Guest Post: The World Before Central Banking

Tyler Durden's picture

Submitted by John Aziz of Azizonomics,

In today’s world, there are many who want government to regulate and control everything. The most bizarre instance, though — more bizarre even than banning the sale of large-sized sugary drinks — is surely central banking.

Why? Well, central banking was created to replace something that was already working well. Banking panics and bank runs happen, and they have always happened as long as there has been banking.

But the old system that the Fed displaced wasn’t really malfunctioning — unlike what the defenders of central banking today would have us believe. Following the Panic of 1907, a group of private bankers led by J.P. Morgan successfully bailed out the system by acting as lender of last resort. The amount of new liquidity disbursed into the system was set not by academics like Ben Bernanke, but by experienced market participants. And because the money was directed from private purses, rather than being created out of thin air, only assets and companies with value were bought up.

The rationale of the supporters of the Federal Reserve Act was that a central banking liquidity mechanism would act as a safeguard against such events, to act as a permanent lender-of-last-resort backed by government fiat. They wanted something bigger and better than a private response.

Yet the Banking Panic of 1907 — a comparable market drop to both 1929 or 2008 — didn’t result in a residual depression.

As the WSJ noted:

The largest economic crisis of the 20th century was the Great Depression, but the second most significant economic upheaval was the panic of 1907. It was from beginning to end a banking and financial crisis. With the failure of the Knickerbocker Trust Company, the stock market collapsed, loan supply vanished and a scramble for liquidity ensued. Banks defaulted on their obligations to redeem deposits in currency or gold.


Milton Friedman and Anna Schwartz, in their classic “A Monetary History of the United States,” found “much similarity in its early phases” between the Panic of 1907 and the Great Depression. So traumatic was the crisis that it gave rise to the National Monetary Commission and the recommendations that led to the creation of the Federal Reserve. The May panic triggered a massive recession that saw real gross national product shrink in the second half of 1907 and plummet by an extraordinary 8.2% in 1908. Yet the economy came roaring back and, in two short years, was 7% bigger than when the panic started.

Ben Bernanke, widely seen as the pre-eminent scholar of the Great Depression thought things would be much, much better under his watch. After all, he has claimed that he understood the lessons of Friedman and Schwartz who criticised the 1930s Federal Reserve for continuing to contract the money supply, worsening the Great Depression; M2 in 1933 was just 72% of its 1929 peak.

So a bigger crash and liquidation in 1907 allowed the economy to roar back, and continue growing. Meanwhile, in today’s controlled, planned and dependent world of central liquidity insurance, quantitative easing and TARP, growth remains anaemic four years after the crash. Have the last four years proven conclusively that central banking — even after the lessons of the 1930s — is inferior to the free market?

Certainly, Bernanke’s response to 2008 has been superior to the 1930s Fed — M2 has not dropped by anything like what it did from 1929:

Industrial production has not fallen by as significant an amount as 1929, nor has homebuilding. And there are many other wide-scale economic differences between 1907 and 2008 in terms of the shape of the economy, and the shape of employment, the capital structure, and the wider geopolitical reality. But the bounce-back is still vastly inferior to the free-market reality of 1907. I think there are greater problems to central banking, ones of which Friedman, Schwartz and Bernanke were unaware (but of which Rothbard and von Mises were acutely aware).

Does central banking retard the economy by providing liquidity insurance and a backstop to bad companies that would not otherwise be saved under a free market “bailout” (like that of 1907)? And is it this effect — that I call zombification — that is the force that has prevented Japan from fully recovering from its housing bubble, and that is keeping the West depressed from 2008? Will we only return to growth once the bad assets and bad companies have been liquidated? That conclusion, I think, is becoming inescapable.

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Rainman's picture

There was no SNAPS in or starve

GMadScientist's picture


Or...hunt. an independently wealthy schmuck.

economics9698's picture

The monetary base increased 26% from 29 to 33.  The Fed was pumping up the reserves but no one was lending.  Sound familiar?

economics9698's picture

Treasury Secretary Chase created the 07 panic by printing IOUs from the Treasury Department for failed ventures and his friends.

The Monkey's picture

Actually, the Fed conducted open market operations only in 1930. They resumed in 1933.

