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Sins of the Past
Sins of the Past
Ben Bernanke has said many times that Marriner Eccles, the head of the Federal Reserve in 1936/37 made a mistake by tightening credit (raising reserve requirements). Bernanke blames Eccles’s actions for the 50% stock market collapse in 1937 and the second leg of the depression that followed.
Bernanke’s interpretation of Eccles’s actions is widely held by historians. It was FDR who first (conveniently) blamed the Fed. I think that Bernanke is also (conveniently) blaming Eccles. He is using history's interpretation to support his position that monetary policy must be set on MAX for the next three years. He has said that he will not make the same mistake that poor old Eccles made.
Eccles was in a bind. His job at the Fed was to maintain relative stability of prices and the stock of money. In the years prior to 1937 money flowed into the USA from Europe. This "flight capital" fled to the USA in the form of gold shipments. The money came because the holders of wealth were anticipating a major war. With gold reserves rising, so did the supply of money. M1 increased 55%, and money in demand accounts rose 71% from 1933 to 1936. More troubling were rising inflationary pressures. In the first six-months of 1936, wages rose by 11%. Wages in the critical steel industry rose by 33%. These conditions would scare any reasonable Central Banker.
The Fed itself answered the historical question of whether the Fed’s actions in 1936-37 was responsible for the 1937-38 double dip. In a research paper, (PDF Link) St. Louis Fed researcher Charles Calomiris concluded:
We find that despite being doubled, reserve requirements were not binding on bank reserve demand in 1936 and 1937, and therefore could not have produced a significant contraction in the money multiplier.
Much of today’s monetary policy is based on the historical interpretation of the consequences of the Fed’s actions. If the Fed was not to blame for the 1937 crash, then who/what was? In her book, “The Forgotten Man”, Amity Shlaes provides some answers. She points to a critical speech by then Treasury Secretary Morgenthau on November 10, 1936:
The war against the Depression had required deficit spending. But the emergency is ending, and the domestic problems we face today are essentially different from those which faced us four years ago. We want private business to expand. We believe that one of the most important ways of achieving these ends is to continue toward a balance in the federal budget.
Morgenthau’s comments 75 years ago (and the following cut backs in federal spending that took place in 1937) remind me of where we sit today. After four-years of spending like mad to fight the recession/depression of 2008, the federal government has committed itself to dramatic cuts in spending starting in January of 2013. Coupled with those cuts are across the board tax increases for every individual who has income.
In the book, Shlaes points to other factors that contributed to the crash of '37:
*The rapid rise of wages/raw materials in 36/37 led to a conclusion by many that corporations were going to face a profit squeeze. It was this threat that led to the 1937 stock market fall. We face a similar situation today. Rising commodity prices and global wages will impact consumers and company’s bottom line. (Think Apple and Foxconn)
*Social Security was collecting money from every paycheck by 1937. This reduced disposable income and contributed to the recession. This is not unlike what we face in 2013 when SS taxes are scheduled to rise by 2%.
*FDR wanted to balance the budget. He raised taxes in 1937; this was a big factor in the decline of the economy. We face the same scenario in 2013 when large increases in taxes are scheduled.
*In November of 1936 Nazi Germany signed the Anti-Comintern Act with Japan and Italy. While there were many like Neville Chamberlain, who ignored the evidence that a war was coming, the financial markets did not. This too, has similarities with 2012.
I think we are about to re-make many of the mistakes of 1936/37. The programmed spending cutbacks, couple with the many impending tax increases on 1/1/2013, will certainly cause a sharp contraction in economic activity.
Bernanke’s Fed has sworn that it won’t make the mistakes of 1936/37. But I've shown (and the Fed’s own research confirms) that Fed policy was not the cause of the '37 crash. Bernanke is relying on a false interpretation of history to justify his monetary policy today.
We will face an economic slowdown due to lower federal spending, and at the same time, inflation will be rising as a result of the excessively loose monetary policy. Stagflation is in our future. Should this be the result, the historians will say that both the Fed and fiscal policy are to blame. In other words, we have not learned a thing from our past mistakes.
