|The Christian Solution||C   S  |
|Home Page   About TCS   Contact Us   Document Library  |
July 8, 2009
Textbook Conditions for another Great Depression
Source: Robert P. Murphy
The Politically Incorrect Guide to the Great Depression and the New Deal
Source: Christian Toto
The Politically Incorrect Guide to the Great Depression
Source: Ludwig von Mises Institute
The Politically Incorrect Guide to the Great Depression
Robert P. Murphy's new book is told in a masterly, calm, reasonable, logical and civilized manner.
Murphy lays out the case, one indisputable piece of evidence, after another indisputable piece of evidence, that absolutely everything we have ever been taught about the Roaring 20's, the Great Depression, the New Deal, and the so-called recovery due to World War II is false.
In fact, we will go one further than Murphy and say that -- both this '08 crash as well as the '29 crash were both deliberately created, deliberately implemented and deliberately manipulated to bring the public along in giving up their freedoms and liberties to a government mommy who promises to nurse them and change their diapers.
In other words, the leaders of this country are not nearly as dumb as they always pretend to be.
Yes, indeed the economy is confusing to the ordinary citizen, and multiple lies told about the economy confuses the ordinary citizen even more, but any competent "intellectual" in power clearly understands what they are doing is pure evil.
Before the Great Depression, banking panics were the worst economic problem we had in this country and by 1913, "Progressive" (read : communist) idealists believed that a newly created central bank could regulate the business cycle to "even out even these tiny little bumps".
If Americans had only known that a Great Depression loomed just 16 years after the Fed was created, the first Great Depression in history, or that a Greater Depression was almost 100 years into the future, perhaps the idea of a Fed "to fix the business cycle" would have sounded somewhat preposterous.
And after only a few minutes of thought, some more intelligent persons may have even figured that allowing the government to have control of the levers of business would cause far more economic disruption than the already existing free market restraints ever would have.
After all, there are elections to win and wars to wage. Managing the country's money supply is fun in pumping up the economy just before an election, or in spending more than the "serfs" can afford to be taxed during a war!
Why do you think that the first two wars after the Fed was created in 1913 were both World Wars?
All major countries other than the U.S. went off the gold standard during WW1. America went off the gold standard after WWI under FDR.
Lastly, the Fed could tell Americans that they are better lovers and protectors of your money than you are. (Child protective services are also known to arrogantly tell lies to parents that they love the children more than the parents love them.)
As everyone knows, it only takes one stupid investor or one unloving parent to give justification to the government in taking control over everyone's retirement account and everyone's child.
For example, investors do love their money, and that is why they had always put "gold clauses" in their contracts. Should the Federal government change the meaning of a dollar bill "payable on demand for gold" at the exchange rate of $20.67 per troy ounce, they would still have their money repaid in the equivalent value of gold.
At FDR's insistence, Congress made a law which allowed gold clauses in contracts to be ignored. -- Just in time for FDR to reset the value of gold to $35 per ounce -- a 40% reduction in all investments and in what the government owed to investors.
Hence, for anti-business reasons such as this and many others, investors stopped investing and the common everyday Depression transformed into "The Great Depression".
Investors do indeed care about their money, but when they attempted to protect their money from the FDR government, then the FDR accused them of being evil, greedy, money-grubbing "gold hoarders".
Even more reason to stop investing.
Here is the problem with the Fed
Supply and Demand economics say that prices are dictated by the market.
The price of a new automobile is dictated by the supply of cars and the demand to buy them.
Interest rates are also a price subject to supply and demand, like any other item.
For interest rates, the market matches up the selling of "money" to the buying of "money".
If I buy a car and make payments over time, then I also have to negotiate what a reasonable interest rate would be.
If interest rates are high, we tend to save more. We will still buy the car, but only after we have saved for it.
This increase in the supply of loan money (we increase our savings) and decrease in the demand for loan money (we do not buy the car on credit) will bring the interest rates back down.
If interest rates are low, then we save less. Instead of saving, we may get a loan in order to have the car now.
This decrease in the supply of loan money and increase in demand for loan money will bring the interest rates back up.
In short order, the free market settles upon a stable, "fair for all" interest rate.
However, with the introduction of a central bank like the Federal Reserve, the central bank takes control of the interest rate. It has such a massive control of the money supply, that it alone, all by itself, can raise and lower the interest rate at will.
And so, in theory, with a loving and benevolent Fed Chairman, each time the economy starts to slip off, the medicine from the Fed is to lower the interest rate and get people borrowing, and hence, spending again.
In theory, if the economy gets a little drunk on its own excesses, the Fed can raise the interest rates to sober everyone up. We stop spending so much and save for that rainy day.
And we all live happily ever after....
Except...as we all know, we do not live happily ever after.
The Fed starts to play games with the economy and creates huge discrepancies between what people want to buy and what they want to save.
The tendency is for the fed to keep interest rates lower than what the supply-and-demand interest rate would be.
And the Fed loves to keep a little inflation going on the side.
Together, they spell disaster.
Few people save years for a new car only to pay for that car down the road with deflated dollars (inflated car price).
