Sunday, March 29, 2009

The Forgotten Man - Amity Shlaes




I have read Milton Friedman on the Great Depression and the contraction of the money supply. I had never really thought about what that meant though.

Chapter 4
The Hour of the Vallar

One late summer day in 1931 in Salt Lake City, the money ran out. Not just the money in the banks, and not just the money in town coffers--the money that citizens had to spend. Locals reached into their pockes and, finding nothing, began to trade work and objects.


She then goes on to explain how barter systems sprang up in responce to the lack of currency. I have never thought about the everyday real world implications of having no stock currency. With the way they print greenbacks in Washington, I am sure it will never happen again. I think the danger today is the opposite. We will have plenty of currency, but it will mean nothing. That is the terrible other side of the spectrum. Still, the history is interesting.

Not only did people begin bartering, they started printed their own currency, like the Vallar in the title of the chapter...

"The money droubht that America was suffering from had a technical name: deflation. Deflation meant that the currency was becoming more valuable every day, rarer and scarcer."


Money was becoming worth more and the business climate was risky. It added an incentive to hoarde money. They also had high taxes on upper incomes, which worked in a perverse way to decrease the money supply. If I take a venture in a risky environment, the risk is all mine. If I lose I could lose it all. If I win and I make money I have to give much of my profit to the government. If I just hold on to my money though, it is increasing in value. It gives the incentive to do nothing. The policy of the government was to make the rich take the sidelines, and at the same times FDR was going after the same "idle rich" that he had created.

"The effect of all this was that banks tended to make loans to businesses in periods of expansion. In periods of contraction, the banks made fewer loans. yet those same bad periods were the very times when the banks most needed and infusion of cash from the Fed."


It appears that the government has at least done this this time around, at least in terms of the infusion of cash.

"Perplexed, yet courageous, American towns and neighborhoods rallied one more time. he made a last effort to solve the money problem on a local level. Salt Lake City had now gone further than barter. The townspeople had banded together and created a group. The Natural Developmetn Association (NDA), that made its own money. They had given their unit the reverberating name of the vallar."

...

Ventura, Califorina, Minneapolis, and Yellow Springs Ohio, were all also making some form of scrip. In Arizona, the state's governor enforced a three-day bank holiday--banks were closed. The legislature, by a special act, ordianed a state scrip, to be issued in denominations of up to $20. Three Million in scrip was to be lithographed by a private firm. As it happened, this scrip was not used. But that did not stop other private firms from generating their own. The Nogales Herald, which had the advantage of possessing its own printing press, issued its own bills. In areas near the border, Mexican pesos begant to trade at a premium; the peso, at least for a short moment, had become anther form of American money.

Obscure nonprofits and citizens' groups, towns and businesses, were all creating money: The Business Men's Club of Oak Hill, West Virgina issued coins. The Lane Bryant Store issued money in Indianapolis...City and state governments also got into the money business. The state of Washington issued money, as did the Port Authority in New York and the Village of Chatham, New York...


I never realized that this happened. There was no money. I couldn't employ you because their was no money to pay you. You couldn't employ me because there was no money to pay me. Everything shuts down without money. It is interesting to see how they reacted to the shortage with an American brand of ingenuity. Not that it did much good, but the scale was impressive.

The barter systems kept growing, by the spring there would be some 150 barter and/or scrip systems in operation in thirty states. Tens of thousands of people--perhaps hundreds of thousands--used barter money. Barter enthusiasts claimed the number of those engaging in some form of barter had hit a million.


It really is an amazing history that I never knew anything about. The history of money is really something. Thank you Amity Shlaes. I found the book very interesting, and the most depressing thing about the depression is how long it lasted. I hope that tough history will never be repeated again, though I feel that tough history has finally arrived again. Sphere: Related Content

2 comments:

King of the Paupers said...

Jct: Now when they set up their LETS time-based barter systems, they'll have computers to keep track of the database of goods and services offered and instantaneous transmission of credits from account to account.
Best of all, peg your local currency to the Time Standard of Money (how many dollars/hour child labor) and Hours earned locally can be intertraded with other timebanks globally!
In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours.
U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture.
See my banking systems engineering analysis at http://youtube.com/kingofthepaupers with an index of articles at http://johnturmel.com/kotp.htm

Shakes The Clown said...

It should be easier to barter and trade today than before Algore invented the internets.