[Note: This comment comes from friend Steve Schear. DLH]

From: Steven Schear <schear.steve@googlemail.com>
Date: January 23, 2009 9:44:00 PM PST
To: Randall Webmail <rvh40@insightbb.com>
Cc: Charles Brown <cbrown@flyingcircuit.com>, dewayne@warpspeed.com
Subject: Re: [Dewayne-Net] Re: Report: biggest decline in prices since the Great Depression

On Fri, Jan 23, 2009 at 2:25 PM, Randall Webmail <rvh40@insightbb.com> wrote:

From: dewayne@warpspeed.com (Dewayne Hendricks)

Date: Friday, January 23, 2009 13:47

Subject: [Dewayne-Net] Re: Report: biggest decline in prices since the Great Depression

To: Dewayne-Net Technology List <xyzzy@warpspeed.com>

Clearly, its not in anyone’s interests to have run-away

deflation or inflation. However, the given wisdom that a constant, small,

amount of inflation is tolerable or even beneficial is IMHO nothing but

propaganda disbursed by those who stand to benefit by it. Some

economists maintain that without the ability to centrally control the

monetary supply and interests rates no modern economy can exist.

However, during the 19th century, when America was undergoing its

westward expansion and massive nation-building, there was no Federal

Reserve Bank, interest rates were primarily set by the markets, the

dollar was still partly backed by gold (in fact, gold coins circulated

widely) and inflation was almost zero over decade time intervals

(according to Alan Greenspan).

And, every twenty to thirty years, there was a “Panic”, a run on the banks and economic collapse.

There were bank runs and recessions, even short-lived depressions but
no economic collapses. Nothing like in the 1930s. And if you look at
the panics they mostly occurred while there was a federal banking
system in place.

In the 19th Century there were five major financial crises or panics
in which bank stampedes of this nature occurred: 1819, 1837, 1857,
1873, and 1893. There was one in 1907 that precipitated the creation
of the Fed. In each case the panics were preceded by periods of
spectacular growth in the money supply, through a combination of
unbacked note issue and credit expansion. In some panics there was
also a pronounced increase in specie, either gold or silver coin. The
Panic of 1837, for example, was preceded by rapid growth in silver
coin from Mexico, where Santa Ana’s government was financing its
deficits with nearly-worthless copper coin, which drove gold and
silver out of the country.

Market success–characterized by stable and sustainable growth levels,
generally falling price levels, and increasing real incomes–is the
norm in the absence of state intervention. This can be shown
empirically in the U.S. by comparing the performance of the economy in
the 60 years prior to the Great Depression (an era of relatively small
government) to the 60 years following it (an era of big government).

To be sure, price inflation, financial panics, or labor crises
occurred prior to 1929, but they were routinely short-lived phenomena
whose damage was minimized by adjustments in the goods, labor, and
money markets. You would be hard-pressed to find a 19th-century
financial panic that lasted as long as the last recession, not to
mention the current one and the 1930s Depression.

From the start of our republic private banks (mostly state chartered)
were already in existence, and a government bank would only crowd them
out and hinder their further growth. But it would also provide
infinite patronage opportunities for the politicians who controlled
it, just as the Bank of England had done for generations. A running
war between the supporters of a limited, decentralized, government
(spearheaded initially by Jefferson and Madison) and those who wanted
a mercantilist type economy as prevailed in Europe (headed by Hamilton
and his heirs) continued until the Civil War when states rights were
crushed.

Despite strong constitutional opposition, President Washington signed
the legislation creating the First Bank of the United States in 1791
after a compromise was reached that would enlarge the area of the
District of Columbia by three miles so that it would be adjacent to
his (Washington’s) property along the Potomac River. Federalist
senators had blocked Washington’s request until he agreed to sign the
bank bill.

The Bank of the US is Born
The Bank of the United States (BUS) was given a twenty-year renewable
charter. It was mostly privately owned, with the government
controlling 20 percent of the shares. The bank would be the depository
of government funds and would issue paper money that was backed by
gold and silver.

