In the early years of the war, gold flowed into the U.S. as the European powers purchased war materiel from American companies and farms. This inflow of gold increased the domestic money supply, and prices began rising as a result. From a low inflation rate of 2% in 1915, inflation rose to an 11% rate in 1916. This increase in prices was fueled by an 11% rise in the base money supply in 1915, and a 15% increase in base money supply in 1916. Since the rise in the U.S. money supply was due to an inflow of gold from abroad, the Federal Reserve remained powerless to mitigate the inflation of prices, since by the rules of the gold standard, the increase in gold automatically resulted in an increase the base money in the banking system.
After the U.S. officially entered the war in April 1917, however, the net inflow of gold from abroad slowed, but the base money supply continued to grow at a high rate as the Federal Reserve acted as an agent of the Federal Government. The Fed’s main function after April 1917 was to underwrite the sale of Treasury bonds and Liberty Loan drives – the two main vehicles of government borrowing during the war.
A Liberty bond (or liberty loan) was a war bond that was sold in the United States to support the Allied cause in World War I
In the two years between May 1917 and May 1919, there were four Liberty Loan drives and one Victory Loan drive, which came just after the war ended in early 1919. Just before the U.S. entered the war, the Federal Government spent less than $1 billion on miliary expenditures, but spending rose to $15 billion a year by 1918 and 1919. In order to fund this massive increase in spending, tax rates were raised, but the bulk of the spending was financed with debt. Federal debt rose from $1.2 billion in 1916 to $25.5 billion in 1919, and the Federal Reserve expanded the money supply to facilitate the expansion. On top of the 11% rise in 2015 and the 15% increase in 2016, the base money supply rose 21% in 1917, and another 16% in 1918.
Although a number of Fed officials were uncomfortable with the Federal Reserve’s wartime role of financing the expansion of government debt by expanding the money supply, they had little choice. In May 1918, Congress passed the Departmental Reorganization Act, or the Overman Act as it was commonly known at the time, and this had given the President sweeping wartime powers to reorganize government agencies and direct private industry for the duration of the war, until six months after the war ended. Under this law, the Federal Reserve was directed by the Treasury Department in all manners of its operations, including how to sell Treasury bonds, and at what interest rates to sell the bonds, and also how fund Liberty Loan drives. Had the Federal Reserve refused to carry out the instructions, the Treasury Department was authorized under the Overman Act to transfer the Fed’s authority over the money supply and the banking system to other agencies that would better serve the war effort. By 1919, a total of $2 billion worth of gold had flowed into the U.S. from abroad during the war years, which brought the domestic gold supply to $4 billion, and Federal Reserve had printed billions of dollars and lent it to commercial banks, so they could purchase Liberty Loan bonds from the government and then sell them to the public. These sources – the gold inflow from abroad and the printing of money by the Fed – had expanded the base money supply in the U.S. by 250%. This, in turn, had fueled a 79% increase in prices throughout the U.S. economy.應該是1919發生的
Shortly after the war ended, the economy suffered a temporary downturn as war production wound down. However, as soldiers began returning home, and wartime price controls and rationing came to an end, consumers began shedding their wartime frugality (節儉的)– and a postwar boom commenced. Inflation, which had slowed with the brief economic downturn in early 1919, began to pick up in the summer, and by the autumn prices were again rising sharply as the economy entered a post-war boom. The Federal Reserve, keenly aware of just how much the money supply had expanded during the war, met on November 3rd, 1919, to consider increasing interest rates to dampen accelerating inflation. A number of Fed Governors, including the head of the New York branch of the Fed, Benjamin Strong, had argued at meetings earlier that summer and fall that an increase in interest rates was warranted 合理的: 必須的. However, the Treasury still held sway 決定權 on interest rate decisions, and had opposed any rate increases that would affect the value of outstanding Treasury and Liberty Loan bonds. In July, 1919, the Boston branch of the Federal Reserve requested permission to raise interest rates, but the Federal Reserve Board in Washington D.C. rejected the request as “inadvisable from the point of view of the Treasury plans.” In September, the Treasury again insisted the Fed not increase interest rates, with Undersecretary of the Treasury Russell Leffingwell pointedly telling the Board “I ask that you do not increase the rates on paper secured by Government obligations.” This objection to higher rates was repeated at the Federal Reserve Board’s meeting on October 28, on the grounds that higher rates would hurt the Treasury’s planned refinancing. By the meeting on November 3rd, however, with inflation accelerating higher toward a 13% year-over-year rate, the Fed had had enough – and the Board voted to increase interest rates 0.25% to 4.25%. This was the first interest rates increase since the end of the war, and it sparked a seismic shift in the financial markets. Although the money supply and credit continued to expand, which continued to fuel prices higher throughout the economy, government bond yields began to rise and stock prices on the New York Stock Exchange began to fall. The amount of loans outstanding to brokers and dealers
also began to decline, which
indicated a reduced demand for
“speculative” credit .