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Bruce, nice rebuttal to street wise professor..
The guy's a fool....
sorry but I prefer the view of Minsky.
Agreed. There will be no stop to deficit spending and money printing. We are going to print our way into oblivion.
At the end of the printing party lurks debt-devouring inflation. That is their destination.That is their goal. We are going there, willing or no.
I don't follow their reasoning. They can inflate the current debt into nothing, but only by creating ... more debt? I start to slip some gears about then.
The only outcome ultimately must be monetary reset; they print new (different) money at 1,000:1 against the old FRN, and confiscate the old ones in the bargain, I envision a series of buy-backs of the old with the new, with each FRN buy-back being on worse terms than the last. People will stampede into the new currency when they sense what is happening. And then, The Fed must buy gold in the new currency, subjecting holders to a massive loss (99% loss seems likely). It would have to be done via legislation however the environment for such draconian measures could be easily nurtured in a police state. Will the other soveriegns go along with this? The answer must be No unless ... they have been decimated by global war.
All these signs seem to point to the same destination; significant inflation (50%/yr at least) followed shortly by hard deflation (200%/yr) and massive gloal warfare and then monetary reset "for great justice."
When? I don't know ... give it a decade I guess.
Yeah. We are very likely seriously screwed.
Edit: I write fiction. So I have an active imagination, to say the least. I can take an idea and run it out very quickly to one outcome or another. However my fiction is what they call speculative fiction, meaning it is much less fantasy and much more a trajectory from current conditions. So I've exercised that "muscle" a lot. As my character Diamond would eventually say, "For all the things that are said and done there are vastly more things that are not, but might equally have been. Those things that might have been necessarily are all of the futures yet to come." What will be is already in the gears. And those gears, they turn relentless.
but before the reset, the idea is that they have as big a claim as the situation will permit on your person, property and future productivity. if they've got your gears slipping, the fix is in.
since the bulk of inflation is measured in the value of real estate and labor...in fact it's almost impossible to get inflation at the generalized level using current methodologies. having said that in that context it does make sense to pursue the goal the Chairman is pursuing...namely "to get wage inflation" since without it the banks and Wall Street will collapse again and this time the government will be nationalizing industries rather than bailing them out as their political masters demanded the last time. we already have the "war thing" so you can skip that as some type of theoretical. in fact the USA has never had more war than now in it's entire history. finally while this is a good piece "there is the problem of context" everywhere and always in history. this is not the 1930's where...for all intents and purposes the Federal Government did not matter. Henry Morgantheau "could have a plan" (namely create a Reserve Dollar) and execute on it then. That simply is not possilbe now given the size and activities of our current Federal "regime." Indeed it really is a miracle not only that the dollar as reserve currency still holds...but that even with interest rates forced this low by the Chairman such that government can even function the dollar remains so. A++++ for the ChairSatan.
"since the bulk of inflation is measured in the value of real estate and labor"
You lost me at "and labor." Do you understand how inflation works, in the sense that it propagates outward from a single source? And "labor" is a few steps removed . . .
the only slow down in gov spending will be to break the "promises" they made to it's citizenry.
Sure you can trust the Government; just ask any Indian.
