AGD - Chaper X: 1931 – “The Tragic Year”

The financial and economic crisis in Europe was particularly dramatic in this year, starting with the failure of Boden-Kredit Anstalt of Austria. When French Government, the Bank of France and lesser French banks insisted on redemption, the crisis hit. Finally Austria had to declare bankruptcy having guaranteed USD 150 m to support the bank and Austria went off the gold standard. Germany, England and many other European countries had to go off the gold standard later that year, England even without fighting avoid disaster. All this affected the US by falling exports and a loss of trust on the US ability to keep the gold standard. Throughout the crisis, the Federal Reserve tried to support European governments by expanding credit or renewing loans when borrowers failed to pay at maturity. 

The American Monetary Picture: The US economy meanwhile contracted further, with unemployment shooting up and production plummeting. The Fed did lower its rediscount rate further to 1.5 %. While it tried to continue inflating, the private sector started to pull out money from the system and hoarding it. Banks where no longer trusted. Even a gold drain started, reducing US monetary gold stock by more than USD 1 bn. 

The Fiscal Burden of Government did raise further, with government spending increasing and huge deficits in 1931 (after a surplus in 1929). Federal expenditures raised by 1.3 USD bn in 1931, 1 bn thereof transfer payments. More Public Works programs were suggested, with expenditures in the range of billions of USD. Wage rates were kept high, meaning that while prices dropped, real wage rates did go up. But this did go hand-in-hand with still higher unemployment. Only in the fall of 1931, the trend stared to shift (with US-Steel and even Henry Ford starting to cut wage rates).

The Spread of Collectivist ideas in the Business World: Rothbard here sketches ideas presented in 1931 – up to so-called Five Year Plans. It is hard to find the best lines here to summarize how far left the thinking did go. Maybe this is a good one: National Guards in Texas to enforce a stand-still of oil-wheels when prices dropped ‘too far’ after discovery of new fields.