Trump is about to hand Democrats a golden opportunity to re-establish their reputation for managing the economy and banking system better than Republicans. Yes, it’s true. At one time Democrats had a reputation for managing better than Republicans, and for a very good reason: Republicans crashed the economy over and over. Usually it started with a bank run, something today’s Republicans want to do again by abolishing the FDIC and other bank and stock regulators.
TL;DR Summary: We review the long Republican record of economic mismanagement and explore how Trump and crypto bros are messing around with crucial reforms implemented by the Federal Reserve system in 1913. We continue our political-economic analysis of interactions between the finance and tech sectors of the stock market. These two sectors by weight make up nearly half the S&P 500.
Actionable items at end. Parts one, two, three, four and five in this series at the links.
Bank Crashes and the Republican Record
The Republican record of economic mismanagement goes way back. It is relevant today and will be more so next year. **Already you can see signs of Trump and the MAGA team’s malignant impact on the economy.
Republicans crashed the economy so badly in 1873 it took nearly 6 years to recover. The 1873 Panic and its aftermath was called the Great Depression for over 50 years.
Until Republicans did it again, and even worse, in 1929.
During the 1873 Panic unemployment hit 14% (approximately, they didn’t have accurate statistics then). Over 100 banks failed, about 18,000 businesses went under, and 89 out of 364 railroad companies went bankrupt.
Railroads were the high tech companies of the day. Telegraph wires invariably ran along rail lines (in order to control traffic). Together you had high speed, low cost transport of goods and information. As with tech today, massive wealth (and abuse of wealth) accompanied the railroads.
Railroad barons were some of the first and worst robber barons, the tech bros of the day.
You might reasonably call the 1873 Panic the first tech crash. It started when the biggest bank backing rampant, wildly speculative railroad building discovered not all railroads would be, or even could be profitable. Worse, due to no regulation at all, it discovered many of the tech bros of the day lied and used cheap, rickety materials to build the roads, or never even finished the job.
It was like the vaporware experience of the 2000 tech crash. Everyone was going to get rich building an Internet app. In 1873, everyone was going to get rich building a railroad.
But Republicans also managed to provoke other crashes in between that one and the Great Depression.
Republicans crashed the economy in the Panic of 1893, for example. This was directly linked to fears about the convertibility of the dollar into gold, sparked by a Republican bill, the Sherman Silver Purchase Act, requiring government to buy large amounts of silver (using gold). While a Democrat became President on March 4th, the economy crashed in May. The new Democratic President Grover Cleveland called an emergency session of Congress and pushed for repeal of the Act, but it was too late to stop the crisis. Unemployment hit about 18%. Wages dropped around 10%. And hundreds of national, state and private banks failed.
This collapse was so bad it sparked the original Progressive Movement which merged with Prairie Populism, an anti-railroad monopoly farmer’s revolt movement that lingered from 1873’s debacle.
Note: This was fundamentally a currency crisis, provoked by Republicans messing with the reserves backing the dollar. They want to do that again by adding crypto currencies as “reserves” backing the dollar.
Republicans did it again with the 1907 Panic, a crash so bad it led to amending the Constitution to replace state appointed senators with elected senators and an amendment to introduce an income tax. It also led to the creation of the Federal Reserve system in 1913.
The 1907 event was also called the Banker’s Panic. But it could have been called the stock investor’s panic when the NY Stock Exchange dropped nearly 50%. There was rampant speculation in new industrial stocks. It ranks as the 8th largest decline in the market in US history up to now. J.P. Morgan (the man, not the bank of today) rescued the economy from complete collapse. His wealth then, like Musk’s today, was extraordinary.
And he used it to save the US economy.
Musk, today’s finance and tech equivalent of financier Morgan and railroader Vanderbuilt combined (Paypal, Tesla, SpaceX, Twitter/X combine finance, communication and transport), thinks his DOGE (Dept. of Government Efficiency) will “save” the US economy from collapse caused by our national debt and interest on that debt.
