How Government Inaction Ended the Depression of 1921

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As the financial crisis of 2008 took shape, the policy recommendations were not slow in coming: why, economic stability and American prosperity demand fiscal and monetary stimulus to jump-start the sick economy back to life. And so we got fiscal stimulus, as well as a program of monetary expansion without precedent in US history.

David Stockman recently noted that we have in effect had fifteen solid years of stimulus — not just the high-profile programs like the $700 billion TARP and the $800 billion in fiscal stimulus, but also $4 trillion of money printing and 165 out of 180 months in which interest rates were either falling or held at rock-bottom levels. The results have been underwhelming: the number of breadwinner jobs in the US is still two million lower than it was under Bill Clinton.

Economists of the Austrian school warned that this would happen. While other economists disagreed about whether fiscal or monetary stimulus would do the trick, the Austrians looked past this superficial debate and rejected intervention in all its forms.

The Austrians have very good theoretical reasons for opposing government stimulus programs, but those reasons are liable to remain unknown to the average person, who seldom studies economics and who even more seldom gives non-establishment opinion a fair hearing. That’s why it helps to be able to point to historical examples, which are more readily accessible to the non-specialist than is economic theory. If we can point to an economy correcting itself, this alone overturns the claim that government intervention is indispensable.

Possibly the most arresting (and overlooked) example of precisely this phenomenon is the case of the depression of 1920–21, which was characterized by a collapse in production and GDP and a spike in unemployment to double-digit levels. But by the time the federal government even began considering intervention, the crisis had ended. What Commerce Secretary Herbert Hoover deferentially called “The President’s Conference on Unemployment,” an idea he himself had cooked up to smooth out the business cycle, convened during what turned out to be the second month of the recovery, according to the National Bureau of Economic Research (NBER).

Indeed, according to the NBER, which announces the beginnings and ends of recessions, the depression began in January 1920 and ended in July 1921.

James Grant tells the story in his important and captivating new book The Forgotten Depression — 1921: The Crash That Cured Itself. A word about the author: Grant ranks among the most brilliant of financial experts. In addition to publishing his highly regarded newsletter, Grant’s Interest Rate Observer, for more than thirty years, Grant is a frequent (and anti-Fed) commentator on television and radio, the author of numerous other books, and a captivating speaker. We’ve been honored and delighted to feature him as a speaker at Mises Institute events.

What exactly were the Federal Reserve and the federal government doing during these eighteen months? The numbers don’t lie: monetary policy was contractionary during the period in question. Allan Meltzer, who is not an Austrian, wrote in A History of the Federal Reserve that “principal monetary aggregates fell throughout the recession.” He calculates a decline in M1 by 10.9 percent from March 1920 to January 1922, and in the monetary base by 6.4 percent from October 1920 to January 1922. “Quarterly average growth of the base,” he continues, “did not become positive until second quarter 1922, nine months after the NBER trough.”

The Fed raised its discount rate from 4 percent in 1919 to 7 percent in 1920 and 6 percent in 1921. By 1922, after the recovery was long since under way, it was reduced to 4 percent once again. Meanwhile, government spending also fell dramatically; as the economy emerged from the 1920–21 downturn, the budget was in the process of being reduced from $6.3 billion in 1920 to $3.2 billion in 1922. So the budget was being cut and the money supply was falling. “By the lights of Keynesian and monetarist doctrine alike,” writes Grant, “no more primitive or counterproductive policies could be imagined.” In addition, price deflation was more severe during 1920–21 than during any point in the Great Depression; from mid-1920 to mid-1921, the Consumer Price Index fell by 15.8 percent. We can only imagine the panic and the cries for intervention were we to observe such price movements today.

The episode fell down the proverbial memory hole, and Grant notes that he cannot find an example of a public figure ever having held up the 1920–21 example as a data point worth considering today. But although Keynesians today, now that the episode is being discussed once again, assure everyone that they are perfectly prepared to explain the episode away, in fact Keynesian economic historians in the past readily admitted that the swiftness of the recovery was something of a mystery to them, and that recovery had not been long in coming despite the absence of stimulus measures.