Instead, we are enticed to buy today -- with un-inflated dollars -- at a low interest rate.
This is where the problems all start.
One stupid mistake begets another, which begets another
If the Fed takes the interest rates much below the normal "free market" interest set-point, then we allow ourselves to get into more debt than we would normally be comfortable with.
The artificial bubble has been created.
After a short while, all the normally cautious buyers who have taken advantage of the cheap loans have done so and are enjoying their new purchase.
They start paying off their note and enjoying their purchase -- but they are not purchasing any more items either.
So as to spur on the economy some more, the fed is asked to lower the interest rate again.
Once again, the even more cautious buyers come out to take advantage of the lower interest rates they just can't pass up.
Each time, a lower and lower interest rate is needed to spur on the buying, until everyone realizes that the bubble has grown too large, they are in too much debt.
Too late -- the bubble has to burst.
At this time, a lower interest rate from the Fed is laughed at.
No one is left who has money to buy anything.
And all those notes have to be paid back before more spending can resume, reducing the public's purchasing power to far below normal levels.
We hunker down into a recession and there is nothing that the Fed can do about what it has created.
But there seems to be a government "solution" to every problem the government creates.
With no cunsumers spending, the federal government proposes that THEY spend more, that THEY give out more unemployment checks, the THEY give out more food stamps, that THEY start a war to "employ" young men, etc.
Following a Fed-created bubble, with massive amounts of people unemployed, the people stop complaining about the government getting bigger -- instead, they start demanding the government to get bigger!
It starts of with an innocent insignificant-sounding proposal for the government to control the interest rate, which only evolves into letting the government control your banks, you retirement savings, the company you work for, your schools -- it never ends!
Subtle little secret
With an artificially low interest rate, one can get an artificially huge home, and as everyone bids on these home, that is, higher demand on the same amount of supply, the home prices go up. In other words, more money equates to a more expensive home. Hence, artificial loan money becomes artificial home prices.
For this Greater Depression we are entering, we Americans tried to buy homes which we could not possibly afford. We were all stretched to the max in debt. Homes were overpriced.
The proverbial "straw that broke the camel's back" was the huge surge in gasoline prices in the summer of 2008. All of a sudden, people were confronted with either making their house payments or with filling their huge SUVs needed to get them to work.
People started to sell their cars and their homes, with the market trying to readjust home prices back to normal.
The only rabbit the Fed could pull out of their hat was what it had been doing all along -- an even lower interest rate and even more spending -- both tried and both failed.
Hoover had the exact same problem with the bubble created during the Roaring 20's, and he tried the exact same "fixes" that George "Hoover" Bush tried.
Obama is here to implement the exact same "fixes" which FDR implemented.
WWIII awaits us in 2020 with Obama siding with another Marxist Stalin.
History does repeat itself.
Solution to the Fed?
To establish a real market-driven value for the interest rate -- we must abolish the Fed and let the free market laws of supply and demand determine the ongoing interest rate.
To establish a real market-driven value of money -- we must abolish the Fed and return to a Constitutional principle of "nothing but gold and silver", as we let the free market determine what the supply and demand value of money in relation gold, which again, is in relation to real everyday itenms such as cars and homes.
Myths of the Great Depression
"The Roaring 20's were a time of unbridled greed!"
The economy of the 1920's had a very real creative component. This was the apex of the industrial revolution.
Americans began to have gas, running water and electricity brought to their homes. This meant, for the first time, they could have electric irons, hot water, radios, vacuum cleaners, etc. They bought their first car. Farm automation freed them from farms.
Henry Ford's Model T sold for $600 in 1912 but its price had fallen to $240 by the mid-1920's.
Henry Ford was getting ever richer, selling us ever cheaper cars.
"Greedy" Capitalism was performing splendidly.
An example of Real Unbridaled Greed
If you want a real example of unbridled greed, you must look to the First World War that had just preceeded it.
Ask any American the real reason why America had to fight in the First World War taking place over in Europe.
They cannot tell you.
Something about a ship called the Lusitania sinking, but they cannot tell you that the ship was not American. Something about an arms race leading up to the war, but they cannot tell you why. Something about some prince being shot by some nobody, in some backwaters part of Europe, nobody ever heard of, but they cannot tell you why he got shot.
Especially, they can tell you absolutely nothing indicating why America had to join in the blood sport.
They cannot tell you who in America really wanted Americas to come out to play with these bloody Europeans.
In fact, the greediest and most unscrupulous of the unbridled greedy groups were the Pharisees who caused WWI among governments, so that Jerusalem could be wrested from the grips of the Ottoman Empire. (see The Jewish Century)
The astronomical amounts of money thrown away to fight the First World War was mostly borrowed, with the taxpayers forced to pay it back.
Most European countries were forced off the gold standard so as to fight this war, and they fought far longer and borrowed far more than we did.
This certainly created market dislocations and following the war, there was a Depression in 1920 to 1921, but we snapped right out of it.
Germany's hyper-inflation during the 1920's was certainly not caused by greedy businessmen -- instead, it was caused by greedy governments and far greedier central bankers.
