Chapter 33 - Recessions and Depressions

A recession is a period of reduction in economic activity. In a recession, unemployment will rise and output fall. A depression is a more severe and longer lasting recession.

Written as a joke:

"When your neighbor loses their job, it's a recession.

When you lose your job, it's a depression!"

This graph of GDP during the Great Depression shows a dramatic fall:

The Great Depression GDP by Andrew Chalkley

If we look at the graph of money supply below, it is easy to come to a conclusion that the depression was caused by a fall in the money supply. But do notice that there was no fall in the government-issued cash currency.

The Great Depression by Andrew Chalkley

There is an error in this logic. It assumes that the velocity remains constant. This same effect can be caused by a decrease in velocity. It leads to the erronious assumption that to correct a recession/depression, all that is needed is to raise the money supply. zzz But velocity, money supply and GDP are related as in the following formula:

Money Supply x Velocity = GDP

Thus, we get the ridiculous statement that a fall in GDP is caused by a fall in GDP. The fall in GDP is influenced by falls in velocity or money supply or both. Let us consider the money that is used by business and customers. To get a better understanding, I calculate the volume of Circulating Money. For many people, their wage has gone within a week, many shops purchase stock daily or weekly. I use an arbitrary cut off of one month. Money that transacts in less than one month is considered to be Circulating Money and money that is held for more than one month is considered to be Hoarded Money. Circulating Money turns out to be GDP divided by 12. Although this seems odd, it allows us to conceptualise the movement of money and the actions that might damage the economy. Circulating Money is the money that is changing hands between customers and businesses and suppliers. It is the money moving in the real economy.

Velocity of Money equals Two by Andrew Chalkley

Hoarded Money remains stagnant and adds nothing to the level of the real economy. People who have 'more money than they can spend' tend to put money in the bank and leave it there for years. Hoarded Money includes savings by citizens and organizations as well as pension funds and money put into tax havens denominated in national currency. Hoarded Money is generally held by those with 'more money than they can spend'. Circulating Money passes between people quickly and tends to be with people that spend quickly and are thus more likely to have little in reserve.

The Velocity of Money and its relationship to 'Hoarded Money'.

Most tax is taken from Sales Tax and Income Tax both of which involve removing money at the time of transaction. Thus, these two taxes are removed from Circulating Money. Most tax is removed from the vital Circulating Money. Hoarded Money is almost completely untouched by any tax. Interest comes from those that borrow, not those that have 'more than they can spend'. Thus, interest repayments are taken from Circulating Money. Circulating Money moves from citizen customers to business to supplier to citizen wages and variations of this loop. As soon as Circulating Money gets into the possession of someone who has 'more money than they can spend' it becomes Hoarded Money. It is easier for money to move from Circulating Money to Hoarded Money than the opposite.

Money Supply is reduced by Andrew Chalkley

There is a tendency for the velocity to increase when the money supply decreases. The reason is that the reduction in the money supply is taken from those that 'make good use of it' whilst the hoarders keep their hoards. When tax is increased, it comes from Circulating Money. When interest rates go up, even more money is taken from Circulating Money. If the banks cut back on lending they continue to collect repayments from Circulating Money with the result that the Circulating Money is reduced.

Graph of USA Bank Lending. All Other Loans, Reporting Member Banks, Federal Reserve System for the United States, Billions of Dollars, Monthly, Not Seasonally Adjusted M1475DUSM027NNBR

Economics books tend to mention that the money supply is reduced, but it is worse than that. In the following diagram, a fall in the money supply of 4% has the potential to reduce the Circulating Money by 50%. This will likely reduce the GDP in a similar ratio.

Effect of a fall in the Money Supply and its effect on the Velocity of Money.

In the previous graph titled 'Currency and Money Supply During the U.S. Great Depression', the volume of government-issued cash currency did not falter or fall. The bank credit component of the money supply fell precipitously. The graphs of Greece GDP and Money Supply show similar trends. Central created cash currency did not fall.

Greece GDP.

Greece Money Supply.