Like all government-operated banks, the BUS quickly created inflation
by printing excessive amounts of money and facilitating the state’s
borrowing and spending. The Bank of the United States promptly
fulfilled its inflationary potential by issuing millions of dollars in
paper money and demand deposits [i.e., checking accounts], pyramiding
on top of $2 million in specie [gold and silver]. The Bank…invested
heavily in loans to the United States government. In addition to $2
million invested in the assumption of pre-existing long-term debt
assumed by the new federal government, the Bank…engaged in massive
temporary lending to the government, which reached $6.2 million by
1796. The result of the outpouring of credit and paper money by the
new Bank of the United States was…an increase [in prices] of 72
percent [from 1791 to 1796].

The bank’s activities brought renewed questions about its
constitutionality, and Congress allowed its charter to lapse in 1811.
But then the financial chaos caused by the War of 1812 led to its
resurrection in the form of the Second Bank of the United States in
1817. President Madison himself supported the bank since he was then
among those responsible for paying for the war (and for the rest of
the government).

As soon as Hamilton’s bank was revived, it ran into grave difficulties
through mismanagement, speculation, and fraud. Unlike the first BUS,
the second had created several regional branches, so all of this
mismanagement and fraud became close to the people; it wasn’t just a
story about governmental antics in the faraway nation’s capital.
Consequently, a wave of hostility toward the Bank of the United States
swept the country.

Let’s look at two of these panics…

1819
The BUS gave itself regulatory powers over other state-chartered
banks. It had a powerful lever on state banks, which it achieved by
acquiring their notes. This acquisition took two principal forms:
since the BUS managed…the federal tax revenues deposited with it and
since these taxes were frequently offered in the form of state bank
notes, the Bank could either accept and hold the notes or it could
present them to the issuing banks and demand specie; further, since
the BUS had tremendous resources of its own, it could go into the
money market and buy state bank notes and then present them for
redemption to the issuing banks.

The success of the commercial banks depended upon their keeping their
banknotes in circulation. The BUS could therefore hurt the banks’
bottom line by demanding specie payment for its notes, effectively
orchestrating a run on the banks. Thus, from the very beginning,
government-run banking tended to control and displace private banks.

The federal government made a fateful decision in 1814: it allowed the
state banks to suspend specie payment. That is, they were no longer
required to hold sufficient gold and silver in their vaults to cover
their loans, so they could lend even more to the federal government.
This went on for two and a half years. The predictable effect was
price inflation of as much as 55 percent per year in some cities.

The creation of the Second Bank of the United States in January 1817
caused an even further expansion of bank credit (and inflation). By
1818 the BUS had lent $23 million with a specie reserve of only $2.3
million.18 All of this cheap credit created an economic boom and
fostered a great deal of real estate speculation that sharply raised
property values around the country. But the BUS soon began to lose
credibility, as it often failed to pay depositors in specie when they
requested it. People became suspicious and alarmed at holding only
pieces of paper with politicians’ pictures on it as opposed to gold
and silver. The bank spent huge sums purchasing specie from abroad,
but that failed to stem its problems.

Beginning in the summer of 1818 the BUS precipitated the Panic of 1819
[the first economic depression in the new country] by a series of
deflationary moves [which]…sharply limited and contracted the loans
and note issues of the [Bank's] branches. This in turn forced the
state banks to reduce their loans, and the overall monetary
contraction led to a wave of bankruptcies throughout the country. The
real estate bubble burst, as prices overall fell precipitously. By
1819 the price of agricultural exports was less than half of what it
had been a year earlier. Personal bankruptcies abounded, especially
among farmers who had accumulated large amounts of debt, merchants
whose retail prices fell precipitously, and land speculators.

