GREAT DEPRESSION BOTTOM (1932 - 1933):

The Collapse Of Governments

FUTURECASTS online magazine
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Vol. 3, No. 8, 8/1/01.

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Summaries of Great Depression Controversies and Facts

The Great Deception:

Great Depression Chronologies

I.
The Crash of  '29  

II.
Rebound from Crash of '29
(1930)

III.
Collapse of agriculture (1930)

IV.
Debate begins.
 (1931)

V.
Collapse of international finance
.
 (1931)

VI.
Collapse of WW I financial obligations  (1932)

(The majority of the following was taken from articles published in contemporary issues of the N.Y. Times.)

 The bottom:

 

 

 

?

  In France, in the elections of May, 1932, centrist governments were replaced by governments of the radical left.
 ?
  In Britain, the movement had been to the right, as the labor party, which had enjoyed a substantial plurality of seats in Parliament, suffered a near wipeout in the elections at the end of 1931. However, Ramsay McDonald remained Prime Minister by suitably shuffling his Cabinet.
  ?
  In Japan, there was grinding depression. This - coupled with discontent over treaty limitations on the size of the navy - reinforced militarist forces. Assassinations of  business and political leaders led in 1932  to the end of liberal government and party cabinets.
  ?

There were substantial electoral losses among incumbent elected politicians.

 

There were more ominous political changes outside the established democracies.

   The political stupidities that condemned the world to economic collapse could not directly be corrected by market mechanisms. However, the markets were now demonstrating how they could ruthlessly grind down far enough to destroy popular support and thus bring the collapse of the responsible governments. In the established democracies, this was reflected in substantial electoral losses among incumbent politicians. Elsewhere, it would lead to more ominous political changes.

  About sixty years later, the Evil Empire would learn that not even the most ruthless despotisms can indefinitely resist the remorseless punishment that market mechanisms can deliver to those that refuse to submit to market disciplines.

The big board dropped to about $15 billion - a loss of about 83% since September 19, 1929. 

 

Everything was sharply down.
   By June, 1932, the short interest was very large. Margin accounts and the floating supply of shares in broker's hands was very small. Shorts were paying big premiums to borrow shares. For one day they paid a whole point ($100 per 100 shares per day) to borrow the shares of International Shoe.
 ?
  Values on the Big Board declined to $15,633,479,577 by July 1, 1932. This was the lowest monthly spot of the Great Depression. In the first week of July, about $1/2 billion more was lost. The Big Board had lost about 83% of its value since September 19, 1929. Broker's loans now totaled less than $1/4 billion - practically a "cash" market. Stock yields - for those stocks still paying dividends - were averaging around 14%, indicating the level of acute pessimism.
 ?
  Steel production dropped from 15% of capacity down to 12% during the 4th of July holiday week. U.S. Steel unfilled orders suffered a sharp drop to just over 2 million tons. Copper hit 5 1/2 cents per pound, corn 27 1/4 cents per bushel (lowest since 1877), rye 27 3/8 cents (less than the 1884 level), oats at 18 7/8 cents and wheat at 44 3/4 cents (both the lowest so far for the Great Depression). A huge corn crop was reported. But livestock was still marginally profitable due to the low cost of feed.
 ?
  Financial institutions continued to fail in spite of the RFC and other measures designed to aid banks. California and Chicago were hard hit. 28 banks closed in Chicago in one week.
 ?
  The rediscount rate was reduced from 3% back to 2 1/2% - a meaningless move. Nobody had any use for Federal Reserve money at any interest rate. Extraordinarily low discount rates in Paris, London, Amsterdam, and Berlin, as well as in N.Y., failed to revive depressed trade. A 2% bank rate in London equaled a historic low last hit in 1897. Open market discounts in London had already dropped to about 1% - something Keynes would neglect to mention a few years later when advocating monetary expansion to drive interest rates down.
 ?
  Everything was sharply down. Building construction projects down 62% from 1931. Auto production was down 50%. Steel production was down 55%. Railroad car loadings were down 30%. Checks at bank clearing houses were down 45%. Price averages were down about 12%. And 1931 itself was a very poor year.
 ?
  With news of the accelerating rate of bank failures, cash in circulation rose $144 million in a week. Cash in circulation was $808 million above the same time in 1931.
 ?

 The N.Y. Times' ardent "confidence game" champion finally admitted that this great economic tragedy was something more than just a psychological aberration.
   Alexander D. Noyes, N.Y. Times financial columnist, in his July 4, 1932, column, finally came out in flat recognition of WW-I and its economic dislocations - the resulting huge financial debts and high taxes - as the fundamental cause of the Great Depression. The effects of this tremendous dislocation had been kept at bay for a decade by loans from Wall Street. Financial collapse was triggered by the ending of the flow of Wall Street credit to the debtor nations - and the drain on European capital by the capital flows into the 1928 - 1929 Wall Street bull market. This caused decreases in world trade, starting in central Europe and Russia in 1928 and extending all around the world by the summer of 1929. The U.S. economy was adversely affected in the summer of 1929, bringing the domestic business boom to a standstill and pricking the stock market bubble to begin the full fledged Depression.
 ?
  Noyes asserted that recovery will occur upon the liquidation of debts - probably through the expedient of currency inflation. This champion of the "confidence game" finally admitted that this great economic tragedy was more than just a psychological aberration.
 ?

