The Great Depression; Failure of Government, Then and Now....

“Myths are like an air mattress they are nice and comfortable but when you examine them
you find that there is nothing inside it but hot air.” (not sure who said that, good quote)

With that thought I would like to present to you the Great Depression.

If you have only studied the Great depression in Elementary School, or you were taught economics in the USA in the last 70 or so years, this will be a fascinating read for you.

This is my first started thread, so I wanted to start with a bang. I know there are other threads about the depression but the ones I have read do not go into the depth that I will here.

Thanks for reading, sorry about the length but if you want the truth of a matter, you will have to do quite a bit of reading. There is no way to give you detail and briefness, though, this is my attempt at doing both. If anyone has read Friedman, there will not be much new below for you.

It begins as most know, on a street in New York City...

Wall street, most of us know what happened there in 1929....


On Oct 29th, 1929 the market collapsed. It came to be known as Black Thursday.



The wall street crash was followed by the worst (until maybe now) depression in
United States History.

That depression has been blamed on the failure of capitalism. It was no such thing but the myth lives on. What really happened was very different...

Although prior to the collapse, things looked healthy on the surface, business had begun to turn down in mid- 1929. The following crash intensified the recession.

So did continual bank failures in the south and mid-west but the recession only became a crisis when these failures were spread to New York; and in particular, when it spread to the Bank of United States. The failure of this bank had far reaching effects and it need never of happened.

It was somewhat of an historical accident that this bank played the role that it did.



Why did it fail? It was a perfectly good bank. Many banks were in far worse financial shape, had come into difficulties before it did and had, through the cooperation of other banks, been saved.

The reason why the Bank of Untied States was not saved had to do with its very special character.

First it's name. Bank of Untied States. A name that made immigrants believe it was an official government bank, although in fact it was just an ordinary commercial bank.

Second, its ownership was Jewish, both its name and the character of its ownership which had so much to do with attracting depositors from the many Jewish business owners in New York

Both of these reason also, had the effect of alienating other bankers who did not like the special advantage of the name and did not like the Jewish ownership.

As a result, other banks were all too ready to spread rumors to help promote an atmosphere in which runs got started on the bank in which it came into great difficulty

These other banks were obviously, less than willing to cooperate in the efforts that may have helped to save it.

Only a few blocks away was the federal reserve Bank of New York, it was here that the bank of United states could have been saved. In deed, the Federal Reserve system had been setup, 17 years earlier precisely to prevent to worst consequences of bank failures.

The federal reserve bank of new york, devised a plan in cooperation with the super-attendant of banking for the State of New York to save the Bank of United States.

Their plan called for merging the Bank of United States with several other banks and also providing a guarantee fund to assure the depositors that the assets of the Bank of United Stated was safe and sound.

The reserve bank called meeting after meeting to try to put the plan into effect. It was on again off again for some time but finally, after an all night meeting on December 10th, 1930, The other bankers, including notably J.P. Morgan (the person) refused to subscribe to the guarantee fund and the plan was off.

The next morning, The Bank of United States closed its doors, never again to open for business.

For those depositors, who saw their savings tied up and their businesses destroyed the closing was tragic. Yet when the bank was finally liquidated, in the worst years of the depression, it paid back .92 cents on the dollar.

Had the other banks cooperated to save it, nobody would have lost a penny.

For the other New York banks, they thought the closing of the Bank of United States would have purely local effects.

They were wrong.

Partly because it had so many depositors, partly because so many of the depositors were small businessmen, partly because it was the biggest bank that had ever been permitted to fail in the United States up to this time, the effects were far reaching.

Depositors all over the country were frightened about the safety of their funds and rushed to withdraw them. Their were bank runs and failures of banks in droves.

And all the time, the federal reserve system stood idly by when it had the power and the duty and the responsibility to provide the cash that would of enabled the banks to meet the demand of their depositors without closing their doors

The way runs on banks can spread and can be stopped is a consequence of the "why" our banking system works.

You may think, that when you take some cash to a bank and deposit it the bank takes that money and sticks it in a vault some where. To wait until you need it again to turn back over to you.