Money was so scarce that large portions of the population resorted to
bartering instead of using money. For the first time, there was
large-scale unemployment in the cities. In Philadelphia, for example,
manufacturing (mostly handicrafts) employment fell from 9,700 employed
persons in 1815 to only 2,100 in 1819. The economic depression lasted
until 1821.

The Panic of 1819 was the first boom-and-bust cycle of the economy
caused by government monetary policy. It was an inevitable
consequence, in other words, of the Hamiltonian system of governmental
debt accumulation combined with a government-run bank that prints
money in order to fund the debt. This, and the growing corruption
associated with the BUS, would lead President Andrew Jackson to
declare war on Hamilton’s bank, a war that he eventually won.

After the demise of the Second Bank of the United States an
alternative monetary system was adopted in which all currency was
backed by specie on demand. A number of economic historians consider
this so-called Independent Treasury System to have been the most
stable monetary system of the nineteenth century. This persisted
until the system was revived during the Lincoln administration with
the National Currency Acts, and ultimately in 1913 the creation of the
Federal Reserve System instituted full-fledged central banking.

1907
The Panic of 1907 is especially significant because it led to
government-directed banking “reform.” The panic got underway when
United Copper’s stock price collapsed. Knickerbocker Trust of New
York had invested heavily in United Copper, and depositors made a run
on the bank to get their money out. When Knickerbocker failed,
depositors at other banks got nervous and demanded their money,
igniting the panic.

J. P. Morgan got together with other banking leaders and met virtually
nonstop for three weeks to solve the crisis. They secured credit from
foreign investors, redirected funds from strong banks to weak ones,
and bought stock in foundering but still promising companies. The
panic died a few weeks later.

For the New York bankers, however, there remained a much more serious
problem. The growth of state banks over the previous 20 years had
slowly eroded their power. By 1896, state and other non-national
banks constituted 61% of the total, and by 1913, 71%. More
significantly, non-nationals commanded 57% of banking resources by
1913.

Both Congress and the American Banking Association had been pushing
for central banking since the 1890s. The Panic of 1907 gave them
another excuse to make it a reality.   Amid all the maneuvering and
proposals for fundamental change, Morgan banker Henry Davison
organized a duck hunting trip at Jekyll Island, Georgia in December,
1910. The ducks they took aim at were not the web-footed kind, but
the unsuspecting American citizen who had always thought of money as
gold.

In 1913, Carter Glass, a Democratic congressman from Virginia, used
the Jekyll Island scheme as the basis for the Federal Reserve Act. The
Act created 12 regional reserve banks ruled by a board of Washington
bureaucrats, including the Treasury secretary and presidential
appointees. Though the reserve banks are officially “private”
institutions, they’re little different than government agencies. In
this manner government seized “a crucial command post” of the economy,
and therefore of the American society. It used crisis–repeated
panics created by government meddling–and the economic illiteracy and
trust of the public to achieve its purpose.

And what has it sown from its command post? A subtle means of wealth
transfer. A method of taxing us without legislation. A way of
counterfeiting money legally. “Through the purchase of [usually
government] debt by a bank, fiat money is injected into the economy,”
Gary North writes. [8] “Wealth then moves to those market
participants who gain early access to this newly created fiat money,”
who are usually politically connected. The ones on fixed incomes or
without close government connections are the losers, as the injection
of money eventually jacks up prices.

The Fed greatly reduced reserve requirements during the 1920s,
expanding credit recklessly and generating a false prosperity that
ended in the crash of 1929. People knew what the Fed was up
to–manufacturing dollars out of thin air–and started a run on banks
to pull their money out in the form of gold specie and certificates.
When Roosevelt took office, he slammed the bank door in their faces,
then later ordered them to return their gold. In 1933 he made the
dollar a fiat currency domestically, but backed by gold
internationally.

