While digging around in the archives of the Federal Reserve, looking for important dates, I found a great speech by Mc C. Martin Jr. which he gave in 1965, right when the Treasury was debasing the coinage to begin paying for serious war inflation for this is also one year after the Gulf of Tonkin faux attack. The Fed chief decided to make a speech about history repeating Herself [NOT ‘itself’, heh!]. History is a bitch. She writes with a pen dipped in blood. She knows very well, she simply has to change the names and dates and over and over again, the story is stubbornly the same! Understanding this helps us avoid obvious pitfalls. But guess what? We love pit falls! We run to these and fling ourselves in, headfirst. This is why the goddess of History constantly laughs out loud at us.
Does Monetary History Repeat Itself?
A SPEECH ABOUT GOLD MANIPULATIONS BY THE FEDERAL RESERVE
Address of Wm. Mc C. Martin, Jr., Chairman, Board of Governors of the Federal Reserve System,
New York City, June 1, 1965
When economic prospects are at their brightest, the dangers of complacency and recklessness are greatest. As our prosperity proceeds on its record-breaking path, it behooves every one of us to scan the horizon of our national and international economy for danger signals so as to be ready for any storm. Some eminent observers have recently compared the present with the period preceding the breakdown of the interwar economy, and have warned us of the threats of another Great Depression, We should take these warnings seriously enough to inquire into their merits and to try to profit in the future from the lessons of the past.
An admirable plan! Look at the past and try to figure out the future. But are we capable of doing this? A serious question, indeed. I would suggest, people are blinded by their own fears and desires so when they look in the Dark Mirror of the past, they see only what they wish, not what they should see.
When this speech was made, we were already going very deep into the Dark Jungles of Vietnam. The faux attack on our fleet in the Gulf of Tonkin was less than a year earlier and the full-scale war was just beginning. During this summer, both Buddhists and Quakers were immolating themselves in protest. One Quaker did this in front of McNamara and another, in front of the UN.
I was only 14 years old when this speech was made. The Treasury, which still, in an archaic way, was still officially the ‘mint’, decided to debase the coinage in the classic manner: diluting the silver with baser metals. Inflation was already quietly ravaging the dollar. The runs on the gold stash in Fort Knox was slowed temporarily by the Gold Pool. This was a scheme set up by Europe and America to keep the value of gold stable despite the US overspending on the Cold War.
France withdrew from the Gold Pool in 1967, just 2 years after this speech. I went to Europe to go to school right about then. The dollar was still strong in Germany but was losing value in France. While looking for stories connected with the topic of this old speech by Mc C Martin Jr, I came across this older story of my own:
The US and Europe seem bent on destroying not only themselves but the world’s economy. The actions aimed at punishing Iran are punishing ourselves much more. All signs increasingly are pointing at a fall in finances, trade and sovereign wealth in the G7 nations. Oil exporting nations and China will flourish. Also, after computer trades were halted 17 times in less than 5 months, Wall Street just threw away this brake and now we can have full-blown panics. 1987, here we come! Exactly 20 years later! What next, another Great Asian Currency Crisis?
It annoyed me greatly two years ago, the gang running the Exchange on Wall Street were hitting the panic button over and over again, more than once a month, and this was not in any news. Of course, some of the guys running that show have now been revealed to be swindlers and cheats. Like Madoff, for example. Dishonest systems always end up crashing. It is like trusting a drunk driver who happens to be a bank robber strung out on drugs. You know you are going to be involved in both a bank robbery, cop chase and a crash. Back to the 1965 speech:
And indeed, we find disquieting similarities between our present prosperity and the fabulous twenties.
≈ Then, as now, there had been virtually uninterrupted progress for seven years. And if we disregard some relatively short though severe fluctuations, expansion had been underway for more than a generation–the two longest stretches of that kind since the advent of the industrial age; and each period had been distorted in its passage by an inflationary war and postwar boom.
