Famine, Crop Yields, Food Surpluses, Irrigation, Plow, Crop Rotation, Cultivars, Fertilizers, Pesticides, Tractor, Railroad and Ships

Posted by PITHOCRATES - June 5th, 2013

Technology 101

(Originally published May 23rd, 2012)

Because of Advances in Farming Fewer People could Grow more Food

Cold weather kills people.  A lot of people throughout history have died during winters as they exhausted their food supplies.  That’s why preparing for the winter was serious business.  You had to store enough food to carry you through the winter.  And if the fall harvests were poor it spelled big trouble.  And famine.  It’s hard to imagine what this was like.  A long winter ahead of you with an insufficient food supply.  It was scary.  For it meant some people would die before the spring came.  Hard to fathom this in a day where you can actually drive your car through a blizzard to your favorite greasy diner or fast food restaurant for a delicious hot meal to take off the chill of the coldest winter day.  It wasn’t always like this.

And it wasn’t only long winters that killed people.  Sometimes the long summers did.  Where there were insufficient rains.  And drought.  That destroyed crops and drastically reduced fall harvests.  You don’t hear much about famine these days in the U.S, Canada, Britain, France, Germany or other advanced nations.  But underdeveloped and impoverished nations suffer famine to this day.  Why?  Two primary reasons.  Improved crop yields.  And improved transportation.  The advanced nations have them.  The impoverished nations don’t.

Improved crop yields create food surpluses.  Key to civilization itself.  Food surpluses allowed a middle class to arise because everyone did not have to grow food.  Because of advances in farming fewer people could grow more food. Those who didn’t have to grow food could think about other things.  Including ways to further improve crop yields.  By creating better tools.  Better techniques.  Better food storage.  And when you do all of these things you not only have enough food for yourself and for your surplus you have enough to export.  To those who do not have enough food.  Even allowing people to live in areas that cannot produce food.  For they can trade for food.  Thanks to these surpluses available for export.

Food is so Plentiful and Inexpensive Today that the Problem in America is not Famine but Obesity

Early farms relied on the fertile soil of river banks.  The spring flooding of the rivers raised river levels.  When the water retreated it left behind fertile soil.  Eventually we learned how to take control of our water resources.  And used it to make fertile land away from river banks.  Using irrigation.  Bringing the water to the land.  Probably the next great development was the plow.  Which let us take control of the land.  We tilled the soil to aerate it.  To control weeds.  To mix in organic material.  Such as manure.  To prepare it for planting.  And we used irrigation to bring those crops to harvest.

We then developed crop rotation to replenish nitrogen in the soil.  And to control pests.  Certain pests attack certain crops.  By rotating crops pest infestation couldn’t spread and return year after year.  Families of crops need certain nutrients.  Rotation prevents the depletion of any single nutrient.  Then we took control of the plants we grew.  By creating new plants.  Cultivars.  Using selective breeding to increase grain size, the number of grains per plant, improve disease resistance, etc.

Then we turned to chemistry.  Creating fertilizers.  And pesticides.  These two advancements alone exploded crop yields.  Never before did so few grow so much with so little.  We maximized the agricultural potential of land year after year.  And then we mechanized the farm.  Introducing the tractor.  Allowing the same number of farmers to cultivate more land.  So not only did their existing lands yield more they added more high-yield lands to explode yields.  Creating huge food surpluses available for export.  And slashing the price of food across the board.  From the bread we make from wheat.  To corn-fed beef.  Food is so plentiful and inexpensive today that the problem in America is not famine but obesity.  Obesity is bad but it takes a lot longer to die from obesity than it does from famine.  And we enjoy all of those delicious things that are making us so fat.  While there’s nothing to enjoy when starving to death.

We were able to Raise Crop Yields to such High Levels we have Food Available for Everyone in this World

As crop yields increased more food entered the market.  Good for people.  But bad for farmers.  Because they depressed crop prices.  Large farms that cultivated more land could still make a profit.  But the small farmer who didn’t cultivate more land just saw his revenue fall.  Until his revenue fell below his costs.  Leaving him unable to service the debt he incurred to mechanize his farm.  Causing bankruptcy.  Which happened a lot in the Thirties.  Causing all those bank runs during the Great Depression.

To fight this free fall in crop prices countries enacted tariffs and import restrictions.  The British Corn Laws kept out the less expensive foreign food so the landowning aristocracy could maximize their profits.  And when the British repealed the Corn Laws and adopted free trade everything the landowning aristocracy feared happen.  Food became inexpensive and plentiful.  In large part because of the United States.  Who was maximizing their crop yields.  And then using the railroad to ship their surpluses to the great rivers.  The Ohio.  The Missouri.  The Mississippi.  Where they loaded these surpluses onto steamships.  Where it traveled down the Mississippi to the Port of New Orleans.  Where they transferred it to ocean-going sail ships and steamers.  Bound for Europe.  And Britain.  Where this food fed hungry people.  And cut into the profits of the wealthy landowners.