The policy of official inaction during the 1920–21 depression came about as a combination of circumstance and ideology. Woodrow Wilson had favored a more pronounced role for the federal government, but by the end of his term two factors made any such effort impossible. First, he was obsessed with the ratification of the Treaty of Versailles, and securing US membership in the League of Nations he had inspired. This concern eclipsed everything else. Second, a series of debilitating strokes left him unable to do much of anything by the fall of 1919, so any major domestic initiatives were out of the question. Because of the way fiscal years are dated, Wilson was in fact responsible for much of the postwar budget cutting, a substantial chunk of which occurred during the 1920–21 depression.

Warren Harding, meanwhile, was philosophically inclined to oppose government intervention and believed a downturn of this kind would work itself out if no obstacles were placed in its path. He declared in his acceptance speech at the 1920 Republican convention:

We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity. We promise that relief which will attend the halting of waste and extravagance, and the renewal of the practice of public economy, not alone because it will relieve tax burdens but because it will be an example to stimulate thrift and economy in private life.

Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. There hasn’t been a recovery from the waste and abnormalities of war since the story of mankind was first written, except through work and saving, through industry and denial, while needless spending and heedless extravagance have marked every decay in the history of nations.

Harding, that least fashionable of American presidents, was likewise able to look at falling prices soberly and without today’s hysteria. He insisted that the commodity price deflation was unavoidable, and perhaps even salutary. “We hold that the shrinkage which has taken place is somewhat analogous to that which occurs when a balloon is punctured and the air escapes.” Moreover, said Harding, depressions followed inflation “just as surely as the tides ebb and flow,” but spending taxpayer money was no way to deal with the situation. “The excess of stimulation from that source is to be reckoned a cause of trouble rather than a source of cure.”

Even John Skelton Williams, comptroller of the currency under Woodrow Wilson and no friend of Harding, observed that the price deflation was “inevitable,” and that in any case “the country is now [1921] in many respects on a sounder basis, economically, than it has been for years.” And we should look forward to the day when “the private citizen is able to acquire, at the expenditure of $1 of his hard-earned money, something approximating the quantity and quality which that dollar commanded in prewar times.”

Thankfully for the reader, not only is Grant right on the history and the economics, but he also writes with a literary flair one scarcely expects from the world of financial commentary. And although he has all the facts and figures a reader could ask for, Grant is also a storyteller. This is no dry sheaf of statistics. It is full of personalities — businessmen, union bosses, presidents, economists — and relates so much more than the bare outline of the depression. Grant gives us an expert’s insight into the stock market’s fortunes, and those of American agriculture, industry, and more. He writes so engagingly that the reader almost doesn’t realize how difficult it is to make a book about a single economic episode utterly absorbing.

The example of 1920–21 was largely overlooked, except in specialized treatments of American economic history, for many decades. The cynic may be forgiven for suspecting that its incompatibility with today’s conventional wisdom, which urges demand management by experts and an ever-expanding mandate for the Fed, might have had something to do with that. Whatever the reason, it’s back now, as a rebuke to the planners with their equations and the cronies with their bailouts.

The Forgotten Depression has taken its rightful place within the corpus of Austro-libertarian revisionist history, that library of works that will lead you from the dead end of conventional opinion to the fresh air of economic and historical truth.

Read More: https://www.mises.ca/how-government-inaction-ended-the-depression-of-1921-2/

