Tag Archive for Great Depression

A Brief Monetary History Of The United States: Part VI

Today we bring you Part VI of “A Brief Monetary History of the United States” from the Ron Paul Monetary Policy Anthology. The full series can be found at the following links:

  • Part I – Colonial Money and the Coinage Act of 1792
  • Part II – The Banks of the United States, McCulloch v. Maryland, and Private Coinage
  • Part III – Government Begins to Monopolize Currency
  • Part IV – The Legal Tender Cases and the “Crime of ’73”
  • Part V – The Rise of the Fed
  • Part VI – The Great Depression, Gold Confiscation, and the Gold Exchange Standard
  • Part VII – The Dollar Reigns Supreme: From Bretton Woods to Stagflation
  • Part VIII – The 1980s to the Great Recession and on to the Future
  • The Great Depression

    Soup Line During the Great Depression

    Soup Line During the Great Depression

    The Federal Reserve’s monetary inflation throughout the mid- to late-1920s resulted, not surprisingly, in the Great Depression. As with any credit-induced economic boom, the newly created credit caused a distortion in the allocation of resources. Instead of economic growth resulting from increased real savings and investment, the boom of the 1920s was caused by an artificial increase of credit in the banking system by the Federal Reserve.

    Whereas savings-induced growth aligns consumers’ present and future preferences, credit-induced growth does not. An artificial increase in credit allows banks to make more loans to businesses, and these increased loans signal to businesses that consumers are saving more in the present in order to consume more in the future. Businesses begin to undertake longer-term, more capital-intensive projects which, once they are finished, they find to be unsustainable because consumers either do not actually want them or cannot afford them because they have not saved enough money to purchase the goods. These resources have been malinvested, or invested badly, into sectors of the economy that do not actually serve the needs and wants of consumers. And it is not just one or two businesses which find themselves in such straits, but a whole slew of businesses, often across many different sectors of the economy.

    The way out of a crisis had traditionally been to allow these malinvested resources to liquidate. Bad debts had to be liquidated so that prices could fall in order for markets to clear. In doing so, resources that were malinvested would be shifted to be used productively in other sectors. This was what was done during the Depression of 1920-21, in which President Harding refused to allow any sort of intervention by the federal government to alleviate the crisis. As we have seen, that crisis, although quite sharp, came to a quick end as the economy rebounded and returned to normal.

    Today in History: Armistice Day

    Today is Armistice Day, the anniversary of the final day of World War I. While we remember the lives of the many men lost in battle, we should also not forget the many other negative and long-lasting effects of the war. In just a few short years, European culture changed dramatically. At Christmas of 1914, troops from both sides declared ceasefires and met in no-man’s land to play football, exchange presents, and sing Christmas carols. By 1918, all that had changed, as the belligerents shelled each other up until the very last minute before the armistice. In 1914 the belligerents saw each other as fellow human beings and hoped for a quick end to the conflict. By 1918 they viewed each other as mortal enemies and had no qualms about engaging in pointless killing just for the sake of killing. Those cultural shifts were to reverberate throughout Western society and impact all aspects of life. Not surprisingly, those changes impacted the monetary system and resulted in something the effects of which continue to impact people around the world today: the collapse of the international gold standard.