The bank does no such thing. It immediately takes a large part of what you put in and lends it out to somebody else. How else would you suppose it earns interest to pay its expenses or to pay you something for the use of your money?




The result is, that if all depositors at all the banks tried at once to withdrawal there wouldn't be anywhere close to enough cash in all the banks of the country to meet the demand. In order to prevent such an outcome, in order to cut short a run. There has to be a way to prevent people from asking for it or some additional source
through which cash can be obtained.

This was to be the intended purpose of the Federal Reserve System.

It was to provide the additional cash to meet the demands of depositors when a run on banks arose.

The system was used successfully with other banks, such as the two in Salt lake city at the time. The banks used a system of psychology to end the bank run in two days.

The first day they offered money as slowly as possible while awaiting the arrival of reserve funds, by the second day with the funds arrived, they processed customers as quickly as possible so that a line could not form. By noon on the second day, people in the community understood that there money was available and left it in the bank.

One of the salt Lake banks even made a temporary loan to the competing bank when they ran out of funds so that word would not spread that a bank could not meet demand, thus ensuring that both banks could keep doors open. This option completely halted all bank runs in the city. (testimony of George S, Eccles; Chairman, First Security Corporation)



It was all just a matter of reassuring the public that they could in fact get their money. The federal reserve system was their to ensure this happened by supplying cash to the banks.


So why didn't the system prevent the great depression after 1929?


Because, from 1929 to 1930 after the stock market crash the federal reserve system allowed the quantity of money to decline slowly, thereby throttling the monetary structure.

By December, 1930, the quantity of money had fallen 3%. This may not seem like much but a "growing" economy needs additional money in order to prevent deflation and the problems it brings.


Given this throttling of the monetary system, what happened after that was more or less inevitable. If it was not the Bank of the United States that had failed it would have been another bank failing that would have set off the runs.


Once the runs started, the federal reserve could of prevented them from having the disastrous consequences that they did by stepping in and providing the banking system in general with the cash they needed to meet the demands of depositors

After all; once depositors start trying to take their money out of the banks there is a strong tendency for the quantity of money to fall, each dollar of cash that is withdrawn from a bank had been backing several dollars of deposits.


If the federal reserve had stepped in. bought government securities on a large scale and provided the cash the depositors would have found that they could get their money and would of stopped asking for it.

Ironically, the people at the New York reserve bank, knew this was the right policy. No one had advocated it more forcefully than Benjamin Strong, The first head of the bank. Tragically for America, he died two years before the real crisis occurred.

With the death of Benjamin Strong, a struggle for power took place between The New York Reserve bank, the other reserve banks and the board in D.C.

The New York Reserve bank lost and the other banks and to a greater extent, the board in D.C. won.

This was a little noticed event but it was the first step, in the massive move of power to Washington, D.C. that has dominated our lives ever sense.

So what happened from this?

Well the federal reserve system refused to buy government bonds, despite the plea from the New York Reserve bank. The buying of government bonds would have supplied cash to the commercial banks
so that they could have more easily meet the demands of the depositors.

Instead, what the Reserve system did was stand idly by while banks crashed around them on all sides. As bank after bank closed, a chain reaction was in process, destroying money as it went.

Its a process, that even today, few bankers understand.


This is because the process does not take place within the bank, but rather through bank to bank transactions. You would have to talk to a bank accountant to get the real story which goes a little something like this:


As the people who ran the federal reserve knew very well, money is created by banks when money is loaned by one bank is deposited in another bank to be loaned out yet again.

During the depression, this worked in reverse. Banks were destroying money.

None the less, the federal reserve let it happen.

The end result was that by the time the whole, sorry episode was over, by 1933, the quantity of money in the Untied states had gone down by a third. The slow throttle had turned into a strangulation.

For every 3 dollars of deposits that people had in 1929, only 2 dollars were left.

For every 3 banks that were open in 1929, In 1933, only 2 were left.

The terrible depression that was left, was a direct result of the bumbling of the federal reserve system. Their monetary policy stifled any hope of economic recovery.

Then and now...