But it wasn’t only in the United States.  Soon other great agricultural countries produced food surpluses that they shipped all over the world.  Winters still happen.  Droughts still happen.  But they don’t happen everywhere at the same time.  And because we were able to raise crop yields to such high levels we have food available for everyone in the world.  And truck, rail and ships can move that food anywhere it is needed.  Which is why we can drive to our favorite greasy diner or fast food restaurant during a blizzard on the coldest day of winter and enjoy a fresh glass of orange juice, coffee, eggs, hash browns and sausage.  No matter where you live.  As long as you live in a country that supports free trade.

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Famine, Crop Yields, Food Surpluses, Irrigation, Plow, Crop Rotation, Cultivars, Fertilizers, Pesticides, Tractor, Railroad and Ships

Posted by PITHOCRATES - May 23rd, 2012

Technology 101

Because of Advances in Farming Fewer People could Grow more Food

Cold weather kills people.  A lot of people throughout history have died during winters as they exhausted their food supplies.  That’s why preparing for the winter was serious business.  You had to store enough food to carry you through the winter.  And if the fall harvests were poor it spelled big trouble.  And famine.  It’s hard to imagine what this was like.  A long winter ahead of you with an insufficient food supply.  It was scary.  For it meant some people would die before the spring came.  Hard to fathom this in a day where you can actually drive your car through a blizzard to your favorite greasy diner or fast food restaurant for a delicious hot meal to take off the chill of the coldest winter day.  It wasn’t always like this.

And it wasn’t only long winters that killed people.  Sometimes the long summers did.  Where there were insufficient rains.  And drought.  That destroyed crops and drastically reduced fall harvests.  You don’t hear much about famine these days in the U.S, Canada, Britain, France, Germany or other advanced nations.  But underdeveloped and impoverished nations suffer famine to this day.  Why?  Two primary reasons.  Improved crop yields.  And improved transportation.  The advanced nations have them.  The impoverished nations don’t.

Improved crop yields create food surpluses.  Key to civilization itself.  Food surpluses allowed a middle class to arise because everyone did not have to grow food.  Because of advances in farming fewer people could grow more food. Those who didn’t have to grow food could think about other things.  Including ways to further improve crop yields.  By creating better tools.  Better techniques.  Better food storage.  And when you do all of these things you not only have enough food for yourself and for your surplus you have enough to export.  To those who do not have enough food.  Even allowing people to live in areas that cannot produce food.  For they can trade for food.  Thanks to these surpluses available for export.

Food is so Plentiful and Inexpensive Today that the Problem in America is not Famine but Obesity

Early farms relied on the fertile soil of river banks.  The spring flooding of the rivers raised river levels.  When the water retreated it left behind fertile soil.  Eventually we learned how to take control of our water resources.  And used it to make fertile land away from river banks.  Using irrigation.  Bringing the water to the land.  Probably the next great development was the plow.  Which let us take control of the land.  We tilled the soil to aerate it.  To control weeds.  To mix in organic material.  Such as manure.  To prepare it for planting.  And we used irrigation to bring those crops to harvest. 

We then developed crop rotation to replenish nitrogen in the soil.  And to control pests.  Certain pests attack certain crops.  By rotating crops pest infestation couldn’t spread and return year after year.  Families of crops need certain nutrients.  Rotation prevents the depletion of any single nutrient.  Then we took control of the plants we grew.  By creating new plants.  Cultivars.  Using selective breeding to increase grain size, the number of grains per plant, improve disease resistance, etc. 

Then we turned to chemistry.  Creating fertilizers.  And pesticides.  These two advancements alone exploded crop yields.  Never before did so few grow so much with so little.  We maximized the agricultural potential of land year after year.  And then we mechanized the farm.  Introducing the tractor.  Allowing the same number of farmers to cultivate more land.  So not only did their existing lands yield more they added more high-yield lands to explode yields.  Creating huge food surpluses available for export.  And slashing the price of food across the board.  From the bread we make from wheat.  To corn-fed beef.  Food is so plentiful and inexpensive today that the problem in America is not famine but obesity.  Obesity is bad but it takes a lot longer to die from obesity than it does from famine.  And we enjoy all of those delicious things that are making us so fat.  While there’s nothing to enjoy when starving to death. 