As far as money supply goes, it's nearly irrelevant if it has no velocity (turnover). Velocity cratered in 31/32.

economics9698's picture

After attempts to create a central bank failed, the Secretary of Treasury Leslie Shaw attempted to continue and expand the experiments of his predecessor Lyman Gage in making theU.S. Treasury function like a central bank. In particular, Shaw made open-market purchases in recessions and violated the Independent Treasury statutes confining Treasury funds to its own vaults, by depositing Treasury funds in favored large national banks. In his last annual report of 1906, Secretary Shaw urged that he be given total power to regulate all the nation's banks.

The Panic of 1907 struck in October, the result of an inflation stimulated by Secretary of the Treasury Leslie Shaw in the previous two years.[

Spacemoose's picture

i believe i read somewhere that when two transients starved to death in new york during the depression, it was national news. in other words, it was a rarity. a quick google of "starvation in the united states history" doesn't bring up much. right off hand i'd say that there wasn't much starvation (maybe malnutrition)  prior to snap.  government assistance or no government assistance, i doubt that the american people would stand idly by while their fellow citizens starved.  

shuckster's picture

7 million people died of starvation during the Great Depression (or the Great Heist more accurately)

The Alarmist's picture

Yeah, and 47 million are starving in the USA today, which is why we have SNAP Cards ... utter BS!  20 million starved to death in the Ukraine with a national government actively seeking to starve them to death, so I find it hard to believe 7m starved to death in the US with a government that was, at best, indifferent to their plight, and even harder to believe given the large number of private charitable organizations and government agencies that were actually working to ameliorate their plight.

smb12321's picture

No, 47 million are NOT starving (Jesus, get a grip).  Consider what the hungry in America have.  Massive government programs -free breakfasts, lunch, food stamps, weekly checks;  Community suppliers like Second Harvest, county kitchens, food banks, etc.  Then there are the endless religious programs that give (at least here in Tennessee) truckloads of food to folks week after week.   There is TennCare (Obamacare light) that covers most kids in the state.  Now restaurants and grocers are donating left over foods.

If 47 million folks are "starving" it is not due to lack of food or resources.  You want to see starvation?  Go to Russia, Chad, Pakistan, India or Haiti.


Dingleberry's picture

Interesting discussion of SNAP and such. First off, when the draft happened during WW2, the gov was shocked to find so many emaciated young men showing up for physicals, hence food aid began in earnest until we had full employment during the war, and has ebbed and flowed since.

 In today's world, all I can say is a quote I read many years ago from a prospective 3rd world immigrant as to why he wanted to come to the States:

 "I want to come to America because there even the poor people are fat".  

Spacemoose's picture

the us had a population of 122 million in 1929 so you are saying that more than one out of every twenty people in the u.s. died of starvation during the depression?  could you provide a citation, please?  (edit: sorry, i misread your answer - you must mean worldwide).

earleflorida's picture

Re: Spacemoose

Ref:       [Dirty Thirties]

Ps. the cost of farmers to bring products to market was a negative return [they slaved for nothing] for selling them.

Ps2. famine, and malnutrition creates disease, which in turn feeds depression and suicide - and let us never forget the infant mortality birthrate. Oh, and by the way - most towns and cities were filled with bastardy children abandoned in early childhood, with a quarter million of them riding the rails. True. No one person can really put the number of actual deaths caused by the great depression, and yet those that live today *whom happened to be in its throes, would rather die than relive that nightmare again. [*my mother as witness]


The Monkey's picture

One of the biggest lessons investors face is that is that they central bankers do not have omnipotent powers to control the economy and the markets. We already saw this in 2000/1 and 2008/9, but after three years of prices moving ahead of risk, apparently it's time for a reminder.

The Fed likes lofty markets as cheap bonds equate to cheap credit, higher earnings and incrementally better employment numbers.  So, more than anything, the central banks work to protect leveraged entities - not those lending to them.

The Monkey's picture

Let's roll through what Mr. Bernanke has said today.

My interpretation is that he inferred he is uncomfortable acting in any big way without fiscal stimulus - unless the markets tank.  He said the Europeans have ample means to contain their sovereign debt problems, but that politics was getting in the way.  He said the Fed would lend to any solvent banks if needed.

Bernanke did not say, "we are going to help markets reconcile an unattainable FY 2013 earnings forecast with what is really feasible", or, "we are going to buy commodities to blunt any supply glut".

This is silly stuff.  Prices are way ahead of themselves and need to come down.

SWCroaker's picture

Um.  What?