Charles Hugh Smith: The Death Spiral of Financialization

derivatives as a monster that will eat Wall Street

Each new policy destroys another level of prudent fiscal/financial discipline.
The primary driver of our economy–financialization–is in a death spiral. Financialization substitutes expansion of interest, leverage and speculation for real-world expansion of goods, services and wages.
Financial “wealth” created by leveraging more debt on a base of real-world collateral that doesn’t actually produce more goods and services flows to the top of the wealth-power pyramid, driving the soaring wealth-income inequality we see everywhere in the global economy.
As this phantom wealth pours into assets such as stocks, bonds and real estate, it has pushed the value of these assets into the stratosphere, out of reach of the bottom 95% whose incomes have stagnated for the past 16 years.
The core problem with financialization is that it requires ever more extreme policies to keep it going. These policies are mutually reinforcing, meaning that the total impact becomes geometric rather than linear. Put another way, the fragility and instability generated by each new policy extreme reinforces the negative consequences of previous policies.
These extremes don’t just pile up like bricks–they fuel a parabolic rise in systemic leverage, debt, speculation, fragility, distortion and instability.
This accretive, mutually reinforcing, geometric rise in systemic fragility that is the unavoidable output of financialization is poorly understood, not just by laypeople but by the financial punditry and professional economists.
Gordon Long and I cover the policy extremes which have locked our financial system into a death spiral in a new 50-minute presentation, The Road to FinancializationEach “fix” that boosts leverage and debt fuels a speculative boom that then fizzles when the distortions introduced by financialization destabilize the real economy’s credit-business cycle.
Each new policy destroys another level of prudent fiscal/financial discipline.
The discipline of sound money? Gone.
The discipline of limited leverage? Gone.
The discipline of prudent lending? Gone.
The discipline of mark-to-market discovery of the price of collateral? Gone.
The discipline of separating investment and commercial banking, i.e. Glass-Steagall? Gone.
The discipline of open-market interest rates? Gone.
The discipline of losses being absorbed by those who generated the loans? Gone.

And so on: every structural source of discipline has been eradicated, weakened or hollowed out. Financialization has consumed the nation’s seed corn, and the harvest of instability is ripening in the fields of finance and the real economy alike.

“The End Goal Is To Destroy The Constitution and Subvert The Country” – How Secretive Non-Profit Organizations Erode The United States

 George Soros Quote: I cannot and do not look at the social cosequences of what I do.

One of the biggest problems facing this nation is the amount of money that has been “sequestered,” to term it, for “Non-Profit Organizations,” or “NPO’s.”  Why?  They present a problem when they can be used by an unscrupulous individual or groups of unscrupulous individuals (for examples, a George Soros, or the Democratic Party respectively).  What is an NPO?  Let’s look at what they are and see if the definition is characterized by actual NPO actions.

Here is an excerpt from a book that describes NPO’s (what they should be):

“The main financial difference between a for-profit and a not-for-profit enterprise is what happens to the profit.  In a for-profit company like Ford or Microsoft or Disney or your favorite fast-food establishment, profits are paid to the owners, including shareholders.  But a nonprofit can’t do that.  Any profit remaining after the bills are paid has to be plowed back into the organization’s service program.  So profit can’t be distributed to individuals, such as the organization’s board of directors, who are volunteers in every sense of the word.”

Nonprofit Kit for Dummies,” ISBN: 0-7645-5347-X, pg. 8

Austere and stoic, these NPO’s, all!  Ahh, but what is conveniently left out is the salary portion…for the directors.  Those salaries are written off as an operating expense by the “Non-Profit,” but they’re hardly the funds gleaned by a “simple volunteer for the beneficent NPO.”  Another paragraph from the book shows this:

…for the most part, we’re talking about an organization that the Internal Revenue Service has classified as a 501(c)(3).  They receive exemption from federal income taxes and sometimes relief from property taxes at the local level.  Nonprofit organizations classified as 501(c)(3) receive extra privileges under the law.  They are, with minor exceptions, the only group of tax-exempt organizations that can receive tax-deductible contributions from individuals and organizations.

Being a nonprofit organization does not mean that an entity is exempt from paying all taxes.  Nonprofit organizations pay employment taxes just like for-profit businesses do.  In some states, but not all, nonprofits are exempt from paying sales tax…”

Read More: www.dcclothesline.com/2017/02/23/the-end-goal-is-to-destroy-the-constitution-and-subvert-the-country-how-secretive-non-profit-organizations-erode-the-united-states/

Here’s Who Funded Shut Down Of Milo Yiannopoulos At Berkeley | The Daily Caller

George Soros quote: "Deliberately misleading propaganda techniques can destroy an open society."

