Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and “The Coming Collapse of the Municipal Bond Market” (Aucontrarian.com, 2009)
“We have taken today a step, which is a substantive step, which will provide additional accommodation for the economy and moreover we have stated that we are prepared to take further steps if necessary to promote sustainable growth and recovery in the labor market, so we are prepared to do what is necessary. We are prepared to provide support for the economy.”
-Ben S. Bernanke, Press Conference, June 20, 2012
Felix Somary, banker, economist, and diplomat, did not adapt to modernity. Viennese born (1881), he had the foresight to convert his clients’ Austrian and Belgian bank deposits to gold (in Switzerland and Norway) in July 1914. (“I was uncertain how much insight the King [Edward V – first cousin to Kaiser Wilhelm II] could have into the situation. I had seen six years before how little informed more capable rulers had been; the information available to insiders, and precisely the most highly placed among them, is all too often misleading.”) He became a Swiss citizen in 1933 and later served in diplomatic missions to Washington. He died in 1956.
In Democracy at Bay (1952), Somary looked at the financial immolation of the West from an earlier perspective: “But that invested capital should in an equal period of time not only not increase but shrink to nothing, or almost nothing, would be considered an impossibility in the eighteenth or the nineteenth century. Despite all the technological advances the West was set back economically by several generations, and the doctrine of the various political parties became meaningless.”
Somary published a table of capital increase between 1884 and 1914 in Germany (+150%), Austria (+150%), Italy (+150%), and France (+110%). Another table follows with the capital decrease between 1914 and 1948 in Germany (-100%), Austria (-100%), Italy (-98.5%), and France (-97%).
Somary commented that in the ruin of the savings banks and of the insurance companies, the middle class lost its financial backbone. The depreciation of government bonds wiped out the reserves of workers’ old age insurance funds.
Bringing this up to date, the middle class and workers are left perplexed, uprooted, disoriented, and can not distill the truth, since, for so long, it has been turned inside-out (or upside-down) by clever and shoddy academics, power-mad bureaucrats, and political opportunists.
Benjamin Anderson, otherwise known as “The Good Ben,” wrote an excellent book with an awful title: Economics and the Public Welfare, A Financial and Economic History of the United States, 1914-1946, published in 1949. It is an economics unfamiliar to this generation’s central bankers; among other reasons, Anderson understood integrity was the backbone of finance. There is probably not a mainstream college textbook today that addresses this nexus, since the combination is foreign to celebrity, economics professor.
Let us compare accounts by Good Ben and Bad Ben of the destruction wrought by Britain when it abandoned the gold-exchange standard in 1931. Anderson wrote (skipping ellipses, as is true below): “The collapse of the gold standard in England was absolutely unnecessary. But Britain did not fight. To a British banker in 1913, this would have been an incredible thing. There was a great shock as it developed that the Bank of France had lost seven times its capital through its holdings of sterling, through trusting the Bank of England, and perhaps the even more shocking discovery that the Netherlands [central] Bank, trusting the word of the Bank of England, had lost all its capital in the decline in sterling. Governments could no longer trust governments in financial matters, and the confidence in central banks by one another was gravely shaken. An immense world asset was destroyed when the Bank of England and the British government broke faith with the world.”
In his lecture series at George Washington University in March 2012, Federal Reserve Chairman Ben S. Bernanke, The World’s Leading Authority on How to Create a Great Depression, told the unfortunate students (watch the video – they are taking notes!): “[T]he reason the Bank of England could maintain the gold standard was that everybody knew that they were going to – their first, second, third, and fourth priority was staying on gold and that they had no interest in any other policy objective. But once there was concern that [sic] Bank of England might – you know, might not be fully committed, then there was a speculative attack that drove him [sic] off gold.”