We were able to Raise Crop Yields to such High Levels we have Food Available for Everyone in this World

As crop yields increased more food entered the market.  Good for people.  But bad for farmers.  Because they depressed crop prices.  Large farms that cultivated more land could still make a profit.  But the small farmer who didn’t cultivate more land just saw his revenue fall.  Until his revenue fell below his costs.  Leaving him unable to service the debt he incurred to mechanize his farm.  Causing bankruptcy.  Which happened a lot in the Thirties.  Causing all those bank runs during the Great Depression.

To fight this free fall in crop prices countries enacted tariffs and import restrictions.  The British Corn Laws kept out the less expensive foreign food so the landowning aristocracy could maximize their profits.  And when the British repealed the Corn Laws and adopted free trade everything the landowning aristocracy feared happen.  Food became inexpensive and plentiful.  In large part because of the United States.  Who was maximizing their crop yields.  And then using the railroad to ship their surpluses to the great rivers.  The Ohio.  The Missouri.  The Mississippi.  Where they loaded these surpluses onto steamships.  Where it traveled down the Mississippi to the Port of New Orleans.  Where they transferred it to ocean-going sail ships and steamers.  Bound for Europe.  And Britain.  Where this food fed hungry people.  And cut into the profits of the wealthy landowners.

But it wasn’t only in the United States.  Soon other great agricultural countries produced food surpluses that they shipped all over the world.  Winters still happen.  Droughts still happen.  But they don’t happen everywhere at the same time.  And because we were able to raise crop yields to such high levels we have food available for everyone in the world.  And truck, rail and ships can move that food anywhere it is needed.  Which is why we can drive to our favorite greasy diner or fast food restaurant during a blizzard on the coldest day of winter and enjoy a fresh glass of orange juice, coffee, eggs, hash browns and sausage.  No matter where you live.  As long as you live in a country that supports free trade.

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Mercantilism, Royal Navy, Napoleon, Pax Britannica, Corn Laws, David Ricardo, Comparative Advantage, European Union and NAFTA

Posted by PITHOCRATES - May 22nd, 2012

History 101

Mercantilism gave Britain the Royal Navy which Ushered in the Pax Britannica

Great Britain had a rough go of it at the end of the 18th century.  They lost their American colonies in the American Revolutionary War.  A war that started over the issue of taxation to pay for the previous Seven Years’ War.  So instead of securing new revenue to pay down old debt they incurred new debt.  The French Revolution closed out the century.  Causing concern for some in Britain that their monarchy may be the next to fall.  It didn’t.  For the constitutional monarchy and representative government in Britain was a long cry from the absolute monarchy that they had in France.  So revolution did not come to Britain.  But war did.  As the French expanded their revolution into a European war.  Pulling the British back into war with their old enemy.

With a large conscripted French Army and the concept of total war France made total war.  Napoleon Bonaparte won a lot of battles.  Conquered much of Europe.  Even marched back and conquered Paris.  Proclaimed himself emperor of France.  And continued waging war.  Including an ill-conceived invasion of Russia.  Which marked the beginning of the end for Napoleon.  And the French Empire.  Weakened from war France saw her old nemesis, Great Britain, rise as the first superpower since the Roman Empire.  And like the Romans’ Pax Romana Britain entered a century of peace.  Pax Britannica.

The reason the British could do this was because of their mercantile past.  They set up colonies and international trade networks.  And they used the proceeds from that lucrative trade to finance the greatest naval power then in the world.  The Royal Navy.  And the Royal Navy would help keep the peace in the Pax Britannica.  She became the world’s policeman.  Making the world safe for trade.  Especially on the high seas.  But then something interesting happened.  She broke from her mercantile past.  Because they saw the shortcomings of mercantilism.  One of which produced wealthy landowners at the expense of a hungry population.

When the British repealed the Corn Laws in 1846 Food Prices fell and the Standard of Living Rose 

The British Corn Laws were a series of laws protecting those who grew cereal crops.  The stuff we grow that has edible grains.  Corn, rice, wheat, barley, etc.  What we call staple crops as they form the basic sustenance of humans everywhere.  We grow these in greater abundance than all other foods.  And when you look at the grain size you come to one realization.  It takes a lot of land to grow these crops.  And who owns large tracts of land?  The landowning aristocracy.  A small group of people with a lot of wealth.  And a lot of political influence.  Hence the Corn Laws. 