Although the Treasury Department
had relented in its opposition to the
0.25% rate increase on November
3rd, it vehemently opposed further
rate increases. At a meeting on
November 19, the majority of Fed
governors favored another rate
increase, but Treasury
Undersecretary Leffingwell
convinced them a rate increase
would be too harmful. Instead,
Leffingwell urged the Fed to use
“moral suasion” to convince
commercial banks to curb new
lending, at least until after the
Treasury’s planned refinancing of
debt in January. The Federal
Reserve Board kept rates at 4.25%.
On November 24th, however, the
Federal Reserve Banks in Boston and
New York voted on their own to
increase the rates in their respective
regions – and this prompted a
ferocious attack from the Treasury.
Leffingwell accused the head of the
Federal Reserve Bank of New York,
Benjamin Strong, of making “a
direct attempt to punish the
Treasury of the United States for not
submitting to the dictation on the
part of the Governor of the Federal
Reserve Bank of New York even
though it be at the cost of a shortage
of funds of the Treasury to meet its
outstanding obligations.” The
Treasury, he said, was borrowing at
a rate of $500 million a week until
January 15, and he urged the Federal
Reserve Board to disapprove the rate
increases in New York and Boston –
which it promptly did.
In response to being overridden,
New York Fed Governor Strong met
with Treasury Secretary Carter
Glass and threatened to increase
interest rates in New York without
the Federal Reserve Board’s
approval – claiming that Section 14
of the Federal Reserve Act of 1913
gave him to sole authority over
interest rates in his region.
Incensed, Treasury Secretary
threatened to have the President remove Strong, and asked the Attorney General to provide an official interpretation over who had the power to determine interest rates – the regional Federal Reserve Banks, or the Federal Reserve Board in Washington D.C. On December 9, the Attorney General responded, “that the Federal Reserve Board has the right, under the powers conferred授予 by the Federal Reserve Act, to determine what rates should be charged…by a Federal Reserve Bank.” This cemented the Federal Reserve Board in Washington D.C. as the sole authority over interest rates in the U.S. The same day the Attorney General issued his momentous opinion, Treasury Undersecretary Leffingwell wrote a letter to Treasury Secretary Glass, in which he detailed how the Treasury’s financial situation had recently improved, and in light of that he said: “I do not think that a moderate further increase in rates at the present time would have a disastrous effect upon the Treasury’s position.” The following day, Leffingwell communicated a similar message to the Federal Reserve Board, and in response, the Board immediately sent telegrams to all the regional Fed Banks informing them they could begin raising interest rates – which they did, by another 0.25%. On December 30th, the New York Fed raised interest rates by another 0.25% to 4.75%, and the other regional banks followed. In the middle of January 1920, Undersecretary Leffingwell reversed course and began pushing the Federal Reserve to increase interest rates all the way to 6% - far higher than the 4.25% he vehemently opposed just six weeks prior. His reasons were twofold. First, the Treasury was no longer actively selling bonds to the financial markets, and thus no longer faced the prospect of higher interest costs if interest rates were to rise. Second, the gold stockpile of the Federal Reserve and the Treasury had begun to decline, and the ratio of reserve gold to the amount of notes outstanding was becoming critical.
