Which leads us inexorably to two final questions. Got bonds ? You may come to wish you hadn’t. Got gold ?
“[Roosevelt] began buying gold both from gold mining companies in America and from foreigners. He had come to believe that if he purchased large quantities of gold, and raised its price, then farm prices would rise as well. Roosevelt believed this theory because two Cornell University professors, George Warren and Frank Pearson, proclaimed it to be true in their recent book, Prices.
“Warren and Pearson argued that a historical relationship existed between the price of gold and the price of farm commodities – they rose and fell together. The professors even displayed charts and graphs to promote their idea. Roosevelt became fascinated with Warren, consulted with him regularly, and gave him an office in the Department of Commerce. Most other economists emphatically rejected Warren’s theory – Keynes called it “puerile” – but Roosevelt embraced it and had the government, through the Treasury Department and the Reconstruction Finance Corporation, bidding for gold on world markets at ever-increasing prices. In fact, Roosevelt and Henry Morgenthau, then his future secretary of the treasury, set the price of gold each morning while Roosevelt had breakfast in bed.
“On November 3, for example, Morgenthau suggested to Roosevelt a 19 to 22 cent rise in price and Roosevelt responded that he wanted 21 cents. Why ? “It is a lucky number, Roosevelt said laughing, “because it’s three times seven.” Morgenthau later wrote in his diary, “If anybody ever knew how we really set the gold price through a combination of lucky numbers, etc., I think they would be frightened.”
– From New Deal or Raw Deal: How FDR’s Economic Legacy Has Damaged America by Burton W. Folsom.
Markets are born free, but are everywhere in chains. This sad state of affairs likely owes much to widespread misunderstanding about America’s seminal economic experience, the 1930s Great Depression. This correspondent recalls being taught, at school, that after the Crash of 1929, the US economy tanked, but a brave and resolute President (FDR) was parachuted in, and his extensive intervention in economic matters would prove to be America’s salvation. (This is why we shouldn’t allow PE teachers to teach history.) The Great Crash and post-Crash experience is doubly useful, in that it can be regarded as a full dress rehearsal for the Global Financial Crisis of 2008. As the US banking system teetered on the brink in September 2008, the US government and its monetary authorities faced a binary choice: attempt to allow the banks to fail in an “orderly” manner, or bail them out with unlimited cheques, courtesy of the taxpayer. We know how the decision went down, but a choice of outcomes was at least theoretically available.
In 1933, Hoover, and then FDR, had a choice, too. Murray Rothbard, in America’s Great Depression – which can be downloaded here – takes up the story:
..here, in the crisis of 1933, the banks could no longer continue as they were. Something had to be done. Essentially, there were two possible routes. One was the course taken by Roosevelt; the destruction of the property rights of bank depositors, the confiscation of gold, the taking away of the people’s monetary rights, and the placing of the Federal Government in control of a vast, managed, engine of inflation. The other route would have been to seize the opportunity to awaken the American people to the true nature of their banking system, and thereby return, at one swoop, to a truly hard and sound money.
The laissez-faire method would have permitted the banks of the nation to close—as they probably would have done without governmental intervention. The bankrupt banks could then have been transferred to the ownership of their depositors, who would have taken charge of the invested, frozen assets of the banks. There would have been a vast, but rapid, deflation, with the money supply falling to virtually 100 percent of the nation’s gold stock. The depositors would have been “forced savers” in the existing bank assets (loans and investments). This cleansing surgical operation would have ended, once and for all, the inherently bankrupt fractional reserve system, would have henceforth grounded loans and investments on people’s voluntary savings rather than artificially extended credit, and would have brought the country to a truly sound and hard monetary base. The threat of inflation and depression would have been permanently ended, and the stage fully set for recovery from the existing crisis. But such a policy would have been dismissed as “impractical” and radical, at the very juncture when the nation set itself firmly down the “practical” and radical road to inflation, socialism, and perpetuation of the depression for almost a decade.
In other words, under genuinely bold leadership, the US banking system and economy would have suffered a sharp deflationary reset, and then recovered. But that is not what happened. And it is not what happened in 2008 either.
The outcome is that economies globally have stagnated. Opportunities have evaporated. Bond and credit markets have experienced the most incredible price manipulation in history. As Russell Napier has pointed out at some length over recent weeks, the euro zone banking and financial system is now paying a heavy price for this intervention. Rothbard, again:
Mr. Hoover met the challenge of the Great Depression by acting quickly and decisively, indeed almost continuously throughout his term of office, putting into effect “the greatest program of offense and defense” against depression ever attempted in America. Bravely he used every modern economic “tool,” every device of progressive and “enlightened” economics, every facet of government planning, to combat the depression. For the first time, laissez-faire was boldly thrown overboard and every governmental weapon thrown into the breach. America had awakened, and was now ready to use the State to the hilt, unhampered by the supposed shibboleths of laissez-faire. President Hoover was a bold and audacious leader in this awakening. By every “progressive” tenet of our day, he should have ended his term a conquering hero; instead he left America in utter and complete ruin—a ruin unprecedented in length and intensity.
What was the trouble? Economic theory demonstrates that only governmental inflation can generate a boom-and-bust cycle, and that the depression will be prolonged and aggravated by inflationist and other interventionary measures. In contrast to the myth of laissez-faire, we have shown [here] how government inter-vention generated the unsound boom of the 1920s, and how Hoover’s new departure aggravated the Great Depression by massive measures of interference. The guilt for the Great Depression must, at long last, be lifted from the shoulders of the free-market economy, and placed where it properly belongs: at the doors of politicians, bureaucrats, and the mass of “enlightened” economists. And in any other depression, past or future, the story will be the same.
The difference between conjuring up the gold price over breakfast, and determining just how negative the bond yields of ultimately insolvent governments “should” be, is only a matter of degree. Actions have consequences, and highly interventionist actions tend to have the gravest consequences. What Rothbard described as a “vast managed engine of inflation” has been activated, and the genie will not go quietly back into his bottle.
Which leads us inexorably to two final questions.
Got bonds ? You may come to wish you hadn’t.
Got gold ?
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