Deflation and Depressions: What Are The Connections? (Republicae)

I was under the assumption that everyone reading the thread would have at least a medial understanding of the term “Great Depression” however, I have been mistaken in the past concerning the depth of understanding that people actually possess. However, since most people appear to associate the term “Great Depression” with deflation then there is indeed a basis for the thread. In terms that should make the differentiation clear I will state that, at least in modern terms, a recession is usually associated with the unsustainable boom created through forces external to the actual market. The artificial and thus unwarranted economic expansion always distorts the market, creating an atmosphere of disinformation on which to make adequate economic and financial decisions. The differences between recession and depression is, for the most part, now little more than semantics, prior to the period known as The Great Depression no such distinctions really existed.

The proclivity of central banks to encourage such booms through credit and monetary expansion always distorts the very important interactions within economic markets. This, in turn, brings about certain imbalances in those vital market forces, which would normally function within a type of market equilibrium; i.e. the demand for products and services verses the proper supply of those products and services. The ability of those operating in the market can no longer rely upon fundamentally sound decision-making information within the market because artificial distortions are manufactured by monetary policies and political expediencies. As such, after an artificially induced boom, the system remains in a state of imbalance and is, as we have seen, not allowed to “right itself”.

Normally, under such circumstances, that is an artificial boom, the actual monetary value of the mal-investments outweigh the actual income and assets that normally form the foundation of a healthy economy, thus the imbalances continue to be extended throughout the market.

Concerning definitions, well as we know the definitions are varied and have been morphed over the years to present a more palatable political doctrine. Economic dislocations commonly associated with cycles of expansion and subsequent contractions have a very distinctive source and that is the un-natural interventions into the free market, whether that intervention is via government actions or banking and monetary manipulations.

A “depression” is, in fact, nothing more than the market adjustments seeking to regain market equilibrium, thus the market seeks to filter out excesses, mal-investments and correct the various distortions created by the artificially manufactured boom. I believe it was Rothbard that said: “The best cure for a depression is the depression itself.” That is true, but depressions are difficult and politically unpalatable.

Now, it is relatively easy to determine where deflation fits in, since, as we have seen, deflation is a relatively measurable force within the economy, just as is inflation. Both are monetary events that translates and is reflected in pricing. In terms of what is called “The Great Depression”, well there is a very definite period of time where deflationary pressures both began and ended during that period. There was a rather abrupt end to the deflationary pressures within the economy when FDR debased the currency through increasing the official price of gold. That inflationary pressure presented itself in the economy almost immediately and reversed the deflationary push that prevailed between 1930 and 1934, of course, FDR’s solution was no solution at all, but merely a politically expediently maneuver that not only allowed the government to expand its scope of power, but also created a path for the government to continually intervene within the markets and in the lives of the American People.

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"In the creation of the federal government, the states exercised the highest act of sovereignty, and they may, if they please, repeat the proof of their sovereignty, by its annihilation."

Well Larry, let us just see if my “thesis” is without foundation and if my representation of The Great Depression is contrary to actual events. I think this will be partially sufficient to support the opinion that your knowledge of the subject is as defective as your attempt at analysis.

Based on the evidence, let me first address your blatantly incorrect statement: “The common denominator of deep depressions is that they have all been the result of a contraction in the money supply.”

If that statement is correct then how do you explain the fact that during The Great Depression that there were countries, approximately half, that experienced economic depression without deflation? If indeed you are correct then deflation or a contraction of the money supply should be consistent throughout each country experiencing The Great Depression, but that is not the case! After all, if the contraction of the money supply is the common denominator, then is should present across the board, not only during The Great Depression but also in other depressions over the last two centuries, or even the last 2000 or more years. The fact is that monetary contraction is not the prevalent indicator in such depressions or recessions. Again, if your statement is correct then how do you explain inflationary depressions, and there are plenty of examples of those around the world?

Now, in a much broader context of understanding, it is important to present evidence of economic depressions outside the period of The Great Depression. As I stated, there are examples of 65 countries, which experienced deflation without any hint of depression, and there are examples of 21 countries that experienced economic depressions without any hint of deflation. How do you explain that if, based on your opinion, all deep depressions have a common denominator of monetary contraction or deflation?

