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The Fed, Explained…

There are some things I just don’t know enough about to go into with any credibility.

But I do have friends who do!

The following post was a Facebook post.  It was not written by me, and is being posted today with the permission of the author who has asked to remain anonymous.

I’ll say this.  We’re not related, but he is related to folks to whom I’m related.

He’s a friend to whom I’ve always looked UP, respected, and appreciated.

A friend who’s a few years older, just a few, four to be exact.

#GHSclassof66

He’s a dad, a grandpa, a brother, an uncle, and a friend.

He was not a jerk in high school, and he was not a bully, but he did get in a fight at the Burger Chef in Miamisburg after a church youth outing.

He didn’t start it.

Frankly, this is the kind of stuff I wish I could write!

Having said that, here’s what he had to say about the Fed.

*****

I’m going to ramble a bit about the Federal Reserve (hereinafter the FR) and inflation. Some people think the FR is engaged in a grand economic experiment the outcome of which is uncertain. I think the outcome is certain, and that the outcome will ultimately be inflation.

First, the FR is the Central Bank of the U.S. It is authorized to exist by an act of Congress, but it is not part of the government. It operates independently, theoretically to be immune from political pressure. The FR is comprised of several banks, and operates like a private corporation with a Board of Directors. The FR has three responsibilities. One is to stabilize the prices of goods and services within the economy. A second is to establish policies to maximize employment.

Together, these are known as the “dual mandate.” A third goal is to moderate long-term interest rates. The FR believes that the economy operates on an equilibrium model.This means that if the economy is running too hot, they can dial it down by raising interest rates. If they think it is running too slowly, they can rev it up by lowering interest rates. In recent years, the FR has been trying to create inflation by various means.

The short-hand definition of inflation is “too much money chasing too few goods”, that inflation exists when there is a general increase in the price of goods and services while purchasing power of money is falling. This can happen for several reasons. It may happen because there is an increased demand for goods which causes prices to be bid up. It could be that the costs of production increases, so that producers must raise prices in order to maintain profit margins. Or inflation may arise because there was simply too much money created. This over-supply reduces the value of each dollar, so more money has to be spent to buy things.

In the last eight years or so, lots of money has been created out of thin air. Despite the huge injection of money, however, inflation has remained stubbornly below the FR’s target of 2%. This is because an increase in the money supply alone will not induce inflation.The money has to move around in the economy.The more times each dollar changes hands (is spent), the “velocity” of money increases.

Velocity of the money supply is essential to cause inflation. Say a bartender gets a $5 tip. She spends the $5 to take a cab home after work. The cab driver uses the $5 to buy gas for his cab. The gas station owner uses the $5 to buy more gas to sell. The more that $5 changes hands, the greater the velocity of the money. But say the bartender decides to walk home rather than to take a cab. Because her bills are paid up, she deposits the money in her bank. Because people are still recovering from the last financial crisis, no one wants to borrow money despite low interest rates. Because the banks are still recovering themselves, the bank doesn’t want to lend the money because that’s how they got in trouble before. So the $5 sits in the bank, creating no velocity. If this scenario occurs commonly, velocity is low, and despite the printing of money, there is no inflation, at least as measured by the government.

The U.S. economy is consumer-based, and its health depends on people spending money. The FR wants everyone to spend, not save, in order to create velocity and inflation. That’s one reason the FR has kept rates so low. They think that if people can’t earn bank interest, they may think they might as well spend it. Or, perhaps even better, the FR would like you to take your money out of the safety of the bank, and invest it in more risky assets like stocks. And people have done so, choosing risk over safety. As the value of stocks rises, the FR believes this creates a “wealth effect”, making people feel that as they become “richer”, they will be encouraged to spend.

The stock market is the main place in the current economy where inflation (of asset prices) is obvious. A second reason the FR wants to create inflation is to devalue the dollar. There are two advantages in this for the federal government. First, our exports become cheaper for foreigners to buy, and we gain competitive advantage over our trading partners. Also, imported goods become more expensive for U.S. citizens to buy, and the price increases are inflationary. In this way, if we can’t create our own inflation, we can import it. A third reason the FR wants to create inflation is so that the U.S. can make debt payments with cheaper dollars. This is a stealth default. Perhaps most importantly of all, it’s not that the FR wants to create inflation, it’s that they want to avoid deflation at all costs.

The short-hand definition of deflation is “too little money chasing too many goods.” In deflation, price levels fall, and they keep falling. This means the value of money increases.These are recessionary conditions that can become depressions. (There are almost no people alive that can remember living through The Great Depression.) In deflationary conditions, as prices fall, people will not spend their money today to buy something that will be cheaper tomorrow.People will hoard cash the value of which is creating more purchasing power. When people stop spending, corporate profits decline, there are lay-offs, and increased unemployment. (By the way, if the FR thinks we have now reached full employment, the unemployment rate has nowhere to go buy up.)