The bank credit is vastly greater than the volume of government-issued cash currency. Bank credit is created when banks make loans. When a bank makes a loan of a million dollars for a housing loan, it writes one million dollars with a plus sign in the sellers account and one million dollars with a minus sign in the buyers account. At that instant, there is one million dollars more bank credit in the nation, the money supply increases by one million dollars and there is one million dollars more debt in the nation. The debt increases with interest to become unpayable. In this chapter we are interested in the money supply and, by simple deductive reasoning, the money supply will increase when loans are issued and decrease when loans are repaid. To keep the money supply constant, it is necessary that loans are issued at the same rate as loans are repaid. However, interest has been added to the debt and so slightly more loans have to be issued than repayments. Thus, the constant need to increase the debts to keep the system running.

In the graph, the volume of money decreases. M1 is particularly bad and M1 is the so-called 'Demand Deposits' of businesses and individuals. This occurs because the banks issue very few loans whilst continuing to collect repayments. This may occur because the citizens are reluctant to take on more debt, or the banks refuse to lend. Loan repayments are taken from those that 'do not have enough money' and so the repayments are made from Circulating Money. Thus a reduction in money supply hits businesses very quickly.

When the citizens are reluctant to take on more debt or the banks cut back on the issuance of loans, the money supply will fall and a recession or depression will occur. If the money supply remains constant, a recession is the typical result. If the money supply falls, a depression it the typical result. Spain shows a recession. Notice that the estimated cash currency did not fall. Notice the lending habits of banks reflected in the balance between private debt and government debt.

Graph of Spain Money Supply and Debt

Governments then make a common mistake. If the money supply falls, a recession/depression occurs as businesses lack trading money and capital for expansion and citizens reduce their spending. However, the reverse is not the case. If the money supply is increased, this does not automatically cause an increase in business activity. During a recession or depression, businesses have closed or cut back on staff and activity. It takes a lot more effort to increase production than throwing money into the money supply. It takes time for business owners to regain confidence and new entrepreneurs to acquire the skills to build business. It takes time for the citizens to trust the economy enough to spend at a higher level. To increase business activity, it is necessary to improve the parameters that make business worthwhile. Punitive taxes on business and expanding business is a major disincentive to expansion. Pushing money into the money supply is more likely to increase the Hoarded Money as the hoarders are skilled at getting money and hoarding. Witness a fall in velocity when a government tries to increase the money supply.

USA Velocity of Money

During a recession, businesses and citizens have their fingers burnt and will be reluctant to increase business activity. It is easy to assume that it is the money supply that needs to be increased. This is poor logic. It is the Circulating Money that needs an increase in a difficult system where the hoarders will grab any money available to add to their hoards. It is not pure greed, it is that the hoarders have little need to spend. An increase in velocity will also boost Circulating Money which equates to moving Hoarded Money to Circulating Money.

How to improve the economy. Graph by Andy Chalkley

This little graph shows a global problem where a greater proportion of global money is being hoarded.

Global Velocity.

The Great Depression, Australia by Bible Believers

The "Bankers Depression of the 1930's

Australians all know about the Great Depression and the extremely hard times it brought about; but what of its causes?

In 1930, Australia did not lack industrial capacity, fertile farmland, or skilled, industrious and willing workers, residing in both the city and country. Already, extensive systems of reasonably efficient transport and communications were in place. War had not ravaged the cities or countryside, nor had famine devastated the land and its population. The one thing that industry and commerce lacked was a sufficient supply of money.

In the early 1930s, Bankers, who were the only source of new money or credit, deliberately refused loans to industry, commerce and agriculture. However, payment on outstanding loans was demanded, which led to a rapid decrease in the circulation of real money.

This caused a complete standstill; jobs could not be done, goods and services could not be purchased. This ploy by the greedy Bankers placed Australia in the Great Depression of the 1930s, and moreover, placed extensive amounts of businesses, private dwellings and farms in the hands of these same Bankers.

The people, not understanding the system, were in a helpless position, and were cruelly robbed of their hard-earned savings and property; they were told things like "times are hard", "money is short", "everyone is suffering." These same statements come to mind when recalling them being made during Australia's recent so-called "recession".

