DetroitCoin: Bitcoin is the new vehicle currency
Tags: Economics, Bitcoin, Detroit, Macroeconomics

Detroit can serve as a key for those looking to unlock the code of American economic history. Its pivotal role in the economy, its sensitivity to Federal policy, and its saliency as a symbol make it the perfect tool for combustion analysis.

I was born in Detroit and raised in Detroit. I graduated from a school named Renaissance. Our mascot was the Phoenix. Detroit’s motto is Speramus Meliora; Resurget Cineribus — ‘We hope for better things; it will rise from the ashes’. For the past century the internal combustion engine has been the beating and erstwhile ailing heart of the City. The mere mention of Detroit brings to mind images of industry, factories, and of course cars. This might lead many people to think that lifeblood of the City is oil. But another lubricant — fiat money — has at least as legitimate a claim.

This might lead many people to think that lifeblood of the City is oil. But another lubricant — fiat money — has at least as legitimate a claim.

In 1913, Woodrow Wilson signed the Federal Reserve Act into law. The Act was in some ways a response to the Panic of 1907, an aftershock of the San Francisco Earthquake of 1906. It established the central bank of the United States with the goal of promoting economic growth & stability and thwarting systemic crises. Chicago won out over Detroit as one of the new system’s regional seats.

Credit, is often given to mass production for making durable goods such as automobiles and radios affordable for the masses. But this is only part of the story. The importance of consumer financing cannot be overemphasized. Following WWI, low interest rates fomented the expansion of credit. And new institutions like General Motors Acceptance Corporation (GMAC) (founded in 1919) funded a ballooning of durable goods purchases. The age’s greatest industrial genius, Henry Ford, was hapless against the financial innovations of General Motor’s chief Alfred Sloan. By 1940 Ford’s US market share had fallen by two-thirds while GM’s had almost quadrupled, making it the greatest private industrial institution in global history. The expansion of credit through the Federal Reserve’s low interest rates made it cheaper and cheaper for consumers to borrow money to purchase durable goods like cars. This led to a boom for the auto industry and a boon for autoworkers who went on to do things like fill the nation’s theaters, buy more cars, radios & other durable goods, and funnel more money back into the system. Over the 1920’s the City’s population nearly doubled, bringing immigrants from Europe and the American South to work in auto plants. Low interest rates also helped to fund the construction boom in Detroit’s downtown, with most of the City’s gems hailing from this period. Detroit’s engines were roaring.

Gem.

The initial result of an expansion of the money supply is increased expenditures, but eventually, with more and more money chasing the same number of goods, prices begin to rise. As prices rise so do business costs, and as business costs rise, profits fall. Investments made based on artificial liquidity signals begin to go sour, stock prices propped up by artificial demand and artificial profits plummet. Wealth, which seemingly appeared from thin air, disappears just as quickly. As more and more of the phantom cash which funded consumer expenditures (on cars for example) disappears, economic activity declines in a vicious autocatalytic cycle. History books are chocked full of stories and images of traders in New York losing their shirts in the stock market Crash of 1929. But the Depression hit harder in Detroit. After the waves of the crash reverberated through the economy, the auto industry employed a fraction of the workforce at a fraction of the wage that had previously attracted so many to the City. The Federal Reserve’s monetary policies had caused the bubbles and busts that it had been created to prevent. The auto industry was built largely on the flow of cheap credit of the 1920s. When that flow collapsed, the industry and the City built on it nearly did as well.

With another, and in this case unprecedented, economic crisis playing itself out on the great American stage, the Federal Government once again answered the resounding call for dramatic action. With riots and strikes breaking out across the country, and one particularly bloody one at Ford’s River Rouge plant in 1932, the government needed an antidote for Red Revolution and perhaps the most definitive restructuring of American society to date proved to be the potion. Hoping that giving people a greater stake in their society by encouraging property ownership would placate the masses, the Federal government, as a part of FDR’s New Deal implemented the federal programs most responsible for the current structure of American society. The programs were made possible in part by the creation of now notorious institutions like Fannie Mae, and the Federal Reserve’s once again low, low interest rates.

The global social crisis which grew in part out of America’s financial crisis created conditions perfect for the rise of fascism. Europeans demanded dramatic action and received some of the most horrifying performances in human history. This indirect product of monetary mayhem pushed Detroit to the top of the largest industrial operation in world history. The automotive industry survived until the trickle of money from consumers turned into a flood from the government with Detroit serving as the ‘Arsenal of Democracy’ and the workhorse of the Allied war effort. The city’s factories were once again brimming with activity, though this time they were rolling out matériel for war and not the luxury cars of the boom years. The Guardian Building, an Art Deco masterpiece in the City’s center served as the command and control center for US wartime production. The nation’s first freeway was constructed to ensure good contact between inner Detroit and outer ring factories. The uptick in production and the development of infrastructure to support it was funded by the largest ever expansion of the national debt, which in turn the Federal Reserve helped to monetize by expanding the supply of money through the purchase of government bonds.

With the close of the war, the historical stage was set for another post-war boom era. Luxury cars again began rolling off the factory floors and the City reached its peak population of almost 2 million. The transformations in real-estate finance of the 1930s and the buildup of infrastructure of the 1940s sowed the seeds of a new social structure and a new American Dream that began to come to fruition in the 1950s: a suburban detached home, owned by (mortgaged to) the occupier, with, of course, a two car garage. This brought about a demographic transformation as dramatic as the one the City underwent in the first half of the 20th century. The structure of the City was gradually completely remade, ostensibly along the lines of credit-worthiness, in fact along lines of race. Blacks were not offered their piece of the property pie and were forced to remain renters in the inner-city while whites formed an ever receding ring around the City’s center. Tensions between the two groups grew until the expression of grievances by the City’s African American population took a violent turn in July of 1967. The riots helped to complete what the freeways had started. Whites began leaving the City in droves, with their tax dollars, for a piece of the suburban pie. Inflation in the 1970s, exacerbated by OPEC price fixing, further damaged the competitiveness of Detroit’s auto industry. These forces worked together to give us the City as we know it today, with an anemic economy and a population divided by color and credit.