DESCENT INTO THE DEPTHS (BEGINNING 1932):

The Collapse of WW I Financial Obligations

FUTURECASTS online magazine
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Vol. 3, No. 7, 7/1/01.

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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)

VII.
Collapse of governments (1932-1933)

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

  Pres. Hoover's annual message to Congress - presented in December, 1931 - provided an accurate picture of the world's economic and financial problems, and the increasing number of political disturbances they spawned.

  "These disturbances have many roots in the dislocations from the World War. Every one of them has reacted upon us. They have sharply affected the markets and prices of our agricultural and industrial products. They have increased unemployment and greatly embarrassed our financial and economic stability.
 ?
  "As our difficulties during the past year have plainly originated in large degree from these sources, any effort to bring about our own recuperation has dictated the necessity of cooperation by us with nations in reasonable effort to restore world confidence and economic stability."

  Hoover then noted "--- our self-contained national economy, with its matchless strength and resources [which] would have enabled us to recover long since but for the continued dislocations, shocks, and setbacks from abroad."

  But his conclusion was remarkably disconnected from the laudably perceptive analysis above.

  "If we can put our financial resources to work and can ameliorate the financial situation in the railways, I am confident we can make a large measure of recovery independent of the rest of the world. A strong America is the highest contribution to world stability."

  He concluded with the now usual blast at the existence of an "unjustified lack of confidence."

 The spring, 1932, revival:

 

 

 

 

 

?

   The short interest in Auburn Motors reached 25% of the float - in I. J. Case it was 50%. The total short interest reached almost 2% of NYSE shares. It had not exceeded 1/6th of 1% during the '29 Crash.
 ?
  The annual "spring business revival" stock market boom was on. Steel production in January, 1932, rose each week from a low of 21% - reaching 28% of capacity by the end of the month. Cotton prices stayed well above 6 1/2 cents per pound on good demand, and other commodities were similarly firm at their low price levels. But as the moment approached for the undoubtedly terrible year end report for U.S. Steel, the short interest grew huge and premiums for borrowing U.S. Steel shares grew to 1/2 point ($50 per 100 shares) per day.
 ?

 Bethlehem Steel omitted its dividend and was quietly replaced on the N.Y. Times 50 Stock Average by National Steel so the dividend omission wouldn't hurt the "yield" average too badly.

 

By January, 1932, wholesale and department store sales were declining sharply, indicating that the Great Depression was finally seriously hurting middle class America.

 

 

The RFC would lend to banks on the basis of lower grade securities, to ease the pressure on banks to remain liquid for fear of bank runs.
   It was the worst in the company's history. The common stock quarterly dividend was cut in half, to 50 cents, as U.S. Steel lost almost $50 million after dividends. Bethlehem Steel omitted its dividend and was quietly replaced on the N.Y. Times 50 Stock Average by National Steel so the dividend omission wouldn't hurt the "yield" average too badly.
 ?
  General Motors reported that it had lost almost $20 2/3 million due to the devaluation of the pound sterling, Woolworth had lost $317,669 from the devaluation of the pound, and other U.S. businesses had lost many millions more. Nevertheless, Woolworth's earnings were a company record high, as the popular discount chain store proved depression proof. Department stores and tobacco did well in 1931.
 ?
  Although there had been broad immediate retrenchment with respect to big ticket items like houses and autos, the vast majority of Americans were still working full time, and their wage or salary cuts had been offset by the decline in the cost of living. Until the last half of 1931, the relatively minor declines in retail volumes indicated that most Americans were still able to maintain their overall living standards.
 ?
  However, holiday sales had been disappointing, and by January, 1932, wholesale and department store sales were declining sharply.
 ? 
  1 1/2 million railroad workers finally accepted the 10% wage cut. This was far less than the decline in the cost of living, so they were still doing very well. N.Y. City quickly floated $100 million in short term bonds at 6% - the highest interest rate that the city had had to pay since WW I - to cover its budgetary problems. Low interest rates don't necessarily translate into easier monetary conditions. Additional borrowing was predicted, and the banks provided a $150 million short term credit line.
 ?
  Hoover signed the Reconstruction Finance Corporation Act, which provided $2 billion to aid banks, railroads and other businesses and financial institutions. The RFC would lend to banks on the basis of lower grade securities, to ease the pressure that had been forcing banks to remain very liquid for fear of bank runs.
 ?
  But total railroad earnings for 1931 were only $89 million after fixed charges such as interest and preferred dividends - the smallest amount since 1897. Led by the railroads and steels, the "spring business revival" rally was nipped in the bud, and the Big Board wound up the month of January with a small further loss of more than $316 million, to a new total of over $26 1/3 billion.

 Reparations, war debts and tariffs:
   Sir William H. Beveridge, Director of the London School of Economics, broadcast over the WABC Columbia network from London on January 10, 1932.
 ?

