banque de France and the French government for help, that didn’t work. The French government offered some loan with conditions, which the Germans thought of that as “political blackmail”.
As the crisis worsened, Danatbank, at the time the second biggest bank in Germany, went bust some two months later after Credit Anstalt failed. On 13 July, it failed to open for business, triggering yet another wave of massive bank runs on every other German banks. With the banking crisis at its worst, a two-day bank holiday was imposed in German to prevent further drain in deposits. Later, banks in virtually the whole of Europe are closed.
Meanwhile, in London, the government is considering measures to reduce budget deficits even as the banking crisis hit Britain, partly because of UK’s banks exposure to Germany and other countries in the continental Europe, and the Bank of England was losing gold reserve, forcing the Bank to raise interest rate when it should not. The military’s salary would be cut in hope to plug the budget gap, but the some sailors in the Royal Navy became (predictably) very angry and essentially went on strike, an event which is now known as the Invergordon Mutiny. Not a particularly huge event, but enough to send a shockwave to the City of London with stock market crashed and a sterling crisis. In about a week after the Mutiny, Britain was forced out of the gold standard.
- European Banks Are Getting Pounded (mb50.wordpress.com)
- As First Greek CDS “Anstalt” Appears, A Question Emerges: Did Banks Not Square Off Margins? (zerohedge.com)
- Chinese Defaulting on Commodity Contracts (ritholtz.com)
- 18 Signs That The Banking Crisis In Europe Has Just Gone From Bad To Worse (raptureimminent.wordpress.com)