Census in the US were taken every 10 years.  (Still are?)   The numbers from the Census Bureau site show:


1920: 106 million

1930: 123 million   (+17 million)

1940: 132 million   (+9 million)


Even given that the census is extremely accurate </sarc>, doesn't count births or deaths but merely noses, and doesn't make any allowance for immigrants/emigrants, I still find it hard to believe that essentially 7% of the then population starved to death, all while the population growth matched and exceeded those deaths and managed to grow and additional 7%.

I suspect you are referencing the Russian academic paper that Wiki yanked.  It is just conceivable, even in this age of lies, that the reason it was pulled was due to shoddy/false research and a knowledge base that prides itself on seriously pursuing accuracy.  I've talked to most of my Grandparents about their experiences during the GD, as well as some on my wife's side.  I hear lots of hardship, lessons learned, tough and lean times and very simple things being treasured.  I don't recall any reports of starvation in family or neighbors.

Unless they were put into mass graves, you'd think there would have been a business boom tracked in those who make pine boxes, and a subsequent bust when non-starvation times resumed...



The Alarmist's picture

Well, I assumed he meant the US as well, but to be fair to him, he only says that 7 million starved to death, but does not say where.  Maybe he meant to imply that that was a global figure rather than a number for the US only.  

NumberNone's picture

RT published a story with someone claiming 7MM people vanished during the Great Depression and hypothesizes they died of starvation. 

SWCroaker's picture

Thanks for the link.  Buried in it, is a link to the census report that our intrepid researcher uses to justify his analysis.  That can be found at . It is a 925 page compiled census report.  On page 2 (the number, actually about the 25th from the start), I find table #3, Area and Population of the United States: 1790 to 1940.

From the article, this was the key section for our researcher.  He noted that the population growth rate dropped off sharply from prior decades, and (my interpretation) concluded that this drop off was too severe to be accounted for by normal statistical deviation.


Well.... when I look at the numbers I see a fairly steady level of a whopping 33-ish % population growth rate, per decade, running from 1790 through 1860.  This declines to 22% and 30% (each revised by a later estimate to 26%) for the decades 1870 and 1880.  From that point, things seem to begin a gradual decline: 25%, 20%, 21%, 15%, 16%, 7%, over the decades 1890 thru 1940.

If I looked at things the way this researcher did, I'd find the 8% dip at 1870 to scream cover-up.  The US admits to 600k people dying during the Civil War (War Between the States); that is only 1.5 percent!  Where are the missing people that account for the other 6.5% of this unusual decline!!!???


The researcher seems to miss several simple factors:

  • Population stats include immigration.  People might just not change countries nearly as freely if there is a) a Civil War in progress, or b) a World Wide Great Depression.
  • The census today is a mess (paid teenagers, voluntary send-in-a-form method, people who do/don't want to be counted).  Imagine the nightmare of trying to collect stats back in 1940, at the end of the worst economic hardship the country had seen.  People living in tent cities, squatting with relatives, for sure willing to welcome someone claiming to be from the government wanting to ask a few questions.  I see fudge factors all over the place.
  • I sort of think it reasonable that families in a depression might curtail the baby dropping a bit.  Presuming that people procreate at such and such a rate regardless of circumstances seems a bit naive.
  • Our researcher stops looking at 1940, which is his anomalous decade.  But the % increases following were: 14% in 1950, 18% in 1960, 13% in 1970, and 11%, 9% 13% and 9% for 1980 thru 2010.  Hmmm.  Looks like we might be tempted to call the children of the 50's and 60s Baby Boomers, and we seem to have settled into a 10% ish growth rate during the relatively stable years following.  Sure makes our researcher's 7% anomaly look, well, down-right reasonable if it is examined in the context of a maturing country.
  • Our boy also overlooks the impact that changing lifespan has on population growth rates.  Life expectancy in the early 20th century (1900s) was 31 years, where it had pretty much been since the Paleolithic (I kid you not, check out  Today it is around 67 years.   That change happened during our researcher's anomalous period.

It is natural for *any* system that seems to continually grow to grow at slower and slower rates.  A small base can have a huge growth, and still be a small number.  A large base would need a massive amount of new influx in order to sustain a constant growth rate.  At the limit, the base reaches infinity, and it becomes impossible to sustain any fixed rate of growth, since even a small percentage represents an essentially infinite addition.  Translation: it is natural and expected to see any growing system begin to have a decline in growth rate as it gains in size; the census values with their plateau into a decline are typical, not odd.


