Wednesday, May 19, 2010

That other monetary crisis in the West

ECB President Jean-Claude Trichet spoke last week about the worst situation since World War II. Somewhere in comments of readers I read the remark that he had better spoken about a similar crisis as the one which has brought about World War II.

How did that crisis came accross?

WW II was caused by the crisis of money, particularly in Germany with the hyperinflation of the Weimar Republik.

Also in the U.S. a money crisis occurred at the same time:

- The spectacular crash of 1929 followed five years of reckless credit expansion by the Federal Reserve System under the Coolidge administration (Source).

- The Great Depression that quickly superseded and distorted the benign recession-adjustment process was not in any sense caused by monetary deflation but by government-induced nominal wage rigidities....This explains why such a large depression occurred in the 1930s, but not in the early 1920s, which was a period of comparable deflation and monetary contraction, but when firms cut nominal wages considerably. (Source)

The response of FDR resulted in the following statement of his Finance Minister in 1938:

"We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot." - Henry Morgenthau, May 1938, FDR's Treasury Secretary (Source)

Needless to add the same process happened, to a far more dramatic extent, in Europe.

Any similarities with the current Crisis?

Let's not get as gloomy as Doctor Doom, but let's hope that somewhere, somebody will say stop to this madness.

UPDATE: Related to this, Zero Hedge cites an interesting op-ed by former US President Hoover addressing FDR in 1938, warning the New Deal might lead the US to fascism: "The torch of liberty has been dashed out by some sort of fascism in 14 nations of more than 240,000,000 people - they all undertook new deals under some title, usually planned economy."

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