Sadly, many of the mistakes of the past have had too heavy a hand in shaping the mistakes of todays times.

As the problem then was too little money, our economy handlers offer too much money! The bad policies that create the inflation we are facing today are direct result of the bad policies that gave us too much deflation between 1929 and 1933.




and back to then...


People came to believe that free market capitalism had failed (lol).

So something was needed to replace it? (lol)

At Cambridge university, in England, a new orthodoxy emerged in the 30's one that has remained powerful to this day.

It owes its influence to one man, I am sure you know the name Keynes. (Keynesian economics)

John Maynard Keynes, was certainly a renowned economist of his time.

He found the great depression as both a paradox and a challenge.

It was a paradox because it seemed to contradict some of fundamental principals that economist had come to take for granted.

It was a challenge, as Keynes constructed a complex hypothesis, which not only explained what had been going on but also offered a way out.


A way to end the great depression and avoid similar occurrences in the future.

The core of his theory, was that what happened to the quantity of money didn't matter (lol)


What really mattered, according to Keynes, was a particular category of spending.


Autonomous spending, so what kind of spending is that?

It could be investment by business enterprises in building factories, or new
machines or adding to inventories.

I can be spending by individuals to build houses

or... most important of all.... it could be deficit spending by a government.


If private spending, was not enough to maintain full employment, then, according to Keynes, government could always step in to make up the difference with spending.

The theory of pump priming was born...

The theory was a godsend to politicians... I mean politicians are always more than willing to spend money, aren't they? Well, provided that they didn't have to raise taxes to high to pay for it.

So here was a solution that told them, not only to spend money but that it was absolutely mandatory that they do so for the success of the country(lol).

And thus Keynesian economics was alive in America.

Is it any wonder that government spending has exploded ever since?

Is it any wonder we abandoned the gold standard for a fiat currency?

Or that deficit spending, even without the excuse of war, and on a large scale has become the order of the day?

In America, the new Roosevelt administration adopted the Keynesian approach and authorized massive spending on government projects.

It involved increasingly, a greater role of government in the economy.

It developed programs, designed to bring financial security to every individual.

In England too, the idea that only government could boost an economy was becoming firmly established thus sealing their fate and tied the two nations with the largest free economies together, away from free markets and towards total, government control.

Though some of these programs may have been useful and needed during the depression, the large scale use of the theory even today would of horrified Keynes.

Keynes died in 1946, it was a shame he could not have made it another decade, for he was the one person of the day, whose name carried enough weight, to have exclaimed that what was good for the 30's and 40's should not be the policies of a very different post-war, post depression world.

I take the firm stance that he would of done so, if only given the opportunity, by fate of living another 10 years.

My stance is given weight by the last article Keynes ever wrote, published after his death.

In that article, he expressed strong reservations about the length to which so of his disciples had been carrying his ideas.

If he had lived another decade, the post war, inflationary period that has taken place ever since, could have completely been avoided.

Instead, student of today are taught his extreme measure policies as perfectly suitable for normal, everyday times. Entire country’s teach his thoughts, which by his own admissions, should not be taken to far or used at all in normal circumstances but students are not taught of his warnings, they are only taught the original theory, this even in place of normal, free enterprise, free market economics, in fact, many who learn
his theory come to know it as free market economics, and this is the tragedy that has delivered our country to ruin.


The massive growth of government, that started during the depression has continued ever since.

If anything, it speeds up every year.

Each and every year, there are more building built by government, filled with more tax payer money, creating more laws to restrict our free market.

The great depression convinced the public the free enterprise was an inherently unstable system.

That the depression showed a failure of free market capitalism

That the government had to step in to provide for the stabilization of the economy to provide security for its citizens.

the wide spread acceptance of these views sparked the large scale, big government that we have today.

As many economist knew then, the truth about the depression was very different.

The depression was produced or at the very least, made far worse by perverse monetary policies that were followed by the US authorities.

Far from being a failure of free market capitalism, the depression was a failure of government.

Unfortunately, that failure did not end with the great depression.

Ever since, government has been attempting to "fine tune" the economy.

