Financial Disaster

As we saw in the previous posting on this subject, politicians could not keep their hands of the central bank’s money machine.  Other factors also contributed to laying the groundwork for financial disaster.

"Something is wrong with the economy . . . but what?"

Technological advances and increasing farm failures continued to reduce the number of small owners, who tended to become non-owning wage workers instead of worker-owners of the large corporations.  Manufacturing jobs disappeared at an accelerated rate, with the slack taken up by massive job creation in administration and logistics required by the expansion of business and commerce.

The business boom fueled a rise in share values, which in turn tempted many people to speculate in the stock market.  Convinced that prices would continue to rise, investment banks connected with commercial banks created money at a tremendous rate for the purchase of speculative shares on credit, sometimes with as little at 3% down.  At the same time, commercial banks created money as usual for agriculture, industry, and commerce.

When the crash came in October 1929, the banking system found itself over-extended in speculative securities loans that went into default.  With the sudden constriction in the money supply and fall in consumer demand, farmers and businessmen were unable in many cases to make debt service payments.  Banks were forced to call loans.  Farmers lost their land, and businesses either went bankrupt or retrenched.

Harold G. Moulton

Even so, Harold Glenn Moulton (1883-1965), president of the Brookings Institution in Washington, DC, argued that had the economy been left to recover on its own, matters would have returned to normal in three to five years.  Due to a number of factors, however, especially government involvement, he regarded the process as unnecessarily slow.  (Harold G. Moulton, The Recovery Problem in the United States.  Washington, DC: The Brookings Institution, 1936, 81-110.)

Moulton agreed that better regulation of the financial system was essential, especially separating commercial and investment banking. (Harold G. Moulton, Capital Expansion, Employment, and Economic Stability.  Washington, DC: The Brookings Institution, 1940, 228-254.)  He disagreed strongly, however, with the prescription of John Maynard Keynes (1883-1946) that funded the New Deal with enormous issues of monetized government debt. (Harold G. Moulton, The New Philosophy of Public Debt.  Washington, DC: The Brookings Institution, 1943.) He also viewed with alarm the effective government takeover of the Federal Reserve that put control over money and credit back in the hands of the politicians and Wall Street. (Harold G. Moulton, Financial Organization and the Economic System.  New York: McGraw-Hill Book Company, Inc., 1938, 416-417.)

Paradoxically, one key to recovery in a modern economy Moulton rejected was expanded capital ownership.  He proved in The Formation of Capital (1935) that self-liquidating new capital can be financed by the expansion of commercial bank credit without redistribution. (Harold G. Moulton, The Formation of Capital.  Washington, DC: The Brookings Institution, 1935, 75-84.) He then contradicted his own findings in the follow up volume, Income and Economic Progress (1935) by asserting that broad-based capital ownership is impossible without redistribution, all the while limiting his analysis to existing wealth. (Harold G. Moulton, Income and Economic Progress.  Washington, DC: The Brookings Institution, 1935, 72-83.)

John Maynard Keynes

Regardless of their strengths or weaknesses, Moulton’s ideas were not adopted, and the principles of the Keynesian New Deal (The widespread belief that Msgr. John A. Ryan influenced New Deal policy is without foundation.  Franklin Delano Roosevelt (1882-1945) found in Ryan a convenient tool to garner the Catholic vote due to program similarities that already existed.) have determined economic, monetary, and fiscal policy in most countries down to the present day.  As a result of the Keynesian emphasis on full wage employment and hostility to small ownership, (John Maynard Keynes, The General Theory of Employment, Interest, and Money.  New York: Harcourt Brace Jovanovich, Publishers, 1953, 221, 290, 376.) private property has virtually disappeared as a significant factor in the economic life of most people, especially in America, once viewed as “the last best hope of Earth.” (Abraham Lincoln, Annual Message to Congress, December 1, 1862.)

Ownership and wealth have become increasingly concentrated, government and consumer debt have skyrocketed, and currency instability is the rule rather than the exception throughout the world.  As ordinary people have lost economic and thus political power, moral relativism has spread, virtue has been redefined or ridiculed, and family, religious, and civil life have degenerated at an astonishing rate.

Nevertheless, despite widespread fear and even despair, there is hope, as the young Louis Kelso firmly believed when he set himself to study the situation in the 1930s.

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