"During the Roaring 20's, the little guy was at the mercy of the unregulated big businesses"
Competition provided real choices during the 20's.
For the first time in history, in many mundane ways, the common citizen began to live better lives than Kings and Queens of old.
For instance, Americans were able to purchase automobiles. What King ever had an automobile prior to the 1900s or so?
Americans had electricity for all kinds of luxuries that no amount of money could buy just 10 years earlier -- such as the radio with broadcast content -- for free!
If Henry Ford ever stopped innovating, if he raised prices or if he lowered quality, then the guys over at GM, Chrysler or American Motors would have been more than happy to sell you one of their models.
The best regulator ever created was the free market.
Unregulated Big Government is the real problem
On the contrary, it was the merciless regulations of FDR during the 1930's and beyond, for which we are crying mercy.
FDR established coercive trade cartels with his National Recovery Act (NRA).
Murphy gives a typical example of Jacob Maged, a New Jersey dry cleaner, who had been pressing pants for 22 years. The NRA Cleaners and Dyrers Code demanded that he charge 40 cents to press a suit. Maged only wanted to charge his customers 35 cents.
Not only was Maged thrown in jail, he was also slapped with a hundred-dollar fine.
We think that this is the only way to enforce the NRA," said Abraham Traube, a director of the NRA code authority for the Cleaners and Dyres Board of Trade.
Obviously, even though Jacob Maged was a businessman, he was one of the "little guys" trying to survive the Great Depression -- and at the mercy of big government! He was certainly not one of the greedy unregulated big businesses.
(And income taxes in 1913 were only going to be demanded of the greedy, monopolistic, big business tycoons! Remember?)
On the other hand, no one ever heard of any instance where Henry Ford, an unregulated big businessman, ever locked up a little guy in one of his cars, simply because one of his employees insisted upon working for less money than Ford offered to pay him.
Government obviously created this myth of the little guy vs big unregulated business in order to gather power for themselves.
My wife is one of ther most powerful persons in the world.
She takes my money to the mall, and every man working there bows down to her trying to get her to buy one of their wares.
Could it have been any different in the 1920's?
"Capitalism led to a run-away stock market, fueled by greed."
Most of the stock gains in Ford Motors was real.
Ford really was growing in size, earnings and profits, by selling a rugged cheaper car that the puiblic wanted to buy. The gain in Ford stock was justified by free market valuations.
What was not justified by free market valuation was the stock market bubble created in 1927 by the Fed.
The English central bank had returned to the gold standard at the same rate as prior to WWI. The problem was that the English Pound did not justify this valuation after the British Empire had exhausted herself fighting Germany.
Since the American dollar remained pegged to gold, there was a gain to be made by trading in English pounds for English gold and then selling the English gold to America for American dollars.
Result: England had a severe gold drain to America.
Since America also had strong exports at the time, those American dollars were making their way back home in Englishmen buying our goods instead of buying their own English goods.
Finally, to Britain's distain, the Fed had the interest rates set artificially high in order to slow down the Roaring 20's economy, which attracted English investors to America as well.
England was sinking fast and asked that the Fed help them out.
Sadly, our Fed was more than happy to help out an old friend with whom we had fought against twice and with whom we had just saved their skin in a World War.
So, for political reasons, and also for economic reasons harmful to America, but helpful to England, the decision was made for the Fed to reverse sound policy and drastically lower interest rates in 1927.
The lower interest rates began to work their wonders.
More people borrowed to buy the miracle inventions, thereby causing more factories to be built, causing higher salaries and bonuses, and on and on.
This bubble continued to expand until late 1929 when the bubble burst.
Capitalism had little to do with this.
"Deflation is bad"
We have all seen Dell computers sell ever better and more capable computers for an ever lower price?
Is cheaper computers a sign that Dell is about to go out of business?
All the productivity improvements in the industrial revolution and the computer revolution results in ever cheaper products.
To be sure, additional taxes and aditional regulations may make these items more expensive over time, but the underlying manufactured costs continue to decline regardless.
Without governmental interference with fiat money, expensive regulations in business, and especially with the government spending more than they have to spend, thereby causing inflation, the typical norm in a capitalistic society is deflation.
Every year capitalist businessmen learn how to make more with less, and they do so not just to increase their profits, they have to in order to stay competitive.
Otherwise, they become dinasaur companies that are put out of business. The oft-cited example is the blacksmith whose business went away.
In electronics, Motorola was the only company who made the transition from vacuum tubes to transistors and they did not stop there. Thery created the underlying cell phone technology. But in the end, they too are being overwhelmed by able competitors in the wireless market.
The results are ever cheaper goods.
Cheaper goods mean we can buy more.
Who says deflation is a problem?
"Decreasing wages reduces purchasing power"
The fallacy is in remembering that decreasing wages does not necessarily decrease the total output of goods, and those goods still have to be sold.
To maintain equilibriam in a system, with everything else being equal, decreasing wages will exactly match decreasing prices.
