Rothbard on Hoover:
Here this thread had a big talk about this subject a year ago - I guess you missed it - the other guy is quoting a book by milton friedman - but chromatic dispersion sources rothbard for a lot of his views - I guess it comes down to whose books and whose interpretation of History you wish to follow. I will put in BOLD the relevant part - but I thought the whole section would be educational.
bankdersysrisk.blogspot.com
In 1919 Hoover’s European food relief program transported surplus US food to Europe and increased food prices
After the depression of 1921 Meyer who had left the WFC in 1920 started to lobby for the restoration of the WFC in order to subsidize agricultural exports. Meyer returned in 1921 with a directive to lend $1 billion to farmers’ cooperatives, exporters, and foreign importers. By 1923 WFC had loaned out $172 million to farm co-ops and $182 to rural banks. This money was used to increase food prices. In 1927 Meyer left the WFC and was now in charge of the Federal Farm Loan Board (FFLB), an institution he helped form.
In 1929 the Federal Farm Board (FFB) was given $500 million for the purpose of making loans and to establish stabilization corporations to control farm surpluses and increase farm prices. The first act was to increase wheat prices by giving loans to the coops to withhold wheat from the market, however prices continued to decline.
After the crash the FFB was able to hold wheat prices up for a time, but in response the farmer grew more wheat in order to get a bigger subsidy by growing wheat that would be held off the market. In the 1930’s saw the fall in wheat prices further as wheat in supply was increasing at a rapid rate. The surpluses continued to grow and prices continued to fall. Other countries began to increase production of wheat and this further drove prices down. Finally the FFB dumped its surplus wheat on the world and prices collapsed.
This story is basically the same for most of agricultural products in the Depression.
In 1931 Hoover tried to reform the old WFC in order to bail out distressed businesses, this became the Reconstruction Finance Corporation (RFC) and was formed in 1932 with Meyer as its head. RFC started with $500 million in capital and could issue $1.5 billion in securities.
So the farming and WFC philosophies were the basic financial structures used during the depression.
Back to the Answer
An interesting note is that if you were able to kept employed, due to Hoover’s directive to keep wages high, the working population actually gained in buying power as general goods and services only fell about 10%.
The banking system. I totally agree in a depression that banks tighten lending as banking defaults occurs, however, the game has changed since the 1930’s. The US, and the rest of the world for the most part has had a policy of bailing out troubles and distressed banks most of the time, and for the US this means every single time since the 1930’s.
The effect of the banks receiving this bail out money and not lending does in fact lead to an increase in the percentage of reserves. No question about this as this is well documented. The story does not end there however.
As I stated before in all countries that go through hyperinflation the banks die as the loans they made are either not paid, then bailed out, then the money coming in through existing good loans is so deflated in purchasing power that the bank cannot even pay the electric bill with the money and the banks go bankrupt again. So as inflation continues the banking reserves collected are depleted, lost to inflation.
This of course just one step on the road to hyperinflation. Banks must continue to lend or they will die through inflation. If they refuse, unlike the depression, the government can now dictate that they lend.
Now the next situation is borrowers. I would expect lending to fall initially, and then increase as home prices versus income become attractive. Businesses are really in a jam as they constantly need to borrow in order to survive. Not many large businesses can survive long without the ability to borrow. Not only that but many businesses will fail if they can not pay employees or buy materials with debt. This kind of debt is used to push money owed in the future to the present to accomplish goals. I do not mean debt used for sole purpose of expansion.
How about the US in the Depression?
Hoover did try and did hyperinflate the currency by having the Federal Reserve create $1.1 billion US dollars through monetizing the debt and borrowing, then pushed this money into the banks. Hoover, frustrated that banks were taking this money and using it to increase reserve instead of lending the money out stopped creating money in this way
I believe in 1934 the banks started creating money through lending in the US again at a great enough level in order to grow the money supply.
Here is the kicker, a government never has to use commercial banks to loan money or even loan money at all to expand the money supply. All they must do is create money. This certainly leads to hyperinflation. This money is then used on various social programs and such.
Why didn’t the US go into hyperinflation during and after the depression. The US government never embraced creating money to print its way out of the depression after Hoover gave it up. The banks started loans out money again and the money supply increased again through fractional reserve banking. The US was also in much better shape than the rest of the world as the US entered WW1 much later than Europe, this gave the US a stronger starting point than the European countries devastated by WW1. The European powers all went through massive inflation. The US at this time was still the biggest creditor nation at the start of the Depression.
Therefore an increase in bank reserves does not in any way prevent inflation. The US did certainly inflate the money supply after the 1934.
It would be more accurate to say that in the Depression that America experienced some mild deflation as the banking system started to disintegrate from lack of faith in it, then started to re-inflate as the banking system recovered. |