 

 

Recovery no longer depended on economic events. Only political relief could end the Great Depression.
   As long as the nations cling to economic nationalism, he stated, the World Depression cannot be cured. He labeled reparations and war debts "the continuation of the War." They must be eliminated along with the heavy tariffs. Unlike ordinary international investments that leave debtor nations better able to pay the costs of their debts (when the debt is for investment purposes rather than for consumption purposes), war debts, he asserted, stem from "destructive expenditure which impoverishes."
 ?
  Beveridge pointed out that the U.S. and France were now creditor nations but still adhered to protectionism, making it difficult for debtor nations to export enough goods to them to service their debts. This left only gold for debt payments, and there simply wasn't much gold left outside the U.S. and France. Moreover, he pointed out, the fall in prices had made all debts more burdensome to the debtors.
 ? 
  War debts aren't defaulted like bad personal debts. They are between governments, and failure to pay becomes an internationally unsettling affair. The Depression had been the result of forces created by the Great War and was postponed until 1929 solely because the U.S. had lent abroad more than she was due to receive. Thus, he concluded, recovery no longer depended on economic events. Only political relief could end the Great Depression.
 ?
  The German financial paralysis affects the whole world. He urged people to think international.
 ?
  The Chairman of Barclay's Bank in London also put the blame for the Depression on reparations, war debts, and the high tariffs of the creditor nations.
 ?

 Since the Tariff Act, there had been 6 general upward tariff revisions in Europe, 19 limited and 5 general upward tariff revisions in South America, plus quota limitations, exchange controls and gold embargoes.

  An accusing finger was pointed at the Smoot-Hawley Tariff by Department of Commerce figures.
 ?
  Since passage of that tariff, there had been six general upward tariff revisions in Europe, nineteen limited and five general upward tariff revisions in South America, plus quota limitations, exchange controls and gold embargoes. The Commerce Department pointed out:

  "--- under the highly interdependent world economic system of today, the repercussions of trade-control measures or financial dislocations of any important country are so widespread as to lead to similar or defensive reactions on the part of other countries."

The increase in currency in circulation was almost entirely in paper currency rather than in gold coins or gold certificates, indicating that great confidence remained in the credit of the Federal Government.

 

The nation was once again paying a sharp price for the dysfunctional banking policies that had existed since the Administration of Andrew Jackson.

 

 

 

 

 

 

   Bank failures caused currency "hoarding," and currency "hoarding" caused more bank failures. Currency devaluation caused gold "hoarding," and gold "hoarding" caused further currency devaluations.
 ?
  Hoover estimated that $1.3 billion in U.S. currency had been withdrawn from the banking system and "hoarded." But with banks failing and credit hard to come by, larger cash reserves were necessary for the ordinary transaction of business as well as to meet the increased danger of emergencies. It is impossible to estimate how much of the increase in currency in circulation had been due to hoarding and how much had been due to the reduction in available sources of credit for all but the strongest credit risks. Deposits in postal savings banks rose sharply, especially in areas where most or all private banks had failed.
 ? 
  With $2 billion in RFC hands available to aid those banks threatened with "runs," it was hoped that the increases in the currency in circulation could be ended. Within the U.S., there was little increase in the circulation of gold coins or gold certificates. The circulation increase was almost entirely in paper currency, indicating that great confidence remained in the credit of the Federal Government.
 ?
  Loss of confidence in banks was not irrational. The nation was once again paying a sharp price for the dysfunctional banking policies that had existed since the Administration of Andrew Jackson. The danger of bank failures was all too real.
 ?
  There were over 2,500 bank failures in 1931, leaving some communities without any banking services. Another 342 failed in January, 1931, and 122 failed in February. However, as RFC support and a Glass-Steagall Act succeeded in strengthening the banking system, failures were cut to just 45 in March. 28 succeeded in reopening. The Federal Reserve Bank also assisted this effort for member banks by extending the rediscount privilege to billions of dollars of assets that were previously not acceptable as security for reserve credit.
 ?
  These were additional extraordinary and effective policy responses made by the Hoover Administration in its efforts to deal with the Great Depression. However, they were only domestic - and the Great Depression was international.
 ?

 The failure of the spring business revival:

 

 

?
   In February, 1932, steel production hit 29% of capacity and then slipped back to 28% as there didn't appear to be any spring business revival at all. The U.S. Steel unfilled orders backlog dropped to a new record low of just under 2.65 million tons. The copper surplus of 780,000 tons equaled about a nine months supply. Railroad maintenance was cut to the bone. Railroad cars not in use were left to rot. Steel orders from the autos and railroads plummeted.
 ?
  Commodities were slipping again. Zinc, copper, rubber, hides, corn, oats, lard, cocoa and sugar hit all time lows.
 ?

 "Everyone was selling." Yet the total number of shareholders increased steadily to break record after record.

 

 

 

 

 

 

 

 

 

 

