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Fantastic response, thanks. You wrote: "monetization ... what does that mean?" In a nutshell: at the time banks would lend money to people for the purpose o

by fexl 15y ago

Fantastic response, thanks. You wrote: "monetization ... what does that mean?" In a nutshell: at the time banks would lend money to people for the purpose of buying stocks and real estate, and as collateral for those loans, they would accept already inflated stocks. On the one hand you might sanguinely say "oh that's just trading on margin", and in a way you'd be right. But it had gotten to a point where the "collateral" only had value because of the insanity which had gone before. Not to mention that the banks were lending the newly issued money on a fractional reserve basis. I don't oppose fractional reserve in principle, but in this case it amplified the insanity by a factor of 10 or so. So the investor went off with new "money" from the bank in hand, and hauled off and put it all into Consolidated Gas. Yay, happy days -- that stock kept racing up. In the meantime, the investor had debt service (interest expense) to contend with, and keep in mind that many of these stocks were paying no dividends or miniscule ones at best. Eventually many investors end up with a cash flow problem, and they are forced to liquidate. This drives down stock prices, and then even more liquidate. After all, there's no sense holding a stock that gives you net negative cash flow and negative capital gains. Regarding the monetization of war bonds, I quote this: "At the end of the Liberty Loan campaings, our banks held very large amounts of United States bonds and it was their habit thereafter to use these as security for Federal Reserve credit when they wanted it, in preference to rediscounting commercial paper." And further: "The difficulties in this situation were these: (1) that the United States bonds were not, like the prime commercial paper, due to be liquidated by the natural process of consuming goods and paying for them, and (2) that the United States had agreed to pay in gold on demand [... but could not]" On this latter point, the financing of war has always been a major driver of monetary inflation, even during periods of an alleged gold standard. World War I was an utter catastrophe in so many ways. The funny thing about the 1920s boom is, it was ultimately grounded in real productivity gains: principally, technological innovations such as the electrification of manufacturing plants. So it certainly was not all an artificial mania like tulip bulbs. But it became that way with the aid of banks, principally the Fed but also others.

yaakov34 15y ago
I understand that. Yes, it was a problem that banks were lending money to people so that those people could trade the stock market. That's described as ONE of the causes of the Great Depression in every standard history. However, this is not called monetization, and it was not a policy of the Fed. The Fed didn't even have the power to regulate this type of loans; it got expanded powers as a result of the Great Depression. Imagine if someone came here and said: "the problem in the crisis of 2008 was that the big banks RADICALIZED the financial markets, and then UNLEVERAGED government money to make good their losses." People don't disagree with this, once it gets deciphered to something that they understand, but it's going to get a downvote for being not very understandable as phrased.
- fexl 15y ago
  You wrote: "this is not called monetization". Monetization is a technical term, and I won't quibble with you over that. However ... You wrote: "it was not a policy of the Fed." Yes, the whole phenomenon was baked into Fed policy even at its founding in 1913. Quote: "We undertook in the Federal Reserve Act (1913), (I) to reduce the reserve requirements of the banks; and (2) to substitute for "gold and other lawful money" as bank reserve, the single item, credit at the Federal Reserve banks, which in turn need be gold-secured only to the extent of 40 percent, which the remaining 60 percent could be commercial paper and United States bonds." In short, Fed policy allowed banks to operate with less solvency than they had before. This enabled massively speculative loans which would not have been possible otherwise.
  - yaakov34 15y ago
    Robinson is not making a good case here - the Federal Reserve Act was, at the time, seen as strengthening banks by making their reserves more liquid. If Robinson wants to argue that it had the opposite effect, he will need a lot more than his opinion. If he is right, then there should have been fewer bank failures in the decades preceding the FRA; but in fact, history is full of them. The post-1913 banking system functioned well for decades, including during a world war. Obviously it had its weaknesses, but where is the proof that the pre-1913 system would have been better in the same circumstances? Also, he is carping about the wrong thing - he complains that the Fed was only 40% secured by gold, but the Fed is not the entity that failed; the banks did. It wouldn't have mattered if the Fed was secured by pure unobtanium. In short, I'm not convinced by any of this - it's basically just one guy's opinion from 1935.

by fexl 15y ago

yaakov34 15y ago

I understand that. Yes, it was a problem that banks were lending money to people so that those people could trade the stock market. That's described as ONE of the causes of the Great Depression in every standard history. However, this is not called monetization, and it was not a policy of the Fed. The Fed didn't even have the power to regulate this type of loans; it got expanded powers as a result of the Great Depression. Imagine if someone came here and said: "the problem in the crisis of 2008 was that the big banks RADICALIZED the financial markets, and then UNLEVERAGED government money to make good their losses." People don't disagree with this, once it gets deciphered to something that they understand, but it's going to get a downvote for being not very understandable as phrased.

fexl 15y ago
You wrote: "this is not called monetization". Monetization is a technical term, and I won't quibble with you over that. However ... You wrote: "it was not a policy of the Fed." Yes, the whole phenomenon was baked into Fed policy even at its founding in 1913. Quote: "We undertook in the Federal Reserve Act (1913), (I) to reduce the reserve requirements of the banks; and (2) to substitute for "gold and other lawful money" as bank reserve, the single item, credit at the Federal Reserve banks, which in turn need be gold-secured only to the extent of 40 percent, which the remaining 60 percent could be commercial paper and United States bonds." In short, Fed policy allowed banks to operate with less solvency than they had before. This enabled massively speculative loans which would not have been possible otherwise.
- yaakov34 15y ago
  Robinson is not making a good case here - the Federal Reserve Act was, at the time, seen as strengthening banks by making their reserves more liquid. If Robinson wants to argue that it had the opposite effect, he will need a lot more than his opinion. If he is right, then there should have been fewer bank failures in the decades preceding the FRA; but in fact, history is full of them. The post-1913 banking system functioned well for decades, including during a world war. Obviously it had its weaknesses, but where is the proof that the pre-1913 system would have been better in the same circumstances? Also, he is carping about the wrong thing - he complains that the Fed was only 40% secured by gold, but the Fed is not the entity that failed; the banks did. It wouldn't have mattered if the Fed was secured by pure unobtanium. In short, I'm not convinced by any of this - it's basically just one guy's opinion from 1935.