DESCENT INTO THE DEPTHS (END 1931):

The Collapse of International Finance

FUTURECASTS online magazine
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Vol. 3, No. 6, 6/1/01.

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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)

VI.
Collapse of WW I financial obligations (1932)

VII.
Collapse of governments (1932-1933)

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

 International financial collapse - I (Germany and Central Europe):

  In late May, 1931, there were reports of Viennese banking problems. The German securities markets tumbled badly in often dull trading as a flood of German capital rushed out of the country to France, England and the U.S. The general decline of prices had the effect of adding 30% to the burden of German reparations obligations and other hard currency debts.
 ?

 Germany could no longer borrow to meet future needs, or even to refinance old debt.
   Tariffs were rising even further all around the world, and the decline in world trade substantially added to the financial burden of all debts. The collapse of German bond prices reflected the destruction of German credit and resulted in Germany losing access to all foreign securities markets. She could no longer borrow to meet future needs. She couldn't even borrow to refinance old debts. There were predictions that Germany would formally request a reparations cut in June.
 ?

  Chancellor Bruening warned that the Depression and the high taxes caused by these debt obligations were turning a frantic German public to the radicals of the left and of the right in search for solutions for their plight.
   On June 5, Chancellor Heinrich Bruening went to London to plead that relief from reparations and debts be provided no later than the following September. He warned that the Depression and the high taxes caused by these debt obligations were turning a frantic German public to the radicals of the left and of the right in search for solutions for their plight. On that same day, Pres. Paul von Hindenberg signed new taxes into law, imposing an additional $400 million burden to pay those debts.
 ?
  The key issue was finally joined on the political front. Sen. William E. Borah (R. Idaho) came out for relief for Germany. Sec. of State Henry L. Stimson and Sec. of Treasury Andrew W. Mellon went to Europe to study the problem. But politicians move slowly, and events were now moving rapidly.
 ?
  British Prime Minister Ramsay McDonald nixed any revision of reparations and war debts. FDR, while quick to attack the Republican tariff, was noticeably quiet on the politically sensitive issue of war debts. Already, international bankers, as well as the Federal Reserve Bank, had been forced to make emergency moves to support the Austrian Creditanstalt. More than 20% of the total German gold reserve - approximately $175 million - was drained in a two week flight of capital out of Germany.
 ?
  In the U.S., economic indicators continued to darken. By mid June, steel production was slipping at a rate of 2 percentage points per week, to 36% of capacity. U.S. Steel reported a drop in unfilled orders of 277,000 tons, in spite of low rates of production. July wheat hit 55 3/4 cents per bushel, as other crops vacillated only slightly above their Great Depression lows. Copper hit 8 cents per pound with a further substantial increase in inventories. Commodity price averages continued slipping at an astounding rate of 2% to 3% per month. 18 small Chicago banks closed their doors in a two day period.
 ?
  The usual summer business "dip" was acknowledged to be a little early this year.

 Hoover Moratorium rally:

 

 

 

 

?
   Then, on June 19, 1931, Pres. Hoover called for relief for Germany from her reparations burden and for the easing of war debt interest payments. It was the first real effort to address these problems since the Hoover administration wrote off 60% of French war debts in the summer of 1929. Total U.S. investment in German securities was between $2 1/2 and $3 billion. The Young Plan and Dawes Plan loans comprised the largest individual elements of this total. Payments were to be suspended for one year from July 1, 1931.
 ?
  The next day - in spite of continued trade declines and in the face of a continuous bombardment by reductions and omission of dividends - securities exchanges in the U.S. and all over the world embarked on a dramatic, sustained upsurge. World leaders hailed Hoover's long-overdue initiative.
 ?

Businessmen, investors and politicians were acutely aware that reparations, war debts, tariffs and other trade war phenomena, played a major role in the collapse of world trade, and domestic business and finance.
  The response to the Hoover Moratorium call is strong proof that businessmen, investors and politicians were acutely aware that the reparations payments, war debts, tariffs and other trade war phenomena played a major role in the tremendous collapse of world trade, and domestic business and finance now known as the Great Depression. Yet little more was done, and nothing was admitted.
 ?
  The inference most apparently to be drawn from this is that the widespread vengeful emotions surrounding the Great War and its financial obligations and the effect of these emotions on democratically elected political leaders was actually one of the root causes of the Great Depression. While a perfectly understandable outcome of a horrific conflict, they condemned the world to continued and worsening economic suffering and perhaps also to WW-II.
 ? 

