Boom-Bust Cycles: Can We Learn From Experience?

By Tom Rose
May 01, 2006

The Federal Reserve Bank (FRB) began operating in 1914. Since then the purchasing power of the dollar has decreased by 98%. This debauching of our monetary unit was the result of planned inflationary monetary policy; it was not a chance happening. Can we learn from history to protect the welfare of our families in the future?

But first let’s look at the history.

In 1921 the United States experienced a post-war depression. Neither the FRB nor the U.S. intervened. As a result of government’s non-intervention, it was the shortest and least damaging depression in American history! In every following recession/depression, the FRB would play a very active role.

The FRB discovered a new power in 1923 — that it could manipulate short-term economic activity through buying and selling government securities in the open market.

Meanwhile, England in 1924 had returned to a form of the gold standard (gold-exchange standard) after WWI, but it did so at an unrealistic price of the pound relative to gold.  British citizens were buying U.S. bonds which paid higher interest rates, thus causing an outflow of gold from Britain to these United States.

Responding to this problem, Montagu Norman, head of the Bank of England, invited Benjamin Strong, Governor of the Bank of New York, to England for a behind-the-scenes visit. When Strong became aware of Norman’s problem of losing gold to America, he replied, “We will give the stock market a coup de whiskey!” (by creating money to artificially depress interest rates in America). The result was the speculative inflationary bubble of the “Roaring Twenties” which ended in the 1929 stock market crash when the FRB suddenly raised the “discount rate” by 20% (from 5% to 6%).

After the 1929 crash, the FRB followed a perverse monetary policy of restricting credit. This caused a deep depression which President Franklin D. Roosevelt used as an opportunity, in 1933, to illegally destroy Americans’ right to own gold by confiscating it at about $20 per ounce, then revaluing it at $35 per ounce.

The result was America’s longest depression which destroyed much private American wealth and impoverished millions of ordinary people, thus making citizens easily subject to manipulative government political control.

Roosevelt’s imposition of state-directed fascism did two things. First, it served to undermine the historic sense of America’s individual freedom and self-responsibility. It also served to establish countless dictatorial government agencies which now control practically every aspect of Americans’ private lives — finally ending with the blatantly unconstitutional “Patriot Acts” and the frightful “Homeland Security” agency.

The Great Depression ended in 1939 when American factories started producing munitions for the Allies in WWII. From this time to the present, the FRB has followed a persistent inflationary monetary policy to stave off the continual threat of rising unemployment and recessionary forces. On one hand, the FRB has falsely mouthed its “duty to protect the purchasing power of the dollar” while, on the other hand, it has insidiously undermined the integrity of the dollar through continual money creation.

Other inflationary boom-bust cycles occurred after World War II.

In 1955-57, special interest groups fostered extending the period of credit for buying new autos from 18 months to 36 months. This caused a boom in auto sales in 1955 but led to a decline in auto sales in 1957 because buyers were still encumbered with loans on their existing autos.

The economic crash of 1963-64 was caused by a sudden reversal of FRB “loose” money to “tight” money. Once again, net wealth flowed from the “weak” hands of borrowers to the “stronger” hands of institutional lenders.

The FRB’s “loose” monetary policy first led to a drop in interest rates which stimulated an inflationary boom that lasted from 1970-1980. The declining purchasing power of the dollar caused lenders to demand higher interest rates on money lent out. By late 1979 and early 1980, short-term interest rates had risen to almost 20%! A new recession began.  

At an international monetary meeting in Tokyo (international monetary collusion) in 1985-87, the FRB agreed to flood our economy with newly created money to force down interest rates. This policy led to the stock market crash of 1987 when the FRB repeated its prior folly of drastically raising the “discount rate.” The Dow Jones Industrial Average plummeted 258 points in one day! 

During the 1990s and up to the present, continued monetary inflation by the FRB has generated the greatest speculative bubble in America’s entire history. The irony of the matter is that the American public generally still trusts the behind-the-scenes monetary manipulation of the FRB, in spite of its consistent failure to protect the purchasing power of the dollar! 

Does the historical record of the FRB warrant our continued trust? In whom should we put our trust? (See: Psalm 118:8-9.)

Topics: Economics, Government, Statism

Tom Rose

Tom is a retired professor of economics, Grove City College, Pennsylvania. He is author of seven books and hundreds of articles dealing with economic and political issues. His articles have regularly appeared in The Christian Statesman, published by the National Reform Association, Pittsburgh, PA, and in many other publications. He and his wife, Ruth, raise registered Barzona cattle on a farm near Mercer, PA, where they also write and publish economic textbooks for use by Christian colleges, high schools, and home educators. Rose’s latest books are: Free Enterprise Economics in America and God, Gold and Civil Government.

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