The Daily Hatch

Worse still, America’s depression was to become worldwide because of what lies behind these doors.

This is the vault of the Federal Reserve Bank of New York. Inside is the largest horde of gold in the world. Because the world was on a gold standard in 1929, these vaults, where the U.S. gold was stored, provide an excellent test of where the depression originated. If the depression had started in Europe or somewhere else in the world, the U.S. would have lost gold, more gold would have flown out of the country then came in. If, on the other hand, the depression started in the United States, the opposite would happen. More gold would come in from abroad as the effects of our depression spread there then went out abroad, in reality that is exactly what happened.

When the international money system was based on gold, the rules of the game were these. The gold in the United States was supposed to control the amount of money issued by the Federal Reserve. In turn, the amount the Federal Reserve issued controlled the amount of money issued by the commercial banks which in turn controlled the amount of money that individuals, businesses and industry could get from the banks. The result, a monetary structure all supposedly tied to the amount of gold in the vaults in the United States. But in 1930 the Federal Reserve didn’t play by the rules. It stood by as banks started to collapse and with each one that went the money supply fell. Businesses and industry inevitably began to fail. Americans, now poor, bought less from abroad. Britain was one of the countries effected. Like the United States, Britain had its own monetary structure tied to gold. The trouble was that Britain could now sell less abroad. It cut down the amount it bought from abroad but not by enough. Under the rules of the gold standard, it had to pay the difference in gold. With every bar of gold that was shipped out of Britain, the amount of money decreased.

A depression that was already underway in Britain got worse. British gold flowed into the United States, supposedly to form the foundation of a new slice of the monetary structure. But the Federal Reserve didn’t let it. The gold was simply locked away. The results, Britain remained in trouble until in 1931 it went off the gold standard cutting the link between the amount of gold and the amount of money. In the United States, suffering the worst depression in history, there was plenty of gold, but to no avail.

Although these events happened almost 50 years ago, many of our policies today derived directly from them. Central bankers throughout the world, government officials everywhere, are afraid of a new great depression. They, have therefore, moved the opposite direction. Instead of the problem of too little money, we are faced with the problem of too much money. The problems of inflation that plagues us today trace directly from the problem of deflation that plagued us from 1929 to 1933.

People came to believe that free market capitalism had failed. Something was needed to replace it. At Cambridge University in England, a new orthodoxy emerged in the 30’s one that has remained powerful to this day.

It owes its influence to the brilliance of one man. John Manrd Kane was unquestionably one of the greatest economists of all time. Like other economists of his generation, he found The Great Depression both a paradox and a challenge. It was a paradox because it seemed to contradict some of the fundamental principles that economists have come to take for granted. Kane rose to the challenge by constructing a complex and sophisticated hypothesis which not only explained what had been going on, but also offered a way out way to end The Great Depression and to avoid similar episodes in the future. The core of his theory was that what happened to the quantity of money didn’t matter. What really mattered was a particular category of spending. In economists jargon, autonomous spending. What kind of spending is that? It might be investment by business enterprises in building factories and adding to the number of machines and adding to inventories. It might be spending by individuals to build houses. Or, most important of all, it might be deficit spending by government. If private spending on investment, on house building, is not enough to maintain full employment, then government could always step in and spend enough to make up the difference. The theory of pump priming was born. The theory was a godsend to politicians who had been grasping at any expedient. After all, throughout the ages, politicians had been only too willing to spend money provided they didn’t have to tax their citizens to pay for it. And here along came a scientific theory offered under the most responsible of auspices that justified what they had been wanting to do all along. Is it any wonder that government spending has exploded ever since or that deficit spending, even without the excuse of war, and on a large scale, has become the order of the day?

In America, the new Roosevelt administration adopted the Keynesian approach. It authorized massive spending on government projects. It involved government increasingly in the running of the economy. It developed programs designed to provide security for every individual. In England too, the idea that only the government could bolster the economy was firmly established as this film at the time makes clear.

With the assistance of the national government, work was restarted on the great Granada, 534. And we all hope that this is a prelude to a period of increasing prosperity in the industry. Exports of cotton goods to India have increased and as a result of the quota system in the colonies, which the national government introduced in order to diminish the dangers of Japanese competition, exports of cotton good to those colonies have been more than doubled. One of the most important contributions which the national government has made toward the improvement of social conditions has been a housing campaign without parallel in our history.

Though some of these measures may have been useful and indeed needed during the depression years, the length to which they have since then carried would have horrified Kane.

Kane died in 1946. I have always regarded it as a tragedy that they did not live another decade. He was the one man who had the standing, the personality, the force of character to persuade his disciples not to carry too far some ideas which were good for the 1930’s but which did not apply in the post war situation. That he might have done so is suggested by an article he wrote just before his death. The last article he ever wrote published after his death. In that article he expressed strong reservations about the lengths to which some of his disciples had been carrying his ideas. If he had been able, if he had lived another decade, the postwar inflationary explosion might have been av