The Corn Laws were legislation with one goal.  To prevent the British people from buying less expensive food.  By either forbidding any importation of cheaper grains until the domestic price had reached a certain price level.  Or adding tariffs to the less expensive imports so the landowners could still sell their grains at higher prices.  Thus preserving their wealth.  And they made specious arguments about how lower-priced food was actually bad for the people.  For it was just a way for manufacturers to maximize their profits.  For if food was cheaper they could pay their workers less.  Being the greedy bastards that they were.  So the only fair thing to do was to keep food prices high.  To keep the living wage high.  To force manufacturers to pay their workers more.  You see, the only way to help the poor and middle class was to let the wealthy landowners become even wealthier.  By keeping the price of the food they sold high.

Opposition grew to the Corn Laws.  People studied the works of their fellow countrymen.  Adam Smith and David Hume (both Scottish).  And the Englishman David Ricardo.  All great economists and thinkers.  Who were all proponents of free trade.  Ricardo’s Comparative Advantage basically proved the case of free trade over the protectionism of mercantilism.  Eventually the political power of the landowners could not overcome the economic arguments.  Or a famine in Ireland.  And, in 1846, they repealed the Corn Laws and adopted free trade.  Food prices fell.  Leaving people with more disposable income.  To purchase the goods the Industrial Revolution was making.  Increasing their standard of living.  While small famers had to leave their farms being unable to farm efficiently enough to pay their bills at the prevailing prices.

The Success of NAFTA proves David Ricardo’s Comparative Advantage

Mercantilists and other opponents to free trade like to point at the human costs.  Small farmers losing their farm.  Just so they can preserve some semblance of privilege to protect the high prices in their industry.  But it was becoming more and more difficult to make the argument that the masses were better off paying higher prices.  Because they’re not.  Lower consumer prices increase the standard of living for everyone.  Higher living standards create healthier living conditions.  And reduces child mortality.   For the greatest killer of children in the world is poverty.

The British were both a military and an economic superpower during the 19th century.  But someone was chasing her.  The Untied States.  Who was feeling her economic oats.  Her economy would catch up and surpass the British.  Making it the mightiest economic power of all time.  How did this happen?  Two words.  Free trade.  The United States was the largest free trade zone in the world.  The economic advantages of all those states trading with each other freely across their state borders made Europe stand up and take notice.  And in response created treaties that ultimately led to the European Union and the Eurozone.  To replicate the large free trade zone of the United States.

Back across the Atlantic the Americans, Canadians and the Mexicans took it up a notch.  And created the North American Free Trade Agreement.  NAFTA.  Extending the free trade that existed in each of their countries across their international borders.  The mercantilist fought against this.  Because protectionism, restrictions and tariffs helped the privileged few protect the high prices in their industry.  In America they talked about a great sucking sound as all American jobs went to low-wage Mexico.  Some manufacturers did move to Mexico.  Primarily because like the small farmers in Britain after the repeal of the Corn Laws they could no longer sell at prices to meet all of their costs.  But it was not as the mercantilists predicted.  Yes, imports increased.  In 2010 they were up 235% from pre-NAFTA 1993.  But exports were up, too.  Some 190% for the same period.  Proving Ricardo’s Comparative Advantage.  By focusing on what we do best and trading for everything else all countries do better.

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The Great Depression

Posted by PITHOCRATES - December 20th, 2011

History 101

The  Roaring Twenties were a Time of Unprecedented Innovation and Manufacturing

The Roaring Twenties were good times.  Kicked off by the Warren Harding administration.  Thanks to one of the few honest guys in his administration besides Harding.  Andrew Mellon.  Secretary of the treasury extraordinaire.  Some say the best secretary of the treasury since our first.  Alexander Hamilton.  High praise indeed.

So what did Mellon do?  He did some research that showed rich people paid less in taxes the higher the tax rates were.  The higher the rate the less they invested in plant and equipment in America.  Instead they invested their money out of the country.  In other countries’ plant and equipment.  So Mellon was a tax-cutter.  And that was his advice to Harding.  And that’s what Harding did.  And Calvin Coolidge continued.  Kept taxes low.  And kept government out of the business of business.

And how business responded.  The 1920s were a time of unprecedented innovation and manufacturing.  Low taxes, little government spending and limited government produced record employment.  Record upward mobility.  And record per capita income.  Gains in the decade touched 37%.  How?  I’ll tell you how.