The collapse of the Weimar government:

 

 

 

?
  The Weimar Republic expired in July, 1932. Von Papen was the new dictator of Germany.
 ?
  Sen. Borah (R. Utah) warned that Germany must be aided. The U.S. must cancel its Allies' war debts so that they could cancel the reparations owed them by Germany. In a nation wide radio address, Borah took his case to the American public, assailing war debts, reparations and armaments.
 ?
  His political opponents and the various cognizant executive departments in the Hoover Administration were no longer so outspoken against Borah's political crusade. Hoover remained opposed to war debt cancellation, but expressed his willingness to be "flexible" about terms. The N.Y. Times now was consistently giving Borah extensive page 1 coverage and editorial support.
 ?
     England successfully converted domestic war debts totaling 2 billion pounds from a 5% issue to a 3 1/2% issue, for a saving of about 23 million pounds per year. France quickly followed suit, refinancing $4 billion in internal debts paying between 6% and 7% with a new issue paying only 4 1/2% for a saving of about $33 to $40 million per year.
 ?
  None of the investors in these new issues preferred "hoarding" to receiving the much lower interest rates. Only 1% of the holders of the old bonds asked for cash rather than accept the new lower yield bonds. Additional efforts along this line continued to improve the financial posture of various strong public and private entities.
 ?
  The Bonus Army was driven from Washington. Greece, Hungary, Bulgaria and Austria defaulted on loans.
 ?

 In Belgium and Poland, there were desperate measures undertaken to shore up defenses against the already perceptible threat from Germany.
   As German rightists called for rearmament, Belgium announced plans for reconstruction of a fortified line facing Germany, patterned after French fortifications. This project would be undertaken in spite of Great Depression stringencies. The handwriting was already clear upon the wall for those with eyes to see. In Poland, a small group of brilliant mathematicians would soon begin their desperate effort to break Germany's unbreakable Enigma cipher machine. It's harder to ignore the impending storm when it's already visible just across the fence from your back yard.
 ?
  By the beginning of August, Germany was asking not only for reduction of interest rates and inter-governmental debts, but for a settlement for foreign private debts as well. Of the almost $5 billion in German foreign private debts, about 40% was held in the U.S.
 ?
  At a speech given at the University of Minnesota, Sen. Borah again blasted U.S. policy on intergovernmental debts. He criticized war debts, tariffs, and reparations as causes of the Great Depression - all stemming from the effects of the Great War. He also criticized costly armaments. Widespread violence was reported sweeping Germany.
 ?

 The agricultural commodity boom:

 

?

  The federal Farm Board had succeeded in dumping almost all its wheat. The market pricing mechanism had finally been permitted to do its ruthless work. The winter wheat crop was only 440 million bushels, and the spring crop was only 273 million bushels. This was well below average domestic consumption plus the average export demand of the previous three years. Grain prices surged upwards from their Great Depression lows.
 ?

Market prices had finally been permitted to do their work.

 

Wheat and cotton crops were sharply reduced, encouraging a surge in farm commodity prices.

 Communism as an economic alternative had already failed - although it would be maintained for almost six more decades as a politically successful means of enslaving the workers and peasantry.
   The surge in agricultural prices, aided by the usual hope for an Autumn business revival, encouraged a stock market advance of substantial proportions. Things simply couldn't get any worse. Even in the face of terrible earnings reports, the Big Board surged ahead almost $5 billion in July - approximately 31% - to a new total of about $20 1/2 billion.
 ?
  An organization of cotton mills agreed to take 3 million bales of the Farm Board's cotton for $90 million and hold it off the market. The average yearly domestic consumption of cotton was 13 million bales. There was a 13 1/2 million bale carryover. But a surprise forecast indicated the smallest cotton crop since 1923. The forecast was 6 million bales less than the 1931 crop and 700,000 bales less than the previous forecast.
 ?
  The Russian grain harvest was reported 25% under poor 1931 levels due to peasant uncooperativeness. Agricultural commodities surged upwards.

Communism as an economic alternative had already failed - although it would be maintained for almost six more decades as a politically successful means of enslaving the workers and peasantry. Many Western "intellectuals" would remain incredibly in denial concerning this obvious fact.

  The monthly number of bank failures declined sharply with the surging commodity and securities prices. The number of National banks had declined 10% in the previous 12 months, with combined assets down $5 1/2 billion.
 ?

 

 

 

 Despite the surge in wheat and cotton exports, total foreign trade was still running about 35% below 1931 levels.

   Financial commentators became almost hysterically jubilant - triumphant at this apparent turn for the better. Their confidence had been justified. "We have seen the worst and have survived." Alexander D. Noyes, financial columnist for the N.Y. Times, crowed over those foolish pessimists who just last June were predicting even further economic reversals.
 ?
  But U.S. Steel unfilled orders dropped below 2 million tons.  There was still no apparent business pickup.
 ?
  The stock, bond, and commodity markets surged upwards through August, and the financial columns sang with Hope and Confidence and improved financial and business conditions.
 ?
  The N.Y. Times business index plummeted to new Great Depression lows. July auto registrations dropped by 25% in one month, and auto production came to a halt. Steel production remained at about 14% of capacity. July imports were reported as the smallest since 1904, exports smallest since 1908.
 ?
  Even that old prophet, Roger Babson, now joined the chorus - predicting business "normal by 1934." However, he warned that the current stock market upsurge was not yet warranted.
 ? 
  Unfavorable weather and the boll weevil sent cotton prices soaring over 8 cents per pound, with the October contract hitting 8.45 cents. The Indian and Egyptian cotton crops were largely destroyed by drought, and the Japanese-Chinese war stimulated cotton exports. Cotton exports to Japan were the largest since WW I. By the end of August, 1932, cotton was over 9 cents per pound, adding $400 million to the value of existing stockpiles. Even copper prices were rising - to 6 cents per pound.
 ?
  Exports of cotton surged 99% (66% by volume), and wheat exports surged 77% (44% by volume) over the same period in 1931. Wheat and cotton comprised 20% of total U.S. exports, as exports of manufactured products continued to dive through the bottom. These would be the last substantial grain exports for the next five years. Total foreign trade was still running about 35% below 1931 levels. Compared with their averages for the previous five years, cotton exports were still down 44% in value, wheat down 40%, autos down 52%, and tobacco and all other exports were similarly sharply down.
 ?
  A "farmers' strike" was developing in the Midwest. Brazilian revolutionaries cut coffee shipments. More widespread violence was reported in Germany.
 ?

