The causes of the Great Depression have been debated for decades. The problem with all of the analysis is this same attempt to reduce the cause to a single event. In school, we read the Great Crash by Galbraith. He was a socialist so he blamed the corporations and never bothered to ever even mention the Sovereign Defaults of 1931 for that would have put blame on government instead of the private sector. The argument that the tariffs at least “contributed” to the Great Depression. Smoot-Hawley wasn’t signed into law until June 17th, 1930, when stocks had already taken a nose dive from 1929 peaks. Cato Institute’s Alan Reynolds argued that Smoot-Hawley was an ongoing drag on the economy and that it was, in fact, a substantial contribution to the stock market arguing that traders saw it coming and acted in anticipation. The argument on the one hand correctly states that traders acted in anticipation, but it incorrectly adopts the position that BUT FOR the tariff issue, the stock market would have continued higher anyway?

Moreover, the pretense that someone the Smoot-Hawley Tariff created or contributed to the Great Depression ignoring the European Sovereign Debt Crisis, is really a specious argument. This ignores the entire issue of tariffs that predate Smoot Hawley. The Emergency Tariff Act of 1921 was a stopgap tariff measure which was rushed out and put in place until Congress could deal with the issue. The Republican Party wanted to quickly reverse the low rates of the Underwood-Simmons Tariff of the Wilson administration prewar. Protectionism had never died-out but remained merely dormant on the back-burner during World War I. After the war, the supporters of tariffs based their arguments on both economics and nationalism. They argued that the economic prosperity which occurred during the war as America produced the food for Europe and goods, unfolded because there was no competition from imports and therefore it was the abundance of exports that created the economic boom. While on the surface this was correct, they overlooked the problem that Europe could not produce in the midst of war and therefore American production sustained Europe. Now that the war had ended, European imports would increase and this would threaten the current economic prosperity.

The protectionists further argued using nationalism stating that Americans would now suffer economic hardship after sending our boys to fight in a war that America did not start. They argued that America should remain in isolationism as a policy staying out of international affairs. Nationalism was on the rise in the United States, as the Senate, in the last days of the Wilson administration voted against joining the League of Nations. Isolationism, nationalism and the concern for continued prosperity merged and gave support to the protectionists to push their arguments for higher protective tariffs. These trends led to the passage of Emergency Tariff in 1921 and then to the Fordney-McCumber Tariff a year later. The rates of these tariffs rivaled the protectionist Payne-Aldrich Tariff of 1909 and were considerably higher than the Underwood-Simmons Tariff passed in 1913. Tariffs were in place throughout the 1920s. Smoot-Hawley has been criticised as a major cause of the Great Depression with no mention of the tariffs that predated the 1930 legislation.

The tariff issue was by no means something that was scaring the stock market. The trend from 1927 into 1929 was one of a major shift in assets from bonds to equities. The smart money began to see that the real crisis was debt. This is a serious problem for even today the debt to equity ratio has varied from 7:1 to 10:1. When only a small portion of smart money begins to shift to equities, this becomes a bottle-neck and what happens is prices rise exponentially in what I have labeled a “Phase Transition” meaning that prices at least DOUBLE. This is a not really Asset Inflation where assets merely rise in proportion to the decline in the currency. A “Phase Transition” typically marks a shift in capital whereby it concentrates into one sector and often one country.

Irving Fisher was a prominent economist of the day who lost his credibility when he came out and said the market had reached a new plateau and thus it would not crash. Part of his reasoning was this shift in capital from bonds to equities. I did not realize that this is a phenomenon I call a Phase Transition signals the end of a trend and not the beginning. The shift from bonds to equities can lead to a new plateau PROVIDE it takes place gradually as a trend. When it erupts short-term and causes a doubling in price, this is a warning sign that we are dealing with a bubble rather than a broad ban shift in the investment trend as was the case following the turn of the Economic Confidence Model back in 1985. That case, when the Dow Jones Industrials were at the 1,000 level, we forecast we would see 6,000 in a few years. That was the shift in trend for cyclically the new wave was beginning not ending and we would move into a Private Wave (shift to equities) and were concluding the end of a Public Wave (when bonds are the #1 investment strategy).