N.Y. Times columnist Alexander Noyes reemphasized his oft repeated convictions that the market decline was the result of "unreasoning" panic which drove market prices below "intrinsic values" - whatever that might be.
   Stock prices slipped lower in trading that diminished almost to a standstill. Brokers' loans dove to just over $512 million at the beginning of February, down 94% from the 1929 high. The loan ratio was now less than 2% of NYSE values. But brokers were financing remaining margin accounts out of their own cash reserves.
 ?
  "Everyone was selling." Yet the total number of shareholders increased steadily to break record after record. The trend towards "reverse split ups" accelerated as corporations reduced "par value" and consolidated their shares. The short interest in January, 1932, rose by 758,000 shares to a new total of over 3.6 million shares.
 ?
  The stock market began February with eight successive daily declines into new record low territory. Investors were ignoring yields ranging from 8% to 15% in expectation of further dividend cuts and omissions.
 ?
  Then, on February 11, news of the Federal Reserve Bank extension of discount privileges panicked the shorts and drove many to cover. "Stop loss" orders placed by shorts to protect their profits were quickly reached and pushed the buying upsurge. The small volume of trading on the stock market enabled such influences to push values sharply - in this case in an upwards direction.
 ?
  Bonds - many of which now qualified as reserve securities for the first time - rose sharply. The next day, Union Pacific Railroad voted to continue its $10 dividend. The value of the stock jumped 8 points (10%) aiding the upturn. Bull speculators and the ever present bargain hunters reappeared in some volume. All around the world, markets that were considered "oversold" rose sharply. Commodities also joined the upsurge.
 ?
  In the short 3 hour Saturday session the next day, almost 2 2/3 million shares traded as the bears bought frantically to cover their short positions. A flood of margin calls went out on short margin accounts. Many "little bears" were driven under when they failed to meet the calls and their accounts were liquidated by buy orders thrown on the market at the new high prices.
 ?
  U.S. Steel bounced from 37 almost to 50 in two days. Employees recently given subscription rights at 40 rushed to avail themselves of their windfall, earning a reported $1.8 million.
 ?
  The "confidence game" was shifted into high gear by this impressive surge that added 20% to the value of Big Board stocks in just two days. N.Y. Times columnist Alexander Noyes reemphasized his oft repeated convictions that the market decline was the result of "unreasoning" panic which drove market prices below "intrinsic values" - whatever that might be.
 ?
     Unfortunately, confidence cannot be built on nothing. There was news of further cuts in steel orders from autos and railroads. Steel production dropped to 25% of capacity with further large decreases in the U.S. Steel unfilled orders backlog. January auto production was reported as the smallest since 1922.
  ?

 The unswerving and precipitous character of this decline in international trade remained one of the most impressive features of the Great Depression decline.
   World trade had practically disappeared. British imports in January, 1932, were down $72 million below 1931. German exports in January were the lowest since 1926 (when France began her austerity program), and her imports were the smallest since 1898. German unemployment increased to ridiculous levels. One out of three workers were reported unemployed. German steel production for domestic consumption was only 10% to 15% of her 1927 rate. French foreign trade was also off sharply - the smallest since 1926.
 ?
  U.S. monthly exports and imports were the lowest since 1910 - only $150 million and $136 million respectively - continuing their sharp, inexorable, decline. The unswerving and precipitous character of this decline remained one of the most impressive features of the Great Depression decline.
 ?
  The gold problem was getting increasingly difficult. The devaluation of sterling hurt many nations. Paper money lost much of its charm outside the U.S. Nobody wanted to get hit by another devaluation. Only gold could be relied upon.
 ?
  Currencies backed by gold were flowing home accompanied by demands for gold. Gold was quickly becoming the sole medium of exchange acceptable in foreign exchange transactions. While this could not be prevented short of abandoning the gold standard, the holding of gold by individuals was discouraged by the refusal of U.S. banks to ship gold in the form of coins as of the beginning of February, 1932.
 ?
  Ivar Krueger committed suicide on March 14, 1932. He had stretched his credit to the breaking point and was destroyed by the Great Depression and currency devaluations. Krueger and Toll securities plummeted to default levels. The scandal involved $300 million. The similar collapse of Samuel Insull's public utility holding company empire on June 6, 1932, involved losses in excess of $225 million.
 ?

The "discharge in bankruptcy" of debts denominated in devalued currency:

 

 Currency devaluations provided a "discharge in bankruptcy" - a payment of debts by means of a "capital levy" - a "monetization of debts." However it is described, the resulting decline of capital and loss of purchasing power is a powerful automatic austerity measure imposed by markets suffering from a loss of confidence in currency.

 

 

 

 

 

 

  

 

 

?
   By the end of March, 1932, Britain had paid back $550 million of the $650 million emergency loan borrowed from N.Y. and Paris. Since WW I, French currency devaluations had cut the value of debts payable in francs by 80%, German inflation had practically wiped out debts payable in marks, and now debts payable in pounds sterling had been cut by between 25% and 35% by the devaluation of the pound.
 ?
  This was a "discharge in bankruptcy" - a payment of debts by means of a "capital levy" - a "monetization of debts." However it is described, the resulting decline of capital and loss of purchasing power is a powerful automatic austerity measure imposed by markets suffering from a loss of confidence in currency.
 ?
  It always succeeds in restoring equilibrium at some lower level of economic activity. However, in the 1920s, when the Weimar government resorted to monetary expansion to make up for the loss of purchasing power - to "maintain liquidity balances" and prevent economic decline - the result was skyrocketing inflation  and economic depression at the same time, and the destruction of its middle class.
 ?
  As always, inflation didn't prevent depression. After a short period of pleasant results, it caused depression. A much milder form - termed "stagflation" - would afflict the U.S. in the 1970s.
 ?
  Of course, reparations and war debts were payable in gold or hard currencies like the dollar, and so were made much more burdensome by debtor nation currency devaluations.
 ?
  The pound sterling was depressed by the purchases of hard currencies needed to meet Britain's hard currency obligations. When these obligations were repaid, sterling began to rise. England had not attempted to "maintain liquidity balances" by monetary expansion. The pound leaped 20 cents to approximately $3.70, and vacillated erratically as it sought its level of intrinsic value. The English bank rate was reduced in three steps from 6% to 3 1/2% as financial strength returned. The decline in market discounts led the official rate down by about a full point.
 ?
  20 leading U.S. corporations were reported to have had to establish $26 million in reserves to cover foreign currency losses.
 ?
  The English budget failed to contain any provision for payment of the $171.5 million due on U.S. war loans in the next year. In December, 1932, she would make her last full payment, almost the only one of the WW I Allies that hadn't defaulted by that time. Bringing her "emergency" tariffs to an end, England doubled her regular tariffs. The steel tariff was set at 33 1/3%, luxury tariffs at 25% to 30%, building materials at 15%, and many manufactured items at 20%.
 ?
    The Farm Board allocated 40 million bushels of wheat to feed the impoverished. Farm Board holdings were up 25% from 1931, to a new total of 207 1/3 million bushels. But cotton exports and domestic consumption reached very high levels. In February, cotton exports were the largest since 1927, and since 1915 before that.
 ? 
   News of relief measures and a good portion of hope offset continued news of further declines in world and national trade. The RFC loaned substantial sums to the hard pressed railroads and brought the stream of bank closures to a virtual halt. There was a substantial decline in the amount of currency in circulation as the nation's credit mechanism was restored.
 ?
  These financial moves restored some confidence, temporarily pushing domestic bonds and preferred stock substantially above their Great Depression lows. But the economic ground was still continuing to crumble underfoot.
 ?