 News of the reopening of many plants and production expansions in others were highlighted in the financial press.
   The boom hit the textile industry. Cotton, silk, rayon and wool - in raw material, in process, and in finished goods forms - all drew hurried buying orders on an impressive scale, pushing prices sharply higher. The autumn business revival appeared imminent. News of the reopening of many industrial plants and the expansion of production in others was highlighted in the financial press.
 ?
  But department store sales for July were running 30% below their July, 1931, levels, and bank clearings were off 35%. Building permits were off 67% from July, 1931. July railroad income was the worst on record - off 57% from the low July, 1931 level. Car loadings were running at just 50% of their 1929 levels. Steel production slipped to 13% of capacity.
 ?
     The N.Y. Times 50 stock index rose over 100% from its July 8 low. The railroad average was up more than 300%. This was almost all cash buying or margins financed by the brokers themselves, as there was little change in brokers loan figures. The NYSE rose an amazing $7,287,742,341 in August to a new total of over $27 3/4 billion - up 77.7% since July 1. It had wiped out all losses since December 1, 1931.
 ?
  The 40 bonds average climbed above 70 and fluctuated narrowly about that point. Dun's commodity price index rose 7% in these two months. Even the New York Times business index managed to stay practically level for a couple of weeks on two separate occasions that summer.
 ?
  The 1932 summer bull market brought the greatest percentage gains for any one or two month period in the history of the NYSE. If securities market movements were causes, and not just cyclical effects, then surely this impressive surge had to mean the end of the Great Depression.
 ?
  But such is not the case. Brokers issued warnings about the many "stop loss" orders guarding recent profits. Auto registrations and production dove to Great Depression lows. Steel production was running at less than 1 million tons per month.
 ?
     Bond financing surged. 25% of the bonds floated in the first eight months of 1932 were floated in August. The total, excluding U.S. and Canadian municipals, was almost $104 1/2 million, all but about $7 1/2 million for public utilities. The total for the first eight months was just over $441.1 million. But, in spite of the August upsurge, this total was still down 78% from the 1931 total of about $2 billion, and 89% below the 1930 total of about $4.1 billion.
 ?
  By the end of September, 1932, the 1,578 bonds on the NYSE averaged 77 1/2% of par value. U.S. bonds were at 102.03, utilities at 86.85, and the rest at 67.25. With many foreign, U.S. domestic industry, railroad, and foreign company bonds now at default levels, this average now included a substantial number of class A credit risks whose bonds were at very high levels.
 ?
  NYSE bonds rose almost $1.5 billion in August, over $3.2 billion for the three months through September, to a new total of $40 billion. Prices of high grade bonds were now sufficient to make refinancing and new issues a reasonable proposition again. $400 million in 1 1/2% Treasury certificates drew $3 billion in bids. $750 million in 3 1/4% 4 year Treasury certificates drew $4 1/3 billion in bids. There was plenty of money around for those with the credit to attract it.
 ?
     On September 2, 1932, a N.Y. Times editorial cited the 70% decline in the value of American exports to Germany - our third largest customer - to emphasize the point that creditor nations must lower tariffs and take in goods from debtor nations if debts are to be repaid and the dizzy spiral of tariff increases, quotas and currency restrictions is to be reversed, and international trade is to be allowed to recover.
 ?
     Dr. Butler, Sen. Borah, and Alfred P. Sloan, Jr. (Pres. of General Motors), formed a Committee for Consideration of Intergovernmental Debts, comprised of leaders from business, agriculture, and labor, to attack the war debts. It quickly boasted over 400 members.
 ?
  Germany now drastically increased its tariffs and quotas to prohibitory levels. But European stock markets were booming in response to the Wall Street surge. FDR made a campaign promise to negotiate reciprocal tariff deals to restore foreign trade. 180 economists petitioned Hoover to lower tariffs. The New York Credit Men's Association argued for settlement of war debts as an essential precondition for the reduction of tariffs. Nations straining to pay off war debts could not lower tariffs and permit increased imports. The loss of these war debts would be a small price to pay for the resumption of trade which was essential for economic recovery.
 ?
  The German economy - freed from the burden of reparations payments - had begun to pick up. Textiles and consumer goods sales were improving, but there was still no improvement in heavy industry or exports. The hour was probably already too late, anyway. The Reichstag - torn between its large Nazi and Communist extremes - was dissolved by Von Papen.
 ?
  Latvia, Estonia and Poland requested two year postponements on their debt payments.
 ?

 The collapse of the Republican majority:

 

?
  During the 1920s, the U.S. exported substantially more than 200 million bushels of wheat per year. During the Great Depression years, however, this total had been cut more than in half, with disastrous results for the wheat market and the markets for other grains. Estimated domestic consumption was now about 650 million bushels. But 1933 U.S. production was estimated at just 785 million bushels. Carryover was 363 million bushels, which was about 200 million bushels more than needed for a healthy wheat market. The free world carryover was about 669 million bushels, with worldwide crops running about 4 billion bushels.
 ?