In practice, just as during the depression, far from promoting stability, the government has been the largest contributing force to instability.

A great and utter shame and black eye on our world.

I think you give the federal reserve's motives too much credit. Personally, I believe the whole thing was orchestrated(just like the current problems) as a way to steal wealth from America and Americans. Thanks to fdr( ) and his ruinous policies adopted in the wake of the depression, we are where we are today.

Edit: S&F anyway. Much of what you say has merit, it is just your position on the fed where we disagree.

reply to post by sonofliberty1776



I agree with you completely... it is just for this writing, i wanted to stick to facts that can be easily proven that show the federal reserve completely dropped the ball and was at fault, despite what the history books would have us believe. I only wanted to stick to facts that people could look up for themselves anywhere and see that the official version doesn't make any sense when they look at the facts of the situation.

I personally believe they did so on purpose in collusion with private businesses... I can't prove that though. not yet.

Though it is completely reasonable to assume that the Fed board in D.C. knew exactly what it was doing.

The New York Federal Reserve, at the time, did everything it could to talk sense into D.C.

I am of the opinion that at present date, they are all scum, criminal, trash.

Back then, when it started, D.C. was mainly where the infiltration took part, in my opinion. They knew what they were doing.

Thanks for reading and the S&F, I appreciate it!

Well done.

Damn shame this thread hasnt gotten more steam.

reply to post by sageofmonticello


sageofmonticello

Thankyou for that information.......... I was aware of some but not all of what you highlighted.....

I have an idea which if implemented into the thinking here would actually solve alot of the polarisation of wealth.....

Individual's salaries being limited to a set annual figure of say $1 million for the most wealthy and a limit of a companies profits in any one year being set at say 10% would provide backstops in the entire system..........

Any surpluses in those areas could be added together and used in a way to improve society OUTSIDE general taxation..........

For it is the Greed mentality which eventually brings things to a halt....it causes envy and frustration, it causes those with and those without............my simple addition to the capaitalist model means that success can still be rewarded but also success brings increased social benefit as well..

PDUK

reply to post by PurpleDog UK


Thank you for reading! I am appreciative of your response.

If you would like to solve the problem of polarization of wealth, I agree, it is a noble goal.

I think the question is, how should one go about achieving that goal? Is it best to have a system in place, like the true, past, no longer existing, free markets and free enterprise of the U.K. and U.S. that had provided for the greatest amount of prosperity for the greatest amount of people in history?

I admit, what you mention, sounds like it would work to decrease the problem on the surface but a few fundamental problems arise.

The foremost problem I see is that it would take a measurement of forced wealth redistribution. I have never heard a good argument to why a poor person has a right to a more well to do persons money. Simply being poor and needing more money assumes the well to do doesn't need it as much. Who gets to make that decision? I have never met a person who doesn't need more money.

The super 1% who own the world excluded, they need to be dealt with, but more because of their criminal nature than their wealth. .

Say you make $1 mil a year, and I make 10k, on the surface it may seem like I need the money more than you but then you may mention how you have a 700k in loans for your business, 300k mortgage on the house, have 5 kids, are taking care of your retired parents and live in a city with a very high cost of living. Now say I make 10k but have no family, a house that is paid for and only eat vegetables that I grow myself and live in the wide open country with a low cost of living. That 10k will go a very far way for me. So who needs money more?

Forced distribution of funds creates such problems and countless more. Such as poor people funding the rent of the well-to-do with taxes (rent control) Besides that, it is simply a moral argument from my stand point, a person should have the right to keep the earning of their labor. If they are not property of the state, than the state should not be able to force money from them. Money can be raised by governments in other ways, such as sales tax, and other various tools, that require voluntary cooperation.

That is the key, voluntary cooperation. In my humble opinion.

The best thing that I think any country can do for its poor is create an entirely free market and free enterprise system.

People should not stand for separation of their freedoms, personal freedom, economic freedom, religious freedom. They are all one package. What is the old saying "divide and conquer" the division of freedom into categories has directly created the problems of our time.