As people lose jobs, there is even less spending, and the economy goes into a downward spiral, perhaps into depression. Now, say that Employee A is living in conditions where inflation is absent. Prices are not increasing, He earns $100,000 per year.He gets a 10% raise up to $110,000 per year. His purchasing power has increased by 10%. Employee B is living in an economy where prices have fallen by 10%.He makes $100,000 per year, and he does not get a raise. His purchasing power has increased by 10%. Is either employee better off than the other in terms of purchasing power? No. They ended up in the same place. But the government likes Employee A’s circumstances better. They can tax his increased purchasing power. The government cannot tax Employee B’s incensed purchasing power. These are the reasons why the FR wants to create inflation slowly, so that it is almost imperceptible. In fact, until it gets out of control, inflation feels pretty good. The price of your house inflates.

You might get a decent return on bank deposits. You could even get a raise that will match the inflation rate, or maybe a little more. So, at first people don’t mind a little inflation. You can pay down your fixed rate mortgage with cheaper dollars. Right now, the economy is in the slowest, longest recovery on record, if we are in recovery at all. We are on a tightrope balanced between inflation and deflation. Even if we fall into deflation as some expect, in the end inflation will win. Even though the FR hasn’t been able to budge the inflation rate they will find a way, because inflation advantages the federal government. Deflation will destroy it.

Like I said, this what I wish I could write…

Today is Nat Turner’s birthday. He was born a slave in 1800 in Southampton County, Virginia.  The man who “owned” him was Benjamin Turner, and when he died, Nat became the “property” of Benjamin’s son, Samuel.

Little is known of Nat’s father, and it is believed that he escaped slavery when Turner was very young.

Born a slave with no last name, history failed to record whether Nat chose Turner as his surname or it was simply given him along the way.

Black History Month being decades away when I was educated at Germantown Elementary, Germantown Junior High School, and Valley View High, Nat was only mentioned in passing.  It was simply stated he “…lead a slave uprising in Virginia, and a lot of people died…”

I remember going to the World Book – our go to guide in pre-Google days – and reading UP on the guy.

At the time, he was regarded as a rebel, a revolutionary, and a murderer.

He was associated with fear, death, hatred, and troublemakers.

I don’t remember my teacher at the time being a big fan.

Although the facts of history never change, their interpretation sometimes does.

Turner and his rebels went from plantation to plantation in 1831, gathering horses, guns, and cohorts who wanted to join his band.

The “mob” consisted of runaway slaves and free blacks.  While the rebellion raged, Virginia legislators targeted free blacks with a colonization bill.

It allowed for funding to remove them from Virginia to a colony elsewhere, denied free blacks trials by jury and allowed for any free black convicted of a crime to be sold back into slavery and relocated.

Really, they had time for this while a band of revolutionaries roamed the countryside killing and burning.

Turner’s band cost the lives of roughly 65 whites.

In retaliation, organized militias and regular troops came out to suppress the rebellion and about 120 blacks were killed.  Some modern historians believe the number was higher.

Some say much higher.

Some of those killed were not involved in the uprising; they were just in the way and the wrong color.

The uprising was suppressed.  Might makes right and all, and Turner went into hiding.

The legislators got busy again passing new laws to control slaves and free blacks.  Education was prohibited, free blacks’ right to assemble was restricted in a direct violation of the U S Constitution, and their right to bear arms was taken as well.

In North Carolina where free blacks had been able to vote, that right was removed.

Oh, and just to keep an eye on things, black religious services had to have a white minister in the crowd.  Can’t have the black folks singin’ Go Down Moses and all that now can we?

Turner’s entire life was spent in Southampton County, most of it on the plantation of his owner.  The county consisted of many plantations where slaves made UP the majority of the population.   Turner was reported by his master as “…having natural intelligence and quickness of apprehension surpassed by few.  He learned to read and write at a  young age.  Deeply religious, he was often seen fasting, praying, or immersed in reading the stories of the Bible.”

None of that crossed the lips of any of my teachers nor was it in the World Book.  It was, however, recorded in plantation records.

Visions resulted from Turner’s deeply religious nature.  He believed they were messages from God, and at the age of 22, he ran away from the plantation but returned claiming a spiritual revelation told him to do so!

He was a Baptist and preached the Bible to fellow slaves who called him “The Prophet.”

He even had white folks at his sermons before the law required them to be there.

Many were reported to have “…turned from their wickedness…” after hearing him preach.

By 1828 Turner was convinced that he “…was ordained for some great purpose in the hands of the Almighty…”

He heard a loud noise in the heavens, a spirit appeared and he claimed “…the Serpent was loosened, and Christ had laid down the yoke he had borne for the sins of men, and that I should take it on and fight against the Serpent, for the time was fast approaching when the first should be last and the last should be first.”

Just in case, the Serpent represents the Devil, Satan, Old Scratch…umkay?

Turner believed he was on a mission from God.

Starting with a few fellow slaves whom he trusted, they created a way to communicate their plan without their owners finding out.

They used songs, stories, and folk tales.

Using knives to carry out their attacks to keep from gunshot noise alerting neighbors, the band went on a killing spree that did not spare anyone in the way; men, women, children.

Turner, when caught, confessed to killing only one person, Margaret Whitehead.  He killed her with a blow to the head with a fence post.