The gilded professor taught the students that at the moment a rock-solid solemn vow is attacked, the thing to do is abandon resolution and to panic: courage to the rear of the class. This, obviously, is a neon sign for investors to expect in the future what we have seen in the past: in a pinch, Bernanke’s course will be to steer the Fed and his banking buddies out of harm’s way. Taking a longer view, it is leadership of this persuasion that fleeces the middle class and peasants, steering the 99% into stocks and mortgages when the 1% need protection.
It is not true in the least that once there was a speculative attack, Britain needed to abandon gold. At the simplest level, it makes no sense. If it did, anyone at anytime could have launched a speculative attack against a currency – including all currencies with less prestige than the pound – and won big. Anderson wrote: “On August 28, , an additional credit of $400 million was given to London by a consortium of commercial [French and U.S] banks and private banks. The expectation was this would surely be enough if Britain made the necessary adjustments. But Britain did not fight. On Friday, September 18, Doctor Vissering, head of the Netherlands Bank, phoned Governor Montagu Norman of the Bank of England to inquire if it were safe for him to continue to hold sterling, and received unqualified assurance that England would remain on the gold standard. England went off the gold standard with [the] bank rate at 4.5 percent. [In the past], in a much less grave crisis, [the] bank rate would have gone to ten percent long before anything like so much gold had left the country.”
Bernanke’s other comments during his lecture about the Bank of England in 1931 mirror the above, in the professor’s strange Val-Girl-Does-the-Ivy-League patois: “In 1931, for a lot of good reasons, speculators lost confidence that the British pound would stand gold [sic], so just like a run on the bank, they all [sic!] brought their pounds to the Bank of England and said, “Give me gold.” And it didn’t take long before the Bank of England was out of gold cause they didn’t have all the gold they needed to support the money supply and then, there was essentially, they’ve essentially had to leave the gold standard….They had no choice because there was a speculative attack on the pound.”
Of the United States abandonment of the gold-exchange standard in 1933, Anderson wrote: “The government had written the word gold not only on the Federal Reserve notes, but also on its bonds and on every interest coupon attached to them. The government was bound by its solemn promises, and the President was personally bound by his campaign utterances and by the platform of his party. It was dishonor.”
The Good Ben penned the most important lesson to be learned from Britain’s abdication of duty, one that Bernanke never learned or was taught, and it may not be possible to teach. At least, that is the real lesson taught by Ivy League economists. Bernanke is representative of the amorality that leads from the top today. Anderson wrote: [T]here is no need in human life so great as that men should trust one another and trust their government, should believe in promises, and should keep promises in order that future promises may be believed in and in order that confident cooperation may be possible. Good faith – personal, national, and international – is the first prerequisite of decent living, of the steady going on of industry, of government financial strength, and of international peace.”
The United States abandoned the gold standard, for an incomprehensible reason dreamt up by Franklin Roosevelt and a farm economist whose earlier scholarship included Alfalfa, An Apple Orchard Survey of Orleans, and Some Suggestions for City Persons Who desire to Farm.
In Once in Golconda, John Brooks described this amateur prank: “As to government policy, nations had before 1933, and often have since then, intervened in the markets to defend the values of their currencies; conversely, over the years they have often deliberately lowered the relative value of their currencies, but no nation had ever mounted a systematic and concerted attack on the currency, in a time when its gold stock was ample, for the sole purpose of creating domestic inflation and thus helping debtors. They had not done so because the idea was so outlandish it never occurred to them. If it had, it would have appeared to their economic ministers about as sensible as repeatedly hitting oneself in the head with a hammer so it would feel good when one stopped.”
In short, whatever else FDR and his hayseed economist concocted while eating scrambled eggs in the President’s bedroom, it was not a product of economic thinking. FDR excluded economists of any weight from this lark. Bernanke’s generation has no trouble justifying the action. A tribute to their scholarship is the fine description of Bernanke’s to George Washington U’s eager attendees: FDR “abandoned the gold standard. And by abandoning the gold standard, he allowed monetary policy to be released and allowed expansion of the money supply which ended the deflation and led to a powerful short term rebound in ’33 and ’34.”