 Retailers were now hit with a sharp increase in installment credit defaults for the first time in the Great Depression, and this pool of credit began to dry up also.
   The Big Board picked up $1.2 billion in February, but the steady drumbeat of bad news and the prospect of horrible first quarter earnings reports in April forced resumption of the decline. It lost over $3 billion in March, to a new low of $24 1/2 billion. The N.Y. Times general business index continued to plummet to one new low after another as the spring business revival completely failed to materialize.
 ?
  Retailers were now hit with a sharp increase in installment credit defaults for the first time in the Great Depression, and this pool of credit began to dry up also. Stores feared that Easter would leave them with large inventories on hand. The Great Depression was now obviously affecting living standards on a broad scale.
 ?
  Commentators blamed the reduced purchasing power on devalued foreign currencies, the tariff war, and the breakdown of the machinery of international credit.
 ?
     Confidence was gone. No more international loans could be floated and debtor nations were forced to cut purchases in order to balance payments.
 ?

 The plunge to the bottom:
   At the beginning of April, 1932, stocks were sent tumbling by the imposition of new taxes on stock transfers and dividends, and the imminent release of first quarter earnings reports.
 ?

 The domestic bond index plunged to its lowest level on record (running back to 1913).
  On April 26, U.S. Steel omitted its quarterly dividend on its common stock and went into the red almost $20 million to pay its regular preferred dividend. Its loss, before its preferred dividend, was over $1.1 million for the quarter. U.S. Steel unfilled orders declined to less than 2.5 million tons. The quarterly loss for Bethlehem Steel was a record - almost $3.7 million.
 ? 
  Pennsylvania Railroad "deferred action" on its dividend. General Motors slashed its dividend in half as total auto production in the U.S. for the first quarter of 1932 totaled only 25% of the 1929 total. Steel production dropped to 21% of capacity. Railroad car loadings dropped about 25%, with net income down about 44%, from 1931. Railroad dividends were severely slashed. N.Y. Central omitted its dividend for the first time since 1870.
 ?
  What is the "intrinsic value" of stocks in these circumstances?
 ?
  As even the most important corporations began omitting dividends, the N.Y. Times 50 stock average ceased giving the average yield figure for the 50 leading stocks. Brokers' letters no longer waxed "indignant" over stock declines and the "slaughter of values." They now just gave the facts -- the ever worsening facts -- and let the markets speak for themselves.
 ?
  Almost $4.2 billion was slashed off the Big Board in April, to a new low of over $20.3 billion. One of the worst monthly percentage losses of the Great Depression. The percentage loss in May would be even worse. Bonds and preferred stocks joined in the sharp retreat. The domestic bond index plunged to its lowest level on record (running back to 1913).
 ?

  Corporate leaders now admitted they could not see any definite signs of future improvement, and refused to make any further optimistic predictions solely on the basis of wishful thinking.

 

 

After two years of futile "confidence game" tactics, they were now worried about a "credibility gap."

   Commodity prices were seriously unsettled. May corn hit a 33 year low of 29 1/8 cents per bushel - oats hit 20 7/8 - rye 36. July wheat hit 55 1/2 in spite of a drought, a winter crop estimated at 42% less than the 1931 crop and 17% below the 1924 - 1928 average - and reports of Russian PURCHASES of five cargoes of Canadian wheat and one shipload of Australian wheat. But the total world wheat carryover was 400 million bushels - up 65 million from last year.
 ?
  Copper was at 5 1/4 cents per pound. Cattle prices in May hit the lowest prices in a generation.
 ?
  The news had for some time been full of huge relief efforts. The American people had, as always, proven more than generous. But now, the relief agencies were being overburdened, and many were near collapse.
 ?
  Even the reports from the "Depression proof" stocks were now bad. By the end of May, tobacco, dairy, food, drug, and utility corporations were caught up in the business debacle. The N.Y. Times business index continued an eight week straight dive into new low ground. General Electric cut its dividend from 25 cents to 10 cents. Cities Service omitted its dividend.
 ? 
  Corporate leaders now admitted they could not see any definite signs of future improvement, and refused to make any further optimistic predictions solely on the basis of wishful thinking. After two years of futile "confidence game" tactics, they were now worried about a "credibility gap."
 ?

 The loss of more than $8 1/3 billion was more than 33% in just two months.
   The NYSE again lost almost $4.2 billion in May to a new low of just over $16.1 billion. The two months loss of more than $8 1/3 billion was more than 33%. The brokers' loan ratio of 1.68% was also a record low since records began being compiled. The N.Y. Times average of 40 domestic bonds hit an all time low of 51.94 - down 30 points from 1931. U.S. Steel common stock hit 25 1/4 - lowest since 1907. The same for AT&T at 88.
 ?