ah, yes, the gov's mo
I don't agree with you Bruce. If you look at the "tightening" of the very gay, but very closeted Eccles, you will note that while raising reserve requirements from 12.5% to 25%, and doubling stock margin rates, he lowered the discount rate from 4.5% to 1.5%. This caused loans to not only dry up, they were getting called in putting the squeeze on John Q Public, while feeding the big banks cheap money so they could survive. They just couldn't lend it, much like they can't today, because the squeeze on the Public. There were simply no viable deals to make loans to or for. Eccles had taken care of the stockmarket exuberance by raising margin rates, and sure the money was flying in from around the pre-war world, and yes, the economy was becoming overheated by the Quantitative Easing of the New Deal, and certainly government spending was a problem, and yes Morgenthau was always beating on FDR about deficit spending; but it was the QE of the New Deal and Eccles knee jerk handling of the squeeze directed against the Public that was the problem. Deficit spending was a piece of the pie, but to lay the blame of the double dip depression on deficit spending is rather simplistic and misleading. You just can't let Eccles off the hook like this and be accurate about things. If you want to go to the heart of the matter, the real issue is Congress farming out its Constitutional Duty to another agency or private corporation, which takes that power of Congress out of the Public Forum, and places that power in the hands of, "cunning, ambitious, and unprincipled men", which includes Eccles, Roosevelt, and the criminal banksters, who use it against the Public. For this is the "customary weapon by which free governments are destroyed." (note: parenthesis are exerpts from Washington's Farewell Speech to the Nation, Sept. 19, 1796)
Take a look at my website: www.nar2012.com. You might want to read the book. We are having a revolution today, they did not have this problem in 1930's America.
"If you look at the "tightening" of the very gay, but very closeted Eccles..."
The same may be said of Dr. Bernanke. Not that I care but it should be obvious to all that he is also gay. And, no, I don't really care one way or the other except to wonder that if the man is hiding his own sexuality (even if from himself...), then what else is he deluded about?
It is clear that he is indeed a very bright man but why is there a need to defer the truth of his homosexuality? What does that mean to his policy and power, vis-a-vis other even more powerful people who also know the truth?
Truthfully, I find this snippet of fact most disturbing of all.
:D
P.S. Sell AUDUSD 'til the cows come home.
Possibly Orly, but when you consider that Keynes was also gay, as was the FED's first NYC Governor (and at the time the essential head of the FED) Ben Strong was gay and quite possibly murdered his wife (his children were taken in by neighbor Henry Davison of JPM, where Strong worked), and that his counterpart at the Bank of England, Montegu Norman was also gay AND Ben Strong's boyfriend (they vacationed together), and that Keynes counterpart at the Dept of Treasury, Dexter White was gay and dragged into the Whittaker Chambers gay Soviet Spy Club, not to mention that J.Edgar Hoover was gay.... you should find this, and THESE snippets of facts even more disturbing.
You have to start thinking about what the fuck else is going on here. I know a number of gays, and most of them are O.K until they get into a group and then everything turns to shit and they turn on society in general. They've been ostricized their whole lives and they do have deep seated anti-social tendencies, especially when they get into groups of like minded individuals. It's like 'payback time' or something.
I don't know about it cause I'm not gay (not that there's anything wrong with that-Seinfeld), but I can understand it, and when these people are given the reins of power and get togther, who the hell knows what is going to happen and why take the chance. It's an element in the fabric of history and usually left unaddressed, and maybe its about to stuff all the PC shit and get down to what is actually going on here. And I'll tell you one thing, it doesn't look good and there could be some far reaching problems due to it all.
When you start stacking these sexually non-mainstream types together, in power, and the result is clearly an anti-social result... like I said, hang all the PC shit, the issue is too big to leave alone, much less their type to continue in their role of power, especially as none of these people have been elected.
And while we're here, lets talk about the only gay president of the United States we ever had, John Buchanan, 15th president and an absolute fuck up. But what you don't know is that he almost single handedly bankrupted America in 1819 by his criminal activity as head of the Baltimore branch of the Second U.S. Bank, that was the center of more under-handed theft and criminal activity in a short time frame that rivals the disaster engineered by Wall Street, Ben Bernanke, Tim Geithner, and Hank Paulson coming out of the March 11th 2008 meeting at the NYC FED meeting with the crime heads of all the 2B2Fail Banksters and their Hedge Fund Henchmen. Clearly a Federal Criminal RICO violation and their guilt is a slam dunk, they should all be in jail for 10 to 20, and I'm not talking 5 and dime.
So where do you want to go next with this Orly,... you look like a cute girl, so I'll give you a heads up. Check out www.nar2012.com
See ya in church, Baby. Aloha.
