4 - 1930s: The great depression

A deflationary depression from 1929 to 1932.

Unemployment hit 25% in 1933 and gross domestic product, the broadest measure of economic activity, plunged 13% in 1932.

Similarities to 2008: 1929 are eerily similar to today, land boom in Florida, excessive margin lending, stock market boom.

Stock market crash begins October 24, 1929. Investors call October 29 “Black Tuesday.” Losses for the month will total $16 billion, an astronomical sum in those days. By February, 1930, the Federal Reserve has cut the prime interest rate from 6 to 4 percent. Expands the money supply with a major purchase of U.S. securities. The first bank panic occurs later 1930; a public run on banks results in a wave of bankruptcies. Bank failures and deposit losses are responsible for the contracting money supply.

The Great Depression was a worldwide economic downturn starting in most places in 1929 and ending at different times in the 1930s or early 1940s for different countries. It was the largest and most important economic depression in modern history, and is used in the 21st century as a benchmark on how far the world's economy can fall. The Great Depression originated in the United States; historians most often use as a starting date the stock market crash on October 29, 1929, known as Black Tuesday. The end of the depression in the U.S. is associated with the onset of the war economy of World War II, beginning around 1939.

Dow Jones Industrial Average hit a low of 41 point in July 1932, down from a pre 1929 crash high of 381.

1930s were the most volatile decade on record for stock prices. Investors, their nerves rubbed raw by the Depression, were prone to fits of euphoria and despair. Thus, the industrial average plunged 52.7% in 1931 and 32.8% in 1937, but it rose 66.7% in 1933 and 38.5% in 1935. Daily volatility was also intense. Strange as it may seem, seven of the 10 biggest up days in history, on a percentage basis, occurred during the 1930s.
The major lesson from the Great Depression of the 1930s was that terrible policies managed to turn a financial crisis into a disaster. The infamous Smoot-Hawley Tariff Act of 1930 was introduced by US policymakers to block imports in a desperate attempt to protect domestic jobs. But it helped worsen the recession by freezing world trade. At the same time policymakers were encouraging firms to collude and workers to unionize to raise prices and wages.
Hoover the administration made some grave error in electing the right policy to deal with crisis.

There has been a lot of talk lately comparing the current situation to the presidential election of 1932, won decisively by Franklin D Roosevelt and leading to two 'New Deals', in 1933 and again in 1935-36.
In fact Obama’s economic advisors have recently been hinting that the Democrat President would imitate Roosevelt's 'First Hundred Days' legislative program of 1933, during which he met continuously with Congress and was granted every legislative request. One of the first of these was the closure of all of the nation’s banks on March 4, 1933. If Barack Obama is elected President today it will decisively bring the Reagan era to an end, an era in which conservatives have been working to undo the New Deal state set up by FDR in 1933.

An Obama Presidency, with the impetus of a new Great Recession, would bring to an end the Reagan-inspired unwinding of the 1933 and 1936 New Deals and mark the beginning of a new era of activist government.

real GDP is unlikely to shrink 25% and the unemployment rate is not likely to go above 30%. S&P 500 did not bottom until June 1932, meaning that even after the 1931 disaster, it still had another 46% downside before it was all over.

The Smoot-Hawley Tariff Act (sometimes known as the Hawley-Smoot Tariff Act)[1] was an act signed into law on June 17, 1930, that raised U.S. tariffs on over 20,000 imported goods to record levels. In the United States 1,028 economists signed a petition against this legislation, and after it was passed, many countries retaliated with their own increased tariffs on U.S. goods, and American exports and imports plunged by more than half. In the opinion of some economists, the Smoot-Hawley Act was a catalyst for the severe reduction in U.S.-European trade from its high in 1929 to its depressed levels of 1932 that accompanied the start of the Great Depression.