 U.S. exports and imports for the first quarter of 1932 plummeted 20% below the last quarter of 1931 - and 33% below the first quarter of 1931.
   The Federal Reserve continued buying bonds to release cash into the economy, but to no avail. With no profits to be made, no one had any use for this paper. Liabilities of bankrupt businesses hit a record level of $90 million per month for the first quarter, and then rose to $101 million in April.
 ?
  In March, the Farm Board decided to sell its 150 million bushels of wheat. There was need to make room for storage of the next crop. In May, the Farm Board decided to sell its 650 thousand bales of cotton "--- to end uncertainty."
 ?
  Auto production rose sharply towards the end of April, but auto registrations were still 50% below 1931 levels and auto and truck exports were practically nil. U.S. exports and imports for the first quarter of 1932 plummeted 20% below the last quarter of 1931 - and 33% below the first quarter of 1931. In April, trade was 36% below April 1931 - less than 14% was accounted for by falling prices. World trade was grinding to a halt.
 ?
  U.S. Steel wages were slashed 15% for 200,000 workers as the giant corporation's losses mounted. Federal salaries were cut 10%. Nevertheless, for these workers - who still had full time jobs - the declining cost of living still easily outstripped their wage cuts.
 ?
  The N.Y. State job index dropped to 58 - it was just 45.3 for factory payrolls.
 ?

 The bottom:

 

?

   June 1, 1932: 40 domestic bond issues at 51.94. Railroad car loadings at 515,450 for the last full week in May. By mid June they were at 447,387. During 1929, railroad car loadings ran well above 1 million per week. Cotton hit 4.92 cents per pound, the lowest price since 1898. All grains hit 1932 lows. Steel production dropped to 15% of capacity.
 ?
     On June 4, Thomas Lamont of J.P. Morgan Co., announced formation of a corporation with $100 million to invest in sound bonds "--- for the long pull." Something had to be done about the bond market to enable otherwise sound corporations to refinance their debts. Whitney, Mitchell, Wiggins, and other notables were shareholders in the corporation. All financial markets rallied strongly on this news. It was the sort of action that old J.P. Morgan himself had taken in 1907 to quiet a panic - but this was no mere domestic panic.
 ?
  By mid-June, U.S. Steel common hit 24 after the corporation reported another big drop in its unfilled orders backlog in May. 
 ?
  Since the devaluation of the pound sterling on September 16, 1931, U.S. gold holdings had declined by over $1 billion, but the U.S. still held $4 billion. There had been about $3 billion in dollar balances held abroad when the pound was devalued, and $2 1/4 billion had been repatriated with demands for gold or the local currency of the foreign holder of dollars.
 ?

 The debate intensifies:

 

 

 

?

  Fingers of accusation were increasingly being pointed at reparations, war debts, and trade war tariffs by an increasing number of commentators.
 ?
  93% of war debts - principle and interest - was owed by four nations. England owed $3,645,605.000. France owed $2,230,000,000. Italy owed $430,956,875. Belgium owed $183,883,000.
 ?
  In January of 1932, Germany had stated flatly that it could accept nothing less than full cancellation of all reparations.
 ?
 

   Treasury Secretary Mellon testified in March, 1932, before the House Ways and Means Committee:

  "The entire foreign debt is not worth as much to the American people in dollars and cents as a prosperous Europe as a customer."

  He pointed out that exports for the first seven months of this fiscal year were almost $1 1/2 billion below the average for the preceding ten years. Since 1923, the U.S. had maintained a favorable balance of trade, collecting income on private foreign investments and receiving payments on governmental war debts solely by loaning Europe the money required to make these payments and taking the rest in gold. The amount taken in gold was just $685 million. Loans totaled over $4 1/3 billion.
 ?
  However, with the present lack of confidence in foreign bonds and the new high tariffs, it was now impossible for foreign nations to meet their obligations to the United States.
 ?
  Three banking groups urged action on war debts and reparations obligations. (Wiggin-Layton report; Report of the Young Plan Committee; Report of the Foreign Creditor's Standstill Committee.)
 ?

 French politicians can't admit the financial loss of uncollectable reparations. They still insist on some substantial payment. After all, who won the war?

 

 

 

 

?
   Silas Strawn, President of the U.S. Chamber of Commerce, told its Board of Directors: "Though reparations is the most immediate problem to be considered and its settlement a prerequisite to return of confidence and restoration of credit, ---" other trade restrictions also blocked recovery. Abandonment of the gold standard by many countries, high tariffs or prohibitory foreign exchange controls, import quotas or licenses, all blocked international trade.
 ?
  One out of three workers in Germany were unemployed, he pointed out. Her ability to pay even private commercial debts is in doubt due to decreased trade. No one expects any improvement in trade or finance until the reparations problem is dealt with. Germany simply couldn't pay reparations. But French politicians can't admit this financial loss. They still insist on some substantial payment. After all, who won the war?
 ?
  (For similar reasons, American Senators and Congressmen couldn't admit loss of war debt payments.)
 ?
  Cordell Hull joined the debate. He argued in the Senate against high tariffs and their deleterious impacts on world trade.
 ?
  A N.Y. Times editorial on April fools day blasted the Smoot-Hawley Tariff, which had massively increased U.S. tariffs that were already higher than those of any nation other than Spain. Thus, the N.Y. Times argued, the proliferation of trade restrictions was directly caused by U.S. policy. We are owed $20 billion and won't let anyone earn enough to pay us off.
 ?
  The League of Nations Financial Committee cited reparations and "political" debts as the key to the international financial collapse. Austria, Greece, Bulgaria, and Hungary were listed as in a state of financial collapse. Tariffs of creditor nations like France and the U.S. caused defaults on bonds and wrecked credit by strangling trade. Arms expenditures were cited for waste of physical and financial assets.
 ?