To understand the entire Smoot-Hawley Tariffs which are blamed by most economists for contributing to the Great Depression, we must look at the whole economy both globally and domestically. It was in 1927 when there was not merely a secret meeting of the four main central banks that conspired to lower US interest rates in hope of deflecting the capital flows back to Europe, but also there was the League of Nations’ World Economic Conference which also met at Geneva that year, which concluded “the time has come to put an end to tariffs, and to move in the opposite direction.”

The resentment toward Germany was really too great, particularly for the French. The reparation payments imposed on Germany led to the revolution in 1918 and the overthrow of the Germany Emperor. These payments could only be made through gold, services or goods. The Germany people were being punished for the action of the political leaders. France broke ranks and began in 1928 enacting a new tariff law and quota system. This really was targeted at Germany and if they could not sell goods internationally, then they could not make reparation payments. This would eventually lead to proposals to allow Austria and Germany to merge in 1931 to which the French began shorting German bonds in the marketplace.

Additionally, the economic shift in trend due to the innovation of electricity combined with the combustion engine had drastically altered the economy. In 1900, about 40% of the civil-workforce was employed in agriculture. By the late 1920s, the United States economy has changed remarkably. There were exceptional gains in productivity due to electrification, which increased production of goods and the combustion engine which profoundly altered agricultural production. With tractors replacing horses and mules, previously, up to 25% of the agricultural land had been used to feed horses and mules. This land suddenly became available to produce crops. The ability to produce food soared and exceeded market demand creating what was called overproduction and underconsumption. This is what Senator Reed Smoot, who was a Republican from Utah and chairman of the Senate Finance Committee, and  Congressman Willis C. Hawley, who was a Republican from Oregon and chairman of the House Ways and Means Committee, were focused on listening to farmers who wanted high tariffs to prevent competition. Neither Utah nor Oregon were industrial states.

Nonetheless, because of World War I and the wholesale destruction of the European economy, the United States was still running a trade account surplus as manufactured exports of goods were rising rapidly. Therefore, Smoot was looking primarily at the food exports which had been declining as Europe found it easier to restore agricultural production than manufacture goods requiring the construction of plants.  The actual value of food imports was a little over half that of manufactured imports and thus the farmers were crying for help in an industry that was changing forever. It was NOT true that the markets were so concerned about the tariffs issue when the industrial production was in a trade surplus and profits were rising.

Senator Reed Smoot, was a Republican from Utah and chairman of the Senate Finance Committee, championed a tariff increase in 1929, which became the Smoot–Hawley Tariff Bill. In his memoirs, Smoot made explained: “The world is paying for its ruthless destruction of life and property in the World War and for its failure to adjust purchasing power to productive capacity during the industrial revolution of the decade following the war.”

The 1928 Presidential election saw Herbert Hoover promise to help the farmers by increasing tariffs on agricultural products. Upon winning the election, Hoover did ask Congress for an increase of tariff rates for agricultural goods and a decrease of rates for industrial goods. He saw this as a balancing act to appease trading partner nations. Indeed, the House passed a version of the act in May 1929, increasing tariffs on primarily agricultural products. Those who have blamed Smoot-Hawley as a major cause of the 1929 Crash argue that when the House passed the bill on May 28th, 1929, which was the first version, the stocks were battered. This is simply not true. The bill was passed on Monday 28th which was a low and it was not attributed to the tariff bill. On May 3oth that week, the British elections took place and ended in a hung Parliament, which was regarded politically as a crisis. The following day, the Ford Motor Company signed a nine-year contract with the Soviet Union. The Soviets agreed to purchase $30 million worth of Ford products within four years while Ford agreed to provide technical advice and help build an automobile factory in Nizhny Novgorod. To say the market responded negatively in May 1929 in “anticipation” of the tariffs was simply not true.

They further argue that on October 23rd, 1929, a Wednesday, it became clear the tariffs would be much broader than first believed. Again they portray the tariffs as the reason for the crash. I found no headlines to support that interpretation, which appears to be predetermined. In fact, that very day of the 23rd the bankers attempted to support the market. The downside of such intervention is when it fails, then confidence collapses completely.  Also on that day, there was an assassination attempt on the Italian Crown Prince. He narrowly escaped with his life.