 The production of a bumper world wheat crop was the last straw for American agriculture - and for the Republican Party.
  The reduced U.S. wheat crop was not due to reduced acreage. That had declined just 1% from 1931, and 6% from 1930. Acreage was 19% below the 1927 peak.
 ?
  The estimated cotton crop rose about 4,000 bales in early September, causing a sharp decline in prices from 9.15 cents per pound to 7.85 cents. The total estimated crop of 11.3 million bales was still the smallest since 1922. Lower prices quickly attracted buying from domestic mills that were now producing at a good rate, and the price decline was halted.
 ?
  However, in October, it was reported that, in spite of the smaller U.S. crop, the world wheat crop was still expected to be huge - the biggest since the record 1928 crop. The news of the bumper world wheat crop, and a further sharp devaluation of the pound sterling from $3.70 to $3.30, broke an attempt to "peg" wheat prices at 50 cents per bushel on the Winnipeg market. The bottom dropped out of the Winnipeg market, and prices hit the lowest level on record.
 ?
  Farmers bore the brunt of the decline as the cost of shipping soon amounted to between two and four times the value of the crops in their hands. Because of the comparatively high costs of storage and transportation, such anomalies as wheat selling at $9 per ton and sawdust selling at $10 per ton at Calgary, Canada, became a regular part of the financial news. Wheat in Kansas was at 20 cents per bushel. Prices were the lowest on record all around the world. (Records in Liverpool, England, went back to 1594.)
 ?
  Corn in Iowa was selling at just 7 cents to 8 cents per bushel. Prices in other Midwestern states also dropped below 10 cents per bushel. Corn in storage was worth less than the cost of storage, leading to frantic efforts to export it even in the face of high world tariff barriers. Surplus crops that couldn't be otherwise disposed of were just tossed out on the ground to rot. Market mechanisms had finally become ruthless enough to shove government interference aside and thus "solve" the problem of surplus agricultural carryovers.
 ?
  Due to the low cattle prices and the length of the Great Depression, livestock men were now unable to meet obligations owed to banks. Runs on Nevada banks began to develop. In the beginning of November, Nevada had to declare a bank holiday that lasted until November 12. $2 million was requested from the RFC to meet the emergency.
 ?
  FDR won in a landslide. Republicans lost heavily at all levels of government - ending the Republican party's 70 year reign as the nation's majority party.
 ?
  The financial news had been dominated by the war debt issue for months. Nevertheless, neither candidate had mentioned the war debt issue - arguably one of the two most vital issues (along with tariffs) facing the nation.
 ?

The Great Depression:

 

? 

  The Big Board lost $1 billion in September, $3.3 billion in October, and $1.2 billion in November to a new total of $22 1/4 billion as the autumn business revival yet again failed to materialize. Apathy reigned, as trading was the dullest in five years. Only 29 million shares were traded in October, just over 350,000 shares during the slowest day. Dividend attrition continued, but the markets resisted dropping back to their Great Depression lows.
 ?

     New bonds and notes floated in 1932 equaled less than $1 billion. There had been about $3 billion in 1931 and $5 billion in 1930. Bank clearances dropped 37% to the lowest level since 1915. This was 50% less than the rate before 1929, and 60% below the 1929 level.
 ?
  Business failures and liabilities broke all records - but were declining towards the end of the year. 30% occurred in the first quarter, and only 18.3% occurred in the final quarter, which actually showed an improvement over the final quarter of 1931. Dun & Co. showed 31,950 business failures with $927.5 million in liabilities - obviously still almost all comprised of small businesses.
 ?
  The banking system had been stabilized by the RFC. It had loaned almost $808 million to banks and generally reduced the pressure of bank "runs." Bank failures had declined from almost 3,000 in 1931 involving $1.7 billion in deposits to 1400 in 1932 involving $700 million in deposits.
 ?
  Farm income, according to Agriculture Department figures, had declined from $12 billion in 1929, to $9 1/3 billion in 1930, $7 billion in 1931, and $5 1/4 billion in 1932.
 ?
  Oats at 15 1/8 cents per bushel, rye at 26 1/4 cents, corn at 23 cents, and wheat at 41 1/2 cents hit all time lows. On one day, only one car load of cash oats arrived in Chicago. Cotton dropped below 5 cents per pound, the lowest price on record. Protected by its trade war tariffs, Europe was harvesting the biggest wheat crop in history - about 1 billion bushels. Wheat exports for the third quarter dove to just 14.2 million bushels, compared to 44 million in 1931.
 ?
  The financial bleeding had been temporarily stemmed over the summer by RFC loans of almost $1.2 billion in three months to 4,324 banks, 49 railroads, and 1,226 other business entities, and by Agriculture Department crop loans to farmers of about $64.2 million. $75 million in U.S. 91 day notes were snapped up for an average return of just 14/100ths of 1%.
 ?
  Weekly auto production dove from 14,110 at the beginning of October to 9,605 at the end, when the autumn business revival again failed to materialize. The all important December department store figures showed a sales decline of 23% from 1931. Sears Roebuck suffered its first yearly loss since 1921, and abandoned 28 stores.
 ?
  Foreign trade for the year had declined 35% from 1931 levels, 57 3/8% from 1930, but the decline had accelerated sharply when agricultural exports died in the second half of the year. There were similar results in Europe.
 ?
  Railroad car loadings had recovered back to 650,000 per week, but retreated below 500,000 again by the end of the year. The holiday week saw less than 407,000 car loads. 28.1 million railroad car loads constituted the smallest yearly total on record (records running back to 1918). There had been 37.15 million car loads in 1931. Railroad net income of about $324 million was down about 75% from 1929's record high of over $1 1/4 billion. After fixed charges such as interest and preferred dividends, railroads had a $200 million deficit.
 ?
  Steel production, which had managed to rise as high as 20% of capacity during the summer upturn, quickly dropped back to levels that were the smallest since January, 1921. Only in 1874-1876 and 1883-1885 had steel production ever declined three years in a row. By year's end, it was at just 12% of capacity. Steel ingot production of 13 million tons was the smallest annual total since 1900. The U.S. Steel unfilled orders vacillated narrowly at and just under 2 million tons. U.S. Steel lost $12.7 million in 1932, its first operational loss ever. It would pay just 50 cents on its $1.75 preferred stock, ending 32 years of full payment.