 The next day, in spite of continued trade declines and in the face of a continuous bombardment by reductions and omission of dividends, securities exchanges in the U.S. and all over the world embarked on a dramatic, sustained upsurge.
  Savings banks were reducing interest rates offered on deposits to 3 1/2% - a 10 year low. Auto production was sharply curtailed beyond ordinary June declines. Railroad car loadings of 732,453 for the third week of June were a new post WW I low. Steel production slipped to 35% of capacity by the end of June. The N.Y. Times business index continued its almost perpendicular decline to one new Great Depression low after another.
 ?
  However, some good news was available, and the reaction to the Moratorium spurred some more good news. Expectations of an improvement in business and prices spurred buying of commodities at their present low prices. Copper exports surged at their present low prices, as 47 million pounds were exported in three days and prices rose a penny, to 9 cents per pound. Cotton prices also increased in response to increased exports and domestic buying.
 ?
  Increases in the prices of cigarettes, steel, copper, and rubber tires, maintenance of the dividends of the B&O Railroad and of Westinghouse, a favorable Federal Communications Commission ruling on an RCA license application - these were available to help spur the market upsurge.
 ?
  Ignored for the present were many dividend reductions (Penn. Railroad down 25% to $6 per year) and the continued decline in the prices of most commodities. Grains remained depressed under the weight of their huge surplus carryovers and large expected crops. Corn crop estimates had risen spectacularly over the drought reduced levels of 1930, and a July 1 carryover of 575 million bushels of wheat was reported. Exports were now running at considerably less than 100 million bushels per year.
 ?
  Due mainly to the "Moratorium Rally," the Big Board picked up almost $5 billion in June, to a new total of $47.4 billion. U.S. Steel rose back over 100 in spite of a production rate of just 37% for the month of June and a further substantial cut of 141,129 tons in its unfilled orders backlog. The stock market rise coupled with further dividend casualties quickly cut yields for the N.Y. Times 50 industrials to an average of just 5.3%, with further dividend cuts still expected.
 ?

 

The tradition of incompetence so firmly established by democratic statesmanship since the Great War was not to be terminated by mere financial, economic and political disaster.

   The large short interest was badly pummeled and was driven to cover. Because of this whipsawing nature of the Great Depression stock market, even the short speculators had few large winners amongst their ranks.
 ?
  On July 1, 1931, a N.Y. Times editorial argued that something spiritual had changed with Hoover's Moratorium proposal.

  "The world never can go back to where it was before the conviction, to which Mr. Hoover gave utterance, was born in the hearts of so many nations, that something must be done to prevent Germany from crashing financially and perhaps politically - - -
 ?
  "Within the year of suspension something will have to be done to create a new order of thought and a new financial conception to meet the changed conditions - especially the intangible but powerful changes which have come into the world's way of looking at the controversy - so that the nations and the peoples will not be thrown back into their former discouragement, or left fearing that statesmen and financiers will not be able to cut a clear path through the jungle left behind by the great war."

  However, the tradition of incompetence so firmly established by democratic statesmanship since the Great War was not to be terminated by mere financial, economic and political disaster.

 International financial collapse - II (Germany and Central Europe):
  After the initial upsurge, the stock market backed and filled nervously. Investors awaited consummation of Moratorium agreements - the hoped for beneficial effects on trade - and the hoped for autumn business revival.
 ?
  But the world's economy is a complex and cumbersome mechanism. There are few instant responses. It takes time for new forces to work their way towards visible impact on actual trade conditions.
 ?

 Capital was rushing to the two safe havens - France and the U.S.
  The total copper surplus for North and South America now totaled 600,827 tons. The 1 cent rise in copper prices was enough to cut off all buying and, by mid July, prices had slid back, diving below 8 cents per pound. The Canadian wheat crop had lost about 200 million bushels due to drought, but the U.S. wheat crop was HUGE. July wheat hit 50 7/8 cents. Kansas farmers were getting just 25 cents per bushel. December corn hit 44 1/2 cents. All cotton contracts fell below 10 cents per pound, with the July contract hitting 8 3/4 cents. Steel production dove to 30% of capacity.
 ?
  By mid July, capital was rushing to the two safe havens - France and the U.S. Banks in Vienna, Danzig, Riga and Warsaw were being suspended. A three day bank holiday was declared in Hungary. Germany planned a moratorium on payment of ALL foreign debts and instituted a bank holiday.
 ?
  The Berlin Bourse was closed. The mark and many other foreign currencies lost value sharply, as did German and Central European bonds. Germany was forced to raise the bank discount rate from 7% to 10%, with rates on collateral loans going up from 8% to a new rate of 15%.
 ?
  Even as German banks quickly reopened for business, news of many failures of small and medium sized banks in the U.S. continued to come in. England, losing $100 million in gold in 10 days, and then a record $25 million more the next day, was forced to raise its discount rate from 2 1/2% to 3 1/2%. The total gold loss from England's small reserves at this time totaled $150 million.
 ?

 Beset by bad news all month, the market gave ground grudgingly until the last few days when the U.S. Steel earnings report came out.
   The NYSE lost over $3 billion in July, to a new total of less than $44 1/2 billion. Beset by bad news all month, the market gave ground grudgingly until the last few days when the U.S. Steel earnings report came out.
 ?
  Only $230,389 earned for the entire second quarter. Preferred dividends alone ate up $6,304,919. The quarterly common dividend was slashed to $1, and the stock lost 8 points in a single day. Bethlehem Steel followed, cutting its dividend in half to 50 cents for the quarter. U.S. Steel unfilled orders declined 74,507 tons in July in spite of production at only 32% of capacity. The new total of 3.4 million tons was the smallest since October, 1927. Grains and cotton traded close to their Great Depression lows.