This focus on tariffs as the culprit for creating the crash was an argument from the Democrats as they did against Reagan with “trickle-down” economics. Along with such tariff proposals, some of the senators advocated a detailed investigation of the Federal Reserve Banking system, as put forth in the pending resolution of Senator William Henry King (1863 – 1949) who was also a Democratic representative from Salt Lake City, Utah who served in the Senate from 1917 until 1941. Senator Carter Glass (1858 – 1946) of Virginia, who one of the authors of the Federal Reserve banking act and then the Glass-Steagall Act, also in the midst of the October crash the time to add to the crisis pushing his bill providing for the imposition of a 5% excise tax on sales of stock which had not been held over sixty days. It was his present plan to offer the bill as a “rider” to the pending tariff bill. To say that people feared the tariffs, which really did not impact the industrial stocks, is absolutely absurd. They were concerned about a 5% tax on stock investment the Democrats were trying to stuff into the tariff act. The Democrats contributed to created the crash in 1929 with these proposals arguing against the rich.

There was also talk of an investigation into the stock market decline to blame someone. Eventually, this would take place and lead to the creation of the Securities & Exchange Commission (SEC). Herbert Hoover in his memoirs apologized for the investigation into the stock market. On top of that, two men were arrested for placing a car on the train track which would have wrecked the coming train carrying President Herbert Hoover. No headlines I found covered tariffs as some dark omen for the economy.

The Senate debated its tariff bill until March 1930, with many Senators trading votes based on their states’ industries. It was not purely supported by Republicans. The Senate bill passed with 39 Republicans and 5 Democrats voting in favor of the bill. The conference committee then aligned the two versions, largely by moving to the greater House tariffs. The House passed the conference bill on a vote of 222 to 153, with the support of 208 Republicans and 14 Democrats. The Democrats who voted for the bill were primarily influenced by the farmers. The Tariff Act of 1930 (codified at 19 U.S.C. ch. 4), commonly known as the Smoot–Hawley Tariff or Hawley–Smoot Tariff, implementing what would be called “protectionist” trade policies was signed into law on June 17th, 1930. Once again, when Smoot-Hawley was passed, I found no damning headlines how this would end the economy.

The bankers were in once again attempting to manipulate and save the market on the very day that Smoot-Hawley was enacted. I found no commentary that attributed the decline to the tariff issue. The day the bill was signed, the Democrats argued that the crash was because of the tariff act, which completely ignored everything else and was used simply as a political criticism of the Republicans. As the press wrote: “It increased duties on sugar, shoes, lumber, cement, bricks and wool and hides, particularly, aroused the Senate to the most extreme political debate in recent times.” Sadly, because the Democrats kept trying to blame the Great Depression on the Republicans, we have the entire tariffs issue still a present view of creating the crisis.

Spending was being cut especially to the military. The debated was thus really focused on the cut in spending and the tariff issue on top of aid to Europe. Many in Congress began to consider the Europeans calling them the “GIMME BOYS” for they wanted free access to the US market, blocking access to their markets to rebuild their economies.

We have to understand that the entire tariff issue began because of the overproduction of agriculture and that this had been 40% of the entire civil-workforce. The economy was transforming from an agricultural based system to one of industrialization. This economic transformation was NOT understood by politicians.

Then in 1931, the rug was pulled out of the world economy. With the bankers’ attempts to support the market always failing, the confidence level kept declining. Government and the bankers were suddenly cast in a light of total incompetance. Survival became one dependent upon oneself.

The Creditanstalt Bank in Vienna failed on May 11th, 1931, leading to a national currency crisis as investors began pulling their funds from Austrian banks and moving them to other countries. Meanwhile, Germany was in the political throes leaning toward fascism. It was on May 8th, 1931 that same month when the prosecution of Adolf Hitler by Hans Litten (1903-1938) for complicity in manslaughter committed by members of the Sturmabteilung at the Tanzpalast Eden (“Eden Dance Palace”) in Berlin in 1930 was dismissed. Litten was eventually arrested on the night of the Reichstag fire along with other progressive lawyers and leftists. Litten spent the rest of his life in German concentration camps, was tortured and constantly subjected to grueling interrogations. Finally, after five years of this treatment, cut off from all outside communication, he committed suicide. His attempt to stop Hilter’s rise was admirable, but it came at such a personal cos

QUESTION: Where the Crusades inspired by economics? You mentioned how Venice looted Constantinople.