Chuck Ross  02/03/2017

The Alliance for Global Justice, based in Tucson, is listed as an organizer and fiscal sponsor for Refuse Fascism, a communist group that encouraged left-wingers to shut down the Yiannopoulos event.

While it is unclear whether those who carried out the violence were paid to do so, the benefactors of the Alliance for Global Justice — and Refuse Fascism — are listed online.

According to its most recent 990 tax form, Alliance for Global Justice (AfGJ) received $2.2 million in funding for the fiscal year ending in March 2016.

One of the group’s biggest donors is the Tides Foundation, a non-profit funded by billionaire progressive philanthropist George Soros. Tides gave AfGJ $50,000.

The United Steel Workers labor union also contributed $5,000. The city of Tucson is also listed in AfGJ’s 990 as a donor, but a city official says that the city acted merely as a pass-through for a Native American tribe that provided a grant to the activist group. The city official said that no city money went to AfGJ.

Charities associated with several major corporations also donated. Patagonia.org, the outdoor apparel and equipment company, gave $40,000. The Ben & Jerry Foundation, the charity associated with the ice cream maker, gave $20,000. And Lush Cosmetic gave $43,950.

Another bit of irony is seen in the $5,000 contribution from the Peace Development Fund, a group that claims to support organizations that fight for human rights and social justice.

Another major donation came from a group that was chaired by Hillary Clinton during the 1980s. The New World Foundation gave $52,000 to AfGJ.

Read More: dailycaller.com/2017/02/03/look-who-funds-the-group-behind-the-call-to-arms-at-milos-berkeley-event/

 

George Soros funds Ferguson protests, hopes to spur civil action – Washington Times

George Soros Quote: I cannot and do not look at the social cosequences of what I do.

There’s a solitary man at the financial center of the Ferguson protest movement. No, it’s not victim Michael Brown or Officer Darren Wilson. It’s not even the Rev. Al Sharpton, despite his ubiquitous campaign on TV and the streets.

Rather, it’s liberal billionaire George Soros, who has built a business empire that dominates across the ocean in Europe while forging a political machine powered by nonprofit foundations that impacts American politics and policy, not unlike what he did with MoveOn.org.

Mr. Soros spurred the Ferguson protest movement through years of funding and mobilizing groups across the U.S., according to interviews with key players and financial records reviewed by The Washington Times.

In all, Mr. Soros gave at least $33 million in one year to support already-established groups that emboldened the grass-roots, on-the-ground activists in Ferguson, according to the most recent tax filings of his nonprofit Open Society Foundations.

Read More: www.washingtontimes.com/news/2015/jan/14/george-soros-funds-ferguson-protests-hopes-to-spur/

A very good crisis

philanthropist, oligarch, oligarchy, NGOs,

George Soros on the 2008 election and financial crisis. “It is, in a way, the culminating point of my life’s work...the American election, the financial crisis... it is actually a very stimulating period."

George Soros is having a very good crisis. Other investors are wilting, political power structures are being upended and market economists are scrambling to fashion new theories, but the world’s most famous speculator is having a belated heyday.

“It is, in a way, the culminating point of my life’s work,” the 78-year-old says in his heavy Hungarian accent during an interview at his London mansion.

If Soros had retired from the money markets at 48 to become a philosopher – which was his life plan when he set up his own Wall Street hedge fund at the age of 43 – the world is unlikely to have heard of him, as either an ideas man or a money man. Even if he had ended his career 20 years later, he would have been remembered as little more than the big-stakes gambler who “broke the Bank of England” with his 1992 bet against the pound that earned him $US1.1 billion.

At 68 Soros had just predicted a global financial collapse which did not happen, just as he had done a decade earlier; his pet theory of market behaviour, which he calls “reflexivity”, had been largely ignored; and his political donations had bought him little sway in Washington. Yet today, he says, all those strands seem to have come together – “the American election, the financial crisis, the theory of reflexivity, so it is actually a very stimulating period”.

Read More: www.news.com.au/news/a-very-good-crisis/news-story/c106017ba109bc5688f219dd87ff845a