     The international financial crisis boiled on. By the beginning of August, the English bank rate was raised again to 4 1/2%. New York and Paris loaned $250 million to hard pressed London. The Reichsbank raised its interest rate again to the prohibitory level of 15%. Foreign bonds were sprinkled with disasters - Hungary, Rio de Janeiro.
 ?
  The Guarantee Trust Co. of New York published an analysis of the situation. They cited Great War dislocations, losses, depletion of morale, reparations, and drastic surges of inflation that wiped out the middle class in Germany, France and several other countries - with only holders of land, fixed assets and foreign securities surviving.
 ?
  The analysis covered the German financial reorganization in 1924 and 1925, which was followed soon thereafter by renewed financial deficits. German tax money provided to individual German states was spent for laudable social but economically unproductive purposes. Much additional money was borrowed for these social purposes. Capital inflows of 3.4 billion marks in 1928 shrank to 2.8 billion in 1929 and just .8 billion in 1930 as a result of the Wall Street boom and bust and subsequent world Depression. Much foreign capital in Germany is on a short term basis - fleeing during each crisis.
 ?

 The illogic of post WW I democratic politics and passions caused the Western democracies to adamantly insist on reparations and debt payments while refusing to allow Germany to take the steps that might allow Germany to accumulate the financial resources required to make these payments.
   Dollars in circulation were now expanding rapidly. In the year before the end of August, 1931, dollar circulation increased by about 25% ($1,106,338,000). This demand for greenbacks was the result of growing distrust of banks and the loss of banking facilities due to the many bank failures.
 ?
  This trend would increase spectacularly as the financial crisis deepened. It also proved that the amount of dollars in circulation - which had declined sharply in the first year of the Great Depression - was totally dependent on the demand for currency and was not in any way limited during the Great Depression by Federal Reserve policy.
 ?
  The interrelationship between financial and trade factors was sharply in evidence in August, 1931. Financial crises reduced international and domestic trade - reduced trade accentuated financial crises.
 ?
  To pay debts and reparations, Germany tried to terminate practically all ability of her citizens to import goods or spend money abroad. Threats of reprisals and other pressures from the U.S. and the other WW I Allies quickly forced Germany to back down on much of this import ban. The illogic of post WW I democratic politics and passions caused the Western democracies to adamantly insist on reparations and debt payments while refusing to allow Germany to take the steps that might allow Germany to accumulate the financial resources required to make these payments.
 ?
  Commodities continued to hit new Great Depression lows, three small N.Y. banks joined the lengthening list of bank failures, English gold again began to drain away, and U.S. exports in July were only $183 million.

 The bountiful 1931 crop was a disaster.
    Government agricultural forecasts for the new crop came in on August 10, 1931.
 ?
  Cotton: Over 15 1/2 million bales - 1 1/2 million more than previous private estimates. Bumper crops in Texas, Oklahoma and Arkansas were 2 million bales above last year's drought ravaged crop. Predicted yield of 185.8 pounds per acre was the largest yield since WW I. 3 million bales were already held by cooperatives and more was held by the Stabilization Corp. Prices tumbled. The October contract hit 6.7 cents, the lowest since January, 1905. London was shaken and Egypt feared utter ruin. Southern farmers reportedly were debating whether it was worth the trouble to harvest the crop. The carryover would be about 11 million bales - almost a full year's normal production.
 ?
  Wheat: Over 893 1/2 million bushels. This was 8.7% above the 1925 - 1929 average, and 3.5% above the huge 1930 crop, and only slightly under the record 1928 crop. The Farm Board already held about 250 million bushels. The yield of 19 bushels to the acre would equal the 1914 record. Quality was excellent. What a disaster. Wheat prices tumbled below 50 cents.
 ?
  Corn: The estimate remained at the bumper level of over 2 3/4 billion bushels. In spite of low prices, total world production declined only 6%.
 ?
  A glut of fresh vegetables and fruits demoralized the N.Y. market.
 ?
  However, flax seed, barley, and wild hay crops were estimated as the smallest on record. Rye was the smallest since 1887. The prices of choice yearlings and fed steers were rising as supplies delivered to market remained below requirements for the sixth consecutive week.
 ?
  Rural bank closings continued as commodity prices crashed.
 ?

 The great increase in currency in circulation continued as banks continued to fail and credit continued to collapse. There was plenty of money around.
    England imposed drastic new tariffs towards the end of August, as Paris and N.Y. rushed to her aid with a further $400 million credit.
 ?
  The domestic bond averages were now declining rapidly as many sound corporations were nevertheless removed from the list of "legals." This forced banks to sell their holdings. All but the highest grade bonds declined. Credit was being pummeled from all directions.
 ?
  By the last week of August, 1931, September wheat hit 46 7/8 cents (the lowest since 1852), September rye hit 32 cents, December corn hit 37 cents (the lowest since 1900), September oats hit 18 3/4 cents (the lowest since 1897). Heavy Liverpool buying in advance of England's new tariff pushed cotton prices up in the last week in August, but the decline for August was still 15%. The August decline for wheat was 10%, and 16% for corn. Duns commodity price index dropped 2 5/8%.
 ?
  Auto production continued to decline, but steel production steadied at 32% of capacity. Bank deposits were declining despite interest rates that represented excellent investment returns under current conditions. The great increase in currency in circulation continued in response to the high rate of bank failures, and credit continued to collapse. There was plenty of money around. Two U.S. Treasury issues totaling $1.1 billion at 3% were quickly oversubscribed.
 ?