The auto industry was booming thanks to Henry Ford’s moving assembly line.  Everyone was driving who wanted to drive.  The car companies sold one car for every 5 people.  This production created a boom in other industries to feed this industry.  And cars did something else.  They gave people mobility.  And opportunity.  People left the farms in droves and drove to better jobs.  Which didn’t hurt the farmers in the least as mechanization on the farm put more land under cultivation with fewer people.  Housing and cities grew.  Radio debuted.  And radio advertising.  Motion pictures went from silent to talkies.  Telephones became more common.  New electric utilities brought electricity to homes.  And new electric appliances filled those homes.  Including radios.  New electric motors filled our factories, increasing productivity and slashing consumer prices.  More people than ever before flew.  An increase of nearly 1000%.  It’s nowhere near today’s number of flyers but it was a reflection of the new industrial dominance of the United States.  There was nothing we couldn’t do.  And Europe was taking notice.  And not liking what they saw.  And talked about a European union to compete against the Americans.

Businesses scaled back Production in Anticipation of the Smoot Hawley Tariff Act

So the spectacular economic growth of the Roaring Twenties was solid growth.  It wasn’t a bubble.  It was the real deal.  Thanks to capitalism.  And a government willing to leave the free market alone.  It was so dominating that the Europeans wanted to stop it anyway they could.  One way was protective tariffs on farm imports.

American farm exports boomed during World War I.  Because most of Europe’s farmers were busy fighting.  With the end of the war the Europeans went back to their farms.  Which reduced the need for American farm imports.  And the tariffs compounded that problem.  To make things worse, prices were already falling thanks to the mechanization of the American farm.  Producing bumper crops.  Which, of course, dropped farm prices.  Good for consumers.  But bad for farmers.  Especially with the Europeans shutting off their markets to the Americans.  Because they paid for a lot of that land and mechanization with borrowed money.  And this debt was getting harder and harder to service.  Throw in some weather and insect problems in some regions and it was just too much.   Some farms failed.  Then a lot.  And then the banks that loaned money to these farms began to fail.

We created the Federal Reserve to increase the money supply to keep pace with the growing economy.  By making money cheap to borrow for those businesses trying to expand to meet demand.  They weren’t exactly doing a stellar job, though, in keeping pace with this economic expansion.  And when the bank failures hit the money supply contracted.  Thanks to fractional reserve banking.  All that money the banks created simply disappeared as the banks failed.  Starving manufactures of money to maintain growth to meet demand.  Things were getting bad around 1928.  The Fed did not intervene to save these banks.  Worried that investors were the only ones borrowing money for speculation in the stock market, they shrunk the money supply further.  About a third by 1932.  Manufacturers had no choice but to cut production.

While businesses were dealing with a shrinking money supply they had something else to worry about.  Congress was moving the Smoot-Hawley Tariff Act through congressional committees in 1929 on its way to becoming law in 1930.  This act would add a 30% tax on most imports.  Meaning that the cost factories paid for raw materials would increase by up to 30%.  Of course, sales prices have to include all costs of production.  So sales prices would have to increase.  Higher prices mean fewer sales.  Because people just can’t afford to buy as much at higher prices.  Businesses knew that once the tariff was passed into law it would reduce sales.  So they took preemptive steps.  And scaled back production for the expected fall in sales.

It was Government Meddling that Turned a Recession in the Great Depression

This brings us to the stock market crash.  The Roaring Twenties produced huge stock market gains as industry exploded in America.  Things grew at an aggressive pace.  Stock prices soared.  Because the value of these manufacturers soared.  And investors saw nothing to indicate this growth was going to stop.  Until the contraction of the money supply.  And then the Smoot-Hawley Tariff Act.  Not only would these slow the growth, they would reverse it.  Leading to the great selloff.  The Great Crash.  And the Great Depression.

As feared the Europeans responded to the Smoot-Hawley Tariff Act.  They imposed tariffs on American imports.  Making things worse for American exports.  Then President Hoover increased farm prices by law to help farmers.  Which only reduced farm sales further.  Then the banking crisis followed.  And the Fed did nothing to help the banks.  Again.  When they did start helping banks in trouble they made public which banks were receiving this help.  Which, of course, caused further bank runs as people hurried to get their money out of these troubled banks.  Tax revenue plummeted.  So Hoover passed a new sales tax to raise more revenue.  Which only made things worse.

Hoover was a Republican.  But he was a Big Government progressive.  Just like his successor.  FDR.  And all of their Big Government Keynesian solutions only prolonged the Great Depression.  It was government meddling that turned a recession into the Great Depression.  And further government meddling that prolonged the Great Depression.  Much of FDR’s New Deal programs were just extensions of the Hoover programs.  And they failed just as much as they did under Hoover.  The Great Depression only ended thanks to Adolf Hitler who plunged Europe back into war.  Providing an urgency to stop their government meddling.  And to let business do what they do best.  Business.  And they did.  Building the arsenal that defeated Hitler.

