Body of Evidence

"She is a beautiful woman. But when this trial is over, you will see her no differently than a gun, or a knife, or any other instrument used as a weapon. She's a killer, and the worst kind. A killer who disguised herself as a loving partner."
--Robert Garrett (Body of Evidence)

I've started in on what appears to be a fantastic study of the Great Depression by Phillips, McManus, and Nelson (1937). The authors were primarily concerned with the underlying causes as they pertained to the banking system, and they're focused primarily on the Fed. The general thesis is that WWI and its financing, coupled with the advent of central banking here in the US, resulted in policies which created a massive credit bubble and its subsequent poppage.

As I chew thru this work, I plan to jot some notes for future reference. Some Chapter II notes:

-->Inflation has historically been subject to various definitions, so much so that Pigou (1917) suggested that we get rid of the term altogether :-) (13)

-->Inflation in most modern countries (US included) is primarily driven by the 'multiplicaton of bank credit by the banking machinery'. (13)

-->Lower taxes to finance WWI than previous wars. US ~ 25%, England ~17%. Compare to England's Napoleonic War tax of 60%+. Nearly all other countries printed currency to finance. US primarily expanded credit. (14)

-->Banks can inflate by making loans or by making investments. Investments were a big part of credit expansion during WWI. (16)

-->Due to initial Federal Reserve Act in 1913 and subsequent amendments in 1917, the following monetary system parameters were modified. (23-30)
a) Member bank reserve ratio requirements were cut from 20% to 10%.
b) All member banks deposited reserves with Federal Reserve banks.
c) Federal Reserve bank requirements were set at 35%.
These three things alone permitted each $1 billion in reserves to be pyramided into nearly $30 of credit (a.k.a. 'slack' in the credit system). This constituted a six fold increase over the previous system's capacity. (27-28)
d) Free gold reserves at Federal Reserve banks reduced from $1 (total backing of each paper dollar in gold) to 40% (more leverage). Gold ownership subsequently concentrated in Fed Banks as a source of reserves for more credit expansion.
e) National Bank Act sanctioned Fed member banks to pay interest on time deposits, thus competing w/ non member banks. Reserve requirements on time deposites cut to 3%.

-->For 1914-1920 period: % increase in deposits of non-member banks: 30%, % increase in deposits of member banks: 250%

-->% of all US bank deposits by Fed member banks 1914: 1/3. % of all deposits by member banks in 1920: 60%.

-->Growth in loans 1914-1920. non-members: 30%, members: 200%+. (32)

-->Price indexes from 1914 to 1920 increased 2.5x. (20)

-->'Lenin is said to have declared that the best way to destroy the Capitalist System is to debauch the currency' (Keynes, 1931: 77).

-->Inflationary debasement of the currency is "a process that engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose" (Keynes, 1931: 78).

-->Beginning in 1922, Fed policies were introduced to prop up the articially high prices stemming from the WWI inflation. Left to their own devices, these prices would have fallen as would have the excess credit. Instead, inflationary policies of 1922 on took the bubble to new levels. (36)

References

Keynes, J.M. (1931). Essays in pursuasion. London: Macmillan and Company.

Phillips, C.A., McManus, C.F., & Nelson, R.W. (1937). Banking and the business cycle. New York: The Macmillan Company.