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Originally posted by Capitalizt The federal reserve was in existence 16 years before the crash of 29. That effectively ended hard money in the USA. They were the ones that expanded the money supply tremendously in the 1920s and set ridiculously low lending requirements and margin rates that led to the big stock bubble. This certainly caused the crash, but it was the "cure" from Washington what ultimately caused the depression. All of the price fixing and other distorting nonsense supported by FDR is what prevented the natural correction. It made the situation far worse than it otherwise would have been.

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Before the creation of the Federal Reserve, Friedman and Schwartz noted, bank panics were typically handled by banks themselves – for example, through urban consortiums of private banks called clearinghouses. If a run on one or more banks in a city began, the clearinghouse might declare a suspension of payments, meaning that, temporarily, deposits would not be convertible into cash. Larger, stronger banks would then take the lead, first, in determining that the banks under attack were in fact fundamentally solvent, and second, in lending cash to those banks that needed to meet withdrawals. Though not an entirely satisfactory solution – the suspension of payments for several weeks was a significant hardship for the public – the system of suspension of payments usually prevented local banking panics from spreading or persisting. Large, solvent banks had an incentive to participate in curing panics because they knew that an unchecked panic might ultimately threaten their own deposits. It was in large part to improve the management of banking panics that the Federal Reserve was created in 1913. However, as Friedman and Schwartz discuss in some detail, in the early 1930s the Federal Reserve did not serve that function. The problem within the Fed was largely doctrinal: Fed officials appeared to subscribe to Treasury Secretary Andrew Mellon's infamous 'liquidationist' thesis, that weeding out "weak" banks was a harsh but necessary prerequisite to the recovery of the banking system. Moreover, most of the failing banks were small banks (as opposed to what we would now call money-center banks) and not members of the Federal Reserve System. Thus the Fed saw no particular need to try to stem the panics. At the same time, the large banks – which would have intervened before the founding of the Fed – felt that protecting their smaller brethren was no longer their responsibility. Indeed, since the large banks felt confident that the Fed would protect them if necessary, the weeding out of small competitors was a positive good, from their point of view. In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn. … Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again. - Fed Chairman "Helicopter" Ben Bernanke http://www.federalreserve.gov/BOARD...108/default.htm

In discussing the current crisis...

There are two options for the Federal Reserve.

OPTION 1: Capitalitz argument...Let the banks fail. Leave interest rates alone. Don't increase the money supply.

OPTION 2: The actions the Federal Reserve did take. Pump liquidity into markets/banks, lower interest rates, increase money supply.

The problem with option 1 is the resultant effect. DEFLATION would set in, which is the mark of a recession, but in this case, we would be in more than a recession, we'de be in a depression (severe recession). We can see it right now. Plummeting stock, house, and other values. Prices are falling. When inflation is rampant, prices RISE. That is no what's happening. Prices are PLUMMETING. So the Federal Reserve is at liberty to increase the money supply to stem the plummeting asset values within the economy. Another effect of deflation is higher unemployment, businesses collapsing, and an increase in defaulting debtors. All of this is occurring as we speak. So, with all this mind, it was essential for the Federal Reserve to inject more liquidity into the economy, and the government to do this bailout. Otherwise, we'de be in the midst of a massive deflationary spiral the likes of which are rivalled only by the deflationary Great Depression. My friend, this would be 1929 all over again, you really don't know how close we are to it. If we were on the gold standard, God only knows the dog doo doo we would be in right now.

So the main point is...inflation right now is good. Increase in money supply right now is good. Why? Because the alternative. Deflation. Would be a much meaner, nastier, bear to wrestle with. You really must let go of this idea that all inflation is bad all the time. Too much inflation, hyper-inflation, yes that's bad. But we need an economy which can adjust the money supply the way it sees fit. And right now, it's very very fit, to increase the money supply. The risk of inflation is substantially offset by the risk of deflation, and so the Fed acted. I am very glad they did what they did.

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I responded to pk one second before your post krypt, lol. My response is the same. And you need to do a bit more reading I'm afraid.. Yes, dollars will still redeemable in gold in 1929, but that did not stop the fed from expanding the money supply and extending credit to businesses and speculators on a huge scale. I think this is one of the reasons that caused people to lose faith in the currency.

You should really be asking yourself...Why was there was such a panicked rush into gold? If the government were on a true gold standard, there would have been no panic, because every dollar would have literally been "good as gold". Those dollars should have been backed by gold..but they weren't! This is because the fed had already inflated money supply WELL BEYOND the gold reserves of the nation's banks. Paper floating around without gold to back it up = major cause of the panic and bank runs.