That is, with less money "demand" in the hands of buyers, the price of the abundant "supply" of goods has to be reduced.
wage reduction does not destroy money
In bad economic times, when the equilibrium has been disturbed, employers have been known to reduce salaries, say 10%, to reduce costs.
If each of 20 employees were to take home $10 less each paycheck, that does not mean there is automatically $200 less to spend on a factory's output.
With a greater productivity, the owner could then raise the employees salaries even higher than they had been before the pay cut.
In no scenario does the purchasing power ever disappear.
"Herbert Hoover did nothing to alleviate the crisis"
If only that were true.
Hoover was the "compassionate conservative" George W. Bush of his day.
Comparing previous Depressions
Before the '29 Stock Market crash, America had two opportunities to have an even Greater Depression than we had in the 30's; however, neither is even remembered today.
There was no Federal Reserve Central Bank back during the Civil War days, but the federal government under Lincoln did print money from out of thin air.
Some know that the Yankee "greenback", as well as all Confederate money, became totally worthless after the Civil War.
Yet even with a complete collapse of the money supply, and the biggest contraction in economic activity ever, marking the greatest depression Americans had ever known up to the Great Depression, President Grant is still not remembered by anyone as presiding during a Depression.
Instead, Grant is only remembered today as a Civil War hero, who was often drunk.
In a second example, this time with a newly created Federal Reserve funding all military expenditures in fighting WWI, creating a much, much larger bubble, that popped in 1920/21, President Harding did nothing to address the Depression of 1920/21 and the economy recovered within 2 years.
Today, no one ever points a finger of shame at Harding as a no-nothing President, even if they can't tell you what he ever did.
The do-something Hoover
The 1929 Fed-caused bubble was different -- the American president at the time was an interventionist.
President Hoover had all the clues he needed to govern wisely, as witnessed in Hoover's own memoirs. Note that these memoirs were writen years after the end of the Great Depression, where Hoover could assess the results and all the damage wrecked upon the country by his policies:
No matter what the urgings on previous occasions, Presidents steadfastly had maintained that the Federal government was apart from such eruptions.
They had always been left to blow themselves out. Presidents Van Buren, Grant, Cleveland, and Theodore Roosevelt had all remained aloof...
Because of this lack of governmental experience, therefor, we had to pioneer a new field.
As a matter of fact there was little economic knowledge to guide us."
This is an embarrassingly bold statement by Hoover that he did not know what to do and so he did it all wrong.
Hoover was not a single lonely man -- he was president, with the world's smartest Secretaries advising him, a Congress to keep him straight and a Supreme Court to bring him back in line should he stray and if all else fails, a Federal Reserve and a Treasury Secretary to advise him of economic matters.
And yet, even if all the government men indeed knew nothing of the marketplace and got it wrong, even this statement of Hoover's was wrong, as he states the correct answer for all to see.
Contray to what one would have expected for him to have said, this is not an admission that he should not have done anything in the first place, to which even Hoover admits, all the experiences of previous presidents before him had proved to be the correct choice.
Government's excuse for every mistake is
Hoover, or any man in the office of the presidency, was smart enough to know exactly what to do ---- DO NOTHING!
Hoover had all the money he would ever need to fix the economy, if he had decided to ---- DO NOTHING!
If it had always worked in the past, why would it not have worked this time?
Secretary of the Treasury Andrew Mellon believed in liquidation following the 1929 crash.
No firm was "too big to fail."
Mellon chose the far worst Depression of the post Civil War era to prove his "do nothing" point, but Hoover, "the compassionate conservative" retorted that people suffered severely after the Civil War:
But he shook his head when told of the observation many had that human nature had not changed in 60 years.
Secretary Mellon was not hard-hearted...He felt there would be less suffering if his course were pursued.
And he was right!
Following the Civil War, we had an extremely large percentage of our most able-bodied men killed or maimed by war; we had a collapsed money supply; we had a astronomical government deficit; we had a completely devastated South with many cities like Atlanta burned to the ground; we still harbored a deep-seated hatred and suspicion of our fellow Americans.
The real hurt and suffering for Americans came during the Civil War and anyone would be a fool to not realize that the economy would have also suffered as a result.
Grant did not "feel our pain" and did nothing. The economy recovered after a short readjustment and America went on with her life.
Hoover did "feel our pain". And Hoover's Depression lasted twice as long and caused far more suffering than any Depression before hand.
Hoover gave America morphine to releve her pain, and then told America it was not his fault that she was now addicted to morphine.
Now, that is governmental love!
What did Hoover believe caused the Great Depression?
Hoover's biggest sin seems to be the fact that he never realized that high wages are the result of high productivity.
He believed it was the other way around; i.e., high wages caused high productivity.
Which makes no sense.
The very essence of great production is high wages and low prices, because it depends upon a widening...consumption, only obtained from the purchasing power of high wages and increased standards of living.
-- Herbert Hoover
A typical politician.
Hoover took all this to heart.
If workers aren't earning enough to buy all the products generated by businesses, then the obvious remedy to Hoover was to boost workers' wages.
New immigrants "took" jobs from everyone else, so new ones were prohibited from entering and many already here were deported.