He is so wrong it would take another article the length of this one to explain why. Instead, rampant speculation in Tesla could be the trigger for the next meltdown, as the third article in this series detailed. And it could be caused by rampant speculation in and creation of crypto currencies, as detailed below.
Democrats Supported Setting up the Fed, more than Republicans
That 1907 Panic and the reforms of 1913 didn’t stop Republicans from messing up again by fiddling with the currency, even though that was the intent of the Act. Heck, even today MAGA Republicans want to reverse the 1913 reforms. All of them! Democrats voted nearly 3 to 1 for the Federal Reserve Act of 1913 (50 against, 164 in favor) while Republicans voted 135 for to 63 against (about two to one for).
The Act set up 12 regional district banks and members who vote on regulatory enforcement measures. It gave members authority to manage the money supply and interest rates and to conduct buying and selling of government securities (Treasuries). It also mandated member banks to hold a certain percentage of their deposits in reserve, in order to ensure ability to meet withdrawal demands. The Fed also was given power to conduct examinations of banks, and to serve as the lender of last resort in liquidity crises (what J.P. Morgan did in 1907).
Finally, the Act authorized the Federal Reserve to issue Federal Reserve Notes, which is actually what the US Dollar is; it is a Fed note, not directly a US government issued dollar.
Look at the top of the face of the currency in your wallet.
What makes it “valuable” and government issued is the little statement: “this note is legal tender for all debts, public and private.” MAGA crypto bros want to make who knows how many of the 350 crypto currencies traded at crypto.com or of the over 20,000 crypto currencies invented so far also legal for all debts, public and private. BUT crucially, NOT let the Federal Reserve manage the supply of crypto currency.
Keep this in mind when reading the next section.
How Republicans managed to screw up again despite the Fed reform
Republicans sparked another panic, yet again, with the 1929 Stock Market crash. This time the corrupt Harding administration, together with completely out of hand stock market and land speculation the Hoover administration did nothing to curb, contributed to the panic. Banks failed because land used as collateral for too many of their loans crashed in value.
Something that also threatens banks today due to climate change.
And there was also a major drought throughout the Midwest and one of the worst hurricanes in US history in 1928 with loss of life and property only exceeded once before (by the 1900 Galveston hurricane) and not exceeded again until Katrina in 2005.
My family was directly impacted by the Okeechobee Hurricane of 1928 that crashed the Florida land market. One (my uncle) died, and their farm was literally washed down the river.
It took more than a generation for my family to recover. There was no FEMA, no recovery funds, no disaster aid, and little warning of the oncoming storm.
Hurricanes killed thousands of Americans before the government transformed the Weather Bureau under the Dept. of Agriculture into the National Weather Service as part of the National Oceanic and Atmospheric Administration in 1970 (under Nixon). Trump and today’s Republicans want to end that too, as well as the Environmental Protection Agency Nixon established by executive order. The National Environmental Policy Act that allowed Nixon’s action passed in 1970 with 92 to 0 votes in the Senate, and 372 to 15 in favor in the House.
Only 2 Republicans opposed it while 13 Democrats voted against.
Trumpers propose to privatize weather forecasting. And kill the EPA. That will surely save money, they assert. It will not save lives.
But we know what matters to Republicans.
In all likelihood it will also not save money; quite the opposite. When, not if, Florida real estate along the coast becomes uninsurable by any means, the ensuing mortgage/bank collapse will be epic. (Subsidence in Miami) (Sections 6.3.3 and 6.4 particularly)
Republicans made that hurricane boosted 1929 crash into the Great Depression with the Smoot-Hawley tariff act of 1930. For decades the experience of the Great Depression (actually the second Great Depression engendered by Republicans) ended Republican control. People suffered so badly they remembered who to blame. And Democrats did so much to fix things an entire generation never forgot who made things better.
Let me repeat: Democrats did so much to fix things an entire generation never forgot.