I also take issue that deflation is necessarily worse than inflation. If we had a healthy economy and a positive savings rate rather than a negative one, a little moderate deflation wouldn't be bad at all. It would mean that a nation's currency is strong, and that your savings would hold value over time. The purchasing power of your savings would be maintained..while prices on goods and services gradually decline. I personally don't mind deflation on the prices of computer parts or other high tech stuff. It's nice to be able to buy new products for cheaper prices than they were a few years ago. Deflation wouldn't be such a bad thing if our economy wasn't built on a mountain of personal and government debt.

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Originally posted by Capitalizt I responded to pk one second before your post krypt, lol. My response is the same. And you need to do a bit more reading I'm afraid.. Yes, dollars will still redeemable in gold in 1929, but that did not stop the fed from expanding the money supply and extending credit to businesses and speculators on a huge scale. I think this is one of the reasons that caused people to lose faith in the currency. You should really be asking yourself...Why was there was such a panicked rush into gold? If the government were on a true gold standard, there would have been no panic, because every dollar would have literally been "good as gold".. Every dollar would have been backed by gold. As you know this wasn't the case because the fed had already inflated money supply WELL BEYOND the gold reserves of the nation's banks. Paper floating around without gold to back it up = major cause of the panic and bank runs.

Did you read everything I posted? I explained in pretty fine detail the effects of the gold standard during the Great Depression, and even provided examples of nations abandoning it in 1931, only to recover much faster the US did.

The gold reserves of the country are largely fixed. The gold-backed currency is not. Now, if there was no increase in the supply of currency, the inevitable effect is the deflation of asset values, which is a very bad thing. Small to moderate inflation is an indication of a healthy economy.

Why was there a panicked rush into gold? Because people lost faith in the GOLD-BACKED currency, and they just wanted gold. Every dollar was backed by gold, and as good as gold, but the system fell apart in deflationary chaos, hence the reason Roosevelt took all the gold. The alternative was the complete collapse of the currency.

Now what do you suggest? That we completely abandon paper currency in favor of 100% pure gold coins? Come on man...That's as utopian as a perfect socialist society in which everyone is equal. The economics of it just does not work...on a fundamental level...

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Originally posted by Capitalizt I also take issue that deflation is necessarily worse than inflation. If we had a healthy economy and a positive savings rate rather than a negative one, a little moderate deflation wouldn't be bad at all. It would mean that a nation's currency is strong, and that your savings would hold value over time. The purchasing power of your savings would be maintained..while prices on goods and services gradually decline. I personally don't mind deflation on the prices of computer parts or other high tech stuff. It's nice to be able to buy new products for cheaper prices than they were a few years ago. Deflation wouldn't be such a bad thing if our economy wasn't built on a mountain of personal and government debt.

Deflation is worse than inflation. I'll tell you why. When prices are falling, because of a decrease in the money supply, this crimps demand. Because demand is reduced, economic output is also reduced. Businesses start laying off workers because of the reduced economic activities. Because prices are falling, this provides incentive for consumers to delay purchases and consumption until prices fall further, and soon a runaway effect takes shape, called the Deflationary Spiral CLICK. The Great Depression is a perfect example of this phenomenon. A gold standard makes it worse and longer lasting.

The reduction in the price of computer is not caused by deflation. Deflation is a reduction in money supply. The reason computer parts become cheaper and cheaper, while at the same time becoming better and better, is because each unit produced by computer parts manufacturors is increasingly packed with more and more processing power. Because they can increase processing power for each unit produced, they can produce more and more powerful units, for the same price. This pricing effect is not the result of deflation.

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krypt..a deflationary spiral is taking things to an extreme just like the hyperinflation example in Germany. It would be possible to have a healthy deflationary environment..but sadly not in today's economy. Our economy is built on a mountain of debt and consumption. Consume Consume Consume...save nothing....don't plan for the future...live for today. That is the attitude of the modern world, and as long as we want to keep borrowing up to our eyeballs to maintain this style of living, I agree deflation isn't good. It is only good when we have a positive savings rate..not when people, businesses, and governments are deep in debt.

Now back to the other issue..As far as I know, a gold standard is one of the few ways to truly bind the federal government..to force them to live within their means. When money can be printed out of thin air there is no limitation on what your government can do. If you can find an alternative that accomplishes this objective, I'd be glad to hear it..