LIVE FISH were seen in the Mahoning River at Youngstown. 
Was all civilization reverting to the jungle?

 The collapse of European governments:
     In October, Von Papen stated the obvious - Germany could only meet her obligations in goods. High tariffs made payment in hard currency or gold impossible by preventing Germany from earning any. Gold was still pouring into the U.S. at a very great rate.
 ?
 

   A 1792 letter from Sec. of State Thomas Jefferson to the British Prime Minister was published in the N.Y. Times. Jefferson pointed out that the British should not complain about late debt payments since British tariffs and navigation laws kept the U.S. from earning the wherewithal to pay such debts.

  "The means of payment constitute one of the motives of purchase at the time of payment [sic - purchase?]. If these means are taken away by the creditor himself he ought not in conscience to complain of a mere retardation of his debt, which is the effect of his own act."

  Montague Norman, Governor of the Bank of England, made very pessimistic remarks about the ability of governments to take the rational actions needed to deal with the Great Depression.
 ?
  Harvard Prof. John H. Williams, speaking at an economic conference in Geneva, noted that the biggest experiment at monetary inflation ever attempted in the U.S. had failed to stop the price decline. The money had just entered bank vaults. He concluded that the Great Depression was a world wide problem that can't be licked by any one nation acting on its own.
 ?
  War debts dominated the international news. Greece and Hungary defaulted. Britain and France asked for debt relief. With no hope of borrowing in the U.S. bond market any more, there was no reason to strive to maintain their credit any longer.
 ?
  The London Economist put it on the line. Unless debtors can sell to creditors, debt payments cannot be met. U.S. tariffs made it much too difficult for debtor nations to sell their goods in the U.S. The financial dislocation deriving from war debts and the tariffs that were imposed in efforts to obtain the financial wherewithal to pay those debts were the fundamental causes of the continuing breakdown in trade. Only by drastically scaling down and settling the entire debt burden could international finance and trade be successfully restored.
 ?
  Belgium joined in asking debt relief.
 ?

 Congress remained adamantly opposed to the compromise of U.S. legal rights on the war debts.
   In December, 1932, Britain pleaded her case for war debt relief. The Great Depression will deepen even further, trade restrictions will increase even further, the Lausanne agreements will be imperiled, if the U.S. refuses to grant relief. The National City Bank Bulletin supported the English contentions. France joined the plea. The pound sterling dropped below $3.15.
 ?
  Hoover was sympathetic. Congress was "unmoved." It refused to compromise U.S. legal rights on the war debts.
 ?
     The N.Y. Times provided editorial support for the British position. If the U.S. doesn't now revise war debts, "--- the force of events, the trend of markets, the laws of trade, will compel it to come to a better mind."
 ?
  Businessmen, bankers, statesmen, all joined in the plea, but Congress hung stubborn. The Hoover Administration again insisted that its debtors make their expected payments, although it again indicated some flexibility on terms. Hoover indicated that if Britain met its December 15 payment, there might be real hope for revision thereafter (when it would be FDR's problem).
 ?
   Premier Herriot of France fell from power as the French deputies voted to default. France then rapidly ran through four additional radical left governments in the next 13 months - a rate of political instability remarkable even for France.
 ?
  Premier Broquiville of Belgium resigned after informing the U.S. that Belgium would default. England and Italy decided to meet just one more payment, due December 15, 1932. Hungary and Poland defaulted.
 ?

  Congress preferred economic war to economic recovery.
   Congress responded with speeches advocating the waging of economic war on errant debtors and the closing of U.S. securities markets to them. What political brilliance! What did they think the Smoot-Hawley Tariff was, an olive branch? And who would buy foreign securities now, anyway?
 ?
  England shipped her entire payment - $95,550,000 - in gold to emphasize the plight of the debtor nations.
 ?

 Merry Christmas:

 

 

"The great obstacles which now stand most in the way of escape from the present conditions are obstacles placed there and maintained there by governments.

 

 

 

 

 ?

 

 

 

   As the Christmas season arrived in this sad year, Sen. Borah spoke to the National Press Club on the Great Depression. The speech was carried by CBS and NBC, and was broadcast in Europe by a German network.
 ?
  The Depression, Borah affirmed, was caused by the policies of Governments.

  "Is there any doubt that this widespread human misery found in every land is due primarily to international policies? --- The great obstacles which now stand most in the way of escape from the present conditions are obstacles placed there and maintained there by governments."
 ?
    "[He appealed for aid for the destitute. He noted the 12 million workers without work,] --- the logical result of political questions which interfere with the normal operation of economic laws."
 ?
  "Since the Great War, governments and leaders in government have proceeded upon the theory that you could amend or repeal economic laws like you do a statute."
 ?
  "The result is all about us - disorganized and disrupted monetary systems, closed markets, trade and commerce dwindling year by year, millions of shipping tonnage laid up and shipbuilding practically at an end. --- If civilization is to be saved, markets must be restored, monetary systems re-established, trade and commerce rehabilitated."

 The Great Depression spared no economic system, no nation, that had been used to enjoying substantial benefits from engaging in international commerce.

