Carol Alexander: Hello.
Carol Alexander: I'm Carol Alexander I'm Professor of Finance at the University of Sussex. I'm also a Visiting Professor at Peking University PHBS Business School, and I'm going to talk to you today about the impact of COVID-19 on financial markets, banks and the global economy.
Carol Alexander: So if you bear with me a moment. I just need to share my screen.
Carol Alexander: Okay, so you should still be able to see me in the corner and I've divided this talk into three parts. I don't know how long it's going to take maybe 10 minutes 15 minutes each pod.
Carol Alexander: So let me just give the outline begin with of what I'm going to talk about
Carol Alexander: So central banks -- the Federal Reserve, Bank of England -- not so much the People's Bank of China, but in the Western world most central banks have responded to the pandemic with some unprecedented interventions in financial markets,
Carol Alexander:  which effectively amount to printing cash to buy company stocks and bonds household debt and even their own government securities.
Carol Alexander: And under Donald Trump, it appears that the strategic aim of the US is to artificially inflate the prices of US stocks and bonds and all US assets......
Carol Alexander: .....decrease the values of safe haven assets such as gold and bitcoin and other cryptocurrencies as well as the US dollar itself --- which is very useful to boost exports if the US dollar devalues
Carol Alexander: And in fact we can trace this type of tactic back to the Great Depression of the 1930s -- in Franklin Roosevelt's first term -- In fact, in his first hundred days he implemented some emergency economic stimuli 
Carol Alexander: which have the same effect. Currency and gold price manipulation, in particular, were used right at the beginning.
Carol Alexander: ...
Carol Alexander: Also, since the banking crisis of 2008 this monetary policy type tool has been deployed continuously in the form of something called Quantitative Easing, which I'm sure many of you have already heard of anyway.
Carol Alexander: And the question is whether this is really masking the true weakness of the US economy and has it just been propped up by continual rounds of Quantitative Easing since 2008 or even before?
Carol Alexander: So I'm going to talk about the Great Depression in this talk. And then the next one part two will be about the development of financial markets leading up to the banking crisis and then
Carol Alexander: In the third part I'll talk about how we might be able to learn from these previous crises, the way that governments have handled them. Will banks and financial markets respond similarly to the packages employed today? or have the Federal Reserve and other central banks actually got to their resort with nothing left? 
Carol Alexander: This is the question.
Carol Alexander: Alright, so to begin with, this part will be looking at how the US economy, in particular, fared after the 1929 stock market crash.
Carol Alexander: And the role of banks commercial banks in particular, and the Federal Reserve. 
Carol Alexander: The FOMC is the Federal Open Market Committee (which we all look at today for its announcements --- Wall Street responds quite quickly to anything the FOMC does) and the establishment of that goes back to Franklin Roosevelt.
Carol Alexander: And we'll look at how financial markets have been used to implement economic policy and how the US economy recovered from the Great Depression.
Carol Alexander: So here's a couple of graphs, not mine. On the left you can see
Carol Alexander: the US gross domestic product in billions of dollars constant terms. So there was a great recession, but not for long, only a couple of years
Carol Alexander: But the depression with the high unemployment rate lasted for 10 years. Following this time GDP recovered and US unemployment went to almost zero.
Carol Alexander: So it's these years that the emergency packages after the stock market crash of 2029 and a very high unemployment rate  -- these emergency packages that Theodore Roosevelt brought into play --
Carol Alexander: were attempting to increase exports fire US dollar devaluation because domestic demand at all but gone with such high unemployment.
Carol Alexander: Demand for agricultural products in particular was very low demand, for cars too, so US manufacturing and agriculture, more or less came to a standstill.
Carol Alexander: And to boost new infrastructure and manufacturing. There was also an increase in the money supply. But in those days.
Carol Alexander: Trade was done in in silver or gold. They had the silver dollar for domestic trade and gold for international trade. So how did they increase the money supply, effectively, back in the 1930s?
Carol Alexander:  I'm just going to focus on the 1934 Gold and Silver Acts, which effectively changed gold and silver from currencies into commodities, albeit with the gold standard (for a long time gold was very closely linked to the value of the dollar).
Carol Alexander: So on the left here you can see presidential order in 1933 very soon after Theodore Roosevelt came to office.