Thank you for making history interesting

KR

ANSWER: To understand the Crusades, we have to first look at what was the original justification. The Catholic Church encouraged pilgrimages from the 4th century, but they began really during the 1st-2nd century and built in intensity. Pilgrimages became very popular once Constantine the Great became emperor. Contemporary historians reported that Roman Emperor Hadrian (117-138 AD) built a temple dedicated to the goddess Venus in order to hide the cave in which Jesus had been buried in hopes of ending early Christian pilgrimages. Constantine ordered during 325/326 AD that the temple of Venus be replaced by a church which has become known as the Church of the Holy Sepulchre. It was during the construction of this church that Constantine’s mother, Saint Helena, is believed to have rediscovered the tomb.  Socrates Scholasticus gives a full description of the discovery in his Ecclesiastical History. In her final years, Helena made a religious tour of Syria Palaestina and Jerusalem, during which she allegedly discovered the True Cross.

The pilgrimages to the Holy Land really began to rise in mass going into the year 1000. As the year 1000 approached, the doom and gloom was pervasive. Everyone assumed that the world would end and this would be last judgment. It became so common that the King of England removed his own portrait from the coinage and placed the Christian symbol of the lamb on one side and the Holy Ghost on the reverse. When the world did not end, he promptly restored his portrait to the coinage the following year.

This belief in the end of the world prompted people to make pilgrimages to the Holy Land. This is when they were being robbed on their travels which became known as highway robbery. Political relationships between the Muslim caliphates and the Christian kingdoms of Europe had remained in a state of somewhat state of suspended truce. The Muslims allowed the continuation of Christian pilgrimages into Muslim controlled lands generally, but as with all political leaders, policies change with the change of regimes. During the reign of Fatimid Caliph al-Hakim bi-Amr Allah (996-1021 AD), because of this view that the world was going to end, a massive wave of pilgrims flocked to the Holy Land. His policies proved to be arbitrary and extremely harsh and at times sheer madness. He ordered the killing of all dogs because their barking annoyed him. He banned various kinds of vegetables and shellfish that he personally disliked. He also engaged in religious persecutions of Sunnite Muslims, Jews, and Christians. He appears to have been insane for he held that he was the incarnation of divinity. Al-Ḥākim in response to the pilgrims from Europe ordered the destruction of the Church of the Holy Sepulchre, which in part inspired the Crusades. Nevertheless, only to have his successor, Abū’l-Ḥasan ‘Alī al-Ẓāhir li-I’zāz Dīn Allāh (1021–1036), allow the Byzantine Empire to rebuild it. Al-Ḥākim was overthrown for he mysteriously vanished while taking a walk on the night of February 13, 1021, never to be heard from again. It was his actions that formed much of the basis for the Crusades. The four main crusader armies left Europe around the appointed time in August 1096. The Seljuk Turks also systematically disrupted Christian pilgrimage routes, which also became a major factor triggering the crusades.

So while the Crusades began as a religious quest of a Holy War, eventually they turned into profit ventures. The Venetian Empire finally saw the opportunity to conquer Constantinople. So while the Crusades did begin over religious issues, once there was money to be had, they became the means to pillage the old capital of the Roman Empire and carry off the loot back to Europe.

The Venetians stole the body of Saint Mark (one of the apostles of Christ) from Egypt and built a church in what is now known as Saint Mark’s square. On the facade of the Church stand four bronze horses, which are really 96.7% copper because copper melts at a higher temperature than bronze making it more difficult to work with. These were stolen from Constantinople in 1204 when the Venetians sacked the city. Their origins are not actually known. They may be the horses that were long displayed at the Hippodrome of Constantinople where chariot racing took place. They were perhaps the “four gilt horses that stand above the Hippodrome” as mentioned in the 8th- or early 9th-century contemporary historians. While the Venetians looted them in 1204 during in the Fourth Crusade, the collars that appear around the necks of the horses were added in 1204 to obscure where the fact that the heads had been severed for transport. Then in 1797, when Napoleon conquered Venice, he had the horses removed and sent to Paris. After the defeat of Napoleon, the horses were return to Venice in 1815.

