A Blog of the Global Justice Movement

Monday, November 12, 2012

Let's Make a Deal, V: Stop Hitting the Snooze Button

The Panic of 1893 was a wake-up call for financial and economic system reform in America. Unfortunately, the country pressed the "snooze" button and got diverted by the Great Depression of 1893-1898, and the presidential campaign of 1896. Incidentally, we just heard an unverified rumor that, just as the Great Depression of the 1930s overshadowed the severity of the Great Depression of the 1890s in its severity, the Great Depression of the 1890s took the title away from the Great Depression of the 1870s.

Here's a sobering fact that should serve as a wake-up call if the academics and politicians would stop hitting the snooze button: the federal government has assumed a burden of debt in the trillions of dollars (that's a multiple of $1,000,000,000,000) in a failed effort to ameliorate the effects of the current Great Depression, say $15 trillion, just to make the calculation easier.

Yes, it's a depression. Get real. It's not a recession, much less a "recovery."

Add to that the potential hit of around $75 trillion for the Social Security and Medicare promises it's made suggests what could happen when the bill comes due and the government can no longer float more loans backed by empty promises. Another $10 trillion or so, and we've hit the $100 trillion mark.

That assumes that the U.S. currency doesn't succumb to the pressure of debt backing and kick off hyperinflation, i.e., the surreal condition in which the price level actually rises faster than the money supply can be increased. When the hyperinflation in Germany in the early 1920s was finally brought under control, the official exchange rate was 4.2 trillion Reichmarks to the U.S. dollar.

The unofficial exchange rate — what you actually had to pay on the black market since the legal exchanges didn't have dollars — was as high as 24 trillion Reichmarks to the U.S. Dollar. This was for a currency backed by nothing but worthless debt issued by a government that didn't even officially exist and thus couldn't collect taxes to redeem its own promises.

The exchange rate before the First World War was 4.2 Reichmarks to the U.S. dollar. The inflation rate was officially (and we all know what that means — e.g., "lies, damned lies, and official unemployment statistics") 100,000,000,000,000%. The unofficial (i.e., real) inflation rate was around 600,000,000,000,000%. And, giving the lie to the Keynesian dogma that there is an inevitable trade-off between employment and inflation, there was massive unemployment, social unrest, and a variety of other factors that ushered in the totalitarian regime of Adolf Hitler to restore order.

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1 comment:

nail-in-the-wall said...

Michael D. Greaney (Intro): According to Harold G. Moulton, the Panic of 1893 and the ensuing Great Depression (I or II, depending on whether you count that of 1873-1878) sounded a wake-up call for financial reform. The National Bank system had imposed an inelastic currency backed with government debt on farmers, small business and consumers, and allowed the rich and the big industrial and commercial interests access to the means of creating an elastic money supply backed with the present value of private sector assets to finance all the new capital they wanted.

Result? A rapid growth in productive capacity not matched by an equally rapid growth in consumer power. This resulted in calls for the government to inflate the currency and stimulate demand artificially by assuming more debt and creating jobs, when what was needed was a way for ordinary people to gain ownership of the new commercial and industrial enterprises and be able to increase their consumption power naturally to match production.

What happened was that the presidential campaign of 1896 diverted the issue from financial reform to "free silver." The bumper crops of 1897 and 1898 "solved" the problem of under-production by farmers and small businesses temporarily, rebuilding consumer power in the short run. As it did not address the underlying problem, however, this only set the stage for yet another financial panic.