 Removal of all POLITICAL obstacles to German economic recovery was a prerequisite for world economic recovery. Reparations must be permanently written off.
   The Moratorium Protocol was signed on August 11, 1931. The German discount rate was quickly reduced from 15% to 10%. However, this good news caused only a temporary upsurge in a completely demoralized stock market. It was enough, however, along with the usual expectation of an autumn business upturn, to produce a narrow $165 1/2 million increase in values on the Big Board. The averages were still about 10% above the June 2, 1931 low.
 ?
  The "Wiggin Report," produced by bankers from France and Belgium, was issued on August 19, 1931. It called for an end to Great War passions, and asserted that removal of all POLITICAL obstacles to German economic recovery was a prerequisite for world economic recovery. Reparations must be permanently written off.
 ?
  However, political leadership was exhausted by the effort to produce a one year moratorium.

 The dividend cutting Crash:

 

 

?

  The September, 1931, stock market Crash was the worst monthly percentage decline of the Great Depression. A speculative leader that had been paying $6 yearly omitted its quarterly dividend, triggering the dive. Domestic bonds joined the sell off at a greatly accelerated pace as confidence in even the long term future was finally drained away. Other dividend casualties continuously pummeled the market along with the continuous decline in commodity prices and an almost complete failure of any materialization of the anticipated autumn business revival.
 ?

 Complete cessation of foreign bond financing in U.S. markets left debtor nations no alternative but to ship gold.

 

No practicable financial system could possibly indefinitely withstand the strain of two decades of the political stupidity of the Great War and the trade war that followed it.
   By the end of the first week of September, the N.Y. Times average of 40 domestic bonds reached the lowest point since 1924. Second and third grade preferred stock joined the decline. In the next week, nearly a dozen major companies reduced or passed dividends in one day. By 14 September, the N.Y. Times 50 stock average tumbled below its June 2, 1931 low. Few brokers were hardy enough to venture an opinion as to when the Great Depression would "bottom out." Wall Street shuddered over expected third quarter earnings reports.
 ?
  The Paris and London markets fell. The Berlin Bourse reopened on September 3 with prices 25% to 40% lower than when it closed. The outflow of capital reached drastic proportions.
 ?
  Complete cessation of foreign bond financing in U.S. markets left debtor nations no alternative but to ship gold. The trade decline, tariffs, quotas, protective subsidies, money restrictions, and price deflation didn't help either. London lost $9 million in gold in one day. U.S. holdings topped $5 billion.
 ?
  However, this was clearly NOT a failure of capitalism or of the gold standard. This was clearly a failure of political governments - especially in the western democracies - and especially in the United States. No practicable financial system could possibly indefinitely withstand the strain of two decades of the political stupidity of the Great War and the trade war that followed it.

 International financial collapse - III (England, the sterling nations, and Scandinavia):
   Panic swept financial Europe on September 19, 1931, two years after the start of the stock market Crash in the U.S. As rumors of English abandonment of the gold standard circulated, Amsterdam and other financial centers hastily attempted to bail out. The huge Paris and N.Y. credits were quickly used up and heavy gold shipments again were made to support the foundering pound sterling. England increased taxes 25% and decreased the dole 10% as part of a big austerity drive - but even this was not enough.
 ?
     There were now well over 4 million unemployed in Germany. In the U.S., one job agency reported 52 applicants for each white collar job. There had been 3 per job in 1929.
 ?
  U.S. Steel tumbled to 75 1/4. The yield on the N.Y. Times 50 stock average was again over 7%, and the average yield for all stock on the Big Board was up from about 3% in 1929 to just over 8% in 1931. But the flow of dividend decreases and omissions was continuing unabated.
 ?
  In a sample of dividends of 5,000 leading companies, 50% were actually still the same or higher than in 1929. However, 20% had been reduced, and 30% had been completely eliminated. Brokers' loans had practically disappeared, as trading was on a cash basis and brokers were using their own cash to finance remaining margin accounts.
 ?
  Domestic bonds were at the lowest levels since 1922. Grains and cotton, which had been fairly steady since their drop after the shock of the August crop estimates, now began to decline again as the Crash in the securities markets reached crisis proportions.
 ?

 Monetary devaluation - a drastic austerity measure that immediately cut substantially into purchasing power in England and in all nations that held pounds sterling as a reserve currency - was expected to finally bring English finances and trade into balance.

 

 

   England finally abandoned the gold standard on September 20, 1931. The unrealistically high value at which the pound had been pegged had boosted domestic consumption and imports and had undermined the competitiveness of her exports, causing funds to drain out of the country. France, on the other hand, had stabilized the franc at only 20% of its pre WW I level.
 ?
  England had only $650 million in gold left. The $250 million and $400 million credits from N.Y. and Paris had been quickly eaten away as London lost over $1 billion in reserves in her futile two month effort to support the pound.
 ?
  Great acceleration towards the end is a common property of financial crises - most of which can seem manageable for months or years before the period of acceleration begins. While the impending crises themselves are often easily discernible by perceptive observers, predicting the onset of acceleration can be very difficult.
 ?
  The London stock exchange closed, but the banks remained open. The government pledged to meet all government and Bank of England obligations that were payable in foreign currencies.
 ?
  Monetary devaluation - a drastic austerity measure that immediately cut substantially into purchasing power in England and in all nations that held pounds sterling as a reserve currency - was expected to finally bring English finances and trade into balance. The German stock market closed indefinitely.