New machines also "took" jobs from workers, so production had to be reduced.
Before Hoover-type bureaucrats, American entrepreneurs had created an economic miracle, all by themselves, and then government Hoover know-it-all types come along to tell them they were doing it all wrong.
On the one hand, Henry Ford wanted lower wages and higher profits -- therefore he must be evil.
On the other hand, American car buyers wanted higher wages and cheaper cars -- therefore they must be saints.
On the one hand, a free market economist would say that the market will set the correct price.
On the other hand, Hoover decided it was time for government to set the prices.
What Hoover gets WRONG is that American workers were paid more by their employers because they produced more.
In other words, it is not how many little green pieces of paper you are given that counts, but how much stuff you make.
Make more stuff, and you have more stuff.
Mexicans or Guatemalans do not have the drive to make a lot of stuff, so they don't have a lot of stuff.
The essence of Hoover's problem -- Artificially prop up wages
-- Herbert Hoover
OK, free trade economists. -- What happens when the price of labor is forced to stay high while the price of everything else reduces?
That's right! -- Businesses reduce their high labor count.
Unemployment skyrocketed under Hoover.
The essence of Hoover's problem -- Start an international economic trade war
The Smoot-Hawley act was to help domestic producers, yet these increased taxes also increased prices.
As the world's largest exporter, the trade war that ensued was far costlier to America than to anyone else.
To gauge our trading partners anger, we find that European countries even took the drastic measure of repudiating debts to us incurred during WWI.
American exports would have fell anyway, but not from $7 billion in 1929 to $2.5 billion in 1932.
The essence of Hoover's problem -- Tax and Spend like a Democrat
Hoover's deficit for FY 1933 was $4.6 billion on receipts of only $2 billion.
That is way over 100% greater spending than income.
The receipts went down as the spending went up:
The problem with saying that government needs to spend massive amounts of money to get out of a Depression is to ask:
The problem is that, at a time where most citizens find that they desperately need to reduce their personal spending and personal debt, they do not need to turn around and find that the government is taxing them more in order to spend their tax dollars like a drunken sailor while getting them into more public debt to go along with their overwhelming personal debt -- all while proudly saying "we are here to help".
That is just plain common sense -- which Virgil Jordan failed to get any of:
we must squander our way out of it"
-- Virgil Jordan, 1932 -- Business Week economist
Funny, I thought the ivory tower intellectuals had told us that the Roaring 20's were the decade of squander, and that that was what had caused the Great Depression.
I hope he was talking "tongue-in-cheek. Otherwise, Virgil says that government squander throughout the Great Depression was the ticket to good health?
But, say the politicians, "YOU will suffer little in paying most of those taxes that will be squandered by us -- for we will get Henry Ford to pay his "fair share"."
The problem is that Henry Ford would have indeed pay the taxes --- for he would not have had any problem whatsoever paying 10,000 times more of his "fair share" of taxes than you and I had to pay -- and when he did, then he would have raised the price of each car he sold to the middle and lower class to make up for it.
It is interesting to note that the tax rate on the poor was increased as well as the tax rate on the rich.
In 1931, if you had made $4,000 for the year, you were taxed 1.5% of that amount.
In 1932, if you had made $4,000 for the year, you were taxed 4% of that amount.
Heck, everyone was taxed higher. The tax on the middle class basically doubled overnight.
Compassion shows no bounds!
The essence of Hoover's problem -- New Deal-lite Programs
Hoover, the "Compassionate Conservative" of his day, created many government projects we still use today.
The ones he is most proud of are the San Francisco Bay Bridge, the Los Angeles Aqueduct, and the Hoover Dam.
At least Hoover was better than FDR -- can you name one accomplishment of lasting value FDR created? And no - Social Security does not count.
The essence of Hoover's problem -- Communism was proved a failed experiment
Hoover was neither the dogmatic right-winger our modern media-Scribe press portrays him as, but neither was he a central planner, as shown in his speech of February 1933:
It has faults, for humanity is not without faults.
Difficulties arise from over-expansion and adjustment to the march of labor-saving devices, but in broad result it stands in sharp contrast with the failure of the system of production, as in its greatest example -- Communist Russia -- where after 15 years of trial, in a land of as great natural resources as ours, that system has never produced in a single year an adequate supply of even the barest necessities in food and clothing for its people...
Our system moves supplies of everything into remotest villages and crossroads; it feeds and clothes great cities each day with the regularity and assurance which cause never a thought or anxiety.
-- Herbert Hoover
Then America get the political "but" from the snub, "She has a wonderful personality, but..."
After wonderfully addressing how marvelous the free market is, Hoover now gives us a very modern view, along liberal lines, about how government can improve on perfection.
In normal times out of our 120,000,000 people there are a few millions who conscientiously work and strive, yet do not produce that minimum of commodities and services to which they have a just right as earnest members of the community.
There is another fringe of a few hundred thousand who receive more than they deserve for the effort they make.
But taxes are furnishing rapid correction in this quarter...
The enlarging social sense of our people is furnishing the impulse to correction of faults...