Now, like then, we again, had a seven year boom. It is interesting that the ancient Egyptians had this thing about seven fat years followed by seven lean years. They also had this interesting goddess, Ma’at, who is basically Libra: the guardian of the Gates of Death and the Balancer of the Scales. Ma’at is also the word for ‘truth’. This old funeral scroll shows the weighing of the scales with Ma’at’s feather on one side and a pharaoh’s heart on the other side.
What is interesting here are the 14 judges at the top. Seven have ankhs and seven don’t. This is one expression of the concept of seven good years and seven bad years. It is interesting to me to see this magic formula from one of the earliest civilizations, playing out in modern times. The deep wisdom of the far past is extremely important to understanding the present. We seem to be trapped in these deeper systems which, try as we might, we seem unable to escape. Here is more of the 1965 speech about gold:
≈ Then, as now, prosperity had been concentrated in the fully developed countries, and within most of these countries, in the industrialized sectors of the economy.
Today, this is still mostly true. The surge of profits to commodity nations was due to consumption by rising industrial powers, most of which were concentrated in Asia and in particular, the meteoritic rise of Chinese industrialization. The US was deindustrializing as well as England but both are hold-overs from the earlier systems so financial markets are still in both nations but this is temporary. The US loss of gold power has weakened us but no one has been desirous to switch with us and become the global fiat currency. So we limp along, barely.
≈ Then, as now, there was a large increase in private domestic debt; in fact, the expansion in consumer debt arising out of both residential mortgages and instalment purchases has recently been much faster than in the twenties.
Um, then, as now, we have the exact same increase in private domestic debt only now, we added corporate debt and government debt to the total.
≈ Then, as now, the supply of money and bank credit and the turnover of demand deposits had been continuously growing; and while in the late twenties this growth had occurred with little overall change in gold reserves, this time monetary expansion has been superimposed upon a dwindling gold reserve.
Now, like then, we have the same thing minus the gold. Instead of gold leaving Fort Knox, it sits there, totally inert now, NOT part of the monetary system AT ALL yet still, lurking in the DARK, a part of it, like an actor waiting offstage, waiting for a cue. This speech doesn’t mention silver at all which is hilarious since silver coins were debased this very same year! We now have the opposite of a dwindling gold reserve: we have gold shooting up in price at an insane rate even as all currencies and values of all assets and commodities are dropping like rocks!
≈ Then, as now, the Federal Reserve had been accused of lack of flexibility in its monetary policy: of insufficient ease in times of economic weakness and of insufficient firmness in times of economic strength.
HAHAHA. Some things NEVER change, do they?
≈ Then, as now, the world had recovered from the wartime disruption of international trade and finance, and convertibility of the major world currencies at fixed par values had been restored for a number of years.
Alas, this is not true for today! We live in a mad world where all currencies are constantly in flux with each other and constantly need to adjust against the dollar’s vacillations which are as bad or worse than the worst currencies on earth. This is extremely irritating to Libra/Ma’at. Part of the prayer to the Goddess is ‘I didn’t mess with the scales or weights!’ Well, we messed up the scales and weights and now, they are vapid and uncertain.
≈ Then, as now, international indebtedness had risen as fast as domestic debt; recently, in fact, American bank credits to foreigners and foreign holdings of short-term dollar assets have increased faster than in the closing years of the earlier period.
All great crashes are global and all of them are due to swift reassignments of values and mass from one sector of the planet to another. Back in 1965, this was tiny compared to today. Now, we are utterly dependent on inflows of lending to the US to sustain our systems. This is why Hillary recently gave the green light to kill whales to Japan and the green light to kill humans to the Chinese [who allow us the same privilege, too!].
≈ Then, as now, the payments position of the main reserve center–Britain then and the United States now–was uneasy, to say the least; but again, our recent cumulative payments deficits have far exceeded Britain’s deficits of the late twenties.
England’s war debts to the US were being paid by the Germans who, in turn, got loans from the US which then were passed on to the British and the collapse of this war reparation cycle is one of the biggest causes of the Great Depression. But due to political considerations, Mc C. Martin Jr. couldn’t say this out loud! Because of the need to support the British Empire as it died, this whole business has been swept under the table so completely, the faux story that took its place STILL haunts us! The story that US consumer debts caused the Great Depression is still the Bible story and only gold bugs and other irritable people like myself, bother to challenge this ideology. Martin Jr certainly knew the role these war debts played in the 1930 banking crisis!
