"The misplaced belief that the road to economic prosperity is paved by near-term fiscal tightening, as espoused by our own Prime Minister Stephen Harper and British Prime Minister David Cameron last week, shows we have learned nothing from Herbert Hoover’s response to the Great Depression. Just as during the current Great Contraction, in 1930, the U.S. federal budget surplus had turned to a deficit that grew rapidly as the economy contracted. Hoover recommended large tax increases, which were approved by Congress in 1932, further exacerbating the rout…we are in danger of repeating the deflationary policies that caused the 1929 stock market crash and the Great Depression." Sherry Cooper, Bank of Montreal
The slam against President Hoover (Republican) is that he committed two extremely large mistakes:
- Hoover proposed, and a Democratic controlled Congress enacted, a massive tax increase meant to balance the federal budget – the deficit was approaching 60% - the financial stability of America’s government was at stake
- Signed into law the Smoot-Hawley tariff in 1930
By the late 1920s income inequality was greater than in any other time in U.S. history. When Black Tuesday shocked the world in late 1929, the top one percent of Americans owned more than a third of the country’s wealth - the poorest 20 percent owned four percent. An American middle class did not exist, the disparity in incomes was unbelievable, a few Americans were rich but the vast majority were poor, eking out a subsistence living or living just above the poverty line. After the tax increase most Americans still didn’t pay any federal income tax.
The Smoot–Hawley Tariff Act and retaliatory tariffs in other countries did exacerbate the collapse in global trade, but foreign trade was just a small part of overall US economic activity and originated from, mostly, the agricultural and resource extraction (mining, logging) sectors. In 1929 American exports were $5.2 billion, declining to $1.7 billion by 1933 - because prices had collapsed the physical volume of exports fell by only half
Cause and Effect
During the 1920s, US factory output soared as technological innovations and increased mechanization increased production. Wages however, remained unchanged, there was no way constrained demand could keep up with ever increasing supply. Eventually, the price of goods for sale in American markets had to drop because there were more goods than people could buy.
Farmers also faced a similar overproduction crisis but with the added drag of soaring debt levels. The collapse of farm exports caused farmers to default on their loans. The small rural banks used by farmers were the first to suffer bank runs in the early years of the Great Depression. The Federal Reserve is suppose to provide the liquidity when a bank cannot meet its depositor’s demands for cash – if depositors cannot withdraw their funds panic spreads throughout the system.
Neither a tax increase or Smoot-Hawley were the problem.
The extremely tight monetary policy enacted by the Fed of the day in response to unfolding events is to blame. All the Fed had to do to turn the US economy around was do what it was suppose to do - be a lender of last resort and add to bank’s reserves by purchasing government securities - this would have expanded the money supply.
“No bank should be more than one night’s train ride from its Federal Reserve bank. In cases of a run on his bank, a banker could gather up his commercial paper with maturities of thirty, sixty and ninety days, catch the train and be at the Federal Reserve Bank by morning, discount his notes and wire his bank that there was plenty of money to pay depositors. To place Reserve banks more than a night’s train ride from the member banks it served would make it impossible to meet one of the very needs for which it was designed.” Sen. John Shafroth, Colorado Democrat
The Federal Reserve failed in its responsibility, they sold bonds and raised the discount rate, they reduced banks liquidity when it should have been increased. By the time the first of the three banking crisis’ was over hundreds of banks had closed, further reducing the money supply.
By August 1931, commercial bank deposits had shrunk by seven percent - more contraction in the money supply. Then, in September, the Fed responded to the British leaving the gold standard with the biggest hike in the discount rate to date.
Commercial banks stopped using the discount window and started hoarding their cash, this cash hoard fooled the Fed into thinking monetary policy was loose enough. By January 1932, bank deposits had declined by another 15 percent and the money supply continued to decline through June 1932.
In January 1933 the banking crisis caused by the Federal Reserve’s mismanagement of the money supply entered its final phase. Bank holidays - banks are not required to give depositors access to their money - were declared across half of the US. The Fed again raised the discount rate.
On March 4 the Federal Reserve Banks closed.
Only 15,000 out of a total of 25,000 commercial banks remained when banks reopened in mid March - the money supply had shrunk to one-third.
“I concluded the Reserve Board was indeed a weak reed for a nation to lean on in time of trouble.” President Hoover
“During Hoover's administration the Democratic Party's chief publicist and spinmeister, Charles Michelson (the Federal Reserve Act passed Congress on December 23, 1913 - Democrats voted "yea", Republicans voted "nay” – R. Mills), orchestrated an unremitting barrage of disparagement of Hoover's shortcomings: a foretaste of what a later generation would call "the politics of personal destruction." Millions of bewildered Americans looked for scapegoats, and Hoover became the target.
It was not the Great Depression; it was the "Hoover Depression." Shantytowns of the homeless were named Hoovervilles. The insides of trouser pockets were called "Hoover handkerchiefs." Newspapers were "Hoover blankets." Armadillos were "Hoover hogs." The "Hoover cart" was the remains of the old tin lizzie being pulled by a mule - you couldn't afford to buy a new car and you couldn't afford to buy gas for the old one.” George H. Nash
Perhaps the “Hoover Depression” is really the Great Federal Reserve Depression?
Back To The Future
U.S. bank deposits continue to rise - since December 2007, domestic deposits have jumped from $1.1 trillion to $8.1 trillion.
The second QE program ended in June. The stock market and commodities started tanking while bond yields make new lows - the dollar became stronger as liquidity started to dry up.
Was the Fed fooled again?
Today’s Fed gave a lot of QE money to the banks on the expectation they would lend the money out, that didn’t happen. The banks kept the money to fill up their coffers and make their ledgers look good. Three mistakes were made in this decision by the Fed – money creation is instant and it’ll show up, digitally, in less than a heartbeat exactly where you want it – no more midnight train rides for bank presidents – kind of calls the need for 12 Federal reserve banks into question doesn’t it? The money should not of been created at this time, not until it was needed and it never was, neither for loans nor bank runs. The second mistake the Fed made is they misjudged consumers – thinking they would take out loans and continue spending. The savings rate has gone from a negative number to a positive 5% and consumer spending is down.
The third mistake? The massive amount of money given to the banks should of gone into job creation.
Conclusion
The saying “It’s better to burn out than fade away” seems to apply too our current situation, or perhaps “It’s better to maybe burn out tomorrow than blow up today” would fit better? Austerity isn’t going to work. The condition of our fiat economies calls for a massive, properly placed, global infusion of newly created money. To do anything else - the only other option is to purge the system - is to invite disaster.
The International Labour Organization and the Organization for Economic Co-operation Development recently reported the world’s major economies remain 20 million jobs short of pre-crisis levels and warned that number could double next year.
We need confidence restored, people need jobs and consumer debt has to be paid down. There will be no economic recovery without a recovery in jobs leading the way.
So throw another few trillion dollars and Euros onto the fiat fueled inflation bonfire.
Inflation means commodities. To this author, commodities mean junior resource companies, after all, they are the ones who actually own the world’s future supply of commodities. And they are on sale….
Are junior resource companies, and the leverage they offer to inflation, on your radar screen?
If not, maybe they should be.