It is not brought about by destruction of the system."
-- Herbert Hoover
"Centralized Planning has all the answers"
At the 2002 birthday tribute to Milton Friedman, the Federal Reserve chairman Ben Bernanke had this to say:
And at that, during the last three months of 2008, the Federal Reserve has expanded bank reserves at an annualized rate of more than 400,000%.
But was Milton Friedman really right?
Their argument was that the powerful Governor of the New York Federal Reserve Bank, Benjamin Strong, had been very competent as the de-facto head of the entire Federal Reserve until his death in 1928.
But after his departure, bureaucratic in-fighting and sheer incompetence led to disaster.
But wait one minute!!!
Should the entire livelihood of 120 million Americans ride on the competency of one man?
Didn't we have a Revolution to get away from the idea of a King?
Friedman need go no further.
The United States should not depend upon a single lonely banker to insure the economic stability and viability of an entire country.
And this is a confession that central planning can be, and indeed has been, far worst at centrally managing the economy than letting 120 million Americans decide individually for themselves, in aggregate, what the best economic policy will be.
Do you pray for competent Benjamin Strong's to protect your livelihood, or do you trust your money in your own hands?
Here is how central planning plays out.
Economies recover from recessions or depressions by reallocating labor and capital to their most efficient uses.
Propping up ailing industries only delays that necessary process and thereby deepens the weaknesses of an economy and delays recovery.
The printing press does not create wealth; it creates green pieces of paper featuring U.S. presidents.
The contraction of the early 1930s was the economy's attempt to recuperate from the earlier bubble inflated by the Fed -- the proper role for the authorities at this late stage was to stay out of it, not to embark on another spree of dollar-printing.
"The Fed contracted the money supply"
The Fed tried every trick in the book to bolster the financial sector, but the public's behavior was to hoard money.
Since bank runs showed the public that banks were not safe places to keep ones life savings, and since deflation made money more valuable by the day, and with many worried about their jobs, many literally chose to "put their money under their mattress".
That is why we now have the FDIC, a constant never-ending inflation and unemployment insurance. The reason is to give the public a sense of confidence in having a bank handle their money and the need for the money to make enough to keep ahead of inflation.
However, because of the fractional reserve banking system, the Fed never had the power to determine the total amount of money in the economy.
Bankers have always liked this immoral system.
They cry that they cannot make any money having gold just sit in their vaults.
Moral bankers would never say such a thing.
There are plenty of storage units around the country that store all kinds of things for a small fee.
The storage of gold or of the gold certificates they represent should present no greater problem.
But honest, moral bankers are ran out of business, by dishonest, immoral bankers.
The fractional reserve system allows the bankers to steal your gold, in order to loan your gold out to another customer, all in the hopes that the other customer returns your gold before you realize that it's not being safely stored away all this time.
The public knows this of course.
Those big heavy vaults at banks protecting your life's earnings are a joke, because your money is not there -- It has been lent out to Joe and Linda for their honeymoon cruise to the Caribbean.
The public could have taken their gold to one of those regular storage units, but this storage unit called "a bank", promised to give you more money back than you gave them.
And why did you need to get more back than you put in? -- Because the Fed constantly steals its value through inflation, which you try to recover with a bank rate.
It all works hand-in-hand
You would get really angry if you had found out that the boat storage unit had loaned out your boat during the week each time you were not using it, but you have no problems when your banking storage unit operator loans out your gold or dollar bills to help people you do not know nor care for.
You just hope that you get the original amount back.
At this point Murphy goes into details about how government laws preventing branch banking and hence spreading the risk of default into disparate industries and geographic regions, heightens the chances of regional failures.
Most impressive is the fact that Canada did not experience a single bank failure during the entire Great Depression.
But in this study about the fractional reserve system, it is proved to be a model for instability.
In its creation, $50 billion dollars of real gold-based money becomes expanded into $500 billion dollars of non-gold-based bank accounting dollars. -- Great during a Roaring 20's decade.
But during a Great Depression decade, $50 billion dollars hiding in pillows becomes $500 billion of contracted money supply. -- A disaster durng a Depression.
"Too big to fall"
-- Walter Bagehot, Bank of England
Bagehot's idea was to charge a very high interest rate, but to lend freely to all takers.
The idea was that only sound businesses would feel the ability to take on the added debt.
Murphy speaks many times of the need for a rearrangement of the economic deck should it get cluttered, so that the most profitable arrangement of capital can be quickly put into place.
In reverse, lowering interest rates to dismally low levels allows zombie companies to survive.
And of course, that is what economist Lional Robbins wrote about in 1934:
From October 1929 to December 1930 no less than $410 million was pumped in the market in this way.
The result was as might have been expected.
The process of liquidation was arrested. New loans were floated.
-- Lionel Robbins, 1934.
Contrary to the popular line, the rate cuts by the Fed after the stock market crash in 1929 through September 1931 were too modest, they were at the time the most aggressive in its history.
Ever since the Fed opened its doors for business in 1914, just in time for WWI, the dominant New York Fed set its discount rate at 6% and never went below 3%.