To address the Bad Ben’s causes-to-effects ad seriatim (or, discuss any phrase other than he “abandoned the gold standard”), would be such a task, that only a budding economics Ph.D acolyte should take it on.
A Scandanavian central banker later told Anderson: “I have lost money in sterling. I have lost money in dollars. I have never lost money in gold.”
Anderson supplanted Somary’s historical review of the fleeting, insubstantial nature of savings, investment, and capital by 1949. Compared to the world of yesteryear, one could not know where in the world money was safe: “We knew nothing of ‘hot money’ on a large scale in the decades that preceded World War I, when great governments protected the gold standing of their currency as a matter of course because it was the honorable and expected thing to do. But since the bad faith of the two greatest governments in the world, Great Britain in 1931 and the United States in 1933, we have had a world of hot money jumping about nervously from place to place, seeing no safety anywhere, but going from places that seemed unsafe to places that seemed less unsafe. We have had a world in which men have been afraid to make long-run plans. We have had a world in which conscientious and scrupulous trustees have been turning from “gilt-edged bonds” toward common stocks, not because they are safe, but because they were less unsafe than the government obligations, and we have had them doing this with the approval of scrupulous and upright judges who have taken cognizance of the bad faith of government.” [My italics – FJS]
Somary wrote in 1952: “[F]or the first time in four centuries European free enterprise was deprived of investments and credits. The “capitalist’ had vanished overnight.” Somary added a footnote: “The temporary mushroom of inflationary and wartime speculation is a secondary phenomenon not related to this development.”
“Temporary mushroom,” indeed. Somary’s foresight throughout his life was extraordinary. But here, towards the end, it was impossible for him to believe the inflationary speculation would not only continue for another 60 years, but grow by – how much? – A thousand fold? Ten thousand fold? A million fold? Whatever the case, the middle class and peasantry do not know which way is up.
Dr. Kevorkian created a money-making brand name with his assisted-suicide gimmick. A generation earlier, he would have remained a strange specimen, studied by curious students, akin to radiation-resistant bacteria in a lab. His medical research explorations would have been ignored, at large. Like so much else these days that fills the news, his arguments were too preposterous to debate.
And so it was with FDR’s rationale for going off gold in 1933. He accomplished this feat at a time – as is true today – when the people were perplexed, uprooted, disoriented, and can not distill the truth. Today’s clever and shoddy academics, power-mad bureaucrats, and political opportunists control the categories. The destruction wrought by illegal money is, as Somary explained, the cracked foundation of social dishevelment.
Even with plain evidence of Bernanke’s failure at every step of his chairmanship, he could tell the press on March 20, 2012: “There are additional steps that can be taken and we have demonstrated through both communications techniques, guidance about future policy, which is something the Japanese have done as well, by the way – and through asset purchases, also something … Japan has done [he’s using Japan as an example of success! – FJS] – that central banks do have some ability to provide financial accommodations to support the recovery even when the short-term interest rates are close to zero. That being said … these nonstandard policies are less well understood and they do have some costs and risks but I do think at the same time that they can be effective in helping the economy.”
Chairman Bernanke is an unqualified failure. He is delighted at the prospect of experimenting with his Ad Lib Economics. Less than two years ago, the former head of the Princeton economics department returned to campus. After he was awakened from his favorite barcalounger in the faculty lounge, he spoke at the Bendheim Center for Finance: “The episode [the 2008 financial free-for-all – FJS] as a whole has not been kind to the reputation of economics and economists, and understandably so. Almost universally, economists failed to predict the nature, timing, or severity of the crisis; and those few who issued early warnings generally identified only isolated weaknesses in the system, not anything approaching the full set of complex linkages and mechanisms that amplified the initial shocks and ultimately resulted in a devastating global crisis and recession.”
And not one person threw an egg.