As inflation accelerated into 1920, holders of Federal Reserve banknotes suddenly realized the purchasing power of their money was rapidly declining – and had begun exchanging their paper notes for gold. At the time, any holder of a $20 Federal Reserve note could walk into the bank and ask to exchange it, with an additional sixty-seven cents, for a one-ounce gold coin, which the bank was obliged to supply. This exchange resulted in no net change in the bank’s balance sheet, as a $20 note was worth the same as a oneounce gold coins, but it reduced the amount of gold in the banking system relative to the number of banknotes in existence. By January, the reserve ratio of gold to banknotes throughout the Federal Reserve system had fallen to 42.7%, and several regional Federal Reserve Banks had a reserve ratio below 40%. The gold outflow from the banking system accelerated as a wartime embargo禁止令 on gold exports out of the U.S. expired, and gold began being repatriated back 移送回 to Europe. The Fed responded by pooling the gold reserves among the various regional banks, but the risk of suspension – of having to suspend the exchange of gold for dollars – was high and rising as gold reserves fell; in fact, the risk of suspension in 1920 would be higher than at any other time in the next fifty years. With the Treasury no longer in opposition, the Federal Reserve Board immediately began increasing interest rates. In February the Fed’s main policy rate was increased to 5%, and by June it had risen all the way to 7% - where it remained for the rest of the year. This increase was enough to stem the loss of gold from the banking system, but it also was enough to trigger a broad deflation of prices throughout the economy – and a severe contraction of credit. The National Bureau of Economic Research (NBER) dates the end of the economic expansion after the Great War and the beginning of the subsequent depression to January 1920. Industrial Production reached a peak that month , just a month after the Federal Reserve Board began increasing interest rates, and fell 23% over the following year. 1920年1月, 在Fed開始調升利率那個月份, 同一時間美國工業生產達到峰值最高, 之後一年內衰退23% , Unemployment rose from 4% in 1920 to 12% in 1921 失業率由4%飆升到12%. Agricultural production fell 15% between 1920 and 1921, and commodity prices fell over 45% from their peak in the summer of 1920 to their trough in early 1922. Broader wholesale prices fell 37% between 1920 and 1921, a sharper decline than any year during the Great Depression a decade later. As the contraction in economic output and prices took hold, however, the Federal Reserve maintained its main policy rate near 7%, and 3-month Treasury bills traded at rates which would not be seen again until the late 1960s – at the beginning of the Great Inflation. Set against the backdrop of falling prices, this resulted in high real, inflation-adjusted interest rates, which reached 20.8% in June 1921. These high real rates were extremely deflationary, and the Federal Reserve, in its annual report in 1920, defended the deflationary monetary policy as necessary to unwind the inflation of prices during the war. Benjamin Strong, Governor of the Federal Reserve Bank of New York, and by this time the de-facto leader of the Federal Reserve System, understood the costs of deflation – but advocated it anyway. In his assessment, the deflation of prices would be “accompanied by a considerable degree of unemployment, but not for very long, and that after a year or two of discomfort, embarrassment, some losses, some disorders caused by unemployment, we will emerge with an almost invincible banking position, prices more nearly at competitive levels with other nations, and be able to exercise a wide and important influence in restoring the world to a normal and livable conditions"
In downtown Kansas City, business at Truman & Jacobson began to dry up as commodity prices plummeted in late 1920. The price of wheat had been $2.12 a bushel in 1919, but by late 1920 it had fallen to $1.44 – a 32% drop. Agricultural prices overall fell 40%, and as farmer’s income and spending declined, so did the income and spending of nearly everyone else in the Midwest. By early 1921, the silk ties, shirts, leather gloves, belts, socks, collar pins and cufflinks that were flying out of the story in late 1919 and early 1920 remained on the shelves and on their hangars. Although many of the same people came through the store as had in 1919, including many of veterans of Artillery Battery D, few were buying anything. Harry and Eddie began borrowing money in 1921 to keep up with their mounting bills, but the economic contraction and deflation of prices continued. As former Battery D sergeant Frederick J. Bowman recalled, “A lot of the fellows that could have bought something would say, 'Well, I need a couple of shirts, but I think I'll wear these a while longer,' because they just didn't have the money to buy any.” The store closed in 1922, and in September held a going-out-of-business sale. As Harry remembered decades later, "A flourishing business was carried on for about a year and a half and then came the squeeze of 1921. Jacobson and I went to bed one night with a $35,000 inventory and awoke the next day with a $25,000 shrinkage.... This brought bills payable and bank notes due at such a rapid rate we went out of business." Gross National Product in the U.S. fell an estimated 8.4% from its January 2020 peak to its trough in 1922, OH !!~
