June 14, 2012 at 1:01 pm #15737
I just finished your lesson on the Great Depression. In it you said it was the United State goal of helping the British that was one of the problems. Britain was off the gold standard, so they could inflate the pound to finance WWI. After WW I they returned to the gold standard at the pre-WW I exchange into gold rate, when the pound was not worth the same as pre -WW I. Was the United States keeping their interest rates lower than Britain, so that they would not compete with Britain for deposits, one of the problems that led to the stock market bubble? Also, Strong was debasing the dollar to help Britain, how was he doing that?
There are so many aspects to the Depression. You could and maybe should have a whole class on that.
TimJune 17, 2012 at 12:18 pm #15738
Hey Tom, Just finished your liberty classroom lecture on the great depression. I am sure there could be a whole section on this topic alone. Question. The USA was supporting Britain, who set their exchange rate, when they returned to the gold standard, at pre WW I levels. Did the US have their interest rate too low, not to compete with Britain? In other words, when the US should have raised rates, they kept them below Britains, thus easy money and stock market bubble. Is that how the US debased the dollar. (Its funny, I kept typing we when I wanted United States. I am not a we anymore.)June 17, 2012 at 10:00 pm #15739jmherbenerParticipant
Power over monetary policy was not centralized in the Board of Governors until the Banking Act of 1935. Benjamin Strong headed the group of Federal Reserve District Bank presidents who, with Board approval, determined rates of discount for commercial paper and open market operations during the 1920s. They engineered a significant monetary inflation and credit expansion in part to re-establish the gold standard, at the pre-War parities and in part to stimulate domestic economic activity.
After the War, the exchange rate of the pound had fallen to $3.20. Britain tried to restore the gold standard at a rate of $4.76. Speculation had driven the rate near $4.70 after 1925, but the fundamentals of underlying purchasing power would not justify it without significant manipulation. That is what the speculators were betting on.
Strong reported to the Board that for the three years 1925-1927, the Fed’s portfolio increased $200 million, the gold stock $18 million, but bank credit had soared by $5 billion. The discount rate was lowered from 6 percent to 4 percent.
The idea was that the pound would appreciate against the dollar if the dollar’s purchasing power was lowered by monetary inflation. The scheme failed because, Britain refused to moderate its own monetary inflation and rising international demand for the dollar prevented the purchasing power of dollar from falling.
The eminent monetary economist, Alan Meltzer, chronicles this story in his landmark book, A History of the Federal Reserve System, Vol. 1.June 18, 2012 at 6:34 am #15740
Thanks Jeff, now I understand. Seems like once banks and Federal Reserve systems inflate, it is like a drug, they can’t get off. I doubt this time around the US economy will not grow into this inflation either.July 4, 2012 at 9:03 pm #15741RedsPwnAllMember
Not to hijack the OP’s thread, but I also have my questions:
1) I don’t think I quite fully understand how the Great Depression became so, worldwide as it did. Was just simply the Fed itself, and going off the gold standard that did it?
2) My second question is more towards the policies of Sweden during The Great Depression. Many say it went full-blown who went full-blown Keynesianism to recover, is this true? If not what attribute to its quick recovery as others say.July 6, 2012 at 10:54 am #15742jmherbenerParticipant
The Great Depression came as a result of the disruption of the world economy and destruction of the international gold standard in the First World War. For all its faults, the international gold standard did impose some fiscal and monetary discipline on countries. Governments that inflated their currencies to help fund their expenditures lost gold reserves to the more prudent countries and suffered booms and busts in the process of inflating the money stock and then deflating as they lost gold.
The period of suspension of the gold standard during and after the war gave states a taste of the power they could wield unfettered by the old monetary and fiscal constraints. But, they did concede that an international monetary system was conducive to, if not essential to, the restoration of international trade and the world economy. They constructed the gold exchange standard, established in the mid-1920s, to try to restore international trade while allowing exercise of their new powers of monetary inflation. Far from penalizing excessive monetary inflation, the gold exchange standard penalized lack of harmonization of monetary inflation among different governments. That is, its purpose was to foster a coordinated monetary inflation among the member countries. As they all inflated together in the latter half of the 1920s, they all went through the boom (and subsequent bust) together. Even so, the inflation was disparate in different countries and one by one states decided to abandon the gold exchange standard too.
The classic work to read on the international aspects of the Great Depression is Lionel Robbins, The Great Depression.October 26, 2012 at 2:59 am #15743miljacicMember
In this lecture on great depression Mr Woods suggests that long-term loans are disproportionately sensitive to manipulations of the interest rate. Since I never took such a loan, I don’t really understand why is this so, strictly mathematically speaking… for example, why the very first month payment all goes to paying the interest and very little to the principal.
My basic question is, for anyone who knows: what is the typical mathematical setup of a long-term loan, how much goes for paying interest as time progresses, and why. Thanks!October 28, 2012 at 4:49 pm #15744woodsParticipant
You can actually see this on the statement the bank sends you every month. It breaks the payment down by principal repaid and interest paid.
When you first start paying, say, a $250,000 loan, interest is accruing on $250,000. When you’ve paid the loan down to just $25,000 left in principal, you are paying interest only on $25,000. The interest amount is therefore much lower, which means that your fixed monthly payment is now disproportionately going to principal repayment.
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