So yes, whatever “good” deed is done, when there is money to be had, it appears that we should then just follow the money to reach the truth.

QUESTION: Mr. Armstrong, what were the gold custom units issued by the Bank of China with the image of Sun Yat-sen.

PHR

ANSWER: The Customs Gold Unit (CGU) was a currency issued by the Central Bank of China between 1930 and 1948. On May 1, 1930, the Central Bank of China put in circulation notes in denominations of 0.10, 0.20, 1, 5, and 10 Customs Gold Units. These notes were printed by American Bank Note Company and dated 1930. CGU notes were originally issued by the Central Bank of China for payment of import duties. These notes were backed by U.S. dollars until 1935.

During and after WWII, the large-size CGU notes were issued for general circulation in China. The vertical face depicts Sun Yat-sen, who was the first president of the Republic of China. The reverse side features the Customs House in Shanghai, which was the commercial and financial hub of Chin

Gold rings were discovered in Ireland and they seem to be uncertain about their original use. The Celts did not create their own coins for many centuries. They used ring money which is commonly found throughout Europe, north of Italy. Celtic ring money is typically bronze. However, it is known that the Minoians sailed into the Atlantic and traveled to England where they traded to obtain tin, which when mixed with copper created bronze. However, the Celts were not the first people to inhabit Ireland for it was inhabited by humans since 6000 BC. There was no Celtic invasion but rather some Celts migrated only arriving in 500 BC. Nevertheless, ring money was probably known to the Irish prior to 500 BC.

The ancient Irish learned how to make bronze from the French Celts who settled in Ireland and brought the materials needed for casting simple bronze objects like arrows and taught the Irish the trade. The technology had already been in place for quite some time on the continent.  Ireland did have abundant copper deposits, which actually inspired the Irish to search the entire island looking for copper. They found it in Mount Gabriel in county Cork and Ross Island in county Kerry, two of the few known Bronze Age mines in all of Europe.

The gold rings recently discovered were handed over to the Donegal County Museum. The curator Caroline Carr told the BBC that: “This is a once in a lifetime find for our county…” Ireland was out-of-the-way even for the ancient Celts. When St. Patrick visited Ireland during the 5th century AD, he wrote that the monetary unit of account was slave girls. That did not mean you went shopping dragging slave girls with you to pay for things. Everything else was valued in terms of slave girls, so they were the “unit of account” which St Patrick said he had spent money valued at the price of several humans.

Nonetheless, Eqypt also did not strike coins until they were conquered by Alexander the Great in the autumn of 332 BC, thereby beginning the Greek period in Egyptian history. The Egyptians also used ring money. Coins were not invented until the 7th century BC in Lydia, located in modern day Turkey. They began as simply modules of a standardized weight. Later they were stamped with the seal of the king, a head of a lion. This effectively certified the first “official” monetization by any state.

The gold rings discovered in Ireland are money, not jewelry. There were areas in Ireland where gold was deposited that were known to inhabitants of Ireland in 2500-500 BC. Most people would never guess, but in fact, there are more Bronze Age gold hoards that have been found in Ireland than anywhere else in Europe! So the gold rings do not necessarily reflect international trade. Ireland was largely isolated.

The question of money supply and inflation has been erroneously been set in stone predominantly by the debasement of Spain and Britain during the period of Henry VIII. This was really a period where there were various countries and their currency completely relied on the exchange market in Amsterdam, which was based entirely upon their metal content. This period was far less judgmental insofar as we have today where currencies rise and fall purely on anticipation of political events. During the middle ages, this influence of anticipating future value based upon possible political decisions was not readily dominant and the coins of one nation were compared entirely on their metal content.