I've tried to refrain from bringing up the researcher's evident motivations for his analysis.  As he relates, in the 1980s, the US Congress baldly accused the Russians of covering up/causing famine deaths in the Ukraine during the 1930s.  His research could easily fit the bill of a funded shouldn't-throw-stones, you-too scenario.  I don't really care about that.  What bothers me is that his work tries to build a case for missing numbers, without explaining the massive amounts of collaborating evidence that *should* be present if his theory were true.  Death records, newspaper stories of nearly 1 in 10 people starving to death, family diaries mourning lost loved ones.  Mass graves where the bodies were dumped.  None of that is there.  Just his analysis of admittedly best-we-can-do-on-a-limited-budget census, and that analysis appears to assume many "normal" rates in a world that is in reality quite variable.


Milestones's picture

Thank you for the well researched paper. It was a difficult read so I can imagine the documentation time needed. Again,--thanks for your effort.      milestones

Hugh G Rection's picture



Central Banking is one of the greatest achievements of mankind.  Charging people interest to counterfeit what their Government has a sovereign right to issue... and getting away with it for damn near a hundred years!


Like to give a shout out to my niggas, Rothschild, Rockefeller, Warburg, Morgan...

Sean7k's picture

President Herbert Hoover declared, "Nobody is actually starving. The hoboes are better fed than they have ever been." But in New York City in 1931, there were 20 known cases of starvation; in 1934, there were 110 deaths caused by hunger. There were so many accounts of people starving in New York that the West African nation of Cameroon sent $3.77 in relief."; font-family: 'Helvetica Neue', Helvetica, Arial, default; font-size: 13px; line-height: 17px; background-position: 100% 50%; background-repeat: no-repeat no-repeat;" rel="nofollow" href="" target="_blank">

Please document your claim and please discount for normal starvation.

lemonobrien's picture

women would swallow in the depression to get a meal; an men tried to save it. 

RiverRoad's picture

There's a moral hazard tsunami out there and it's going to take the world with it.

Kobe Beef's picture

Centrally planned economies always collapse.

Fiat monetary systems always collapse.

History is quite clear on this. The USSA is neither a unique nor special historical case, and will meet its predictable end in the predetermined way.

Got gold? get more.

hidingfromhelis's picture

Yes, central banking is a "solution" looking for a problem.  Of course, in this case, the solution is the problem.

I think we're going to skip the zombification, not collect our $200, and go straight to meltdown.

GMadScientist's picture

Monetary policy IS a problem; central banking just isn't a good solution.

JR's picture

The Fed does not have a money-making machine. It has a money-destroying machine. It’s not a printing press, it’s a money shredder.

They are not central planning. They are central robbing.

And the politicians are the problem.

The fact that Ron Paul ran in the Republican primaries exposed him to a national audience; not only to Republicans but to Independents and Democrats (many of whom support him). His ideas are part of a movement that won’t be stopped. It is a movement that will split, if not now then soon, the Republican Party. Ron Paul, in spite of what the media says, is going to have in terms of his own delegates and the delegates pledged to Romney but are for Ron Paul what amounts to about 20 percent of the total delegation at the Republican Convention - which no media has ever recognized.

(Speaking of media bias, election night I went to bed too early to hear the Wisconsin results on the Walker recall. But NPR’s on-the-half-hour roundup at 5:30 a.m. told me Walker had won when instead of the Wisconsin story, NPR led with the JPMorgan hearing.)

Ron Paul, with the kinds of stands he takes - continually against the wars, never backing down on his opposition to the compromises in George Bush’s party - to get the kind of movement he got because of the GOP debates, his message became a national message; it’s undeniable and it won’t go away. He is the one who identified the Fed and the wars and the foreign policy, making the point over and over that these foreign countries are against us because we are in their countries.

Paul has made a major impact. He is not supporting Romney; he is continuing on.  This, IMO, is highly significant.

Paul Atreides's picture

Republican convention is going to be a nightmare for TPTB, I hope Ron Paul makes it there in one piece and takes it by storm.

DoChenRollingBearing's picture

+ 1 to both JR and Paul

Romney and the other R-Team PTB had best be nice to Ron Paul!  Libertarian thinking is catching on...  It is the best set of policies in our very TOXIC environment.

If Romney wins, the Senate will likely go R as well.  We will then have a two year period to see if there IS any differences between the R-Team and the D-Team.  I will not be holding my breath though.