Carol Alexander: The confiscation of all the gold owned by US citizens -- on fear of a very large fine. In fact, the Federal Reserve acquired
Carol Alexander:  4300 tons of gold bullion during this period, and it paid $20.67 per ounce for the for this gold. That was the gold standard at that time. But very soon after it changed the standard to devalue the dollar so that
Carol Alexander: ...versus gold (the unit of international trade after all) the dollar was devalued by 70%. So the new gold standard was one ounce of gold equals $35 and it remained this way until the gold standard was dropped later on.
Carol Alexander: And on the right here you can see a picture of the silver mines, past and present. The blue and the red dots are the highest quality silver
Carol Alexander: And not only are they almost exclusively (a few in Australia and South Africa) but almost exclusively they are on the west coast of the Americas. And this area has the world's monopoly in silver production.
Carol Alexander: So there was a very powerful farming lobby when Theodore Roosevelt first took office. But it wasn't just a farming lobby, it was also the silver lobby.....
Carol Alexander: The  price paid for silver was too low. And so the Federal Reserve purchased silver direct from the minds at a 50% premium.
Carol Alexander: And called a senior storage tax. And in return the Fed gave silver certificates and this resulted in an increased price for silver at the same time as effectively increasing the money supply. The silver certificates were a paper form of money instead of the silver dollar
Carol Alexander: It also had the side effect that the Chinese economy -- which was the last economy to actually adhere to the silver standard --
Carol Alexander: Had eventually to drop that because of the pressure on the silver price and it then introduced a fiat Yuan  that was initially pegged to the Japanese Yen, at that time.
Carol Alexander: So the role of commercial banks is quite important at this time.
Carol Alexander: Because although the 19th century banking laws prohibited commercial banks from operating in capital markets, they got around this by
Carol Alexander: finding loopholes in the laws and setting up subsidiaries, which are now called investment trusts.
Carol Alexander: And this way. They boosted demand in stock markets and contributed to the stock market bubble of the 1920s.
Carol Alexander: So these two rather stern looking men Glass and Steagall were US senators that introduced an act in 1932
Carol Alexander: Which made a clear distinction between the activities of commercial and investment banks and, in particular, made it impossible for commercial banks to gamble with the savings of ordinary consumers on stock and other capital markets. So that was the Glass-Steagall Act of 1932
Carol Alexander: In fact, that act was incorporated by Roosevelt into the 1933 Emergency Banking Act, which was an extension of the 1913 Federal Reserve Act. Here you can see a photograph (with a another photo of of Senator Glass)....
Carol Alexander: Which explains the setup of the new Federal Reserve. There's a board of seven members to supervise the entire banking system in the country.
Carol Alexander: And regional banks, 12 of them actually. This Federal Open Market Committee that I mentioned at the beginning ... 
Carol Alexander: consists of 5 of the 12 Federal Reserve Bank presidents and the Federal Reserve Board members and the purpose of this committee is to control interest rates and the money supply by issuing
Carol Alexander: Treasury securities, that's the short  maturity Treasury bills and notes and the longer maturity Treasury bonds -- and not only issuing them, but also buying and selling them ---
Carol Alexander: In what we call open market operations with special banks, usually JP Morgan, Goldman Sachs, Citibank, .... the bigger banks ....
Carol Alexander: That are the primary dealers. These are the only banks that are allowed to deal directly with the Federal Reserve. And it is through these Open Market Operations that it creates money. It used to be in paper, but now it's done just digitally.
Carol Alexander: There was also a role for social media for Franklin Roosevelt, just like for Donald Trump.
Carol Alexander: He started fireside chats. You can see a photograph of him here -- a very flattering photograph with with the radio microphones in front --
Carol Alexander: And I find it very interesting to listen to those recordings  -- in particular, the very first one when he first took office -- he's explaining to the general public that banks are not just there to take savings and make loans, they are also investing in capital markets! So this was
Carol Alexander: after the glass Steagall Act was incorporated into the Banking Act. So these fireside chats (very interesting, as I said you can hear the recordings) this right-hand-side with not such a flattering photograph of Theordore Roosevlet ....
Carol Alexander: contains the transcript of one of those chats, where he explains the response to the second downturn in the Economy in 1937, so there was more economic stimuli 
Carol Alexander: around that time, because unemployment started going up again. At the same time he introduced accounting reforms because Theodore Roosevelt
Carol Alexander: felt that marked market accounting was another contributory factor in the stock market crash of 1929
Carol Alexander: Basically when  companies are allowed to mark their assets -- not in terms of the book value or what we call cash accounting i.e. the cost of those assets ---
Carol Alexander: but they can look at the market and say "Oh, that's how the market values my assets at the moment so that's the value I'm going to put down in my accounts."