Before authorities could mobilize and respond, 60 whites were dead.

Turner’s band spared poor whites because they  “…thought themselves no better than the negros…”

Turner believed the violence would awaken whites to the reality of the brutality of slave-holding – it didn’t.

It took all of two days to suppress the rebellion.

Turner eluded the authorities and escaped.

On October 30, he was discovered hiding in the woods by Benjamin Phipps and was captured.

Thomas Ruffin Gray, an attorney, took Turner’s “confession.” Nat was tried for conspiring to rebel and making insurrection.  Convicted and sentenced to death, he was hanged 11.11.1831 in Jerusalem, Virginia and was buried in an unmarked grave.

He went to the gallows believing he was ordained for some great purpose in the hands of the Almighty.

Repeat, Nah, Probably Not!

On September 29, 1789, the first United States Congress adjourned.

The met in New York City’s Federal Hall; the Capitol wasn’t even constructed, heck, Washington D.C. wasn’t even there!

In that first session, the boys did the following… On April 1, they had a quorum and elected officers.  Five days later, the Senate did the same thing! That same day, the House and the Senate, in a joint session, counted the votes of the Electoral College and certified that George Washington had indeed been elected the first President of the United States and second runner UP, John Adams was VEEP!

On April 30, GW took the oath of office in New York City at Federal Hall.

Martha was so proud she posted a picture of the proceedings on Instagram.  It got lots of s!

When they got together back in March, the gang got busy.  The regulated time and manner of oaths of office, created the Tariff of 1789, created the first Cabinet Department, the Department of Foreign Affairs, which was aptly named as Thomas Jefferson was the first Secretary of State, and boy did he have affairs!

In July, Collection of Duties was regulated when they established the Customs Service.  In August they created the Department of War (later PCed down to the Department  of Defense.) The Department of the Treasury and a Judiciary Act came in September which established the federal judiciary and the office of the Attorney General.

That same month before taking off for home, the boys approved 12 amendments to the US Constitution and guaranteed us freedoms and rights, set clear limitations on governmental power, and sent them to the States for ratification.

Of course the states pussy-footed around and it took longer than anyone had hoped!

North Carolina became the 12th state to ratify the Constitution and joined the Union.  There were Tarheel parties everywhere!

Then the boys took off for home, vacation, checking out things at the plantation, kissed a few babies, raised some cash, and basked in the glow and praise of their constituents who were thrilled at all they had accomplished.

Wonder if that’ll happen this year?

Nah, they’d have to accomplish something first!

Oh, Why Not?

Today is national Chocolate Day!

It’s also Milton Hershey’s birthday.

Imagine that?

Hershey was an American confectioner who later became a philanthropist.  He founded the Hershey Chocolate Company and the town of Hershey, PA.

In 1883, he borrowed money and started the Lancaster Caramel Company in Lancaster, PA.  It was huge success.

Again, imagine that?

He used the caramel recipe to make candy and learned caramels sold better in bulk, so he became a bulk provider.

One order to a visiting Brit was so large; the profit from it enabled Hershey to pay off his debt.

By 1891 the company was so successful it employed over 1,300 people.

While at the World’s Columbian Exposition in Chicago he became interested in chocolate.

Knowing it would be an even bigger hit, he sold the Caramel Company for one million dollars and started making Chocolate.

He bought 30 acres of farmland near Derry Township some 30 miles northwest of Lancaster.  The location was perfect since he could easily get the large quantities of milk he would need to make milk chocolate.

Chocolate at that time was a luxury; Hershey was determined to make it affordable to the American public.

Trial and error paved the way to success, and the Hershey bar was first produced in 1900.  Kisses arrived in 1907!

In March of 1902 he began building the worlds’ largest chocolate manufacturing company.  Completed in 1905, it used the latest mass production techniques and Hershey’s milk chocolate became the first nationally marked product of its kind.

With the success of the factory, workers started building nearby, churches were built, schools, and business sprang UP, and Hershey, PA was born!

Back in 1898, Hershey married Kitty Sweeney from New York whom he met at a candy shop!

They were unable to have children, and decided that since they had no kids to spend their money on they would help others, especially orphans.

Kitty died in 1915, Hershey never remarried, and transferred most of his assets to the Milton Hershey School Trust fund which benefited the Hershey Industrial School.

The Trust holds the majority shares of the company which allows it control of the company, the school, and the Hershey Entertainment and Resorts Company which owns Hershey Park and other properties.

In the 1930s, he set UP the M. S. Hershey Foundation which provides educational and cultural opportunities to the resident of Hershey PA.  It funds the museum, the gardens, the theater and the community archives.

He also funded the Hershey Medical Center at Penn State, a teaching hospital with an endowment of $50 million.

During WW II, he supplied the US Army with chocolate bars.

He retired in 1944, and one year later at the age of 88, he died of pneumonia at the Hershey Hospital.

There’s a statue there of Milton Hershey with an orphan boy wrapped in his arms.

The inscription says, “His deeds are his monument. His life is our inspiration.”

Indeed!

Happy National Chocolate Day, please feel free to feel less guilt as you chow down on a chocolate bar today!