“I’d Gladly Pay You Tuesday for a Hamburger Today!” - Wimpey
Submitted by Economy CSI on November 1, 2006 - 1:22am.
Economics | Economy | Economy CSI
Economy CSI Series on Debt
An American History: Part VIII
“I’d Gladly Pay You Tuesday for a Hamburger Today!” - Wimpey
By the Economy Team
The first half of the twentieth century not only had fascinating rhythms, in terms of the US economy, they were fascinating times. Land speculation in Florida proved prosperous for many in the 1900s. The FED was supposed to be supervising the banks, but that didn’t always work out so well.
Automobiles were becoming a major part of the lives of the elite.
During the 1910s, Ford had manufactured a million cars.
America produced a third of the world’s oil. Not only were people listening to ragtime, they were “cooking with gas!” It wasn’t long before they were cooking with electricity, which also brought to manufacturing a wide variety of inventions that became appliances and modern conveniences. Manufacturing had replaced agriculture as the primary economic engine for the USA. The rich were getting richer. Everybody else was either working class or just downright poor. There was no middle class to speak of…yet.
Just as Germany was surpassing England as the economic power, war broke out in Europe. This time it was the United States who financed the allies in what became WWI. Some say the real reason the US got into that war was to protect our economic interests to be repaid those debts. To pay for the war, the FED printed more money. We were on the gold standard, so that money could still be converted to gold. That type of inflation provoked problems to say the least. Woodrow Wilson was the only Democrat to be president in the early part of the century. He not only led us into WWI, he supported the rights of workers in American factories.
Labor unions kept trying to win better working conditions for the workers in the factories. It wasn’t exactly a war, but sometimes the protests led to riots and it sure looked like a war sometimes. Things got pretty bloody. In terms of money, there were gold and silver coins, silver and gold certificates and of course, 90% of transactions were being carried out by check.
When WWI was won by the allies, Germany was made to pay reparations for the debt in financing the war. The USA then loaned money to Germany to rebuild. After the roaring twenties when the world wide depression ensued, those loans were never repaid.
The national debt was $16 million in 1930 and private debt drove people to real acts of desperation after the stock market crash of 1929, which had been fueled with borrowed money. People had turned from land speculation in Florida to the stock market in the hay day of manufacturing in the 1920s. This was the time installment credit really emerged.
People clamored to win all the latest appliances and gadgets. People wanted to buy cars. America was in love with cars. Buying stocks on margin was allowed and too many people who really couldn’t afford to be in the market were gambling to get rich. Sadly, when the margins were called and people couldn’t pay, the stock market crashed in New York. This was the start of the Great Depression.
Banking was a growth industry in the teens and twenties. Then during the twenties with a depression in the agricultural sector, banks began to fail. In the early thirties they collapsed at a high rate. Even the school kids who had been learning to save for a rainy day lost their meager deposits – and developed a healthy distrust of banks.
Companies went broke and workers without jobs went hungry, along with their families. The government had a laissez-faire policy regarding the private sector and the people who were suffering. It was the US version of “let them eat cake.”
The heady days of the twenties were the years of Harding, Coolidge and in 1929, Herbert Hoover. These were Republican presidents. They had the backing of the wealthy and corporations. They favored tax cuts.
When working class and other people hit bottom, moving to shantytowns as they’d become homeless, these places were known as Hoovervilles. “Safe as houses” wasn’t a term tossed about anymore.
In 1933, Franklin D. Roosevelt became president with a mandate to turn our economy around for all the people…”chicken in every pot” was the promise to all. One of the first things he did when he took office was to close the banks for 10 days, a bank holiday, to reorganize our banking system. Then he raised the value of gold to $35 an ounce, which devalued the dollar. He also required everyone to turn in their gold coins.
For the private sector, the dollar was no longer convertible to gold. Only foreign governments could still retrieve their money for gold.
For everybody else, dollars could be converted to silver. We still had silver coins and silver dollars. People could also convert silver certificates into silver bullion if the wished. The economic plan that was developed in the FDR years was known as Bretton Woods. It was the end of Hamiltonian economics in the United States.
Economists of the day looked to the wisdom of John Maynard Keynes to help them develop the grand plan they designed. One of the primary architects for these economic times was John Kenneth Galbraith.