The Alarmist's picture

Nah, RP and his minions will go quietly into that gentle night.  The Republican convention is going to be a snooze-fest.

shovelhead's picture

I'm voting for the only candidate who will not make my dog ride on the roof of the car...

Or eat him.

Ron Paul.

YHC-FTSE's picture

+1 @JR I make a lot of disparaging remarks about the general populace so easily swayed and controlled by the msm - many of us on ZH make fun of the sheep or stupid apes that make up the electorate. But every now and then people surprise you with genuine warmth, intelligence, and insight encouraged by men like Dr.Paul. The messages of sanity - of foreign, economic, and fiscal policies are so important that once heard, they can never be forgotten.

We all know the probability of a Ron Paul victory is slim, but every now and then people surprise you with an outstanding example of the "Wisdom of crowds" process. I think you're right - Dr.Paul will have a major impact in that den of rationalizing nutjobs and thieves in Washington this year, whatever the outcome as long as good people continue to stand with him.

JR's picture

Thank you for this heartfelt and powerful message, YHC-FTSE.  I too am encouraged by men like Dr. Paul…by his spirit and wisdom.

“What country can preserve its liberties if its rulers are not warned from time to time that their people preserve the spirit of resistance?” – Thomas Jefferson

It has begun…

GMadScientist's picture

How was upward mobility? Median incomes? Healthcare outcomes?

Clue-LESS! (and you forgot the 20 or so panics before then, for obvious reasons)

Aziz's picture

Yes, because central banking is necessary for all of those things.


shuckster's picture

Anything, and I mean anything, is better than central planning (aka Central Banking)

Sean7k's picture

The panics were a result of bankers printing too much money and then not being able to redeem in specie. They got governments to rescind specie redemption for them (though they were allowed to require specie payments from debtors) until the panics were over. These were usually a result of land speculation (1819) and stock and bond market manipulations and speculation. 


Tirpitz's picture

Will we only return to growth once the bad assets and bad companies have been liquidated?

Sometimes the only solution to a problem about to hit one's head is stepping back and let the dices fall as they may. Otherwise the avalanche would sweep us along into the abyss.

JR's picture

+1, (Not that it really matters, but leading off with italics deactivates the arrow system.)

deagle44's picture

current system also allows for huge trade deficits to build up, which as we are seeing can lead to instability.

Ricky Bobby's picture

Healthcare outcomes? WTF 1905 dude, no corporate/state monstrosity like now.

Medical bill - hey doc would you take two chickens for pay and oh by the way thanks for making a house call.

spine001's picture

I have written about this phenomenae in several forums and blogs. Even before Bernanke came up with his bailout program. The summary of a very complex subject, full of equations to accomodate velocity, acceleration ( and derivatives to the nth degree) of both money supply and economic activity, chaos theory and game theory based economic models you can say:


Without the pain suffered by our ancestors in the great depression (had Bernanke been around to avoid it) we'd have lost WWII and the USA would be a German satelite Country in a very different world.

The economic power of the USA, the power that allowed to react the way it did had its base in the economic recovery post 1930s depression. This is by contrast to the stagnation that would have followed had Bernanke and his supposed knowledge and thesis work been around at that time.

I fully support the article above that goes into the details of why this could have been the case. I can assure you  that it is a lot more complex than that, but it doesn't matter the real summary is that wihout sacrifice and hard work and literally the destruction of what doesn't work, and the loss of the capital that was incorrectly invested = PAIN, there will be NO GAIN....

Until next time,


walküre's picture

You seem to write allot...

Bernanke and his cronies robbed the treasury. They did this in the Thirties as well but they took the detour of a major war that required large government spending programs and war bonds. That 2nd Great War was the result of their 1st Great War which should have cemented all their lust for power but then Germany stalled and stopped paying the bills of odious debts.

Guess what is happening right now and which country seems to be asked again to pay the bills for everyone else.


Bansters-in-my- feces's picture

...@ spineless ,Fuck Off slave.

LeisureSmith's picture

Does central banking retard the economy? Yes. Central banking left unchallenged will eventually go full retard.The retardation is accelerating at ridiculous speed towards the event horizon.

AUD's picture

The marginal utility of central bank, so government, credit is already zero. The event horizon has already been reached, if not breached.

It's just that like Facebook into its IPO, nobody cares. It's a mania of unparalleled proportions.