This was "a 'recession' we had to have," the politicians proclaimed; and one I'm sure the banks loved to have. If you should have the opportunity, a check on how the banks faired during the so-called "recession" will reveal sustained and increased profits, with an abnormal increase in acquired property assets! [330]

Sir Ralph Hawtrey, Assistant Secretary to the Treasury 1933

"Further, I agree with him (C. H. Douglas) that banks create money, and that trade depression arises from faults in the banking system in the discharge of that vital function." [331]

Senator John A. Logan 1874

in a great speech, discussing the panic of 1873, said:

"But, sir, that the panic was not due to the character of the currency is proved by the history of the panic itself. * * * No, sir, the panic was not attributable to the character of the currency, but to a money famine, and to nothing else. In the very midst of the panic we saw the leading bankers and business men of New York pressing and urging the President and the Secretary of the Treasury to let loose twenty or twenty-five millions more of the same paper for their relief." [332]

United States Monetary Commission 1888

On the subject of the panic of 1873 to 1877, the United States Monetary Commission says:

"The true and only cause of the stagnation in industry and commerce, now everywhere felt, is the fact everywhere existing of falling prices, caused by a shrinking volume of money. * * * * This is the great cause. All others are collateral, cumulative or really the effects of that primal cause." [332]

The Great Depression by Andrew Chalkley

Andrew Jackson 1837

"The paper system being founded on public confidence and having of itself no intrinsic value, it is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain. The corporations which create the paper money can not be relied upon to keep the circulating medium uniform in amount. In times of prosperity, when confidence is high, they are tempted by the prospect of gain or by the influence of those who hope to profit by it to extend their issues of paper beyond the bounds of discretion and the reasonable demands of business; and when these issues have been pushed on from day to day, until public confidence is at length shaken, then a reaction takes place, and they immediately withdraw the credits they have given, suddenly curtail their issues, and produce an unexpected and ruinous contraction of the circulating medium, which is felt by the whole community. The banks by this means save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here. These ebbs and flows in the currency and these indiscreet extensions of credit naturally engender a spirit of speculation injurious to the habits and character of the people. We have already seen its effects in the wild spirit of speculation in the public lands and various kinds of stock which within the last year or two seized upon such a multitude of our citizens and threatened to pervade all classes of society and to withdraw their attention from the sober pursuits of honest industry. It is not by encouraging this spirit that we shall best preserve public virtue and promote the true interests of our country; but if your currency continues as exclusively paper as it now is, it will foster this eager desire to amass wealth without labor; it will multiply the number of dependents on bank accommodations and bank favors; the temptation to obtain money at any sacrifice will become stronger and stronger, and inevitably lead to corruption, which will find its way into your public councils and destroy at no distant day the purity of your Government." [333]

Joseph Huber 2014

"Unrestrained, overshooting issuance of banknotes and credit creation result in inflation, asset inflation, currency depreciation, recurrent boom-and-bust cycles, and banking crises. In the process, bank money (deposits) proves to be unsafe." [334]

Michel Chossudovsky 2010

"We are at the crossroads of the most serious economic crisis in world history. The economic crisis has by no means reached its climax, as some economists have predicted. The crisis is deepening, with the risk of seriously disrupting the structures of international trade and investment.

What is distinct in this particular phase of the crisis is the ability of the financial giants - through stock market manipulation as well as through their overriding control over credit - not only to create havoc in the production of goods and services, but also to undermine and destroy large and well-established business corporations.

This crisis is far more serious than the Great Depression. All major sectors of the global economy are affected. Factories are closed down. Assembly lines are at a standstill. Unemployment is rampant. Wages have collapsed. Entire populations are precipitated into abysmal poverty. Livelihoods are destroyed. Public services are disrupted or privatized. The repercussions on people's lives in North America and around the world are dramatic." [335]

James Petras 2009

"A world depression, in which upward of a quarter of the world's labor force will be unemployed, is looming. The biggest decline in trade in recent world history defines the future. The immanent bankruptcies of the biggest manufacturing companies in the capitalist world haunt Western political leaders. The "market" as a mechanism for allocating resources and the government of the U.S. as the "leader" of the global economy have been discredited.

All the assumptions about "self-stabilizing markets" are demonstrably false and outmoded. The rejection of public intervention in the market and the advocacy of supply-side economics have been discredited even in the eyes of their practitioners.

