The Great Depression Part 1 - The Roaring 20's

The Great Depression Part 1 – The Roaring 20’s

Let’s go back in time to the roaring 20’s where Wall Street was booming, Babe Ruth and the New York Yankees were the champs of baseball, movies and movie stars were the talk of the town, authors such as F.Scott Fitzgerald & Eugene O’Neill were coming on to the scene and the flappers were dancing the Charleston.

Good day to each of you reading this column on depression.

This topic was chosen for history repeats itself as we will soon feel the effects of the next catastrophe in the United States.

This is a very bold statement, so wait and examine the facts before you jump to any conclusions. The ramifications of this depression will send shock waves throughout the world.

Fellow Christian let me tell you a story about a catastrophe that affected the whole world and then draw your thoughts from there.

Let’s go back in time to the roaring 20’s where Wall Street was booming, Babe Ruth and the New York Yankees were the champs of baseball, movies and movie stars were the talk of the town, authors such as F.Scott Fitzgerald & Eugene O’Neill were coming on to the scene and the flappers were dancing the Charleston.

Ah, yes, we are having a gay ole time sneaking around in back rooms trying to avoid prohibition with illegal booze and back door business deals. You see, it was a time to celebrate for the 1st Great World War was over and the United States was an industrial machine.

President Woodrow Wilson had guided the American people through the 1st World War and finished his term to give way to Warren G. Harding who would only be in office for two years before dying from a heart attack.

The tares were being sown with the establishment of the Federal Reserve bank on December 23, 1913 by President Woodrow Wilson. President Wilson asked advice from Carter Glass & H. Parker Willis, the fathers of the Glass-Willis proposal which was passed as a decentralized central bank that balanced the competing interests of private banks and populist sentiment. Remember private banks.

Timing is everything for the establishment of the Federal Reserve Bank was passed while most congressional members were away on Christmas Holidays and the winds of war in Europe were swirling.

It is very interesting to note in the federalreserveeducation.org of the following events–November 16, 1914, the 12 cities were chosen and opened as regional reserved banks while Europe was three months into the first world war.

The Federal Reserve policy from 1914-1919 was that the United States added the flow of trade goods to Europe, helping finance until 1917, when the United States declared war on Germany and financed our war effort.

The war was over and L.Benjamin Strong, governor of the New York Fed from 1914 to 1928 was the instrumental force behind using gold as the central factor in controlling credit. Under his purchasing power, a large purchase of government securities were purchase as thus began the open market operations as a monetary policy tool.

With the rapid growth of the Federal Reserve Bank in the United States, Mr. Strong promoted relations with other central banks, especially the Bank of England.

Mr. Strong, who ran the Federal Reserve during his tenure, introduced “fatal conceit” of modern economics. “Fatal Conceit” is when economists, politicians, and central bankers think they can plan, direct and guide the economy through their great wisdom and application of their economic models. But as economist Friedrich Hayek explained, the central planners’ arrogance ignores the knowledge problem. No individuals or groups of individuals, no matter how many PhDs they have among them, possesses the knowledge necessary to foresee all of the consequences of a given policy. This was quoted from: https://schiffgold.com/guest-commentaries/the-story-of-benjamin-strong-how-fatal-conceit-wrecks-economies/.

When reading this article, please read in entirety for here is the introduction of “easy money” or low interest rates—Does this sound familiar?

It is so interesting to note the following from the above article: [i] William Jennings Bryan, President Wilson’s secretary of state, strongly cautioned Wilson against allowing American banks to loan money to belligerents on either side.  Bryant knew that once banker’s money was at stake in the outcome of the war, America would eventually be forced to enter the war to protect the bankers’ interests.  This is exactly what happened.

Again, timing is everything, for England owed a great deal of money to the United States from World War 1 and they were not able to pay their debts. The English pound was plummeting and something had to be done.

It is so interesting to note the correspondence between Bernard Strong and Secretary of Treasury, Andrew Mellon in May 1924 as Strong told Treasury Secretary Andrew Mellon he was pursuing a “readjustment” to benefit England. The “readjustment” required Strong to pursue a policy of inflation in the United States and thus keep Britain from having to raise interest rates. Here is Strong in his own words,

…the burden of this readjustment must fall more largely upon us than upon them (Great Britain). It will be difficult politically and socially for the British Government and the Bank of England to face a price liquidation in England… in face of the fact that their trade is poor and they have over a million unemployed people receiving government aid.” 

Murray N. Rothbard, America’s Great Depression (5th edition), Mises Institute, Auburn, AL 2000 p. 147

In secret, Strong and his counterpart, Montagu Norman of the Bank of England decided to make the dollar weaker in order to make the pound stronger. This plan went on for three years with fatal results to England, thus a meeting of the world’s central bank leaders was held in Long Island in July 1927 to have all central bank leaders implement the same policy of providing “easy money” to help Great Britain.

As for President Calvin Coolidge, where does he fit? President Coolidge took office in 1923 after a heart attack by then president, Warren G. Harding. President Coolidge was known as “Silent Cal” saying less and aligning with big business and big bankers such as Andrew Mellon, his Secretary of the Treasury.

President Coolidge succeeded in reducing income tax and estate tax but he added to the woes of the American farmer. As many other businesses were prospering, farmers were not and needed help in their endeavors. Twice, Congress passed the McNary-Haugen Bill asking for the federal government to purchase surplus crops and President Coolidge twice vetoed the bill.

Unknowingly to those coming up in the “roaring 20’s”, this was a good time to be an American for the GDP grew greatly, jobs were abundant and unemployment was under 4%, the total wealth had doubled from 1920 to 1929, and the stock market was booming from individual investing.

Let the good times roll and so they did for 9 years, but like cracks in a dam, the water began oozing out and the crack became bigger. Why? Companies became overextended and bankrupt, consumer debt increased greatly, various financial markets joined into stock market frenzy. Buyers did little or no research on companies they were buying and they bought shares on margin, not realizing if the stock fell, they would have to pay for the full amount of the stock. Ouch!

Many Americans were actually gambling with their future by playing the stock market because that the “quickest way to get rich” without doing any work. But did they check out the company, were they buying full shares and was the company’s earnings justifying the price of the stock or were the prices inflated?

1929 – was this when the house of cards would crumble? The roaring twenties were coming to an end and what an end for until that fateful month in October 1929 the stock market kept rising and rising and rising and “easy money” was just that, “easy”.