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LESSONS LEARNED #3 “Inflation is just another name for irresponsible government.” -Old Pithy

Posted by PITHOCRATES - March 4th, 2010

PEOPLE LIKE TO hate banks.  And bankers.  Because they get rich with other people’s money.  And they don’t do anything.  People give them money.  They then loan it and charge interest.  What a scam.

Banking is a little more complex than that.  And it’s not a scam.  Countries without good banking systems are often impoverished, Third World nations.  If you have a brilliant entrepreneurial idea, a lot of good that will do if you can’t get any money to bring it to market.  That’s what banks do.  They collect small deposits from a lot of depositors and make big loans to people like brilliant entrepreneurs.

Fractional reserve banking multiplies this lending ability.  Because only a fraction of a bank’s total depositors will ask for their deposits back at any one time, only a fraction of all deposits are kept at the bank.  Banks loan the rest.  Money comes in.  They keep a running total of how much you deposited.  They then loan out your money and charge interest to the borrower.  And pay you interest on what they borrowed from you so they could make those loans to others.  Banks, then, can loan out more money than they actually have in their vaults.  This ‘creates’ money.  The more they lend the more money they create.  This increases the money supply.  The less they lend the less money they create.  If they don’t lend any money they don’t add to the money supply.  When banks fail they contract the money supply.

Bankers are capital middlemen.  They funnel money from those who have it to those who need it.  And they do it efficiently.  We take car loans and mortgages for granted.  For we have such confidence in our banking system.  But banking is a delicate job.  The economy depends on it.  If they don’t lend enough money, businesses and entrepreneurs may not be able to borrow money when they need it.  If they lend too much, they may not be able to meet the demands of their depositors.  And if they do something wrong or act in any way that makes their depositors nervous, the depositors may run to the bank and withdraw their money.  We call this a ‘run on the bank’ when it happens.  It’s not pretty.  It’s usually associated with panic.  And when depositors withdraw more money than is in the bank, the bank fails.

DURING GOOD ECONOMIC times, businesses expand.  Often they have to borrow money to pay for the costs of meeting growing demand.  They borrow and expand.  They hire more people.  People make more money.  They deposit some of this additional money in the bank.  This creates more money to lend.  Businesses borrow more.  And so it goes.  This saving and lending increases the money supply.  We call it inflation.  A little inflation is good.  It means the economy is growing.  When it grows too fast and creates too much money, though, prices go up. 

Sustained inflation can also create a ‘bubble’ in the economy.  This is due to higher profits than normal because of artificially high prices due to inflation.  Higher selling prices are not the result of the normal laws of supply and demand.  Inflation increases prices.  Higher prices increase a company’s profit.  They grow.  Add more jobs.  Hire more people.  Who make more money.  Who buy more stuff and save more money.  Banks loan more, further increasing the money supply.  Everyone is making more money and buying more stuff.  They are ‘bidding up’ the prices (house prices or dot-com stock prices, for example) with an inflated currency.  This can lead to overvalued markets (i.e., a bubble).  Alan Greenspan called it ‘irrational exuberance’ when testifying to Congress in the 1990s.  Now, a bubble can be pretty, but it takes very little to pop and destroy it.

Hyperinflation is inflation at its worse.  Bankers don’t create it by lending too much.  People don’t create it by bidding up prices.  Governments create it by printing money.  Literally.  Sometimes following a devastating, catastrophic event like war (like Weimar Germany after World War II).  But sometimes it doesn’t need a devastating, catastrophic event.  Just unrestrained government spending.  Like in Argentina throughout much of the 20th century.

During bad economic times, businesses often have more goods and services than people are purchasing.  Their sales will fall.  They may cut their prices to try and boost their sales.  They’ll stop expanding.  Because they don’t need as much supply for the current demand, they will cut back on their output.  Lay people off.  Some may have financial problems.  Their current revenue may not cover their costs.  Some may default on their loans.  This makes bankers nervous.  They become more hesitant in lending money.  A business in trouble, then, may find they cannot borrow money.  This may force some into bankruptcy.  They may default on more loans.  As these defaults add up, it threatens a bank’s ability to repay their depositors.  They further reduce their lending.  And so it goes.  These loan defaults and lack of lending decreases the money supply.  We call it deflation.  We call deflationary periods recessions.  It means the economy isn’t growing.  The money supply decreases.  Prices go down.

We call this the business cycle.  People like the inflation part.  They have jobs.  They’re not too keen on the deflation part.  Many don’t have jobs.  But too much inflation is not good.  Prices go up making everything more expensive.  We then lose purchasing power.  So a recession can be a good thing.  It stops high inflation.  It corrects it.  That’s why we often call a small recession a correction.  Inflation and deflation are normal parts of the business cycle.  But some thought they could fix the business cycle.  Get rid of the deflation part.  So they created the Federal Reserve System (the Fed) in 1913.