Roosevelt also created the Federal Deposit Insurance Corporation
(FDIC) in 1933, providing federal guarantee of bank deposits. Bank
runs and the threat thereof have vanished, and most people believe
this is good. The threat of bank runs used to “to keep wanton
investing at bay,” but the government-banking cartel views such
restrictions “as against the national interest.” As a result, the
banking industry is perpetually shaky, and the largest banks are a
menace to public life itself.

Bottom line
During what economists call the “free banking era,” which began when
the Second Bank of the United States was dissolved in the 1830s, the
purchasing power of American currency remained stable. This stability
resulted precisely because the money supply was denationalized. State
governments took a more or less laissez-faire attitude toward banking;
about half did not even require a state government charter for
individuals who wanted to start a bank, accept deposits, and issue
banknotes. Banks, then, were “regulated” mainly by competition in the
marketplace: a bank that printed too much currency and did not hold
sufficient specie reserves would eventually fail. Such failures did
occur, but they remained localized and never caused a national bank
panic or depression, as has been the case with nationalized banking
systems. Panics and depressions are what economists refer to as
“contagion effects” of centralized or nationalized banking.

Prior to 1929 the government had never intervened to help recovery
from a recession. Previous administrations had let recessions run
their course, and recovery, at the hands of the market, usually
occurred in a year or less. Hoover, and then Roosevelt to a much
greater degree, took the statist course and drove the economy into a
prolonged depression. For his part, Roosevelt has been deified.

The Fed, as the engine of inflation, bankrolls government wrong-doing.
Its creation marked the first step in the destruction of sound
money–our gold standard. Ideologically, sound money belongs in the
same class with political constitutions and bills of rights. In the
name of civil liberty and civilization itself, the Fed should be
abolished.

The lack of inter-generational memory (<http://en.wikipedia.org/wiki/Kondratiev_wave>) and economic

group-think is behind our economic troubles. For thousands of years money based on gold has kept money values and banking >systems relatively stable but such a basis acts as a restraint on the politically powerful, the foolish, the greedy and the corrupt

and so its been abandoned.

Ask yourself WHY the “Gold Standard” was adopted:   It’s because there is a finite supply of Gold AND because its economically-viable production could be controlled by a relatively small number of Rich Old Men.   (It can be distilled from seawater, after all – but there are relatively few Gold mines where it can be dug from the ground).

The REAL Golden Rule:   ”He who has the Gold, makes the Rules.”

Now ask yourself why the US (and thus the world) went off the Gold Standard:   It’s because it was no longer necessary.

Alan Greenspan disagrees with you. His short essay, Gold and Economic
Freedom (http://www.321gold.com/fed/greenspan/1966.html) is definitely
worth reading.

“In the absence of the gold standard, there is no way to protect
savings from confiscation through inflation. There is no safe store of
value. If there were, the government would have to make its holding
illegal, as was done in the case of gold. If everyone decided, for
example, to convert all his bank deposits to silver or copper or any
other good, and thereafter declined to accept checks as payment for
goods, bank deposits would lose their purchasing power and
government-created bank credit would be worthless as a claim on goods.
The financial policy of the welfare state requires that there be no
way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against
gold. Deficit spending is simply a scheme for the confiscation of
wealth. Gold stands in the way of this insidious process. It stands as
a protector of property rights. If one grasps this, one has no
difficulty in understanding the statists’ antagonism toward the gold
standard.”

Time to get rid of the Fed and back to basics.

There is certainly enough gold to back the money supply worldwide

though the price of gold would sky-rocket.

From the founding of the Republic until the Nineteen Thirties, financial panics and collapses were regular events, happening about every twenty to thirty years. Is that really what we want to go back to?

There were bank runs and recessions but no economic collapses. No
depressions like in the 1930. It seems for real collapses (as
occurred in 17th century France – the Mississippi Bubble and England-
the South Seas Bubble) you need the leverage of a central bank and the
displacement of specie (gold and silver) from circulation by paper.

“Paper money eventually returns to its intrinsic value: zero.” — Voltaire

Steve