From a starting discount rate at 6% in October, 1929, the Fed lowered the interest rate to 2% by December 1930. The rate was eventually lowered to 1.5% in May 1931.
Of course, we have the 1920/21 Depression following the WWI bubble the Fed created as an example of what to do right.
Consequently, the New York Fed hiked its discount rate from 4.75% up to 6% in one fell swoop in January 1920.
The Fed then hiked again to a record high 7% in June 1920.
Despite the fairly severe depression -- recall that unemployment averaged 11.7% in 1921 -- the Fed held steady to its record-high rate for almost a full year, not cutting until May 1921, after the depression was basically over.
Record high interest rates during 1920 Depression; record low interest rates during the Great Depression. -- Thus proving Milton Friedman wrong about his monetarist tight-Fed theory.
After all the central banks abandoned the "keep you honest" gold standard, and flooded their economies with new money -- just as Friedman recommended -- the world still suffered through many years of economic stagnation.
According to the monetarists like Friedman, the Fed's high interest rates in 1921 should have caused a Great Depression then, but instead, it marked the most prosperous decade in U.S. history.
Moral of the story: Let everything that is dying die, so that the living can go on living.
In an absolutely horrible and heartless analogy, which is OK if you are talking only about economics. You are doing a 90-year-old man no favors by giving him massive amounts of medical aid, allowing him to live a few more months in abject misery, and that wipes out both the inheritance of the children and grandchildren. Let the old man meet his maker -- then divvy up his estate.
This is the gist of what Murphy suggests.
"World War II got us out of the Great Depression"
This was the biggest eye opener for a conservative.
I had to admit that I was taken in by the conservative line "A war is good for the economy."
As always, Murphy does an excellent job of shooting this myth down as well.
If FDR's hiring of millions of unemployed men to work on WPA projects like the Hoover Dam which birthed Las Vegas, is bad for the economy, then how could it be good for the economy for FDR to employ the same millions of unemployed men to shoot guns at Germans and Japs?
How could building a nature trail be bad for the economy, but blowing up artillery shells you had just assembled is good for the economy?
Between 1940 and 1943, unemployment fell by...7.45 million...while the armed forces increased by 10.87 million.
Young man to his father, "Heh dad, I got a job. I may get blown up or mained for life by a German or a Jap, but don't worry about me one bit!"
The Broken Window Fallacy
The Broken Window Fallacy looks at a broken window as more business for a glazier.
This is a typical analysis which fails to take in the whole picture.
The reality of the deal is that the money to replace the window would have been spent on a new suit you were about to buy, instead of replacing items that you already had paid for.
You are poorer after a broken window because now you cannot afford to buy a new suit. You will have to work more to save up for the suit again.
Otherwise, we would all get rich by hiring a street gang to throw bricks into everyone's windows.
And a good reason why planned obsolescence is not a good thing for society in general.
Productivity creates wealth
Truth is that it is productivity which creates wealth, not wanton destruction.
The fact that Japan and Germany recovered so quickly after the war, does not prove that leveling their cities was good for them.
Instead, it proves how incredibly productive they are.
Germans and Japanese did not outperform us because they had newer, more modern factories. They outperformed us simply because they were more productive.
Starting with nothing, within a few years, they had both surpassed the productivity of civilizations thousands of years older, such as India and Nigeria.
A poor man has "needs", but cannot (or will not) provide for himself; A rich man made poor, also has needs, but can and does provide for himself.
The GDP lies
The Gross Domestic Product is not just about adding up the price of all sandwich bags and potato chips bought. It also includes spending by government.
And the federal government was spending like never before during WWII.
The total GDP was way up during WWII, as FDR supporters love to say as proof that WWII got us out of the Depression.
But upon closer inspection, during the middle two years of WWII, the citizen's portion of the GDP was down to levels lower than during any year of the Great Depression.
We were poorer in terms of goods and services than we were in the Great Depression.
What was way up was the government's spending on the war.
There was a good reason the civilian portion of the GDP was way down -- the government rationed everything.
Women could not buy nylons for their legs. Tires had to be used until they fell off the wheel.
And to top it off, FDR imposed price controls, rent control and other socialist controls so loved by socialists like FDR.
War may be a necessary evil, but 1 billion dollars spent on tanks are not the economic productivity which makes life enjoyable.
By this time, FDR had us off the gold standard, so even these GDP numbers were largely inflated by printing press money.
Murphy suggests that conservatives believe, "If only FDR would have started WWII in 1932, instead of waiting until the very end of 1941, then America would have been much better off."
Indeed, isn't that what Churchill wanted all along?
"We can trust our government during wartime"
The other oddity that Murphy painfully makes the conservative reader aware of is the seeming agreement between conservatives and liberals about the government being a good patron with our money.
The only difference is one of timing.
The liberal believes that government spends tax money wisely on domestic affairs -- the conservatives disagree.
The irony is that conservatives believe government spends our tax dollars wisely on international affairs, such as war. -- the liberals disagree.
(Some Ron Paul supporters are coming around to see the light.)
