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?"|
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|
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|
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.