Democrats also clearly blamed the failures on the rich and Republicans, in no uncertain terms. Read an FDR speech. A 20-year generation went by without a Republican in the White House.
Eisenhower, the first Republican president since Hoover, left Roosevelt’s 91% marginal tax rate on the highest incomes in place. He proposed building the interstate highway system, one of the largest investments in public works made up to that time. He supported the establishment of the Department of Health, Education and Welfare, and supported expansion of Social Security.
Sounds like a Democrat.
The middle class flowered during the Eisenhower era, nurtured by infrastructure spending, the G.I. Bill, the vast expansion of public schools, colleges and universities, and increased social spending. But perhaps the biggest factor behind all this was that Democrats took the House in 1954 and kept it until 1994.
Republicans Revert to Form
But when they started getting back power in 1969-1970 in the Senate and with the presidency, Republicans started their record of economic failure all over again. Nixon, who was far more conservative than Eisenhower, was forced by trade deficits and inflation, driven largely by the Vietnam War he promised to end but never did, to nix the convertibility of the dollar into gold. The Nixon Shock of 1971 made the dollar into the fiat currency it is today, and took almost all countries into the same system.
Nothing stands behind most currencies today but the “good faith and credit” of the country issuing it.
Remember that phrase.
The dollar became no longer as “good as gold”. It was only as good as people’s trust in the government, and holds value only as long as the government demands enough of it in taxes and as long as it forces people to take it in exchange for goods and services required by the government.
“This note is legal tender for all debts public and private.” That means when you offer a Federal Reserve Note to satisfy a demand for payment, they HAVE to take it.
Now, imagine if that fiat currency issuing government began to accept other currencies for taxes and paid for goods and services in another currency. Or maybe accepted thousands of other currencies—all issued by private parties and based on nothing.
Not even good faith and credit.
The Treasury Secretary even signs US currency as part of that guarantee. The phrase and signature promises that the full power and authority of the government stands behind the dollar, and via the Fed system, all the banks will comply with whatever it takes to make it good.
Who signs for crypto? Who stands behind any of its varieties?
Republicans were in charge during the Arab Oil Embargo of 1974-75 that sank the economy into the worst recession since WWII, until Reagan brought on an even worse recession in 1982. Unemployment peaked at 10.8% in 1982, and the economy contracted by 2.2%.
Most folks today have completely forgotten Reagan’s crash.
In the 2008-09 “Great Recession” unemployment peaked at 10% (less than in 1982) and the economy contracted 4.3% (more than ‘82). But also under Reagan the largest bank failure since the Great Depression took place, with the Continental Illinois National Bank and Trust Company going broke. And nearly a third of all savings and loan associations in the US collapsed under Reagan and GHW Bush. That was also when Republicans controlled the presidency and the Senate, which backed nearly everything Reagan wanted, especially deregulation, until 1986, when they lost the Senate majority.
What Republicans could not deregulate by law, they deregulated in practice by simply not enforcing regulation. That has led over and again to massive failures.
And it will again lead to failure under Trump.
That S&L crisis cost taxpayers over $124 billion to fix. The Feds under Reagan and Bush failed to regulate and failed to root out fraud in the S&Ls. It was the biggest bank failure, with about 1,000 S&Ls closed and taken over, since the Fed was established.
Until 2008. When Republican mismanagement crashed the economy again.
Worse, this time.
The crash of 2008 under George W. Bush stemmed directly from actions pushed by Republicans, such as repeal of the Glass-Steagall Act, the deregulation of mortgage-backed derivatives, and the wholesale reassignment of FBI fraud agents to pursue terrorists instead of financial fraud. As with the abolition of the Glass-Steagall Act in 1999, Republicans introduced the bills and backed them with votes, but a large number of Democrats went along.
While 147 Democrats voted against repeal, 82 supported it. In the Senate, 29 Democrats opposed repeal while only 8 supported it. That is, most Democrats opposed repeal.
Yet Democrat Bill Clinton, president in 1999, signed it into law.