Among almost all conventional economists, pundits, investment advisors and various and sundry experts and economic historians, there is a common faith that in the long-run, the stock market will recover, the recession will end and the government will withdraw from the economy. Fixed on notions of past cyclical patterns and historical trends, these analysts lose sight of the present realities which have no precedent: the world nature of the economic depression, the unprecedented speed of the fall, and the levels of debt incurred by governments to sustain insolvent banks and industries and the unprecedented public deficits, which will drain resources for many generations to come." [339]

Anthony Migchels 2014

"But all these narratives just serve to hide the truth: that the boom/bust cycle is a totally artificial tool of plunder and centralization of wealth and power by a centralized financial system. ... but the point is that bubbles need to be blown so they can be popped and this happens to be the story with which they blew the housing bubble of the 2000's. ...

Blowing bubbles and popping them with alternating inflations and deflations is, with Usury, the Money Power's core business. Each cycle has its own story and derivatives are the story of the Greatest Depression. The worst is yet to come. Years of scarce money, depression and centralization of wealth lie ahead of us. They will undoubtedly manage to spring something nasty on us yet. ...

Only ending banking as it operates today can end centuries of wholly artificial booms and busts.

But this will only become possible when people stop wondering about corruption in finance and start seeing finance itself is corrupt." [337]

Michel Chossudovsky 2014

"With the worldwide deterioration of living standards and plummeting consumer spending, the entire structure of international commodity trade is potentially in jeopardy. The payments system of money transactions is in disarray. Following the collapse of employment, the payment of wages is disrupted, which in turn triggers a downfall in expenditures on necessary consumer goods and services. This dramatic plunge in purchasing power backfires on the productive system, resulting in a string of layoffs, plant closures and bankruptcies. Exacerbated by the freeze on credit, the decline in consumer demand contributes to the demobilization of human and material resources.

This process of economic decline is cumulative. All categories of the labor force are affected. Payments of wages are no longer implemented, credit is disrupted and capital investments are at a standstill. Meanwhile, in Western countries, the "social safety net" inherited from the welfare state, which protects the unemployed during an economic downturn, is also in jeopardy." ...

"While there is talk of an economic renewal, Wall Street commentators have persistently and intentionally overlooked the fact that the financial meltdown is not simply composed of one bubble - the housing real estate bubble - which has already burst. In fact, the crisis has many bubbles, all of which dwarf the housing bubble burst of 2008." ...

"When all these simultaneous plant closures in towns and cities across the land are added together, a very different picture emerges: entire sectors of a national economy are closing down." ...

"Media disinformation largely serves the interests of a handful of global banks and institutional speculators which use their command over financial and commodity markets to amass vast amounts of money wealth. The corridors of the state are controlled by the corporate establishment including the speculators. Meanwhile, the "bank bailouts", presented to the public as a requisite for economic recovery, have facilitated and legitimized a further process of appropriation of wealth. Vast amounts of money wealth are acquired through market manipulation. Often referred to as "deregulation",... These tools of manipulation have become an integral part of the financial architecture; they are embedded in the system." [338]

Circulating Money

We need to study the Circulating Money. This is the portion of the money supply that is changing hands within one month and is thus carrying out the duties for which it was invented. Less than 5% of the money supply is created as cash currency by the central bank. The remaining 95% exists as numbers in computers. It did not come from the central bank as the central bank never created this volume of money. People who have 'more money than they can spend tend to leave this virtual bank credit in bank accounts for prolonged periods. this money is hoarded and not available for everyday trade in the real economy. Traders and most citizens spend their money fairly quickly. This is the active part of the money supply and I shall call it Circulating Money. I define this money as money that changes hands at least once each month. The GDP is the amount of money turned over in a year. The velocity is the number of times the money supply is turned over in a year. So it turns out that Circulating Money is one-twelfth of the GDP. Circulating Money is very susceptible to depletion. The money is changing hands daily, weekly or monthly. If the money passes to a person with 'more money than they can spend', it is likely to get hoarded. Almost all taxes are taken from Circulating Money. Bank repayments are taken from Circulating Money. (People with 'more money than they can spend' do not need to borrow money!) Hoarded Money may sit for year after year and the hoarders tend to manipulate the political process to minimise taxation on their hoards.

