Quotes from The Great Depression: A Diary (click to buy). If I left the dates out you might think I am quoting a modern day book, but I am not. Only a fool thinks history does not repeat itself.

“It is also interesting to note that the effort to create credit by having the Federal Reserve Bank buy U.S. bonds in the open market has failed. Huge reservoirs of credit are available but banks won’t make loans because business is too uncertain. It seems to prove that when business starts moving credit will expand automatically but the artificial creation of credit will not expand business.” November 18, 1933

“The U.S. Treasury will face the task in a few weeks of paying out huge amount for bond interest and maturities. Where will the money come from – greenbacks (printing press)?” November 18, 1933

“Industry continues to boom and the entire public seems to be speculating in the stock market. Almost as bad as 1929. Last Friday was a record day of the year with 9 million shares changing hands. The whole recovery has been so spectacular as to almost be unbelievable. Because so much of it is based on inflation theories I have doubted its permanency. The next few months should tell the story. In the meantime lawyers and professional groups have failed so far to share in the boom.” July 3,1933 – sound familiar? The Depression was just getting going and the boom was because of FDR confiscating the gold and adjusting the price, effectively taking U.S. citizens off of the gold standard, but the U.S. still honored international settlements in gold.

“For the 12th consecutive day stocks have been drifting lower. Congress starts an investigation of short selling.” April 13, 1932

“During the boom years it became popular to buy real estate at inflated prices on a shoestring. This was done by encumbering it with a 1st, 2nd and 3rd mortgage. Second mortgage companies were formed to buy 2nd mortgages at a discount of 10% to 25% per year. It has proven to be a bad investment because at each sheriff sale the 2nd is wiped out. Most of these companies have frozen assets and seem to be heading for bankruptcies.” About June 5, 1931

“Magazines and newspapers are full of articles telling people to buy stocks, real estate, etc. at present bargain prices. They say that times are sure to get better and that many fortunes have been built this way. The trouble is that nobody has money.” July 30, 1931 – He further went on to say in 5/16/32; “This advice was premature. Here a year later prices are 1/3 of what they were in 1931.”

The point of this is that we may very well be in one of the peaks and valleys that were fairly common during the 1930’s. If you look at the economic policies of Hoover, which FDR took over and expanded, they are very similar to what we see the present government doing. As it turns out these policies actually extend the problems because banks cannot purge the troubled loans and assets, sound familiar, which created zombie banks. Eventually banks began to get states to pass laws restricting withdrawals, they did this with life insurance loans as well, and that still did not stop banks from failing. Bad mortgage debt is what caused the banks to fail, sound familiar?

The assets of depositors ended up frozen and shareholders were wiped out when a bank closed, they had double liability back then which means shareholders could lose more than they invest in bank stocks if the bank failed, they would get sued basically. Many of these banks did reopen thanks to Hoover’s Reconstruction Finance Corporation, but the savings accounts or passbooks were frozen. These passbooks were used as currency as people would sell them for pennies on the dollar, in hopes the institution would allow withdrawals at full face value. It is interesting to see how this al played out and what the average person was thinking during those times. I have to tell you, this book is all one needs to read about the Depression. I am sure Ben Bernanke learned a lot about the technical’s of the Depression, but unless he read this book he does not know squat.

The real killer, according to Benjamin, was the Smoot-Hawley Act, which placed high tariffs on imports to prevent dumping. Europe had devalued their currency so the tariff was put in place to make sure people bought American. It did not work and made things worse. Does this sound familiar with the rhetoric coming out of Washington about China’s currency value? The interesting thing is that, just like now, all countries were devaluing their currency in order to remain competitive and export in order to improve their own economies, it failed. When every country is devaluing and trying to export, as Benjamin points out, who is left to buy anything?

I will post more quotes from this book, but I urge everyone to read it. The similarity between the 1930’s and today is amazing to say the least. They tried to create inflation and failed, just like Ben is trying, and they tried the NRA, like the stimulus bill but they made the NRA much more strict and imposed higher pay and shorter hours so they had to hire. The NRA put unions in a position of power and several times Benjamin pointed out that labor troubles would come and they did. The current administration also wants more union jobs and activity, I fear that will fail to as unions strike often and are the primary reason the U.S. is not competitive in manufacturing, among other reasons.

History repeats itself and if we forget that basic rule we will always be doomed to repeat it. People who claim this is nothing like the 1930’s are insane. Sure, it is not as severe, maybe it will be if we relapse, but we are showing many of the same symptoms as were present in 1931, 1932 and 1933. Even the market action is somewhat similar. The one difference I foresee in the future is inflation, which only materialized in the 1930’s through price controls and increasing the price of gold, but overall inflation was very tame in the Depression as there was no money velocity, again, sound familiar?

We are slightly more creative in 2010 so I expect money velocity or a full blown currency crisis in the near future. In 1933 we really could not destroy our currency because of the gold standard, we did float the dollar though, but in today’s world we have nothing backing our money so it could really go to zero. It’s scary if you think about it.