  "Governments have almost without exception shown themselves stubborn in their timorousness, and both unable and unwilling to understand the conditions which confront them --- ."

   Dr. Nicholas Murray Butler, Pres. of Columbia University, and Director, Intercourse and Education Div., Carnegie Endowment for International Peace, launched a personal crusade against the economic evils that he saw tearing the world apart.

  "[E]conomists and men of affairs drawn from many lands in conference, have clearly stated --- that what remains to be done must be done by governments in the realm of formal politics. --- [It is only the failure of governments] that is responsible for the world's inability to achieve stabilization."
 ?
  "[1931 marked the climax of those forces] which since the close of the Great War have been making for the undermining and overthrow of the world's economic and financial system."
 ?
  "[Perpetuation and worsening of the world crisis is caused by] attempts to achieve the unreasonable and the impossible in the field of war reparations and so-called intergovernmental war debts."
 ?
 "[Noting the obvious contradictions of ignorant policies, he pointed out] the accumulation of the world's free gold in two centers, the raising and stiffening of tariff barriers in every direction, and the cries for a return to prosperity, while insisting on the perpetuation of conditions without parallel in history."
 ?
  "Governments have almost without exception shown themselves stubborn in their timorousness, and both unable and unwilling to understand the conditions which confront them --- ."

 Leading world bankers extended a voluntary freeze on German short term debt payments, and pleaded for governments to remove the financial shackles from Germany. "There is no time to be lost," they exclaimed.

 

  But the politicians did nothing.

   Al Smith - ex Governor and Democratic Presidential candidate in 1928 - told the Economic Club of Chicago that war debt and reparation cancellation or reduction as well as reduction of tariffs were essential for recovery.

  "The notion so often advanced here in the United States that we are simply passing through one more natural period of depression and panic from which we shall recover as we have recovered from others is illusory. --- These amazing conditions bear no relation whatsoever, either in origin or character, to those we are accustomed to associate with the years 1837, 1857, 1873, 1893 and 1907."

  In May, Sen. Borah (R. Utah), attacked the causes of the Great Depression. He pointed out that the Depression was world-wide in nature. The collapse of world credit, exchange and trade was the fundamental cause dragging down the U.S. economy.
 ?
  Borah would be the most persistent and courageous political voice in the U.S. on this issue. As yet, he offered no remedies.
 ?
  Even Alexander Noyes, the prominent N.Y. Times financial columnist, finally admitted that there were peculiar evils present in this Depression that were absent from previous depressions. Noyes finally acknowledged that international debt entanglements, over expansion of productive capacity in the speculative boom of 1929, and Europe financially and economically prostrate, were important factors.
 ?
  However, he still had his heart in sunny confidence. This too shall pass, he yet again reminded one and all - but he didn't offer any explanation as to how it would pass - or how the process could be speeded up.
 ?
  A banker noted that the French public - finally feeling the full sting of the Great Depression - was now taking a more "reasonable" view of the reparations problem. The passions of WW I were being drowned in the growing desperation of the grinding Great Depression.
 ?
  The presidents of seven railroad unions joined in calling for a 25 year moratorium on all war debts. The restoration of world trade was an obvious necessity for improvement in railroad job prospects. A Foreign Policy Association report on "American Foreign Policy and World Crises" emphasized the deleterious impacts of our tariffs.
 ?
  Leading world bankers voluntarily continued a "freeze" on German payments on short term credits. They pleaded for governments to remove the financial shackles from Germany. "There is no time to be lost," they exclaimed.
 ?
  But the politicians did nothing.
 ? 
  At the end of May, 1932, Prime Minister McDonald decided to expand the upcoming conference on war debts and reparations at Lausanne to also include tariffs, quotas, embargoes, etc., to try to prevent world trade from declining to a practical standstill. No nation can recover until world trade is restored, he acknowledged.
 ?
  But events were moving even as the politicians dithered. The Bonus Army arrived in Washington. The Bruening Cabinet fell in Germany and Von Papen was made Chancellor. German Young Plan bonds, originally sold at 90, now listed at 27.
 ?

 The failure of reason:
   However, there were other voices. Financial commentators continued to urge that "intrinsic" values and good buys were to be had. But what good are intrinsic values when political stupidity continues to strangle world commerce? There were increasing cries for resort to monetary inflation as a "cure" for the Great Depression.
 ?

The strange notion was accepted that capitalism would prove too productive.