Carol Alexander: And if companies like General Motors see their share price going up and up, then it's easy for them to inflate the actual value of that company.
Carol Alexander: So that it looks like their assets are worth a lot more than they really are according to the book value. And that's one of the reasons why so many companies went bankrupt, following the 1929 stock market crash.
Carol Alexander: Now the recovery from the Great Depression did not actually happen until World War Two broke out.
Carol Alexander: At that point the ailing car manufacturing industry in the US turned itself to manufacture military equipment so
Carol Alexander: Here you can see a couple of propaganda posters or a book about how the US must become the "great arsenal to save democracy", and indeed the manufacturing industry in the US took off -----
Carol Alexander: Millions of guns and bombs 300,000 planes 50,000 tanks 600,000 jeeps two and a half million trucks were manufactured so unemployment, as you saw in the original graph of this talk, decreased to zero.
Carol Alexander: And industrial production increased by 15% per annum and the gross national product also increased --almost doubled during the war years.
Carol Alexander: Towards the end of war in 1944 sorry there's a typo here. It's not 1994 1944, of course.
Carol Alexander: Bretton Woods was a place in the US where the 44 allied countries met led by John Maynard Keynes from the UK
Carol Alexander: and Harry Dexter White a US economist and there was a famous argument between these two  economists. The purpose was to stabilize exchange rates because
Carol Alexander:  before the war there had been  competitive devaluations of other currencies, not just the dollar. The UK and other countries also tried to devalue in order to increase exports. So rather than return to that environment....
Carol Alexander: Eventually Harry Dexter White won the argument. And instead of having the reserve currency ...
Carol Alexander: ... the currency, where in fact it turns out more than 60% of world trade is now done .... being a basket currency (like the IMF special drawing rights, the XDR is a basket of currencies.....
Carol Alexander: ...currently it's a trade-weighted basket, although at the moment there should be a little bit more of the Japanese yen and definitely more of the Chinese yuan.... So at the moment, the XDR constitution is 41% US dollar 30% euro, 11% yuan, 8% yen and 8% pound sterling)
Carol Alexander: But instead of having that type of basket
Carol Alexander: The Bretton Woods agreement was to peg all exchange rates to the US dollar within 1%. And the reason for that was because the US had so much gold.
Carol Alexander: That they agreed to adhere to the gold standard and would not print more dollars than they had gold on the parity of one ounce of gold was equal to $35 so this prevented them from making the dollar into a feared currency, where they can just print as much as they like.
Carol Alexander: And these special drawing rights of the International Monetary Fund ---were there for countries who needed (with this fixed exchange rate regime) who needed
Carol Alexander: ...if the currency became too low, they needed to buy their own currency and required reserves for that....
Carol Alexander: Or if the currency became too high, they needed to sell their own currency and put reserves for that back into the International Monetary Fund. So these special drawing rights were used to help maintain parity with the US dollar.
Carol Alexander: Now, established back in 1934 (I didn't mention this when I was looking at the Gold Act and the silver act, but) the proceeds from
Carol Alexander: the 1934 Gold Act were almost $3 billion (when they bought gold for about $20 and then automatically revalued it at $35)
Carol Alexander: And a large quantity of that was used (actually as a response from the UK which had its own exchange equalization account) by the US to establish an Exchange Stabilization Fund.
Carol Alexander: And it was originally used to intervene in the foreign exchange markets to stabilize the value of the US dollar versus gold as it had the gold standard from 1934
Carol Alexander: But the Bretton Woods agreement gave a permanent authority to the Exchange Stabilization Fund.
Carol Alexander: For instance, to finance short term loans to Latin America and other countries during the financial crisis, while they were negotiating longer term loans from the IMF.
Carol Alexander: But also, the Exchange Stabilization Fund was able to deal, not just in the US dollar and gold, but other currencies and keep profits within the fund. So this fund is  within the Federal Reserve
Carol Alexander: and it is subject to much speculation (I mean, there's all sorts of videos if you have a look on YouTube about how the Exchange Stabilization Fund had links with the CIA and
Carol Alexander: drugs and money laundering and all sorts) but the point is that there is this vast amount of cash. In fact, by October 2009, after the banking crisis of 2008, the ESF held assets worth $105 billion, including $58.1 billion in special drawing rights from the IMF.
Carol Alexander: So I'm going to leave this first part with the Exchange Stabilization Fund, because it has begun to play an increasingly important role in what is happening today in response to COVID-19
Carol Alexander: ....
Carol Alexander: ...
Carol Alexander: ...