 N.Y. Times analysis of Great Depression causes:
   The N.Y. Times dedicated half its first page and all of its second page as well as some other sections and the financial section on September 21 to present its analysis of the situation.
 ?
  Reparations and war debts were now openly blamed for financial dislocations leading to financial breakdown and gold standard readjustments. They were called "economically non-productive financial obligations." Tariffs were also blamed. Recovery required the restoration of "confidence" in international relationships.
 ?

With foreign raw materials and goods costing more in terms of pounds, a significant price rise within England would exist for a couple of months side by side with the great unemployment caused by the Great Depression.

 

 

 

 

 

 

 

   The tremendous burden of public debts forced staggering tax increases on the English economy as receipts from existing taxes were cut by the Great Depression. The cost of "social" legislation was simply too much to bear under the circumstances.
 ?
  England had $25 billion invested in her Empire, the U.S., Latin America and other foreign countries. But revenue from these sources, and the value of these investments, declined drastically during the Great Depression. Her capital fled to France (which held $3 billion in gold reserves) and the U.S. (which held $5 billion in gold). (The total supply of the world's monetary gold was $11.3 billion.) When English funds in Austria and Germany were tied up by the financial breakdowns in those countries, the English financial crisis accelerated to its end.
 ?
  Expectations were that the pound would lose a substantial proportion of its purchasing power in foreign markets. With foreign raw materials and goods costing more in terms of pounds, a significant price rise within England would exist for a couple of months side by side with the great unemployment caused by the Great Depression.

  This is an occurrence that John Maynard Keynes and his followers have always since conveniently ignored. By the end of the year, the British price index would be up almost 10% - it would still be up more than 4% a year after the devaluation.
 ?
  If the devaluation had not been accompanied by harsh austerity measures - if it had been "accommodated" by monetary expansion - the inflation of prices could have continued indefinitely, even with Great Depression unemployment. This is the mechanism of inflationary depression - the worst form of economic collapse - and stagflation - its much milder form experienced in the 1970s in the United States.

  If the pound declined by 1/3, it would cost the U.S. and France about $650 million each. In both France and the U.S., there was about $2 billion in English securities held by governments, financial institutions and private citizens. About 60% of the world's business was done in pounds. Holland, Sweden, Switzerland, which were pound creditor nations, would be hurt. Germany, Austria, Hungary, Italy, which were pound debtor nations, would be helped, by the decline in the pound sterling. But all would be hurt by the loss of purchasing power throughout the British Empire. All who held assets denominated in pounds would be hurt.
 ?
  The recent Paris and N.Y. credits were payable in gold or dollars. So was England's $4.6 billion war debt and over $143.5 million in bonds floated on Wall Street. The devaluation would greatly increase the burden of these obligations. Further tariff increases were expected.

 The Crash of '31:

 

 

?

   The crisis in confidence was now total. The pound fluctuated wildly from $4.85 to $3.70 and lower. Nothing paper was sacred any more. Rumors of further gold standard abandonment and securities exchange closings ran rampant.
 ?
  Foreign banks sold U.S. bills and securities for U.S. gold. $180.6 million in U.S. gold was earmarked for foreign accounts in the first week. All securities markets tumbled. The Great Depression claimed its eleventh Big Board house.
 ?

 Railroad car loadings for the third week in September were only 667,750 as commerce dropped through the bottom.
   U.S. Steel cut wages 10%, and other steel companies followed as labor leaders and politicians howled. Wages in 1928 had been 160% above pre WW I levels and had fallen little since then, while prices had dropped 30 percent - back to 1913 levels. Those who had steady work were living very well and had no complaints. But many were working only part time. General Motors cut salaries 10% to 20% -- wages were not cut.
 ?
  Grains hit new lows: September wheat, 45 cents; December corn, 35 7/8 cents, September oats 20 1/2 cents. Cotton hit 6.05 cents per pound. Railroad car loadings for the third week in September were only 667,750 as commerce dropped through the bottom.
 ?

 Shorts were paying premiums as high as 1/8 and 1/4 point per day for the right to borrow many of the speculative leaders.
   Values on the Big Board tumbled a fantastic 27 1/3% in September -- down $12 1/4 billion to a new total of just under $32 1/3 billion.-- a bigger monthly point decline than even October or November of 1929 and more than double the percentage decline of those months.
 ?
  As all margin bull speculators abandoned the market in final despair and the short interest swelled to new record proportions, shares available for shorts to borrow became scarce. Shorts were paying premiums as high as 1/8 and 1/4 point per day for the right to borrow many of the speculative leaders.
 ?
  Indicated stock yields for the N.Y. Times 50 stock average of 7 3/4% were viewed as a fiction due to the expectation of massive further dividend cuts. AT&T and General Motors were the only remaining billion dollar companies on the NYSE.
 ?
  With steel production stagnant at 30% of capacity and no sign of any Autumn business revival in evidence - with dividend reductions and omissions constantly assailing beleaguered stock values -- with credit deteriorating rapidly as bond markets dropped all around the world -- with world trade constantly and rapidly diminishing towards the point where only a trickle of essential raw materials and agricultural commodities flowed between nations -- with foreign currency devaluations and bank closings joined by an accelerating rate of domestic bank failures -- HOPE and CONFIDENCE had nothing more to stand on and so departed the scene.
 ?