Fifteen years of unremitting and growing policy stupidities by the governments of the Allied democracies - and the obvious noxious impacts of those policies cumulating over time - could be ignored and indefinitely overcome simply by printing enough money.
   Then there were the Marxist stupidities - gaining popularity as the Great Depression undermined belief in capitalism.
 ?
  Too dull witted to understand the unlimited flexibility and potential of capitalist growth, Marx and his followers - and those influenced by his ridiculous theories - had accepted the strange notion that capitalism would prove too productive - that excess production would squeeze profits and bring about the collapse of capitalism. These notions gave rise to belief in the "mature economy" and "secular stagnation" stupidities, and the threat of "automation." These fantasies presumably required a substitution of government management and redistribution in place of market mechanisms - if not the outright substitution of socialism for capitalism.
 ?
  A Swedish economist, Gustav Cassel, blamed the Depression on efforts by the U.S. financial authorities to restrict the market speculation of 1929. He said this was solely due to "American Puritanism," which purposely brought on Depression to punish a handful of N.Y. speculators.
 ?
  Fifteen years of unremitting and growing policy stupidities by the governments of the Allied democracies - and the obvious noxious impacts of those policies cumulating over time - could be ignored and indefinitely overcome simply by printing enough money. The extraordinary failure of recovery after 1929 despite floods of available money and extraordinarily low interest rates need not be explained.
 ?

Policy epilogue - the triumph of Keynesian concepts: 

 

No extent of policy stupidity need be corrected. All could be overcome simply by running budgetary deficits and running the printing presses.

 

The politicians loved it - and so it was Keynesian and redistributionist economics that triumphed.

 

   This was typical of the lunacy amongst several economists that eventually culminated in the writing - and broad acceptance of John Maynard Keynes' "The General Theory of Employment, Interest, and Money (1936)." No extent of policy stupidity need be corrected. Politically difficult decisions about war debts and trade liberalization need not be confronted. All could be overcome simply by running budgetary deficits and running the printing presses.
 ?
  The politicians loved it - and so it was Keynesian and command economy and redistributionist policies that triumphed.
 ?
  FDR and some of those in his administration - especially the Keynesians during his second term - were heavily influenced by the "mature economy" stupidity arising from Marxist mythology.
 ?
  FDR presented his "mature economy" concepts in a campaign address at the San Francisco Commonwealth Club later in 1932. There was no more room for growth. The frontier is long gone. Capitalism had simply become over productive. Productivity gains were a threat that would just cause greater unemployment (the "automation" myth). The task now was thus not to stimulate further growth, but to manage the economy to more equitably distribute its products.
 ?

The New Deal never attempted to restore economic growth. Its main policy thrusts were redistributionist and the broad assurance of security.

 

 

 Economic revival at the end of the decade was greeted with mixed feelings, and feared by some New Dealers as the closing of the window of opportunity for the implementation of their policy experiments.

 

 

 

 

   Thus, the New Deal wouldn't "fail" to end the Great Depression and restore economic growth. It would never really try. It's primary thrust would be to arrange for the equitable distribution of material necessities, and the broad provision of security ("freedom from fear").
 ?
  FDR was not adverse to efforts to reestablish foreign markets. He just recognized that the monetary disciplines and market mechanisms required for successful international commerce would prevent his experiments in monetary inflation, command economy policies and cartel-like price and wage fixing arrangements, and broad scale redistribution.
 ?
  Indeed, the Great Depression was welcomed by FDR and many in his Administration as an opportunity to initiate their policies. They eagerly implemented those policies in ways that would cement the Democratic Party's new status as the nation's majority political party. Economic revival at the end of the decade was greeted with mixed feelings - and feared by some New Dealers as the closing of the window of opportunity for the implementation of their policy experiments.
 ? 
  By 1935 - after the first two years of the New Deal Administration - the initial command economy, price control and monetary inflation efforts had clearly failed to sufficiently mitigate the Great Depression. Then, Sec. of State Cordell Hull - a strong proponent of liberalized foreign trade - acting pursuant to legislation passed in 1934 - finally began negotiating reciprocal trade agreements to poke some holes in trade war barriers. It was not until 1938, however, that any real progress would be made on this front.
 ?
  By 1937, New Deal policy failures threatened the failure of the Roosevelt Administration. However, with the outbreak of WW II in September, 1939, the threatened Allies commenced urgent rearmament programs. This stimulated U.S. exports, and initiated enough economic revival to save the Roosevelt Presidency and assure his reelection in 1940. However, many trade war restraints remained largely intact.
 ?
 
   One of the most urgent economic policies implemented after WW II was the ending of the trade war and the continuous elimination of trade barriers. The increasingly influential Keynes and his followers played major roles in these efforts. This was clearly their greatest policy contribution. It would lay the groundwork for renewed economic growth and avoidance of the expected return of the Great Depression - and by the end of the century would reveal the stupidity of the "mature economy" and "limits to economic growth" myths.
 ?
  There were other positive New Deal policies that would play important roles in the post WW II restoration of prosperity.
 ?
  A rational system of banking regulation was finally provided. This brought to an end the chronically high rates of banking failures and frequent banking panics that had periodically plagued the nation since Andrew Jackson prevented the renewal of the charter of the Bank of the United States in the 1830s.
 ?
   Securities and real estate disclosure, auditing standards and enforcement efforts strengthened securities and real estate markets and financing mechanisms. Although competition was being throttled by government programs, antitrust regulation and enforcement efforts attacked private restraints on competition.
 ?

 When gold reserves became inadequate to maintain the value of the dollar in the 1970s, the unavoidable result of Keynesian policies was dollar devaluation, the increasingly vicious swings of the "obsolete" business cycle, and rising rates of inflation and unemployment existing at the same time (as historically has ALWAYS occurred in times of chronic inflation).