 

 

?
   The Soviet Union - faced with a mounting unfavorable trade balance - drastically curtailed purchases of goods for her people and technical services from foreign engineers for her industry. In Moscow, people were subsisting on bread, potatoes, and cabbage. The situation was much worse among the peasantry and in the cities outside Moscow.
 ?
  There was no official unemployment in Russia, but everybody was impoverished. The Great Depression spared no economic system, no nation, that had been used to enjoying substantial benefits from engaging in international commerce.
 ? 
  U.S. foreign trade continued to disappear. The total in the last half of 1932 - as grain exports died - was an astounding 50% below the low levels of 1931 - 75% below the low levels of 1930 - 82% below the levels of the last half of 1929. The yearly declines were 35%, 57 3/8%, and 70% respectively. Substantially more than half these declines were due to volume rather than prices, which showed 11% and 24% declines for the last two years.
 ?

 Happy New Year:

 

 

 

 

 

 

?
   As 1933 began, Germany's release from her reparations payment obligations continued to show noticeable results. German bonds led in a substantial recovery of the general bond averages. Germany had taken the opportunity of the low prices on her dollar bonds to buy up about $750 million of them for about $250 million. Money and private credit in Germany were once again ample, and the expansion of trade and production was expected to follow shortly. German steel production in the last quarter of 1932 rose 10% above the previous quarter, but still remained slightly below the level of the last quarter of 1931. International trade restraints, world wide Depression, and the heavy burden of her private debts, continued to hinder German prospects.
 ?
  Financial London responded hopefully to the prospect of a solution for the war debt problem. English banks reported a great pileup of funds. A N.Y. Times columnist pointed out that the war debts, international trade restraints, and agricultural problems still remained, and had to be dealt with.
 ?
     The National Industrial Conference Board blamed weaknesses in the banking system for the contraction of credit that worsened the business decline. The banking system, which was composed of independent but actually interrelated banks, was obviously defective (and had been since the 1830s). It had been forced to respond to sharp declines in securities prices by reducing financing levels so as to retain sufficient liquidity to deter or handle bank "runs."
 ?
  Somewhat inconsistently, however, the Board's study showed that 86.4% of businesses had NO bank credit problems, 38.5% were self financing and didn't even use bank funds, and only 13.6% had been refused bank credit. (No Canadian banks had as yet failed during the Great Depression.)
 ? 
  But there was no denying the systemic weakness. Even in 1926 and 1927, before the Great Depression, there had been 956 and 662 bank suspensions respectively, compared to1,345, 2,298 and 1,453 in 1930, 1931 and 1932 respectively. There had been over 20,000 banks, but now there were about 18,000. And now, complete collapse was at hand.
 ?

  The available supply of gold was sufficient for financial needs as long as trade restrictions are not so high as to force settlement of financial obligations by exporting gold instead of goods.
   20 economists wrote a joint letter to FDR. They included Broadus Mitchell (U. Pa.), Davis R. Dewey (MIT), E. W. Kemmerer (Princeton), J. F. Ebersole (Harvard), and B. M. Anderson (Chase National Bank). The foreign trade problem must be resolved to end the Great Depression, they wrote. Reciprocal lowering of tariffs and prompt settlement of inter allied debts and maintenance of the gold standard would stimulate international trade and lead to worldwide recovery.
 ?
  They stated their opinion that the available supply of gold was sufficient for financial needs as long as trade restrictions are not so high as to force settlement of financial obligations by exporting gold instead of goods. Confidence had fallen so low even in creditor nations that it was impossible for them to use their existing monetary gold to expand credit.
 ?
  Known world production of gold in 1932 was almost 24 million fine ounces, valued at almost $1/2 billion ($1 at 23.22 grains pure). Production had increased 7.8% over 1931 to an all time record. In addition, the devaluation of the pound sterling - increasing the number of pounds paid for a given weight of gold - had stimulated the inflow of gold from ornaments and private hoards - especially from Russia and India, as well as from England - equivalent almost to one year's world production. Monetary gold had never been so plentiful.

  The Great Depression could in no way be attributed to insufficient supplies of money.

 The Senators didn't explain how France was supposed to earn the wherewithal to pay her debts when U.S. tariffs stood at prohibitory levels.
   The U.S. Senate debated the French war debt default on January 4, 1933. Senator Borah alone called for world wide debt revision and financial and trade reform.
 ?
  Other Senators blasted France, asserted that such debt revision would leave the U.S. to foot the bill for the Great War, and reduce U.S. purchasing power. They didn't explain how France was supposed to earn the wherewithal to pay her debts when U.S. tariffs stood at prohibitory levels. The Senators lauded U.S. generosity in extending loans and aid. They rightly blamed France for greedy territorial and financial demands during the Armistice negotiations at Versailles - but that was yesterday's blunders.
 ?