There were higher discount rates and higher tariffs everywhere, as all nations girded for battle over the world's precious, rapidly eroding supply of sound financial capital.

No more foreign bonds would be floated during the last three months of the year.
   Action breeds reaction. Italy raised tariffs 15% "to prevent British 'dumping.'" Sweden, Norway and Egypt quickly followed with suspensions of the gold standard. There were higher discount rates and higher tariffs everywhere, as all nations girded for battle over the world's precious, rapidly eroding supply of sound financial capital.
 ?
  This precipitated the worst break in the high grade foreign bond average in Wall Street history. Scandinavian issues led all foreign bonds precipitously lower, slamming the door shut on any possible new financing and making eventual refinancing of old issues a task to be dreaded.
 ?
  In the first nine months of 1931, there was only $295,402,500 in foreign bonds floated on Wall Street - $62 1/2 million for refinancing. No more would be floated during the remainder of the year.

 

   Equilibrium began to return. By the beginning of October, 1931, high grade foreign and U.S. government bonds - the most basic stuff of finance - began to rapidly recover lost ground. After all, the economic world wasn't coming to a complete halt -- yet.
 ?

 High grade foreign and U.S. government bonds - the most basic stuff of finance - began to rapidly recover lost ground.

 

Announcement of a $500 million central bank fund to aid banks during "runs" relieved them from the growing need to hold increasing amounts of assets in cash or highly liquid assets.
  The stock market decline continued through October 5, led downwards by the railroad and steel stocks. At the close of that day, the average yield for the N.Y. Times 50 stock average was up to 8.8%. Steel production was stagnant at about 30% of capacity. Railroad car loadings were 21% below the low levels of 1930 and 10% below the previous post WW I low. Auto production was 16% under the 1930 level.
 ?
  Cotton prices were especially hard hit by the decline in the value of the pound sterling. Wheat, corn and cotton hit new lows: 44 5/8 cents per bushel; 32 7/8 cents per bushel; and 5.35 cents per pound respectively. Oats hit 20 1/4 cents and rye hit 36 1/4 cents per bushel. Even steel prices were now 12% below their 1929 highs in spite of numerous price fixing efforts. Manufacturing payrolls were down 40%.
 ?
  However, the credit of the U.S. government remained good, so the Hoover administration still had the power to act. On October 6, Hoover announced creation of a $500 million central bank fund to aid banks during "runs" and to relieve them from the growing need to hold increasing amounts of assets in cash and highly liquid assets.
 ?
  The shorts were driven to cover, and all markets rebounded vigorously. For the rest of October, they vacillated uncertainly seeking a new equilibrium range at their new low levels. The Big Board recovered almost $2 billion in October to a new total valuation of $34 1/3 billion.
 ?

 A vast flood of gold, especially gold coins, flowed out of government stockpiles.

 

Declines in steel production, auto production, railroad car loadings, and other indices, indicated that the business depression was still worsening.
   With sterling vacillating wildly between $3.50 and $4, Europeans, fearing further monetary devaluations, sought gold. A vast flood of gold, especially gold coins, flowed out of government stockpiles. Over $650 million in gold left the U.S. in the first month after the devaluation of the pound - mostly to France.
 ?
  At the same time, U.S. paper currency in circulation rose rapidly as confidence in banks deteriorated and the availability of financial services diminished with each bank failure and curtailment of service. Circulation rose over $600 million, over 10%, in just three months.
 ?
  On October 8, the U.S. Federal Reserve Bank admitted that its cheap money policy had failed to end the Depression. It raised the rediscount rate from 1 1/2% to 2 1/2%, and again on October 15, to 3 1/2%, in its efforts to stem the gold and capital exodus.
 ?
  The NYSE continued much needed reform efforts. Restrictions were imposed on short sales ordered at prices below the previous quotation. This reform eliminated the practice of intentionally selling down a weak stock to precipitate automatic selling pursuant to existing bull stop loss orders. It also gave preference to sell orders from actual share holders. (Bull speculators played "shooting the shorts" in the opposite direction, by buying up stocks where there was a heavy short interest whenever the market surged higher.)
 ?
  With brokers loans down to less than $800 million and still falling, and almost all of this from banks (outsiders weren't lending at current low interest rates), the opportunity was grasped to prohibit loans to brokers from "outsiders." This gave the banking system a firmer grip on the credit available to stock market speculators.
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  On October 20, the Interstate Commerce Commission granted the railroads a much-needed and long-requested 15% rate increase - but with numerous, costly strings attached. The actual rate rise of 7 1/2% was not a pleasant occurrence to the steel industry and to other large volume shippers.
 ?
  Profit taking by shorts, new bargain hunters, a general drying up of selling pressure at these new low prices, and the growing tendency of corporations to buy their own shares for retirement or treasury stock purposes, all helped to sustain a firm October market. However, declines in steel production, auto production, railroad car loadings, and other indices, indicated that the business depression was still worsening.