In fact, Larry, if you actually look, you will find that nearly 90% of all deflationary periods were absent of economic depressions. It should also be noted that of that 90%, most of the historical deflationary pressures within those economies were under the stabilizing effects of gold standards of one degree or another. So, gold had a moderating effect on the economies since, in the majority of cases there was no economic depression, which occurred while those countries, experienced deflationary periods in their history.

“I explained in my post below that our debt based money system will inherently contract as principal payments are extinguished daily. That money ceases to exist as the borrowers liability decreases along with the asset to the bank.
If new loans are not taken out at a pace at least equal to the elimination of old debt, the money supply will contract at roughly the same rate.
This is what caused the last "great" depression and it will happen again unless monetary reform takes place.”

Strange, but Larry didn’t you say before, in one of your posts on a different thread, that it was gold or the lack of it that caused The Great Depression, now you have changed your story to say that it is loans or the lack there of, that caused it. I’m sorry which is it Larry?

Let’s just see what happened during the years prior to The Crash of 1929, shall we?

Between 1921 and 1929 there was a massive inflationary boom. During the 1920s there was, to say the least, a policy of monetary inflation, which, as all booms do, shot prices upward and increased productivity. Now, there was, at least for a while, a balancing act between the effects of monetary inflation and increased production; the increased production counteracted the inflationary pressures by lowering cost and decreasing prices. As with all interventionist economies however, the effects of various government monetary policies, particularly in this country, affected the overall economic and financial functions within the economy. Thus, if a little inflation works, then more inflation should, at least in the minds of many in government and central banking, work even better. Soon the benefits of increased production were counteracted by the inflationary policies of the government as it continued to expand and thus extend the boom cycle by increasing paper fiat currency beyond stable reserves.

Since money is considered the generally accepted medium of exchange it is very important that we have an understanding of just how people must retain confidence in the ability of their money to serve as an actual medium of exchange in an economy. Enter the principles behind Demand Deposits, they can only operate when the depositor has faith that he can redeem such deposits on demand, when there is confidence, both in the currency and the banks, there is no problem however, when confidence is lost, either in the currency or the banks, then there is a major problem.

Facilitating the problem was an increase of the fiat money supply by almost 62 percent during the period between 1921 through 1928 until the first half year of 1929 when, confidence began to come into doubt, bank deposits declined rapidly, but the money supply remained relatively constant during those first few months of 1929. The interesting fact behind this monetary expansion was that it was almost completely made up of “money-substitutes”.

Thus, inflation, especially during the period between 1921 and 1929, is technically not just an increase of the total money supply, but it was, during that period, an increase in the money supply not covered by the gold or convertible into the gold reserves of this country. In the eyes of the People of this country however, since Federal Reserve Notes, and the credit created based on those notes represented a claim on real money [i.e. gold], there was a major problem on the horizon, claims without the ability to meet such claims. By 1929 there were approximately $69 Billion Dollars in completely uncovered claims in this country either in fiat Federal Reserve Notes, which, by the way, was not nearly as much as was the claims of fiat credit creation in the form of bank deposits and the resulting monetary credit base of commercial banks.

Now, this didn’t just start in 1921, it started in this country earlier as the Federal Reserve, contrary to the stipulations of the Federal Reserve Act ventured into fiat monetary creation, which Congress finally “legalized” in 1922 because of the political favoritism of such easy monetary policies.

It should be of interest to note that prior to the passage of The Federal Reserve Act that national banks could not legally pay interest on time deposits, but after the passage of that Act, there was an immense expansion of such deposits, in fact between 1921 and 1929 there was almo0st an 80% increase in such deposits, is there any wonder?

Prior to that time only State banks and savings banks could pay interest on such accounts; the policies of The Federal Reserve helped influence Congress to allow for such interest payments on those accounts and it was a boom for commercial banks as well as highly “connected” people. Additionally, The Federal Reserve Act allowed for a reduction in the reserve requirements of member banks from 5% to 3% by 1917; the combination of fractional reserve banking and fiat money/credit rapidly became a contributing factor in the events leading up to The Crash of 1929 and the subsequent Depression.

So, it can be logically deducted that there were two basic effects that brought a rapid and dangerous expansion of the total money supply in this country during the 20s. One was the reduction of reserve requirements via The Federal Reserve Act, and, in conjunction was a change in the total bank reserves of the Federal Reserve Bank and its member banks.

Now, I will address this point that you made, completely incorrect, I might add:

“You talk about "fiat" currency as if it is the core problem. Then you suggest that a gold backed money system has reduced the impact and duration of depressions. You fail to differentiate between the various types of fiat and gold money.”

