Tuesday, September 16, 2008

Forward into the Past: October 1929, Part 1 of 6

The similarities between what happened in October 1929 and recent events on Wall Street are frightening, and not just because of the precipitous drop in share values. High-level meetings over the weekend between brokers and bankers, reassurances from government officials that all will be well, rapid bursting of asset bubbles after exuberant speculation in assets that don't pay for themselves . . . we've (sadly) seen it all before — and more than once. Just a few of the financial and economic lows of the first third of the 20th century are:
• In 1907, the president of the Knickerbocker Bank and Trust got his bank into trouble by using bank reserves to speculate in copper shares. J. P. Morgan refused to advance a loan to stave off a run on the bank, and sparked a worldwide depression: the "Panic of 1907." This led to the formation of the Federal Reserve and the Income tax, both long-needed monetary and fiscal reforms.

• In 1917, the federal government, desperate to raise money to finance the war without raising taxes, found a way to circumvent the ban on government borrowing from the Federal Reserve. This was to allow the central bank to engage in "open market operations" to purchase bonds of the second Liberty Loan Drive. This led to the Federal Reserve abandoning its primary mission of providing a "flexible" currency by creating money to purchase qualified industrial, commercial, and agricultural loans as the lender of last resort for the private sector, and becoming the lender of first resort for the government by purchasing government debt.

• In 1929, touched off by the exuberant wave of speculation in secondary corporate equity and lending by financial institutions to engage in unsound margin purchases of questionable securities, the stock market plunged, as did brokers out of windows as they and their clients, over-invested in speculative issues purchased with small down payments, saw the value of their portfolios evaporate into the thin air from which they came. Private sector enterprises were subsequently unable to obtain credit to continue operations, replace old capital, or form new capital. Consequently, companies contracted operations, laid off workers, and in many cases went out of business. This led to the Great Depression.

• In 1933, Roosevelt implemented the "New Deal." This involved, among other "fine-tuning" measures advocated by John Maynard Keynes, devaluing the currency, incurring massive federal deficits, and instituting open market operations as virtually the sole function of the Federal Reserve, aside from price fixing of interest rates.
And so on. This list is by no means complete, but it does give an idea of the "solutions" that have been imposed on the economy. Of the above short list, only the Federal Reserve and the Income Tax were necessary — and they were quickly subverted to ends other than their original intent: the purpose of the Federal Reserve was changed from providing liquidity for "full production" through the private sector, to funding government and meeting taxpayer-subsidized "full employment" goals, while the purpose of the Income Tax was changed from funding government to social engineering. The result was increasing economic power, corruption, and waste even more than under monopoly capitalism.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):