In the previous section we described how the monetary system was born in the USSR. If you haven’t read this article, we refer you to this place. Today we will move to a topic that may be particularly close to us today. It is about the so-called great crisis.
A great crisis breaks out
The great crisis began in October 1929. It didn’t start with any nasty plague, but with the stock market crash, specifically on Wall Street. At that time, the US authorities tried to fight the problem with completely different methods than at present. President Herbert Hoover and his advisers have focused on deflationary policy. Customs duties were also increased by as much as 40%. Immigration laws have also been tightened. In addition, the Grain Stabilization Corporation, founded the following year, bought grain from farmers. A public works program has also been launched – but for now on a small scale.
In July 1931, attempts were made to save the banking sector. As much as USD 4 billion has been allocated for this purpose. Failed: more banks went bankrupt. In total, 5.5 thousand operations ended in 1929-1932. institutions of this type, which meant that every 4th bank went bankrupt.
Further on, taxes were raised by 40 percent. There was also a conflict with war veterans. Under the Bonus Act of 1924, they were to be paid benefits of $ 1 for each day of their former service in the army. The trial, however, was to be lengthy and last until 1945. They demanded accelerated payments during the crisis. As a result, there were bloody protests in Washington.
At this point, we are already entering a controversial and difficult to assess period. It’s about the so-called Big Deal. First of all, it may appear from the above description that the authorities did not deal with the crisis. However, just before Franklin Delano Roosevelt came to power, the situation began to improve. The reflection in the economy was clearly visible.
Roosevelt himself went to the elections with the New Deal program. He claimed to heal the American economy. Despite this, his electoral success was accompanied by panic. Economists have argued that monetary policy and monetary policy will loosen by the decision of the new tenant of the White House inflation (i.e. something we see today).
Eventually, Roosevelt took power in early 1933 (on the other side of the ocean another politician emerged from the crisis – Adolf Hitler – and exactly on January 30, 1933 he became Chancellor of Germany). The new president has announced a “bank holiday”. After 9 days of announcing 75% banks resumed operations. However, the new law divided them into commercial and investment ones and those subordinate to the Fed. The Federal Deposit Insurance Corporation was established, which insured the deposits of bank customers up to 5,000. USD. Further regulations increased the centralization of the Fed. The power of the Federal Reserve Governor has become much greater than the governors of the individual state reserve banks.
Interventionism and pressure on Americans
Roosevelt also started the intervention program. Government agencies dealt with the reduction of supply in agriculture. Numerous and large public investments have also been started.
A little-known fact is that in 1934-1935 the Supreme Court questioned the compliance with the US Constitution of most of the new laws related to the New Deal. The administration was accused of generating a large deficit.
In addition, in May 1935, Congress passed the so-called amendment from Thomas. This authorized the government to devalue the dollar by 50 percent. In this way, they wanted to force citizens to buy … everything. Americans, in fact, were scared in crowds to the shops. Only this madness lasted a short time. After some time, the US residents cooled down and decided that the authorities only act in such a way as to scare them. In response, in autumn 1933, the intention to devaluate was announced, but without setting a limit (i.e., Congress could, for example, devalue the dollar by 90%). The Americans stormed the stores again.
Finally, on January 21, 1934, the dollar was devalued by as much as 40 percent. Currency convertibility to gold was suspended almost simultaneously. Not only that, everyone – both individuals and banks – had to sell their gold to the state. Then, a law was introduced that limited the possibility of acquiring crumbs by US citizens. Yes, it really took place in a country that has been associated with civic freedom for decades!
As you can see, New Deal can be controversial. Economists, moreover, argue to this day whether Roosevelt’s ideas actually helped the economy. David Stockman in the “Great Deformation” rather points to the negative aspects of the president’s rule. He explains that the situation began to improve already during the term of his predecessor. It is possible, therefore, that the economy could be left alone so that the crisis would end. In any case, it cost Americans the loss of some civil liberties. Besides, have you not heard that every crisis is used by the government for just such purposes?
The crisis has spread all over the world. One of the largest banks went bankrupt in Germany. Also the local authorities tried to fight the crisis with deflation. In December 1931, even a top-down reduction in prices, wages and rents was established, by as much as 10%.
From May 1932, the method of fighting recession was changed. The new Chancellor Franz von Papen initiated a public works program. In general, the economy was also redirected to interventionist management methods.
Germany’s problem was that most Germans still remembered the hyperinflation of the 1920s. Certainly the citizens of the Weimar Republic were afraid of the return of this nightmare. This can be explained by the fact that suddenly the Nazis, with Adolf Hitler in the top, started to gain popularity since 1932. This fear and faith that the NSDAP leader would make Germany great again led to the success of the Nazi party in 1932 and a few months later Hitler took up the position of chancellor.
The Nazis eventually winded up the market by reinforcement and public works (construction of famous highways). The standard of living increased (although it was far from that before World War I). Many economists emphasize that Hitler’s policy would sooner or later lead to hyperinflation and bankruptcy of the Third Reich. Therefore, the solution turned out to be war in Europe, and ultimately on a global scale.
It is also worth mentioning the famous Mefo bills of exchange. It was with their help that these reinforcements were financed. They also paid workers who worked in companies that produced weapons. Bills of exchange were not a type of currency, but they were accepted in banks. They actually helped in the quiet printing of money. Finally, in 1936, the government introduced a price and wage block. This was in force until 1948, i.e. three years after the end of World War II.
In parts of Europe it was not better. The financial crisis was raging in Austria. Fascist Italy moved even more towards interventionism. In 1934, the lyre was devalued and currency control was introduced.
Belgium has also decided to devalue the currency. The Netherlands did the same. Switzerland has carried out two devaluations.
The world was heading towards war …