Monday, June 29, 2015

BANKS | "Holidays"–Greece-2015 v FDR-1933

Monday morning, March 6, 1933, Day 1 of FDR's administration. The last column notes that FDR
authorized issuance of "scrip" to replace dollars. Instead, Secretary Woodin just printed more dollars.
June 29, 2015–Greece has declared a six-day bank holiday.

It applies to foreign banks operating in Greece. A cap has been imposed on withdrawals of deposits - a personal limit of €60 a day on withdrawals from ATM machines.

This sounds something like the four-day (Monday to Thursday) bank holiday that FDR declared on March 6, 1933, right after his inauguration.

FDR embargoed export of gold in the same way that Greece has put capital controls on transfers of deposits out of the country. Later, he made it illegal for individuals to own gold. Private holdings of gold for non-industrial use (with an exemption for holders of special gold coins in the hands of coin collectors) had to be turned in to be replaced with paper dollars. Months later, he significantly devalued the dollar against gold.

If you think of the U.S. link to gold as comparable to Greece's link to the euro, its imposition of capital controls shows some separation of the Greek financial system from the rest of Europe.

Greece is considering issuance of scrip to pay pensions and other internal obligations. One scenario is that the scrip could be the beginning of the reintroduction of the drachma.

Will Woodin, the incoming U.S. Secretary of the Treasury in March 1933, was authorized to issue scrip to the banks or to pay employees and pensioners when the bank holiday was over. But he said he had a "Eureka!" moment during a night of fitful sleeping when he realized that U.S. scrip would be the equivalent of printing new dollars.

Instead, he embarked on round-the-clock production of $2 billion of new greenbacks at the Bureau of Engraving and Printing. He personally supervised the printing and packing up of the greenbacks on trucks, and had film crews recording the event for the Pathe News shows at cinemas all across the country.

When the solvent banks reopened after having been subjected to stress tests, the panic that began in October 1929 and had intensified in the intervening three-and-a-half years was over. Once the panic stage ended, the Depression era settled into a fiscal and monetary battle over how much to stimulate the economy.

Then as now, sober people looked back on the previous era of profligacy that led to insolvencies, illiquidity and panic and were eager to mete out punishments. FDR had the common sense to see that the punishments would be a new crime against the unemployed who were bearing the brunt of the pain.

The difference between the United States then and Greece today is that the U.S. dollar was printed at the discretion of the Secretary of the Treasury under U.S. laws. Also, a crucial aspect was that the Treasury committed itself to reopening only solvent banks, promising deposit insurance (the Steagall part of the Glass-Steagall Act of 1933) and meanwhile standing behind the banks that were reopened.

The euro, on the other hand, is printed and minted by each national central bank under the control of the European Central Bank. The ECB announced in January its latest QE program, creating liquidity Europe-wide by buying $1.1 trillion of bonds over the next two years, injecting a steady stream of liquidity into the financial system. This has not been enough to stop the Greek panic.

Paul Krugman thinks Greece can't take any more austerity, and that - as in the United States of March 1933 - austerity measures are counter-productive. Today as in 1933, reforming the system needs to take a back seat to calming the panic and making sure that the economy is not further destroyed.

When speculators fail, they take their losses and move on. But when the economy fails, the biggest victims are unemployed people, who are innocent of the past crimes or excesses for which they are being punished.