I do talk as though fiat currency is the core problem, because it is since all of it is a Debt Standard Monetary System. Yes, a gold backed monetary system not only reduces the impact, as is evidenced by numerous examples throughout the history of the last few hundred years, additionally, the duration of such economic dislocations are eased relative to either the addition or absence of government interventions, not only the presence of gold money.

But when considering the period of the 1920s, leading up to the Crash of 29 and subsequent Great Depression there were several factors during that period which effected the increase and decrease of overall bank reserves, some controllable and others beyond control. One of the uncontrollable factors was the monetary gold stock. During the 20s, a person could deposit his gold in a bank; usually at that time it was some sort of commercial bank, which in turn, would deposit the gold holdings in The Federal Reserve Bank. These gold deposits would then be added to the bank reserves.

During the period there were in and outflows of gold on the domestic front however, the primary drain on gold reserves were through foreign transactions, much of which were brought about by various government interventionist policies that affected the gold reserves. It is also very important to understand that the monetary gold stock was not considered a part of The Federal Reserve Asset Purchases since at that time it was rare for The FED to actually purchase gold, instead gold was deposited in The FED and became a part of its reserve.

Additionally, to add to the complexity of this subject we must understand the roll that Acceptance Paper played in the period preceding the Crash of 29 and subsequent depression. During this period The Federal Reserve basically created a subsidy by buying “Bills Bought” and also a variety of U.S. Government Issued Securities through what came to be known as its “Open-Market”. This moves us to the subject of Discounted Bills, or Coupons, which were, and are, loaned to member banks at a fixed rate and although they do increase the reserves of member banks they must be repaid to The FED. Normally Discounted Bills are used to “assist” member banks, which fall into distress, such bills are inflationary to say the least since, as recently, The FED becomes the “lender of last resort”.

Again, in deference to your understanding, there are other factors that were involved and several contributing factors to The Great Depression, not just one or two and certainly not those, which you have indicated as primary factors. Such as outstanding Treasury Currencies, which are deposited at The FED and is usually spent on various government expenditures. Thus the government loves, absolutely loves The Fed and Fiat money since it is, at least for government, the goose that laid the fiat egg.

Needless to say, during the period between 1921 and 1929, the overall level of reserves increased, now I am not speaking about gold reserves, but fractional reserves under a massively expanding fiat regime policy. In member banks alone, fiat reserves were expanded from approximately $1604 Million in 1921 to over $2356 Million by 1929, that is a substantial increase in fiat money/credit of various types. There were controllable and uncontrollable factors in the banking sector, but it is clear from the evidence, both in the Congressional Record and The FED’s own records that there was a very deliberate fiat inflationary policy embarked upon by The FED during that period. Thus, it can be easily surmised by the evidence that gold was never a problem and particularly not the major problem that some, including yourself, have presumed. I say presumed because not only does the evidence not support such a presumption, but also it is a theory that is heavily promoted by the very ones we consider to be an enemy of the People, that is The FED.

So, let’s take a deeper look shall we Larry, step by step, period by period to see just what were the contributing factors that lead to The Great Depression in this country:

By July of 1922 the banks were paying off their Discounted Bill loans to the FED, but instead of remaining policy neutral, the government attempted to counteract the effects of such repayment by pumping massive amounts of “new money” into reserves to the tune of almost a half a billion dollars within a very short period of time. By December of that year all declines in bank reserves were completely offset by government intervention via The FED.

A rather strange thing happen by the middle of 1924, reserves begin to fall while bank deposits remained at a relative level constant. The only difference was the fact that total deposits and indeed the total money supply continued to increase, this caused what could be considered a signal that something was wrong, between the first part of the Spring of 1923 to mid-Summer of 1924 there was a rather mild recession that took place. Thus, in typical fashion, the government decided to step in to make sure the balloon did not burst. The FED shifted their purchases of government securities into high gear, which added up to approximately $42.4 Million per month. The FED deliberately increased it purchase of those securities with the inflationary intent.

By November of 1925, the government, via The FED began to increase its controlled reserves with both Discounted Bills and Bills Bought. By July of 1927, The FED began to create more fiat inflation by its actions and then by December of that year it once again kicked into high inflationary gear increasing reserves again by $42 Billion a month. It appears that by the middle of 1928 those within The FED decided that it was time to put the brakes on in an attempt to control what they saw coming, a complete bursting of the artificially created boom they brought into existence, it did so by several moves that proved only slightly deflationary in fiat monetary and credit terms.