And that tarred Democrats with contributing to the 2008 collapse.
Having learned little from previous experiences, Democrats got involved in trying to solve Republican George W. Bush’s misrule with TARP (the Troubled Asset Relief Program), and ended up getting much of the blame for bailing out banks but not homeowners. Democrats also got saddled with blame because they held majorities in the House and Senate in 2008, and thus had responsibility, as the legislative arm of government, to act to avert a crisis even if not of their making.
It was Grover Cleveland cleaning up after Republican screwups all over again.
Democrats should NOT bail Trump out from the coming crash he will cause.
How we narrowly avoided another Great Depression in 2020
Democrats need to be saying NOW the coming crash will be caused by Trump, so the ones causing it will have to fix it. They should not vote yes on ANY Trump cabinet member. Make sure Democrats have clean hands during the coming Executive-led disaster.
Democrats dominate on the issue of healthcare because not a single Republican supported the ACA improvements to our (still) very flawed healthcare system.
Republicans refused to support the ACA with a single vote.
Republicans went on in 2010 to run to Democrat’s left, promising to “protect” Medicare and Social Security from Democratic cuts. Those “cuts” (actually projected reductions in costs) in Medicare were made by lessening waste and fraud in Medicare contracts as spelled out in the ACA bill. But Obama set up the “cat food commission” to look into a “deal” with Republicans to cut Social Security, and that gave them an opening they cynically took advantage of.
Trump promised to protect Social Security in his 2024 campaign, even though every single budget he proposed in his first term proposed cuts to it.
Americans don’t remember. And they ignore actual facts or history. That is, they do until their ignorance blows up in their faces.
As it will again, shortly.
Democrats must not “compromise” on a fix for the coming Social Security shortfall that results in cuts. Nor on the fixes for the myriad ways Trump and his billionaire buddies will crash the economic system.
They bought it. Then broke it.
The 2008 crash came closest to the depths reached in the Great Depression, only to be exceeded by the 2020 crash. Unemployment hit 14.8% in April 2020 under Trump, while the economy contracted 31.4% in the second quarter of 2020.
The 2020 economic crash from COVID was not the fault of Republican’s directly; but Trump made the crash and impact of the pandemic much worse.
We did not start really recovering until Biden took over and made vaccines widely and freely available. Trump had no plan and no organization in place to distribute vaccines. Biden got one up and running in record time.
Imagine if RFK had been in charge then. Imagine how he’ll do in a bird flu pandemic.
And, Biden and Democrats passed stimulus bills that restored the economy to growth, indeed record growth, in the shortest time ever recorded for recoveries from crashes. Yes, we had a spate of inflation that was quickly reined in, but instead of widespread and real suffering from unemployment and consequent impoverishment, most folks were squeezed in their budgets but not crushed by a collapse nearly as bad in impact as that of the Great Depression.
Instead of 11-12 years until recovery sparked by a World War as during the Great Depression or the similar length for full recovery due to Republican intransigence and Democratic gullibility following the 2008 Bush Crash, it was closer to 12-13 months of economic dislocation until recovery under Democratic administration.
Remember, and realize, 2020 was the worst crash since the Great Depression.
If Trump and his tariff raising ways had stayed in office, we would have had a repeat of the 1929 crash followed by a Smoot-Hawley tariff trade war type disaster.
As with most sequels, the Trump second term would very likely have seen a worse Great Depression than the first one.
But there’s still time to bring one on. Seems like Trump fully intends to.
And, under Democrats this time we avoided a World War even though Ukraine, Gaza and Syria/Lebanon could easily have deteriorated into sparking one. Instead, we cleared out a lot of obsolete equipment by giving it to Ukraine, and may have fatally crippled the United States’ greatest adversary country (up to now).
Not a single US soldier has died in Ukraine or in the defense of our NATO allies under Biden.