≈ Then, as now, some countries had large and persistent payments surpluses and used their net receipts to increase their short-term reserves rather than to invest in foreign countries.
HAHAHA. And today, what are other central banks doing with their excess net receipts? Why, they are putting them into their FOREX reserves in order to keep the dollar stronger against their currencies. So they can invade our open free trade markets.
≈ Then, as now, the most important surplus country, France, had just decided to convert its official holdings of foreign exchange into gold, regardless of the effects of its actions on international liquidity.
HAHAHA. Again! HAHAHA. Um, in 1955, France was mired in this hopeless war in a place called ‘Vietnam’. When this speech was made, it was the same year the US troops in Vietnam went from under 6,000 to over 21,000. Oh no! We are in the same thing, today! Obama, instead of fleeing the stupid, destructive wars of occupation, is increasing troops by almost exactly the same amount! This speech’s title certainly is correct!
≈ Then, as now, there were serious doubts about the appropriate levels of some existing exchange rate relationships, leading periodically to speculative movements of volatile short-term funds.
ARF! I will note that Hillary did NOT bark at either Japan nor China for keeping immense FOREX reserves and then making their currencies weaker against the dollar! We have surrendered.
≈ And most importantly, then as now, many government officials, scholars, and businessmen were convinced that a new economic era had opened, an era in which business fluctuations had become a thing of the past, in which poverty was about to be abolished, and in which perennial economic progress and expansion were assured.
Oh boy! Remember all the speeches about how the Derivatives Beast meant we would never have any more risk? And that the wild tax cutting and spending on wars would make us rich? And note how the DNC is aping the GOP and increasing our wars [we bombed a funeral procession this week instead of just wedding parties!] and we are cutting taxes more. Obama has sent word, he is thinking about raising some taxes. HAHAHA. This is going to be fun to watch. But the main point is, we never learn, do we?
Derivatives are financial instruments whose values are derived from something else such as assets or indexes such as interest rates or the stock market. They are used to mitigate or hedge the risk of economic loss from the changes in the value of the underlining asset or index. Derivatives can also be used to acquire risk rather than insure against it to speculate, betting that the party seeking insurance will be wrong about the future value. The derivative market is largely unregulated with no loss reserve requirement thanks to Clinton’s 2000 Commodities Future Modernization Act.
Total world derivatives are $1000 trillion or 19 times the total world GDP of $54 trillion. Over-the-counter derivatives total $684 trillion of which 67 percent are interest rate swaps. Exchange-traded derivatives total $344 trillion. Interest rate swaps are the largest derivative powder keg waiting to blow the world financial markets to supernova.
Interest rates swaps are maintained by the spread between the Fed funds and prime mortgage rates. At the end of 2008 Fed funds were at 5.25 percent while mortgage rates were six percent, yielding a spread of less than one percent.
If some of these likenesses seem menacing, we may take comfort in important differences between the present and the interwar situation The distribution of our national income now shows less disparity than in the earlier period; in particular, personal incomes, and especially wages and salaries, have kept pace with corporate profits, and this has reduced the danger of investment expanding in excess of consumption needs. Perhaps related to that better balance, the increase in stock market credit now has been much smaller.
Dear gods! Today, income disparities are immense. And the only pleasure we get from all this is, the rich decided to go very deep into debt, too, so they could play speculative markets and live like Queen Elizabeth.
Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest.
About 2.57 percent of prime borrowers who took out jumbo loans last year were at least 60 days delinquent, according to LPS Applied Analytics, a mortgage data service in Jacksonville, Florida. They got to that level within 10 months, almost twice as quickly as 2007 borrowers and the fastest rate since at least 1992, when LPS Applied Analytics began tracking the market.