For example, because of the French at war with Britain, they created a wave of inflation that spread like a contagion to other nations, namely Spain and Italy, because money was commodity based using gold and silver. In this way, there was really a single currency base among nations and the problems of one would be exported to all others by their debasement.

We can see that wages more than doubled even in Spain as inflation became a contagion. To cover the cost of war, France began debasing their gold and silver coinage. There was clearly economic pressure for in 1305, the French Crown issued a restored monetary system. The gros now appears at 12d fine and the denier are also returned to a sound MONEY standard. These were now worth 300% greater than the debased coinage in circulation. The gros was now worth 10.5 deniers for with the end of the war, precious metals fell in value for a marc of silver collapsed back to 56s 8dt. Despite the end of the war, gold demand remained strong in all countries. By 1311, the coinage once again was debased as precious metals rose in value. A new gold coin was issued known as the angel d’or that was valued at 20 st. The silver to gold ration now jumped to 15:1. Silver begins to disappear being hoarded and gold becomes more commonly struck in France and England. Yet the volatility seems to have been incredible for the times. Gold prices crashed in value and the agnel d’or dropped from 20st to 15st. Silver collapsed falling 25% in value at this time, yet the silver to gold ratio remained at 15:1.

Silver began a three-year rally reaching a ratio of 12:1 in 1316. This rally coincided with the death of Philip IV, but his successor, Louis X (1314-1316), appears to have struck no silver gros whatsoever. The only coins struck in his name are the gold angel. The coinage reflects a surge in inflation as reflected in wages going into 1329. We see bullion prices rising again starting in 1322 whereby in October that year, there appears to be a significant debasement whereby the fineness collapses to about 47%. The debasement continued in 1323 and again into 1326.

The Capetian dynasty dies with the three sons of Philip IV, none of whom had produced a male heir and thereby the line passed to the Valois Dynasty. We come now to a Monetary Reform of 1330, with a major effort to restore sound MONEY once again. They did learn that one could not simply return the MONEY supply to a sound footing overnight. They tried to phase it in more gradually, for it has the tendency to lead to the new MONEY merely being hoarded. Nevertheless, this monetary reform under the new Valois Dynasty was short-lived, for, in 1337, there was the start of the Hundred Years War with England and the invasion of Edward III (1327-1377).

Their accounting books of Peruzzi Company, one the main Florence bankers, covering the period of 1335 to 1343 have survived to provide us with the detailed footnotes to the history of this period. For by 1330, the Peruzzi Company was the second largest banking house in Europe, just behind the Bardi, with 15 branches covering the Middle East all the way up to London. They were not just a super-rich merchant-banking firm they were one of the earliest truly international companies to emerge. Their capitalization stood at 100,000 gold florin in 1330 and they had a staff of about 100 people. The Peruzzi had made a fortune on taking English wool and turning it into fine cloth in Bruges, and selling luxury products to Avignon, London, Paris, and Naples to mention a few. They also dealt in spices, silk, drugs, and other luxury items from the East. They emerged as a great wholesaler supplying credit to the lesser merchants and creating a vast sales network. They became dealers in large quantities of commodities that even included grain from Italy. Yet with the defaults of Edward III, the Peruzzi collapsed in 1343 and were driven into bankruptcy by 1345.

Because of the French/English war, the French drove the price of silver up dramatically. In Florence, they utilized a two-tier monetary system with silver used as the domestic coinage for wages and gold for international transaction much as Bretton Woods after Roosevelt’s confiscation of gold in 1934 domestically. Because of the French debasement, the price of silver rose and this disrupted the economy in Florence. Companies could no longer pay wages in silver and businesses failed. As unemployment rose, the people, not understanding the real cause, stormed the palaces of the banks and burned them to the ground. The bankers were blamed for the action of kings.

Therefore, the precious metal monetary system was by NO MEANS a good stable system where money was tangible. It also allowed for contagions that people did not understand. If we are going to create a new monetary system, the “reserve” currency cannot be one of any single nation. It must be a basket at best for this is the ONLY way to prevent contagions. Currently, with the dollar as the reserve currency, because we still use Demand Economics, then the raising or lowering of interest rates sets in motions contagions that will either export inflation or deflation to other countries. We need to understand how contagions take place and their origin.