2022年5月30日 星期一

1915 ~ 1917 第一次世界大戰 美國通膨回顧

 




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.

“While central banks in the U.S. and Europe are moving toward monetary tightening or rate increases, the Japanese economy is still on the road to recovery from the impact of the Covid-19 pandemic,” Governor Kuroda said in April. “It is most important to support economic recovery by patiently continuing monetary easing.” The Bank of Japan also made it clear that while it has no plan to increase short-term interest rates, it also has no plan to allow long-term Japanese bond yields to rise either. The yield on the 10-year Japanese government bond has fluctuated in a narrow range above -0.3% and below 0.2% since 2016, when the Bank of Japan first announced it would effectively pin long-term Japanese government bond yields to zero with quantitative easing. Along with bond yields around the world, however, the yield on the Japanese government 10-year bond has risen this year to its highest level in years, to 0.25%. In response, the Bank of Japan reiterated this past month its intention to keep the yield of the 10- year government bonds near zero, and vowed to buy an unlimited amount of bonds from the market at 0.25% to keep 10-year yields from rising further. In contrast to the Fed, which is vowing to shrink its balance sheet by possibly selling Treasury and mortgage-backed bonds over the next year, this past month the Bank of Japan effectively doubled down on unlimited amounts of purchases in order to keep interest rates capped near zero. Japan’s GDP has remained near $5 Trillion since the mid-1990s, but in that time the Japanese government’s debt has climbed from 75% of GDP to 266% of GDP, the highest ratio of public debt to GDP of any developed nation. The expense of the national debt in Japan has long been unaffordable to the Japanese Government, and since 2012 the Bank of Japan’s balance sheet has grown from ¥1500 Trillion to ¥7300 Trillion as it purchased Japanese government bonds. The Bank of Japan now owns 45% of Japanese government debt, an amount larger than the annual output of the entire Japanese economy. As Japan has fallen ever deeper into the trap of compulsory monetary expansion due to its government’s high indebtedness, the price of gold has risen 7-fold. This long trend higher includes a sudden 18% rise this year as the Yen has rather suddenly fallen out of favor relative to other major currencies. Historically, and all the way up to the present day, gold has served as the safehaven asset of last resort. Until this year, the Yen was viewed as a safehaven currency, as its value amid Japan’s ongoing struggle with deflation appeared safest relative to most other major currencies. This view helped propel the Yen higher during the financial crisis, and it helped maintain the Yen’s value against other currencies even as the Japanese government and Bank of Japan ventured ever further down the road of unsustainable debt and monetary expansion. This view, however, has long been questioned by the steady rise of gold in Yen. The nature of risk in these fragile, debt-laden circumstances is, by nature, discontinuous. One day, the value an asset or a currency such as the Yen can appear as safe as it has always been, and the next day its value can suddenly appear completely vulnerable. When that phase-shift occurs, prices can move quickly as the markets price in risks which were largely ignored up to that moment. Yet, in these circumstances, there are usually subtle signs that the markets are not completely ignoring the buildup of debt-induced risk, and gold is nearly always among them. The rise in the Yen-price of gold has followed the rise in the Bank of Japan’s balance sheet nearly lockstep since the financial crisis, and this long trend will likely go down in history as a canary in the coal mine after Japan is forced to reckon with its enormous national debt. Of course, the U.S. economy is also laboring under a near record about of debt. Federal Government debt rose above $30 Trillion in January, and the sum total of public and private debt is at the same level it was just before the financial crisis. As the Federal Reserve attempts to shrink its balance sheet and the base money supply in the months ahead, we will see just how much market and political pressure it can withstand before it relents. In 1920, when Governor Strong and the Fed deflated the money supply, the value of gold rose against nearly all risk assets and commodities, as the dollar was backed by gold at the time. And the last time the Fed attempted to shrink its balance sheet, in 2018 and 2019, the price of gold began rising within just a few months of the beginning of the monetary contraction, in anticipation of the negative impact on the markets and the economy, and the policy response that would inevitably follow. A similar progression will likely unfold if the Fed carries through and attempts to shrink its balance sheet again, but the precise timing of such market pivots is difficult, if not impossible, to predict.

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