Instead of a gradual decline in wholesale prices and stability in consumer prices, there has now been stability in wholesale prices though consumer prices have been creeping up. The worst defects in the structure of commercial and investment banking and of business seem to have been corrected–although we are time and again reminded of our failure to eliminate all abuses. The potentialities of monetary and fiscal policies are, we hope, better understood–although the rise in government expenditures even in times of advancing prosperity threatens to make it difficult to be still more expansionary should a serious decline in private business activity require it.
This all goes back to the seven fatted cows and the seven starving cows: always, the temptation is to fatten the cows too much in good years and have no grain stored to feed the cows in the drought years. The US has done this more and more all my life, I notice how there has been, since Reagan’s anti-tax crusade, no desire to pay down debts in good times! Instead, debts increase during good times and then everyone cuts back and tries to pay them off in bad times! This backwards system has now been stuck in high-speed reverse.
States are laying off workers and shrinking money being sent back out while the Federal government is so far out on the limb [see the tree at the top of this story!] it has broken. Look at this insane headline:
Now, how the hell is he going to do this? Cutting back in Iraq is pointless if we doubling spending in VietnamAfghanistan! Raising taxes on the rich is nearly politically impossible, our Congress is all multi-millionaires and note that they don’t like paying taxes, ahem. That should be clear! So this leaves ‘cutting waste’ and since much of that is in the Pentagon, well…can he cut that turkey and eat it? I doubt it. The heads of the DNC are all Daddy Warbucks or in the case of the females, Little Orphan Annies who got their guns.
In spite of the rise in the international flow of public and private credit and investment, business abroad appears in general to be less dependent upon American funds. The recent restraint on the outflow of U. S. capital has had little effect on business activity abroad, in contrast to the paralyzing effect of the cessation of U. S. capital outflows in the late twenties. While the cold war makes for sources of friction absent in the twenties, we are no longer suffering from the cancer of reparations and war debts.
HAHAHA! 1965, we were just beginning to really rack up those pesky war debts! And he knew this. I knew it! If I knew it, via spying on my dad, certainly the head of the Federal Reserve knew this. One of my friend’s dad was the very first Green Beret to be killed after the French pulled out, after all.
We have learned the lessons taught by the failure of trade and exchange restrictions, and of beggar-my-neighbor policies in general, although the temptation to backslide is ever present. We have become aware of our responsibility for helping those less developed countries that seem willing and able to develop their economies–although the poor countries still are not becoming rich as fast as the rich countries are becoming richer.
The International Monetary Fund has proved to be a valuable aid to a better working of the international payments system. A network of international, regional, and bilateral institutions and arrangements has reduced the danger of lack of international financial communication.
A major force of anti-American hate is via the IMF’s harsh repayment terms.
President Obama’s new housing plan is as elegant a solution as we’re going to see to end the foreclosure crisis. That doesn’t mean it’s perfect. It will help some people who don’t “deserve” to be helped, just as the bank bailouts have helped Wall Street executives – none of whom deserved to be helped.But no effective solution to the economic crisis facing this country is going to feel fair to the vast majority of Americans who played by the rules. What would be even less fair would be for Americans to refuse to support this quite good solution out of spite. Stopping the cycle of foreclosures is the only thing that will slow our country’s downward economic spiral.
See? We want to save even the ‘undeserving’ so we can continue to roll passively along the road to total global destruction of all monetary/trade systems! This childish desire to eat our cake and save it too, is a very serious social problem for the entire planet. We didn’t give a hoot when the IMF punished whole populations due to debts run up by despotic governments, for example!!! Yet, we want to get away with no pain, from problems we created for ourselves and which our own leaders dumped into our laps.
And finally, the experience of the twenties has strengthened the resolution of all responsible leaders, businessmen and statesmen alike, never again to permit a repetition of the disasters of the Great Depression, But while the spirit is willing, the flesh, in the form of concrete policies, has remained weak. With the best intentions, some experts seem resolved to ignore the lessons of the past.
This is a very long speech. Part 2 is all about the loss of the gold standard. I wish to examine this in the next posting.
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