“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
- Thomas Jefferson, Letter to Treasury Secretary Albert Gallatin (1802)

With thanks to Josh Ryan-Collins for drawing my attention to this quotation.

I’ve dubbed the 9th August, 2007 ‘debtonation day’ – because on that day banks froze lending to each other, central banks panicked and began providing ‘liquidity’ – i.e. new loans to banks in trouble – and the Credit Crunch took hold.

By strange coincidence, it was on the 9th August (see Charles Kindleberger in ‘The World in Depression’) that the Federal Reserve Bank of New York raised interest rates from 5 to 6% – an act that helped precipitate the Great Crash and then the Great Depression.

The Fed had started ‘tightening’ i.e. increasing the real cost of borrowing in 1928, and persisted in this tight monetary policy after the Crash had started. The Fed had been determined to raise interest rates to (finally) prick a bubble of its own creation: the easy credit bubble that fuelled the stock market of the roaring 20s. Taking away the punch bowl by raising interest rates, proved very unhelpful to bankrupts and debtors – of which there were many millions in 1929.
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The Commentariat are spooking themselves themselves with ‘frightmares’ about the “spectre of inflation”. The charge is led by the BBC’s economics team with Hugh Pym warning in his News At 10 report (17th June) that inflation was “haunting the economy….” . Tonight Michael Crick of Newsnight piled on the horror by flashing images of the strikes and inflation that brought down Callaghan’s government……

The Governor of the Bank of England, dismayed by the shock-horror his earlier inflation-hype has caused, has belatedly tried to calm nerves and contradict these irrational fears in his now famous ‘Letter to the Chancellor’ of 16th June. Recanting of his earlier assertions he wrote: “there are good reasons to expect the period of above-target inflation we are experiencing now to be temporary” (my italics). (More about this inflationary squeeze being temporary in my next blog.)
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Listen to Ann respond to Alistair Darling’s speech at Mansion House tonight, 18th June, 2008, on Radio Four, 10pm (93.5FM).

We trust Central Bank governors. They are after all, civil servants – not masters of the universe – there to serve the citizenry, not just the finance sector. And they are charged to act as ‘guardians of the nation’s finances’.

So when the deputy governor of the Bank of England says in a report on the nation’s financial stability on the 1st May, 2008 that: “the most likely path ahead is that confidence and risk appetite will return gradually in the coming months” we are inclined to believe him. His comforting words were echoed by that American civil servant and central bank governor of the Federal Reserve, Ben Bernanke, who said in a speech on 9th June, 2008 that “although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”

But then a cautious citizen turns to Page 27 of the Financial Times of 14th June, and reads that European banks have a $400 bn hole on their balance sheets, in spite of raising a great deal of money from the capital markets this last week. Furthermore there are fears of another American bank failure – Lehman brothers – ‘a dead bank walking’ according to critics quoted in the FT on 14th June.

A cautious citizen would extrapolate from this first, that confidence is unlikely to return; second, that risks have not diminished over the past month or so. Third, that therefore our public servants are either a) deluded or b) unaware of the state of banks’ balance sheets.

This could cause a cautious citizen to lose confidence in the pronouncements of central bankers.