National programs were developed to put people to work. There was the WPA, programs for the arts, social security was instituted to help the elderly avoid poverty. FDR also championed improvements in the workplace and labor unions gained power to bargain with management. Management was most unhappy with social security, as they would have to match the payments the workers were making into the system. Business owners were sure it would force companies into bankruptcy. It didn’t.
FDR wanted to establish a national health program, but that was not to be, alas.
Then war broke out in Europe again.
We’d learned from WWI that money could be made in selling the allies what they needed to fight the war from our factories and American oil. WWII was an even bigger economic opportunity. It’s what picked our economy up, sending soldiers off to war and everybody else to work in the factories. Wall Street was happy. After WWII our national debt had climbed to $260 million. In those days Americans sacrificed to buy U.S. bonds to finance the war. Truman, who had succeeded FDR instituted the Marshall Plan to rebuild Germany and helped the allies get back on their feet.
The United States had become the leading world economic power.
For our final installment…next time we find out what “In God We Trust” means in terms of our money….
Links and Sources:
Florida Land Speculation 1900s – Florida Commercial Brokers Network - Partner Case Study
Bretton Woods
Great Depression
Additional Sources:
The History of Money - R. Davies
Greenback - The Almighty Dollar and the Invention of America - J. Goodwin
John Kenneth Galbraith on the Depression
Labor History in the US – US History.com
Sharecroppers and Tenant Farmer’s Debt Through 1930s – Farmers Without Land: The Plight of White Tenant Farmers and Sharecroppers; by Charles C. Bolton; Mississippi History Now
The Crash of 1929 – The Jazz Age Page by R. Richard Savill
Gold in the 20th Century (good charts) – Monetary Gold Mismanagement in the Twentieth Century; by Joseph M. Miller
FDIC History – OC Register; May 5, 2005
We're In the Money - Music and lyrics by Al Dubin and Harry Warren; All Musicals.com
Brother, Can You Spare a Dime - Lyrics by Yip Harburg, music by Jay Gorney (1931)
Image Sources:
Automobile Images
Labor Strike Image
Hooverville Image
Unemployed Man Image
Silver Coins
http://www.pbs.org/wgbh/pages/frontline/retirement/view/
I recomend this topic
Michael J. Fox - " (I am) passionately moving to support any candidate who supports ALL stem cell research," then he jokingly added, "...no pun intended." Nov. 2, 2006
http://www.dailykos.com/storyonly/2006/12/13/72111/695
The Complete Failure of Supply-Side Economics
by bonddad
Wed Dec 13, 2006 at 04:33:53 AM PST
http://chill888.newsvine.com/_news/2006/12/19/487987-conspiracy-theories-the-declining-dollar-and-m3
Conspiracy Theories: The Declining Dollar and M3
News Type: Opinion — Tue Dec 19, 2006 6:02 AM EST
us-news, business, economy, dollar, conspiracy, fed, inflation, bubble
chill
M2 Is Flat, N3 Is skyrocketing.
Source: Shadowstats
Headlines have been full of stories regarding the ever weakening dollar and there's been lots of good discussion here at Newsvine - see Iran to replace dollar with euro. It's a complicated but important subject as discussed here in a previous article I posted The Decline and Fall of the American Dollar - Why it Matters.
This article will not deal with why it matters, but more specifically on the little understood subject of money supply and recent shenanigans that have got conspiracy theorists frothing at the mouth.
OK, sounds good but what is money supply?
It's complex even for experts (and I am certainly no expert) but at its simplest, the value of a currency (money) is based on supply and demand. The greater the supply, the less people will pay for an asset. The greater the demand for an asset the higher it's price.
Technically, economists in the USA (it can be different elsewhere) define Money as follows:
M0: The total of all physical currency, plus accounts at the central bank which can be exchanged for physical currency.
M1: M0 + the amount in demand accounts ("checking" or "current" accounts).
M2: M1 + most savings accounts, money market accounts, and certificate of deposit accounts (CDs) of under $100,000.
M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements.
See Wikipedia for more
Umm OK, But how is Money Supply controlled?
See Wikipedia here.
