Less Economic and Financial Market Volatilty With the Fed than Without

[william the wie]

Toro, the Dutch central bank was established to achieve Dutch independence from Spain and a global empire, which it did. The Bank of England was established to conquer more than one quarter of the World's surface, which it did.

The idea that a central bank serves a purpose other than imperialism is revisionist history. I have no problem with economic warfare and the Fed is an important instrument of war to smooth out the shortages and bottlenecks but everyone who thinks it is an instrument of peaceful economics is simply ignorant of history.

 

[oldfart]

I own this book but haven't read it. I think I will soon.

The Depression was exceptional in its economic ferocity. As Liaquat Ahamed writes in his book "Lords of Finance": "During a three-year period, real GDP [gross domestic product] in the major economies fell by over 25 percent, a quarter of the adult male population was thrown out of work. . . . The economic turmoil created hardships in every corner of the globe, from the prairies of Canada to the teeming cities of Asia."

Anyone who wants to know why should read this engrossing book. Ahamed, a professional money manager, attributes the Depression to two central causes: the misguided restoration of the gold standard in the 1920s and the massive inter-governmental debts, including German reparations, resulting from World War I.

His story builds on the scholarship of economists Milton Friedman, Anna Schwartz, Charles Kindleberger, Barry Eichengreen and Peter Temin. But Ahamed excels in evoking the political and personal forces that led to disaster. His title refers to four men deeply implicated in the era's perverse policies: Montagu Norman, governor of the Bank of England; Benjamin Strong, head of the New York Federal Reserve Bank; Émile Moreau, head of the Banque de France; and Hjalmar Schacht, head of Germany's Reichsbank. Their determination to reinstate the gold standard -- seen as necessary for global prosperity -- brought ruin.

Under the gold standard, paper money was backed by gold reserves. If gold flowed into a country (normally from a trade surplus or a foreign loan), its money and credit supply were supposed to expand. If gold flowed out, money and credit were supposed to contract. During World War I, Europe's governments suspended the gold standard. They financed the war with paper money and loans from America. The appeal of restoring the gold standard was that it would instill confidence by making paper money trustworthy.

Unfortunately, the war damaged the system beyond repair. Britain, the key country, was left with only 7.5 percent of the world's gold reserves in 1925. Together, the United States and France held more than half the world's gold. The war had expanded U.S. reserves, and when France returned to gold, it did so with an undervalued exchange rate that boosted exports and gold reserves. Meanwhile, German reparations to Britain and France were massive, while those countries owed huge amounts to the United States. The global financial system was so debt-laden that it "cracked at the first pressure," writes Ahamed.

That came after a rise in American interest rates in 1928 forced other countries to follow (no one wanted to lose gold by having investors shift funds elsewhere) and ultimately led to the 1929 stock market crash. As economies weakened, debts went into default. Bank panics ensued. Credit and industrial production declined. Unemployment rose. Weakness fed on weakness.

washingtonpost.com

I've finished my copy. On top of being pretty sound history and economics, it's an excellent read. Especially good is the coverage of the role of Germany and Central Europe (it helps if you have read Keynes' "Economic Consequences of the Peace" or are at least familiar with it) and the discussions of Federal Reserve policy 1926--1933.

 

[SteadyMercury]

I've come to the conclusion the libertarian/gold bug/Austrian convergence is little more than a political cargo cult based around mental midgets and reactionaries like Ron Paul and Lew Rockwell.

This is about as good a summary as one could give.