During WWII, how many red-blooded American conservatives questioned FDR deciding who gets what supplies, through a rationing system?
We had a war to fight by golly -- liberty and the free market had to give a little.
But that is what liberals said during the Great Depression -- there is an economic war to fight -- liberty and the free market has to give way.
If central planning rationing had been done during peacetime, these conservatives would be in Civil War.
But during war, free market conservatives become followers of central planning -- and there is no greater central planning than a soldier immediately and unquestioningly following his commander's orders!
If the free market can product a magical abundance of consumer goods during peacetime, Murphy asks the million-dollar question -- "Why do you abandon a free market system which works so well during your time of greatest need -- during a war?"
Do we produce the best tanks, for the cheapest price, in the quickest time, by auditing the books of the military contractor whom we have given a monopoly bid on the project, and then accusing its CEO of corruption?
Is that how we buy our McDonald's hamburgers, at a good price, with consistent quality and of all things -- fast!
Do we accuse the CEO of McDonald's of trying to rip us off? Or if we feel ripped off, do we instead just buy our hamburgers from Burger King?
How fast can we win a war?
Many say our lessons learned from Vietnam, was that the military should not be micromanaged. (i.e. centrally planned)
But if the military was ran like McDonald's, the Vietnam War would have been won in under a year -- yes, actually won.
Afraid of the Chinese?
OK, then our soldiers could have been set loose on Fidel Castro, 80 miles from our own borders, and the war would have been won in under a week, with all the soldiers home for the weekend with their families.
Chavez the next week.
Already, the Iraq war and the Afghanistan War has lasted longer than WWII, and the Taliban keep coming.
The Germans and Japanese were good, friendly people afterward their total surrender.
But ask yourself how fast WWII would have been over if someone of Henry Ford's character would have been in the White House?
We can only speculate.
At least FDR, even with all his fascist tendencies, realized that fireside chats and ivory tower plans were not going to defeat Hitler, so practical, common sense businessmen were brought in to replace most of the the socialists and communists in his administration.
The Pharisees may have wanted to turn America communist, but they found an even greater priority -- the need to soundly defeat their worst enemy and the need to shore up their trophy prize, communist Russia.
The end of WWII coincided with the end of FDR.
True prosperity did not come to America until after FDR released his death grip upon America's free market.
The true cause of the end of the Great Depression -- was the death of FDR.
Lessons for today
Socialists and fascists believe that the deregulation of the Ronald Reagan years and later Bush father and junior, allowed the greedy capitalists to come wreck havoc upon the economy once more.
These are the same people who argue in favor of not interfering with the complex and subtle balances in nature. They know the occasional tornado or volcano destroys and disrupts, but that nature rights itself in no time with no help from man.
But these socialist find it impossible to believe that a free market can exist without causing a tornado or volcano.
They argue that the Federal Reserve will protect us from storm and yet we find ourselves in one now.
They argue that they can manage the economy and foresee market dislocations faster than professional Wall Street experts who survive on knowing how to make money.
They try to argue that it was the greedy free market system of conservatives that artificially lower interest rates, creating a moral hazard in the housing market, followed by their stepping on the brakes later on.
Many pin the blame on Republican Bush, who was more RINO Herbert Hoover, than free market Ronald Reagan.
They will try to fix the economy by seizing Fannie Mae and Freddie Mac. (They used the word, "seize", which is a very tyrannical approach to government.)
They have arrogantly seized General Motors, replacing its CEO with a political crony, and have stiffed the GM bondholders.
Repeating the mistakes of Hoover and especially FDR, they are the enemy of the investor.
TARP deliberately hides bad banks among good banks so there are no runs on the bad ones, they prohibit the free execution of stock trades by prohibiting short sales, and they take seemingly random actions of shutting down some firms and propping up other ones.
The free market despises governmental interference where any day they could be accused by a hostile administration of violating some Sarbanes-Oxly law.
Investors will sit out this administration and thus create a new, Greater Depression.
Back to the nature analogy, Socialists go into the American economy to shoot all the businessmen whom they believe are wolves, and then are stunned to find several years later that millions of starving, overpopulated deer are stripping the grasslands to a nub -- "If only we had killed more wolves", they will say, "then those deer would not have been starving and those grasslands would still have abundant vegetation on them preventing erosion".
As the socialist fascist fan of FDR would have said as well:
-- George W. Bush, CNN interview, 2008
And Obama is indeed a neo-FDR.
He is pro-labor at the expense of industry, unbalancing a delicate relationship existing between employment and production. -- unemployment will go much higher as a result.
Obama wants to "spread the wealth" around, further alienating the man (or woman) providing your paycheck.
So we can expect the current 9.8% unemployment to rise to 15% next year, as the trend is followed from the previous Great Depression.
Obama has his centrally planned pet projects, such as alternative fuels, CO2 reductions, health care. -- All government-directed rather than free market-directed.
Indeed, we stand poised for a repeat of history.
You can read further at Solutions.
Article located at:
Last Hope for America
Christian Libertarian: Harmonious Union
Church and State
The Christian Solution ©             First Release: March 15, 2008