Trump’s mishandling of Ukraine and NATO could have, and likely will in future, cost the US an untold penalty in blood and treasure. Russia would be immensely stronger now if Trump had been President in 2022 and let Putin run over Ukraine without consequence.
Again, there’s still time for Trump to reverse Biden’s success.
It is a sheer myth Republicans are better at managing the economy than Democrats. This myth is one born of decades of relentless Republican propaganda and Democrats playing into Republican hands again and again by supporting their bills that led to economic disaster.
TARP was opposed by most House Republicans and it initially failed to pass in the House because Democrats wouldn’t support it unless Republicans did. But in the Senate, it was 35 Republicans and 39 Democrats (majorities of each) voting together for it. Democrats split 172 for and 63 against in the House on the second vote to pass it. So despite the 2008 collapse being the fault of Republican George W. Bush almost abolishing fraud investigations and their nixing of the Glass-Steagall Act in 1999, the bank bailout was often blamed on Democrats, particularly by Mike Pence and Jim DeMint.
We will have the opportunity to change that, soon. If we learn from our mistakes.
That is, if our Democratic “leaders” learn from their mistakes.
The Coming Crash from Republicans Screwing with Cash, AGAIN
The MAGA tech billionaires want to “bail out” US finances by cutting government spending, slashing social programs, pitching hundreds of thousands of civil servants with vital skills and irreplaceable knowledge out on their ear, and substituting crypto currencies for the US dollar or gold as part of the reserves as well as making it legal tender for all debts, public and private.
Republicans never learn.
But American voters never remember, either.
They should. If they did remember the repeated dire consequences of letting Republicans control banking and finance, they would never let them near it again.
But what happens if government does begin accepting crypto as payment? Or makes crypto holdings part of currency reserves? Crypto folks want to be able to bypass dollars altogether. That’s part of the right wing’s “starve the beast” idea for shrinking government.
Taxes are the direct force for creating demand for dollars. If taxes ever become directly payable by crypto or the government starts demanding crypto in payment, the dollar is in serious trouble.
A fiat currency is only protected by government and depends on the full faith and credit of the state.
It also depends on the Federal Reserve competently managing the economy and that requires managing the money supply. Letting crypto currencies add to liquidity with no control whatsoever by government or any other conscious agency of the supply (and value) of such currency is a recipe for disaster.
Unlike gold, there is no natural limit to crypto currency as a whole. While specific crypto currencies such as Bitcoin and Litecoin have numerical limits on how many units will exist, some, like Ethereum only have mechanisms to manage inflation and supply over time.
But Bitcoin and the like do not have ways to limit the gains, or losses, in price caused by events or by fluctuations in demand. The only way to “shore up” crypto currencies is to exchange Federal Reserve Notes or other national currencies for a specific crypto currency, perhaps.
There is absolutely no precedent for how a government could restore a crypto currency’s value.
On the other hand, there are many ways a government, not necessarily our government, could destroy the value of a crypto currency. For example, quantum computers may pose a real threat to the cryptography crypto currencies (hence the name) rely on. “Downtime Required for Bitcoin Quantum Safety” Popular summary in Fortune.
Trump is already undermining the faith and credit of the US. How much can the fiat money system take of dicking around with crypto like Musk and others want to do?
This is why we have to watch cryptocurrency as part of the reserves held by the Treasury. If that is permitted, government creates a demand for crypto. It also then will want a supply of crypto, hence, accepting it as payment.
Instantly, there goes effective management of the money supply, as well as means to really manage the value of reserves held by banks. Remember, banks lend against the value of reserves they hold. Treasuries (T-bills) are the essence of safety and dependable value.
Are crypto currencies the same? Obviously, NOT.
Banks get into trouble when they do not have the reserves to cover investor/savers demands to redeem funds. If crypto “reserves” were to suddenly collapse in value or become inaccessible for any reason, that could become a recipe for the banking panic of all panics, dwarfing every other that came before.
Currently, crypto holdings by the US government come from confiscation related to criminality. And they are sold off fairly quickly.
