IT is a difficult subject to explain, although it seems very simple. The U.S. Federal Reserve system was created in 1913 as the result of capitalism in full development. Salvador Allende, a man we all remember as from our era, had turned about 15 years old.
World War I broke out in 1914, when the heir prince to the Austrian-Hungarian Empire in the heart of central and southern Europe, was assassinated in Sarajevo. Canada was still a British colony. The GB pound sterling had the privilege of being the currency used internationally. The basic metal used to make it was gold, as it had been for more than 1,000 years in the capital of the Roman empire of the east, Constantinople. Those who began the bloody battles against Muslims in the Near East, brandishing religious pretexts, were feudal knights of the Christian kingdoms of Europe, whose real purpose was to control trade routes and other mundane, more vulgar goals that could be addressed on another occasion.
The United States began to participate in World War I toward the end, in 1917, two years after the sinking of the Lusitania, which was carrying U.S. passengers who had departed from New York. It was sunk by torpedoes fired from a German submarine with absurd instructions to attack a ship flying the flag of a distant, rich and potentially powerful country that, under the cover of supposed neutrality, intended to find a pretext to participate in the war on the side of Britain, France and their allies. The attack took place on May 7, 1915, as [the ship] was crossing the strait between Ireland and England. In the 20 minutes it took to founder, very few passengers were able to abandon ship; the 1,198 people who were still aboard perished.
The growth of the U.S. economy after that war was maintained continuously, except for cyclical crises that were resolved by the Federal Reserve system (FED), without more serious consequences.
On October 24, 1929, remembered in U.S. history as “Black Thursday,” the economic crisis broke out. The Reserve Bank of New York, which is based on Wall Street, just like other banks and corporations — according to the right-wing theorist and renowned U.S. economist Milton Friedman, Nobel laureate in economics (1976), reacted “instinctively,” adopting the measures that he considered to be most correct: “of putting money into circulation.” The Reserve Bank in Washington, accustomed to the preeminence of its opinions, was able to finally impose the opposite idea. The secretary of the Treasury under President Hoover supported the Reserve Bank of Washington, and the one in New York ended up giving way. “But the worst was yet to come,” stated Friedman, who explains more clearly than any other eminent economist — some of them from the opposite tendency — the sequence of events, when he wrote, “Until the fall of 1930, the recession in economic activity, despite being serious, was not affected by financial difficulties or the petitions of depositors who were trying to withdraw their deposits. The character of the recession changed drastically when a series of bankruptcies in the Midwestern and southern United States weakened people’s confidence in banks and resulted in numerous attempts to convert bank deposits into cash.
“On December 11, 1930, the Bank of the United States closed. It was the critical date. It was the largest commercial bank ever to collapse in U.S. history.”
In the month of December 1930 alone, 352 banks closed their doors. “The FED could have reached a better solution by making a large-scale buyout on the market of public debt securities.
“In September 1931, the date on which Britain abandoned the gold standard, it followed a policy that was even more negative.
“The system reacted after two years of hard repression, increasing that type of interest to a level never reached in its history.”
We should take into account that Friedman is reflecting an opinion that still predominates in official U.S. circles almost 80 years later.
“In 1932, the FED, under pressure from Congress, ended its period of sessions and immediately canceled its buying program.
“The final episode was the bank panic of 1933.
“Fear intensified during the interregnum between Herbert Hoover and Franklin D. Roosevelt, elected on November 8, 1932, but whose inauguration did not take place until March 4, 1933. The first did not wish to take any drastic measures without the cooperation of the new president, while Roosevelt, for his part, did not want to assume any responsibilities until he was sworn in.”
The episode reminds us of what is happening today with the president elected in the recent November 4 elections, less than a month ago, Barack Obama, who will succeed Bush on January 20, 2009. Only the period of interregnum has changed; in the 1930s, it was no more than 117 days, and currently it is no more than 77.
Right during the peak of the economic boom, according to Friedman, there were as many as 25,000 banks in the United States. At the start of 1933, the number had gone down to 18,000.
“When President Roosevelt decided to end the bank closure, 10 days after it had begun” — Friedman said — “something less than 12,000 banks were authorized to open their doors, to which only 3,000 were added later. Therefore, altogether, about 10,000 of the 25,000 banks existing in 1929 disappeared during those four years, via a process of bankruptcy, merger or liquidation.
“The closure of businesses, falling production and growing unemployment all fueled nervousness and fear.
“Once the depression was underway, it spread to other countries and, of course, there was a reflexive influence; another example of the realignment so omnipresence in a complex economy,” Friedman concludes.
The world of 1933 that he referred to in his book is nothing at all like today’s, which is totally globalized, comprising more than 190 states represented at the UN, whose inhabitants are all being threatened by dangers that scientists — even the most optimistic, cannot ignore, and that a growing number of people know about and agree on, including prominent U.S. politicians.
The echo of the repercussion of the current crisis can be seen in the desperate efforts of major world leaders.
The Xinhua agency reports that President Hu Jintao of the People’s Republic of China, a country that has experienced sustained, two-digit growth in recent years, warned yesterday that “China is under growing pressure because of its enormous population, limited resources and environmental problems.” It is the only country that we know has hard currency reserves of almost $2 trillion. The Chinese president lists “a series of essential steps for protecting the fundamental interests of the population and protecting the environment in the strategy of industrialization and modernization of China.” He said, finally, that “with the propagation of the financial crisis, world demand for products has been considerably reduced.”
With these words from the leader of the most populated country on the planet, it is not necessary to add more arguments concerning the profundity of the current crisis.
Fidel Castro Ruz
November 30, 2008