The Federal Reserve System controls the size of the money supply by conducting open market operations, in which the Federal Reserve lends or purchases specific types of securities with authorized participants, known as primary dealers. The Open Market Desk has two main tools to adjust the monetary supply: repurchase agreements and outright transactions.
Note there are other ways to effect the money supply like bank reserve requirements --- but I am trying to be brief. Links provide more data.
Yawn. Boring! Get to the Conspiracy Part
OK, fair enough. On November 2005, the federal reserve announced that it would stop publishing M3 effective March 2006. Read that sentence again please. It's a big one!
Hey, but doesn't M3 include Repurchase Agreements conducted by the fed? And M3 also includes EURO Dollars?
Yes, great, you are paying attention!
Euro Dollars:
From Wikipedia here:
Eurodollars are deposits denominated in United States dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the United States, allowing for higher margins.
Note, EURO dollars aren't necessarily located in Europe. The term is left over from post WW2 rebuilding of Europe. It would include for example much of the $Trillion in dollar reserves held by China. Or much of the petro dollars owned by Arab nations. It's a big number.
So why did the Fed stop tracking M3?
Well first the non conspiracy theory answer: In a November Wall Street Journal article:
Federal Reserve Chairman Ben Bernanke said two weeks ago in a speech at a speech in Europe that money-supply measures haven’t proven reliable enough to play an important part in policy strategy. European Central Bank head Jean-Claude Trichet said prior to this speech that “a model of monetary policy that includes no role for money is incomplete in some important respects.”
Back To the Conspiracy Theories. From the same WSJ article:
But M3 is the money-supply measure increasing the fastest. Shadowstats, which cobbles M3 back together from various Fed data releases and other estimates, put it at 9.6% growth in October, highest since March 2002. Some believe its growth is fueling M&A and the stock market (the S&P 500 has gone more than 90 days now without a 1% one-day decline, longest since 1995). “People are swapping cash for hard assets, be it copper mines, or timberlands or office buildings or gold,” says Mr. Ritholtz. “There’s a lot of cash, and people are playing ‘hot potato’ to get rid of it as fast as possible.”
A chart by this same Shadowstats (see chart) shows a flat M2 while M3 surges. Basically, the Fed is pretending to tighten with its continuous interest rate hikes and publishing of M2. While the no longer published M3 spikes. The Fed is not tightening credit if it is increasing the Money Supply
Any more conspiracy theories?
Yes, A big one. In November 2006 the right wing New York Post published the following article: US Treasury Quietly Doing the Feds Work It basically describes how the Treasury Department is using similar powers as the Fed in UNPUBLISHED and little-known-about Repurchase Agreements to increase the money supply.
"FOR the past few years the U.S. Treasury has been quietly involved in what the financial markets call "repo" agreements and this near-secret operation could explain why the nation's money supply seems to be confoundingly large.
It might also explain why Washington decided earlier this year to stop publishing M3 money supply figures, the broadest and most popular measure of money in circulation. Experts worry whenever there is too much money - liquidity - in the financial system because it can lead to things like price spirals in the housing market and bubbles in stocks.
But even more worrisome for the financial markets than too much liquidity would be an inability to track the amount of money being pumped into the financial system.
it looks as if the Treasury has created a way to duplicate the Fed's power. And that is a disturbing possibility unless it is somehow monitored.
Those last two sentences say it all. Scary stuff. Many mainstream economists believe one major factor in the housing bubble, stock market surge, and dollar decline, is due to this hidden increase in money supply. And maybe Bush has his hidden hand in this conspiracy.
Is Anyone Doing Anything About This? Well many investors are looking abroad to protect against the ever declining dollar. As linked above, Iran and other nations are reducing their US dollar exposure. Finally, Republican Congressman Ron Paul (Texas) has a bill pending bill H.R. 4892: Sunshine in Monetary Policy Act mandating the Fed to publish M3 weekly.
As a final note, you might ask, why is inflation not increasing if money supply is out of control? That could be a whole other article on the questionable reliability of inflation statistics. And I think we are all tired now.
Here's a primer though: Inflation Vanquished
http://www.stopglobalwarming.org/sgw_feature.asp?id=7 Leonardo DiCaprio - Feature
for another informative post...