Gays do not propagate, hence a shorter time-horizon. Nothing nefarious, just the reality of human self-interest mainifested on an inter-generational (or lack thereof) timescale.
As was Nixon and Bebe Rebozo, not to mention J. Edgar Hoover. My point was that if Dr. Bernanke is going along to play along so that his little "secret" is not spilled- just as those boys' secrets were not altogether common knowlege during their lifetimes- then I think that that is an especially insidious anachronism.
Seriously, does anyone care where he puts his...thing...as long as it doesn't come anywhere near me? If he is playing their game to keep from being discovered, then he is still living in the '60's.
I would urge him to declare himself, come out of the closet and do the right thing for America and the world. Stop being a tool of the bankster class and get right with the Universe.
:D
Addo:
The sexually non-mainstream types...like the Boy's Town and the Bohemian Grove stuff that goes on? You're probably right about that. I don't understand why this stuff is tolerated at the highest levels of our government, Is there no one decent in our government any more anywhere?
Unbelievable.
Interseting twist on gay cabals in this thread. I was intrigued by the comment that they often seek immediate rather than generational achievement...this was exactly the timeless struggle that Confucian bureaucrats had with the eunuch mandarins in the Imperial palaces of the Chinese dynasties...hmmm, interesting dynamic. When the reset's came it wasn't pretty for those on the losing side.
Wow. Quite interesting. I'll study that era and perhaps it can give clues as to what may happen here.
:D
i was sure Bernanke would raise rates at the time of the market crash. the point of the Eccles story is that any extended period of loose credit is going to produce a shock to the system when it is removed. the longer you use heroin the harder it is to kick the monkey. i suppose it is naive to think the fed should price interest rates at a level commensurate with risk, to try and keep the markets honest. the fed should always try to balance the economy (not try to steer it) so that the market can price commodities and labor appropriately (and not look the other way while companies like Apple create a bubble based on cheap labor in China, which pegs illegally to the dollar).
the day of reckoning has more to do with their successes than their failures, soon enough the problems all the easy credit was meant to solve will be complete, and then what? without a wall of worry, (more heroin, or easy credit required to solve the problems) the stock market will no longer have a reason to wake up in the morning. then the economy either recovers, and interest rates go higher on their own, or the economy stalls and wall street has to hand out their profits in the form of dividends, which is the same thing. but paying out 3 or 4% on money that really cost them nothing is no business plan, even if the Fed keeps up the flow of phantom cash, (which they have to turn into real cash).
but there are some who think the depression never really ended. what if the depression was the norm, and the parabolic rise of the 90's was called the Great Elation? pretty hard to recreate that when you're already 15 trillion in the hole, and the Great Elation started with a government surplus?
the greatful un... " i suppose it is naive to think the fed should price interest rates at a level commensurate with risk, to try and keep the markets honest"
................................
To assume that the Fed should be 'setting interest rates' is foolish. There exists no group of men, no matter how experienced and well educated, that should be in charge of setting interest rates.
Only the market can set interest rates.
Once a group of individuals begin setting interest rates they are picking winners and losers even if they begin with the best of intentions... and, the Fed nor any government with a supposedly free market should be picking winners and losers.
The Fed (among other reasons) was created to 'smooth out' the boom/bust cycles of capitalism... but, boom/bust cycles are a at the core of capitalism. To believe that the Fed or any similar group of people can change the nature of capitalism by removing boom/bust cycles is rediculous. It is like saying that the human heart occasionally malfunctions so all human hearts should be removed at birth so that they will not malfunction and cause an individual to suffer a possible heart problem.
Our 'capatalist system' is now so distorted that it doesn't resemble free market capitalism. We are on the slippery slope of a long experiment of various economic manipulation. The result of this experiment cannot be known until it's conclusion, although we are free to speculate about possible results... Good luck to all of us participants. BTW, we are not 'soverign individuals' (as we have been reminded) so participation is mandatory unless you happen to be a one percenter.
