by Marvin Dumont
History books falsely teach students that Great Depression of the 1930s was caused by the stock market crash of 1929, as well as, failure of businesses. It’s a dangerous myth that doesn’t blame the real culprit: The Federal Reserve.
The Fed was created as “lender of last resort” for banks. It’s a private corporation whose shareholders are member banks — perhaps including foreign banks, although this is disputed. (However, foreign financiers were instrumental in establishing the Federal Reserve System in 1913. These included globally-influential interests from Europe such as Rothschild and Warburg families.)
The Fed is tasked to provide liquidity to America’s financial system. But from 1930 to 1933, it shockingly engaged in deflationary monetary policy that reduced the nation’s cash supply by nearly one-third, according to Nobel Prize-winning economist Milton Friedman).
As privately-owned central bank of United States, the Fed can change the quantity of dollars in circulation — which leads to (and magnifies the) economic boom and bust cycles of U.S. economy. This is god-like power that can be extremely dangerous if decision makers have conflicts of interest or act unethically. For example, if you are given central-bank powers you can crash the economy and buy hundreds of businesses at 90% discounts from pre-crash valuations, thereby making a fortune when the economy recovers.
When the national cash supply shrinks too rapidly (deflationary policy), you get a recession (or depression). Less dollars in circulation means Americans have less cash in their wallet to pay bills. People, farmers and businesses also can’t pay interest on loans, and thus many go bankrupt.
Imagine what would happen if 50% of all bitcoins were programmed (by a central authority) to disappear from all wallets. BTC holders globally would be under extreme financial distress — having seen their digital fortunes evaporate into thin air.
In the early 1930s, the Fed decreased dollars in circulation by one-third at a time when it needed to do the opposite, according to Milton Friedman. (One-third is an extreme reduction.)
Therefore, banks begged for loans. Members of congress urged the Fed to change policy. But decision makers, most of whom came from Wall Street, refused to loan capital that would have enabled weakening banks to pay the withdrawals of depositors.
[ Friedman explores this topic in 1980 PBS documentary “Free To Choose.” See video. ]
What should have been a mild recession could have ended by 1930–1931. Instead it exploded into an apocalyptic economic depression. Unemployed Americans grew from 1.6 million to 12.8 million in 4 years — 1 in 4 was out of work. People’s disposable incomes dropped 28%.
Consumer prices dropped in half. Company valuations plummeted, making businesses ripe for acquisitions and/or hostile takeovers.
The Fed is supposed to reduce systemic risk by injecting capital into the banking system (for example, by purchasing bonds) and keep the economy going. Instead, it withheld capital from desperate community and major banks. One-third of U.S. banks went bankrupt. And many were eventually purchased at firesale prices by large competitors, especially JPMorgan.
[ Was there conflict of interest at the Fed? The globally-influential Rothschild family out of Europe (which helped to create the Fed) is alleged to be a financier of American banker J.P. Morgan. ]
Had the Fed done its job, a mild recession would have lasted until 1931 at the latest, according to Friedman.
Fractional reserve lending — the practice of loaning out people’s deposits — increases the chance of system meltdown if there’s a “run on the banks.” Most of depositors’ cash are actually lent to borrowers (and not kept inside vaults), thus banks need to borrow cash from the Fed when there’s a high level of withdrawals.
Interestingly, fractional reserve lending was outlawed in biblical times in some parts of Middle East. Bankers would charge money to gold investors for storing their precious metal in secure vaults or buildings. Kings would often punish bankers with death if they secretly loaned out gold deposits since the practice seemed fraudulent. Additionally, it threatened people’s confidence in the repository system.
[ It is said that bank vaults are a marketing ploy designed to inspire the public’s (false) confidence in the banking system. With fractional reserve lending, there’s very little physical cash inside banks. ]
A “run on the banks” is what happened in 1929–1930. Americans lost confidence in the financial system and withdrew their deposits for safekeeping. They stood in line for hours.
The Federal Reserve’s job is to be a lender of last resort. But their intentional inaction (the deflationary policy was intentional) led to Americans panicking their life savings would vanish if or when a local bank would go bust. The Fed caused the Great Depression by standing pat as hundreds of community and major banks failed due to lack of cash.
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