Although it may sound simple, it is a very difficult subject to explain. The U.S. Federal Reserve system, resulting from a fully developing capitalism, was established in 1913. Salvador Allende, a man we remember as someone of our times, was already 15 years old.
The First World War broke out in 1914, when the prince heir to the Austrian-Hungarian Empire in the very heart of the center and south of Europe was murdered in Sarajevo. Canada was still a British colony. The British pound sterling enjoyed the privilege of being the currency used in international transactions, with gold as its metal backup. This had been the case over one thousand years before in the capital of the Roman Empire in the East, that is, Constantinople.
The bloody wars against the Muslims in the Near East, with religious pretexts, had been initiated by the feudal lords of the European Christian kingdoms. Their true purpose was to be in command of the commercial routes and other more obscene and mundane objectives which could be discussed some other time.
At the end of the First World War, the United States joined the war, that is, in 1917, two years after the sinking of the Lusitania, a ship carrying American passengers that had left from New York. It had been sunk by torpedoes shot from a German submarine following the absurd instructions of attacking a vessel carrying the flag of a distant, rich and potentially powerful country whose government, from supposedly neutral positions, was looking for a pretext to join the United Kingdom, France and other allies in the war. The attack took place on May 7, 1915, as the vessel was crossing the Strait between Ireland and England. Actually, very few passengers could abandon ship in the 20 minutes before it sank, thus, the 1,198 people still on board lost their lives.
The U.S. economy grew steadily after that war, except for recurrent crises which were resolved by the Federal Reserve without a major impact.
Then, on October 24, 1929, a date that would go down in the history of the United States as the “black Thursday”, the economic crisis started. According to the right wing theoretician and famous American economist Milton Friedman, an economics Nobel Laureate (1976), the Bank of the New York Reserve in Wall Street, the same as other major banks and corporations, reacted “instinctively” by adopting the measure it considered most appropriate: “injecting money into circulation.” The Washington Reserve Bank, which was used to the dominance of its criteria, finally forces the opposing view. President Hoover’s Treasury Secretary supports the Washington Reserve Bank, and that of New York eventually gives in. “But the worst was yet to come,” says Friedman, who explains clearer that any other outstanding economist –some of them with an opposing view– the sequence of events as he writes: “It was not until the autumn of 1930, that the recession of the economic activity, although serious, was affected by financial difficulties or by the petitions of the depositors trying to withdraw their money. The nature of the recession experienced a dramatic change when a chain of bankruptcies in the Midwest and South of the United States undermined confidence in the banks leading to numerous attempts at turning the bank deposits into cash.”
“The American Bank was closed on December 11, 1930. This was the critical date. It was until then the most important commercial bank in the American history that had collapsed.”
Just in the month of December 1930, 352 banks were closed. “The FED could have tried a better solution buying on a large scale public debt bonds in the open market.”
“On September 1931, when the United Kingdom abandoned the gold standard, the other pursued an even more negative policy.”
“After two years of strong repression the system reacted by raising the interest rates at a level never known before in its history.”
Be mindful that Friedman is exposing a view that is still prevalent in the U.S. official circles, almost 80 years later.
“In 1932, under Congress pressure, the FED concluded its sessions and immediately cancelled its buying program.”
“The final episode was the banking panic of 1933.”
“The fear was intensified during the interregnum between Herbert Hoover and Franklin D.Roosevelt, who was elected on November 8, 1932 but was only inaugurated on March 4, 1933. The former did not wish to take drastic measures without the cooperation of the new president, while Roosevelt did not want to take on any responsibility until his inauguration.”
The episode is a reminder of what is happening today with the president elected on November 4, less than a month ago, Barack Obama, who will be inaugurated on January 20, 2009. Only the interregnum has changed; in the 1930s it was of no more than 117 days and at present it is of no more than 77.
As Friedman indicates, at the moment of the greatest economic boom there were up to 25 thousand banks in the United States. Early in 1933 that figure had decreased to 18 thousand.
“When President Roosevelt decided to put an end to the closing of banks, 10 days after it had started,” said Friedman, “a few banks short of 12 thousand were allowed to open the doors, followed later by only 3 thousand others. Therefore, all together, some 10 thousand of the 25 thousand banks in 1929 disappeared during those four years, due to bankruptcy, merging or liquidation.”
“The closing of businesses, production cut down and growing unemployment all fed the agitation and fear.”
“Once the depression had started, it expanded to other countries and then, of course, there was this reflected influence: another example of the always present feedback in a complex economy,” Friedman concludes.
The world of 1933 described in his book is quite different from todays. This is an absolutely global world made up by more than 190 nations represented at the United Nations. Its population is threatened by risks that scientists, even the most optimistic, cannot ignore and that a growing number of people know and share, even prominent American politicians.
The echo of the impact of the current crisis can be felt in the desperate efforts of important world leaders.
The Xinhua press agency has reported that Hu Jintao, President of the People’s Republic of China, a country with a sustained growth exceeding two digits in the past few years, warned yesterday that “China is under increasing pressure from its enormous population, its limited resources and environmental problems.” This is the only country that we know has foreign currency reserves amounting to almost two trillion dollars. The Chinese leader lists “a series of indispensable steps to secure the primary interests of the people and preserve the environment in the framework of the Chinese strategy of industrialization and modernization.” Lastly, he indicated that “with the expansion of the financial crisis the world demand for products has been markedly reduced.”
These words from the leader of the most extensively populated country on Earth make it unnecessary to add any more arguments on the depth of the present crisis.
Fidel Castro Ruz
November 30, 2008