Recall we previously discussed the restrictions on new money creation eased by the FDR administration with the Federal Reserve turning all of it’s gold over to the Treasury. I will share the chart of monetary expansion from that discussion. This is an important reference because one should note that monetary expansion began to increase in velocity particularly after the creation of the Federal reserve in 1913 and into WWI.
But for today, we will be focusing on the 1920s rather than the 1910s. We should look to US Secretary of Treasury Andrew Mellon (1921-1932). The booming economy of the roaring twenties was a result of Mellon’s push to lower federal reserve interest rates in 1921 and 1924. The availability of cheap credit and cheap capital, encouraged what it always does, rampant speculation.
In 1928, responding to the fear of a dangerous bubble in the stock market, the Federal Reserve began to raise interest rates (this cycle of boom and bust should be familiar to you). In 1929 the Fed raised the interest rates to 6%, and yet still, failed to stop rampant speculative activity in the markets.
Less than three months after this rate hike, came Black Tuesday. Historically, the worst financial crash in the history of the United States. Mellon was a strange man. On one hand, he publicly proclaimed his disdain for economic intervention, and yet by 1930 he was already again calling for interest rate cuts (2% by mid 1930).
Here you have a man who seemingly believed in free markets, he had the following to say on the liquidation of mal-investment (as well remember the quote from Robbins).
“liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. … enterprising people will pick up the wrecks from less competent people.”
And yet, he failed to understand the dramatic implications of artificial manipulation on discount rates and expansion/contraction of the money supply. However, the liquidation he embraced, became so painful for the greater economy that Hoover and his administration were swept from office by the promise of change from the radical FDR. The rest is history.
This story should give us pause. In the future, probably after I finish covering the New Deal series, we will cover each of the financial panics in the US, prior to the Great Depression. You will find they ended much differently when bureaucrats wielded far less power to affect financial markets.
Book of the Month:The Ethics of Money Production by Jorg Guido Huulsman
-“Nicholas Oresme postulated that the princes did not have the right to alter the coins at all, unless they had the consent of the entire community”
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