In short, failure of economic co-operation and resurgent nationalism in the form of trade protectionism contributed to the global financial crisis of the 1930s

Current initiatives look eerily similar to the 1930s

America’s Great Depression by Murray N. Rothbard

What is amazing is the chapter on the Reconstruction Finance Corporation (RFC), which was like the TARP in its efforts to bolster government equity stakes in banks, and therefore, to perpetuate the excess capacity in the system. The RFC provided money to groups from financials to farmers (cotton loans were big) to railroads (“some $264 million were loaned to railroads during the five months of secrecy”) to state governments. Sound familiar?
This RFC began with government capital of $500mn in 1932. Eventually, that grew nearly eight-fold, which is why we think the current TARP is really TARP1. You read this book and you get a glimpse of Hoover’s “war on the stock market, particularly on short-sellers” and the new Federal bankruptcy law of 1932, which served to “weaken the property rights of creditors … states also joined in the attack on creditors” ... as in most depressions, the property rights of creditors in debts and claims were subjected to frequent attack, in favor of debtors who wished to refuse payment of their obligations with impunity ... many states adopted compulsory debt moratoria in early 1933”.

‘Hoover New Deal’ that FDR inherited and nurtured through the 1930s.

“the banks also received their share of Hoover’s ire for their unwillingness to expand in those troubled times”. Hoover actually lodged a complaint in the New York Times that “banks have not passed the benefits of these relief measures on to their customers”. So, in the end, Hoover (Roosevelt,
remember, inherited and expanded on this infrastructure) “and Congress agreed
to transform the RFC from a generally defensive agency aiding banks and railroads in debt, to a bold ‘positive’ institution, making capital loans for new construction”.
FDR confiscated all the private gold in the U.S. in 1933 (except for wedding rings and minor jewelry) at $20 an ounce.

In 1933, the London Economic Conference
Back then, representatives of 66 nations completely failed to agree on a concerted international response to the Great Depression. The fault lay mainly with the newly elected U.S. president, Franklin D. Roosevelt, who vetoed European proposals for currency stabilization.
After October 1929, Wall St. if one thought it had just gone through hell with a 45% decline. They had no idea the market would continue to drop for 3 more years and finish with an 89% decline!
In response to the Great Depression, and at the request of President Franklin D. Roosevelt, Congress passed the Gold Reserve Act on 30 January 1934; the measure nationalized all gold by ordering the Federal Reserve banks to turn over their supply to the U.S. Treasury. In return the banks received gold certificates to be used as reserves against deposits and Federal Reserve notes. The act also authorized the president to devalue the gold dollar so that it would have no more than 60 percent of its existing weight. Under this authority the president, on 31 January 1934, fixed the value of the gold dollar at 59.06 cents.
US history Encylopedia: Gold Reserve Act
1934. Jan 31. Presidential Proclamation (no. 2072) of Franklin D. Roosevelt fixing the gold value, by weight, of the United States Dollar, making the dollar convertible to gold at the from 20.67 to new price of $35.00 per ounce.
January 31, 1934The day after the passage of the Act, President Roosevelt fixed the weight of the Dollar at 15.715 grains of Gold "nine-tenths fine". The Dollar was thereby devalued from $20.67 to one troy ounce of Gold to $35.00 to one troy ounce of Gold - or by 69.3 percent. The Treasury, which had become the possessors of all the nation's Gold on the previous day, saw the value of their Gold holdings increase by $US 2.81 Billion. The Treasury now "owned" the Gold, and no one else inside the U.S. was allowed to own any Gold except by the express permission of the Treasury.
The new ratio of $US 35 was adopted at Bretton Woods in July 1944. The U.S. Dollar was made the world's Reserve Currency and the IMF and World Bank established in 1947. The now international ratio of 35 U.S. Dollars to one troy ounce of Gold lasted until August 15, 1971.
Extract from THE AGE OF THE GREAT DEPRESSION

The overexpansion of credit was a prime cause of the disasters that followed 1929. The First World War began a process which reckless financing continued to accelerate. In the background loomed the huge structure of long-term debt in the United States a public debt, federal, state and municipal, of thirty-three billion dollars, and corporate and individual debts of one hundred billion which demanded expanding markets and world prosperity for successful carrying.