Snidely,
Much as I like your post, from an historical perpective, since the nation state exists and prints its own money, can you give one instance when the market has determined interest rates? It has always been the privilege of those who make the money; the keepers of the seal!
I think during the feudal ages one has to go back to the likes of the DOges of Venice, to the princes of FLorence or to the Fuggers to find a private banking house printing money and controling its rate and supply. Never since then, until the FED was invented; as it is a private bank with a national mandate given by the Treasury, has this occured anywhere.
But I may have missed something...obviously fractional reserve banking makes its own money market rules but its back up rate is the central bank "banker of last resort" rate.
Great post, I agree. To think the Fed was created to avoid the pain of the natural boom bust cycles. Here we are 4 years on into this financial travesty and still no bust or the inevitable succeeding growth.
i'm sorry, but this sounds utterly like an oxymoron. the fed should not be. central planning can do nothing except subsidize stupid decisions.
+1 Interesting thought. The Great Elation.
1929-1936 was no day at the beach either. Who get's the credit for that?
One thing is certain, only in America was it The Great Depression.
Mercury,
Thank you for lending your visage to the US dime. It's probably my favorite coin to collect
I thought I was the only one. Cheers! How goes the quest for the 45P FB?
Actually It's just the hat - borrowed by Lady Liberty for the occasion.
Bruce, I think you are mostly right on the money.
My only quibble is that while I agree that cutting deficit spending negatively effected the economy in 1937, and will do so again in 2013 if we make cuts, I don't see it as a mistake.
2007 was a bubble. When the bubble broke, the economy declined. Government spending ramped up and filled part of the hole.
Continued large deficits are simply propping up the economy at an unsustainable level.
I wasn't trying to pass a judgement on the budget cutbacks due in 2013. If you read me regularly, you would understand that I hate debt.
But lets face it, cutbacks cause recessions. You see it to today with austerity in the EU, they will have negative growth. You also see it it 1937.
My point is that is is happening again in 2013. We will have a recession as a result. Bernanke will keep his foot on the gas, and we will end up with inflation.
I think that the cutbacks in 2013 are ill timed. They all happen on 1/1/2013 because the jerks in DC set it up that way. So it will happen. That does not mean that Bernanke is right with monetary policy. He is trying to offset a slowdown in government spending with monetary gas. It will end badly.
The cuts in 2013 will be repealed before they ever take place. The debt ceiling will be raised again. It's either take massive pain now or excruciating pain later. They will choose later. Moody's will announce at the end of the year that they will consider downgrading the US in 2019.
Bruce,
I respect you too much to give you a hard time over moving into the Pual Krugman camp regarding "austerity". I'd like to suggest a positive action that will broaden your understanding of the current situation.
Take a couple of weeks off, get in your favorite car and head west on the U.S. highway system (not the interstate). Go at a reasonable pace and stop for breakfast, lunch and dinner at the small eating establishments that have busy parking lots. Listen and talk to the people of America and don't turn back until you are west of St. Louis. It is 60 degrees this afternoon in the midwest and the forecast indicates a relatively mild next ten days to two weeks.
When you come back, take the notes from your trip and start writing with a fresh perspective. One of the things you will learn - the recession has never ended. People are MORE afraid of losing their job today than ever before. They also view the people running this country as being totally out of touch with reality ... because THEY ARE.
Breaking news flash and I'd appreciate a hat tip if you come around to agreeing with it: REALITY CAUSES RECESSIONS/DEPRESSIONS
Any idiot who thinks the markets are comparable to where they were before this all started has conveniently tuned out reality and inconvenient facts:
The real lesson of the Great Depression is the futility of trying to "orchestrate" the market outcomes to a politically palatable taste. This doesn't happen in the real world. The fractal pattern that applies to households, small businesses and honestly run businesses scales all the way up to the global economy. You can't keep spending what you don't have.
Once upon a time, you knew and accepted this as fact, Bruce. Time to rejoin reality and reacquaint yourself with what millions of your fellow citizens already know:
There are times when things turn mean and ugly. The shortest path through those times is to accept them, put your head down and keep working to make them better.
barliman
barliman, great post! I wish we could get a political leader in DC or a media person shouting this out to the whole country.
