I have given some concepts of economic term in previous Parts. Now I will try to put together, a story of the where we are in present situation.
We will begin our story from the beginning of the last century. One significant event in the beginning of the twentieth century was the World War I. And the war is the serious consumer of money. It sucks in money from all corners. It puts so much of money into the economy that it prospers, even after the war is over. This global/country prosperity has always taken place when the wars have been waged. And they have been great tools for Bankers to earn significant sums of profits.
World War I began in 1914. So, how can the country finance its military adventures? Simple, print the money. There is nothing more easy in the world than printing your own money and buy whatever that would be required. Rich Man did that. [But, you know the price he paid.] Most of the Europe was engaged in bloody war. To finance this all the countries involved, be it Germany or England, simply printed the money. And money was used to fund the war purposes. US, was not involved in the first War. But, in order to assist England to win the war, it started its won printing program.
Germany hyper inflated around 1923 [32 trillion for a pair of shoe! Refer Part 5]
To understand something more, let us add a twist. Let us take production into account. The main role of US in World War I was as a supporter to England. In order to finance the England's war plans, US began printing money [Financing England]. But the clever US did not help much in the term of cash in the term of war goods. For example, they built ships, automobiles, guns, steel for England. Therefore much of the money printed was gainfully put into expansion of the economy and building of assets. Since, US was exporting more rather than importing [that is producing more, than consuming] and because they were gainfully utilized, US did not hyper inflate. But it went on to face another problem.
The decade after the war became to be known as "The Roaring Twenties" in US. The War had just ended. The increase in money supply had placed lots of money with the people, who used it for lavish consumption. The times were generally good and it was a jolly good time to have fun. But after the War and after few years of reconstruction of England, and reconstruction loans to other countries, the US dint have much incentive to increase the money supply. [Remember, the money supply is spiral effect. The money retains value as long as the new money is coming in. Refer Part5] Once the money supply tap was turned down, the consumption levels dropped. The demand dropped.
Soon, after the war, major requirements from the war front had stopped. But this had led to excess capacity created in US to be idle. Many of the factories were converted for civilian purposes. [For the employment sake] The competition and production capacity increased and the prices began to fall. Factories produced so much that many factories had to close. Because of better management, efficiency, large production economics the prices kept on falling and the other business were closing. All the while demand was decreasing as the money supply came down. Finally, the unemployment rate was so high, that the demand for the products virtually diminished. In order to survive, the surviving businesses cut down the prices further to stimulate sales. All these led to cascading fall in prices. This was "Deflation". The period became famous in economic history as "The Great Depression".
There is a heart rending story that explains a lot. The father used to work in collieries and had lost his job,
Child: Mother, Why don’t we have enough coal to heat?
Mother: Because we do not have the money
Child: Why don’t we have the money?
Mother: Because your father does not have a job
Child: Why doesn’t father have a job?
Mother: Because there is too much coal!
[It was poverty amongst the plenty.]
In the decade following the recovery, the World War II started. And as always, war eats up the money. So, it leads to more money creation and more fun for people. The after war period saw great growth in the US economy. Partly fueled by increase in money supply and partly by genuine demand and progress. It must be mentioned, that up until that time, the Dollar bills [notes] were freely convertible in gold. But US was major exporter at that point with great industrial strength, therefore Money [convertible into Gold, therefore Gold] kept coming into the US.
But in the late 60's the tide changed. Japan began exporting to US in a big way. And for first time in a long period, the Gold was going out of the country [US imports from Japan were more than exports. So, had to pay Japan in gold-convertible money] US later adopted the policy that was landmark. It totally delinked the Dollar from the gold. From now on, Dollar holders could not claim the equivalent value of Gold. In effect, US threw off the "brakes". Earlier, there had to be some basis [linked to Gold] in order to print or issue money, but with the "brakes" off, it could print any amount it wanted. The market will decide what the value of the dollar bills was. [Just like in the case of Rich Man's Promissory notes]
From then to now, the Fed has been printing money, for every reason it deems fit. Iraq war. Homeland security. The rate of money creation increased in the mid 90's. Now, the US owes the foreign countries Trillions of dollars. Just like our Rich Man.