Short-term T-bill rates went negative was during the Great Depression, when frightened bankers were effectively paying the US Treasury for the privilege of lending money to it! Happened again in Dec 08.


Franklin Roosevelt

March 4, 1933Not quite 20 years after the establishment of the Fed, President Franklin D. Roosevelt was inaugurated for his first term in office.
March 6, 1933Using a wartime statute passed in 1917, Mr Roosevelt issued a proclamation closing every bank in the U.S. for four days. The banks were closed from March 6 to March 9.
March 9, 1933Day One of "The Hundred Days".


Franklin Delano Roosevelt took office in 1933, instituted social programs and put people to work building roads and public buildings. The history of his administration could serve as a political Rorschach test.
The stock market generally seemed to like FDR's measures. The Dow industrials rose 39 points in 1933, 6 points in 1934, 40 points in 1935 and 36 points in 1936. New Deal provided a psychological, not an economic, boost.

By 1938 the Dow had fallen below 100 again. Mr. Sobel blamed Mr. Roosevelt, for raising taxes. Mr. Stillman said overseas demand for U.S. goods was weak, as other countries were embroiled in their own miseries. The two historians agreed that World War II was the spark that finally ended the agony. Said Mr. Sobel: ''The war took the country out of the Depression, not Roosevelt.''

We do know when the last global banking crisis was turned round, when confidence started to recover. Indeed, the Great Depression has precise dates for its beginning, which was the Wall Street panic on October 24, 1929, and for its recovery point, which came with Franklin Roosevelt's inaugural address on March 4, 1933.

Franklin Roosevelt’s New Deal and the Emergency Banking Act of 1933, a weeping gestures and big picture reforms.

New deal part I: (1933-36) aid manufacture, providing loans, bring down the unemployment,
New deal part II: social reform.

The Guardian, Friday August 31 2007
GEORGE Soros, billionaire, philanthropist and hedge fund legend, has characterised today's situation in global markets as the most severe since the Great Depression.
Mr Soros said global financial markets were in a period of rapid, massive de-leveraging that would fuel volatility. “We are in a period of financial wealth destruction ... and now we have de-leveraging,” he said.
The billionaire blamed the lack of transparency in the credit default market, which he calculated at $US45 trillion, as the root of the curtailing of bank-lending, and hence the credit squeeze.

“That is an amazing figure,” Mr Soros said, noting that the size of the CDS (credit default swaps) market is equal to the total wealth of US households and five times the national debt level. Mr Soros called credit default swaps - a sector in which he said hedge funds are particularly active - a “totally unregulated” market fraught with risks. “You don't know if their counterparties will meet their obligations,” he said.

Compare with the 2008 crisis: Swanson said the US has several ‘shock absorbers' today that didn't exist in 1929. Among them the country's deposit insurance guarantee, low interest rates and stronger balance sheets due to more stringent corporate governance imposed on companies.
Moreover, in 1929 the US Federal Reserve was only a decade and a half old, was operating according to vastly different objectives and there wasn't any liquidity at all. Even worse, government intervention was still years away.

“We don't know whether the Great Depression is about to be replaced by the Great Credit Freeze as the financial disaster touchstone for a new generation. But there is no doubt that we are going through a tremendous reassessment of how government and Wall Street intersect -- a reassessment that should remind us that one of the great lessons of capitalism is that without strong oversight and strict rules, greed will inexorably lead markets astray.” Andrew Leonard 6 Oct 2008

* One regulatory responses to this situation. The first is to try to put banking back in its box; to reverse the trends of the past twenty years by dismantling the financial conglomerates and re-imposing strict activity constraints on deposit-taking institutions. This was the US response after the 1929 crash not only from the legislature in the form of the Glass Steagall Act but also from the leading banks themselves, who of their own volition announced that they were disposing of their securities affiliates because events had shown that commercial and investment banking should not be mixed.