 Impacts of the devaluation of the pound:
   The value of the pound sterling was cut about 23% in the first three weeks after its devaluation. In spite of extremely high unemployment, English commodity prices soared 7 7/8% in terms of sterling. Since commodity prices all around the world were declining rapidly, the relative price increase - the difference between the cost of commodities in terms of sterling and in terms of gold or currencies that remained tied to gold - was more than 10%.
 ?
     However, austerity took hold quickly in England and prevented the indefinite continuation of this "inflationary depression." England cut down sharply on all non essential imports. Exports boomed at their new reduced real prices.
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  English textile production increased by 1/3, to 75% of capacity, aiding U.S. cotton exports. But this immediately stimulated selling by farmers who had kept their crops in storage, and so limited any price increase. English steel, shipping, coal and other industries were also aided by the cuts in real wages and the reduction in other costs brought about the "austerity" effects of the currency devaluation. England's balance of payments quickly turned favorable.
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  For international trade, however, the devaluation of the world's primary reserve currency was a crippling blow. Canada, Egypt, Australia, British Malaya, India - all of the great expanse of the British Empire - and South America, had suffered an instantaneous 23% loss of purchasing power. Bankruptcy and unemployment rates soared in Germany and Central Europe.
 ?
  British debtors and foreigners that had incurred pound sterling debts rushed to pay off their obligations in the new depreciated pound sterling. Buying of sterling for this purpose temporarily helped to sustain its value. Hoarding of cash (mostly U.S. dollars) and gold increased - much of the outflow of U.S. gold continued to be in the form of coins rather than bars.
 ?
  In mid October, Brazil defaulted on $500 million in bonds - over $150 million held in the U.S. and most of the rest in England.

Collectivization was an immediate economic failure - and Russia was forced to buy back her own wheat futures contracts.

 A few good signs began to accumulate for the U.S. towards the end of October.
 ?
  The Russian wheat crop had flopped. Collectivization was an immediate economic failure - and Russia was forced to buy back her own futures contracts. With Austrian and Argentine crops unavailable until January, and only a four week supply available outside North America, wheat exports picked up substantially and prices rose dramatically back towards 70 cents per bushel. Poor European wheat crops had caused several European nations to lower their wheat tariffs.
 ?
  Corn and cotton prices surged over 20%. The low cotton prices had stimulated consumption, driving prices higher in spite of an estimate that the current crop would be the second largest in history.
 ?

 Of 98 business lines, none were better than in 1930, 83 were lower, and only 15 were even.
  Some returning confidence,  and the Fed's 3 1/2% interest rate, helped stop the currency and gold hoarding in the U.S. Bonds followed the stock markets higher in this substantial advance. Importantly, steel remained steady at 30% of capacity. The Bank of England was already able to repay $100 million of the emergency credits.
 ?
  However, dividend omissions and decreases continued and many, including U.S. Steel and Bethlehem Steel, were again forced to dig deep into retained earnings to pay their dividends. Ford cut wages 15%. There were a record number of business failures in October, 1931, breaking the October, 1930 record. There were 2,362 business bankruptcies with about $70 2/3 million in liabilities.
 ?
  With stock prices rising and dividends declining, the modest rally in October was sufficient to bring the average yield for the N.Y. Times 50 stock average down below 7% again. The N.Y. Times general business index continued its steady dive to new low after new low through the third straight month. Of 98 business lines, none were better than in 1930, 83 were lower, and only 15 were even.
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  By mid November, commodity price increases caused buying to dry up, the fact of huge surpluses once again struck home, and a new decline in commodity prices set in. The Great Depression decline was on again.
  
    The last half of November was bad news.
 ?
  England imposed 50% emergency duties on hundreds of articles previously imported freely. The railroad union in the U.S. refused to accept a 10% wage cut.
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  The Farm Board reported that it still held 190 million bushels of wheat. It also reported that it still held all the 1.3 million bales of cotton which it had bought at an average price of almost 16.3 cents. It had bought almost 300 million bushels of wheat at an average price of just under 82 cents per bushel. Much of the wheat it had managed to resell had been dumped on credit to Brazil, China, and Germany, all of whom proved to be very bad credit risks.
 ?
  The N.Y. Times business index continued its almost vertical dive through the fourth straight month. U.S. Steel unfilled orders declined 185,541 tons in November to a 20 year low of less than 3 million tons.
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The difficulty in marketing bonds was hurting many business and utility corporations as refunding operations fell due. Many more corporations now found their bonds taken off the list of "legals" that savings banks were permitted to invest in.

   The pound sterling broke sharply to $3.25. French held sterling declined in value from $400 million to $264 million, and many other nations were similarly affected by this "capital levy" impact of the devaluation of the world's primary reserve currency. This "tax" was, in effect, paying off debts owed in pounds sterling. It was a "discharge in bankruptcy" affecting all assets denominated in pounds sterling. France would remain suspicious of foreign paper currencies, including the U.S. dollar, for decades thereafter.
 ?
  The NYSE lost over $3 billion in November, down to a new Great Depression low of $31.1 billion. Bond issues listed on the NYSE declined $2.2 billion to $39.5 billion. The difficulty in marketing bonds was hurting many business and utility corporations as refunding operations fell due. Many more corporations now found their bonds taken off the list of "legals" that savings banks were permitted to invest in.
 ?
  In December, the railroads reported that $234 million in bonds and equipment loans would have to be refinanced in the next year - $1 billion in the next three years. This refinancing now appeared to be too expensive to be economically feasible. The Reconstruction Finance Corporation proposed to step into the breach with emergency loans to the railroads. These events highlighted the greater stability of the equity capital derived from stock, which might decline in value but did not need to be refinanced.
 ?