 France and England had at last recognized their policy errors, by U.S. political stupidity remained in full force and effect.
  However, the war debts were one of the fundamental causes of the Great Depression, and a discharge in bankruptcy was now the only way out. At least, at the Lausanne Conference, Britain and France had recognized the error of their political policies and demonstrated a willingness to correct their past errors. But U.S. political stupidity remained in full force and effect.
 ?
  Sen. Borah now called for a devaluation of the dollar, and caused a short, sharp flight from the dollar. There was a steady sprinkling of demands that inflation be resorted to as a "cure" for the Great Depression.
 ?
     The Preparatory Economic Commission for the London Conference urged return to the gold standard, abolition of exchange controls, the ending of quotas and trade prohibitions, and tariff reduction. They called for "settlement" of war debts to relieve world finance of this onerous burden. Ogden Mills, Sec. of the Treasury, also called for war debt settlement and removal of trade restrictions. Support for these views came from many others.
 ?
  FDR, through Pres. Hoover, invited Britain to talk about her war debts after FDR took office on March 4, 1933.
 ?
  But events would no longer abide by such delays in dealing with the causes of the Great Depression. Chancellor Schleicher quit, and Pres. Hindenburg again sought a new Cabinet. Adolph Hitler became Chancellor at the end of January. German bonds broke sharply lower due to uncertainty over Hitler's attitude towards these privately held debts. The Reichstag was dissolved and new elections were ordered for March 5.
 ?
     Economist Max Winkler pointed out that England had had to cancel war debts owed to her after the Napoleonic War. Debtor nations couldn't pay those debts, and economic revival was slow after that war.
 ?
  By the early 1820s, political disturbances broke out in several European nations. In 1823, when the war debts were canceled, and tariffs were reduced on a reciprocal basis, the historic 19th century advance of European prosperity got rolling, laying the foundation for England's great Victorian Age.
 ?

The Great Depression had been permitted to fall deep enough, and drag on long enough, to take its ultimate political toll.
   Although the debate continued, it was already much too late. The World Chamber of Commerce renewed its call for debt settlement, tariff reduction, stable money, elimination of reparations, and elimination of trade quotas and other trade distortions. In short, all the evils emanating from the Great War had to be eliminated to permit economic prosperity.
 ? 
  By the end of February, FDR was reported preparing for the upcoming debt talks. However, Japan had quit the League of Nations in response to a unanimous censure of her actions in China, and Hitler tightened his grip on Germany as Hindenburg became seriously ill. Nazi toughs were armed to act as police in Prussia. German and Japanese bonds plummeted to default levels. The Great Depression had been permitted to fall deep enough - and drag on long enough - to take its ultimate political toll.
 ?

The Great Depression led logically to the destruction of public confidence not only in the physical and financial aspects of the economy, but in democratic government as well.

   Dr. Butler wrote to Sen. Reed Smoot, Chairman of the Senate Finance Committee. He reiterated that the Great Depression was an international problem stemming from the Great War. That war had in four years destroyed the financial capital that had taken the world two hundred years to accumulate. The normal lines of world trade, established since the Napoleonic Wars, had been destroyed. Abnormal war demands had distorted the mix of productive facilities. In a world devoid of economic growth, he feared the impact of automation.
 ?
  The aftereffects of the Great War placed severe strains on the international mechanism of credit and exchange and spurred a cycle of increased governmental expenses, borrowing and interest costs that resulted in rising tax burdens throughout the world. These events led logically to the destruction of public confidence not only in the physical and financial aspects of the economy, but in democratic government as well.
 ?
  Butler called for reductions in government costs so that budgets could be balanced without additional taxes, and tax reform to eliminate unfair tax burdens (which he didn't here explain). But nothing will succeed, he concluded, until intergovernmental debts are settled. These debts can only be paid by goods and services, or by gold. If tariffs, quotas, exchange controls, and other trade restrictions exclude international sale of goods and services, there is not enough gold to service these debts. Thus, trade barriers should be removed or lowered by means of reciprocal trade agreements.

  The debts and reparations obligations were already as good as dead, but the trade barriers remained.

  Butler also saw the need for the U.S. to join the International Court and work with the League of Nations to try to limit excesses of political and economic nationalism and to encourage international cooperation. Unemployment insurance and limitations on interlocking directorships were also suggested to provide a rational basis for the restoration of the confidence that alone could restore prosperity.
 ? 
  Cordell Hull began conferences with French and English officials on the debt problem - but the Reichstag was already burning.
 ?

Markets were simply too low to drop any further.
   Germany again reported a surplus of grain - encouraged by her tariff protections - which she tried to sell on the glutted and depressed world export market. Nevertheless, the grains and cotton continued trading between 10% and 20% above their Great Depression lows.
 ?

 The collapse of the banking system:

 

 

 

 

 

 

 

 

 

?
   The nation's weak banking system was again swept by crises, with widespread closings hitting Atlantic City, New Orleans, Chicago, Detroit, Akron, Dayton, Cleveland, and Indianapolis. However, stocks were now in "strong" hands, of investors who had bought for the long term. Crisis news now brought only brief declines followed by quick recoveries. Actually, there wasn't much further the market could fall.
 ?
  Congress acted quickly, enacting authorization for the Controller of the Currency, with the Treasury Secretary's approval, to aid failing and temporarily embarrassed National Banks. But state banking systems began to crumble.
 ?
  Bank holidays and/or limitations on withdrawals were imposed in 32 states. By Inauguration Day on March 4, approximately 3,000 of the nation's 18,000 banks were operating under some form of restriction. The day after, the remaining states joined the bank holiday.
 ?
  Currency in circulation surged towards $7 billion, as banking facilities disappeared. Dollar transactions were suspended in London, Paris, and other world financial centers. The N.Y. Times business index dropped like a stone to new lows. Detroit, in its fourth week without banks, saw a 60% decline in retail trade. Auto production dropped to 10,633 per week.
 ?

 It was not government policy stupidity, but "unscrupulous money changers," that FDR blamed for the Great Depression.

   FDR blamed the Depression on the practices of "unscrupulous money changers" - and thus added impetus to the many noxious myths that would encumber understanding of the Great Depression. Bank failures proliferated widely.
 ?
  FDR closed the National banks and then devalued the dollar and removed its gold "peg." Gold was called in, and it became a crime to hold gold. Banks rushed to join the federal system.