The Fed is a central bank.  It loans money to Federal Reserve regional banks who in turn lend it to banks you and I go to.  They control the money supply.  They raise and lower the rate they charge banks to borrow from them.  During inflationary times, they raise their rate to decrease lending which decreases the money supply.  This is to keep good inflation from becoming bad inflation.  During deflationary times, they lower their rate to increase lending which increases the money supply.  This keeps a correction from turning into a recession.  Or so goes the theory.

The first big test of the Fed came during the 1920s.  And it failed. 

THE TWO WORLD wars were good for the American economy.  With Europe consumed by war, their agricultural and industrial output decline.  But they still needed stuff.  And with the wars fought overseas, we fulfilled that need.  For our workers and farmers weren’t in uniform. 

The Industrial Revolution mechanized the farm.  Our farmers grew more than they ever did before.  They did well.  After the war, though, the Europeans returned to the farm.  The American farmer was still growing more than ever (due to the mechanization of the farm).  There were just a whole lot less people to sell their crops to.  Crop prices fell. 

The 1920s was a time America changed.  The Wilson administration had raised taxes due to the ‘demands of war’.  This resulted in a recession following the war.  The Harding administration cut taxes based on the recommendation of Andrew Mellon, his Secretary of the Treasury.  The economy recovered.  There was a housing boom.  Electric utilities were bringing electrical power to these houses.  Which had electrical appliances (refrigerators, washing machines, vacuum cleaners, irons, toasters, etc.) and the new radio.  People began talking on the new telephone.  Millions were driving the new automobile.  People were traveling in the new airplane.  Hollywood launched the motion picture industry and Walt Disney created Mickey Mouse.  The economy had some of the most solid growth it had ever had.  People had good jobs and were buying things.  There was ‘good’ inflation. 

This ‘good’ inflation increased prices everywhere.  Including in agriculture.  The farmers’ costs went up, then, as their incomes fell.  This stressed the farming regions.  Farmers struggled.  Some failed.  Some banks failed with them.  The money supply in these areas decreased.

Near the end of the 1920s, business tried to expand to meet rising demand.  They had trouble borrowing money, though.  The economy was booming but the money supply wasn’t growing with it.  This is where the Fed failed.  They were supposed to expand the money supply to keep pace with economic growth.  But they didn’t.  In fact, the Fed contracted the money supply during this period.  They thought investors were borrowing money to invest in the stock market.  (They were wrong).  So they raised the cost of borrowing money.  To ‘stop’ the speculators.  So the Fed took the nation from a period of ‘good’ inflation into recession.  Then came the Smoot-Hawley Tariff.

Congress passed the Smoot-Hawley Tariff in 1930.  But they were discussing it in committee in 1929.  Businesses knew about it in 1929.  And like any good business, they were looking at how it would impact them.  The bill took high tariffs higher.  That meant expensive imported things would become more expensive.  The idea is to protect your domestic industry by raising the prices of less expensive imports.  Normally, business likes surgical tariffs that raise the cost of their competitor’s imports.  But this was more of an across the board price increase that would raise the cost of every import, which was certain to increase the cost of doing business.  This made business nervous.  Add uncertainty to a tight credit market and business no doubt forecasted higher costs and lower revenues (i.e., a recession).  And to weather a recession, you need a lot of cash on hand to help pay the bills until the economy recovered.  So these businesses increased their liquidity.  They cut costs, laid off people and sold their investments (i.e., stocks) to build a huge cash cushion to weather these bad times to come.  This may have been a significant factor in the selloff in October of 1929 resulting in the stock market crash. 

HERBERT HOOVER WANTED to help the farmers.  By raising crop prices (which only made food more expensive for the unemployed).  But the Smoot-Hawley Tariff met retaliatory tariffs overseas.  Overseas agricultural and industrial markets started to close.  Sales fell.  The recession had come.  Business cut back.  Unemployment soared.  Farmers couldn’t sell their bumper crops at a profit and defaulted on their loans.  When some non-farming banks failed, panic ensued.  People rushed to get their money out of the banks before their bank, too, failed.  This caused a run on the banks.  They started to fail.  This further contracted the money supply.  Recession turned into the Great Depression. 

The Fed started the recession by not meeting its core expectation.  Maintain the money supply to meet the needs of the economy.  Then a whole series of bad government action (initiated by the Hoover administration and continued by the Roosevelt administration) drove business into the ground.  The ONLY lesson they learned from this whole period is ‘inflation good, deflation bad’.  Which was the wrong lesson to learn. 