For prosperity, freedom needs to be prevalent or Adam Smiths, "invisible hand" can't guide people properly in creating a better society. It is absolutely necessary for the advancement of people that they are left entirely free to pursue their own self interest for their own selfish reasons of getting rich. That is how a better society will exist. Milton Friedman explains my thoughts on the subject very well, if you want to look into any of it more.

Though I dis-agree with your premise, I wouldn't mind hearing a bit more depth if you have the time.

Thank you for bringing up the issue! I enjoy discussion, these are just my views on the topic. Sorry, I am more than a bit long winded.

Originally posted by felonius
Well done.

Damn shame this thread hasnt gotten more steam.

Thanks felonius! Yea, I really thought a thread on this topic would take off quickly. I think I may have A) written far to much at once or B) be the victim of bad timing or C) tackled a subject many already feel they know everything about.

Thanks though, glad you came by to check it out and found some value.

reply to post by sageofmonticello


Threads are a fickle thing arent they?

Kinda like on FB. I post stuff to wake up family and friends......usually no response what so ever.

reply to post by felonius


I hear you about Facebook, I am Pretty certain that the majority of my "friends" have just went ahead and clicked on "hide all post"

My proof? I got engaged a month or so ago and didn't hear a peep on the FB, about 20 minutes after I posted about it, my GF did the same and within seconds had 20 or so likes and comment after comment.

I had a good laugh.... Obviously, we overwhelmingly have the same "friends"

I have come to the conclusion that a vast amount of people simply don't want to believe just how horrible things have become, in all frames of society, from the gov approved poison we buy at the grocery store to the sociopaths that run the government.

Who can blame them. I wish I was still in lala land sometimes. Much easier way to live but much harder to live with once the knowledge bomb drops, there is no turning back. What choice do we have but keep trying to inform people? Wish I knew.

Its the human condition I suppose.

Star & Flag.

Some where in my readings I have seen information stating the 1929 crash was not a mistake but a calculated move used to funnel corporate assets into certain hands.

Here is one article I found after a quick google.

....Congressman Charles A. Lindberg Sr. accurately proclaimed “From now on depressions will be scientifically created.”

Having built the Federal Reserve as a tool to consolidate and control wealth, the international bankers were now ready to make a major killing. Between 1923 and 1929, the Federal Reserve expanded (inflated) the money supply by sixty-two percent. Much of this new money was used to bid the stock market up to dizzying heights.

The House Hearings on Stabilization of the Purchasing Power of the Dollar disclosed evidence in 1928 that the Federal Reserve Board was working closely with the heads of European central banks. The Committee warned that a “major crash had been planned in 1927” and at a secret luncheon of the Federal Reserve Board and heads of the European central banks, the committee warned the international bankers were tightening the noose.

When everything was ready, the New York financiers started calling 24 hour broker call loans. This meant that the stockbrokers and the customers had to dump their stock on the market in order to pay the loans. This naturally collapsed the stock market and brought a banking collapse all over the country because the banks not owned by the oligarchy were heavily involved in broker call claims at this time, and bank runs soon exhausted their coin and currency and they had to close. The Federal Reserve System would not come to their aid, although they were instructed under the law to maintain an elastic currency..... www.worststockmarketcrashes.com...

Good introduction. Thanks for posting.

We've always lived in a great depression, as long as there are kings, and politicians, there will always be a depression, it hasn't changed since time immemorial.

reply to post by crimvelvet


HEAR HEAR!!!!

would you mind if I stole your sig?

reply to post by RadeonGFXRHumanGTXisAlien


Excellent point!

as long as humans accept the notion that others have right to power over their very lives, the depression will continue. Couldn't agree more. In my mind, the only role of government is to have authority when one persons rights conflict with another persons rights.

reply to post by unsolicited



Thanks!

much appreciated

reply to post by crimvelvet


Thanks for adding that to this thread.

I would have to agree, it was a calculated move. History would have us believe that they were simply "willing fools" that they were somehow, unaware of the seriousness of their actions and lack of action. I think any reasonable person can conclude that they knew exactly what they were doing and most certainly benefited a great deal.