Life and Times During the Great Depression
The economy of the United States was destroyed almost overnight.
More than 5,000 banks collapsed, and there were 12 million people out of work in America as factories, banks, and other shops closed.
Many reasons have been supplied by the different economic camps for the cause of the Great Depression, which we reviewed in the first part of this series.
Regardless of the causes, the combination of deflationary pressures and a collapsing economy created one of the most desperate and miserable eras of American history. The resulting aftermath was so bad, that almost every future Central Bank policy would be designed primarily to combat such deflation.
The Deflationary Spiral
After the stock crash, money and consumer confidence was hard to find. Instead of spending money on new things, people hoarded their cash.
Fewer dollars spent meant more drops in demand and prices, which led to defaults, bankruptcies, and layoffs.
As a result of this spiral, the prices for many food items in the U.S. fell by nearly 50% from their pre-WW1 levels.
The price of butter went from pre-crisis levels of $0.21 to $0.13 per pound in 1932. Wool had a drop from $0.24 to $0.10 per pound, and most other goods followed the same price trajectory.
Here’s how “real value” is affected in a deflationary environment:
Real value increases: cash is king and gains in real value.
Assets (stocks, real estate)
Real value decreases as prices fall.
Debtors owe more in real terms
Real interest rates (nominal rates minus inflation) can rise as inflation is negative, causing unwanted tightening.
From Bad to Worse
The Great Depression lasted from 1929 to 1939, which was unprecedented in length for modern history.
To this day, economists disagree on why the Depression lasted so long. Here’s some of their explanations:
The New Deal was not enough
Looking back on The Great Depression, John Maynard Keynes believed that monetary policy could only go so far.
The Central Bank could not ultimately push banks to lend, and therefore demand had to be created through fiscal policy. Keynes advocated massive deficit spending to offset markets’ failure to recover.
Keynesians such as Paul Krugman believe that Franklin D. Roosevelt’s economic policies through The New Deal were too cautious.
“You can’t push on a string.” – Keynes
The New Deal made things worse
Some economists believe the New Deal had a negative net effect on the recovery.
The National Recovery Administration (NRA) is a primary subject of this criticism. Established in 1933, the goal of the NRA was to lift wages. To do this, it got industry leaders to meet and establish minimum prices and wages for workers.
Cole and Ohanian claim that this essentially created cartels that destroyed economic competition. They calculate that this, along with the aftermath of these policies, accounted for 60% of the weak recovery.
Lastly, one other charge leveled at Roosevelt by his critics is that the sprawling policies from the New Deal ultimately created uncertainty for business leaders, leading to less investment. This lengthened the recovery.
“[The] abandonment of [Roosevelt’s] policies coincided with the strong economic recovery of the 1940s.” – Cole and Ohanian
The Federal Reserve didn’t do enough
Milton Friedman claimed that the Federal Reserve made the wrong policy decision, which extended the length of the Depression.
Between 1929 and 1933, the monetary supply dipped 27%, which decreased aggregate demand and then prices. The Fed’s failure was in not realizing what was happening and not taking corrective action.
“The contraction is…a tragic testimonial to the importance of monetary forces…[D]ifferent and feasible actions by the monetary authorities could have prevented the decline in the stock of money… [This] would have reduced the contraction’s severity and almost as certainly its duration.” – Milton Friedman (and co-author Anna Schwartz)
The Federal Reserve shouldn’t have done anything
Austrian economists believe that the Fed and government both made policy choices that slowed the recovery.
For starters, most agree with Friedman that the Fed’s policy choices at the start of the Depression led to deflation.
They also point to the premature tightening that occurred in 1936 and 1937 as a policy failure. During those two years, the Fed not only hiked interest rates, but it also doubled bank-reserve requirements. These policies coincided with Roosevelt’s tax hikes, and a recession occurred within the Depression from 1937 to 1938.
Critics of these policies say that this delayed the recovery by years.