The proper lesson to learn was that when people interfere with market forces or try to replace the market decision-making mechanisms, they often decide wrong.  It was wrong for the Fed to contract the money supply (to stop speculators that weren’t there) when there was good economic growth.  And it was wrong to increase the cost of doing business (raising interest rates, increasing regulations, raising taxes, raising tariffs, restricting imports, etc.) during a recession.  The natural market forces wouldn’t have made those wrong decisions.  The government created the recession.  Then, when they tried to ‘fix’ the recession they created, they created the Great Depression.

World War I created an economic boom that we couldn’t sustain long after the war.  The farmers because their mechanization just grew too much stuff.  Our industrial sector because of bad government policy.  World War II fixed our broken economy.  We threw away most of that bad government policy and business roared to meet the demands of war-torn Europe.  But, once again, we could not sustain our post-war economy because of bad government policy.

THE ECONOMY ROARED in the 1950s.  World War II devastated the world’s economies.  We stood all but alone to fill the void.  This changed in the 1960s.  Unions became more powerful, demanding more of the pie.  This increased the cost of doing business.  This corresponded with the reemergence of those once war-torn economies.  Export markets not only shrunk, but domestic markets had new competition.  Government spending exploded.  Kennedy poured money into NASA to beat the Soviets to the moon.  The costs of the nuclear arms race grew.  Vietnam became more and more costly with no end in sight.  And LBJ created the biggest government entitlement programs since FDR created Social Security.  The size of government swelled, adding more workers to the government payroll.  They raised taxes.  But even high taxes could not prevent huge deficits.

JFK cut taxes and the economy grew.  It was able to sustain his spending.  LBJ increased taxes and the economy contracted.  There wasn’t a chance in hell the economy would support his spending.  Unwilling to cut spending and with taxes already high, the government started to print more money to pay its bills.  Much like Weimar Germany did in the 1920s (which ultimately resulted in hyperinflation).  Inflation heated up. 

Nixon would continue the process saying “we are all Keynesians now.”  Keynesian economics believed in Big Government managing the business cycle.  It puts all faith on the demand side of the equation.  Do everything to increase the disposable money people have so they can buy stuff, thus stimulating the economy.  But most of those things (wage and price controls, government subsidies, tariffs, import restrictions, regulation, etc.) typically had the opposite effect on the supply side of the equation.  The job producing side.  Those policies increased the cost of doing business.  So businesses didn’t grow.  Higher costs and lower sales pushed them into recession.  This increased unemployment.  Which, of course, reduces tax receipts.  Falling ever shorter from meeting its costs via taxes, it printed more money.  This further stoked the fires of inflation.

When Nixon took office, the dollar was the world’s reserve currency and convertible into gold.  But our monetary policy was making the dollar weak.  As they depreciated the dollar, the cost of gold in dollars soared.  Nations were buying ‘cheap’ dollars and converting them into gold at much higher market exchange rate.  Gold was flying out of the country.  To stop the gold flight, Nixon suspended the convertibility of the dollar. 

Inflation soared.  As did interest rates.  Ford did nothing to address the core problem.  During the next presidential campaign, Carter asked the nation if they were better off than they were 4 years ago.  They weren’t.  Carter won.  By that time we had double digit inflation and interest rates.  The Carter presidency was identified by malaise and stagflation (inflation AND recession at the same time).  We measured our economic woes by the misery index (the unemployment rate plus the inflation rate).  Big Government spending was smothering the nation.  And Jimmy Carter did not address that problem.  He, too, was a Keynesian. 

During the 1980 presidential election, Reagan asked the American people if they were better off now than they were 4 years ago.  The answer was, again, ‘no’.  Reagan won the election.  He was not a Keynesian.  He cut taxes like Harding and JFK did.  He learned the proper lesson from the Great Depression.  And he didn’t repeat any of their (Hoover and FDR) mistakes.  The recession did not turn into depression.  The economy recovered.  And soared once again.

MONETARY POLICY IS crucial to a healthy and growing economy.  Businesses need to borrow to grow and create jobs.  However, monetary policy is not the be-all and end-all of economic growth.  Anti-business government policies will NOT make a business expand and add jobs no matter how cheap money is to borrow.  Three bursts of economic activity in the 20th century followed tax-cuts/deregulation (the Harding, JFK and Reagan administrations).  Tax increases/new regulation killed economic growth (the Hoover/FDR and LBJ/Nixon/Ford/Carter administrations).  Good monetary policies complimented the former.  Some of the worst monetary policies accompanied the latter.  This is historical record.  Some would do well to learn it.

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