The Accounting System #11: The Great Unraveling of 1930

previous: #10, The Federal Reserve and Accounting Money

In short, in 1930 the economic system unraveled because of the way it was built. The previous upward spiral of increasing economic activity was enabled by the ability of the banking system to expand both deposits and loans. Over time, however, many people had withdrawn deposits from banks to buy stocks, while others took loans from banks that were used to buy stocks. When stock prices started dropping (because enough people had realized it was a fool's game), people could no longer easily take money out of the market like they could take it out of a bank deposit. For loans to be repaid more stocks needed to be sold, and when stocks became relatively worthless, deposits had to be drained to make loan payments or for ordinary expenses. Loans and deposits, accounting money, disappeared rapidly, even when there was plenty of cash to facilitate cash transactions.

At the end stage banks could not collect on loans (because so many people had lost their jobs), and so had to use reserves to pay depositors who wanted to make withdrawals. When reserves were gone, the accounting rules said the banks had to close. There was no deposit insurance, so accounting money in the form of deposits, simply disappeared. Suddenly self-accounting with cash seemed like a better idea than bank accounting with numbers in ledgers.

We are largely trained to forget that there was one large, industrialized nation whose economy did not collapse in the 1930s. In the U.S.S.R. (essentially Russia) there was no stock market to collapse, and state banks and most of the economy were all government-owned. The government had total control of the accounting system. Despite the other defects (even atrocities) of the Communist system, there was a realization that money, the economy, and accounting were all human creations, and it was possible to run a command economy with some success (although command economies also have very high failure rates. It mostly depends on the commanders).

The New Deal can be fairly said to replace the free market economy of the United States by a command economy supervised by the government. In the end it took the increased demand created by World War II to get the American economy on its feet, and the legacy of the New Deal was not a command economy but a re-engineered free market economy.  Some of the changes had little to do with the accounting system, but two made noteworthy changes.

While most of the bubble in stock market prices was simple human folly, there was also fraudulent accounting at some corporations that was used to jack up stock prices. The SEC (Securities and Exchange Commission) was created in 1934 to attempt to insure that investments traded in public markets were neither fraudulent or manipulated. Among other reforms, the accounting of individual listed corporations now had to be audited by a (hopefully) independent auditor, and reported to all investors at least quarterly in a standardized format. Their accountants and their auditors were giving accounting rules they had to follow, Generally Accepted Accounting Principles (GAAP). This standardization of the accounting system meant that any person, not just accountants, could learn to read and understand any American business accounting statement.

The creation of the Social Security system would have long-term repercussions far beyond what was originally envisioned. Because many Americans were alive who had the same name, each person who paid into or received money from the system was given a Social Security Number.  Later this number would come to be used as a national, individual identity number, thus vastly enlarging the domain of The Accounting System.

Next: #12 Electronic Money Takes Over

[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]

The Accounting System #5: Physical Money As Portable Accounting

previous: #4: The Big Reversal

During the Age of Coin the normal relation of reality to symbols of reality was inverted for many people. This inversion permeates human culture even today, long after the Age of Coin (roughly 1400 to 1900) has faded into history.

Leaving aside human relations, possessions and their use are generally believed to hold value. Food, clothing, housing, tools, and land have obvious value. Coin, however, came to be the common denominator allowing people to think about the value of mixtures of types of possessions. A farmer could come up with a total numeric value of his land, cows, sheep, and money held in bank accounts and cash. An urban investor know how much his stocks were worth, and the shares of companies they represented in turn could be accounted for in terms of projected future profits and current assets that might include factories, inventories, and money in bank accounts, less what was owed on loans.

It was a convenient fiction that any citizen could turn all assets into a pile of coin or paper currency, stand naked beside the pile, and know his or her worth. Even more conveniently, one could come close to this by selling everything, putting the resulting money into a bank account, and looking at a single number on a bank statement.

In reality not everyone could convert all their assets to currency or even into bank accounts at once. There was not enough currency to meet the demand if too many people demanded cash at any given time. The history of the United States of America, from colonial times until the creation of the Federal Reserve, was punctuated by proofs of this. Metallic coin, preferably silver or gold coin, was always in short supply because at first it had to be imported. After about 1850, when large amounts of gold and silver were found and mined in the states, coin remained in short supply because the rest of the economy expanded at such a fast rate. The Free Silver (coinage) and Greenback political campaigns encapsulated the deadening effect on the economy of the mindset that only gold could be real money, or represent real value.

Going back to our naked ape sitting beside a pile of coin (perhaps have kept aside a knife or six-shooter to defend it with), pretty soon, except in cases of insanity, hunger or discomfort would lead to spending down the pile. If no one was willing to trade food for gold, the pile was useless, and without value. We know from history that in times of famine scraps of food came to be "worth their weight in gold."

Another problem would occur if everyone tried to liquidate their assets at once. In that hypothetical situation, there would be no buyers. The value of truly valuable things drops to nothing if buyers cannot be found. This can be true even when there is plenty of money (coin, cash, account balances, or credit) to buy the assets. Thus we have had a series of asset bubbles over the centuries, some of the most famous being the Tulip bubble, the South Seas bubble, the Florida land bubble, the Internet stock bubble, the housing bubble of 2005-2006, and (as of April 15, 2013) the Gold bubble. In a bubble money is traded for something believed to have real value, until only the most foolish citizens can't see that the money value exceeds the real value. Then, when buyers become scarce enough, bubbles burst. Tulips are just tulips again, not investments. (My favorite bubbles: tropical fish bubbles and the farmed mink bubble).

Next: #6: Counting, Coins, and Crashes

[The Accounting System, Your Fate is in the Cloud, is a work in progress by William P. Meyers, ©2013]

Give the Iraq Money Back

Billions were stolen by the Bush administration and friends - and now we aren't talking contracts for Halliburton or a few federal dollars for church-based proselytizing. In Billions Over Baghdad former Time reporters Donald L. Barlett and James B. Steele tell the story of how money that had been seized from Iraq was given away to well-connected corrupt friends of the Pentagon and CIA.

Oh, it is not the first time in American history. As early as the Revolutionary War money that was supposed to go for one thing went into dishonest men's pockets. In every war since then taxpayer money has disappeared or been traded for shoddy or even phony goods. Harry Truman documented the wasteful spending just before the U.S. entered World War II.

But in this case it was not American taxpayer money that was grabbed. It was Iraqi money. Taking the money was an act of genocide. I don't trust the Democrats to investigate, because though they might like to make the Republicans look bad, they have a long history of corruption themselves and are probably just mad the money ended up in the other guy's pockets.

Maybe a special prosecutor could do the job, given enough resources. But again, this isn't ordinary stealing, this is the moral equivalent of genocide. So I think the best institution for conducting the investigation could be the World Court.

Better still, let's really go for justice this time. Let's empower a group of Iraqi clerics noted for their incorruptible nature to investigate and determine punishment. While I am against the death penalty as a matter of general principle, I think beheading would not be inappropriate for anyone who dipped into the Iraqi cash fund or looked the other way while it was happening.

So we would lose much of the senior Bush administration, campaign donors, Pentagon contract boys and CIA we-can't-buy-heroin-without-front-money spooks. I guarantee you that if this is pursued far enough, the Republican Party and probably the Democrats too will collapse like the House of Usher. Apparently the Federal Reserve was originally in charge of the money; how safe is the rest of our money system?

Okay, enough said. Let's end the war and start behaving like a civilized race. Let justice be done, though the heavens fall.