“I agree with Milton Friedman that once the Crash had occurred, the Federal Reserve System pursued a silly deflationary policy. I am not only against inflation but I am also against deflation. So, once again, a badly programmed monetary policy prolonged the depression.” – Friedrich Hayek
Personal Stories from The Great Depression
“One evening when we went down to check on the bank, there were hundreds of people out front yelling and crying and fighting and beating on the locked doors and windows. They had fires built in the street to keep warm and there were people milling around all over the downtown.” – Vane Scott, Ohio
“A friend I worked with said in the Depression he rode the rails and stopped to eat vegetables out of a garden. The owner said he would shoot him if he didn’t stop. My friend said ‘go ahead,’ as he was that hungry. ” – James Randolph, Ohio
“When neighbors couldn’t get a loan from the bank, they’d come to Dad. He sold farm machinery. He never put his money in a bank. He stored it in a strongbox in the fruit cellar, under the apples. He’d loan the neighbors what they needed and they paid him back when they could. If there was a month—especially the winter months—when they couldn’t pay, they’d slaughter a cow or a pig and give him a portion. In the summer it was vegetables: corn, peas, whatever they had growing.” – Gladys Hoffman, New York
“I thought the Depression was going to go on forever. For six or seven years, it didn’t look as though things were getting better. The people in Washington DC said they were, but ask the man on the road? He was hungry and his clothes were ragged and he didn’t have a job. He didn’t think things were picking up.” – Arvel “Sunshine” Pearson, Arkansas
After the 1937-38 Recession, the United States economy began to recover.
The focus of the American public would eventually shift away from the Great Depression, as events in Europe unfolded after Germany’s invasion of Poland in 1939.
About the Money Project
The Money Project aims to use intuitive visualizations to explore ideas around the very concept of money itself. Founded in 2015 by Visual Capitalist and Texas Precious Metals, the Money Project will look at the evolving nature of money, and will try to answer the difficult questions that prevent us from truly understanding the role that money plays in finance, investments, and accumulating wealth.
Why Gold is Money: A Periodic Perspective
Gold has been used as money for millennia. People often attribute this to beauty, but there are basic physical properties for why gold is money.
Why Gold is Money
The economist John Maynard Keynes famously called gold a “barbarous relic”, suggesting that its usefulness as money is an artifact of the past. In an era filled with cashless transactions and hundreds of cryptocurrencies, this statement seems truer today than in Keynes’ time.
However, gold also possesses elemental properties that has made it an ideal metal for money throughout history.
Sanat Kumar, a chemical engineer from Columbia University, broke down the periodic table to show why gold has been used as a monetary metal for thousands of years.
The Periodic Table
The periodic table organizes 118 elements in rows by increasing atomic number (periods) and columns (groups) with similar electron configurations.
Just as in today’s animation, let’s apply the process of elimination to the periodic table to see why gold is money:
- Gases and Liquids
Noble gases (such as argon and helium), as well as elements such as hydrogen, nitrogen, oxygen, fluorine and chlorine are gaseous at room temperature and standard pressure. Meanwhile, mercury and bromine are liquids. As a form of money, these are implausible and impractical.
- Lanthanides and Actinides
Next, lanthanides and actinides are both generally elements that can decay and become radioactive. If you were to carry these around in your pocket they could irradiate or poison you.
- Alkali and Alkaline-Earth Metals
Alkali and alkaline earth metals are located on the left-hand side of the periodic table, and are highly reactive at standard pressure and room temperature. Some can even burst into flames.
- Transition, Post Transition Metals, and Metalloids
There are about 30 elements that are solid, nonflammable, and nontoxic. For an element to be used as money it needs to be rare, but not too rare. Nickel and copper, for example, are found throughout the Earth’s crust in relative abundance.
- Super Rare and Synthetic Elements
Osmium only exists in the Earth’s crust from meteorites. Meanwhile, synthetic elements such as rutherfordium and nihonium must be created in a laboratory.
Once the above elements are eliminated, there are only five precious metals left: platinum, palladium, rhodium, silver and gold. People have used silver as money, but it tarnishes over time. Rhodium and palladium are more recent discoveries, with limited historical uses.
Platinum and gold are the remaining elements. Platinum’s extremely high melting point would require a furnace of the Gods to melt back in ancient times, making it impractical. This leaves us with gold. It melts at a lower temperature and is malleable, making it easy to work with.