Greed and miscalculation; those are the tripwires to disaster.
I think the crypto bros want the government to buy their product and even subsidize its production. But these folks believe scarcity is the key to value, so the dollar has to be tied to something scarce. But while any given crypto might be “scarce” and require “mining” to be found, with thousands of varieties of crypto currently circulating, and essentially no barriers to entry, crypto as currency is anything but scarce. And even Bitcoin may not be as scarce as promised.
And backed by nothing real.
We also have a Secret Service that goes after counterfeiters. Which agency enforces crypto security and punishes wallet theft?
Currently, debt is the limit (technically the “cost” to service the debt is the limit). Another limit is the willingness to buy and hold Treasuries (T-bills). But in accounting terms, demand for debt is the key to issuance of “currency” to meet and service that debt.
In other words, our fiat currency has value that depends on managing the amount of dollars in circulation so that it is scarce enough to be invested wisely/productively but not so scarce it chokes off growth (which is financed by debt and growth in nominal currency).
A 2% loss of value per year (due to what used to be called debasement but is now called inflation) and 4-5% unemployment rate seems to be about the sweet spot for this form of fiat currency management, with manipulation of M1 and other forms of currency allotment and reserve interest rates in light of effects (such as inflation and unemployment) the key management tools.
Crucial Point and SUMMARY:
The effectiveness of these tools depends on the reliability of statistics used to manage them.
This is where Muskrat’s and Rabidswamy’s (clownish names for clownish acts) slash and burn approach to government spending could come in, disastrously. Sack the key employees and agencies which gather vital economic data, and currency and economic management becomes an exercise in driving while blind.
Oh, speaking of crashes, one other thing Musk wants to abolish? The rule for collecting and releasing data on automated driving crashes. Which shows, by the way, Tesla has by far the worst record for crashes and deaths involving driver-assist systems.
Recklessness, greed and “unexpected events” are EXACTLY what caused previous crashes.
They will certainly cause the coming one.
Actionable Items:
Watch like a hawk any Trump/Musk/MAGA proposals regarding the regulatory and enforcement agencies (FED, FDIC, SEC, FBI, etc). Be prepared to contact your House and Senate representatives regarding these proposals. Watch for any changes in personnel in these agencies. And watch for reassignments/reallocations of staff into areas other than statistical collection, regulatory action, and enforcement. Be careful locking yourself into longer term CDs or T-bills. And do not invest or bank with the big national banks that hold large amounts of T-bills as the main part of their reserves and/or who support, or accept crypto currencies as part of their reserves. Both inflation and crypto-currency instability could imperil the financial viability of those banks. Find blue state based credit unions that hold and service all or most of the loans they make, and which make most of their loans to blue state residents. If and when blue states forbid crypto currencies as counting as part of bank’s or credit union reserves, trust those institutions with your money and investments.
Next Week:
Continuing the Finance-Tech sector interaction with politics analysis. A Rachel Maddow type comparison of Donald Trump’s populism with Andrew Jackson’s, and how Jackson’s messing about with banks and reserves and currencies helped cause the worst crashes in history around the globe (until the Great Depression), and sow the seeds of war.
Disclaimer and disclosures:
I am not a CFA (chartered financial analyst). This article and comments are not investment advice from a fiduciary. They are discussions among investors with varying levels of experience. For over 30 years I taught state-market interactions at under-graduate and graduate level, focusing mainly on economic history and thought as well as specialized classes on international trade structures (WTO) and dynamics, and public administration as it relates to economic policy making, taxation and regulation, mainly in China. I was an area political-economic risk analyst for a decade for an internationally known risk assessment firm. I have technical degrees (and experience) as well as academic degrees, including a certification in Military History from West Point which would have let me teach ROTC classes if I had not gone overseas. I also started two small businesses (one a B-corporation type) and currently farm (organically and sustainably) in WA state. I have managed my own investment portfolios for at least 25 years. All advice is offered freely and from this context.