Chapter 16 - A Lesson From The Great Depression.

It was a dreadful and long-lasting economic downturn. This is an inappropriately named event. It was a human disaster with millions going hungry and living in misery. There was nothing ‘great’ about it. It was a ‘Miserable Depression’. This ‘Miserable Depression’ ran from about 1929 to about 1939. It began soon after the stock market crash of October 1929.

USA Unemployment Rate during the Great Depression by Andy Chalkley. Creative Commons Attribute

In this graph of the Great Depression, you can see that the government-issued cash-currency did not fall. The banks cut their lending whilst continuing to collect interest and loan repayments.

The Banks stop lending which causes a fall in the Money Supply which causes a recession by Andy Chalkley. Creative Commons Attribute

This is a classic bank-induced recession/depression. Banks stop lending. Banks continue to collect repayments. Money Supply falls.   Depression ensues.

Sometimes the tax revenue falls by a greater amount than the fall in Circulating Money.

A graph of the Great Depression in the USA. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

Notice that the Bank Credit portion of the Money Supply decreases whilst the government issued Cash Currency increases slightly. This is caused by bank lending practices causing a fall in Bank Credit. The media from the ruling elite will suggest that it is poor government management. The cessation of lending could be malicious or unintended.

The next graph shows a dramatic fall in bank lending starting about 1930. Anybody but the banks gets the blame for this:

A graph of the Great Depression in the USA. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

Next, we shall have a look at the portion of the Money Supply that is actually circulating. To study the volumes of Circulating Money and Hoarded Money, I class money that is idle for more than one month as Hoarded Money. Money that changes hands in less than one month is classed as Circulating Money. This allows me to make a better study of the economy. I give you a graph of Circulating Money during the Great Depression:

A graph of Circulating Money during the Great Depression in the USA. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

Notice that a 21% fall in the Money Supply caused a 32% fall in Circulating Money. This caused a 32% fall in the GDP.

Between 1930 and 1934 the following changes occurred. Cash Currency increased by 17%. Shortage of Cash Currency was not the cause of the Great Depression. A statistic called “All other loans” fell by 56%. Bank lending fell dramatically. Repayments were collected as before. This caused a fall in the Money Supply. The Money Supply M2 fell by 28%. M3 fell by 21%. Because repayments are taken from Circulating Money, (People with more money than they can spend do not take out loans.) the Circulating Money fell by a greater percentage than the Money Supply. The Circulating Money fell by 32%. The GDP fell by 32%. This fall in GDP affected government revenue. Those with ‘more money than they can spend’ manipulate the political process to minimize tax on rich people’s income and hoards. This political manipulation moves taxes onto production and human sweat and toil. One result is that the government revenue becomes volatile, sometimes called counter-cyclical. Tax revenue falls dramatically with the fall in production. Taxes on land, wealth, and hoards tend to be less susceptible to fall in times of economic stress.

A graph of Circulating Money during the Great Depression in the USA. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

In the next graph, I show a graph of Circulating Money during the Great Depression. You can see a second depression that was caused by a second cutback in lending in 1937. This second recession was caused by the Federal Reserve increasing the reserve requirements on banks. This caused the banks to cut back on lending. There was a reduction of Bank Credit in society. During this second recession, the Circulating Money fell by approximately 6%. (the figures are scant) M2 fell by less than 1%. M3 did not fall. M1 fell by less than 2%. (Only annual figures are available. The falls in M1, M2, and M3 were so small that the calculation can be classed as a very good approximation.) As is typical, Hoarded Money remained hoarded and the shortfall was taken from Circulating Money. So in this second depression, M3 remained constant. M2 fell by less than 1%. M1 fell by less than 2%. Circulating Money fell by 6%. The reason for the differences are that the reduction in the Money Supply comes from Circulating Money. Hoarders do not borrow money and pay no tax on their hoards.

A graph of Circulating Money during the Great Depression in the USA. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

So, all you need to do to destroy an economy is to reduce the Money Supply which dramatically reduces the Circulating Money. In fact, the Circulating Money tends fall by a greater percentage than the Money Supply. The only way to reduce the Money Supply is to arrange for the banks to cut back on lending whilst continuing to collect repayments. In past times the situation was different. Before the various revolutions in Europe, the sovereign of a nation created the money of the nation and spent it into society, effectively operating a debt-free society. Gone are the days when sovereign governments created the money of the nation in a debt-free manner and spent it into society. Any government or person that wants money beyond their meagre income has to borrow the money.

A graph of Circulating Money during the Great Depression in the USA. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

I often ask people “Who has the authority to create the money of the nation?” The answer is of course the government. I then ask: “Why, then, would the government be in debt?” The answer is that it is not the government that is creating the money. The government becomes indebted to the money creators.

In the following graph, it can be observed that the national debt increased dramatically as the nation was brought out of the Great Depression.

A graph of National Debt during the Great Depression in the USA. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

Here again is another graph showing the reduction of bank lending:

A graph of Other Debt during the Great Depression in the USA. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

This next graph shows tax revenue during the Great Depression. The percentage fall in tax revenue vastly exceeds the percentage falls in the contributing factors. M3 fell by 21%. M2 fell by 28%. Circulating Money Fell by 32%. Tax revenue fell by 75%.

A graph of Tax during the Great Depression in the USA. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

This graph of velocity can be incorrectly analyzed. From 1939, the velocity falls. It is easy to make an incorrect conclusion that an increasing volume of money is being hoarded. From previous graphs, you can see that this is incorrect. Both Hoarded Money and Circulating Money are being reduced but the Circulating Money is falling faster than the Hoarded Money. The reason is that both tax and bank repayments, as well as interest are removed from Circulating Money. Hoarded Money rarely moves and stays in bank accounts.

A graph of Velocity during the Great Depression in the USA. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au
A graph of Circulating Money during the Great Depression in the USA. Creative Commons Attribute - Andy Chalkley. www.andychalkley.com.au

Eustace Mullins “As soon as Mr. Roosevelt took office, the Federal Reserve began to buy government securities at the rate of ten million dollars a week for 10 weeks, and created one hundred million dollars in new [checkbook] currency, which alleviated the critical famine of money and credit, and the factories started hiring people again.” [1]

This means that the Federal Reserve increased the Money Supply immediately after President Roosevelt took office. This suggests that they had held the Money Supply at ransom until the inauguration of President Roosevelt. If the bulk of the Money Supply consists of Bank Credit and the Federal Reserve willfully withholds credit, then they willfully damaged the economy.

Notice that a 21% fall in the Money Supply caused a 32% fall in Circulating Money. This caused a 32% fall in the GDP. Unemployment rose from almost full employment to around 24%. This caused a 75% fall in the Federal Income Tax receipts and a 75% fall in the Federal Company Tax receipts.

It is simply not safe to allow private banks free reign in creating such a large portion of the Money Supply as Bank Credit.