終於懂為什麼作者Brian要扯到1919 ~ 1920這一段歷史, 因為當時候工業生產衰退23%, 而這次2021聽說衰退8% and by that time the Federal Reserve’s base money supply had declined over 18% as economic activity and trade contracted. With agricultural prices almost half of their level two years earlier, and unemployment at 12%, the Midwest and other parts of the country were mired in depression. While Governor Strong and other Federal Reserve officials saw the deflation of the money supply and prices as a necessary unwinding of the inflation during the Great War, public attitudes had grown hostile. At a meeting with the American Farm Bureau Federation in 1921, the group told Fed officials that “farmers feel that they have no financial system designed to meet their needs.” One representative pointed asked “Who decided that deflation was necessary?” Strong replied that “No one could have stopped it, and no one could have started it. In our opinion, it was bound to come.” All countries had experienced inflation during the war, he said, and all countries must deflate. A quarter of a century after the failure of Truman & Jacobson, President Truman considered how best to manage the economic transition after the Second Great War. His experience during the depression of 1920-1922 greatly influenced his outlook, and he was determined to avoid deflation at all costs. Unlike in 1919, when the expiration of the Overman Act re-established Federal Reserve independence shortly after World War I, the Federal Reserve would not regain its independence until six years after World War II. By that time, in Truman’s judgement, the economy was beyond the risk of deflation. As the Federal Reserve maintained its wartime interest rate pegs for Treasury securities, prices had risen 17.6% between 1946 and 1947, 9.5% between 1947 and 1948, and continued higher until, by 1951, consumer prices were 45% higher than they were in 1945. Only then did the Federal Reserve regain its independence with the Treasury-Fed Accord of 1951.
When Governor Strong and the Federal Reserve Board decided to actively deflate the rise in prices that had occurred during the Great War, they increased interest rates and kept them elevated while the economy shrank, unemployment rose, and prices throughout the economy tumbled. For those who lived through the downturn in the early 1920s, as Harry Truman did, it left an indelible mark. So much so that when he was given the opportunity to lead the country through a similar set of circumstances after becoming President in 1945, he deliberately chose to maintain wartime restrictions on the Federal Reserve’s independence for six years after the end of the war, in order to inflate the economy through its post-war transition. The early 1920s left an indelible mark on the Federal Reserve as well. The public backlash following the Depression of 1920-1922 was so severe that state legislatures and the U.S. Congress considered enacting legal limits to interest rates. The view in the Midwest was that the Federal Reserve was penalizing farmers in order to benefit Wall Street, as farmers, unable to service their loans with the price of many crops half of what they were just two seasons before, were forced into bankruptcy, while banks in New York collected the highest rates of interest in anyone’s memory. In a letter to John Perrin of the San Francisco Fed, Federal Reserve Board Chairman Harding wrote in 1921: “I do not know whether you appreciate how violent the attacks are which are now being made upon the Board and the System.” Those attacks left such a lasting mark that the Fed has only twice since then attempted to shrink its balance sheet, in 1937 and in 2017, and both of those attempts were quickly reversed in the deep recessions that followed. The Fed has never again intentionally attempted to “deflate” prices. Yet we will likely learn in the next few weeks details of what will amount to the Federal Reserve’s third attempt since 1922 to shrink the base money supply. This time, just as it was a century ago, the Federal Reserve is alarmed at an acceleration in prices throughout the economy after a national response to an enemy, this time a virus, and it plans to dramatically increase interest rates and shrink its balance sheet in order to dampen inflation. Based on public comments by Chairman Jerome Powell and other Federal reserve officials, the monetary contraction over the coming year could end up being the most dramatic tightening of monetary conditions since the Paul Volker era forty years ago. It must be noted that in the wake of Paul Volker’s actions, and the Federal Reserve’s deflation in 1920- 21, the stock market registered two of the three lowest valuations of the entire Federal Reserve era. With valuations today near the highest ever recorded as the Fed embarks on its balance sheet contraction, the degree of risk to U.S. risk assets is glaring. * * * In contrast to the planned tightening by Federal Reserve, the Bank of Japan made it clear this past month that it has no intention of going down a similar path, and the markets have been listening. Over the past two months, the Yen has fallen precipitously against other major currencies, and at the end of April, the Yen traded at the lowest level against the U.S. Dollar in twenty years. While Federal Reserve officials have made it clear interest rates in the U.S. may rise in half-point steps over the next few meetings of the Federal Open Market Committee, Bank of Japan Governor Haruhiko Kuroda made it clear this past month that the Bank of Japan has no plan to increase interest rates.