 Hitler on the right and the Communists on the left were tearing Germany's political structure apart

   Central European dollar bonds were held by about 200,000 U.S. citizens. $600 million defaulted. Many were now selling at 20 cents to 40 cents on the dollar. Germany, now bankrupt, owed over $8 billion on government debt, $1.2 billion in short term bank loans, and $1.25 billion on German municipal, bank and business debt. More than half of these were selling at less than 25 cents on the dollar. $815 million in South American bonds held in the U.S. defaulted in 1931. Foreign governmental and industrial loans total just under $12 billion net nominal value.
 ?
  Hitler on the right and the Communists on the left were tearing Germany's political structure apart as these debts forced the imposition of new taxes and wage cuts on the heavily battered German public. Living standards plummeted. Spain and Belgium added drastically to their tariffs. Sterling hit a low of $3.24 1/2 on 7 December, 1931.
 ?

     Dividends in December, 1931, showed 178 reductions, 172 omissions, 14 resumptions, and 13 increases. This compared with 55 reductions and 120 omissions in December of 1930. Food packing, tobacco and mail order houses were the only business corporations doing well. Steel production shrank to 25% of capacity, and then to 21% just before the holiday week.
 ?
  Stock values on the NYSE dove another $4.4 billion in December, to a new low of just under $26.7 billion.
 ?
  U.S. Steel unfilled orders dropped almost 200 thousand tons to 2.842 million, the lowest since 1910. U.S. Steel stock was in free fall - all the way down to 36 1/2. Even the $7 preferred was now dropping like a stone, losing about 1/3 its value since 1930. Railroad gross income was off about 25%, net off about 67%. Car loadings of just 441,589 for the Christmas week was a postwar low. Railroad stocks led the market down, and the Wabash Railroad was in receivership.

 Summing up 1931:

 

 

 

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    During 1931, values on the NYSE declined 45%, about the same as the loss from its September, 1929 high to the end of 1930. Brokers loans practically disappeared as brokers were able to finance margins out of their own cash and most bull speculators were driven from the market in final despair. 46 issues were removed from the Big Board, only 23 were added. At the end of the year, the yield for the N.Y. Times 50 stock average exceeded 9% - obviously discounting considerable further decline. However, this pessimism was hardly "unreasoning."
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 There were less than $300 million in dollar foreign bonds floated in 1931 - all in the first nine months.

 

 

 

 

  • Foreign trade in 1931 was the smallest since 1914-1915.
  • Auto production had been cut more than in half since 1929, declining from about 5.36 million units to 3.36 million in 1930 and to 2.39 million in 1931. Auto and truck exports, once about 20% of sales, had practically ceased by the end of the year.
  • Corporate earnings were reported by just 43% of the half million corporations that filed income tax returns. They showed a net income of about $5.6 billion. Over 46% showed losses, totaling about $4.2 billion. The rest were inactive.
  • The farmer's plight was deepened in the last quarter of 1931 when livestock prices, which had been holding up fairly well, plummeted. Livestock prices were off 30% for the year, the lowest since 1921. Hog prices were the lowest since1899.
  • 65,000 bankruptcies cost creditors over $900 million. However, they had cost creditors $740 million even in the boom year of 1928. The contraction of credit accelerated sharply in the last quarter of 1931.
  • Bond averages dove 26 points in the last half of 1931, breaking all records. They had dropped only 15 points in the 1893 - 1894 panic and 16 3/4 points in the 1920 depression. $815 million in U.S. held South American national and municipal bonds defaulted in 1931. Bolivia, Brazil, Chile and Peru ceased payments. There was less than $300 million in dollar foreign bonds floated in 1931 - all in the first nine months. There had been about $900 million in 1930.
  • Bank investments and loans on security declined only 4% between September 1929 and September 1931, but the last quarter of 1931 saw a further 8% drop, of $1.5 billion, with a further drop of over $500 million dollars in January of 1932. Bank unsecured loans were down about two thirds from 1930 to just $500 million.
  • Total new public financing in New York, excluding U.S. and Canadian municipals, was less than $2 1/4 billion in 1931, down 55% from 1930 and 64% from 1929. Of the new securities floated in 1931, 94% was in bonds and notes rather than equities (stock).
  • Money in circulation rose about $750 million in 1931 to over $5.6 billion - the highest since 1920 - despite plummeting price levels. The continuation of the Great Depression could certainly not be blamed on a shortage of currency.
  • Bank clearings had declined about 25% in each of the first two full years of the Great Depression.
  • Wholesale price indexes showed a 14% decline for the year, and the general price level was down about 12%. Commodity price levels were fairly firm in the last quarter, after their sharp declines earlier. Nevertheless, commodity prices were at their lowest level since 1911.
  • The AF of L estimated that 7.5 of 48.4 million workers were unemployed.

  In mid December, Congress by Joint Resolution approved Hoover's War Debt Moratorium, but the House voted to record its objection to any War Debt revision. After all, America had been more than generous in financing the Great War. Why should the U.S. be left holding the financial bag?
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  The House thus condemned the world to continued Depression and worsening political chaos.

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  Copyright 2001 Dan Blatt