While not sufficient to offset an increase in Time Deposits and other monetary expansions, it was nevertheless, the first indication that something was very wrong in the economy. Something unknown happened however, by the end of 1928, FED governors decided to once again inflate but it was too late to stop the train that had already left the station. The damage to the economy had been done, the fiat inflationary boom, as they all do, end in a burst of that artificially induced balloon economy. Instead of allowing the markets to filter out the massive mal-investments and distortions the fiat inflation had caused, the government intervened more into the markets, in a fashion very similar to what it is doing today. The results of such drastic interventions will also be very similar.

It appears that this government and its Federal Reserve Partnership in Crime have never learned the lessons of the Boom and Burst Cycles they create, over and over again.

To address other issues that you have raised, incorrectly I might add, based again, on the work of David Hume, the idea that there is not enough gold to function as a monetary unit that would enable every country in the world to not only have a gold monetary system, but to prosper in ways that are simply not possible under a fiat monetary system where each monetary unit is drastically depreciated over time. When seeking to understand the utility of money, gold money that is, there can never be too much or too little since, in an actual Free Market, the market itself becomes self-regulatory. Again, it is not the quantity of money that is important, but the quality of that money as it functions in the market. Fungibility Larry, Fungibility. That is evident since both supply and demand of all goods and services are balanced by correlating pricing under the utility of sound money.

Thus, it was never the gold reserves of this country or any other country that was the problem, it was the fact that there was a government willing and, as with ours, able to use a central banking system to induce a politically popular balloon economy beyond sustainability. The idea that there is never enough gold is a fallacy, one promoted by governments and especially central planners in order to grasp the reigns of total economic and political power from the People. Governments hate the idea of independent money, money which is real property, property of the People beyond government's control or access.

Perhaps the most attractive attribute of gold money is that it is not only very difficult for governments to place a specific value on each monetary unit, but it is also very difficult for the government actually have much control over gold money at all, that’s why governments throughout history have despised gold as money. Gold money, unlike any fiat currency, is the actual property, real property of the holder of that money. Another factor about gold that few consider is that the production of gold is still relatively in a free state and its production is a response to the Free Market ideal of profit. If the production of gold increases substantially or decreases substantially then, in a Free Market at least, the purchasing power of each monetary unit is balanced by either an increase or decrease. Gold Money has the great advantage, especially for those of us who love Liberty that the value of gold is independent of all political actions in a truly Constitutional Republic and the Free Market it promotes.

Perhaps the primary reason that governments, not only ours, but all governments favor fiat currencies is the fact that, by its intervention it can not only manipulate the currency, but do so to the detriment of the People while granting almost untold benefits on those who are politically connected and influential.

The point of gold is that it provides the People with a degree of protection that, when combined with the Principles found within the Constitution, allows for a far greater degree of prosperity and freedom!

I will continue to give answer to your rather pointless points at a later time.

Cheers,
Republicae

http://www.1776solution.blogspot.com

“There is danger from all men. The only maxim of a free government ought to be to trust no man living with power to endanger the public liberty.”-Adams

I am continually amazed that you can completely and absolutely avoid the subject matter of the posts that are written on this forum and go off on such tangents as you do!

I will address your current tangent later tonight, but to give you a hint....there is no difference between DEBT in a fiat monetary system and MONEY, because all MONEY IS DEBT AND ALL DEBT IS MONEY. How do you distinguish DEBT in a Fiat Money System where each and every Federal Reserve Note (physical or digital) is a legal notification of Debt Obligation, from the Money itself? What is the difference between DEBT and MONEY in such a system since all MONEY IS DEBT IN A DEBT BASED SYSTEM. You cannot repay a debt liability with a debt liability, all that is ever done is debt swaps. In other words, it is completely impossible to pay off DEBT in a system where MONEY IS DEBT.

http://www.1776solution.blogspot.com

“There is danger from all men. The only maxim of a free government ought to be to trust no man living with power to endanger the public liberty.”-Adams

all I can say is BULLCRAP... You don't have a clue what is going on..

A prudent man foresees the difficulties ahead and prepares for them; the simpleton goes blindly on and suffers the consequences. Proverbs 22:3
Matthew 10:34 Think not that I am come to
send peace on earth: I came not to send peace,
but a sword.