When Governor Strong and the Federal Reserve Board decided to actively deflate the rise in prices that had occurred during the Great War, they increased interest rates and kept them elevated while the economy shrank, unemployment rose, and prices throughout the economy tumbled. For those who lived through the downturn in the early 1920s, as Harry Truman did, it left an indelible mark. So much so that when he was given the opportunity to lead the country through a similar set of circumstances after becoming President in 1945, he deliberately chose to maintain wartime restrictions on the Federal Reserve’s independence for six years after the end of the war, in order to inflate the economy through its post-war transition. The early 1920s left an indelible mark on the Federal Reserve as well. The public backlash following the Depression of 1920-1922 was so severe that state legislatures and the U.S. Congress considered enacting legal limits to interest rates. The view in the Midwest was that the Federal Reserve was penalizing farmers in order to benefit Wall Street, as farmers, unable to service their loans with the price of many crops half of what they were just two seasons before, were forced into bankruptcy, while banks in New York collected the highest rates of interest in anyone’s memory. In a letter to John Perrin of the San Francisco Fed, Federal Reserve Board Chairman Harding wrote in 1921: “I do not know whether you appreciate how violent the attacks are which are now being made upon the Board and the System.” Those attacks left such a lasting mark that the Fed has only twice since then attempted to shrink its balance sheet, in 1937 and in 2017, and both of those attempts were quickly reversed in the deep recessions that followed. The Fed has never again intentionally attempted to “deflate” prices. Yet we will likely learn in the next few weeks details of what will amount to the Federal Reserve’s third attempt since 1922 to shrink the base money supply. This time, just as it was a century ago, the Federal Reserve is alarmed at an acceleration in prices throughout the economy after a national response to an enemy, this time a virus, and it plans to dramatically increase interest rates and shrink its balance sheet in order to dampen inflation. Based on public comments by Chairman Jerome Powell and other Federal reserve officials, the monetary contraction over the coming year could end up being the most dramatic tightening of monetary conditions since the Paul Volker era forty years ago. It must be noted that in the wake of Paul Volker’s actions, and the Federal Reserve’s deflation in 1920- 21, the stock market registered two of the three lowest valuations of the entire Federal Reserve era. With valuations today near the highest ever recorded as the Fed embarks on its balance sheet contraction, the degree of risk to U.S. risk assets is glaring. * * * In contrast to the planned tightening by Federal Reserve, the Bank of Japan made it clear this past month that it has no intention of going down a similar path, and the markets have been listening. Over the past two months, the Yen has fallen precipitously against other major currencies, and at the end of April, the Yen traded at the lowest level against the U.S. Dollar in twenty years. While Federal Reserve officials have made it clear interest rates in the U.S. may rise in half-point steps over the next few meetings of the Federal Open Market Committee, Bank of Japan Governor Haruhiko Kuroda made it clear this past month that the Bank of Japan has no plan to increase interest rates.
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