   When Keynesians had a chance to demonstrate in the 1960s how they could "obsolete the business cycle," reality would repeatedly perversely refuse to conform to Keynesian expectations. Their policies would drive the American economy into the double digit woes of the 1970s.
  ?
  There was a period of initial apparent success bought by the expenditure of America's huge gold and hard currency reserves. When those reserves became inadequate to maintain the value of the dollar in the early 1970s, the unavoidable result of Keynesian policies was dollar devaluation, the increasingly vicious swings of the "obsolete" business cycle, and rising rates of inflation and unemployment existing at the same time (as historically has ALWAYS occurred in times of chronic inflation).
 ?
  The "mature economy," "secular stagnation," and "automation" myths would again be revived. The 1980 - 1982 depression and fifteen years thereafter of above average real interest rates and below average economic performance would be the price that the nation would have to pay for full recovery from inflation at the end of the century and final proof of the stupidity of Marxist concepts.
 ?
  There are still Keynesians, however, who have not yet gotten the message, and await the inevitable next recession to again advocate their dangerous policy nostrums.

 The "discharge in bankruptcy" of WW I debts:
   In the middle of June, 1932, the Lausanne Conference determined to extend the Reparations Moratorium until after the 1932 elections in the U.S. Either the U.S. would then accept an end to war debt payments or be presented with a fait accompli.
 ?

 After 1932, only the trade war tariffs and other trade restrictions would remain of the fundamental causes of the Great Depression - but these restraints were becoming even more onerous than before.
   The Lausanne conferees agreed to cut German reparations from $31.68 billion to just $714 million, payable after 3 years, but contingent upon U.S. granting relief from war debts. The U.S. was owed $7 1/4 billion. Hoover opposed cancellation, and warned the conferees that the U.S. had no intention of canceling the war debts. But it didn't matter. These debts were clearly not collectible, and almost all payments would soon end.
 ?
  In essence, America's WW I Allies were declaring bankruptcy, and giving themselves and Germany the necessary discharge in bankruptcy that was needed for financial and economic recovery. After 1932, only the trade war tariffs and other trade restrictions would remain of the fundamental causes of the Great Depression - but these restraints were becoming even more onerous than before.
 ?
  The United Kingdom, France, Italy, Germany, Estonia, Latvia, Austria, Belgium, Denmark, Japan, and Czechoslovakia all raised tariffs in the first half of 1932.
 ?

 However, events would not wait on the U.S. elections. Germany needed immediate relief.
   U.S. political leaders had refused to join the conference, but there were unofficial observers from the U.S.
 ? 
  German bonds rallied sharply on the news of the sympathetic attitude of Britain and France towards Germany. However, events would not wait on the U.S. elections. Germany needed immediate relief. There were over 5.5 million unemployed in Germany, up 1.5 million in the last year. Total European unemployment outside Germany was estimated at 7 million, with 5 million unemployed estimated for England, France, and Italy combined.
 ?
  For lack of foreign exchange, Krupp and other German industries resorted to barter in a number of transactions. Hitler continued his political gains amidst the German economic debacle.
 ?
  At Lausanne, the little nations - Belgium, Holland, Luxembourg, Denmark, Sweden, and Norway - moved for lower tariffs and reorganization of the system of international credit and money. They asserted that this was essential for the recovery of each individual national economy.
 ?

 The fear of losing a few votes had reduced political discussion of the Great Depression to vague platitudes. When Congress had voted last December to adopt a resolution that refused to cancel war debts, it in effect voted prolongation of the Great Depression.

   Dr. Butler spoke before a dinner of the U.S. Advertising Federation at the Waldorf-Astoria Hotel. He reported on the results of a questionnaire circulated amongst 53 prominent financial and business leaders. Almost all were of the opinion that removal of intergovernmental debts, reparations, tariffs and other trade barriers were prerequisites for economic recovery. He reiterated his call for the elimination of the obstacles to international commerce, and also called for international money reform.
 ?
  He warned that the Depression was leading to an even greater disaster. The German plight is extreme, he warned. He blasted Washington politicians for lack of initiative and failure to boldly recognize and deal with these problems. Their fear of losing a few votes had reduced political discussion of the Great Depression to vague platitudes. When Congress (now evenly divided between Democrats and Republicans) had voted last December to adopt a resolution that refused to cancel war debts, it in effect voted prolongation of the Great Depression.
 ?
  Dr. Butler again traced the Depression back to the Great War and its colossal destruction of the world's wealth and savings.

  "The statesman leads where the politician tries so to till the soil as to avoid giving offense. --- Would to god we could exchange a thousand politicians for even one statesman."
 ? 
  "There is abroad in our modern democracies an infectious disease which may best be described as candidatitis. It attacks both the seat of intelligence and the seat of courage. It thrives upon platitudes, the more sonorous the better, and upon rhetorical expression of truths so old and so universal that one must wonder why they are repeated."
 ?
  "The troubles from which we are suffering are international in origin and international in extent, and they can only be cured by international remedies."

  From the political leaders of the U.S. - both Republican and Democrat - there came no response.
 ?

     On this day, June 20, 1932, only 388,465 shares were traded on the Big Board - the slowest day since January, 1924. Apathy reigned supreme. Only .6% of the shares listed were traded per day on average in this month - the slowest month in NYSE history. The previous low had been 1%, on a day in 1921. More than 50% of the shares listed on the NYSE were below $10 per share. Total U.S. unemployment was estimated at between 9 and 11 million, with many others only partially employed.
 ?
  The Lausanne Conference and speculation about second quarter dividends commanded the most attention in the financial press.

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  Copyright 2001 Dan Blatt