Personally I like the idea of competing currencies. I know we will never voluntarily get rid of the federal reserve.. But why not just legalize competition to the dollar? It's been tried a few times...most recently last year. http://en.wikipedia.org/wiki/Liberty_Dollar

The liberty dollar group was a small operation...but if a few banks or large investors got together and decided to issue a hard currency backed by a basket of commodities or something else, why not let them? If the feds were being prudent with our money and were determined to maintain it's value, they should have nothing to fear from a little competition.

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Originally posted by Capitalizt A true gold standard is one of the only way to bind the federal government..to force them to live within their means. When money can be printed out of thin air there is no limitation on what they can do. If you can find an alternative that accomplishes this objective, I'd be glad to hear it..

A true gold standard would not only bind the federal government, but would you, me, and the entire economy. The idea of it is truly on the scale of communist utopia in which everyone in society is truly equal.

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Personally I like the idea of competing currencies. I know we will never voluntarily get rid of the federal reserve.. But why not just legalize competition to the dollar?. It's been tried a few times...most recently last year. http://en.wikipedia.org/wiki/Liberty_Dollar

So you want other currencies to be considered "legal tender" within the USA? It's never going to happen. Anyways, you can buy commodities on the open market any time you want. What's stopping you?...well, nothing, me and you have traded gold/silver. You don't need to buy some commodities backed currency. You can already buy the commodity itself.

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The liberty dollar group was a small operation...but if a few banks or large investors got together and decided to issue a currency backed by a basket of commodities or something else, why not let them? What harm could it do? If the feds were being prudent with our money and were determined to maintain it's value, they should have nothing to fear from a little competition.

To maintain the value of the dollar, the public's confidence in the dollar's value must be maintained. Having a competing currency undercuts this goal. Additionally, who would control the money supply of this new currency, if not the Federal Reserve? One of the primary reasons the Fed was even created was to consolidate all the competing currencies floating around into one. Having a competing currency inside the USA would do much more damage than good.

Anyways, you can already...buy commodities like gold and silver on the open market...and...buy other currencies on the open market. You need to realize that the dollar already is competing with other international currencies. No need to have one competing domestically. I've been buying some Iraqi Dinars recently. It's not that hard at all. If you don't have faith in the dollar, start buying Euros, or gold. Your options are limitless...

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Originally posted by Capitalizt krypt..a deflationary spiral is taking things to an extreme just like the hyperinflation example in Germany. It would be possible to have a healthy deflationary environment..but sadly not in today's economy. Our economy is built on a mountain of debt and consumption. Consume Consume Consume...save nothing....don't plan for the future...live for today. That is the attitude of the modern world, and as long as we want to keep borrowing up to our eyeballs to maintain this style of living, I agree deflation isn't good. It is only good when we have a positive savings rate..not when people, businesses, and governments are deep in debt.

If deflation is present in the economy, that means people lose jobs, economic output decreases, productivity decreases, asset values decrease, etc. None of this is good. There is no such thing as a "healthy deflationary environment". It doesn't exist. Such an environment means the economy is in a recession. The only good thing to come out of a recession is an increase in savings. But I believe there are ways to increase savings without having a deflationary economy. One thing is, making it illegal to borrow money using savings, 401k, IRA, as collateral.

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oh believe me krypt I am getting out of the dollar as fast as I can. Every other pay day I visit the local coin shop to grab a few generic silver bars.. As I've said before though, my main interest is putting a harness on the federal government. Anything that might sedate them (even temporarily) is good in my book.

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Originally posted by Capitalizt oh believe me krypt I am getting out of the dollar as fast as I can. Every other pay day I visit the local coin shop to grab a few generic silver bars.. As I've said before though, my main interest is putting a harness on the federal government. Anything that might sedate them (even temporarily) is good in my book.

I agree, but a gold standard is not the answer. I mean, look at what Bill Clinton did. A government surplus is completely feasible.

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Originally posted by Krypton If deflation is present in the economy, that means people lose jobs, economic output decreases, productivity decreases, asset values decrease, etc.

Deflation is nothing more than a decline in the general price level. You are associating it with recessions because that is what we've seen in the past, but these two things aren't necessarily linked. Money/credit contractions are a bad cause of deflation, I agree...but prices can also fall when the economy is doing well and productivity rises. When new methods of production are developed and more can be produced at a lower cost, prices drop and this is a positive type of deflation.

P.S. Bill Clinton rocked.