Sunday, December 4, 2011

The Stock Market Crash of 1929


By Charles A. Morse
web posted April 24, 2000

We are accustomed to viewing the 1929 stock market crash and the depression that followed as an example of greedy capitalism run amuck. Nothing could be further from the truth. Understanding the crash and depression requires a study in money, circulation, credit, and other subjects that seem dry and dull at first glance. The insufferable shoptalk around the subject of economics causes us to tune out. Once the jargon, sophistries, and linguistic posturing are swept aside however, the subject becomes fascinating. To understand monetary issues is to understand the essence of private ownership and freedom. Manipulation by governments, usually working in tandem with central bankers, of our monetary supply is the primary cause of systemic poverty and social dislocation.

First some definitions. What is money? Money has three properties. It is a means of exchange, a measure of value, and an instrument of savings. As a means of exchange, we exchange a mutually agreeable abstract commodity, money, which has been anything from beads, seashells, tobacco or tally sticks to the internationally accepted standard of gold and silver. Money enables us to conduct commerce and trade without bartering our services. Primitive societies figured out the importance of money as an abstract means of exchange. Sound money, accepted by society as honest and standardized, is the basic building block of civilization.

As a measure of value, money places a specific value on products or services. The ultimate value is determined by what a recipient is willing to pay and the transaction is calculated in measured denominations. Denominations of money are how we measure the value of products and services.

As an instrument of savings, money allows us to save and store the results of an exchange of products and services. By accumulating the capital we produced or acquired, we are able to then use that capital to invest in other people’s products and services. This allows others, possibly, to expand their endeavor and accumulate more capital. The investor is paid in money or ownership depending on the "measure of value" he invested and the level of success of the venture. Accumulated savings or wealth, is the key to freedom and independence.

The underlying principal of our Constitutional Republic is a system of laws to protect that "means of exchange"as an abstract expression of property, to insure the maintenance of a stable "measure of value", and to preserve the ability to save that value in all forms. Our founding fathers understood this when they formally recognized the prerogative of the sovereign state to regulate the quantity and value of money. They expressed this in the constitution as follows:

ARTICLE I (sec.8, clause 3): The Congress shall have the power to coin Money, regulate the Value thereof, and of foreign coin, and fix the standard of Weights and Measures.

Congress set the value of gold and silver, and by doing so, established the "means of exchange", an immutable "measure of value" to that exchange, and a guaranteed "savings" of wealth that the citizen could count on. By regulating the value, Congress was able to influence the amount of money in circulation and their decisions, made publicly, were based on the level of production in the country, what we would call the "gross national product" and other indexes. Money would be an expression of tangible capital and creative endeavor rather than what money has mostly become which is an expression of debt.

Paper money was originally receipts for gold coin which was stored in warehouses in medieval Europe. These warehouses were the first banks and the receipts, redeemable in gold, were loaned at interest and used as a gold substitute. Until recently, our treasury and banks, including the Federal Reserve banks, stored gold and issued paper money redeemable in gold. Banks would loan a ratio of paper money greater than gold reserves, but were restrained by the quality of the loans and the ability of the borrower to pay back. The gold reserve in a free banking system, with Congress regulating the value, was a means of insuring conservative policy in terms of the issuance of paper money and a natural check on inflation.

Inflation is what happens if more paper money is spent into the economy than production of wealth. The result of inflation is a devaluing of the workingman’s dollar and a subsequent need to increase the price of goods and services to keep up. Deflation happens if not enough money is in circulation to keep up with production. The result is a contraction in business growth and unemployment.

Our monetary system was a based on the gold standard until the passage of the Federal Reserve Act of 1913. The pre-1913 system would experience occasional, short lived recessions as sometimes, private banks had trouble maintaining enough gold reserves to keep up with the demands of business and would come up short. This was remedied, in a free market context and with occasional government intervention, by increasing interest rates paid by banks for gold deposits which would attract the necessary gold deposits and allow the bank to resume making loans to meet the needs of business.

According to Federal Reserve Chairman Alan Greenspan, in an essay published 1966 in philosopher Ayn Rand’s book "Capitalism: The Unknown Ideal", the Fed was devised to "find a way of supplying increased revenues to the banks so they never need be short!" The logic was that "If banks can continue to loan money indefinitely, there need never be any slumps in business." This would detach the dollar, partially, from gold and allow the government unlimited accesses to credit loaned by this legalized banking monopoly. The money would be created by fiat.

Greenspan goes on to state that "Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government." The "taxing power" was enhanced with the ratification of the 16th amendment, the amendment that established the income tax. This was ratified, coincidentally, in 1913, the same year as the Federal Reserve act became law. The Fed would loan the government credit, ostensibly, to cover swings in the economy, and direct taxation would be used to pay back the deficit incurred to the Fed and to sop up excess money spent into the economy by these loans thus controlling inflation. Interesting scheme.

Congress had surrendered to the Fed, an essentially private cartel of bankers and investors, its constitutionally mandated power to regulate the value, and therefore the quantity of our currency. Money could now be created not on an objective measure of production and backed by gold, but on the arbitrary decision of the government working with the quasi public central bank and printing paper money based nothing more than an estimate of the future earning power of the taxpayer. In other words, they have the power to mortgage our future without our consent!

Greenspan outlines a policy of coordination between the Fed and the Bank of England in the 1920’s in which the Fed would pump "excessive paper reserves into American banks" for the purpose of bailing out Britains gold drain which was occurring as a result of the disastrous world war on Britain’s economy. Our money and economy was now being used as a political football rather than an objective "means of exchange" to reflect an American "storage" of value. Our elected representatives in Congress were out of the loop and generally still are concerning these machinations.

Greenspan points out that "The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom." This was followed, in 1929, by the Fed suddenly reversing course, raising interest rates drastically and virtually overnight, and thus contracting the money supply. The result was massive foreclosure on property purchased with hyper inflated dollars, widespread bank failures, and a worldwide financial collapse.

The result of the crash and depression was the bankruptcy of large segments of small and medium sized industry and personal holdings with a concentration of wealth in the hands of financial combines who were able to pick up the pieces after the smoke cleared. The government responded by borrowing more "credit" from the Fed for the purpose of laying the foundations, during the "New Deal" of the socialistic welfare state. To coin a phrase from 19th century French jurist Fredrick Bastiat, in his treatise "The Law", the government "[c]reated the poison and the antidote in the same laboratory."

Chuck Morse is a syndicated talk show host on the American Freedom Network and a contributing writer to Enter Stage Right and Etherzone.

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