THE GREAT DEPRESSION

At the turn of the 20th Century, economies were still reliant on horses, wind and
steam power. But by 1929, automobiles, planes, the radio, skyscrapers, ocean
liners, and an array of electrical appliances emerge. Europe declines as the U.S.
soars with its technological industries and financial might. By way of example, in
1880, the U.K.’s share of world trade was over 23%. By 1913, it was down to only
14.1% - Technology, trade, and financial might ushered in the “Roaring Twenties,”
with its unprecedented wealth and excess.
Another significant event in U.S. economic history was the creation of the Federal
Reserve in 1913. It established a central banking system, meant to serve as a
formal “lender of last resort” to banks in the event of a liquidity crisis, like during
panics when depositors seek to withdraw their money faster than banks can pay it
out (commonly referred to as a “run on the banks”). The Federal Reserve was
created in partial response to a severe panic in late 1907, also known as The 1907
Banker’s Panic, in which the NYSE fell 50% from 1906 levels. The Reserve is
also a safe depository for federal monies, and a source of ready capital when the
Federal Government needs to borrow money. All Nationally charted banks had to
become members of the Federal Reserve, and post a set amount of non-interest
bearing reserves. There are 12 member banks, and they are responsible for
regulating the commercial banks within their districts. They are considered nonprofit
since, historically they didn’t pay interest, though they were allowed
dividends limited to 6% per year. But in 2008, Congress granted authority for the
Fed to pay interest on the funds deposited to the reserve. The Fed was also given
the power to "print" money. On a side note, printing money, now referred to as
"quantitative easing," is not done on presses with paper. Rather, creating money
supply is accomplished by the Fed buying short-term federal securities from banks,

and crediting the purchase price to each bank's account in a federal reserve bank.
The selling bank's reserves grow and thus they can lend whatever leverage multiple
allowed by law.
Back to 1917, when another major event in history transpired. In Russia, workers
revolt and overthrow the Tzar. Communism is born. In simplest terms,
communism is a social and economic system whereby the public, “the community”
owns the means of production and distribution of goods and services for the benefit
of the community. This is in direct contravention to capitalism, in which the
private individual owns the means of production and distribution of goods and
services with no obligation towards the public welfare.
If we are all wired with the desire to receive, as the Kabbalists say, then why
wouldn’t communism be the perfect philosophy? It is an entire economic platform
where all needs are met. Everything is provided for the individual. This brings us
to another Kabbalistic principle known as “bread of shame.” Basically, “bread of
shame” is the feeling of discomfort that accompanies unearned good fortune. If
you continually get something for nothing, not only won’t you appreciate it,
eventually you may even grow to resent it and/or the donor or provider.
The problem with communism is that the individual’s drive, their desire to earn, is
not fostered by communism. Pure communism, like pure capitalism will fail—
communism because it fosters bread of shame, and capitalism because it fosters the
desire to act for the self alone. We will discuss more examples of bread of shame
later on.

During the “Roaring Twenties, ” Wall Street went wild. Share prices kept rising
and no one believed they would ever fall. Debt increased to astonishing levels as
did margin trading. Margin trading is when you own shares of stock, let’s say it’s
worth $100K, and the brokerage house or investment bank holding your stock
loans you money against the stock you own to buy more stock. Nowadays,
investment houses will typically loan 50-60% of the value of your shares. If the
price of your stock portfolio declines below your threshold value, you get a
“margin call” requiring you to replenish your account with cash. If you can not
pay the “margin call,” the investment house will sell your stock on the open market
to make up the deficit. In the 1920’s you could routinely buy stocks with 10%
down and the bank would loan the rest. At the same time, Europe entered into a
recession and they could not pay their international creditors with the gold they
had. Also, not surprisingly, U.S. banks were over-extended; confidence weakened
and panic hit again. Depositors began selling stocks, taking money from banks,
and hoarding cash. Banks were toppled in the U.S and Europe.

On October 24, 1929, the stock market crashes. The day becomes infamously
known as “Black Tuesday.” It was the beginning of “The Great Depression,” an
economic calamity which affected basically all Western industrialized nations and
lasted over a decade-- essentially until the outbreak of WWII. Even before Pearl
Harbor, the European Allies looked to the U.S. to help with supplies. After Pearl
Harbor and America’s entrance into the war, the need for workers to make
ammunition, weapons and military air/sea/land crafts contributed to the end of the
Depression by 1941.
So what is a Depression? While there is no generally agreed upon definition, there
are some basic characteristics such as: an extreme form of recession lasting a
prolonged period of time; large increases in unemployment; lack of available
credit; a large number of bankruptcies and bank failures; and deflation. Deflation
is where the price of goods and services decline so your money (if you have any)
actually buys more. In opposition, inflation is a rise in the price of goods and
services so your money buys less.
During the Depression, unemployment in the U.S. hit 25%, and 33% in other
countries. International trade plunged by 50%. Crop prices plunged 60%.
Housing prices declined by almost 80%. As a result of the Depression, capitalism
came under great scrutiny. Fascism rose in several parts of the world. Likewise,
communist and socialist ideologies rose in influence as well.
In 1931 Britain abandoned its gold standard to combat speculators demanding gold
for currency, and thereby threatening the solvency of England’s monetary system.
Obviously, it becomes prohibitively difficult to continuously acquire gold to
exchange for paper when there is too much demand for the exchange. The U.S.
followed suit in 1933.

In 1932-1933 – The Glass-Steagall Acts (GSA) were enacted which imposed
substantial regulations on the financial industry. Banking institutions were given
one year to choose if they wanted to be a commercial bank or an investment bank,
but they could no longer be both. This was to stop investment speculation by
commercial banks. The prior speculation of banks was considered a major cause
of the Great Depression. Banks had bought new issues of stock in companies,
extended unsound loans to those companies, and then encouraged their clients to
buy that stock. After the GSA, only 10% of commercial bank revenue could come
from securities; the one exception being underwriting government bonds. Another
part of the GSA was the formation of the Federal Deposit Insurance Corporation
(FDIC), which insured bank deposits (originally for commercial banks only)
against losses up to a certain amount. In 2010, to quell fears during the global
economic meltdown, the insurance limit on a depositor’s funds was raised from
$100,000 to $250,000. The Federal Reserve Board (the main regulator of U.S.
banks) was responsible for GSA implementation, which turned out to be fairly lax.