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490 THE CREATURE FROM JEKYLL ISLAND
DOWN! In the spring of 1928, the Fed contracted credit to halt
the boom.
UP! But the banks shifted their reserves into time deposits
(where customers agree to wait before withdrawing their
money). Since time deposits require a smaller reserve ratio
than demand deposits, the banks were able to issue more
loans than before. That offset the Fed's contraction of credit.
UP! By that time, the British government had consumed its
previous subsidy which was used to maintain its
state.
welfare
In the spring of 1928, the pound sterling was again
sagging on the international market, and gold began to flow
back into the United States. Once again, the fledgling
Creature came to the aid of the Bank of England, its ailing
parent. The Fed bought a huge volume of banker's
acceptances to depress interest rates and halt the flow of
gold. The money supply suddenly increased by almost
$2 billion.
DOWN! In August, the Fed reversed its expansionist policy by
selling Treasury bonds in the open market and raising
interest rates. The money supply began to contract.
It was the final bubble.
SIXTH REASON TO ABOLISH THE FED
One of the myths about the Federal Reserve is that it is needed
to stabilize the economy. Yet, it has achieved just the opposite.
Destabilization is dramatically clear in the years prior to the Crash,
but the same cause-and-effeet continues to this day. As long as men
are given the power to tinker with the money supply, they will
strive to circumvent the natural laws of supply and demand. No
matter how high their intentions or pure their motives, they will
cause disruptions in the natural flow. When these disruptions are
perceived, they will try to compensate by causing opposite disruptions.
But, long before they act, there will already be new forces at
work which they cannot, in all their wisdom, perceive until they are
already manifest. It is the height of egotistical folly for "experts" to
think they can outsmart or do better than the combined, interactive
decisions of hundreds of millions of people all acting in response to
their own best judgment. Thus, the Fed is doomed to failure by its
nature and its mission. That is the sixth reason it should be
abolished: It destabilizes the economy.
THE GREAT DUCK DINNER 491
TULIPOMANIA
Easy credit was not the only problem in this period. Equally
important was the effect
that had on the behavior patterns of the
populace. Responding to herd instinct and a belief in the possibility
of something-for-nothing, men were driven to the most bizarre
form of investment speculation.
This was not the first time such hysteria had seized a population.
One of the most graphic examples occurred in Holland
between the years 1634 and 1636. It came to pass that a new, rare
flower, called the tulip, was discovered in the gardens of some of
the more wealthy inhabitants of Constantinople, now known as
Istanbul. When the root bulbs of these exotic blossoms were
brought into Holland, they rapidly became a status symbol among
the wealthy—much as race horses or rare breeds of dogs are today
in our own society—and those with surplus funds found that an
investment in tulips brought them significant social recognition.
The price of tulip bulbs climbed steadily until they became, not
merely symbols of status, but speculative investments as well. At
one point, prices doubled every few days, and speculators were
seen everywhere amassing great fortunes with no input of either
labor or service. Many otherwise prudent people found themselves
infected by the hysteria. They borrowed against their homes and
invested their life savings to get in on the anticipated windfall. This
pushed up prices even further and tended to create the fulfillment
of its own prophecy. Contracts for the future delivery of tulip
bulbs—a form of today's commodity market—became a dominant
feature of Holland's stock market
Tulip bulbs eventually became more precious than gemstones.
As new varieties were developed, the market became more complex,
requiring experts to certify their origin and their grade. Prices
soared, and the herd went insane. One bulb of the species called
Admiral Liefken was valued at 4,400 florins; a Semper Augustus,
Worth 5,500 florins, was purchased for a new carriage, two gray
horses, and a complete set of harnesses. It was recorded that, at one
sale, a single Viceroy brought two lasts of wheat, four lasts of rye,
four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of
wine, four casks of butter, one-thousand pounds of cheese, a bed
and mattress, a suit of clothes, and a silver drinking cup.