Hoarded Money is a massive drain on the financial system for numerous reasons:

Because 95% of money is created as bank credit at the time of making a loan, more bank credit is needed to keep an adequate supply of Circulating Money. To create more bank credit more loans have to be issued. Loans are then hung on anything that can hold a loan. If the public cannot be prevailed upon to take out loans, the government has to step forward and carry more debt. Without increasing the debt to banks, the Circulating Money cannot be increased.

Under a crisis situation, Hoarded Money has the potential to avalanche into the Circulating Money. The crisis can trigger a hyperinflation situation involving the rapid movement of Hoarded Money into Circulating Money as the hoarders purchase anything that isn't money.

I shall boldly state that: Hoarded Money has no value. Although this may seem to be a silly statement, consider the reasoning. When Hoarded Money is converted to Circulating Money, it dilutes the pool of Circulating Money. Thus, Hoarded Money only has value when brought back into circulation, if a similar amount of Circulating Money becomes hoarded. Thus, a huge resumption of Hoarded Money will destroy the value of all money and may even destroy the money system. Scary will be the day that all the money in tax havens gets churned into the real economy. All money will be destroyed. At a velocity of 1, 92% of money is hoarded. Catastrophe awaits.

Only by reducing Hoarded Money through taxation and otherwise, can debt be reduced under a debt banking system. The money supply needs to be controlled for the benefit of the real economy rather than for the benefit the speculators. Money was invented to enable trade and overcome the inefficiency of barter. It was not invented to be stored by hoarders and speculators. Hoarders and speculators do not realise that their hoards rely on circulation to give value to their money.

The hoarders do not realize that their Hoarded Money only has value because there is Circulating Money in a real economy. Any damage to the real economy damages their Hoarded Money. Any big move of Hoarded Money into Circulating Money devalues all money. Hoarded Money only has value if converted to Circulating Money if an equal amount of Circulating Money becomes hoarded. I cannot find any reference to this anywhere. Any large movement of Hoarded Money into circulation (as might occur in a crisis) will cause the value of all money to fall and is effectively like the buildup of snow on a hill ready to avalanche causing hyperinflation. Hoarded Money creates the avalanche situation necessary to foment hyperinflation.

How to Create a Recession

To find the ways to create a Recession, one only needs to look at the definition of a recession. The simple approach is to reduce the GDP. It turns out that Circulating Money equals one-twelfth of GDP. [GDP=Velocity x Money Supply. GDP is money turned over in a year. Circulating Money = money turned over in a month. Therefore, Circulating Money equals GDP divided by twelve.] To damage Circulating Money:

Turn Circulating Money into Hoarded Money.

Let people with 'more money than they can spend' put money away as savings.

Encourage savings and hoarding.

Fail to tax hoarding and saving.

Fail to tax interest on hoardings.

Tax money from Circulating Money

Increase Sales Tax or Income Tax or other taxes on Circulating Money. (However, the government spends the money back into society)

Tax business profit rather than business income. Business income is the money the business owners take as living expenses. (Depreciation on money already spent is a bad practice.)

Remove money from Circulating Money. (This is the best was to destroy an economy.

Cut back on bank lending. The banks will continue to collect repayments which will come from Circulating Money, not Hoarded Money. This will decrease the Circulating Money very rapidly.

Cut back on credit to businesses.

(I have listed taxation above, but tax is generally spent back into society. Tax makes a difference when it is taken from Circulating Money rather than Hoarded Money.) The major way to reduce the Circulating Money is the reduction of bank lending whilst the banks continue to collect repayments.

How to Recover from a Recession
The Recovery from 2008

Have a careful look at this graph:

USA graph of debt and money


[331] Sir Ralph Hawtrey, Assistant Secretary to the Treasury in a BBC broadcast 22 March 1933.

[332] Seven Financial Conspiracies Which Have Enslaved the American People by Mrs. Sarah E.V. Emery. 1888

[333] President Andrew Jackson, in his farewell address of March 4, 1837]

[334] Modern Money Theory and New Currency Theory. A comparative discussion, including an assessment of their relevance to monetary reform

[335] Michel Chossudovsky 2010, Chapter I


[338] Michel Chossudovsky 2014. The Global Economic Crisis: Causes and Devastating Consequences

[339] World Depression: Regional Wars and the Decline of the US Empire Part I By Prof. James Petras, Chapter 4.