:) Falkor
We will begin our story from the beginning of the last century. One significant event in the beginning of the twentieth century was the World War I. And the war is the serious consumer of money. It sucks in money from all corners. It puts so much of money into the economy that it prospers, even after the war is over. This global/country prosperity has always taken place when the wars have been waged. And they have been great tools for Bankers to earn significant sums of profits.
World War I began in 1914. So, how can the country finance its military adventures? Simple, print the money. There is nothing more easy in the world than printing your own money and buy whatever that would be required. Rich Man did that. [But, you know the price he paid.] Most of the Europe was engaged in bloody war. To finance this all the countries involved, be it Germany or England, simply printed the money. And money was used to fund the war purposes. US, was not involved in the first War. But, in order to assist England to win the war, it started its won printing program.
Germany hyper inflated around 1923 [32 trillion for a pair of shoe! Refer Part 5]
To understand something more, let us add a twist. Let us take production into account. The main role of US in World War I was as a supporter to England. In order to finance the England's war plans, US began printing money [Financing England]. But the clever US did not help much in the term of cash in the term of war goods. For example, they built ships, automobiles, guns, steel for England. Therefore much of the money printed was gainfully put into expansion of the economy and building of assets. Since, US was exporting more rather than importing [that is producing more, than consuming] and because they were gainfully utilized, US did not hyper inflate. But it went on to face another problem.
The decade after the war became to be known as "The Roaring Twenties" in US. The War had just ended. The increase in money supply had placed lots of money with the people, who used it for lavish consumption. The times were generally good and it was a jolly good time to have fun. But after the War and after few years of reconstruction of England, and reconstruction loans to other countries, the US dint have much incentive to increase the money supply. [Remember, the money supply is spiral effect. The money retains value as long as the new money is coming in. Refer Part5] Once the money supply tap was turned down, the consumption levels dropped. The demand dropped.
Soon, after the war, major requirements from the war front had stopped. But this had led to excess capacity created in US to be idle. Many of the factories were converted for civilian purposes. [For the employment sake] The competition and production capacity increased and the prices began to fall. Factories produced so much that many factories had to close. Because of better management, efficiency, large production economics the prices kept on falling and the other business were closing. All the while demand was decreasing as the money supply came down. Finally, the unemployment rate was so high, that the demand for the products virtually diminished. In order to survive, the surviving businesses cut down the prices further to stimulate sales. All these led to cascading fall in prices. This was "Deflation". The period became famous in economic history as "The Great Depression".
There is a heart rending story that explains a lot. The father used to work in collieries and had lost his job,
Child: Mother, Why don’t we have enough coal to heat?
Mother: Because we do not have the money
Child: Why don’t we have the money?
Mother: Because your father does not have a job
Child: Why doesn’t father have a job?
Mother: Because there is too much coal!
[It was poverty amongst the plenty.]
In the decade following the recovery, the World War II started. And as always, war eats up the money. So, it leads to more money creation and more fun for people. The after war period saw great growth in the US economy. Partly fueled by increase in money supply and partly by genuine demand and progress. It must be mentioned, that up until that time, the Dollar bills [notes] were freely convertible in gold. But US was major exporter at that point with great industrial strength, therefore Money [convertible into Gold, therefore Gold] kept coming into the US.
But in the late 60's the tide changed. Japan began exporting to US in a big way. And for first time in a long period, the Gold was going out of the country [US imports from Japan were more than exports. So, had to pay Japan in gold-convertible money] US later adopted the policy that was landmark. It totally delinked the Dollar from the gold. From now on, Dollar holders could not claim the equivalent value of Gold. In effect, US threw off the "brakes". Earlier, there had to be some basis [linked to Gold] in order to print or issue money, but with the "brakes" off, it could print any amount it wanted. The market will decide what the value of the dollar bills was. [Just like in the case of Rich Man's Promissory notes]
From then to now, the Fed has been printing money, for every reason it deems fit. Iraq war. Homeland security. The rate of money creation increased in the mid 90's. Now, the US owes the foreign countries Trillions of dollars. Just like our Rich Man.
:) Falkor
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