Gold as Money
Gold does not dissipate into the atmosphere, it does not burst into flames, and it does not poison or irradiate the holder. It is rare enough to make it difficult to overproduce and malleable to mint into coins, bars, and bricks. Civilizations have consistently used gold as a material of value.
Perhaps modern societies would be well-served by looking at the properties of gold, to see why it has served as money for millennia, especially when someone’s wealth could disappear in a click.
The 7 Major Flaws of the Global Financial System
Since the invention of banking, the global financial system has increasingly become more centralized. Here are the big flaws it has, as a result.
The 7 Major Flaws of the Global Financial System
Since the invention of banking, the global financial system has become increasingly centralized.
In the modern system, central banks now control everything from interest rates to the issuance of currency, while government regulators, corporations, and intergovernmental organizations wield unparalleled influence at the top of this crucial food chain.
There is no doubt that this centralization has led to the creation of massive amounts of wealth, especially to those properly connected to the financial system. However, the same centralization has also arguably contributed to many global challenges and risks we face today.
Flaws of the Global Financial System
Today’s infographic comes to us from investment app Abra, and it highlights the seven major flaws of the global financial system, ranging from the lack of basic access to financial services to growing inequality.
1. Billions of people globally remain unbanked
To participate in the global financial sector, whether it is to make a digital payment or manage one’s wealth, one must have access to a bank account. However, 1.7 billion adults worldwide remain unbanked, having zero access to an account with a financial institution or a mobile money provider.
2. Global financial literacy remains low
For people to successfully use financial services and markets, they must have some degree of financial literacy. According to a recent global survey, just 1-in-3 people show an understanding of basic financial concepts, with most of these people living in high income economies.
Without an understanding of key concepts in finance, it makes it difficult for the majority of the population to make the right decisions – and to build wealth.
3. High intermediary costs and slow transactions
Once a person has access to financial services, sending and storing money should be inexpensive and fast.
However, just the opposite is true. Around the globe, the average cost of a remittance is 7.01% in fees per transaction – and when using banks, that rises to 10.53%. Even worse, these transactions can take days at a time, which seems quite unnecessary in today’s digital era.
4. Low trust in financial institutions and governments
The financial sector is the least trusted business sector globally, with only a 57% level of trust according to Edelman. Meanwhile, trust in governments is even lower, with only 40% trusting the U.S. government, and the global country average sitting at 47%.
5. Rising global inequality
In a centralized system, financial markets tend to be dominated by those who are best connected to them.
These are people who have:
- Access to many financial opportunities and asset classes
- Capital to deploy
- Informational advantages
- Access to financial expertise
In fact, according to recent data on global wealth concentration, the top 1% own 47% of all household wealth, while the top 10% hold roughly 85%.
On the other end of the spectrum, the vast majority of people have little to no financial assets to even start building wealth. Not only are many people living paycheck to paycheck – but they also don’t have access to assets that can create wealth, like stocks, bonds, mutual funds, or ETFs.
6. Currency manipulation and censorship
In a centralized system, countries have the power to manipulate and devalue fiat currencies, and this can have a devastating effect on markets and the lives of citizens.
In Venezuela, for example, the government has continually devalued its currency, creating runaway hyperinflation as a result. The last major currency manipulation in 2018 increased the price of a cup of coffee by over 772,400% in six months.
Further, centralized power also gives governments and financial institutions the ability to financially censor citizens, by taking actions such as freezing accounts, denying access to payment systems, removing funds from accounts, and denying the retrieval of funds during bank runs.
7. The build-up of systemic risk
Finally, centralization creates one final and important drawback.
With financial power concentrated with just a select few institutions, such as central banks and “too big too fail” companies, it means that one abject failure can decimate an entire system.
This happened in 2008 as U.S. subprime mortgages turned out to be an Achilles Heel for bank balance sheets, creating a ripple effect throughout the globe. Centralization means all eggs in one basket – and if that basket breaks it can possibly lead to the destruction of wealth on a large scale.
The Future of the Global Financial System?
The risks and drawbacks of centralization to the global financial system are well known, however there has never been much of a real alternative – until now.
With the proliferation of mobile phones and internet access, as well as the development of decentralization technologies like the blockchain, it may be possible to build an entirely new financial system.
But is the world ready?
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