Bman:
Thanks for these comments. In truth I have been have been living in a small world, writing the past three years. You're right that is best to get a way and walk about to see/feel the realities of what is going on. So I will make that trip, and I will listen and, hopefully learn.
bk
Barliman,
What you say won't happen because the people in DC/WS who run the country are in Imperial mindset; they are all millionaires through crony capitalism, they know the reality of the construct and its unsustainability, but they won't admit that they are responsible for it. As they have all the power that "exorbitant petrodollar privilege" and MIC overkill gives them, they won't act to avoid collision with the Iceberg.
Manifest destiny of Empires; sorry for those who believed that Caesar was their friend and leader. Never was, never will be. You don't cross the Rubicon for the sheeple, but to destroy the Republic. Greatest lesson of History.
+ 1 to Barliman and above upthread comments. Bruce is one of the best here, but a road trip might do some good. I get my best ideas in the shower... Problem is I usually forget them before I can write something down.
Out - Fucking - Standing post. By far the best comment in this thread.
I love BruceK on ZH (my favorite contributor). I hope he takes your advice. I have had many problems in life that were solved not by hard work, but by stepping away and letting the mind clear. Things process in the background, slowly grinding away. My best solutions in engineering have been conceived on the shitter, cooking, and driving nowhere significant.
Often times the truth/solution is simple.
Excellent advice. Excellent commentary.
Regards,
Cooter
+1
The short Depression of 1920-21 is the way to go. Prices reset by 60%; crappy businesses shut down; good ones stay open and could buy out the dying competition; people lose their jobs for a couple of months and then get rehired at a better company; the roaring twenties results; no bailouts, no government deficit spending.
barliman,
A great posting and spot on.
DavidC
http://www.biblegateway.com/passage/?search=Habakkuk%202&version=KJV
ROTF
99% ''spot on''
BUT!
I am Jack's security
The 1%
of
Nothing
Jack is dead
http://www.youtube.com/watch?v=0_yZP4tmYWI
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Mr. P.S. Down Arrow, lol. the acused confirmed
Bruce,
If the too-big-to-fails had been allowed to go under (as they should have in a properly operating capitalist system) then we would have had a relatively short period of great pain (think Iceland) followed by recovery.
There is NO natural or biological system that can carry on growing. ALL natural systems either ebb and flow (forests actually REQUIRE forest fires to flourish), or are extinguished (Zero Hedge says it - on a long enough timeline...).
This isn't a common or garden recession, it is the end stage of a debt cycle of 50-60 years. It doesn't matter what is tried, at some point there WILL be a rebalancing, it is mathematically unavoidable.
DavidC
I agree that it will end badly. My point was that cutting spending will hurt just as much regardless when you do it.
Government budget cutbacks create recessions in proportion to the size of the government footprint in the economy as a whole.
Yet another reason for less government.
Exactly! Crush the government size and spending, shut down the empire, end corporate and individual welfare, and balance our books once and for all. It'll never happen though. We have far too many beggars now and too few producers.
Right, it won't happen, but the reason is simple:
The people of the world have handed power over everything to the two most despicable groups they could find: politicians and banksters.
A better recipe for injustice couldn't be found.
cutbacks cause recessions
Isn't that a little too much dumbed down?
I don't believe Bruce meant it that literally. Hell, let's have WWIII then, for the spending will certainly solve the problem. /sarc off
if our furhrer obama deems our deaths ,so be it! but then i am a newly registered democrat so good fuckwads...GOD DAMN AMERIKKKA, eh obama
Bruce,
Quit wrestling with pigs!
You're being disingenuous by claiming Bernanke has "failed" at anything.
To believe so is itself a far more serious error, as you've confused actions with the sophistry that surrounds it.
You know better.
Wages rising? What's that? If wages aren't going up, there is no inflation, per the Bernank.