  FDR would now try - and fail - to inflate his way out of the Great Depression. He would try to mitigate its effects through redistributionist, command economy, and cartel-like price fixing policies. These policies would join the continuing trade war in substantially hindering economic recovery. Indeed,  recent scholarly analysis by UCLA economists Lee E. Ohanian and Harold L. Cole attributes as much as 60% of the failure of recovery during the New Deal period to New Deal cartel-like price and wage fixing policies - a result that no longer seems controversial given the disastrous failures of command economy policies during the rest of the 20th century.
 ?
  However, New Deal financial reforms in banking, securities and real estate markets would prove a source of great financial strength in the years after the Great Depression.

 World trade and U.S. business plummeted to their ultimate Great Depression lows.
   Hitler won his "election," and the Weimar Republic was officially terminated, as the Nazis swept into full power. Financial dislocation was now total throughout the world. All credit was suspect and only gold remained acceptable as a medium of exchange in international markets.
 ?
  The rapid decline in world trade now reached new lows, and the N.Y. Times business index plummeted to its ultimate Great Depression low - both reflecting the drastic impact of the temporary loss of most financial facilities.
 ?

 The Great Depression was called "the last battle of the World War."
   France now lost gold rapidly and England and the U.S. gained. England's gold reserves were now at the highest level since 1928. The U.S. practically ceased gold sales. The dollar vacillated wildly as doubt about its true value flowed across the world, cutting down its utility as a medium of exchange.
 ?
  As trade diminished, wide fluctuation occurred on comparatively small dollar transactions. Stock and commodity prices surged upwards, and vacillated wildly, in response to the sharply lower and erratically vacillating purchasing power of the dollar.
 ?
  On April 19, 1933, the U.S. officially left the gold standard. The bond market tumbled temporarily, then recovered, as all stock and commodity markets rose, seeking their value in terms of the reduced dollar. The economy boomed briefly as businesses rushed to make inventory purchases before the purchasing power of the dollar could decline further. Steel production surged to 35% of capacity.
 ?
  Professor James T. Shotwell, Director of the Columbia University Division of Economics and History, called the Great Depression "the last battle of the World War" in a report to the Trustees of the Carnegie Endowment for International Peace. The Great War deranged world credit, and post war political follies accentuated the impact. Remedies must be political as well as economic. Borrowing that had not been for future benefits, but for past expenses, had over strained credit facilities, and "mortgaged the future." Recovery of confidence and the healthy expansion of credit are made impossible by these debts.
 ? 
  American tourists in Europe streamed home, fearful of being stranded due to the loss of the purchasing power of the dollar. Americans working in Europe, who had been paid in dollar checks on Friday and had not changed them into local currency before that weekend, suddenly found themselves poorer when they went to exchange them the following Monday.
 ?

 As always, monetary inflation, after an initial appearance of success, failed to fulfill expectations.
   In May, a tariff truce treaty was signed by the U.S., England, France, Germany, Italy, Japan, Belgium, and Norway, and a conference on international trade was set for June 12. Much too little, much too late.
 ?
  In June, England made only a $10 million installment on its scheduled $76 million war debt payment and again appealed for debt revision. France again defaulted. FDR - heavily dependent on isolationist elements in Congress for passage of his New Deal experiments - rejected pleas to join international efforts to address war debt and trade war problems. He refused to make international agreements designed to restore world trade until domestic policy had time to bring recovery through the process of monetary inflation. 
 ?
  The London trade conference was imperiled. No one explained how the U.S. could recover if the world did not. International trade remained at low Depression levels through the middle of 1939. As always, monetary inflation - after an initial appearance of success - failed to fulfill expectations.
 ?

The 1933 wheat crop of about 502 million bushels, the least since 1896, was 125 million below domestic needs, which was just as well because there was no longer an export market.

 

 

?
  

   Drought plus low prices, continued to "solve" the agricultural surplus problem. The 1933 wheat crop of about 502 million bushels - the least since 1896 - was 125 million below domestic needs, which was just as well because there was no longer an export market. Foreign trade practically disappeared. Competitive currency devaluations roiled international commerce. The corn crop of 2.5 billion bushels was the smallest since 1913. The total grain crop was the smallest since 1903.
 ?
  Agricultural commodity prices surged sharply higher, driven by the devaluation of the dollar and the drastically smaller crops. Steel production surged above 50% of capacity. Monetary volatility was reflected in acute volatility in securities market prices.
  ?
  In July, the U.S. finally moved through the Federal Reserve Bank to curb the wild fluctuations in the dollar, but still left it un-pegged. England switched bonds from dollars to pounds as dislocation of international finance continued, and the dollar lost its status as a hard currency.
  ?

 War debts and reparations were effectively ended, but the complex trade war system of tariffs, capital controls, quotas and other trade restrictions remained to frustrate the revival of international trade.
   At the end of 1933, there was still no formal debt settlement. However, most of the debtor nations sent, at most, only token payments. War debts and reparations were effectively ended, but the complex trade war system of tariffs, capital controls, quotas, licensing requirements and other trade restrictions remained to frustrate the revival of international trade.
 ?
  In the United States, as elsewhere around the world, the economic bounce off the Great Depression bottom would be severely limited and widely disappointing. Soon, the trade war would for some years be joined by  new government policy blunders - command economy and cartel-like price fixing experiments - as overwhelming obstacles to recovery.
 ?
  Some effort to poke holes in the trade barriers would begin in 1935 when Sec. of State Cordell Hull began to negotiate reciprocal trade agreements. It would not be until 1938 that these efforts would reach any significant proportion. However, broad scale removal of trade restraints would remain largely beyond the capacity of democratic statesmanship until the passions of WW-I and its aftermath - the Great Depression - were drowned in the blood of the Second World War.

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Copyright 2001Dan Blatt